SOURCENEXT CORPORATION

The AI translation market to which the AI translation device "POCKETALK" belongs has seen numerous entrants including translation apps and competing translation devices, and if the Company's uniqueness is lost, this could adversely affect business performance. While the market is growing due to the recovery of inbound demand and expanding demand for multilingual support in the United States, the competitive environment remains severe. In addition to hardware devices, the Company offers the software "Sentio" to corporate customers, seeking to diversify risk through diversification of customer segments.

The pace of technological innovation in OS, web services, communication technology, generative AI, and other fields is extremely rapid, creating a risk that the Company's products could become obsolete. In particular, the rapid evolution of generative AI technology could cause existing products and services to lose competitiveness in a short period of time. The Company is responding by adopting cutting-edge AI such as "Genspark" and strengthening its own development capabilities, but if there is a delay in responding to market changes, there is a risk of losing competitiveness.

The Group's products have a high proportion of software for personal computers, and business performance is significantly affected by trends in personal consumption and personal computer sales volume. Replacement demand associated with the end of Windows 10 support is expected to continue into 2026, but if personal consumption weakens or PC sales volume stagnates, this could adversely affect business performance. The Company is working to mitigate this risk by strengthening sales to corporate customers.

As the Company expands globally in the United States, Europe, China, and other regions, it is subject to numerous laws and regulations in each country, including consumer protection, data protection, import/export regulations, and tariff policies. In particular, in Europe, regulations concerning corporate social responsibility are being strengthened, which could lead to increased costs and business constraints. While the Company has taken measures such as establishing a production base in Vietnam in response to U.S. tariff policy, there is a risk that continuous changes in laws and regulations could result in costs exceeding expectations.

The Company acquires important user information such as location data and usage history through its hardware products, and if a cyberattack occurs due to malware infection, targeted attacks, system vulnerabilities, or other causes, damage such as information leakage, data destruction, or service outages could result. If such damage occurs, it could have a material impact on business performance and operations through damage claims and loss of reputation. The Company has taken measures such as building an information security system compliant with ISMS and obtaining ISO27001 certification, but if threats occur beyond expectations, additional costs may be incurred.

Hardware products such as "POCKETALK" have higher component costs compared to software, and if demand forecasts are significantly mistaken, increased production, storage, and disposal costs could squeeze profits. In addition, if quality issues arise from product defects (such as safety incidents), the Company could bear liability and substantial countermeasure costs not covered by product liability insurance. In FY2025 (ended March 2025), the Company actually recorded a valuation loss on old products returned in connection with the launch of "POCKETALK S2," underscoring the importance of inventory management.

The Group outsources development, production, logistics, and customer support operations to specific third parties, and if it becomes difficult to secure outsourcing partners or if a sudden increase in workload occurs, this could affect business operations and performance. In particular, software and hardware development depends on outsourcing partners with limited areas of technical expertise, and switching to alternative partners would require a certain amount of time and cost. The Company is working to strengthen relationships with existing outsourcing partners and to develop and cultivate new ones.

The Group sells products licensed from third parties, and if license agreement renewals fail or royalties increase, the Company may be forced to change or discontinue its development and sales plans. In addition, due to technological innovation, there is a risk that products may infringe on the intellectual property rights of third parties not recognized by the Company, and if litigation, damage claims, or discontinuation of product sales occurs, this could have a material impact on business performance and reputation. The Company conducts trademark, patent, and design investigations with advice from legal counsel and patent attorneys, and has established a system to prevent rights infringement.

The Company positions the development of products and services applying AI technology as a top management priority, but if the market does not sufficiently recognize the Company as an "AI company," this could lead to a decline in competitiveness relative to major platform operators and emerging AI-related companies. A gap in brand image could also lead to lost opportunities to acquire global talent, such as excellent AI engineers, which could adversely affect business development, financial condition, and business performance. The Company is working to build its brand as an AI company by promoting AI integration in its products and through proactive public relations and marketing initiatives across various media.

The Group has experienced significant fluctuations in net sales, ordinary income (loss), and net income (loss) over the past five fiscal years, recording consolidated operating losses, ordinary losses, and net losses continuously from FY2022 (ended March 2022) through FY2025 (ended March 2025). In the fiscal period ended December 2025 (an irregular nine-month accounting period), a net loss was also recorded due to an impairment loss on "POCKETALK"-related software. While ordinary income (loss) has been trending toward improvement due to increased revenue and cost management, there remains a risk that temporary losses, such as valuation losses on investment securities and product valuation losses, will continue to weigh on business performance.