Members Co., Ltd.

With the rapid advancement of AI technology including generative AI, the Group's core business, such as large-scale web operations, has already been significantly affected by automation through AI. The Group recognizes that the risk of existing business models being substituted will continue going forward, and if technological innovation progresses more rapidly than anticipated, the strengths of its services could be lost, potentially impacting operating results. As countermeasures, the Group is working on formulating an AI ethics basic policy and AI usage guidelines, as well as educating digital creators and having them acquire new technical skills.

Because the DX field and internet-related industry have low barriers to entry and rapid technological progress, the emergence of new entrants or new technologies/services could cause the Group's strengths to disappear, potentially resulting in a shrinking of core operations or intensified price competition. In addition, the advertising market is highly susceptible to economic conditions, and fluctuations in Japan's economy could affect operating results through a slowdown in the growth rate of internet advertising. Currently, there is no single client accounting for more than 10% of revenue, but the Group also recognizes the risk of reduced transactions due to changes in the business policies of major clients.

Securing and developing highly specialized personnel in the DX field is the most critical issue, but the narrow talent pool in the industry and rising demand for engineers are making it difficult to hire excellent personnel. As Japan's population decline and accelerating aging society progress, securing personnel is expected to become even more challenging, and delays in developing new graduate hires into productive contributors or an increase in the turnover rate of hired and trained employees could affect operating results. The Group is working to strengthen new graduate and mid-career hiring, expand regional and global recruitment, and curb turnover rates.

In a business model centered on labor-intensive professional services, developing management personnel in step with the expansion of human capital is an important issue. If the development of management personnel does not proceed smoothly, or if there is an excessive outflow of existing management personnel, this could significantly impact business operations and thereby affect operating results. Based on the human capital story disclosed in the Annual Securities Report, the Group is working to develop, recruit, and retain management personnel.

If confidential information or personal data of client companies were to be leaked, tampered with, or improperly used due to computer viruses, unauthorized access, system defects, or similar causes, this could result in claims for damages and a loss of social trust, potentially affecting operating results. The Group has obtained Privacy Mark and ISO/IEC 27001 certifications and has built and operates a continuous information security system, but complete prevention cannot be guaranteed. In recent years, the risk of cyberattacks such as ransomware, which are becoming increasingly sophisticated and complex, has also been rising.

In large-scale system development and other projects, if there is a gap in understanding of man-hours or specifications with client companies, additional costs arise, unforeseen troubles occur, or delivery deadlines change due to specification changes, this could significantly affect revenue and profit for the period, as well as generate opportunity losses due to additional staffing requirements, potentially affecting financial position and operating results. The Group has implemented countermeasures such as a multi-tiered audit system prior to order acceptance, man-hour checks by a specialized audit department, a shift toward agile development, and monitoring by the Group Management Meeting.

The Group holds goodwill arising from M&A activities and performs impairment testing at least once a year or whenever indications of impairment are recognized. If the test results determine that the relevant assets will not generate sufficient future cash flows, the Group may be required to recognize a substantial impairment loss, which could significantly affect its financial position and business performance.

Due to the impact of order-based operations, deliveries tend to concentrate at the end of the second quarter and the fiscal year-end (September and March), leading to larger revenue in those periods, while at the start of the fiscal year, selling, general and administrative expenses increase due to upfront costs for recruiting and training new graduates. In the interim period of the previous fiscal year, the Group recorded an operating loss of ¥479,686 thousand and a net loss for the period of ¥321,809 thousand, while for the full year it recorded operating profit of ¥493,142 thousand and net profit for the period of ¥349,824 thousand, indicating significant performance fluctuations due to seasonality. Although this trend is improving due to changes in the revenue composition resulting from the expansion of the DX field, the risk continues to exist.

There is currently no direct legal regulation concerning internet advertising, but if regulations were to be tightened due to changes in social conditions, this could have a significant impact on business operations. There is also a risk that the Group could become subject to claims for damages if it were deemed involved in an advertiser's violation of laws such as the Act against Unjustifiable Premiums and Misleading Representations, as well as a risk of violating the Act on Promoting Subcontracting Small and Medium-sized Enterprises' Transaction Fairness in dealings with small-scale subcontractors. If a license under the Worker Dispatching Act were to be revoked or similar action taken, this could significantly hinder service operations.

Based on scenario analysis conducted in accordance with TCFD recommendations, the Group has identified risks including increased response costs from stronger energy-saving policies and the introduction of carbon taxes, uncertainty in power procurement and rising prices of environmental value certificates, increased costs of business operations due to abnormal weather such as typhoons and floods, and increased air conditioning costs due to a rise in extremely hot days. If the Group's response is judged insufficient against the tightening of sustainability standards among major clients, there is a risk that maintaining business relationships could become difficult. If policies and regulations in various countries tighten beyond expectations, or if climate change progresses further than anticipated, this could have an additional impact on the Group's financial position and operating results.