Tokyo Communications Group,Inc.

In the current consolidated fiscal year, profitability improved, with operating income of ¥195 million, ordinary income of ¥665 million, and profit attributable to owners of parent of ¥230 million recorded. However, against short-term interest-bearing debt of ¥1,251 million, cash and deposits remained at only ¥1,138 million, and improving the funding structure continues to be a challenge. The Company itself recognizes that this imbalance between short-term interest-bearing debt and available liquidity gives rise to circumstances that cast significant doubt on the going concern assumption. The Company is seeking improvement through strengthening cash flow generation in its core businesses, selecting and concentrating investments, and cooperating with financial institutions, and states that working capital for the near term has been secured; however, there is a risk that if the plan is not achieved, cash flow could deteriorate.

The Group's business foundation is premised on the continued expansion of the internet-related market and the smartphone-related market, with the smartphone ownership ratio among households reaching 90.5% as of 2024. If market growth is impeded by unforeseen factors such as the introduction of new legal regulations, delays in technological innovation, or fee revisions by telecommunications carriers, this may affect the Group's business and results of operations. As the market matures, a slowdown in growth carries an inherent risk of directly leading to a ceiling on revenue.

While the internet advertising market is on an expanding trend, it is sensitive to corporate economic conditions, and there is a risk that advertising demand could decline due to a sudden change in economic conditions. In addition, changes in the competitive landscape with other advertising media could also affect the Group's advertising revenue. Since advertising revenue is a primary source of income for the Group, the impact of demand fluctuations spreads directly and significantly to its business results.

The internet-related field is a rapidly changing industry with a succession of new technologies and services being introduced, and if the Group is slow to respond to version upgrades or discontinuations of development languages, operating systems, databases, and the like, there is a risk that the competitiveness of its products and services could decline. If difficulties arise in recruiting and training engineers or in acquiring technical expertise, this could lead to a decline in service quality, and additional system costs and personnel expenses for responding to new technologies are also expected to increase. Should these factors compound, this may lead to a decline in the Group's competitiveness and a deterioration in its business results.

The Group is subject to various laws and regulations, including the Act on Specified Commercial Transactions and the Act against Unjustifiable Premiums and Misleading Representations, and if a violation is discovered, this could lead to a decline in credibility and monetary compensation such as claims for damages. In addition, there is a risk that advertisements contrary to public order and morals could be placed through ad networks, and even where this does not amount to a legal violation, it could lead to reputational decline. While the Group has implemented measures such as establishing internal advertisement placement standards and conducting periodic monitoring patrols, it is difficult to fully control the actions of advertising agencies and advertisers.

The Group acquires personal information in the course of providing its services, and while it has established internal rules and a management system based on the Act on the Protection of Personal Information, if a leakage or unauthorized use of personal information were to occur, this could result in monetary compensation such as claims for damages and a deterioration of the Group's corporate image. The Group holds personal information through a wide variety of services, including telephone fortune-telling services, love consultation services, messaging apps, and fan club sites, and the scope of information subject to leakage risk management is extensive. Information leakage due to external factors, including cyberattacks and system failures, also cannot be ruled out.

The Group's business is entirely dependent on smartphones, PCs, and communication networks, and if a system failure occurs due to a natural disaster, accident, unauthorized access, computer virus, power supply outage at a data center, or cloud service outage, this could seriously impede business continuity. Damage to Group facilities and power supply restrictions caused by natural disasters such as major earthquakes and typhoons are also recognized as risks that could have a significant impact on business results. Although the Group has implemented appropriate security measures, it is difficult to completely prevent failures caused by unpredictable factors.

The Group transitioned to a holding company structure in April 2023, and if holding company governance—including the allocation of management resources, review of Group strategy, and monitoring and supervision of Group companies—does not function adequately, this could have a significant impact on the Group's business results and financial condition. Most of the holding company's income consists of management guidance fees, outsourcing fees, and dividends received from subsidiaries, and there is a risk that if subsidiaries fail to record sufficient profit, it could become difficult for the holding company to pay dividends. As the organizational structure remains under development following the transition, ensuring the effectiveness of Group management is an important management issue.

The Company has recorded goodwill and other assets in connection with corporate acquisitions through the acquisition of shares, and if business development does not proceed as planned compared to initial expectations, impairment of goodwill and other assets may become necessary, which could affect business results. M&A and capital and business alliances are utilized as effective means of strengthening existing businesses and expanding into new business areas, but there is a risk that the initially expected effects may not be achieved, resulting in the strategic objectives not being met. Although due diligence is conducted by external experts, the risk that the plan may not be achieved due to changes in the business environment following an acquisition cannot be ruled out.

Competition to acquire talent in the IT industry is extremely intense, and if the Group is unable to secure the necessary personnel in a timely and sufficient manner, or if excellent personnel leave the Group, this could constrain future business development and affect business results. As the Group is a small-scale organization, its internal control system remains commensurate with that scale, and if the reinforcement and training of personnel in line with business expansion does not proceed in a timely and appropriate manner, there is a risk that the enhancement of the internal control system could be delayed. While the Group is working to develop an environment for external talent acquisition, internal training, and prevention of personnel attrition, the effectiveness of these measures may be limited due to the intensifying competitive environment.