SK JAPAN CO., LTD.

The prize merchandise market for the amusement industry, in which the Company operates, is small in scale because the interpretation and operation standards (revised March 1, 2022) of the Act on Control and Improvement of Amusement Business, etc. restrict prize unit prices to generally ¥1,000 or less. Major game machine manufacturers hold roughly half of the market share, with the remainder contested among approximately 30 companies including the Company, resulting in intense competition. In addition, operator sales are influenced by economic trends and the popularity of game machines and characters, making the Group's business performance susceptible to external environmental factors.

The majority of products handled by the Group are character merchandise, and fluctuations in character popularity directly affect business performance. If the Group is unable to obtain merchandising licenses for popular characters from rights holders, or if existing contracts are terminated, this could also impact performance. Furthermore, since merchandising licenses are often contracted by category, the Group cannot restrict competitors from using the same characters, creating a risk that differentiation becomes difficult.

Products handled by the Group have short life cycles, and if consumer trend forecasts prove incorrect or hit products enjoy only temporary popularity, this affects business performance. Because product procurement is mostly conducted based on forecasts, there is a risk that forecasting errors could lead to an increase in slow-moving inventory. If slow-moving inventory arises due to weak sales or other factors, this could lead to recording of losses on sale or disposal losses.

The Group does not own its own production facilities and relies entirely on outsourcing for production and logistics, meaning that if an outsourcing partner becomes insolvent or delivery is delayed, this could affect business performance. While risk is mitigated by diversifying outsourcing partners, the Group places particular emphasis on delivery and quality management for overseas procurement, conducting progress checks on production processes and product inspections both locally and domestically. Business performance could also be affected if product defects occur.

Since the majority of the Group's planned products are manufactured overseas, exchange rate fluctuations directly affect import prices. Although risk is mitigated through forward exchange contracts, if sharp and substantial exchange rate fluctuations continue, this could affect business performance. As increases in import costs are passed through to product cost of sales, there is a risk that this could lead to lower profitability.

The Group uses derivative transactions to address exchange rate fluctuation risk associated with import transactions, and accounts for gains and losses at fair value. Valuation gains and losses are recorded due to fluctuations in exchange rates and the Japan-US interest rate differential, among other factors, as of each fiscal period-end, which could affect business performance. While derivatives are utilized as a risk-hedging tool, depending on market conditions they could become a factor in losses.

The Group obtains and manages personal information from customers for sales promotion and after-sales service purposes, and if a serious incident such as an information leak occurs, this could affect business operations and performance through claims for damages or a decline in credibility. While the Group conducts compliance training for all employees and monitors and continuously improves its personal information protection and management practices, it is difficult to completely eliminate this risk even with such measures in place.

The Group has business partners located throughout Japan, and if a natural disaster occurs in these regions, this could affect business performance through damage to business partners or disruption to logistics. While the risk of concentration in a specific region is diversified, in the event of a widespread disaster, there is a risk that multiple business partners could be affected simultaneously. There is no specific description of a business continuity plan (BCP) in the Annual Securities Report.

Under the interpretation and operation standards revised on March 1, 2022 for the Act on Control and Improvement of Amusement Business, etc., the retail price of prizes for prize machines is regulated to generally ¥1,000 or less, legally constraining the upper limit of product unit prices. This regulation is a primary cause of the small market size in which the Group operates, and if further regulatory tightening or changes in interpretation occur in the future, this could further constrain the business environment. There is no description of countermeasures against this regulation by the Group, and the situation is accepted as part of the external environment.

The spread of the novel coronavirus that occurred in 2019 affected the sales of amusement facility operators and other businesses, and there is a track record of this also affecting the Group's business performance. The number of visitors to amusement facilities is easily affected by the spread or containment of infectious diseases, and if operating restrictions are imposed on facilities, there is a risk that demand for prizes could sharply decline. There is no description of specific countermeasures against infectious disease risk by the Group.