Hi-CRATES CO.,LTD.

There is a risk that the competitive advantage of the dental electronic medical record integrated system "Hi Dental Spirit" may be lost due to major technological innovation, significant changes in the IT environment, or sudden shifts in customer needs. The Company differentiates itself through its long-standing dental-specialized system and community-based support, but it remains vulnerable to competitors catching up technologically and to sudden changes in the market environment. In addition, responding to program modifications required by OS changes to Windows servers or iPads could impose ongoing cost and workload burdens.

With Japan's declining population, the number of dental clinics, which forms the Company's customer base, is expected to trend downward going forward, and competition among dental clinics is expected to intensify. If clinic closures due to retirement or business underperformance, or a decline in replacement demand and investment appetite among existing customers, exceed the Company's projections, this could directly and adversely affect net sales. While the Company anticipates continued growth in its customer base, the macro-level demographic risk remains a structural challenge.

The Company's business is specialized in the development and sale of the dental electronic medical record integrated system, and if significant issues are identified with this product or a major mismatch with the market occurs, the impact on the entire business would be substantial. Because product line diversification is limited, the Company faces a structural risk whereby a decline in the competitiveness of a specific product would directly lead to deterioration of its financial position and operating results. Delays or cancellations in the development of new products and services would also amplify this risk.

The Company has entered into an exclusive distributor agreement with Hitachi, Ltd., through which it receives stable procurement of IT equipment and technical support for new product development. However, if Hitachi were to change its exclusive distributor strategy or other terms, or if the agreement were terminated, this could significantly impede the smooth and stable conduct of business activities. Furthermore, because suppliers are limited to Hitachi and certain others, there is a risk that alternative procurement would be difficult in the event of deterioration in a supplier's business environment or a significant problem in product supply. While a favorable relationship has been maintained on an ongoing basis, this high degree of dependence constitutes a structural risk.

Revisions to the medical insurance fee schedule occur roughly once every two years, and revisions to the long-term care insurance fee schedule occur roughly once every three years; the Company factors in net sales from paid program updates that respond to these revisions. If the scope, scale, or complexity of a given revision exceeds the Company's processing capacity, if a material defect or bug is contained in the updated program produced in response, or if an anticipated system revision fails to occur, this would affect the Company's financial position and operating results. In addition, an increase in program modification work could force sales staff to concentrate on supporting existing customers, creating a risk that sales activities targeting new customers stagnate.

Because the Company's system handles patient information at dental clinics, there are opportunities involving personal information during data conversion or system replacement, and if a leak, tampering, unauthorized access, or similar incident were to occur, this could result in significant disadvantages such as claims for damages and loss of social credibility. The Company has implemented measures such as data encryption, strict operational manuals, and internal training, but it has identified obtaining third-party certification for a Personal Information Protection Management System (PMS) as an urgent task, and at present its countermeasures are not yet complete. Any information leak could pose a credibility risk affecting business continuity.

Maintaining the Company's community-based support services requires securing and developing personnel who combine specialized knowledge of dental care and insurance-covered treatment with IT skills; however, there is a risk that personnel acquisition and development may not keep pace with the expansion of branches, offices, and sales offices across prefectures. In addition, a certain number of employees leave due to changes in the economic or employment environment or personal circumstances, and if attrition were to reduce staffing below the level necessary to maintain community-based support, this would lead to a decline in service quality and adversely affect the financial position. The Company is strengthening new graduate and mid-career hiring and has established a training system using on-the-job training and dedicated instructors, but intensifying competition in the labor market remains a challenge.

Shigehisa Ishii, the founder and Representative Director, plays a central role in every aspect of management strategy, business promotion, and sales policy, and there is a risk that if he were unable to continue executing his duties, this would create a significant impediment to management. The Company is advancing the establishment of its board of directors and executive officer system and the delegation of authority, but at present it remains highly dependent on him. He is also a major shareholder holding 66.8% of the total issued shares, and a decline in his shareholding ratio could affect the stock market and the exercise of voting rights.

HMG (Hi Dental Hard Maintenance Mutual Aid Association) is a voluntary organization formed by dentists who are customers of the Company, and it works closely with the Company's business model with the aim of reducing the burden of hardware repair and maintenance costs. However, because HMG is an organization independent of the Company, if a major shift in its founding purpose or operational policy were to occur based on the consensus of its members, this could have a significant impact on the Company's business model. Although a very favorable partnership is currently maintained, the organization's independence gives rise to a risk that lies outside the Company's control.

The Company concentrates its development base at its Okayama head office and provides services from various locations centered primarily in western Japan, and if an emergency such as a large-scale natural disaster or infectious disease outbreak were to occur, there is a risk that the continuation of business activities itself could become difficult or impossible. Because the Company's customers are dental clinics, which are medical institutions, there is demand for continued provision of services in the same manner even during an emergency, while the geographic concentration of its bases could constitute a vulnerability from a BCP perspective. Although the Company has formulated countermeasures through its BCP (Business Continuity Plan), the impact would be significant in the event of extensive physical or human damage.