(1) Risks common to all segments

1 Business environment–related risks

1) Risks related to the growth potential of the imaging business

The Group operates a variety of businesses within the imaging business domain.
As imaging media diversify, the frequency of video usage in a wide range of media is increasing, giving rise to changes in video-related user needs and preferences. To address these needs, we are establishing a system to provide fine-tuned services and taking initiatives to create new imaging experience opportunities such as strengthening our live entertainment and game-related businesses. Additionally, we are optimizing our existing businesses in response to environmental changes.
However, the diversification of demand for video content may lead to a decline in its market value, intensify competition, and result in slower growth of the imaging business. This could adversely affect the Group's operating results and financial position.

2) Risk of technological change in the imaging business

Technological advances and changes in video systems related to production and distribution are significant in the imaging business areas in which the Group operates. The Group is introducing new technical services, such as cloud-based editing systems that enhance the safety and flexibility of remote production environments, as well as virtual production services. Going forward, it will be necessary to continue responding to such technological changes.
However, responding quickly to technological changes in the imaging industry may result in increased costs for developing and introducing new production methods and systems. Additionally, as competitors respond to technological changes, the Group's technological advantages may diminish. If this occurs, it could affect the Group's operating results and financial position.
Furthermore, as generative AI spreads, there is a possibility that outsourcing to us become simpler or even obsolete. Therefore, it is crucial to conduct in-depth research on AI, utilize it efficiently in operations, and provide services that surpass AI's capabilities. Depending on the future evolution of AI, however, this could impact the Group's operating results and financial position.

3) Risks related to the creation of new business models

In the imaging business, there has been a shift away from traditional video distribution channels such as TV broadcasting, movie theaters, and DVDs, and with the growth of the internet, and particularly the use of smartphones, it is now possible for anyone to easily access video content and to inexpensively produce video content, which has dramatically changed the imaging distribution structure. Competition is also intensifying due to the unprecedented emergence of competitors, thus, it is necessary to ascertain these changes in imaging needs and flexibly develop the imaging related business.
In this environment, we are pursuing new initiatives that go beyond traditional business models, such as expanding transactions with internet video streaming service providers, including overseas companies, enhancing global end-to-end services to accommodate diverse imaging distribution channels, additionally, promoting the planning and production of various imaging events and expanding the value of original IP. However, if the Group is unable to accurately capture rapidly changing consumer preferences and adapt our business model accordingly, it could adversely impact our operating performance and financial position.

2 Risks related to mergers & acquisitions, etc.

The Group is developing business alliances, mergers & acquisitions (M&A), etc. to expand its share of the video production and technical services market, develop new services, expand existing businesses, acquire imaging-related technologies, and address personnel shortages, and has positioned these as important elements of its management strategy.
When undertaking a merger & acquisition, etc., we conduct a detailed examination of the business value, financial and legal aspects, etc. of the target company to avoid risks associated with the merger & acquisition, etc.
However, if the business value of the target company declines, or the synergistic effect with the Group is not fully realized after the merger & acquisition etc., we may need to write down goodwill and other assets, which could affect the Group's operating results and financial position. It is also possible that contingent liabilities or unrecognized compliance violations of the target company may come to light.
We already acquire new business models for the imaging business through such activities as investing in start-up companies, but if we do not realize the expected investment return on account of changes in the business environment or operational problems at the Company invested in, this could affect the Group's operating results and financial position.

3 Risks related to securing and developing talent

The Group's imaging business requires creative talent with expertise in the fields of video production and imaging systems, and the Group works together to acquire such talent. However, if dramatic changes in video production methods and technologies or video-related user preferences cause the Group's brand strength in the imaging business to decline, the Group may not be able to secure and train enough talented personnel, and its competitive organizational strength may decline.
In addition, in the current labor shortage environment, there are risks such as employee overwork, operational dependency on individuals, and increased outsourcing and commissioning costs. Such cases could affect the Group's operating results and financial position.

4 Risks related to large-scale disasters, infectious diseases, etc.

In case of the event of direct damage to people or property caused by natural disasters or business disruption due to social demands arising from such disasters, we have implemented measures such as introducing an employee safety confirmation system and establishing business continuity plans through the Risk Management Committee. Additionally, we are taking steps to minimize damage by purchasing fire insurance and other policies. However, these measures may not be sufficient to address all potential impacts. Such factors could adversely affect the operating results and financial position of the Group.
In addition, the spread of new infectious diseases such as influenza or COVID-19 could cause changes in the environment, such as paralysis of the business due to restrictions on business activities and video production activities, requests for voluntary restraint or postponement of various events, or cancellation of advertising activities due to an economic downturn, which could affect the Group's operating results and financial position.

5 Risks related to information security

The Group's major companies have acquired Privacy Mark and ISMS/ISO-IEC27001:2013 (Information Security Management System) certification. Additionally, given that our business often involves access to confidential information, such as work-related data prior to public disclosure, we provide all employees with compliance training, including information security training, to enhance their awareness of information management. We also perform information security risk assessments and implement measures to address network vulnerabilities. We standardize security standards across group companies to strengthen our countermeasures.
However, risks remain, such as insufficient awareness of the dangers and vulnerabilities of information asset leakage, inadequate business continuity measures in the event of system downtime that exceeds anticipated countermeasures, unforeseen incidents that deviate from current management standards like leaks from trusted external contractors, employee actions that disregard prohibited items, or unauthorized access by malicious third parties. Although we have implemented countermeasures, such as cyber risk insurance, such incidents could negatively impact our group's operating performance and financial position due to factors such as a decline in social credibility, compensation for damages, and costs associated with recovery efforts.

6 Risks related to intellectual property rights

The Group protects its rights in the various countries that it conducts its imaging business, including both Japan and overseas, by acquiring intellectual property rights, such as copyrights related to content creation, patents and trademarks related to imaging technology, and licenses to intellectual property rights. The Group also manages its intellectual property rights so as not to infringe on the intellectual property rights of third parties.
The rapid proliferation of generative AI raises concerns about information security risks and intellectual property rights associated with its use. As a group, we have established projects to collect the latest information, develop and disseminate usage guidelines, and implement countermeasures. However, unauthorized use, imitation, or other infringements of our intellectual property rights, including those related to AI, may still occur, and we may not be able to prevent all such infringements. There is also the possibility of claims regarding infringement of such rights as intellectual property rights to video content used by the Group. If this occurs, it could affect the Group's operating results and financial position.

7 Risks related to compliance

When conducting its imaging business, the Group is subject to various legal regulations. In addition, in each country that it conducts business, the Group is subject to the legal regulations of that country.
The Group strives to promote compliance and foster awareness of social norms by conducting not only compliance training for all employees in Japan but also compliance training at each group company that is tailored to the needs of that company.
However, the Group could lose the trust of its business partners and customers due to disciplinary measures, lawsuits, or loss of reputation resulting from violations of laws and regulations or actions by employees that are contrary to social expectations. If this occurs, it could affect the Group's operating results and financial position.

8 Financial risks

1) Risks related to the timing of revenue accrual and recording

As part of the operation of the imaging business within the Group, there are cases when the scale or content of an ordered project deviates significantly from what was expected, or the delivery date is changed and total net sales and earnings are delayed to the next month, next quarter, or next fiscal year. In particular, for the commercial and TV content production and production technology services businesses, net sales and earnings tend to be concentrated around the end of the quarter, in September and March, because they are linked to the advertiser's advertising budget and TV stations' TV programming reshuffle. Therefore, if net sales and earnings are posted in different periods/fiscal years, this could affect the Group's operating results and financial position for the period depending on the amount.

2) Risks related to investment securities

Sometimes, the Group acquires shares (securities) of business partners in order to more effectively develop its business. When acquiring such shares, the Group conducts a preliminary examination of the target company's state of management and future business plan, and acquires the shares comprehensively taking into consideration such factors as business synergies with the Group, profitability, risk factors, etc. However, it is difficult to completely predict these factors. If the target company's corporate value declines in the future for any of various reasons, including the target company's business expansion falling short of initial plans, the Group may be forced to record an impairment loss on the securities it acquired, which could affect the Group's operating results and financial position.

(2) Risks in each segment

1) Content Creation business

Changes in the content creation production process, such as delays in production schedules, may result in extended production periods and costs that exceed the initially estimated production budget. The Group addresses this issue by strengthening its management system, but if the production budget exceeds the original estimate, this could affect the Group's operating results and financial position.
In addition, the Group makes joint investments in the production of feature films and other content for various media and earns revenue from related profit sharing and secondary use rights. Although we evaluate profitability and risk factors when making investment decisions, an increase in released works or a concentration of hits on a few works makes it difficult to anticipate market reactions fully. This may result in revenue falling short of expectations. The Group addresses this issue by conducting thorough research and creating a system to identify risks for each work, but if it is not possible to earn the anticipated return, this could affect the Group's operating results and financial position.

2) Production Technology Services business

Within the Domestic E2E services and post-production services, commercial-related operations and TV program operations, which are paid for through corporate advertising expenditures, are easily impacted by changes in the economy, and the number and value of orders tends to decline during economic downturns, which could affect the operating results and financial position of the Group.
In addition, some of our location shooting and live broadcasting services are highly dependent on specific suppliers, and if a sudden or unexpected event occurs with those business partners, making it difficult to conduct business with them, this could affect the Group's operating results and financial position.
The overseas E2E services business is comprised of multiple overseas subsidiaries, primarily Pixelogic Media Partners LLC, and changes in various systems, customs and culture, political and economic conditions, and foreign exchange rates in the countries and regions in which we operate could affect the Group's operating results and financial position.

3) Imaging Systems & Solutions business

The Imaging Systems & Solutions business develops and manufactures various types of imaging equipment. However, if the sales of new products do not generate the expected revenue, or if there are defects, failures, or complaints about the products, the increase in impairment loss and such costs as those to respond to the problem could affect the Group's operating results and financial position. In addition, some operations are highly dependent on specific business partners, and there is the possibility that a sudden or unexpected event could occur with those business partners, making it difficult to conduct business with them. We are addressing this issue by increasing the number of staff in and consolidating R&D departments through the acquisition of talent throughout the Group and acquisition of shares in companies engaged in system solutions and other activities, strengthening education and training, and establishing a specialized department for new business development. However, such cases could affect the operating results and financial position of the Group.
In addition, the manufacture and sale of various types of imaging equipment requires the procurement of essential components and materials. If the prices of these components and materials rise beyond the level originally anticipated or if they become difficult to obtain, it could affect the Group's operating results and financial position due to an increase in manufacturing costs or difficulties in continuing production as planned.

As we export our imaging equipment overseas and develop and manufacture medical-related imaging equipment and similar products, we are required to comply with the Foreign Exchange and Foreign Trade Act and Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices, etc., and conduct business after obtaining the necessary licenses and approvals. The Quality Assurance Department monitors the latest information to ensure compliance with these laws. However, if new costs are incurred due to unexpected changes or tightening of these regulations, this could affect the Group's operating results and financial position.