CDS Co.,Ltd.

Dependence on the top three customers remained high, at 43.8% in the previous consolidated fiscal year and 39.1% in the current consolidated fiscal year. In particular, dependence on Mitsubishi Motors Corporation reached 32.4% in the current consolidated fiscal year. The "IT Outsourcing Service Agreement" with this company does not guarantee orders after March 31, 2026, and there is a possibility that business performance will be affected after the contract period ends. The Group is focusing on acquiring new customers to reduce this dependence, but diversification in the short term remains difficult.

In the automotive, industrial equipment, and information equipment industries, which are the Group's main customer base, competition among companies is becoming increasingly globalized, and demands for cost reduction, quality, and delivery times are becoming more stringent. Amid the shortening of product life cycles, if competitiveness declines due to price competition with other companies in the same industry, or if the Group fails to respond to customers' development needs, this may affect period earnings. There is also a similar risk if customer companies withdraw from business or cancel or postpone product development plans due to economic conditions.

The Group operates its business under both subcontracting agreements and worker dispatch agreements, and unfavorable revisions resulting from ongoing reviews of the Worker Dispatching Act and related laws and regulations may affect business performance. Regarding the issue of disguised subcontracting, the Group has taken measures such as establishing management supervisors and a regular reporting system; however, if a customer company is cited by regulatory authorities for disguised subcontracting and subjected to a business suspension or other disposition, this could have a material impact on the Group's performance given its high dependence on specific customers.

Since orders received under subcontracting agreements are contracts in which compensation is paid for the performance and completion of contracted work, the Group may bear liability for non-conformity or product liability with respect to deliverables. Should such liability issues arise, business performance and financial condition may be affected through damages compensation and other costs. Disclosure of specific countermeasures in the securities report is limited, and enhancing the risk management system remains a challenge.

Goodwill has arisen from the acquisition of shares in PMC Corporation and others, and as the Group intends to continue making corporate acquisitions, the impact of goodwill amortization on business performance is expected to continue. Since goodwill amortization is not tax-deductible, the effective corporate tax burden after application of tax effect accounting becomes higher, and if the effects of acquisitions do not contribute to earnings within the expected short timeframe, this may put pressure on business performance. There is also a risk that the substantial funding requirements associated with acquisitions could increase the financial burden.

In each of the Technical Information Solutions, FA Robot Solutions, and Digital Solutions businesses, securing and developing specialized personnel is essential for business expansion. If the Group is unable to secure appropriate personnel or conduct internal training as planned, this may affect business operations. While the Group has adopted a policy of actively promoting the securing and development of personnel necessary to achieve its growth strategy, the certainty of achieving this is unclear against a backdrop of intensifying competition in the labor market.

In some cases, the Group's employees and dispatched staff engage in work that involves exposure to product information within customer companies, creating an inherent risk of confidential information leaking to outside parties. While the Group strives to strengthen management through information management education and guidance, if an unexpected leak occurs, the resulting loss of the Group's credibility may affect business performance. Given the business characteristic of handling customers' confidential information, the impact of an incident on business relationships can be particularly significant.

If important facilities of the Group or customer companies are damaged by a natural disaster such as an earthquake or an unforeseen accident, or if operations are scaled back or suspended due to the spread of an infectious disease or other cause, this may affect business performance and financial condition. Given the business characteristic of performing much of its work on customer company premises, disasters or operational stoppages affecting customers pose a risk that could directly lead to a decrease in orders received by the Group.

Against a backdrop of significant increases in fuel prices and other factors, price levels have been rising, creating a risk that increases in various expenses such as raw material costs and utility costs, as well as labor costs, will put pressure on the Group's profitability. If these cost increases cannot be passed on to transaction prices in a timely manner, profitability may decline. Given the Group's labor-intensive business structure, the impact of rising labor costs is particularly significant.

If unforeseen new introductions or changes are made to accounting standards or the tax system, the Group's business performance and financial condition may be affected. In addition, if differences of opinion arise with tax authorities in tax filings, this may also affect business performance and financial condition through additional tax burdens and other costs. The Group's financial structure, including the tax treatment of goodwill amortization, is susceptible to the effects of tax system changes.