ExaWizards Inc.

The EU AI Act came into effect in August 2024 and is being phased in, and in Japan the "Act on the Promotion of Research and Development and Utilization of Artificial Intelligence-Related Technologies" was enacted in May 2025. While there are currently no direct constraints on the Company's business, future changes in legal interpretation and operation, or the introduction of new regulations, could constrain business activities. The Company is addressing this through the development of a compliance framework and the formulation and operation of an AI ethics handbook, but the risk of sudden changes in the regulatory environment remains.

Social demands regarding AI ethics and AI governance are changing rapidly, and there is a possibility that the AI products/services and AI agents developed and provided by the Company Group could unintentionally result in deviations from social norms and ethics. This could lead to a decline in social credibility, which may affect the business, financial condition, and results of operations. The Company addresses this through the formulation of its AI Basic Policy and AI ethics handbook, regular reviews by the Risk Management Committee, and the establishment of an expert committee.

The pace of innovation in AI technology is extremely rapid, with research institutions, companies, and universities around the world competing in research and development. If the Company Group is unable to respond to the emergence of new business models or sudden changes in the market environment, it could lose its competitive advantage, affecting the business, financial condition, and results of operations. The Company seeks to differentiate itself through the continuous development of products and services that combine proprietary AI technology with industry knowledge, but the risk of being unable to keep up with the speed of technological change is ever-present.

While legal discussions and guideline development regarding intellectual property rights related to generative AI technologies are progressing both domestically and internationally, uncertainty remains regarding their application to individual cases and the scope of liability. There is a possibility that third parties may allege infringement of intellectual property rights or breach of contract, etc., in connection with the manner in which the Company Group, its outsourcing partners, business partners, or users utilize generative AI-related technologies, which could result in impacts such as royalty payments, damages, service suspension, and loss of credibility. The Company addresses this through the formulation of guidelines, training of officers and employees, and contract review, but comprehensively grasping rights is difficult.

There are numerous existing operators in the AI-related market, and new entrants continue to emerge, ranging from major corporations to highly specialized start-ups. Depending on the movements of operators with superior technological development capabilities, sales capabilities, or brands compared to the Company, there is a possibility that the Company may not be able to acquire or retain customers as expected. The Company strives to maintain its competitive advantage through the development and provision of differentiated products and services that combine proprietary AI technology with industry knowledge.

The Company Group is actively exploring joint ventures, investments, and acquisitions to expand its exaBase products, but there is a possibility that business may not progress as initially planned due to sudden changes in the business environment after acquisition, the occurrence of contingent liabilities, or goodwill impairment, among other factors. There is also a risk in fundraising for acquisitions, such as procurement under unfavorable conditions, dilution of share value, or increased interest burden on borrowings. The Company strives to reduce risk through the use of due diligence and third-party evaluation institutions, but complete elimination is difficult.

The Company Group records goodwill and customer-related assets arising from corporate acquisitions, as well as internally developed software, as intangible fixed assets and amortizes them; however, if expected results are not achieved due to changes in the business environment or sudden changes in the market or competitive landscape, impairment losses may be recorded. This could have a significant impact on the Company Group's results of operations and financial condition. The Company addresses this through careful assessment of the market environment and periodic asset evaluations, but complete preparedness for external environmental changes is difficult.

The Company Group handles confidential information related to customers' management strategies and personal information, and there is a possibility of information leakage, loss, or unauthorized use due to intentional acts or negligence by employees or outsourcing partners, unauthorized access by malicious third parties, malfunction of AI agents, or other causes. Should such an event occur, it could have a significant impact on the business, financial condition, and results of operations through liability for damages, substantial security remediation costs, administrative sanctions, and loss of customer trust. The Company addresses this through the acquisition of ISMS certification, the development of information management regulations, and the establishment of technical countermeasures.

As the business expands, it is essential to recruit and develop business development personnel and software development engineers responsible for the business application of AI/AI agents; however, due to intensifying competition in the AI talent market, the Company may not be able to secure personnel as planned. If the necessary personnel cannot be secured, it could result in a slowdown in business growth and an adverse impact on financial condition and results of operations. The Company continuously works to strengthen its recruitment and development framework, but the risk remains dependent on trends in the external labor market.

The Company Group's AI services are built on major cloud environments, and if a system failure occurs due to a natural disaster, cyberattack, sudden increase in access, or other causes, it may become difficult to provide services, which could affect the business, financial condition, and results of operations. In addition, major failures in third-party cloud services or external APIs used by the Company could also disrupt its services. While no significant incidents have occurred to date, the risk inherent in the structure of dependence on cloud services continues to exist.