SM ENTERTAINMENT JAPAN Co.,Ltd.

There is a possibility of losing fans due to suspension of entertainment activities caused by military service of key male artists or restrictions on group activities. In addition, reputation risk arising from non-renewal of contracts with artists or from legal violations or acts damaging credibility could directly affect business performance. Since the Group's business centers on "Korean Wave content" and depends heavily on specific artists, the impact would be significant.

The parent companies, SM ENTERTAINMENT Co., Ltd. and Kakao Corp., indirectly hold 73.2% of voting rights, giving the parent companies potential influence over fundamental matters such as director appointments, organizational restructuring, and dividends. In addition, transactions with the parent company group accounted for approximately 69% of purchases in FY2025 (ending December 2025), meaning that changes in the parent company's business policy or deterioration in its financial condition could directly affect the Company's business performance. The Company strives to maintain fair trading relationships through deliberation by an independent board of directors.

Due to external factors such as yen depreciation, unstable international conditions, and an increase in the number of domestic performances, concert production costs including labor costs, venue fees, and crude oil prices are rising. While the Company strives to secure profitability through ticket price pass-through and operational efficiency improvements, if cost increases cannot be sufficiently passed through, profit margins may decline and affect business performance. This risk is directly related to the holding of events, the Group's core business.

Since content is primarily procured from Korea, the Company is constantly exposed to foreign exchange rate risk on foreign currency-denominated transactions. While the Company strives to mitigate this risk by adjusting payment timing, sufficient avoidance is difficult, and legal regulations related to copyright, tax law issues, and changes in international relations may also affect business performance. Combined with rising prices of Korean content, there is a compound risk of increasing procurement costs.

Investments in the acquisition and production of dramas and other video content, particularly large-scale projects, are conducted through joint venture arrangements, but losses may arise due to poor viewership ratings or prolonged investment recovery periods. Acquiring rights has become more difficult due to rising prices and shrinking market supply of Korean content, and while the Company is diversifying into content from other Asian regions such as China and Taiwan, business performance would be affected if the Company continues to be unable to acquire popular Korean content. Risk management is conducted by setting certain limits on investment balances.

As of December 31, 2025, the tradable share ratio stood at 32.6%, meeting the listing maintenance criteria of the Tokyo Stock Exchange Growth Market, but there is a risk that the Company could again fall below the criteria due to changes in major shareholders' holding policies or a decline in market capitalization caused by falling share prices. If delisting were to occur, it could have a material adverse effect on the share price and liquidity. There is also a risk of share value dilution from 2,073,000 potential shares (1.79% of total issued shares) related to stock options.

Competition in paid broadcasting services via CS broadcasting, CATV, and IPTV is intensifying year by year due to the rapid growth of OTT services in addition to terrestrial, BS, CS, CATV, and IPTV broadcasting, making subscriber acquisition competition increasingly fierce. There are concerns about declining subscribers due to the maturation and slowing growth of the paid broadcasting market, and business performance would be affected if subscriber numbers fall below expectations. The shrinking DVD/BD market accompanying OTT market expansion also affects the Group's business performance.

The Company acquires personal information through content distribution, fan club operations, e-commerce, and other activities, and any information leakage would result in loss of social credibility and impact business performance. While measures such as revising internal regulations, monitoring outsourcing partners, developing information leakage response manuals, employee training, and strengthening system security are being implemented, the risk of accidents due to unforeseen circumstances cannot be eliminated.

To reduce dependence on specific artists, the Company is promoting the discovery and development of original IP such as new groups and virtual artists, but such development requires substantial upfront investment over a long period, making future revenue difficult to predict. If developed artists fail to generate the expected revenue, investment recovery may be delayed, potentially affecting business performance.

In the entertainment industry, there is a chronic shortage of specialized personnel such as skilled managers and producers, and since few companies engage in K-POP artist management, competition to acquire talent is intensifying. If the Company is unable to sufficiently secure necessary personnel or if personnel turnover occurs, business activities may be hindered or restricted, affecting business performance. The Company strives to improve retention rates through recruitment activities utilizing specialized recruitment agencies and its own networks, as well as through improvements to the work environment.