HENNGE K.K.

If a serious system failure occurs in products or services designed to provide a secure environment, or if the Group is subject to a cyberattack from outside, trust in the services could decline significantly, potentially affecting the Group's business and results of operations. As a countermeasure, the Group is actively investing in both preventing failures and minimizing their impact, including gathering and sharing information on new technologies and commercially available products, analyzing the causes of past failures and sharing recurrence prevention measures internally, and regularly conducting bug bounty programs and vulnerability assessments. The likelihood of occurrence is medium, the impact is high, and the risk level is on an increasing trend.

If confidential information obtained from client companies in the course of implementing products and services is lost or leaked due to a cyberattack from outside or intentional or negligent acts within the company, this could affect the Group's business and results of operations through loss of trust, damages, and litigation costs. As a countermeasure, the Group has built an information management system by obtaining and maintaining ISMS (ISO 27001) certification, conducting annual security assessments by external service providers, establishing various information system and security regulations, and thoroughly implementing internal education and monitoring. The likelihood of occurrence is medium, the impact is high, and the risk level is on an increasing trend.

If the Group falls behind in responding to rapid technological innovation in the IT industry, including AI, or if a vendor of cloud-based groupware that integrates with the Group's main service, HENNGE One, changes its policy to provide similar services in-house, this could have a material impact on the Group's business and results of operations. As a countermeasure, the Group actively trials, verifies, and applies new technologies, and seeks to differentiate itself from competitors by acquiring know-how through investments and business alliances with SaaS companies and by promoting research and development of AI services. Although the likelihood of occurrence is low, the impact is high, and the risk level is on an increasing trend.

HENNGE One is operated mainly on the foundation of Amazon Web Services (AWS), and if a failure or capacity shortage occurs at AWS, service access may be interrupted or delayed, potentially damaging customer trust. In addition, changes in the business strategy or pricing of Amazon Web Services, Inc. could also affect results of operations. As a countermeasure, in addition to limiting liability for damages under the terms of use, the Group continuously conducts research, examination, and trial implementation aimed at diversifying into and migrating to alternative cloud services.

Sales of HENNGE One account for the majority of the Group's total sales, and if HENNGE One sales decline significantly due to changes in market conditions or other factors, this could have a material impact on the Group's business and results of operations. As a countermeasure, while continuing to expand HENNGE One sales, the Group is working to reduce its dependence on a specific service, with a view to expanding its business scale through the active promotion of new business development and business investments that generate synergies.

If a third party infringes on intellectual property rights held by the Group, or if the Group infringes on the intellectual property rights of another party, this could have a material impact on the Group's business and results of operations. As a countermeasure, the Group registers rights to its in-house developed intellectual property in a timely and appropriate manner, while thoroughly monitoring the services of competitors and vendors and conducting prior research at the development stage. Although the likelihood of occurrence is low, the impact is high, and the risk level is on an increasing trend.

The cloud service market, to which the HENNGE One business that the Group focuses on belongs, is growing rapidly; however, if market growth slows due to changes in economic conditions, or if competition intensifies due to the entry of major domestic and overseas capital and competitors, it may affect the Group's business and results of operations. As a countermeasure, the Group seeks to differentiate itself by improving and enhancing the functions of HENNGE One, which comprises three categories—Identity, DLP, and Cybersecurity—developing new features, and improving customer success.

If the recruitment and development of personnel necessary for business expansion does not proceed as planned due to intensifying competition for talent in the cloud services field or changes in the international situation, this could affect the Group's business and results of operations. As a countermeasure, the Group is working to build an environment where employees can work with high motivation over the medium to long term, through promoting diversity management, securing excellent talent from overseas by making English an official in-house language, and building and improving useful training programs.

The Group makes investments and financing, such as capital contributions, M&A, and joint ventures, in domestic and overseas companies to expand its business; however, if the business of an investee company does not progress as planned, if the Group is unable to recover the amount invested, or if impairment losses occur, this could affect the Group's business and results of operations. As a countermeasure, the Group makes investment decisions after carefully examining the appropriateness of the business content, synergies, business plan, and valuation of prospective investee companies. Although the likelihood of occurrence is high, the impact is low, and the risk level is on an increasing trend.

Since cloud server usage fees are paid mainly in U.S. dollars, a sharp depreciation of the yen could worsen cost of sales, potentially affecting the Group's business and results of operations. As a countermeasure, the Group appropriately utilizes forward exchange contracts and other hedging instruments for foreign currency-denominated trade payables, thereby implementing hedges to keep fluctuations in cost of sales within a certain range. Although the likelihood of occurrence is high, the impact is low.