GALA INCORPORATED

In the current consolidated fiscal year, the Company continued to record operating losses and net losses attributable to owners of the parent, giving rise to material events that raise substantial doubt about the going concern assumption. The main causes are holding company management costs, operating losses at ROAD101 Co., Ltd., survey and construction-related expenses at Treeful Inc., and extraordinary losses including impairment charges related to both companies. At the end of the current consolidated fiscal year, cash and deposits stood at ¥744 million and net assets at ¥1,019 million; while the Company judges that there is no concern regarding cash flow, the continuation of losses carries a risk of materially affecting the financial position.

The Company positions NFT games/blockchain games as a core business under its management strategy, but in the current consolidated fiscal year, legal and tax reviews in Korea regarding the cryptocurrency used within the games took longer than expected, leaving the service launch date undecided and preventing any contribution to revenue. If revenue is not generated as expected going forward, this may affect the financial position and operating results. A delay in monetizing the core strategy carries the risk of significantly setting back the Group's overall earnings recovery scenario.

Regarding the cryptocurrency used in NFT games/blockchain games, legal and tax regulatory responses are required within Korea, and in the current consolidated fiscal year this became a factor delaying the service launch. The regulatory environment for cryptocurrency and NFTs in each country remains fluid, and the introduction of new legal regulations or tightening of existing regulations could constrain business development. The Group continues to review legal and tax matters, and if the response is prolonged, the impact on the financial position and operating results may expand.

Gala Lab Corp. and Gala Mix Inc. develop and operate online games, HTML5 games, smartphone apps, and NFT games; if development does not proceed as planned, or if system troubles or unauthorized ID use due to hacking occur, this may affect the financial position and operating results. Similar risks arise if updates to existing titles or multilingual rollout do not proceed as planned. Development of the new HTML5 game "Ragnarok Universe" is also underway, and managing multiple projects in parallel increases operational risk.

The internet industry to which the Group belongs is strongly affected by the emergence of new technologies and changes in the internet environment, and the emergence of new technologies, new methods, and new services, as well as the rise of competitors, could lead to rapid obsolescence of the business and a decline in marketability. In the smartphone app field, user preferences change rapidly, and if the Group is unable to develop apps and provide services that meet user needs, its appeal to users may decline, potentially affecting the financial position and operating results. Delays in responding to technological innovation carry a risk directly linked to a decline in the competitiveness of existing titles.

The Group's game business services are deployed worldwide, with overseas settlements made in foreign currencies, and overseas subsidiaries prepare financial statements in local currencies; therefore, if foreign exchange fluctuations become large, foreign exchange gains/losses and translation adjustments may be recorded, potentially affecting the financial position and operating results. The Group does not engage in derivative transactions such as forward exchange contracts and has not implemented hedging measures against foreign exchange risk. As global expansion increases, the impact of exchange rate fluctuations on business performance may further expand going forward.

Transactions between overseas subsidiaries within the Group carry transfer pricing taxation risk, and if tax authorities raise issues, this may affect the financial position and operating results. The Group states that it determines intra-group transaction terms after conducting risk management, but there is a risk of additional tax assessments depending on the judgment of tax authorities in each country. Due to the globally deployed business structure, transactions spanning multiple tax jurisdictions occur continuously.

Consolidated subsidiaries ROAD101 Co., Ltd. (VFX Business) and Treeful Inc. (Treehouse Resort business) recorded operating losses in the current consolidated fiscal year, and also recorded extraordinary losses including impairment charges. Fundamental restructuring measures are under consideration for ROAD101, while for Treeful Inc., discussions are proceeding toward reducing the equity stake and dissolving the outsourcing relationship, with the aim of curbing cash outflows from the Group. If the business restructuring of both companies does not proceed as expected, additional losses or cash outflows may occur, potentially affecting the financial position of the Group as a whole.

The Group is developing new businesses including the cloud-related business (supporting AWS and other cloud businesses with Megazone Cloud Corporation) and the Meta Campus business (providing virtual campuses via a metaverse platform); if changes in the business environment or delays in platform development prevent business development from proceeding as planned, this may affect the financial position and operating results. In particular, for the Meta Campus business, the risk of ballooning development costs is explicitly noted, and pursuing multiple new businesses in parallel carries the risk of dispersing management resources.

In the Treehouse Resort business self-operated in Nago City, Okinawa Prefecture, changes in the business environment or failure to achieve the expected occupancy rate may prevent the recovery of invested capital from proceeding as planned. In the current consolidated fiscal year, survey-related and construction-related expenses were incurred at Treeful Cambodia, resulting in an operating loss, and impairment charges were also recorded. Business review and restructuring are currently underway, but if this does not proceed as expected, additional losses may occur, potentially affecting the financial position and operating results.