SOLITON SYSTEMS K.K.

The Group frequently handles users' critical information in development projects, and if information is lost, destroyed, or leaked, or if unauthorized external intrusion occurs, this may lead to claims for damages or a decline in trust, potentially affecting business performance. Although the Group has implemented measures to prevent internal information leaks through the conclusion of confidentiality agreements and strict operation based on compliance-related regulations and manuals, such risks cannot be completely eliminated.

The Group is focusing on the development of authentication and access control, telework security, isolated environment access solutions, cybersecurity services, video distribution products and cloud services utilizing public mobile networks, and analog edge AI, among others. However, changes in the market environment during the development period or the emergence of similar or competing products may result in an inability to recover development costs. If these risks materialize, they may affect the Group's business performance.

The Group handles products from domestic and overseas third-party vendors as a sales agent, and some of these are strategically important products. If a major third-party vendor discontinues product supply due to a review of its business strategy, merger, absorption, or dissolution, this may have a material impact on the Group's business performance. The Group continuously collects information on partner vendors' performance and business strategies in an effort to detect changes in business policy at an early stage, but this risk cannot be completely avoided.

In an information network that seamlessly connects LAN, WAN, cloud, and mobile, there is a risk of initial defects during the construction of large-scale systems or malfunctions in new network equipment products. Responding to such trouble requires significant time, labor, and cost, which may affect the Group's business performance. Because the Group engages in the construction of highly advanced, network-specialized systems and the development of equipment, the scope of impact in the event of a malfunction may be extensive.

The difficulty of projects is increasing due to shortened delivery times based on user needs and the growing sophistication and complexity of projects. If unprofitable projects arise due to development man-hours exceeding initial estimates, this may affect business performance. The Group has established a company-wide project management framework to curb unprofitable projects, but it is difficult to completely eliminate the risks associated with increasingly complex projects.

The Group possesses strengths not found in competitors as a network and security product manufacturer and network integrator; however, price competition with equipment vendors and network integrators entering the market in the future may affect business performance. Although the Group continues to develop products and services that anticipate market needs, there is a risk that changes in the competitive environment could put pressure on profitability.

The Group is working to expand transactions with other companies to reduce its dependence on specific sales customers; however, trends in capital investment by certain sales customers may affect business performance. If a major customer changes its investment plans or reduces its budget, there is a risk that fluctuations in net sales could become significant.

Continuous recruitment, training, and retention of highly specialized and capable personnel is essential for business expansion; however, if such recruitment and training prove difficult, or if capable personnel leave the Group, this may affect business performance. As competition to acquire talent in the IT and security fields intensifies, the risk of being unable to secure the necessary personnel may constrain business growth.

There are risks that intellectual property rights held by the Group may become obsolete due to technological innovation, risks of unauthorized disclosure or misappropriation of trade secrets, risks of litigation from third parties alleging infringement of intellectual property rights, and risks of litigation related to the evaluation of compensation for employee inventions made in the course of duty. The Group has strengthened its internal management systems and established procedures for prior investigation of third-party intellectual property rights; however, if these risks materialize, they may affect business performance.

The Group's balance of investment securities decreased from ¥104 million at the end of FY2021 (ended December 2021) to ¥12 million at the end of FY2025 (ended December 2025), and a valuation loss of ¥16 million was recorded in FY2025 (ended December 2025). If the financial condition of investees deteriorates or adverse events occur in the market, the Group may recognize impairment losses in the future, which could affect business performance. Although the Group's acquisition policy calls for investments in business partners aimed at promoting business relationships and efficient management of surplus funds, risks arising from changes in the market environment remain.