PIALA INC.

The Company had recorded operating losses for four consecutive fiscal years through the previous consolidated fiscal year, giving rise to events that raise material doubt about the going concern assumption. Although the Company achieved a full-year profit in the current consolidated fiscal year for the first time in five years since FY2020 (ended December 2020), this was mainly due to deteriorating advertising efficiency caused by regulations under the Act against Unjustifiable Premiums and Misleading Representations and the Pharmaceuticals and Medical Devices Act, as well as underperformance of overseas subsidiaries including those in China. At present, the Company has determined that no material uncertainty exists, and it has secured working capital through overdraft agreements, including a new contract with Resona Bank.

The Group is subject to laws and regulations such as the Act against Unjustifiable Premiums and Misleading Representations, the Pharmaceuticals and Medical Devices Act, and the Medical Advertising Guidelines, and changes in laws, new regulations, or changes in interpretation could affect business operations. Voluntary review standards set by advertising media and networks have also become stricter than the legal requirements, and this has already caused temporary deterioration in advertising efficiency, such as past creative content becoming unusable. Furthermore, there is a risk that if a client is ordered to suspend advertising due to a violation committed by another advertising company, this could also affect the Group's business with that client.

The Group's core service, "EC Marketing Tech," is a performance-based, "KPI-guaranteed" contract based on marketing outcomes, meaning revenue is not fixed until results are confirmed. Costs are based on CPC (cost per click), while revenue is a fixed performance fee, resulting in different charging bases for costs and revenue and an undetermined profit margin. The Group manages this risk through DMP data accumulation and a full renewal of its AI-powered "Result+" platform, but if these measures fail to function as intended, business performance would be directly affected.

Regular algorithm updates implemented by major platforms such as "Yahoo! JAPAN" and "Google" may be difficult to respond to in a timely and appropriate manner, as the determining factors are not publicly disclosed. If the Group's response is delayed or inappropriate, there is a risk that expected profits may not be secured due to reduced advertising exposure. The Group's business model is highly dependent on internet advertising, and the impact of algorithm changes directly affects business performance.

The internet-related field is a rapidly changing industry with a continuous stream of new technologies and services, requiring ongoing response to new technologies amid the accelerating adoption of smartphones and tablets. A delayed response to technological innovation could result in reduced competitiveness and service quality, as well as increased additional system costs and personnel expenses. The Group is focusing on recruiting and developing engineers and building a creative workplace environment, but the risk could materialize if it is unable to acquire the necessary knowledge and expertise.

The Group has established subsidiaries as part of its global expansion, centered on the Asia region, and unstable global conditions, including U.S. policy trends and the slowdown of the Chinese economy, have affected these subsidiaries. Underperformance at subsidiaries, including those in China, was one of the main causes of the four consecutive years of operating losses. Unexpected changes in the economic environment and legal regulations in each country may affect the Group's financial position and business results. The prevalence of infectious diseases is also recognized as a risk factor that could disrupt the continuation of overseas operations.

Takao Asuka, President and Representative Director, plays an extremely important role as founder in technical decision-making, management policy, and business strategy determination, resulting in a high degree of dependence on him. Should he become unable to continue his duties for any reason, this could have a material impact on the Group's financial position and business results. The Group is working to reduce this dependence through information sharing at board meetings and management councils and by strengthening its management organization, but the establishment of a substitute framework is still in progress.

The Group collects user behavioral history data through cookie technology via platforms such as SSPs, DSPs, and DMPs, and is subject to the Personal Information Protection Act. Going forward, if new laws related to internet advertising are enacted, or if existing laws are amended or voluntary regulations are strengthened, the Group's ability to provide services could be constrained. The Group is subject to multiple laws and regulations, including the Telecommunications Business Act, and is required to continuously respond to changes in the regulatory environment.

The Group's greatest asset is its human resources, and there is a risk that securing and developing the necessary talent could become difficult due to rapid changes in business content, increased workload accompanying business expansion, and changes in the supply-demand balance of the labor market. The departure of key personnel could also affect the Group's financial position and business results. The Group issues stock options to secure talented personnel, but competition for talent in the internet advertising and DX fields remains intense.

The Group's services are provided over the internet from computer systems centered on servers, and if a system failure occurs due to equipment malfunction, natural disaster, a sudden surge in access, computer viruses, or unauthorized access, this could lead to service suspension, loss of customer trust, and claims for damages. In the event of a major earthquake, typhoon, or other natural disaster in Tokyo, there is also a risk that facility damage or power supply restrictions could disrupt the continuation of services. The Group has implemented measures such as the use of external data centers, regular backups, and operational monitoring, but it is difficult to completely eliminate this risk.