Nihon Knowledge Co.,Ltd.

Competition in the test and verification services market is currently limited, but if major software development companies with strong financial resources and brand power enter the market as new competitors, or existing competitors strengthen their positions, there is a risk of falling into price competition. Simple operation confirmation tests and similar services have low entry barriers, and if price competition intensifies beyond expectations, this could affect the Group's operating results and financial position. As countermeasures, the Group is promoting differentiation through international standards, proprietary testing methods, and AI technology utilization, as well as diversifying customer industries.

Continuous securing and training of engineers with advanced knowledge, skills, and experience is essential for expanding the Development Business and Verification Business. However, amid a worsening shortage of IT engineers, if the Group is unable to secure and train personnel commensurate with market expansion, this could lead to a decline in the quality of services provided or a slowdown in business expansion. In addition, a shortage of sales personnel could also hinder the acquisition of new customers. The Group implements recruitment based on its own proprietary standards for both new graduates and mid-career hires, along with intensive post-hire training.

The majority of the cost of sales in the Verification Business and Development Business consists of engineer labor costs, which have been rising against the backdrop of increased IT investment and a shortage of engineers. If securing engineers takes precedence over order intake balance, labor costs may temporarily increase, potentially affecting the Group's operating results and financial position. As a countermeasure, the Group aims to secure profits by improving technical capabilities across the entire Group and shifting toward higher-priced projects.

The Group holds patents in the Verification Business and recognizes the importance of intellectual property rights. However, if the Group's business is found to infringe on the intellectual property rights of a third party and a legitimate claim is asserted, the Group could be required to bear damages compensation obligations, incur costs for continued use of the relevant intellectual property rights, or in some cases be unable to continue part or all of its business. The Group continues to file applications for patents, trademarks, and other rights as a countermeasure.

Sales dependence on the Otsuka Corporation group, a major business partner, is at a high level of 34.7% in FY2026 (ending March 2026), with transactions concentrated in both the Verification Business and Development Business. Although the Otsuka Corporation group is also a major shareholder and current transactions remain stable, if transactions were to shrink due to future changes in business trends, this could have a material impact on the Group's operating results and financial position. As a countermeasure, the Group aims to reduce dependence by acquiring new customers and expanding services through the enhancement of the Test Automation Service.

In contract development projects, even projects judged to have appropriate profitability at the time of order acceptance carry the risk of becoming unprofitable due to project management issues during the development phase or unexpected expansion of development scope or increases in man-hours. The occurrence of unprofitable projects could affect the Group's business performance and financial condition. As countermeasures, the Group conducts reviews by independent personnel, monthly reporting of income and expenses to the Board of Directors, and intensive audits of projects above a certain scale.

Founder and Representative Director Yoichi Fujii possesses extensive experience and knowledge in the Verification Business and Development Business, and plays an extremely important role in determining and executing management policy and business strategy. If, for any reason, he becomes unable to continue his duties, this could affect the Group's operating results and financial position. The Group is working to reduce this dependence by strengthening information sharing at Board of Directors and Executive Officers' meetings and reinforcing its management organization.

In the Verification Business, the proportion of work outsourced to partner companies is relatively high, and if the shift to in-house man-hours does not proceed as expected, this could affect profit margins. In addition, if an unexpected cancellation of transactions with a major partner company or a deterioration in terms were to occur, this could affect the Group's operating results and financial position. The Group addresses this by maintaining partnerships with numerous partner companies, securing engineers through recruitment, and regularly monitoring the business conditions of partner companies.

In test and verification services, employees are stationed on-site at customers' new product development departments and are constantly exposed to confidential information. If an information leak were to occur, it could result in contract cancellations, damages claims, and a loss of trust within the industry. The Group has implemented measures such as obtaining ISO27001 (ISMS) certification and Privacy Mark certification, continuous information security training, and the conclusion of confidentiality agreements with partner companies.

While the Group primarily undertakes business on a quasi-mandate contract basis, it also engages in worker dispatching in some cases. If the Worker Dispatching Act and related laws and regulations are amended or their interpretations are clarified in writing, or if changes in circumstances after contract conclusion give rise to the possibility of disguised contracting, this could affect dispatch-related sales. The Group has obtained a general worker dispatching business license and established a compliance framework, but continued close monitoring of future regulatory developments is necessary.