eSOL Co.,Ltd.

Securing engineers capable of responding to technological innovation, as well as excellent personnel in sales and administrative departments, is a prerequisite for business continuity and expansion. If personnel and outsourcing costs rise due to recruitment difficulties or work-style reform, or if existing personnel leave, this could adversely affect the Group's financial position and business performance. The Group is implementing measures to promote recruitment of next-generation management executives and employees and to retain personnel, but there is no guarantee that staffing will be secured as planned.

Customers of the Embedded Software Business span diverse industries including automobiles, industrial equipment, robotics, medical devices, and communication equipment, but the entire industry could be adversely affected by significant foreign exchange fluctuations or global policy/geopolitical factors. In this business, a large portion of orders involve customers' development projects for several years ahead, so if an event affecting customers' investment plans occurs, the impact on business performance could be substantial. The Group seeks to diversify risk through sales activities across various industry sectors, but cross-industry impacts from macro factors are difficult to avoid.

The Group positions the automotive-related market as its highest priority market against the backdrop of its initiatives in SDV (Software-Defined Vehicle), and transactions with this market are expected to expand further. However, if intense competition among automakers and parts manufacturers, or some other factor, causes the growth trend of the automotive-related market as a whole to slow or decline, this could have a material adverse effect on the Group's financial position and business performance. The Group is seeking diversification through expansion into the broader Vehicle category (railways, ships, aircraft, drones, robots, etc.), but the current structure of sales concentration continues.

There is a possibility that damages liability due to quality defects may arise in connection with the Embedded Software Business's proprietary software and Engineering Services, as well as the Sensing Solutions Business's Vehicle-Mounted Printers and handheld terminals, among other products. In particular, for products destined for automotive and medical device applications, the amount of damages could be substantial. The Group has taken out professional indemnity insurance (IT insurance) and product liability insurance (PL insurance), but if the amount of damages exceeds insurance coverage, this could adversely affect the Group's financial position and business performance.

In projects under Engineering Services and the Sensing Solutions Business, unprofitable projects may arise due to factors such as changes in the client's required specifications, delays in hardware development, or quality defects in embedded software. The Group individually manages quality, budget, and schedule for all projects, but if adequate compensation cannot be obtained for problems caused by the client, or if the Group's own project management is inadequate, this will adversely affect its financial position and business performance.

Computer technology is advancing remarkably, and any delay in responding to the latest technologies directly leads to the obsolescence of software products. The Group uses a standard of approximately 10% of net sales for development investment, combining R&D expenses and revision-up costs, but this ratio has been trending upward in recent years. If revenue fails to generate profit commensurate with the investment amount, or if the development structure cannot keep pace with the speed of technological innovation, this could adversely affect the Group's financial position and business performance.

Judging that growth in the logistics-related business is difficult to foresee, the Group is proceeding with business restructuring centered on the sensor network-related business, but at present sales remain at the research stage, and future stabilization remains uncertain. Amid expectations of intensifying competition due to the entry of numerous companies into the IoT market, if the business restructuring does not proceed as anticipated, this could adversely affect the Group's financial position and business performance.

eSOL Europe S.A.S., a consolidated subsidiary established in France in March 2018, is positioned as a cost center for the time being. If the subsidiary's operations do not proceed as anticipated—for example, if it fails to contribute to the future expansion of overseas sales—returns commensurate with the investment may not be obtained, which could adversely affect the Group's financial position and business performance.

In the information and communications industry, where the pace of technological innovation is rapid, there is a possibility of being subject to claims of intellectual property rights infringement from other companies. In addition, there are risks of information leakage involving held personal information and embedded software development specifications, as well as litigation risk arising from labor-related issues. The Group has taken measures such as establishing an Information Security Committee and conducting employee training via e-learning, but if litigation arises and damages are sought, this could adversely affect the Group's financial position and business performance.

The Group is subject to a wide range of legal regulations, including tax law, commercial transactions, labor issues, and intellectual property rights, and advocates compliance-focused management. However, should the Group fail to comply with these laws, regulations, or rules, this could adversely affect its financial position and business performance. There are also concerns about the impact on business performance if natural disasters or large-scale infectious disease outbreaks cause damage to business sites, employees, or social infrastructure.