SYSTEMS DESIGN Co. , Ltd.

Under software development contracts, revenue is recognized based on the percentage of completion, but since the scope and specifications differ by project, estimation of total cost depends on management's judgment. If the estimated total cost is revised due to specification changes requested by customers, etc., the percentage of completion may fluctuate, potentially having a material impact on revenue recognition. Revenue subject to this in the current consolidated fiscal year was ¥377,906 thousand (3.8% of total net sales), and the Company is responding by strengthening its project progress management system through a cross-departmental review committee.

Goodwill arising from corporate acquisitions is recorded on the consolidated balance sheet, with a balance at the end of the current consolidated fiscal year of ¥9,618 thousand (0.1% of consolidated total assets). If the business plans of acquired subsidiaries, etc. are not achieved due to changes in the business environment or other factors, recognition of impairment losses may be required, which could adversely affect business performance and financial condition. The Company monitors the sales performance of each department and subsidiary through monthly budget-versus-actual meetings to prevent risks in advance.

Deferred tax assets are recorded based on future profit plans, with a balance at the end of the current consolidated fiscal year of ¥279,795 thousand (4.1% of consolidated total assets). If actual taxable income deviates from projections or if there are changes in the tax system, a write-down of deferred tax assets may be required, potentially affecting business performance. The Company strives to prevent risks in advance through progress management and information sharing via monthly budget-versus-actual meetings.

Since the recoverable amount of fixed assets is calculated based on assumptions such as future cash flows, discount rates, and net selling prices, if the initially expected income is not achieved or if there are changes in the assumptions, recognition of impairment losses may worsen business performance. The Company monitors the sales performance of each department and subsidiary through monthly budget-versus-actual meetings, striving for early identification and response to issues.

Changes in the business environment, such as intensifying competition, intensifying price competition, rapid technological innovation, and changes in customer needs, may affect financial condition and business results. The Company continues to research and analyze market trends, competition, and customer needs, and is promoting improvement in profit margins by shifting from low-profitability businesses to high-profitability businesses through selection and concentration of businesses, and by eliminating unprofitable and low-profitability projects.

While demand for IT talent and advanced IT talent is increasing amid the progress of social transformation through DX, the tight labor market continues to make it difficult to hire excellent personnel. If the Company is unable to secure necessary personnel in a timely manner or if a large number of employees resign, this may affect financial condition and business results through a decline in service quality and development capabilities. The Company is working to develop a rewarding work environment through strengthened recruitment activities, in-house talent development, workstyle reform, and promotion of diversity.

If cyberattacks such as computer viruses or unauthorized access, or unforeseen circumstances, result in the external leakage or corruption of personal information or confidential customer information, this may affect financial condition and business results through decreased sales due to loss of trust and the occurrence of damage compensation costs. The Company has established an information security system through obtaining Privacy Mark certification (2004), company-wide ISMS certification (2020), development of various regulations, and continuous employee training.

If a large-scale disaster or a new pandemic occurs, causing partial or complete suspension of operations, or if there are significant fluctuations in financial and capital markets or supply constraints, this may affect financial condition and business results. The Company implements BCP measures such as decentralizing business locations and migrating servers to data centers, striving to establish a system to minimize damage.

Net sales to PCA Corporation as a proportion of total net sales were 10.9% in FY2025 (ended March 2025) and 11.1% in FY2026 (ending March 2026), and changes in the company's ordering policy, etc., may affect financial condition and business results. In addition, the Yamanashi Ryuo Center and Yamanashi Office lease part of the land and buildings owned by the company, creating dependency in terms of facilities as well. The Company is working to reduce its dependency on specific customers by developing new customer segments.

In the Systems Development Business, profitability may deteriorate due to specification changes, work processes exceeding initial estimates, unexpected defects, and other factors, and there is also a risk of additional costs arising after acceptance due to non-conformity with contracts. The balance of provision for loss on order received at the end of the current consolidated fiscal year was ¥22,240 thousand. Through strengthening the proposal review system by the review committee and reviewing project progress management after order receipt, the Company strives to avoid accepting high-risk, low-profitability projects and to prevent delivery delays.