ES NETWORKS CO., LTD.

The source of added value in consulting services is the knowledge and expertise of individual consultants, so failure to achieve recruitment and development plans or the outflow of talented personnel to outside the company directly affects business performance. The Group is working to build a foundation of human resources through the development of position and salary systems and a cross-departmental assignment structure; however, if sufficient personnel cannot be secured, this may lead to a decline in order-taking capacity and service quality.

In the event of unforeseen circumstances such as a large-scale disaster or major system failure, the scale of anticipated damage is expanding year by year due to progressing globalization and dependence on information networks. The Group is working to build a crisis management structure and strengthen its internal system infrastructure; however, if an event occurs that a single company cannot control, business continuity may become difficult, potentially causing a material impact on business performance.

The leakage of customer information and system failures associated with the use of cloud services are recognized as the primary information security risks. The Group's service infrastructure depends on the internet and cloud services, and if a system failure occurs due to a cyberattack or natural disaster, both customer information leakage and loss of credibility could occur simultaneously. As countermeasures, the Group conducts annual information security training, has introduced malware countermeasures and misdirected-email prevention tools, and requires submission of written pledges upon joining and leaving the company.

The consulting business has low barriers to entry, as it requires no licenses or qualifications and no large-scale capital investment, resulting in numerous competitors ranging from major firms to individual practitioners. If the Company cannot appropriately respond to intensifying price and service competition, it may affect business performance. The Company addresses this through a differentiation strategy leveraging its unique strength of providing CFO functions and its characteristic of on-site, hands-on operational execution support.

Credit risk arises from trade receivables owed by business partners, and if problems arise in collecting receivables due to an unexpected bankruptcy of a business partner, this may affect business performance. The Company strives to avoid this risk by setting credit limits based on credit information analysis for new business partners and conducting periodic credit limit reviews for existing business partners.

When consultants are stationed on-site at a client company, there is a risk that the Company could be held liable for damages if misconduct occurs at the client company, as well as a risk of reputational damage arising from rumors suggesting the Company's involvement in such misconduct. There is also an inherent risk that the provision of on-site services could be mistaken for disguised subcontracting (labor dispatch in the guise of contracting); to prevent discrepancies in legal interpretation, the Company makes prior inquiries to experts, develops and disseminates internal manuals, and conducts periodic reviews of operational status.

Zeirishi Hojin ES Networks (tax accountant corporation) and Shakai Hoken Romushi Hojin ES Networks (social insurance and labor consultant corporation) are not affiliated companies of the Company, but since they use the same trade name, if operations at either affiliated firm are not conducted appropriately, this could affect the Group's reputation. If collaboration with either affiliated firm becomes difficult, it may become difficult to provide high-quality services, potentially disrupting the continuity of order contracts. The Company monitors transaction details and amount trends at its monthly regular Board of Directors meetings.

Services provided under worker dispatch contracts and fee-charging employment placement contracts are subject to regulation under the Worker Dispatching Act and the Employment Security Act, and future enactment or revision of laws related to the consulting business may affect business performance. There is also a risk that demand for consulting itself could change due to amendments to the Companies Act, the Financial Instruments and Exchange Act, tax laws, and other legislation. The Company confirms its response status through regular communication with the Internal Audit, Risk and Compliance Committee and with internal and external experts such as attorneys.

During economic downturns, demand for Management Support Consulting Service (related to corporate investment and IPOs) tends to decrease, while demand for Business Turnaround Support Consulting Service tends to increase, creating a two-sided dynamic. Conversely, during economic upturns, demand for turnaround support decreases, meaning that an impact on part of the business is unavoidable in either phase. The Group strives to reduce this risk by appropriately allocating management resources through a cross-departmental consultant assignment structure.

As of the filing date of this document, stock acquisition rights issued as stock options amount to the equivalent of 370,000 shares, representing 11.8% of the total number of issued shares of 3,148,100. If stock acquisition rights granted in the future are exercised, the value per share may be diluted, potentially affecting stock price formation. The period in which this could occur is specified as within the next few years.