Digital Arts Inc.

Most of the Group's products are sold through sales agents, and net sales may fluctuate significantly due to changes in the business environment of major agents, such as M&A or bankruptcy. There are also risks that agents may prioritize handling competitors' products, and risks of uncollectible receivables from agents. The Group is working to expand sales through proactive engagement with agents, but the structurally high level of dependency remains an ongoing risk factor.

Net sales to national and public schools and local governments are heavily influenced by fluctuations in national budgets and the allocation and utilization of budgets by local governments. If there is a shift in policy direction or budget cuts, net sales in this segment could decline sharply. The Group factors this volatility into its planning process, but the high degree of dependency on external factors constitutes a risk.

If government agencies or NPOs provide low-cost or free web security-related measures, or if such functionality becomes increasingly embedded free of charge into operating systems, the Group may be forced to change its business and revenue model. Since the Group specializes in the security business, alternative revenue sources are limited, making the potential impact significant. The Group is responding by differentiating its products and enhancing their added value, but continuous monitoring of regulatory and policy trends is essential.

The Group specializes in the development and sale of web security software and email security software, creating a risk that weak demand in the security market could directly impact overall performance. In a deteriorating economic environment or during periods of restrained IT investment, concentration in a specific business increases financial vulnerability. As business diversification is limited, the Group's relative resilience to changes in the market environment is a challenge.

Unauthorized access, ransomware attacks, or zero-day attacks by third parties, as well as information leakage caused intentionally or negligently by employees, could result in short-, medium-, and long-term impacts such as disruption of critical operations, damages claims arising from leakage of confidential customer information, and lost sales opportunities due to damage to corporate image. The Group has implemented measures such as establishing an ISMS framework, utilizing security systems, conducting internal training, and preparing incident response plans, but risks that cannot be directly managed are increasing due to the sophistication of cyberattacks and expanded use of cloud services.

The Group's main services depend on servers that provide URL databases, antivirus information, and similar data, creating a risk that service provision could be interrupted due to hardware failure, data loss, facility shutdown, or cloud service outages. Service interruptions directly lead to reduced customer trust and deteriorating business performance. The Group aims to ensure stable operations through server redundancy, data backups, obtaining the Privacy Mark certification, and maintaining an ISMS-compliant framework.

If the technology underlying the Group's products and services becomes obsolete or technological innovation stagnates, the competitive gap with rivals could widen, significantly affecting business performance and financial condition. In addition, if unexpected software bugs are discovered after sale, there is a risk of decreased sales, returns, and loss of trust. The Group addresses this through continuous development activities and strengthened quality check processes, but risk remains ongoing in an environment requiring responses to new technologies such as zero trust.

The Group is highly dependent on key management personnel, including Representative Director and President Toshio Dogu, and there are concerns about the impact on business performance and financial condition should events such as extended leave, retirement, or death occur. In addition, due to the declining birthrate, aging population, and intensifying competition for hiring with peer companies, securing specialized security personnel is becoming increasingly difficult. The Group is responding through hiring approximately 30 new graduates annually, actively pursuing mid-career hires, developing successors, and establishing systematic human resource development programs, but failure to proceed as planned could affect future growth.

The Group uses servers of foreign companies for part of its cloud service infrastructure, and fluctuations in the USD/JPY exchange rate—particularly a weakening yen—could negatively affect business performance through increased costs. While revenue is mainly denominated in yen, a structural mismatch exists as some costs are denominated in foreign currency. There is currently no description of specific hedging measures in the securities report, and exchange rate trends remain a factor affecting business performance.

The Company is listed on the Prime Market of the Tokyo Stock Exchange, and the Representative Director and President is the largest shareholder, holding 2,257,999 shares (approximately 16.0%) of the 14,133,000 shares issued; however, as a publicly listed company, the possibility of acquisition or merger cannot be ruled out. If the Group becomes the target of an acquisition, merger, or transfer of business rights, or if the Group carries out an acquisition or merger, this could significantly affect business performance and financial condition. At present, no specific defensive measures are explicitly stated in the securities report.