Encourage Technologies Co., Ltd.

The flagship product "ESS REC" has created the system audit trail tool market, but new entrants, including overseas products, continue to emerge as market recognition increases. If ESS REC loses its competitive advantage due to the emergence of higher-performance or lower-priced competing products, or if competitiveness cannot be maintained for other products such as "ESS AdminONE," this could directly impact net sales. As countermeasures, the Company is working to continuously strengthen competitiveness through the expansion of cloud-compatible products (commencement of ESS AdminONE Cloud) and version upgrades to ESS REC 6.

Since the Company's basic stance is to plan and develop general-purpose packaged software, there is a risk that products will not be accepted in the market if they do not fit customers' actual operating environments, or if they are inferior to competitors' products in terms of functionality or price. In addition, significant excess in development periods, product defects, and the discovery of unknown vulnerabilities in products utilizing generative AI could result in substantial rework costs, making it difficult to recover development expenses. Any of these could affect the Company's financial position and business results.

Maintenance Support Service, which is an important pillar of the Company's revenue, carries the risk that contracts may be terminated or changed if the Company's products are not adopted for new systems when customers update their systems, or due to the downsizing or discontinuation of systems. In addition, if major product defects or prolonged incident response damage customer trust, this may prevent the renewal of maintenance contracts. Since Maintenance Support Service is a stable revenue source alongside license sales, any impairment to it would directly affect the Company's financial position and business results.

With the rollout of "ESS SmartIT Operation," Consulting Service has become increasingly sophisticated and complex, evolving toward system construction support for overall IT controls. If delays in acceptance inspection occur due to problems, if estimated work hours are exceeded, or if claims for damages or compensation work arise due to discrepancies with customer requirement specifications, this could affect the Company's financial position and business results. Amid the need for broad and advanced project management capabilities, improving the precision of requirements definition, delivery scheduling, and quality control has become a challenge.

Dependence on sales to NTT DATA Corporation remains high, at 22.2% in FY2025 (ended March 2025) and 19.7% in FY2026 (ending March 2026). Although the Company has maintained stable business relations over many years based on an agency agreement, if the contract is changed or terminated for any reason, the impact on net sales could be substantial. While the transaction is ongoing at present, high dependence on a single business partner is recognized as a structural risk factor.

Securing development engineers necessary for developing next-generation new products and expanding existing products, system engineers for consulting and support operations, and sales personnel are all challenges. Due to the shortage of domestic IT engineers, rising wages, increased fluidity in the labor market, and a job-seeker-favorable market for new graduate recruitment resulting from the declining birthrate, difficulties in recruitment are expected to continue. If securing IT engineers does not proceed as planned, this may lead to delays in R&D and product releases, as well as stagnation in customer development, potentially affecting the Company's financial position and business results.

For sustainable growth, it is essential to strengthen the development of management personnel responsible for planning and executing business plans and coordinating between departments. Delays in developing next-generation leaders and candidates for executive positions could impede the execution of business plans. As countermeasures, the Company is implementing a young leader development program, establishing a mentoring system led by HR department experts, and promoting external hiring of senior and mid-level personnel as well as the appointment of female executives, but securing a supply of talent commensurate with organizational growth remains a challenge.

The possibility that third-party intellectual property rights unrecognized by the Company already exist, or that free software used by the Company infringes on third-party rights, cannot be completely ruled out. If claims for damages, requests for injunctions against use, or demands for royalty payments arise, litigation response costs and expense burdens could affect the Company's financial position and business results. While the Company seeks to prevent rights infringement through registration applications for intellectual property rights related to technical requirements and trademarks of its own products, it is difficult to completely eliminate this risk.

With the normalization of remote work environments for employees working from home and partner companies, there is a constant risk of leakage of confidential information and personal information due to computer virus intrusion, targeted email attacks, and ransomware. In addition, the risk of unauthorized removal of trade secrets and technical information by current and former employees is also recognized. If measures taken prove ineffective against unprecedented attacks, this could have a material impact on the Company's financial position and business results due to loss of social credibility, and the Company continues to strengthen countermeasures through the establishment of an Information Security Committee and the utilization of its own products.

In product development utilizing generative AI, the risk of discovering unknown vulnerabilities has newly emerged. When vulnerabilities are discovered, fixing the defects may require substantial work hours, making it difficult to recover development expenses, and potentially leading to product release delays and damage to customer trust. With the rapid evolution of AI technology, continuous response to new risks that cannot be fully addressed by conventional security measures is required.