IG Port, Inc.

If animation or comic works fail to match customer preferences, or if production delays occur, this may affect operating results. The Group continuously strives to build an optimal production system and achieve high-quality production, but due to the nature of the creative industry, there are limits to predicting market acceptance in advance.

In the Animation Production business, pre-production processes (creation of proposals, character designs, storyboards, short videos, etc.) may occur before formal orders are received. If formal orders fail to materialize, there is a risk that these upfront costs will be recorded as losses. The business faces a structural challenge in that upfront investment is required even for projects with low order probability.

The Group's publications are subject to the resale price maintenance system (saihan system) under Article 23 of the Antimonopoly Act, under which fixed-price sales at bookstores are maintained. While the Japan Fair Trade Commission announced in March 2001 that it would maintain the system for the time being, it has requested the industry to apply it flexibly. If the system is abolished in the future, this may affect operating results through deterioration in the publications market.

The Group may make investments for the purpose of acquiring copyrights and other rights to animation works, and has a mechanism to receive a share of the revenue from such works. However, if the produced works fail to gain customer acceptance, there is a risk that the expected revenue will not be secured and returns commensurate with the investment amount will not be achieved. The Licensing business is subject to high revenue volatility and is heavily dependent on the market reception of works.

In the Group's Merchandise Sales business, most wholesale transactions are conducted on a buy-out basis, but some are on a consignment basis. If sales are sluggish for consignment sales due to a mismatch with customer needs, product returns may occur, potentially affecting operating results.

For large-scale investment projects in animation, the timing and amount of revenue recognition vary depending on the content of licensing agreements and royalty/distribution reports. If depreciation of video masters and content assets does not align with revenue recognition within the same accounting period, operating results may fluctuate significantly, requiring special consideration when making period-to-period comparisons.

If the spread of infectious disease or a natural disaster causes infection or damage among employees, creators, or domestic and overseas business partners, there is a risk of delays across all processes of pre-production, production, and post-production. Failure to deliver by the deadline may affect operating results, illustrating the vulnerability of animation production, which depends on a global supply chain.

If continued global inflation causes further increases in outsourcing costs, labor costs, utility costs, and other expenses, it is expected that costs exceeding the production budget will be incurred for works already under order. In the Animation Production business, where many orders are contracted at fixed prices, it is difficult to pass on cost increases through price adjustments, creating a risk of deteriorating profitability.

With the expansion of the animation market, low-cost production companies in China, South Korea, the Philippines, and elsewhere have emerged, intensifying competition both domestically and internationally. There is a risk of being forced into a situation where declining order prices become unavoidable in order to secure orders, which may affect operating results.

As international competition intensifies, an increasing number of competitors are offering favorable terms to hire talented animators, and the Group is expected to face rising outsourcing costs in order to secure talented personnel. Intensifying competition for talent acquisition may worsen the cost structure and affect operating results.