Scala, Inc.

The DX Business, which accounts for approximately half of consolidated revenue, has a high correlation with the IT investment trends of major domestic corporate clients and the domestic economic climate. When the economy deteriorates, there is a possibility of decreased orders and increased pressure to lower selling prices. While the Group aims to strengthen its competitive advantage in the industry, it is difficult to completely shield itself from the effects of the external environment.

The pace and degree of technological progress in the IT industry are extremely rapid, and if innovative technologies emerge beyond expectations, or if the Group is unable to raise the substantial funds required to respond to new technologies in a timely manner, delays in response may occur. This could result in obsolescence of the services provided and a decline in competitiveness. The Group addresses this by continuously monitoring the latest technology trends and actively releasing new functions and new services.

As projects in the DX Business become larger and more complex, it may become difficult to reuse them as standardized services, resulting in an increase in one-time revenue relative to recurring (stock) revenue. For system development projects with large order values, there is a risk that development may be significantly delayed due to changes in required specifications or additional requests from clients. Should such events occur, they may affect the Group's business performance.

The Group presents clients with SLAs concerning server uptime, incident response, and maintenance notifications for its SaaS/ASP services. If the Group fails to meet these standards in the future, it may be subject to substantial claims for damages. Although the Group strives to establish a robust operational framework, unexpected system failures could affect its business performance.

The DX Business is heavily dependent on communication infrastructure such as the internet, telephone, and fax. If a system outage occurs due to hardware or software malfunctions, cyberattacks, natural disasters, or other causes, it may become impossible to carry out operations or provide services. This could lead to a combination of effects, including external leakage or misuse of information, decreased sales, increased recovery costs, and loss of social credibility. The Group is implementing measures such as building backup systems and reinforcing or upgrading aging server equipment.

The Group may hold information assets, including customers' personal information, and if information leakage occurs due to unauthorized external access or deficiencies in information management systems, this could result in claims for damages and loss of social credibility. The Group has obtained ISO/IEC 27001 certification and received a qualifying determination for the Privacy Mark, and thoroughly manages information based on its internal management system; however, such risks cannot be completely eliminated.

The Group's business and new services may become subject to licensing requirements or legal regulations imposed by regulatory authorities, which could lead to the incurrence of legal costs or restrictions on business activities. In addition, if a third party files a claim for damages, an injunction, or a demand for royalty payments on the grounds of intellectual property rights infringement, the Group may become unable to use certain technologies or provide certain services. The Group states that, at present, it has not been subject to any lawsuits related to intellectual property rights infringement.

If the internal control system fails to function effectively and illegal or fraudulent conduct occurs, this could result in increased operating costs and workload required to restore trust, thereby affecting business performance, financial condition, and social credibility. The Group has established and operates an Internal Control and Information Security Promotion Headquarters, along with a monitoring framework by the Internal Audit Department, and is working to thoroughly ensure legal compliance and strengthen risk management.

The Group regards M&A as an important management priority; however, even when due diligence is conducted, not all material facts may be disclosed, and contingent or unrecognized liabilities may come to light after an acquisition. If a rapid change in the business environment after an acquisition prevents business development from proceeding as planned, there is a risk that losses exceeding the acquisition amount could occur, which may affect business performance and financial condition.

If the Group is unable to secure and develop the excellent personnel essential to the development of its IT business, or if necessary personnel cannot be secured or leave the company, this may affect the Group's competitive advantage, business, and performance. In addition, if the fixed personnel costs resulting from an increase in headcount exceed the increase in sales, this could adversely affect business performance and financial condition. The Group addresses this through diverse recruitment activities for new graduates and mid-career hires, as well as by enhancing its educational programs, including post-hire training.