Sockets Inc.

In the internet-related technology industry, new technologies and services are developed one after another, and the pace of change is rapid. If the Company fails to respond appropriately to market changes due to delays in R&D or in securing excellent human resources, its technologies and services may become obsolete, resulting in a decline in competitiveness. The Company is promoting the development of Kansei (sensibility) AI-related technologies and focusing on R&D aimed at realizing proprietary value-added services.

The development of generative AI is progressing on a global scale and is expected to have a significant impact on the internet-related technology and data service fields in which the Company is engaged. Rapid technological evolution is accompanied by transformation of social structures, and there is a risk that the competitive advantage of the Company's existing services could be undermined. The Company is addressing this by continuing to develop its proprietary Kansei metadata and Kansei AI while strengthening collaboration with generative AI.

In the internet data service field, an increase in new entrants is expected going forward, and in the internet advertising market, the Company faces competition from leading companies both in Japan and overseas. If competitors achieve development speed or service quality that exceeds the Company's, this may affect the Company's business operations and financial results. The Company seeks to differentiate itself by strengthening the utilization of its proprietary database, built on more than 10 years of track record in developing and operating Kansei metadata, and by considering collaboration or partnerships with leading companies as necessary.

In the development of applications, systems, and databases, it is difficult to completely eliminate bugs, and if a serious bug occurs, service interruption or suspension may result. This could lead to a decline in the Company's credibility and claims for damages from business partners or users, potentially affecting financial results. The Company has established a testing and verification framework at the time of delivery, utilizing both an in-house dedicated verification team and external specialized verification firms, to strengthen quality control.

Regarding proprietary service software recorded as intangible fixed assets based on contracts with business partners, there is a possibility that part or all of it may be retired due to contract changes or other reasons. If such retirement occurs, the related expense would be recognized at once, potentially affecting the Company's financial results. The Company seeks to reduce this risk by establishing a project promotion framework and striving for careful planning and execution.

If servers and systems fail to operate normally due to natural disasters, fires, computer viruses, unauthorized acts by third parties, excessive server load, or any other cause, the Company's services may be suspended. If a service suspension occurs, the Company may face claims for damages based on contracts, which could affect its financial results. The Company addresses this through the establishment of a security system centered on cloud services and a 24-hour system monitoring framework.

Securing, developing, and retaining excellent human resources is the Company's most important challenge; however, there is no guarantee that recruiting activities, personnel evaluation systems, training programs, and other measures will be effective, and the Company may be unable to secure the necessary personnel. Furthermore, there is no guarantee that recruited and trained officers and employees will continue to contribute to the Company's business, and in such cases, business operations and financial results may be affected. The Company addresses this through proactive recruiting activities, the development of personnel evaluation systems, executive training, and new employee development programs.

Koji Urabe, the founder and Representative Director and President, has significant influence over company management, including business planning and execution, and if he were to become unable to continue his duties due to an unforeseen accident or other reasons, this could affect the Company's business operations and financial results. The Company states that dependence on him is decreasing through delegation of authority and division of duties, but the risk nonetheless remains.

The Company acquires and manages personal information such as the names and phone numbers of service users, and if data is leaked externally due to problems in the management system, unauthorized external intrusion, or intentional or negligent acts by business partners or outsourcing contractors, this could result in a decline in credibility and claims for damages from users, potentially affecting business operations and financial results. The Company has continuously obtained Privacy Mark certification since June 2010, and has established a personal information protection management system as well as an advanced security management framework using an external data center.

The Company has introduced a stock option system and intends to continue implementing it on an ongoing basis going forward; therefore, if stock acquisition rights are exercised, the per-share value of the Company's stock may be diluted, potentially affecting the future share price. Although the stock acquisition rights are, in principle, subject to conditions under which they become exercisable in stages after two years have elapsed, the risk of dilution continues to exist.