mobcast inc.

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RISK MANAGEMENT

The matters set forth herein are subject to various risks and uncertainties, including those described below, that could significantly affect investors’ judgment. In addition, the following statements include matters which might not necessarily fall under such significant risks, but are deemed important for investors’ judgment from a standpoint of affirmative disclosure.

The Company Group fully recognizes the potential for these risks to materialize and accordingly maintains a policy that involves endeavoring to prevent their occurrence while appropriately addressing issues that arise in that regard.

Nevertheless, it is the Group’s view that investment decisions concerning its shares should be made upon giving careful consideration to the details set forth below as well as information provided elsewhere.

Forward-looking statements herein represent the Group’s judgment as of the end of the current fiscal year and do not constitute a comprehensive list of all risks that may occur in the future.

1. Risks Related to Business

  1. Mobile-Related MarketsThe Group is primarily engaged in the mobile game business, which places a focus on services offered over mobile Internet. As such, a fundamental condition for the development of the Group’s business is the expansion of the mobile-related market as a result of network expansion and speed increase, price reduction, advances made in relevant smart phone devices, diversification, and associated telecommunication price reduction.

    As of December 2014, the number of mobile phone subscribers in Japan was 145.05 million, 99% of which had access to high-speed data communication. (Source: Telecommunications Carriers Association) In addition, the number of smart phone shipments in 2014 reached 27.7 million units, accounting for approximately 70% of mobile device shipments. (Source: Corporation MM Research Institute)

    The Group anticipates, based on these statistics, that the market will continue to expand as mobile services become cheaper and more convenient to use. However, there is a possibility that the Group’s business and earnings could be adversely impacted if unforeseen factors hinder the expansion of the mobile-related market. For example, new regulations, unfavorable trends by telecommunications carriers including increases in usage fees.
  2. Technological InnovationThe mobile industry is characterized by extremely fast cycles of technological innovation and changes in customer needs. Services based on new technology are being successively brought out to the market. In addition, there have been constant technological innovations to mobile devices, along with the appearance of sophisticated devices such as the smartphone, resulting in widespread advances.

    To ensure that the Group responds flexibly in such a rapidly changing environment, the Group is moving towards actively building up knowledge and know-how of cutting-edge technologies, including open source, and hiring excellent, highly skilled engineers.

    However, acquiring and building up knowledge, accumulating know-how, and hiring engineers may require great expense if the Group does not respond appropriately and timely to the latest technological innovations, therefore resulting in the need to make large system investments and pay high personnel costs. If such events occur, it is possible that the Group’s technical superiority and service competitiveness would be compromised and have an adverse impact on the Group’s business development and operating results.
  3. Mobile Gaming MarketWith social games* steadily transitioning in the mobile gaming market to which the Group belongs, native application games have shown rapid growth, thus expanding the market.

    If significant environmental changes occur in the future, such as the implementation of new legal regulations, rapid changes in telecommunications carrier trends such as the discontinuance of flat-rate data services, rapid changes in user tastes, or disputes with other companies in the same industry regarding intellectual property rights, it is possible that it will have an adverse impact on the Group’s business development and operating results.

    * Social games refer to online games that are integrated into social networking services (SNS)** and allow communication between users while playing.

    ** Social networking services (SNS) refer to community-type membership services that promote and support human interaction through tools such as messages and posts.

  4. Native Application Game DevelopmentIn the industry surrounding the Group, the preferred gaming platform for users has begun to change, making the transition from browser games to native application games prominent.

    In order to respond flexibly to such changes, the Group will focus on the development of native application games while continuing to expand the browser platform and distributing browser games.

    However, such a response may result in the need to make large system investments and pay high development costs, possibly leading to decreased profitability and an adverse impact on the Group’s business development and operating results.
  5. Risks Related to International ExpansionThe Group is also currently developing a mobile game business in Korea through its subsidiary, mobcast Korea inc. The Group plans to actively continue global distribution of domestically released titles in addition to original titles developed by the subsidiary.

    However, if abrupt changes occur in the distribution territories related to external factors such as the market, political conditions, laws, or regulations, it may have an adverse impact on the Group’s business development and operating results.
  6. Financial Riska.Goodwill Record

    The Group has recorded a substantial amount of goodwill in its consolidated balance sheets in accordance with generally accepted accounting principles.

    If the total of the carrying amounts, including goodwill, in relation to the business related to such goodwill exceeds its fair value, the relevant goodwill must be recalculated, and the difference between the current amount and the recalculated amount will be recognized as an impairment.

    Therefore, additional impairments may be recorded, depending on the valuation of long-lived assets and the forecast of future cash flow from business related to goodwill.
    Also, if the business related to goodwill is an overseas business, additional impairments may be recorded depending on external factors such as the market, political conditions, laws, regulations, or fluctuation in foreign exchange rates.

    b.Impairment Loss Related to Software

    In regard to the game titles developed and distributed by the Group, revenue may not reach estimated projections for such reasons as changes in user preferences.
    The Group is committed to the development of content that will satisfy its users.

    However, if content that is developed and distributed is not accepted by its users, impairment loss and software retirement will occur. This may have an adverse impact on the Group’s business development and operating results.

    c.Exchange Rate Fluctuation

    Financial statements of overseas subsidiaries are created in the local currency. However, on the consolidated financial statements they are translated into Japanese yen. Since foreign exchange gains and losses occur due to fluctuation in exchange rates, this may have an adverse impact on the Group’s business development and operating results.

2. Risks Related to Services

  1. “mobcast”

    “mobcast” is a mobile gaming platform that opened its services in February 2010. Since then, the Group has developed games such as “mobapro,” “mobaDerby,” and “mobasoccer.” The Group has also co-developed “Mobanobu – Nobunaga’s Ambition -” with Tecmo Koei Games Co. Along with the Group’s other browser games, these titles have garnered a broad range of support and increased sales.

    However, transitions in user needs and innovations are volatile when it comes to online mobile services. When the introduction of a service corresponding precisely to user needs becomes problematic for various reasons, user appeal declines. This may have an adverse impact on the Group’s business development and operating results.

    In addition, in regard to “mobcast”, the Group has continued to develop a service that is characterized by its support of user needs. However, the Group belongs to a high-growth market area, and, as new technology and services are constantly being introduced, increased competition with other companies and the entry of new businesses into the market can be expected. In the event that the Group cannot take a timely and appropriate response to these competing companies, there may be an adverse effect on the Group’s business development and operating results.

  2. Reliance on Specific Businesses for Paid Services

    Since the Group’s mobile game business revenue model requires direct user billing, a part of the payment system is reliant on specific businesses. Particularly in regard to paid services such as digital content sales, the Group uses collection agency services provided by companies such as NTT DoCoMo, Inc. and KDDI Corporation. Therefore, if the Group were to encounter changes in its business relationships with these companies, including but not limited to termination of business, or if trouble were to occur regarding payment for paid service due to such circumstances as degradation in the other party’s business or system failure, this may have an adverse impact on the Group’s business development and operating results.

  3. Reliance on Platform Providers

    In regard to the Group’s earnings, since there are plans to increase the ratio of smartphone native app games, revenue dependence on platform providers such as Apple Inc. and Google Inc., will increase. Therefore, because of conversions and trends in business strategies of platform providers due to factors such as changes in item unit prices caused by fluctuations in commission rates and exchange rates, this may have an adverse impact on the Group’s business development and operating results.

  4. Contractual Relationships with Contractors

    In regard to the Group’s main browser game title “mobapro,” through its contract with Nippon Professional Baseball Organization, the Group has received the licensed rights to use photos and names of players and coaches. Currently, the Group is unaware of any events that may interfere with the continuation of its contract with the organization. However, if contract termination or significant changes to the contract due to policy changes in the organization were to occur, this may have an adverse impact on the Group’s business development and operating results.

    Likewise, in regard to “mobasoccer,” through its contract with FIFPro Commercial Enterprises B.V., the Group has received the licensed rights to use photos and names of players and coaches. Currently, the Group is unaware of any events that may interfere with the continuation of its contract with the association. However, if contract termination or significant changes to the contract due to policy changes in the association were to occur, this may have an adverse impact on the Group’s business development and operating results.

  5. Open Platform

    In order to allow more users to enjoy its mobile game platform “mobcast,” the Group is expanding and strengthening its content lineup centered around social games. As part of this effort, the Group has opened its platform so that users can enjoy content created by third-party developers on “mobcast.” As a result of increased diversity in content, the Group expects an increase in users and user activity.

    However, in the event of receiving less content by third-party developers than anticipated, this may have an adverse impact on the Group’s business development and operating results. In addition, if troubles or issues related to the content created by the third-party developers were to occur, as the platform operators, this may damage the Company’s credibility and the “mobcast” brand.

3. System Risks

The Group recognizes that the stable operation of services, systems that support services, and Internet connection environments are prerequisites for business operations. The Group has made efforts to create a stable system operating structure by installing the system in a data center operated by a third-party that provides strict security on the server itself in addition to constant data back-ups and security improvements.

However, in the event of unexpected natural disasters or accidents, sudden increases in the number of members and traffic, software issues, illegal access via a network, or infection by a computer virus, stable operation of the service may be difficult, and this may have an adverse impact on the Group’s business development and operating results.

4. Misconduct Risks

The Group keeps and manages an extensive amount of information both private and confidential regarding its customers. The Group exercises much care in protecting the confidentiality of such obtained information, as well as training its executives and employees to be aware of the importance of information management.

In addition, regarding information security, systematic measures are taken to prevent unauthorized external access as well as virus infections.

However, there is always a possibility that customer information will be leaked, lost, altered, or used without permission due to unauthorized external access, human negligence in system operation, or deliberate misconduct by an executive or employee. Failure to respond appropriately in such situations may damage the Group’s credibility, incur financial losses, and have an adverse impact on the Group’s business development and operating results.

5. Real Money Trade (RMT) Risks

As part of the Group’s services, for the purpose of enhancing game enjoyment, a function has been provided where in-game items can be traded amongst users. In similar services provided by other companies, there have been incidences of misconduct where some dishonest users acquire items through illicit means and use or trade them online such as via auction websites in what is known as a Real Money Trade (RMT)*, and this has become something of a social concern.

In a few instances, items that are purchasable on the Group’s website have even shown up on these auction websites. In regard to RMT, the Group is putting systems in place to prevent these trades, as well as strictly prohibiting these acts in user agreements and carrying out user awareness programs. Also, the Group invokes serious penalties for violators of this policy, including suspensions or account bans.

In addition, the Group regularly patrols major auction websites and, if one of its items are discovered, a warning is promptly issued followed by a request to the website administrators to remove the item.

However, in the event that misconduct involving the items provide by the Group continue to occur and increase, trust in the Group, its services, and its brand itself may be impaired. This, in turn, may affect the Group’s business development and operating results.

*Real Money Trading (RMT) is the sale or purchase of in-game items, currency, characters or other data using real-world currency.

6. Service Safety and Soundness Risks

The Group recognizes that providing services that users can use with a peace of mind will improve reliability and contribute to the sustainable development of its business. For the sake of youth protection and to maintain and promote the soundness of its services, the Group is implementing measures such as the following:

  1. Systematic Response

    ・Word censorship – Prohibition of inappropriate and wrongful words
    ・ Mini-mail limitations – Users who are minors can only exchange mini-mails with other minors

  2. Post Monitoring System

    Post content is verified 24 hours a day, 365 days a year

  3. Prohibition and Countermeasures Against RMT (Real Money Trade)

    The Group prohibits RMT and regularly patrols auction websites, responding promptly upon discovering improper items or bids. RMT prevention measures have also been introduced into to the game system.

  4. Blacklist

    In order to prevent the increasing of troublesome behavior, the Group provides the ability for users who have been the victim of harassment to blacklist their perpetrators.

  5. Ban

    Improper conduct or behavior within the community (anti-social behavior, displays of obscenity or violence, sexual advances, commercial acts, posting personal information, vandalism, etc.) will result in suspension from the community. The Group implements a strict ban on other violations of its rules.

  6. Spending Restrictions

    Users under 18 years of age (registered age on the Group’s services) are restricted to spending no more than 10,800 yen (including tax) a month.
    In addition, a portion of the Group’s games restricts users under 18 years of age to spending no more than 3,240 yen (including tax) a month. Furthermore, the Group has also introduced a mechanism that displays a warning when monthly spending exceeds a certain level.

  7. Safety and Security Committee

    For the sake of youth protection and in an effort towards maintaining and promoting the soundness of its services, the Group regularly holds “Safety and Security Committee” meetings where measures towards strengthening the soundness of its user environment are discussed.

  8. mobcast’s 8 Rules

    On its website, the Group has published instructional rules for safe use written in plain text so that minors can comprehend them as well.
    As a result of these measures, the Group recognizes that safety and soundness of the services provided have been kept to a certain extend.
    However, if any problems were to occur within the services provided, in addition to the possibility of legal liability, trust in the Group, its services, and its brand itself may be impaired. This, in turn, may affect the Group’s business development and operating results.

7. Risks Related to Legal Regulations and System Trends

  1. Legal Regulations Related to the Internet

    The Group is primarily engaged in the mobile game business, which places a focus on services offered over mobile Internet. As such, it recognizes that compliance with laws and regulations related to the Internet as well as other laws and regulations is an important management priority.

    Of the main domestic laws and regulations related to the Internet pertaining to the Group, the “Telecommunications Business Act” is the Group’s highest priority. Since the Group has registered as a “Telecommunications Carrier” according to the Act, it is obligated to protect the privacy of communications.

    Next, there is the “Act on the Limitation of Liability for Damages of Specified Telecommunications Service Providers and the Right to Demand Disclosure of Identification Information of the Senders” (“Provider Liability Limitation Act”). Since the Group is a “Specified Telecommunications Service Provider” according to the Act, in cases where a third party’s rights are infringed by information distributed through telecommunications, the Group may be obligated to disclose information on the person who sent the rights-infringing information, as well as to pay damages to the person whose rights were infringed.

    Also, there is the “Act on the Prohibition of Unauthorized Computer Access.” The Act prohibits the use of a third party’s ID or password without their permission, as well as the exploitation of system defects to gain unauthorized access. The Group is an “Administrator” according to this Act, and as such is obligated to take measures to prevent any unauthorized access.
    In addition, the Group may be obligated to disclose matters required by law when transmitting certain e-mail advertisements under the provisions of the “Act on Specified Commercial Transactions” and the “Act on Regulation of Transmission of Specified Electronic Mail.”

    Furthermore, on April 1, 2009, the “Act on Development of an Environment that Provides Safe and Secure Internet Use for Young People” came into effect. The Group is a “Business Related to Internet Use by Young People” according to this Act. Accordingly, it is obligated to implement measures to minimize the opportunities for minors to encounter harmful information while using the Internet, and has the responsibility to educate minors on how to use the Internet appropriately.

    In addition to the above, various discussions on Internet use has been made in Japan in recent years. If interpretations of the existing relevant laws and regulations are amended to changes in social conditions, or if new laws and regulations are introduced in the future, this may adversely affect the Group’s business development and operating results.

  2. Laws and Regulations Related to Social Networking Services

    The Group’s “mobcast” mobile platform services are operated on the assumption that communication between users will be appropriate, and therefore is not an “Internet Dating Business” as defined in the “Act on Regulation of Soliciting Children by Using an Opposite-Sex Introduction Service” on the Internet.

    If interpretations of the existing relevant laws and regulations are amended due to changes in social conditions, or if new laws and regulations are introduced in the future, this may adversely restrict the Group’s business

  3. Laws and Regulations Related to Protection of Personal Information

    The Group handles personal information that can identify its users through the provision of Internet services. Accordingly, the Group bears the obligations of a Business Operator Handling Personal Information according to the “Act on the Protection of Personal Information,” and is obligated to strictly adhere to laws protecting personal information in countries where it operates. In order to avoid external leaks or manipulation of personal information, the Group considers managing personal information to be an important aspect of business operations, and it strives to comply with the Act and related regulations by increasing awareness about the protection of personal information, by disseminating the existence of the relevant rules through in-house training for executives and employees, and by clarifying workflows and structures of responsibility when personal information is being handled. In addition, it has established internal regulations and standards for handling personal information such as the Personal Data Protection Regulations. Other measures include storing all personal information in a server that is physically separate from the one used for providing and developing services. Access to this server is strictly limited and only access via a special secure server is permitted to employees who require it to fulfill their tasks.

    However, in the event that personal information is leaked or misused by an employee of the Group, a Business Risks business partner, or a contractor, whether intentionally or accidentally, damage to the trustworthiness and brand image of the Group and its provided services may ensue. In addition, the Group could be held accountable in claims for damages and other liabilities. As a result, this may adversely affect the Group’s business development and operating results.

  4. Laws and Regulations Related to Social Game Specifications

    A portion of the media has raised issues concerning the above mentioned RMT, youth protection and soundness mentioned in 6., and such things as an inducement of excessive gambling spirit in regard to the social games distributed by the Group.

    In addition, on May 18, 2012, the Consumer Affairs Agency (CAA) announced (“Regarding ‘Kompu Gacha*’ in Online Games and Premium Regulations Under the Premiums and Representations Act”) that “Complete Gacha” and other corresponding systems fall under guidelines “required to present a certain combination of various different cards” set forth in Section 5 of “Restriction on Premium Offers by Lotteries or Prize Competition” (FTC Notification No. 3 of March 1, 1977) based on the Act Against Unjustifiable Premiums and Misleading Representations (Premiums and Representations Act) and that “Complete Gacha” may function as prizes which are prohibited in Section 5 of the same Notification. Furthermore, on July 1, 2012, ”Guidelines for the Interpretation of the Notification on Premium Offers by Lotteries or Prize Competition” (April 1, 1977 Secretary General Notice No. 4) was amended*** to specify “Complete Gacha” as a prohibited act.

    “Complete Gacha” or other corresponding systems have not been introduced into the social games distributed by the Group. Therefore, the regulations regarding “Complete Gacha” do not directly impact the Group. In regard to the other issues set forth, although there is currently no clear violation of laws or regulations, the Group believes that individual companies who provide such services, as well as the industry as a whole, should voluntarily address and respond to these issues and work towards preventing compromise to the soundness and development of the industry. However, if interpretations of the existing relevant laws and regulations are amended due to changes in social conditions, or if new laws and regulations are introduced in the future, these issues may adversely restrict the Group’s business

    *Complete Gacha (Kompu Gacha) refers to a system that enables players (consumers) to win rare items by completing a specific set of items obtained through purchasing Gachas** within online games.

    **Gacha refers to a system that enables users (consumers) of online games to obtain characters or items within the game. The consumer is unable to freely select which character(s) or item(s) they will obtain, but instead receives them at what appears to be a chance selection from the consumer’s perspective.

    ***The revised “Guidelines for the Interpretation of the Notification on Premium Offers by Lotteries or Prize Competition” deems the following to constitute methods involving card combinations.
    “When items employed within a game that is distributed on a mobile network or the Internet are provided for a fee using a method where the variety of the item is determined by chance. When players who complete a specific set of items are provided with, for example: characters who fight opponents within the game, items used to decorate the virtual space of a character who becomes the alter ego of the player (what is referred to as an “Avatar”), or other such items that can be used within the game.”

8. Risks Related to Personnel Structure

The Group believes that, for the sake of stable business continuity and further business expansion, securing the appropriate personnel for individual fields as well as personnel placement is essential.
The Group especially believes that securing exceptional personnel involved in game production is important. However, the Group recognizes that, with all the significant innovations, there is a limited amount of personnel who possess a wealth of experience, making the task of securing exceptional personnel difficult. Therefore, in the event that the appropriate personnel and personnel placement cannot be secured or personnel migration occurs, there may be an adverse effect on the Group’s business development and operating results.

9. Risks Related to Natural Disasters

As the Group’s subsidiary in South Korea is the only other office besides its headquarters, in the event that natural disasters such as earthquakes and typhoons or other circumstances that would hinder the continuation of business activities were to occur, it may impact the Group’s business and performance.
The Group is considering a business continuity plan in preparation for such an occurrence and plans to implement precautions according to the circumstances. However, in the case that external or physical damage caused by such disasters far exceed expectations, the continuation of the Group’s business may become problematic.

10. Risks Related to Dividend Policy

Since the Group’s establishment, even when recording a net income, having placed a priority on strengthening the Group’s financial foundation and conducting aggressive business expansion, the Group has not paid out dividends. On the other hand, regarding the return of profit to shareholders, the Group recognizes that this as an important management issue and plans to examine the distribution of dividends.
However, the possibilities and implementation period are as of yet undecided.

11. Risks Related to Dilution of Share Value due to the Exercise of New Share Subscription Rights

As an incentive for executives and employees of the Group, new share subscription rights (hereinafter referred to as “employee stock options”) are provided. In the case that these employee stock options are exercised, the issuance of new Company shares may dilute the share value and voting rights of existing shareholders. In addition, for the purpose of financing, third-party allotted new share subscription rights (hereinafter referred to as “third-party allotted stock options”) are provided. In the case that these third-party allotted stock options are exercised, the Company’s shares will be newly issued, there is a possibility that the value and voting rights of shares held by existing shareholders are diluted.
As of December 31, 2014, there were 254,700 dilutive shares associated with employee stock options and 1,290,000 dilutive shares associated with third-party allotted stock options, making the total number of dilutive shares 1,544,700 equivalent to 10.9% of the total number of outstanding shares, which was 12,200,808.