Headwaters Co., Ltd

At the end of the current consolidated fiscal year, the current ratio stood at 63.4%, and a situation has been identified that raises substantial doubt about the going concern assumption. The main cause is short-term borrowings of ¥1,900,000 million used to acquire shares of a related company. Based on an agreement with financial institutions, the company plans to refinance this into long-term borrowings after one year; however, this refinancing has not been definitively promised through a contract or otherwise. If the refinancing does not materialize, it could have a material impact on the financial position and operating results.

The Group's AI Solutions Business primarily serves corporate clients, and a downturn in the domestic economy or a reduction in customer companies' system-related capital expenditures directly affects business development. In an economic downturn, there is a risk of order declines or project postponements, which could affect the financial position and operating results. Given the structural dependence on specific customer segments, particular attention should be paid to the high sensitivity to changes in the macro environment.

In the AI-related industry, new entrants have continued to emerge alongside the spread of AI, and intensifying competition in product differentiation and pricing is anticipated. The Group is responding by enhancing its industry recognition and accumulating track record, but if it becomes difficult to conclude contracts at expected unit prices, profitability could decline. Because intensifying price competition directly affects not only revenue but also profit margins, there are concerns about the impact on operating results.

In contracted system development projects, there is a risk that development man-hours may exceed initial expectations due to major specification changes or the occurrence of defects. Increased man-hours lead to deteriorating profitability, and changes in delivery dates may cause revenue and profit recognition to shift to the following quarter or fiscal year. If such profitability deterioration and timing shifts occur simultaneously across multiple projects, the impact on the financial position and operating results could be correspondingly significant.

The AI-related industry is characterized by extremely rapid technological innovation, with research and development advancing worldwide. The Group is striving to build a system capable of responding to technological innovation, but if it fails to keep pace with the speed of technological change, it could lose its competitive advantage, potentially affecting the financial position and operating results. In particular, in the current environment of continued rapid technological evolution such as generative AI, ongoing technology investment and human resource development are essential.

The Group outsources part of its system development work to subcontractors for the purposes of securing personnel, improving development efficiency, and responding promptly to customer requests. While the Group currently maintains good collaborative relationships with excellent subcontractors, if it is unable to secure sufficient personnel from subcontractors, maintaining the development system could become difficult, potentially affecting the financial position and operating results. In an environment of continued tight supply and demand for IT talent, attention should be paid to the risk that securing subcontractors may become increasingly difficult.

The Group's core business, system development, is knowledge-intensive labor, and securing, developing, and retaining engineers and sales personnel with specialized technical skills and knowledge form the foundation of business continuity. While the Group is implementing measures to prevent attrition, such as strengthening recruitment, internal training, and enhancing employee benefits, if it is unable to secure sufficient necessary personnel, its development and sales capabilities could decline, potentially affecting the financial position and operating results. Securing personnel for administrative departments is also recognized as an important issue.

The Group has occasion to handle customers' confidential information and personal information held by customers, which inherently carries information leakage risk. Although the Group has obtained ISO/IEC 27001 certification and established an information management system, if information is leaked due to human error or other causes, it could result in a loss of social trust and damages, potentially affecting the financial position and operating results. Deficiencies in information management directly affect trust relationships with customers, making this an important risk for business continuity.

The Group's outsourcing contracts may be subject to the "Act on Promoting the Improvement of Subcontracting and Other Small and Medium-Sized Enterprise Transactions" (Subcontracting Fair Trade Act), and if operational deficiencies result in violations of legal obligations, there is a risk of loss of social trust. In addition, while the Group strives to confirm that it does not infringe on third parties' intellectual property rights, there is a possibility of infringement through the existence of unrecognized rights or through free software. If claims for damages, injunctions, or royalty payments arise, it could affect the financial position and operating results.

The Group has adopted a stock option system aimed at providing incentives to officers and employees. As of the filing date of this document, outstanding stock options number 443 units (354,400 shares), equivalent to 9.2% of the total number of issued shares. If these are exercised, new shares will be issued, potentially diluting the value of shares held by existing shareholders. Given that the dilution rate reaches approximately one-tenth, this represents a non-negligible risk factor for existing shareholders.