HEROZ, Inc.

Technological innovation in the fields of generative AI and AI agents, including OpenAI's ChatGPT, is progressing at a rapid pace. If the Group is unable to respond appropriately and in a timely manner to changes in AI/SaaS-related technologies that form the foundation of its "AI BPaaS" strategy, this may affect its business and results of operations. In particular, as the Group aims to realize "AI Agent 2.0 (Meta Agent)", any delay in responding to changes in the market environment, including the emergence of new business models, would directly lead to a decline in competitiveness. As countermeasures, the Group continues to gather information through participation in the Japanese Society for Artificial Intelligence and the Japan Deep Learning Association, promote business alliances including capital alliances, and expand the functionality of "HEROZ ASK" and "JOINT iPaaS for SaaS".

In the AI/SaaS-related business fields, there are numerous competitors and competing services both in Japan and overseas, with new entrants ranging from major companies in other industries to highly specialized start-ups entering the market one after another. If competitors surpass the Group in terms of financial strength, technological development capabilities, and customer base, it may become difficult to acquire and retain customers, and downward pressure on prices may lead to deterioration in profit margins and additional cost burdens. As a countermeasure, the Group is working to accelerate research and development investment leveraging its accumulated AI technology and to continue providing services that meet customer needs.

If confidential information relating to customers' management strategies handled in the process of AI training data generation and SaaS solution provision by the Group is leaked due to intentional or negligent acts by employees, or unauthorized access or cyberattacks by malicious third parties, this may result in liability for damages and substantial costs for security system improvements, making it difficult to acquire and retain customers. Group company Variosecure has taken measures such as obtaining ISO/IEC 27001 certification and Privacy Mark certification, implementing multiple firewalls and antivirus systems, and concluding confidentiality agreements with all officers and employees; however, complete prevention is difficult.

As of the end of the current consolidated fiscal year, the Group recorded goodwill of ¥1,896,451 thousand, tangible fixed assets of ¥215,401 thousand, and intangible fixed assets (excluding goodwill) of ¥675,947 thousand, and impairment losses may occur due to changes in group companies' business plans or the management environment. In the current consolidated fiscal year, the Group recorded an impairment loss of ¥96,987 thousand on a portion of software of Strategit Inc., and if actual performance diverges from estimates in the future, this may have a material impact on the Group's results of operations. As a countermeasure, the Group maintains close information exchange and coordination with each group company and conducts regular monitoring of business performance and the business environment.

The domestic supply of engineers with advanced skills in AI, SaaS, and security-related fields is limited, and competition to secure talent is intensifying. In particular, the added value and competitive advantage of the Company's AI services are highly dependent on specific engineers involved in the development of core AI, and if such personnel become unable to participate in development, it may become difficult to maintain the competitiveness of the services. As countermeasures, the Group is promoting initiatives such as utilizing direct scouting, strengthening in-house training, developing HR systems, and conducting engagement surveys.

If defects occur in in-house products and software, including "HEROZ ASK" and "JOINT iPaaS for SaaS", this may lead to additional costs and loss of trust. In addition, if development is discontinued due to changes in needs during the development period or technological innovation exceeding expectations, invested costs may become unrecoverable, resulting in a risk of software impairment. As countermeasures, the Group has established an appropriate structure for release and operation, conducts regular monitoring of development status, and regularly updates its understanding of market trends.

As of April 30, 2025, the ratio of interest-bearing debt to total assets on the consolidated balance sheet reached 25.22%, and since most of the borrowings are at variable interest rates, an increase in market interest rates may affect the Group's business results. In addition, large borrowings may hinder agile fundraising and put the Group at a disadvantage in competition with competitors with a stronger financial base. As countermeasures, the Group implements profitability-focused management, formulates investment and funding plans with attention to financial balance, and continues negotiations with financial institutions on interest rate terms.

The Group actively utilizes capital and business alliances and M&A to expand its business foundation and diversify revenue, and has made Strategit, Variosecure, AI Squared, and Tifana.com, among others, consolidated subsidiaries. However, if post-integration synergies fall short of initial expectations, if new risk factors arise due to the limitations of due diligence, or if expected investment returns are not achieved, impairment losses on securities held or goodwill may occur. In the current fiscal year, the Group recorded a valuation loss of ¥231,892 thousand on shares of affiliated companies related to Strategit Inc. shares; as countermeasures, the Group conducts expert interviews, thorough market research and due diligence, and progress monitoring.

Variosecure outsources the manufacturing of its in-house developed security equipment, VSR, to two Taiwanese manufacturers, and procures VCR from one UK manufacturer, and therefore procurement may become difficult due to geopolitical risks, sharp increases in raw material prices, or organizational changes resulting from M&A. In addition, in the fiscal year ended February 2025, 66.9% of sales were dependent on the top five sales distributors, and if any of these companies changes its sales policy, if relationships deteriorate, or if distributor consolidation occurs due to M&A, this may affect the business results of the company and the Group. The company has concluded minimum purchase guarantee contracts with certain manufacturers, and there is also a risk of excess inventory if sales volumes fail to meet plans.

The Group's business is subject to legal regulations such as the Telecommunications Business Act, the Act against Unjustifiable Premiums and Misleading Representations, the Act on Settlement of Funds, and the Act on Specified Commercial Transactions, and Variosecure, as a telecommunications carrier, is obligated to protect the secrecy of communications, among other duties. If new laws and regulations targeting internet users, related services, and businesses are enacted, or if the interpretation of existing laws changes in the future, this may impose restrictions on service deployment, and administrative dispositions, contract terminations, or claims for damages may affect the Group's business results and corporate image. As a countermeasure, the Group is working to develop its compliance structure and enhance its management systems.