Tera Technology, Inc.

With the rapid advancement of generative AI, a fundamental skill shift toward LLM utilization technologies, prompt engineering, and new AI-premised architectures is required. If the technological paradigm shift accelerates far beyond expectations, there is a risk that existing business models and development structures could become obsolete, making it impossible to provide appropriate customer value. The Group is addressing this by deploying advanced technologies such as generative AI in actual projects and strengthening reskilling efforts.

The Company grants stock acquisition rights as incentives to officers and employees, and as of the end of the current consolidated fiscal year, the ratio of potential shares (171,000 shares) to the total number of issued shares (1,801,000 shares) has reached 9.5%. If these stock acquisition rights are exercised, the value of shares held by existing shareholders and their voting rights ratio could be diluted. While this is an intentionally designed incentive scheme, it should be noted that the dilution rate is relatively high.

The Group's services depend heavily on the capabilities and qualities of its information processing engineers, and human resources are positioned as the key differentiator from other companies. While the Group is strengthening new graduate and mid-career recruitment and implementing training measures such as level-specific training and on-the-job training, if human resource acquisition and development do not proceed as planned, the Group may be unable to secure the capacity to handle contracted projects, potentially affecting business results. Amid the continuing shortage of engineers across the IT industry as a whole, intensifying recruitment competition is a concern.

In operations handling personal information and confidential information of customers and business partners, there is a risk that if an information leak occurs, it could lead to reduced sales due to loss of trust and the incurrence of damages costs. While the Group has implemented measures such as IC card access restrictions, access controls, and obtaining Privacy Mark certification, if a leak occurs due to an outsourcing partner, the Group's responsibility may still be called into question. The Group also implements equivalent management for outsourcing partners, including obtaining written pledges and conducting training.

Unprofitable projects may arise due to factors such as increased development man-hours, and if serious defects are discovered after delivery and acceptance are completed, this could result in loss of client trust and risk of damages claims or litigation. The Group strives for prevention through building and continuously improving a quality management system based on ISO9001, and by strengthening pre-order review and monitoring for large-scale projects. It also seeks to mitigate financial impact by maintaining liability insurance.

Personnel costs and outsourcing costs for engineers account for the majority of cost of sales, and since personnel costs are fixed, there is a risk that profitability could deteriorate if order volume sharply declines and utilization rates fall, since costs would not decrease correspondingly. In addition, if the industry-wide shortage of engineers worsens, outsourcing partners may demand price increases, which could affect business results if these cannot be passed on to customers. The Group is addressing this through building long-term, stable business relationships with customers and diversifying its businesses and customer base.

Representative Director Kazunari Miyamoto is a major shareholder holding 59.79% of issued shares, including shares held through his asset management company. If his shareholding were to change sharply for any reason, this could affect the market price of shares and the exercise of voting rights, among other matters. While he maintains a policy of continuing to hold a certain level of voting rights as a stable shareholder while also giving consideration to the interests of minority shareholders, the concentrated shareholder structure inherently carries liquidity risk.

The Group conducts business under various relevant laws and regulations, including those concerning the proper conduct of contracting and staffing arrangements, and there is a risk that violations of laws or the introduction of new regulations could damage social credibility and lead to claims for damages, affecting business results. The Group strives for early detection and prevention through building a structure based on its Basic Compliance Policy and Corporate Ethics Code, thorough education of all employees, and the operation of an internal whistleblowing system and compliance surveys.

There is a risk that trouble in internal systems caused by disasters such as earthquakes or fires, computer viruses, power outages, or communication failures could affect business activities and results. While the Group has implemented disaster countermeasures through the operation of its Business Continuity Management (BCP) program, at this stage the possibility of system failures due to unforeseeable causes cannot be ruled out.

The top two customers (Fujitsu Limited and TIS Inc.) account for approximately 30% of customer sales, indicating a relatively high degree of dependence on specific customers. There is a risk that the Group's business results could be significantly affected by changes in these specific customers' IT investment behavior, management changes, or sudden shifts in the business environment or regulatory system. The Group is working to reduce this dependence by expanding transactions with major customers in diverse fields, including direct transactions with end customers.