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Business and Other Risks

The following are the main matters that are considered to be risk factors in realizing the Group's strategies.
Our Group's policy is to recognize these risks and strive to avoid the occurrence of risks that are potentially avoidable, and to respond appropriately if risks materialize.
Please note that matters regarding the future in this text are based on judgments made by our group as of the end of the current consolidated fiscal year.

(Organization of business risks, etc.)

(1) Business Environment Risks

The information services industry to which the Group belongs is undergoing rapid technological innovation due to fierce competition between domestic and overseas companies. Customers' IT investment needs may change suddenly due to changes in the business environment, pricing standards within the industry may change significantly due to technological innovation, or the technology and know-how currently possessed by the Group may become obsolete. In order to keep up with the speed of technological innovation, the Group has adopted a policy of always systematically acquiring new technology and know-how, improving the capabilities of all employees, and appropriately securing, developing and utilizing the human resources necessary for the promotion of business, thereby preparing the ability to respond appropriately to customer needs. In the future, if the Group is unable to respond appropriately and promptly to these technological innovations and changes in customer needs, this may affect the Group's business development, operating results and financial position due to changes or termination of contracts related to continuing business relationships and outsourcing.
The Group plans to continue to proactively launch new businesses and new services in order to expand the scale of its business and diversify its sources of revenue. However, it is expected that it may take some time for these businesses to generate stable revenue, and there is a risk that the investment recovery period will be prolonged. In addition, when developing new businesses and services, we collect and consider the information necessary to reduce risks. However, if a situation different from the initial forecast occurs and things do not proceed as planned, we may not be able to recover our investment, which may have an impact on the Group's business development, operating results, and financial position.
In our business for government agencies, we closely monitor policy trends of the national and local governments and have established a system that enables us to provide appropriate services in a timely manner. However, in the event of a change in policy regarding Public Sector's works, a restructuring or reduction in budgets, a postponement of investments in information systems, or a review of the bidding system, this could have an impact on the Group's business development, management performance, and financial position.

(2) Information Security Risks

Due to the nature of the various solutions and services that our group provides to companies, our group's employees may have access to personal information and confidential information held by client companies. In addition, we accumulate and manage a large amount of personal information by selling IT-related products on our group's own e-commerce site and the e-commerce sites of contract customers operated by our group. In the event that confidential customer information or personal information held by our company is leaked due to a cyber attack or human error, our group's business development and management may be affected due to a loss of trust in our group or the filing of a lawsuit for compensation. It may affect the performance and financial condition.
For this reason, our group has introduced measures against cyber attacks, acquired access history, established a constant monitoring system to detect abnormalities at an early stage, established a CSIRT, a specialized team to respond to computer security incidents, and outsourced operations. We are taking measures such as thorough and regular training regarding compliance and information security, including for the company.

(3) Risks related to Large-scale Natural Disasters, Pandemics, etc.

The business activities and performance of the Group may be adversely affected by emergencies that damage social infrastructure, such as major earthquakes, major power outages, and traffic disruptions, as well as pandemics such as new strains of influenza or COVID-19.
Our group's services are provided to customers mainly in the Tokyo area using IT infrastructure, but if the foundation supporting the IT infrastructure stops (for example, power outage, data communication line interruption, difficulty in securing personnel), it will be difficult to continue the services. In addition, if it becomes difficult to go out due to a pandemic or other reasons, it will be difficult to provide 24/7 monitoring services and system operation and maintenance work that involves physical work at customer sites.
Our Group has established a business continuity plan, and is proceeding with measures such as securing uninterruptible data centers, redundant communication lines, and preparing equipment and facilities for telecommuting in order to be able to respond to anticipated emergency situations. In addition, we have established priorities based on the importance of our services and adopted contractual arrangements under which we can continue to provide services at a reduced level. However, in the event of such an emergency, it will be unavoidable to reduce the provision of some services, which may affect our Group's business development, operating results, and financial condition.

(4) System Development Risks

Our Group provides system design and construction services for client companies, and in this service, it is necessary to decide the system specifications with the client before the development work begins. However, in reality, there are cases where the client is forced to change the initially determined specifications during development due to circumstances on the client's side, and in such cases, unexpected development costs may be incurred. In addition, in recent years, large-scale and complex systems require sufficient testing before operation, but if the delivery date presented by the client is short, insufficient testing may cause problems that were not discovered in advance to occur after operation, resulting in significant costs for repairing defects. In order to respond to such risks, our Group has established a project management system, and for important projects, we monitor the progress of development work and are working on new system development methods such as agile scrum development (a method of developing in stages by repeating activities in a short period of time). However, if the above-mentioned problems occur despite these measures, it may affect our Group's business development, operating results and financial condition.

(5) Software Investment Risk

The Group has set the expansion of tools for efficient system development and services sold to customers as important strategic themes, and is investing in software. The Group thoroughly verifies the validity of business plans before commencing software development, and even after the software is completed, checks the progress of the business plans and modifies the business plans as necessary.
However, the possibility of recovering investments is not necessarily guaranteed, and there is a possibility that we may record losses without achieving the planned return on investment due to changes in sales or product strategies or changes in the business environment.

(6) Risks Related to Securing and Developing Excellent Human Resources

The Group's business is highly dependent on human resources, and it is necessary to acquire and retain highly specialized human resources, but competition to acquire IT human resources is intensifying across all industries due to factors such as the declining birthrate and aging population, and the promotion of DX, which uses IT in business to strengthen competitiveness. In this environment, the Group strives to secure excellent human resources by developing a culture, personnel system, and office environment in which diverse human resources can thrive, and is also focusing on human resource development, such as supporting employees in obtaining qualifications and systematizing training systems. However, if the securing and development of human resources does not proceed as expected, or if a large number of human resources leave the Group, this could have an impact on the Group's business development, operating results, and financial condition.

(7) Risks Related to Revenue Recognition

The Group's contracted development projects are deemed to be performance obligations that are to be satisfied over a certain period of time, and therefore the Group reasonably estimates the progress of the fulfillment of the performance obligations and recognizes revenue based on that progress. In addition to efforts to improve the accuracy of estimated total costs, the Group has established and operates an appropriate system in which a project management department independent of the project site manager evaluates the accuracy of estimates from a third-party perspective and checks for abnormal values, including fluctuations in estimates as the project progresses. However, if the specifications initially determined change during development due to circumstances on the client's side, etc., additional man-hours beyond the initial estimate may be required. In such a case, the estimated total costs are likely to exceed the contract amount, and since the estimated total costs and the progress rate of the project are recorded based on forecasts, if revisions become necessary, this may affect the Group's business performance and financial position.
In addition, since the fiscal year end of many of our clients is in March, sales in March tend to be higher than in other months due to the fact that many of our clients specify delivery dates before the fiscal year end. We recognize revenues by fulfilling performance obligations for the various services we provide, such as system development contracts and operation monitoring services (total consolidated sales of 76.9%). However, when determining the completion date of a project that involves deliverables, such as system development contracts, it is necessary to determine whether the deliverables have been substantially delivered to the customer, that is, whether both parties agree that the project contracted with the customer has been completed and the performance obligations have been fully fulfilled. Therefore, if differences in the specifications and scope of work of the deliverables are found in March, which is the deadline for delivery, unexpected additional work hours may suddenly be required, and depending on the judgment of the actual timing of the completion date, this may have a significant impact on the generation of sales and the appropriateness of the period attribution.

(8) Risks Related to Parent-child Listing

The Group belongs to a corporate group centered on SoftBank Group Corp. SoftBank Corp. the core company of the corporate group responsible for the domestic telecommunications business, is the parent company that is recognized as having the greatest influence on the Company, and directly holds 54.0% of the voting rights of the Company as of the end of this consolidated fiscal year.
While maintaining its management independence, the Company participates in the management of the parent company's group and makes effective use of SoftBank Group 's brand and other management resources within the Group. However, if there are any changes in the parent company's strategy or if any competitive relationship arises with the parent company group in the future, this may have an adverse effect on the Group's business development, operating results, and financial position.
In addition, the Parent Company has decision-making and veto power with respect to matters requiring approval at our general shareholders' meeting, and also has significant influence, including veto power, with respect to special resolution matters. However, the Parent Company's exercise of voting rights may not necessarily be in line with the interests of our other shareholders.
In addition, there is no guarantee that the parent company's voting rights ratio in our company will remain constant in the future. If there is a significant change in the parent company's ownership ratio of our company shares in the future, this may have an impact on the liquidity and share price of our company shares, as well as on the business and operating results of our group.
At the Board of Directors meeting held on April 25, 2024, the Company resolved and announced that it supports the tender offer for the Company's Shares, etc. by SoftBank Corp., the Company's controlling shareholder (parent company), and recommends that the Company's shareholders accept the tender offer. The results of the tender offer are as set forth in the "Notice Concerning the Results of the Tender Offer for the Company's Shares, etc. by SoftBank Corp., the Company's Parent Company" dated June 12, 2024.

(9) Risks of Service Integration Using External Services and Equipment, etc.

In addition to the existing system design and construction services, our group is increasingly providing "service integration" services, which involve system monitoring, operation, and maintenance for customers. In this type of service integration, some of the functions required by customers are provided by incorporating cloud services and equipment provided by vendors, so the quality of these (functions, information security, and service continuity) is important. For this reason, our group manages the quality and continuity of services and equipment by conducting sufficient function reviews, credit reviews, continuity inspections, regular on-site inspections, strengthening vendor relationships, and other measures in advance from the design stage.
However, due to the termination of services due to strategic changes by each vendor, sudden changes in service specifications due to periodic functional improvements specific to cloud services, or malfunctions in the services and equipment of each vendor, it is possible that some of the services provided by the Group may become unavailable, which may have an adverse effect on the Group's operating results and financial position.

(10) Risks Related to Sustainability

In light of the importance of sustainability-related issues such as climate change, the Group has established a Sustainability Promotion Committee through which it promotes the Group's sustainability activities. However, if these activities are insufficient or if the Group is unable to gain sufficient understanding from stakeholders, this could result in a decline in social trust, which could have an impact on the Group's business development, operating results, and financial position.