Japan Data Science Consortium Co. Ltd.

The Company has adopted a stock option system aimed at providing incentives to officers and employees, and the value and voting ratio of shares held by existing shareholders may be diluted through the exercise of currently granted stock acquisition rights as well as those to be newly granted in the future. Regarding currently granted stock acquisition rights, it is anticipated that a certain portion will be exercised in the short to medium term, causing this risk to materialize. The Company plans to continue utilizing the stock option system going forward, meaning this dilution risk will persist.

The domestic AI business market is expected to expand from ¥1.3 trillion to ¥2.0 trillion between 2022 and 2027; however, in scenarios where the pace of market expansion slows sharply or competitive advantages fail to materialize, growth pace may not correlate with market expansion. Given the market's short history, there is also a risk of significant fluctuation in trends. As a countermeasure, to avoid dependence on a single industry or customer, the Group is promoting expansion of its AI Solutions lineup and diversification of client industries.

Given the growth potential of AI-related fields, many companies have entered the market, creating a risk that the Group's competitiveness may decline. The Company seeks to differentiate itself by leveraging both technical and business expertise to address SDGs themes across entire industries, but its advantage could be lost as competitors emerge. Although the Company strives to maintain competitiveness by utilizing its accumulated AI algorithms, if this risk materializes it may affect the Group's business and results of operations.

The source of the Group's competitiveness lies in its proprietary AI algorithms and related technologies; however, in the event of rapid technological innovation, the development costs and man-hours required to respond to such changes could increase significantly. The Group addresses this through continuous information gathering and by focusing on the recruitment and training of talented engineers and data scientists, and recognizes that the short-term likelihood of this risk materializing is low. If this risk materializes, it could affect business progress and results of operations.

In the AI Solutions Business, the top three business partners accounted for 28.8% of total sales in the fiscal year under review (26.3% in the previous fiscal year), creating a risk of dependence on specific business partners. Changes in transaction terms with these major partners could affect results of operations. However, as horizontal deployment of AI Solutions across industries progresses and new business partners increase, the proportion of sales attributable to specific partners is trending downward, and the likelihood of this risk materializing is expected to decline accordingly.

In M&A and strategic investments undertaken for non-continuous growth, there is a possibility that business may not proceed as originally planned due to sudden changes in the business environment or the emergence of unforeseen contingent or unrecognized liabilities. Regarding the goodwill of ¥611,437 thousand and customer-related assets of ¥1,149,750 thousand recorded upon the acquisition of Mail Customer Center Co., Ltd. in the previous fiscal year, impairment treatment may become necessary due to changes in the business plan or management environment, which could have a material impact on the consolidated financial statements for the following fiscal year. There are also risks in financing acquisitions, including procurement under unfavorable terms, dilution of share value, and increased interest expenses on borrowings.

The subsidiary Mail Customer Center Co., Ltd. is centered on the Direct Mail Fulfillment Service, and changes to postal system services or rate revisions could affect the Group's business results and financial condition. During the fiscal year under review, a revision occurred to the Yu-Mail transport service outsourcing agreement with Japan Post Co., Ltd. As a countermeasure, the Group is flexibly and promptly adjusting services and pricing for individual products to capture switching demand, while also focusing on securing higher value-added projects to improve operating margins and other metrics.

In the course of its operations, the Group handles data including confidential customer information and personal information, and there is a risk that information leakage could occur due to human error or unauthorized access. If this risk materializes, it could affect the Group's business and results of operations through damages payable to customers or loss of social credibility. As a countermeasure, the Group has built an information security and information management framework, and obtained ISO 27001 certification in May 2023.

Satoshi Kato, Representative Director and President, is the founder and a major shareholder, and plays a critical role in determining management policy and business strategy. If he becomes unable to continue his duties, business execution could be hindered during the period until a successor is established. As a countermeasure, the Company is strengthening its management organization through the establishment of executive officer positions and active information sharing, and is working to build a framework that eliminates excessive dependence on any single individual.

Securing and developing talented personnel is essential for sustained high growth, but there is a possibility that securing and developing personnel meeting the required standards may not proceed as planned. As of the end of the fiscal year under review, the organization was small, with 124 employees, and increasing personnel demand accompanying business expansion is a challenge. As a countermeasure, the Group is working to secure resources through active recruitment activities and promotion of talent development, in addition to strengthening cooperation with external outsourcing partners.