Drecom Co.,Ltd.

The domestic mobile game market is maturing and growth is slowing, accompanied by rising user expectations and increasingly complex, prolonged, and costly game development. Intensifying competition is also heightening rivalry among existing service providers, and if the market were to decline, the Group could be forced to transfer or withdraw from mobile game-related businesses. New legal regulations and the trends of telecommunications carriers may also affect market growth.

A large portion of the Group's Game Business revenue is derived from games distributed by BANDAI NAMCO Entertainment Inc., resulting in a structure highly dependent on a specific partner. While the Group currently recognizes its relationship with the company as favorable, any significant change in the company's business policy could have a material impact on the Group's business results and financial condition. This concentration risk in revenue sources requires ongoing monitoring.

Since FY2016 (ending March 2016), the Group has focused on an IP Games strategy centered on joint development and operation with external IP partners; however, if partner companies change their business policies or scale back or discontinue investment, the Group may be unable to pursue its intended business operations. In addition, for self-owned IP such as Wizardry, there is a risk of significantly impairing the value of IP content if human resource development as an IP holder is insufficient. If collaboration with external partners does not proceed as expected, the progress of business strategy may also be constrained.

Programs and other assets developed in the Game Business and Content Business are recorded as software on the consolidated balance sheet, but if declining profitability of individual titles or services makes investment recovery difficult to justify, the Group may be forced to recognize impairment losses or valuation losses. During the fiscal year under review, the Group actually recorded software impairment losses, which contributed to the revision of the full-year earnings forecast and the decision to omit dividends, with the financial impact having already materialized.

Much of the Game Business provides services through domestic and overseas platform operators (such as the App Store and Google Play), and if these operators change their business policies or content standards, substantial costs may be required to respond. Additionally, since collection of game usage fees is also conducted via platform operators, if any of these operators becomes unable to make payments, it could affect the Group's business results and financial condition.

The internet and gaming industries are characterized by the rapid emergence of new technologies and services, including AI, and short service life cycles, meaning delays in responding to technological innovation directly translate into reduced competitiveness. Although the Group actively pursues technology development, if its response is delayed or research and development expenses increase beyond expectations, this could affect its business results and financial condition.

If services are interrupted or suspended due to system malfunctions, temporary access congestion, natural disasters, unauthorized external intrusion, or other causes, this could result in damages claims or loss of credibility, among other impacts. Although the Group has implemented measures such as strengthening monitoring systems and duplicating systems, risks remain in the event of loss or leakage of important data or server outages.

The Group accumulates personal information such as users' email addresses and job applicants' personal information in its databases, and if such data is leaked due to problems in internal management systems or unauthorized external intrusion, this could result in damages claims or loss of credibility, among other impacts. Although the Group has established a personal information protection policy and implemented access restrictions and security measures, ongoing compliance with domestic and international personal information-related laws and regulations is also required.

Representative Director and President Yuki Naito plays a critical role in everything from determining management policy and business strategy to building business models, and if he becomes unable to continue executing his duties, this could affect the Group's business results and financial condition. Although the Group is working to reduce this dependence through information sharing at the Board of Directors and management meetings and by strengthening its management organization, dependence on him remains high at present.

If new laws, regulations, or guidelines related to games are established, revised, or strengthened domestically or overseas, this could require substantial costs to address and may constrain business operations, forcing major policy shifts. Given the Group's policy of expanding overseas, there is a risk that costs of responding to regulatory trends in various countries will increase, and expenses for legal interpretation research may also arise in situations where legislative development fails to keep pace with technological innovation.