Disclaimer: The following is an extracted translation of the Japanese language annual securities report (yuka shoken todokedesyo) for the year ended January 31, 2023 submitted on June 23, 2023.

Business and other risks

• (1) About our group as a whole
(1) Risk of earnings deterioration due to the slump in the amusement industry
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
The earnings of the GENDA Group are heavily dependent on GENDA GiGO Entertainment Inc., which operates amusement arcades. While the market size of the amusement industry in Japan has expanded driven by the popularity of prize games related to Japanese animation, there is a risk that the performance of GENDA GiGO Entertainment Inc. and GENDA Games Inc., which conducts machine lease business for amusement arcades, may deteriorate due to the diversification of leisure markets, the expansion of home and social games, and the further decline in the birthrate. Additionally, it is considered that the entry of new manufacturers in the amusement machine industry is limited due to the monopolization by major companies, resulting in fewer opportunities to create innovative game machines and the possibility that the entire amusement arcade industry may become inactive.
GENDA Group intends to import amusement machines from overseas game machine manufacturers, develop game machines planned by GENDA Group, and develop new business models for amusement arcades, but if these do not progress as planned, GENDA Group's financial position and operating results may be affected. However, in the event that these developments do not progress as planned, there may be an impact on the financial condition and business performance of GENDA Group.
(2) Dependence on a specific individual
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
The Representative Director and Chairman of the Board, Nao Kataoka, is the founder of the Company and has played a significant role in the business development of the Company since its foundation. Kataoka has extensive experience and knowledge in the operation of amusement arcades, and he is currently focused on the optimal operation of individual businesses related to the operation of amusement arcades. The Company has been working to develop a management structure that is not overly dependent on Kataoka, while strengthening its organizational structure by promoting information sharing and the transfer of authority to officers and employees at Board of Directors meetings, Investment Committee meetings, and Group Management Meetings. However, if for some reason it becomes difficult for Kataoka to continue his management of the Company, it may affect the financial condition and business performance of the GENDA Group.
(3) Relationship with Midas Capital Co.
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
The leading shareholder of the Group Company "Hideki Yoshimura and Midas B Investment LLC" and major shareholder “Midas Capital G Fund LLC" are financed by Midas Capital Co., Ltd (hereinafter referred to as “Midas Capital”). Midas Capital is a private equity fund led by Mr. Yoshimura and is comprised of members who are entrepreneurs or businesspeople who aim to grow and strengthen collaborations with other entrepreneurs, both domestic and international, unlike common private equity funds. In principle, Midas Capital does not accept funding from external sources and its members invest in the funds that the company establishes as either general partners or limited partners. Nao Kataoka, Representative Director and Chairman of the Board, and Mai Shin, Representative Director and President, hold 8.33% and 1.67%, respectively, in "Midas Capital G Fund Limited Liability Partnership," which is a major shareholder of the Company. Kataoka and Shin have waived their voting rights in the fund by a separate memorandum of understanding. For more information on Midas Capital including an overview, management philosophy, and investment targets, please visit the company's website (https://midascapital.jp/).
Currently, as of the date of this report, the Company maintains a positive relationship with Midas Capital Co., Ltd. and Midas Group (comprising of Midas Capital, the funds established by Midas Capital Co., Ltd., and its affiliated companies (hereinafter referred to as "Midas Funds"), and the companies invested in through the Midas Funds). However, in the event of a change in the management principles of Midas Capital, it may have a significant impact on the Company's resolutions made by shareholders' general meeting, such as the selection and dismissal of board of directors, organizational restructuring through mergers with other companies, divestitures, and changes to articles of incorporation.
Midas Capital comprises multiple funds, and in general, the management of the companies that the funds invest in are the substantive investors. However, in the event that a company or its investors in which Midas Capital or other funds invest, experience a loss of social credit due to violations of laws or other reasons, there may be an impact on the financial condition and business performance of GENDA Group due to the commonality of the funds, which have “Midas” in their name, and the potential for reputational damage, despite the absence of direct relationships with the Group Company.
Governance principles of Midas Capital and the relationship between the Company and Midas Group Midas Capital has established governance principles that apply to all companies in the Midas Group, and regulations and monitoring are in place for business transactions, capital transactions, and personnel interactions among the group companies. Details on the governance principles and the status of the Group Company are as follows:
(i) Business Transactions
Information on the governance principles of Midas Capital
Reasonable economic conditions (transaction details, circumstances of the start of the transaction, transaction price) that do not deviate from transactions with third parties or market transactions are established when conducting business transactions between companies belonging to the Midas Group. In addition, resolutions of the board of directors or a similar decision by the institution on both parties are required when starting business transactions between companies belonging to the Midas Group. In principle, the composition ratio of the amounts recorded for total sales, total cost of sales, total selling and general administrative expenses, total assets, and total liabilities in transactions with other companies in the Midas Group should not exceed a certain standard for each investment target company, and mutual monitoring is to be carried out.
Information of the Company
The Company is conducting the following business transactions with the Midas Group. The transaction value is set as equivalent to that of transactions with independent third parties in terms of economic conditions when conducting business with companies within the Midas Group.
Entity	Transaction counterparty	Transaction details	Background of the transactions	Transaction price
GENDA GiGO Entertainment Inc.	AViC Co., Ltd.	Ad placement of online crane game services	Introduced by GENDA	FY2023/1: 20 million yen Percentage of advertising expenses: 2.11% FY2022/1: 11 million yen Percentage of advertising expenses: 1.32%
GENDA GiGO Entertainment Inc.	inglewood Co., Ltd.	Use of services to prevent credit card fraud in online services	By referral from SPSS Co., Ltd.	FY2023/1: 0 million yen FY2022/1: -
GENDA GiGO Entertainment Inc.	Shikomel Food Tech Inc.	Food and Beverage Purchasing	Based on a review by GENDA GiGO Entertainment, GENDA Inc.	FY2023/1: 0 million yen FY2022/1: -
GENDA Inc. (Currently GENDA Games Inc.)	AViC Co., Ltd.	Ad placement of online crane game services	Sales promotion by AViC Co., Ltd.	FY2023/1: 61 million yen Percentage of advertising expenses: 39.20% FY2022/1: 100 million yen Percentage of advertising expenses: 85.84%
SPSS Co., Ltd.	inglewood Co., Ltd.	Sales of appliances and design fees	Sales promotion by SPSS Co., Ltd.	FY2023/1: 3 million yen FY2022/1: 16 million yen
(ii) Capital Transactions
Information on the governance principles of Midas Capital
In principle, companies within the Midas Group will not make new investments or loans to other companies within the Midas Group.
Information of the Company
Based on the fact that companies within Midas Group are independent companies, the Company has the following basic policy regarding transactions (hereinafter referred to as "financial transactions") that may result in capital transactions or monetary lending or similar effects between participating companies
A) As a principle, the Company will not conduct any new capital transactions or financial transactions with companies participating in Midas Capital. In the event that a transaction is carried out, the Company will carefully check and consider the necessity and rationality of the transaction with the board of directors and disclose the information of the transaction.
B) In the event that capital transactions or financial transactions are carried out, the Company will not take any corporate actions that may distort the creditworthiness of the Company or the Midas Group or damage the soundness of the capital market as a result of the transaction.
As of the date of submission of this document, Marine Food Co., Ltd., which is majority-owned by Midas Capital, holds 2,000 shares (shareholder’s ratio [2.29%]) of the Company's stock. Marine Food Co., Ltd. invested in our company on December 20, 2019, and joined the Midas Group in July 2021, so the Company recognizes that the above policy does not conflict with this. There are also no plans for additional investment by the company in the future.
(iii) Personnel Interactions
Information on the governance principles of Midas Capital
In principle, regular staff members of the companies within Midas Group do not hold concurrent positions with other businesses within Midas Group. In addition, if a staff member of Midas Capital takes on a position as an officer of an investment target company, it is limited to being a non-executive and independent director or auditor, and officer compensation will be within a reasonable range based on market conditions.
Information of the Company
Considering that companies participating in the Midas Group are independent companies, the Company has a basic policy of not engaging in personnel exchanges such as concurrent positions with other companies within the Midas Group or Midas Capital, following the listing.
Currently, no officers of the Company hold concurrent positions with other companies within the Midas Group or Midas Capital.
(4) Fluctuations in the financial performance of subsidiaries
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
Our group operates under a pure holding company structure, and we are striving for the growth of the entire group through the expansion of each subsidiary's business. Therefore, the financial position and operating results of each subsidiary may have a significant impact on the financial position and operating results of the entire Group. Currently, the Company is carrying out overall management of the group and each subsidiary's business strategies and management, however, if the business operations of each subsidiary do not proceed smoothly or if unexpected changes occur within the group companies, its financial condition and business performance may be affected.
(5) Risks related to M&A and other similar activities
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
GENDA Group aims to enhance existing businesses and efficiently enter new businesses through M&As and business partnerships targeting both domestic and global entertainment companies. GENDA Group utilizes its management expertise to create synergies in business with acquired or partnered companies. However, the following reasons may have an impact on the financial condition and business performance of GENDA Group.
(i) Progress of business plan after acquisition:
GENDA Group conducts sufficient due diligence and carefully consider risks related to the business, finance, and laws during the process of M&As. However, if the business plan assumed at the time of acquisition does not progress as planned, there is a possibility that it could affect the financial position and business performance of the GENDA Group, for example due to impairment of goodwill, etc.
(ii) Occurrence of unexpected debt and unrecognized debt:
When executing M&A, the GENDA Group conduct due diligence on the target company's businesses, finances, legal affairs, and taxes in advance, to make decisions after sufficiently identifying risks and analyzing ordinary earning power. However, if problems arise that were unable to identify during the prior investigation, such as the occurrence of unexpected debt or the identification of unrecognized debt, it could affect the financial position and business performance of the GENDA Group.
(iii) Asset restructuring associated with integration:
In the post-M&A management integration process, there is a possibility that extraordinary profits or losses may occur through business reorganization or the sale of idle assets, which could affect the financial position and business performance of the GENDA Group.
(iv) Financing arrangements for M&As:
GENDA Group is considering M&As of related businesses as one of the effective means to accelerate business expansion. In addition to new financial burdens and dilution and changes in equity capital, if new borrowing is used, depending on the situation of market interest rate changes, the burden of borrowing interest may increase, which could affect the financial position and business performance of the GENDA Group.
(v) Consolidated financial statement system due to increase in consolidated subsidiaries:
Currently, GENDA as the holding company works closely with each of its subsidiary to ensure the timely and appropriate closing of accounts. However, if it fails to settle the accounts in a timely and appropriate manner due to inadequate management systems, it may not be able to close its consolidated financial statement in a timely and appropriate manner.
(6) Risks due to legal regulations
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Impact: High)
The businesses of GENDA Group may be subject to regulatory risks, such as those related to laws and regulations governing business operations, including but not limited to: the Act on Control and Improvement of Amusement and Entertainment Businesses, Fire Service Act, Specified Commercial Transactions Act, Payment Services Act, Act against Unjustifiable Premiums and Misleading Representations, Act on the Protection of Personal Information, Act on Regulation of Transmission of Specified Electronic Mail, Food Sanitation Act, Act on Prevention of Transfer of Criminal Proceeds., Secondhand Articles Business Act, the California Consumer Privacy Act, the Children's Online Privacy Protection Act, Consumer Contract Act, Civil Law, Act on Prohibition of Private Monopolization and Maintenance of Fair Trade, Copyright Act, Act against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors and Telecommunications Business Act. In close cooperation with industry associations and experts, we will immediately respond to any amendments to these laws and regulations, but in the unlikely event that we are unable to do so as expected, the financial position and business performance of our group may be affected.
(7) Risk of consumption tax rate hike
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
In the event of a consumption tax rate increase, we will take measures to reduce costs and further improve management efficiency so that customers will not be burdened. However, if such measures would also cause a significant loss of profit, we will consider measures to pass on the tax increase to customers through price increases. GENDA Group has been introducing amusement machines equipped with cashless payment systems and has relative price flexibility compared to amusement machines that do not have cashless payment systems. However, if GENDA Group is unable to pass on the tax increase to prices, its financial position and operating results may be affected.
(8) Risks related to internal controls
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
GENDA Group has established and is operating a system to ensure the appropriateness and reliability of its financial reporting and is making continuous improvements. However, even in situations where an effective internal control system has been established, the internal control system may fail to function due to various factors, such as malicious or grossly negligent actions by employees or others. Failure to properly address such events could result in future violations of laws and regulations or other problems, and in the loss of the GENDA Group's social credibility, which could adversely affect its business, or in the payment of administrative penalties, fines due to criminal lawsuits, or damages due to civil lawsuits, which may potentially affect the financial position and business performance of GENDA Group.
Furthermore, the GENDA Group has established and is operating a system to ensure the effectiveness and efficiency of its operations and is making continuous improvements. However, the system may fail to function due to various factors, such as changes in the business or social environment that was not anticipated at the time the internal control system was established, or the inability of internal organizations and functions to properly respond to the invalidation of the system due to such changes. Failure to properly address such events may potentially affect the financial position and business performance of GENDA Group.
(9) Use of Funds
(Likelihood of manifestation: Low; Likelihood of manifestation: within one year; Degree of impact: High)
GENDA Group plans to use the proceeds from the planned public offering to open new amusement centers and purchase amusement machines. However, in order to respond to changes in the external environment surrounding our group or in the business environment, there is a possibility that the procured funds will be used for purposes other than those planned. In such a case, we will promptly disclose the change in the use of the funds. Even if the funds are used as planned, GENDA Group may not be able to achieve the expected results, which may affect its financial position and operating results.
(10) Contingent risks
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
GENDA Group has subsidiaries and stores throughout Japan and internationally. Therefore, in the event of a natural disaster such as a major earthquake, torrential rains, pandemic of infectious diseases including Covid-19, or other catastrophe, social or political incident, or upheaval in the regions where GENDA Group operates, GENDA Group may be adversely affected, such as suspension of headquarter functions, damage to stores, or suspension of operations. This may potentially affect the financial condition and business performance of GENDA Group.
In addition, outbreaks of new epidemics such as COVID-19, which continues to spread around the world, may disrupt the business activities of the stores operated by the Company resulting from issues such as the decrease in the number of customers visiting amusement arcades, shortened operating hours, temporary closures, and self-quarantine measurements requested from the local authorities.
(11) Risks related to securing human resources
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
In order to continue and expand each of GENDA Group's businesses, it is necessary to secure experienced and talented human resources that match the characteristics of each business. Our group conducts recruitment, education, and training, etc. by appropriating a budget based on a recruitment plan. However, if we are unable to secure human resources as planned, it may affect our business performance. In addition, the declining birthrate and aging population are expected to lead to an aging workforce and a decrease in the number of workers.
(12) Risks from rumors on the Internet and other media
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
The occurrence and spread of reputational damage due to various postings on the Internet, including the misuse of trademarks owned by GENDA Group and complaints from customers, could affect the business, financial position, business performance, brand image, and social credibility of GENDA Group, regardless of the accuracy of the content of such postings. Brand image and public trust may also be damaged by inappropriate actions or other incidents involving employees or third parties.
Reputational damage could include allegations of illegal, unfair, or inconsistent employee conduct, employee dissatisfaction, inappropriate postings in media reports or on the Internet or social networking sites, criminal acts, data privacy violations, internal control deficiencies, or scandals involving employees of GENDA Group or other companies in the same or similar industries. Regardless of whether the allegations or complaints are upheld, any unfavorable publicity regarding the stores of GENDA Group, competitors' stores, or the amusement market could adversely affect the credibility of GENDA Group with respect to all stores. The Company has established a customer service center to directly address customer complaints and pay close attention to the Company's compliance with laws and regulations and corrective action instructions. In addition, the Company has been educating its employees, led by its Chief Branding Officer (CBO), about the Company brand and is working to create a brand image of safe and enjoyable stores. However, if some customer complaints or other actions by employees of the Company or similar companies develop into a situation that damages the credibility and image of the GENDA Group as a whole, the financial position and business performance of GENDA Group may be affected.
(13) Possibility of lawsuits
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
GENDA Group is striving to establish a compliance system and works with its legal advisors for any concerns that may become an issue in the future and conduct its business with the utmost care against the risk of litigation. However, in the event that a lawsuit is filed by the business partners or customers of GENDA Group for some reason, the financial position and business performance of GENDA Group may be affected depending on the nature and outcome of the lawsuit or other action.
(14) Pension Liabilities
(Likelihood of manifestation: Medium; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
The SEGA Corporate Pension Fund, of which consolidated subsidiary GENDA GiGO Entertainment is a member, is an integrated multi-employer plan. As a result, the amount of retirement benefit expenses may increase or decrease due to changes in the basic rate used in the actuarial calculation of retirement benefit obligations, changes in the pension plan, gains or losses from the management of pension assets, and changes in the contribution policy of this fund. In addition, if the Fund is dissolved or frozen, or if the company withdraws from the Fund or transfers to a defined contribution pension plan, the financial position and business performance of GENDA Group may be affected due to losses corresponding to assets related to retirement benefits resulting from the termination of the retirement benefit plan.
(15) Dividend Policy
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
The basic policy of GENDA Group with respect to the distribution of profits is to secure the internal reserves necessary for future business development and strengthening of the management structure in anticipation of M&A, which is the pillar of our growth strategy, while always keeping in mind the improvement of per share value and comparing business investment and dividends to optimize capital distribution from time to time. As of the date of submission of this document, we have not paid dividends since the establishment of the company from the viewpoint of optimal capital allocation to improve per share value, since we are in a state where there are many effective business investments that contribute to improving stock value in comparison to dividends.
In the future, the Company may implement measures to return profits to shareholders, taking into consideration of its business performance and financial position, but at this point, the possibility and timing of dividend payments have not yet been determined.
(16) Risks related to overseas business development
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
GENDA Group operates businesses in China (Five Colors Inc.), Taiwan (GiGO Taiwan Inc.) and the United States (Kiddleton, Inc.). Overseas business activities may be affected by trends in economic growth and exchange rate fluctuations, as well as changes in legal regulations regarding investment, trade, foreign currencies, taxes and business licenses, differences in lifestyle, labor-management relations, and other political and social factors. When opening new stores or developing new services, our group will comply with the various laws and regulations of the region and secure human resources. However, failure to address these risks may affect our group's financial position and operating results.
(17) Risks related to unauthorized use of credit cards
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
If a product purchase or gameplay is made using a fraudulently used credit card, the e-commerce site operator may be challenged by the original owner of the credit card. If the credit card company cancels a series of payments, the e-commerce site operator loses the sales it would have received, and must pay the price of the merchandise, shipping costs, and credit card transaction fees.
Since GENDA Group operates online crane games and an online shopping site, there is a risk of profit loss due to the unauthorized use of credit cards. To address this risk, the online crane games and online shopping sites of GENDA Group have security measures in place, such as introducing identity authentication of credit cards. However, in the unlikely event of unauthorized use of credit cards bypassing security measures, the financial position and business performance of GENDA Group may be affected.
(18) Risks related to contract manufacturing outsourcing and procurement
(Likelihood of manifestation: High; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
Prize machines and prizes for amusement arcades and online crane games are procured from suppliers since GENDA Group does not have a manufacturer function. Although the GENDA Group manages delivery dates of prizes, delivery delays may occur in the event of unpredictable or unmanageable events in the supply chain of manufacturers, such as the recent tightening of demand for semiconductors. In addition, since these products are mainly manufactured in China, changes in political and economic conditions, exchange rates, laws and regulations, and other factors unique to China, as well as the occurrence of defective products and delays in delivery, may prevent stocking products as initially planned or may cause a steep rise in purchase prices. GENDA Group is working to mitigate these risks by having multiple suppliers and preparing for in-house production of amusement machines and prizes within GENDA Group, but failure to address these risks may affect GENDA Group's financial position and operating results. However, failure to address these risks could have an impact on GENDA Group's financial position and operating results.
(19) Net operating loss carryforwards
(Likelihood of manifestation: High; Likelihood of manifestation: within 2 years; Degree of impact: Medium)
As of the end of the current fiscal year, GENDA Group had a net operating loss carried forward for tax purposes. If our group's business performance is favorable compared to our business plan and the loss carried forward for tax purposes is eliminated, corporate income tax, inhabitant tax, and enterprise tax based on the normal tax rate will be recorded, which may affect our group's financial position and operating results.
(20) Depreciation and amortization
(Likelihood of manifestation: High; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
In December 2020, we accepted fixed assets at a fair value below book value at the time of the acquisition of SEGA Entertainment (now GENDA GiGO Entertainment), resulting in a temporary decrease in depreciation expense. If depreciation expenses increase in the future due to investments such as new store openings, the financial position and operating results of GENDA Group may be affected.
(21) Dilution of share value due to exercise of stock acquisition rights
(Likelihood of manifestation: High; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
GENDA Group grants stock acquisition rights ("stock options") to directors and employees of the Company for the purpose of incentivizing them. The Company grants stock options to its directors and employees as an incentive. In addition, there is a possibility that the Company will continue to grant stock options as an incentive to directors and employees in the future. As of the date of submission of this document, the ratio of the number of potential shares to the total number of shares issued excluding treasury stock was 10.00%. If these stock options are exercised, new shares of the Company's stock will be issued, which may dilute the value of the shares and the percentage of voting rights held by existing shareholders.
(22) Quarterly fluctuations in business performance
(Likelihood of manifestation: High; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
GENDA Group's revenues are largely dependent on GENDA GiGO Entertainment, which operates amusement arcades. Because amusement arcade sales tend to increase during long vacation periods, GENDA Group's net sales for the third and fourth quarters of the fiscal year tend to be higher than those for other quarters.
Sales for the first quarter of the fiscal year ending January 31, 2023 and the first quarter of the fiscal year ending January 31, 2024 are as follows
(Millions of yen)
FY 2023/1				FY 2024/1
First Quarter Consolidated accounting period (From: Feb. 1, 2022 To: Apr. 30, 2022)	Second Quarter Consolidated accounting period (From: May. 1, 2022 To: Jul. 31, 2022)	Third Quarter Consolidated accounting period (From: Aug. 1, 2022 To: Oct. 31, 2022)	4th Quarter Consolidated accounting period (From Nov. 1, 2022 To: Jan. 31, 2023)	First Quarter Consolidated accounting period (From: Feb. 1, 2023 To: April 30, 2023)
9,730	11,020	12,309	13,032	11,994
(Note)
Figures for the quarterly consolidated accounting period ending January 31, 2023 have not been reviewed by Sanyu Audit Corporation in accordance with the provisions of Article 193-2-1 of the Financial Instruments and Exchange Act.
(23) Financial results for past fiscal years
On December 30, 2020, the Company acquired 85.1% of the shares of SEGA Entertainment (now GENDA GiGO Entertainment) and made it a consolidated subsidiary. Since the financial position and operating results before and after making GENDA GiGO Entertainment a consolidated subsidiary differed significantly, and it is difficult to compare historical results, we present here for reference the financial results before and after the fiscal year ended January 31, 2021 (only the balance sheet was consolidated for the fiscal year ended January 31, 2021).
Accounting Period		FY 2019/1	FY 2020/1	FY 2021/1
Net sales	(Millions of yen)	39,877	41,841	30,244
Operating income (loss)	(Millions of yen)	1,550	320	△2,576
Ordinary income (loss)	(Millions of yen)	1,512	150	△2,776
Net income (loss)	(Millions of yen)	743	△829	△13,478
(Note)
1. Since consolidated financial statements are not prepared for the period from January 2019 to January 2021, the financial statements prepared in accordance with the provisions of the "Corporate Calculation Regulations" (Ministry of Justice Ordinance No. 13 of 2006) for each company in our group as of the end of January 2021 are simply added together.
2. GENDA GiGO Entertainment have a fiscal year ending on the end of March prior to the fiscal year ended January 31, 2021 (changed to a fiscal year ending on the end of January from the fiscal year ended January 31, 2022), the combined financial statements are prepared using the end of March as the reference date.
3. The figures for the period from January 2019 to January 2021 have not been audited by Sanyu Audit Corporation in accordance with the provisions of Article 193-2-1 of the Financial Instruments and Exchange Act.
4. SEGA Entertainment (current GENDA GiGO Entertainment) for the fiscal year ended January 31, 2020, based on a business plan reflecting the impact of the Covid-19, the Company determined the recoverability of deferred tax assets, and as a result, recorded an income tax expense due to the reversal of deferred tax assets. As a result, the company recorded a net loss for the period.
5. In the fiscal year ended January 31, 2021, SEGA Entertainment (current GENDA GiGO Entertainment) posted an operating loss and ordinary loss due to the temporary closure of stores following the declaration of a state of emergency to prevent the spread of the new Covid-19 virus infection. In addition, the Company recorded an impairment loss of 14,115 million yen based on a business plan reflecting the impact of the new Covid-19 infection, resulting in a significant net loss for the period.
(24) “Following Meeting” of the 18th Annual General Meeting of Shareholders by the Company's Subsidiary
GENDA Inc. was scheduled to adopt a resolution approving the financial statements for the fiscal year ending January 31, 2022 at its 18th annual general meeting of shareholders, but was unable to complete the closing-related procedures by the time of the 18th annual general meeting of shareholders. As a result, a following meeting of the said shareholders' meeting (the "Following Meeting") was held, and the financial statements for the fiscal year ended January 31, 2022 were resolved at the Following Meeting. As a result, as of the end of the month prior to the date of submission (May 31, 2023), there were 13 accounting personnel (an increase of 3 from the end of January 2022), further enhancing the accounting system.
• (2) Amusement arcade operations
(1) Stand-Alone Issue at the Company's Subsidiary
(Likelihood of manifestation: Medium; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
GENDA GiGO Entertainment Inc.'s business performance may change as a result of its departure from the SEGA SAMMY Group. Specifically, the terms and conditions of transactions with SEGA SAMMY Group, which were lower than those of third-party transactions, may change in the future. As an example, GENDA GiGO Entertainment Inc. has concluded an agreement with SEGA Inc. on the use of the amusement machine network service "ALL. Net”, a network service for amusement machines, and the agreement allows the Company to purchase the software at a lower price than the third-party price until December 31, 2025. However, in the event that existing store sales in a sales calculation period (the period from April 1 of each year to the end of March of the following year) exceed the sales of the same store for the period from April 1, 2018 to the end of March 2019, the same terms and conditions as for arm's length third party transactions will apply for the sales calculation period following the first sales calculation period in which such excess will apply.
On the other hand, with the departure from the SEGA SAMMY Group, the freedom of choice in purchasing amusement machines has increased, and amusement machine purchases from operators other than the SEGA SAMMY Group have increased, contributing to an increase in daily sales per amusement machine for the fiscal year ending January 31, 2023 compared to the same period last year. increased compared to the same period of the previous year, contributing to the expansion of our business performance.
Thus, the impact of the departure from the SEGA SAMMY Group may affect the financial position and operating results of GENDA Group.
(2) Possibility of implementing disposal or write-off of prizes due to retention or obsolescence
(Likelihood of manifestation: Medium; Likelihood of manifestation: No specific period; Degree of impact: Low)
The prizes for prize games offered by GENDA Group are purchased by ourselves and held in our own inventory, but it takes about three months from purchase to delivery. When purchasing prizes, we take into consideration customer preferences and social conditions at the time of delivery and strive to properly manage inventories. However, if customer preferences change, the speed of prize payouts may decrease, inventories may build up, and we may need to dispose of or write down inventories, which could affect our group's financial position and operating results. This may affect GENDA Group's financial position and operating results.
(3) Changes in customer preferences
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
It is necessary to provide attractive game machines and prizes for prize games that match customer preferences in the operation of amusement arcades. The Company strives to understand customer preferences through market research to offer attractive services. However, if there is a significant change in customer preferences in the future, or if GENDA Group is unable to accurately respond to such a change, the number of customers visiting amusement arcades could decrease, which may affect the financial position and business performance of GENDA Group.
(4) Risks related to new store opening
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
Under its mid-term management plan, GENDA Group aims to achieve growth through a steady stream of new store openings. GNEDA Group is working to expand its store development capabilities by improving sales forecasts and simulations related to store leasing and location selection and plans to open stores in suburban roadside areas, shopping centers, and in front of urban train stations, similar to existing stores. In addition, the Company plans to open new stores in new business categories that will allow for more flexible store development, starting with the opening of stores specialized only in prize games in the fiscal year ending January 2022.
Since the initial costs required to open a new store vary depending on the location, the Company gives due consideration when proceeding with store development, but there is a possibility that sales at such stores will not grow as expected and the Company cannot recover its investment. In addition, although flexible store development is possible, the financial position and business performance of GENDA Group may be affected if it is unable to open new stores as planned due to a decrease in the amount of space available.
(5) Risks related to leasing contracts
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
The stores of the GENDA Group are located on leased land or in leased buildings. Therefore, the ability of GENDA Group to continue its business is affected by whether or not the Company can continue to lease on favorable terms.
If there is a significant increase in rent at new or existing stores, the operating costs of GENDA Group will increase. In addition, its ability to enter into, maintain, or renew leases in more favorable locations is subject to risks associated with the lessor, such as whether the lessor agrees to renew the lease at the end of the lease term. If such risks materialize, GENDA Group may not be able to maintain the lease contract in the relevant location and may be forced to relocate. Furthermore, when considering new locations for opening new stores, if competition arises with other amusement arcades or other potential lessors, rent and other costs may increase, and if the GENDA Group cannot incur such costs, it may lose such opportunities. In general, such cost increases could be more expensive in urban areas. In addition, the GENDA Group may also incur losses from the disposal of assets or other related losses if it is forced to close a store for reasons such as lease termination or profitability standpoint. Furthermore, in the event of bankruptcy and other issues of the landlord to whom the leased premises are leased, GENDA Group may not be able to collect the security deposit and guarantee money. Although GENDA Group strives to prevent these events from occurring unexpectedly by maintaining close communication with the lessor and building relationships on a daily basis, the occurrence of any of the above losses could affect the financial position and business performance of GENDA Group.
(6) Risks related to store contractors
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Medium)
GENDA GiGO Entertainment Inc. and GSE Taiwan Inc. operate 250 stores as of the end of May 2023, all of which use leased land or leased buildings, as described in "5) Risks related to leasing contracts ". Therefore, there is a potential risk that each store is susceptible to changes in the environment due to the type of contract and cost classification of each store. In addition, in some cases, deposits are paid to the other party in the contract, which may not be collected depending on the situation at the end of the contract. GENDA GiGO Entertainment Inc. and GSE Taiwan Inc. strive to build good relationships with store owners and ensure stable management, but in the event of changes or suspension of transactions due to unforeseen reasons or deterioration in the economic conditions of the counterparty, GENDA Group's financial position and operating results may be adversely affected. However, if the transaction is changed or suspended due to unexpected reasons, or if the economic situation of the counterparty deteriorates, the financial position and operating results of GENDA Group may be affected.
(7) Risks related to food safety
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
The Group manages and provides guidance based on the Food Sanitation Law and the HACCP concept. However, in the unlikely event of food poisoning or accidents due to mislabeling caused by these foods and beverages, the Group's financial position and operating results may be affected due to a decline in confidence in the Group's "food safety".
(8) Risk of legal restrictions on amusement arcade operations
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
GENDA GiGO Entertainment Inc. operates amusement arcade in Japan and is licensed by the Prefectural Public Safety Commission in accordance with Article 2, Paragraph 1, Item 5 of the "Law Concerning Control and Improvement of Amusement and Entertainment Businesses" (hereinafter, the "Amusement Business Law"). The contents of the license include the system for applying for permits and licenses for establishment and operation of facilities, restrictions on operating hours, restrictions based on the age of visitors, restrictions on amusement fees, and regulatory matters related to the structure, interior, lighting, noise, etc. of the facilities.
As of May 31, 2023, 203 of the 246 amusement arcades in Japan were operating under the "Entertainment Establishments Control Law" license. The stores that are not subject to licensing are "zoned facilities within large-scale retail stores" that fall under facilities not subject to the government ordinance stipulated in Article 2, Paragraph 1, Item 5 of the "Entertainment Establishments Control Law",
i) It must be used primarily by customers who are attracted to the retail business,
ii) Business hours must be the same as those of the retail portion,
iii)The interior of the facility can be easily seen from the outside of the facility.
Since October 2022, GENDA Group has retained Mr. Satoru Shimane, an alumnus of the National Police Agency with extensive knowledge of the Entertainment Establishments Control Law, as an advisor, and he has provided useful opinions to ensure that GENDA Group complies with the Amusement Business Law. In addition, we share information with the competent police stations and lawyers and administrative scriveners who are well versed in the Amusement Business Law, and take the utmost care to ensure that there are no deficiencies in our response to such cases, while reducing risks by providing training to store managers. GENDA Group will continue to set up and operate its facilities in compliance with the regulations of the " Amusement Business Law". However, changes in laws and regulations, such as changes in operating hours or age restrictions on admission, could affect GENDA Group's business results. In addition, GENDA Group's financial position and operating results may be affected in the event that our Group or licensed facilities are subject to revocation of their licenses or suspension of operations due to inadequate compliance with the Amusement Business Law.
• (3) Online Crane Game Operation
(1) Risk of damages and loss of credibility due to leakage of personal information
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: High)
Operations of online crane games hold personal information necessary for business operations, such as member information. To manage personal information, the Company has established internal rules in accordance with the "Act on the Protection of Personal Information" and thoroughly informed and educated all employees. Despite these measures, in the event of leakage or unauthorized use of such information, the financial position and business performance of GENDA Group may be affected due to compensation for damages or loss of credibility.
(2) Risk of policy changes by app platformers
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
In July 2022, Google LLC implemented changes to its policy regarding apps listed on the Google Play Store. In response to this change, GENDA Games Inc. carefully considered its policy regarding the online crane game application "Liftle”. After careful consideration of the policy, GENDA Games Inc. has decided to take the application private from the Google Play Store, taking into account the impact on users in the event that changes to the game operation method, etc. are requested. GENDA Games Inc. will continue to improve the UI and UX of the application published on the App Store and the web version of "Liftle”. However, if Apple Inc. were to change the criteria for releasing apps from the App Store due to a change in its policies in the future, this could have an impact on the financial position and business performance of the GENDA Group.
(3) Risk of overinvestment due to improvements in telecommunications technology
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
An increase in capital investment due to an increase in the frequency of system modification and abolition in order to maintain and improve service levels due to advances and improvements in communication technology and other factors may affect the financial position and business performance of GENDA Group.
(4) Risks due to system failure
(Likelihood of manifestation: Low; Potential timeframe for manifestation: No specific period; Degree of impact: Low)
Online crane game operation services are provided via servers, so if the system goes down due to unpredictable reasons such as computer viruses, power outages, communication failures, etc., GENDA Group will not be able to provide services. Although we routinely perform system maintenance and take security measures, there is a possibility that this could affect the financial position and business performance of our group.
• (4) Amusement machine rentals
In GENDA Group's amusement machine lease business, GENDA Group purchases amusement machines and then rents them to its customer, an amusement arcade, and GENDA Group and the customer share in the sales of the machines at the customer's facility (hereinafter referred to as the "Business Model").