RISK FACTORS

The following represents matters with the potential to seriously impact investor decisions. To promote the proactive disclosure of information relevant to investor decisions, below we also disclose information not necessarily applicable as the indicated types of risks but still believed to be relevant as it relates to investor investment decisions.
Our policy is to maintain sufficient awareness of the possibility that these risks may occur, to work towards prevention and avoidance, and respond in the event of occurrence. However, we believe investment decisions related to our Group stock should be made after having given due consideration to the information indicated in this paragraph and the other sections of this document.
Furthermore, forward-looking statements indicated in this document are judgments made by this Group as of the submission date for this document and do not encompass all possible future risks.

(1)Online advertising market trends and competition

The online advertising market in which our Group operates has seen sudden and rapid market growth over the past 10 years. The advertising industry, including the online advertising business, is susceptible to general economic trends. Moving forward, there is a possibility our Group's financial status or operational performance could be impacted by economic decline, a declining in advertisement budgets, or if market scale does not expand in line with assumptions.
Amid an already fiercely competitive environment, our Group implements various measures to establish a competitive advantage and further increase our competitiveness. However, there is no guarantee that these measures will be successful and lead to us securing a competitive advantage. In such cases, there is a possibility our Group's financial status or operational performance could be impacted.

(2)Seasonal fluctuations

Group ad technology sales are based on the advertisement budgets of advertisers, so we are susceptible to the impact of advertiser monthly budget allocations, which tend to concentrate heavily in December and the final month of the fiscal year (typically March).
Compared to businesses with stable monthly transitions in earnings, our sales and income fluctuate easily. At the same time, we must secure the human resources necessary to maintaining operations during busy periods. As such, there is a possibility our Group's financial status or operational performance could be impacted in the event of a significant downward shift.
Quarterly earnings for our 7th consolidated accounting period are as follows.

(Unit: Thousand yen)

7th consolidated accounting period
(From April 1, 2016  To March 31, 2017
1Q Consolidated
accounting period
2Q Consolidated
accounting period
3Q Consolidated
accounting period
4Q Consolidated
accounting period
Net sales 2,446,399 2,647,345 3,168,689 3,468,466
Operating income
or losses ( - )
28,411 △13,799 124,602 118,396

(Note)

1. Net sales do not include consumption taxes, etc.
2. The above quarterly consolidated fiscal year figures have not been subject to quarterly review as outlined in the provisions of Financial Instruments and Exchange Act Article 193-2, Section 1.

(3)Responses to technical innovation

Our Group's services are grounded in technology related to the internet. Internet-related fields are subject to disruptive innovation caused by the continuous development of new technologies and the emergence of new services based on those technologies. As devices that display advertisements, the use of devices such as smartphones and tablets is expanding rapidly, leading to the constant development of new services that take advantage of new technology.
As such, our Group focuses on the hiring and development of engineers, on ensuring a creative work environment, and on acquiring technology, knowledge, and knowhow, particularly that related smartphones.
However, if the acquisition of relevant knowledge and knowhow proves difficult, or if our Group is late in responding to technical innovation, there is a possibility our Group's competitiveness could decline. Furthermore, there is a possibility that responding to new technology will result in increased expenditures related to new systems, human resources, etc. In a case where our Group technical capabilities decline and result in a decline in service quality or competitiveness, there is a possibility our Group's financial status or operational performance could be impacted.

(4)Securing and developing human resources

The greatest asset supporting our Group growth is our human resources and we view the hiring and development of elite personnel as a core management issue. As such, we put forth maximum effort towards securing and developing elite human resources. However, a situation where due to a sudden change in business operations, an increase in work volume due to sudden business expansion, a lack of supply and demand balance in personnel markets, or for some other reason we are unable to secure or develop the required personnel, or if we incur an outflow of critical personnel or the number of resignations is greater than anticipated, there is a possibility our Group's financial status or operational performance could be impacted.

(5)System risks

Our Group's business involves providing services to customers over the internet from computer systems, mainly servers. As a part of service management, we work constantly to enhance our systems and improve our backup system functions to ensure stable operations. However, there is a possibility our Group's financial status or operational performance could be impacted in a situation where we are forced to suspend services due to equipment failure, natural disaster, sudden access volume that exceeds expectations, a computer virus or other computer system or communications network error, the modification of our programs or other system content as the result of unauthorized access, or if such a situation damages our credibility or results in a claim for damages.

(6)Dependence on specific business

As of the current fiscal year, our Group's revenues are dependent on GenieeSSP, the core business on which we have concentrated our management resources since our founding. Currently, we are working to expand from the ad technology domain to the marketing technology domain and apply the massive ad distribution data, customer platform, and cumulative ad management knowhow cultivated through GenieeSSP to expand our business domains to include GenieeDSP, GenieeDMP, and the marketing automation tool MAJIN in order to strengthen and expand our revenue platform. Moving forward, we will work to expand market share for these new businesses while also work on the development of new functions and new services.
However, if these efforts are not as successful as planned due to changes in the operating environment or, in the event of changes in client distribution policies or system malfunctions that result in a decline in transactions, there is a possibility our Group's financial status or operational performance could be impacted.

(7)Transactions with the SoftBank Group

As of the date of this submission, our Group is a member of the SoftBank Group, which includes SoftBank Group International GK, which owns 34.89% of our voting rights. The SoftBank Group is recorded under other affiliates. The SoftBank Group operates Domestic Telecommunications Segment, Sprint Segment, Yahoo Japan Segment, Distribution Segment, ARM Segment, and other businesses. Geniee is positioned as an equity method subsidiary of Yahoo!. However, we have no contracts outlining special privileges in relation to matters voted on by the Geniee Board of Directors and we have ensured the independence of the Geniee Board of Directors. Of our five directors, we invited one member of the SoftBank Group to serve as director with the purpose of applying that person's vast experience towards enhancing our corporate structure. That director's name and position within Geniee and within the SoftBank Group is as follows.

Position within Geniee Name Position within the SoftBank Group
Director
(part-time)
Daisuke Fujihira SoftBank Group Corp., Enterprise Business Management, Enterprise Business Strategy HQ, Digital Marketing Business Management Dept., General Manager, SB-Gift Corp. Representative Director, SB Ad Corp. Director, Generate Inc. Representative Director & CEO
Position within Geniee
Director (part-time)
Name
Daisuke Fujihira
Position within the SoftBank Group
SoftBank Group Corp., Enterprise Business Management, Enterprise Business Strategy HQ, Digital Marketing Business Management Dept., General Manager, SB-Gift Corp. Representative Director, SB Ad Corp. Director, Generate Inc. Representative Director & CEO

Total amount of transactions between our Group and the SoftBank Group (Note) during FY2016 was 3,084,430,000 yen (percentage of total Group sales: 26.3%), total transaction amount related to expenses was 227,474,000 yen (percentage of Group sales costs and SG&A expenses: 2.0%). However, in the event that a change in policies at the SoftBank Group results in changes to transaction conditions, there is a possibility our Group's financial status or operational performance could be impacted.
(Note) SoftBank Group refers to SoftBank Group Corp., its subsidiary Yahoo! Corp., and SoftBank Co., Ltd.

(8)Overseas business risks

Our Group is expanding our online ad business throughout the Asia region, including subsidiaries in Singapore, Vietnam, Indonesia, and Thailand. We position the overseas business as a future growth investment for our Group and will continue expand our overseas operations. However, in the event that it becomes difficult to promote operations due to an ability to respond to the business customs or government regulations of a specific country and are unable to recover our investment, there is a possibility our Group's financial status or operational performance could be impacted.

(9)Investment risks

Our Group conducts investments in internet-related companies in accordance with our business policies mainly with the expectation of generating business synergy between our Group and the investment target. Due to declining financial conditions of certain investment targets, during the 7th accounting period, we recorded provision of allowance for doubtful accounts of 33,657,000 yen, loss on valuation of investment securities of 59,850,000 yen, and impairment loss of 46,664,000 yen. Furthermore, during the first six months of our 8th accounting period, we recorded investment security valuation losses of 275,653,000 yen. In response to these results, our Group established investment management regulations and created/enhanced an internal management system for investment decision-making and monitoring investment targets in an effort to reduce the risk of incurring losses. However, depending on the future performance of investment targets, there is a possibility our Group's financial status or operational performance could be impacted by not being able to recover investments or due to incurring valuation losses due to the application of impairment accounting.

(10)Intellectual property

Our Group responds to potential third-party intellectual property infringement to the extent possible through investigations. However, it is difficult to fully ascertain the possibility of intellectual property infringement as it relates to our Groups services. In the event that circumstances result in an infringement of intellectual property we own or the infringement of a third-party's intellectual property that results in a cease and desist claim or claim for compensation of damages, there is a possibility our Group's financial status or operational performance could be impacted.

(11)Legal regulations

Domestic laws regulating the internet include the Act on the Protection of Personal Information. Through our SSP, DSP, DMP, etc., service platforms, our Group uses cookie technology to acquire the behavior history (accessed URLs, content, browsing order, etc.) of users who access websites partnered with our company.
At present, there are no laws interfering with our Group business but in the event laws relevant to the provision of services related to online advertising are newly established, existing laws are revised, or voluntary regulation is requested, this could restrict our service provision and there is a possibility our Group's financial status or operational performance could be impacted.

(12)Internal management system

Our Group views corporate governance as vital to the sustainable growth of our corporate value. We ensure work appropriateness and the credibility of our financial reporting. Furthermore, we recognize the need to reinforce legal compliance based on a healthy ethical perspective and work to enhance our internal management system. However, in the event of a significant expansion of operations that results in a situation where the development of a sufficient internal management system falls behind the pace of expansion and makes appropriate operations management difficult, there is a possibility our Group's financial status or operational performance could be impacted.
To ensure no unauthorized activities are conducted by internal affiliates, we reinforce compliance with domestic and international laws and rules, and conduct regular internal audits to confirm the status of compliance. However, there is no way to completely eliminate the possibility of legal infringement or unauthorized activities by internal affiliates. As such, in the event that such a situation occurs, there is a possibility our Group's financial status or operational performance could be impacted.

(13)Enhancing monitoring system for inappropriate ad distribution

Our Group views quality management for the ads we distribute as being vital to ensuring the value we provide to customers. Specifically, we monitor ad distribution to online media that displays unauthorized ads, that displays misleading ads, or that publishes illegal content. Furthermore, we have outlined internal policies related to the handling of adult content ads and are working to reduce transactions for such ad content. However, in the event that due to unforeseeable circumstances there is a lapse in our response to such situations that results in a need to compensate a customer for damages, there is a possibility our Group's financial status or operational performance could be impacted.

(14)Dependence on specific persons

Tomoaki Kudo is our representative director, president, and founder, and he has maintained the position of CEO since our founding. Kudo has vast experience and knowledge related to service development and technology used in online advertising, and he serves an extremely vital role in decisions on technology and the execution of corporate policy and business strategy.
Our Group is strengthening information sharing among directors and senior employees at the Board of Directors and Management Council meetings, and enhancing our management structure to establish a management structure that is not overly dependent on Mr. Kudo.
However, in the event that circumstances result in it being difficult for Mr. Kudo to continue Group operations, there is a possibility our Group's financial status or operational performance could be impacted.

(15)Position as a young company

Geniee is a relatively new company that was established in April 2010. Thus far, we have continued to record income growth but the operating environment influencing the online ad industry is subject to rapid change and thus we are forced to include various uncertainties in our Group management plans. Furthermore, based on our past financial status and operating performance, we lack sufficient grounds for predicting future earnings.

(16)Natural disasters

Our Group's business activities rely on our servers, for which we use external data centers and conduct regular backups to offset the risks related to natural disasters, accidents, etc. We also conduct regular monitoring of operating status to prevent and avoid system trouble. However, in the event that a major earthquake, typhoon or natural disaster or an accident occurring in Tokyo where our company headquarters results in equipment damage, restricted power supply, or other trouble, there is a possibility that our ability to offer continued service could be impaired. Furthermore, if we incur expenses related to repairing damaged equipment or providing compensation to affected employees, there is a possibility our Group's financial status or operational performance could be impacted.

(17)Use of procured capital

The capital we procure through the planned public offering will be applied towards the personnel expenses, hiring expenses, advertising and promotional expenses, and server-related expenses incidental to the expansion of existing business.
However, the industry in which we operate is subject to dramatic change. Thus, there is a possibility we may apply procured capital towards uses not currently planned in order to respond flexibly to changes in our operating environment.
Furthermore, even if procured capital is used according to initial plans, there is the possibility that the anticipated investment effect will not be achieved.

(18)Dividend strategy

Our basic policy on dividend distribution is to ensure the internal retention required for future business expansion and to strengthen our management structure while implementing continuous and stable dividends.
However, at present we do not issue dividends and we have no definitive plans concerning the possibility of issuing dividends in the future or said timing. Our policy concerning the distribution of surplus income to shareholders is to conduct a comprehensive evaluation of transitions in earnings, our financial status, and future business and investment plans to maintain balance with internal retention.

(19)Dilution of stock price due to exercising of stock options

We provide our directors and employees with stock options as an incentive to promote long-term improvements in corporate value. There also is a possibility that we will issue stock options for the purpose of securing elite personnel.
If these stock options are exercised, it would result in the issuance of new shares for our company and could possibly dilute the per-share value of stock currently held by shareholders. As of the end of October 2017, the number of latent shares affixed to stock options is 1,052,250 shares, representing 6.5% of the 16,124,000 total shares issued (excluding treasury shares).

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