Data Applications Company, Limited

Rapid advances in information technology, including generative AI and large language models, pose a risk that the Group's products and services could become obsolete. Price-reduction pressure is also increasing due to competitors' new product launches and strategic alliances, and if the Group's competitive advantage in the market is impaired, this could have a material impact on its business results and financial condition. As countermeasures, the Group is promoting the development of ACMS Cloud and Placul, and strengthening its R&D framework in the AI, data integration, and EDI/EAI fields through the group participation of WEEL, Digital Trans Communications, and Melon.

It is considered impossible to completely eliminate defects in increasingly sophisticated and complex software. In particular, systems provided by WEEL and Melon that utilize generative AI and time-series analysis technology involve uncertainties different from those of conventional software, due to the nature of AI. In cloud services such as ACMS Cloud, Traco, and Magic Order, a failure could simultaneously affect multiple customers, potentially leading to a decline in sales of products and services. The Group is strengthening its quality control framework through the establishment of a Quality Control Office, acquisition of ISMS and cloud security certifications (ISO/IEC 27001 and 27017), and adoption of redundant configurations.

The majority of sales of the Company's (Data Application's) software products and cloud services are generated through indirect sales via partners such as system integrators. If relationships with partners deteriorate, partners form strategic alliances with competitors, or partners' financial condition worsens, this could affect the Group's business results and financial condition. In addition, since it is difficult to detect in advance highly confidential projects such as those of government agencies, there is a risk of divergence from disclosed earnings forecasts. As countermeasures, the Group is deepening relationships through proactive communication with partners and strengthening value-added proposals that combine data integration, AI, and EDI/EAI.

The Software Business has a structure with a high fixed-cost ratio, in which fluctuations in sales have a significant impact on profit. With the termination of the perpetual-license type sales for shipments from April 1, 2026 and the transition to a subscription-type model, temporary slowdowns in sales may occur during the transition period. In the System Integration Business, there is a risk of divergence between plans and actual results due to the increasing scale of projects and fluctuations in customers' budgets and procurement schedules, while in the AI-Related Business, such divergence may arise from differences in requirements across projects and development uncertainties specific to cutting-edge technology fields. The Group aims to build a stable revenue base through plan management that takes into account the characteristics of each business segment, and through the accumulation of recurring revenue resulting from the transition to the subscription-type model.

In cloud services such as ACMS Cloud, Traco, and Magic Order, business data of multiple customers is processed and managed on the cloud. If information leakage or loss occurs due to cyberattacks, unauthorized access, system failures, or other causes, this could have a significant impact on the Group's social credibility and result in substantial cost burdens. Although each group company is developing its information security management framework, the risk of incidents increases if the management level is not unified across the entire Group. The Company has acquired ISMS and cloud security certifications (ISO/IEC 27001 and 27017), and Digital Trans Communications has acquired ISMS certification (ISO/IEC 27001); the Group is working to unify and strengthen its management framework across the entire Group.

The Group is a small-scale organization with 253 employees (as of March 31, 2026), and there is a risk that operations could be disrupted due to delays in securing replacement personnel in administrative departments or delays in handover of duties. With Digital Trans Communications and Melon joining the Group in April 2025, developing and enhancing the group management framework, including grasping the status of business execution at subsidiaries and ensuring the effectiveness of internal controls, has become an even more important issue than before. As countermeasures, the Group is strengthening its management framework across the entire Group through personnel reinforcement, regular convening of group management meetings, and conducting internal audits of subsidiaries.

Highly specialized personnel in software and cloud service development, data integration, and AI, data science, and large language models are essential to business execution, but amid a labor market where the supply-demand balance for IT personnel remains tight, it may become difficult to recruit and develop personnel as planned. If personnel turnover or delays in development occur, this could affect the Group's business results and financial condition. As countermeasures, the Group is strengthening its Group-wide human resource development framework through planned recruitment of new graduates and mid-career hires, expansion of learning opportunities, and the sharing of specialized knowledge and technology as well as personnel exchange among group companies.

With the rapid development of AI technology, applications and registrations of related patents are becoming increasingly active worldwide, and the scope and interpretation of intellectual property rights relating to AI model training methods, algorithms, and rights to use training data remain fluid, with legal views still evolving. If AI solutions provided by WEEL and Melon unintentionally infringe on the intellectual property rights of third parties, this could result in damages, injunctions, and payment of consideration, potentially having a material impact on the Group's business results and financial condition. As countermeasures, the Group conducts intellectual property management through its legal department, regularly surveys patent trends, adopts industry-standard licensing forms, and promotes patent applications for its own proprietary technologies.

The Company (Data Application) holds listed stocks and bonds, while Digital Trans Communications holds investment trusts, and depending on trends in the stock market, bond market, and net asset value of investment trusts, these holdings may become subject to impairment. This poses a risk of affecting the Group's financial condition and business results. The Group's equity ratio remains at a high level of 68.4% as of the end of the current consolidated fiscal year, and the funds necessary to maintain corporate activities are secured.

If employees or facilities are damaged by natural disasters such as earthquakes, fires, or the spread of unknown infectious diseases, this could result in decreased sales due to reduced order-taking activity and incurred facility restoration costs, potentially affecting business results and financial condition. In particular, in the AI consulting and contract system development businesses of WEEL and Melon, and the System Integration Business of Digital Trans Communications, there is a risk that project progress could be delayed and customer satisfaction affected under conditions where face-to-face work is restricted. As countermeasures, the Group is promoting telework and a distributed office setup, building a framework for conducting business in remote environments, and formulating and reviewing its Business Continuity Plan (BCP).