Terilogy Holdings Corporation

With the spread of generative AI, vendors' release cycles have shortened, and there is a possibility that software released to the market without sufficient verification will increase the number of update responses, QA workload, and defect-handling workload for the Company Group, leading to increased personnel and outsourcing costs and delays in the timing of revenue recognition. In addition, if the use of generative AI in in-house development is not appropriately controlled, there is a risk that opportunities for engineer development may be lost and issues may arise in intellectual property management. As countermeasures, the Company is promoting automation of the QA process, developing internal guidelines, and formulating development plans premised on the use of generative AI.

The supply-demand balance for engineers in the cybersecurity and network infrastructure fields is tight, and in particular, the difficulty of hiring security engineers and network equipment support engineers is high, which may affect personnel planning even in the short term. If a shortage of engineers occurs, it may result in reduced capacity to handle projects, project delays, quality deterioration, increased outsourcing and recruitment costs, and constraints on the maintenance and operation service provision system. As countermeasures, the Company continues development through internal technical training programs, provides support for obtaining qualifications, and is strengthening new graduate and mid-career recruitment both domestically and internationally.

The Company Group itself, which provides security countermeasure services, is also constantly exposed to the possibility of being targeted by cyberattacks such as unauthorized access, malware infection, ransomware attacks, and intrusions via the supply chain, and incidents could occur even in the short term. If an attack materializes, it may result in the suspension of internal operations and service provision, information leakage, increased recovery costs, damages, and loss of credibility, thereby affecting the financial position, business results, and cash flows. As countermeasures, the Company has organized a CSIRT, introduced EASM, SSPM, and SACBT, and conducts quarterly training exercises.

The Company Group primarily imports products from overseas manufacturers in the United States and Europe, and the proportion of foreign-currency-denominated purchases has been on an upward trend, at 48.0% in FY2025 (ending March 2025) and 58.1% in FY2026 (ending March 2026). If the yen depreciates more than expected, causing an increase in purchase prices converted into yen, it may adversely affect business results through a decline in profit margins. Although the Company takes measures to mitigate foreign exchange risk by utilizing multiple financial institutions, complete hedging is difficult.

The cybersecurity and network infrastructure-related markets are expanding rapidly, and numerous competitors, including major system integrators, have entered the market, intensifying competition. It is expected that competitors will provide superior systems and services and that price and service competition will further intensify, which may affect the business development of the Company Group.

The Company Group holds customers' network information and personal information, and separately from cyberattacks, there is a risk that information may leak to outside parties due to human errors such as loss or misdirected transmission by officers and employees, or inadequate management by outsourcing contractors. If a leak occurs, it may have a material impact on business results and financial condition due to loss of social credibility, payment of damages, administrative sanctions, and customer attrition. The Company is strengthening its management system through the development of an information security manual based on ISO27001 certification, regular training and comprehension checks, stricter access authorization controls, and the conclusion of confidentiality agreements with outsourcing contractors.

The business operations of the Company Group depend on cloud services such as SaaS and the network infrastructure of telecommunications carriers, and serious failures could occur due to natural disasters, cyberattacks, or defects in external services. If a failure occurs, it may result in the suspension of service provision, business interruption, and data loss, leading to loss of customer trust, liability for damages, and deterioration of brand image, thereby adversely affecting business results and financial condition. As countermeasures, the Company has implemented redundancy of key systems, geographically distributed backups, 24-hour monitoring systems, and BCP formulation.

Delivery delays and increases in purchase costs due to semiconductor shortages and other factors may lead to reduced profits and lost orders. In addition, temporary increases in projects due to year-end demand or the transition of discontinued products may result in a shortage of engineering resources, causing delays in project execution and postponement of the timing of revenue recognition. Although hardware sales are on a gradual downward trend due to the market's shift to cloud, it remains necessary to continue addressing procurement risk.

Due to increasing labor market fluidity and intensifying competition for talent acquisition, it may become difficult to secure excellent personnel with specialized knowledge and experience, and there is a risk that key personnel may unexpectedly resign or be dismissed. If such events occur, they may hinder smooth business operations and affect business results and future business development.

The Company Group primarily imports products from overseas manufacturers in the United States and Europe, and if conflicts, political instability, or disruptions to parts procurement occur in the regions where these manufacturers are based, it may hinder product supply. In addition, if customer companies restrain or postpone security-related investments against a backdrop of geopolitical tensions, it may adversely affect the business results and financial position of the Company Group.