Business Risks

Among the matters related to the business status and financial status, etc., described in this document, the following are the major risks that management perceives as likely to have a material impact on the financial status, operating results, and cash flow of the consolidated company. In addition, we actively disclose matters that do not necessarily fall under the category of business risks and matters that are considered important in investors’ investment decisions.

While the Group is aware of the potential for these risks to arise and strives to avoid them and respond promptly when they do occur, we believe that investment decisions regarding our shares must be made after careful consideration of the information contained in this and other sections.

The Group has established a Risk Management Committee to manage risk. As well as being an advisory body to the President, this committee is an executive body on specific risk management activities and emergency response. It is composed of full-time Executive Directors, the Executive Officers in charge of the Corporate Affairs Department and Human Resources Department, and the CISO (Chief Information Security and Personal Information Protection Officer). Regular quarterly meetings and ad hoc meetings are held with the President as chairperson, and various measures related to the establishment and operation of the Group’s risk management system, as well as the handling of complaints and incidents, are deliberated and answered. In addition, in the event of an emergency situation, it is planned that the Risk Management Committee will act as a decision-making and instruction organization for response measures.

The forward-looking items in the text are the judgments of the Group at present and are not guaranteed to cover all risks that may arise in the future.

(1) Risks related to the business

① Growth potential of AI-related market

The AI-related market, which is a business area of the Group, is under the influence of technological innovation, expansion of the utilization of AI in various industrial fields, and acceleration of DX (Digital Transformation) initiatives. The market growth rate is strong, and the market is expected to continue to expand in the future. However, future market growth rates will be affected by external factors such as the introduction of new regulations and policies on AI technology, relevant market trends, and the contraction of user companies’ AI-related investments due to economic fluctuations. As a result, any slower market growth rate due to these effects may affect the Group’s business, financial condition, and performance.

② Technological innovation

The usefulness and importance of AI technology is now recognized globally, and research and development into AI is being advanced by research institutions, companies, and universities around the world. As a result, the pace of AI innovation is extremely fast, leading to further growth of the AI-related market and opportunities for business expansion by incorporating the latest technology. However, if the Group is unable to respond to changes in the market environment due to the speed of innovation and the emergence of new business models, this may affect the Group’s business, financial condition, and performance.

③ Competitive trends

In the AI-related market, which is a business area of the Group, there are a large number of existing businesses, and various businesses are expected to enter the market in the future, from large companies to highly specialized start-ups regardless of industry. The Group retains an overwhelming competitive advantage by focusing on AI services combining proprietary AI technology with knowledge of various industries and operations, and the growth of AI-related businesses does not pose an immediate competitive threat. However, depending on the trends of other businesses with superior technological development capabilities, sales capabilities, brands, or popularity, we may not be able to acquire and maintain customers as expected by the Group.

Although the Group will continue to strive to develop and provide AI services that differentiate it from other businesses, the intensification of the competitive environment, etc. may affect the Group’s business, financial condition, and performance.

④ New businesses

AI services developed by the Group can be provided to a wide range of industries due to their product characteristics, and we will continue to work actively on new services and new businesses. This may result in additional expenses, such as system investment and labor costs, which may reduce the profit margin. In addition, if the introduction, expansion, and growth of new services and new businesses do not progress as originally forecast, it may affect the Group’s business, financial condition, and performance.

⑤ Expansion of business through joint ventures, investments, and acquisitions

The Group hopes to expand the functionality of exaBase at an early stage. Therefore, in addition to recruiting personnel for in-house development, strengthening the technology base, and expanding complementary functions, we are also exploring various possibilities including joint ventures with appropriate partners and investment and acquisition, and carefully examining projects in light of profitability, financial soundness, and our management policy.

In the development of joint ventures, in addition to conducting a detailed investigation of the performance and financial condition of the target companies to be partners, we will endeavor to avoid risks as much as possible by agreeing in advance on the business plan, definition of mutual roles, and governance system for the joint venture. However, we cannot deny that there may be differences in the management policies of both parties after the start of the joint venture and that it may not be possible to achieve the intended synergy effects. This may also make it difficult to recover the investment funds and may affect the Group’s performance and financial condition.

In the case of equity investments and acquisitions, we will conduct detailed due diligence with internal and external experts in advance regarding the financial, tax, legal and other contractual relationships and business conditions of the target company, and will endeavor to reduce the risk as much as possible, taking into account the opinions of third-party appraisal agencies with regard to valuation. However, if the business does not progress as originally planned due to a sudden change in the business environment or other unforeseen reasons after the investment and acquisition, the Group’s financial condition and operating results may be affected. In addition, it is difficult to completely eliminate the risk of unexpected contingent liabilities and unrecognized liabilities being discovered after the investment and acquisition. If such risk becomes apparent, it may affect the Group’s performance and financial condition.

If goodwill is recorded in connection with an acquisition, if there is an indication of impairment due to the deterioration of the target company’s performance, etc., and the recoverable value representing the future effects becomes lower than the book value of the goodwill, the goodwill may be impaired, which may affect the Group’s performance and financial condition.

When implementing acquisitions, our basic policy is to raise funds from its own funds, borrowings from financial institutions, corporate bonds, and equity financing. There is no guarantee that the Company will be able to raise funds in accordance with the demand for such funds in a timely and appropriate manner. If the Company is unable to raise the necessary funds, or is forced to raise funds under unfavorable conditions that are unfavorable to the Company, or if the new financing creates burdens, dilutes share value, changes equity capital, and uses new borrowing, the Group’s performance and financial condition may be affected by an increase in the burden of interest expenses on borrowings, depending on market interest rate fluctuations.

If the Company is unable to raise the necessary funds, or is forced to raise the funds under conditions that are unfavorable to the Company, or if new the financing creates burdens, dilutes share value, changes equity capital, and uses new borrowing, the Group’s performance and financial position may be affected by an increase in the burden of interest expenses on borrowings, depending on market interest rate fluctuations.

⑥ Seasonal fluctuations in performance

In Japan, many companies set March as the end of the fiscal year due to their business practices, and some of the Group’s services support business transformation and business creation for companies. This means that the Group’s customers often expect the Group to provide services by the end of March in time for April, the new fiscal year. As a result, the Group’s sales tend to be uneven in Q4 (January to March), particularly in March, making it difficult to judge the Group’s full-year earnings forecast based on only certain quarterly results.

⑦ System failure

The majority of AI services that the Group offers in the cloud rely on the Internet communication network. Therefore, it becomes difficult to provide our services when the Internet communication network is disconnected due to a natural disaster or accident. In the event of a cyber-attack on our service infrastructure, system failure may make it difficult to conduct business, and important business secrets may be leaked. In addition, in the case of temporary overload due to unexpected sudden access increase or other unforeseen events, the Group’s services may be suspended due to server downtime. Until now, such events have not occurred in the Group. However, if such system failure occurs in the future and it is impossible to provide services in a stable manner, it may affect the Group’s business, financial condition, and performance.

⑧ Intellectual property rights risks

In the Group’s business, proprietary methods and technologies developed by the Group and patents and other intellectual property rights developed or licensed by the Group are important. Although the Group strives to acquire intellectual property rights for the content and services it operates, failure to adequately protect the intellectual property rights of the Group may affect the Group’s business, financial condition and performance.

In addition, to the extent possible, we investigate the possible infringement of intellectual property rights of third parties by the Group. However, it is difficult to fully grasp the intellectual property rights of third parties in the Group’s business areas, and we cannot deny that the Group may infringe the intellectual property rights of other companies without being aware of them. The payment of royalties and claims for damages, etc. in such a case, or any infringement of the Group’s intellectual property, may affect the business, financial condition, and performance of the Group.

⑨ Legal regulations

Currently, there are no laws and regulations that regulate the AI-related businesses conducted by the Group. However, in areas where the Group uses AI to develop content and services, in addition to legal regulations for specific businesses such as the “Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices” related to medical care, the “Banking Act” related to finance (regulations for the electronic payment agency business), there are general legal regulations such as the “Act against Unjustifiable Premiums and Misleading Representations,” the “Act on Specified Commercial Transactions,” and the “Act on the Protection of Personal Information.”

In order to comply with these laws and regulations, the Group is working to improve its management system, including the development of a compliance system. However, in the future, we cannot completely deny that the content and services provided by the Group may conflict with legal regulations, and future changes to the above legal regulations, the enactment of new laws and regulations, and changes in interpretation of laws and regulations may restrict the Group’s business and affect the Group’s business, financial condition and performance.

⑩ Impairment of goodwill risk

The Group accrues goodwill and intangible fixed assets arising from corporate acquisitions and amortizes them over a period of time. We have determined that the goodwill appropriately reflects future profitability, but if the expected results are not obtained due to changes in the business environment or other reasons, an impairment loss may be recorded for the goodwill, which may affect the Group’s performance and financial condition.

⑪ Impairment of intangible fixed assets (software) risk

From among the Group’s own software, the Group records its software for third-party purposes (cloud services) as intangible fixed assets only when it is recognized that future revenue will be earned and amortizes them over a period of time.

We carefully monitor the market environment and other factors when developing software, but if the software cannot be expected to be used in the future due to sudden changes in the market or competitive conditions, etc., or if recovery of the investment cannot be expected due to decreased profitability, there is a risk of retirement or impairment.

Such circumstances may affect the Group’s performance and financial condition.

(2) Risks related to the business management system

① Recruitment and development of human resources

With the expansion of its business, the Group is actively recruiting and developing talented engineers who develop algorithms in the machine learning area, engineers who develop software such as infrastructure and application production, and consultants who promote customers’ digital and AI strategies and business use of AI. However, if the development of human resources within the Group and the recruitment of talented human resources from external sources in response to the expansion of the business scale do not progress as planned and the necessary human resources cannot be secured, this may affect the Group’s business, financial condition and performance.

② Dependence on specific persons

Ko Ishiyama, President and CEO of the Group, and Makoto Haruta, founder and Chairman of the Board of Directors, play an important role in the work of the Group through their specialist knowledge and expertise in management and business strategies. The Group aims to strengthen its organizational structure by sharing information and transferring authority to officers and employees at meetings of the Board of Directors, etc., while maintaining a management system that minimizes risks to management. However, if either of these individuals leaves the Group, it may affect the Group’s business, financial condition, and performance.

③ Internal management system

In order to sustainably increase corporate value, the Group recognizes that effective corporate governance and proper and efficient utilization of human resources, capital, services, and information assets are essential to ensure proper operations and financial reporting reliability, as well as ensuring compliance with laws and regulations based on sound ethical principles.

To this end, the Group strives to improve its internal management system. However, if, due to the rapid expansion of the business in the future, the establishment of an adequate internal management system cannot be achieved, it may become difficult to properly manage the business, which may affect the Group’s business, financial condition, and performance.

④ Compliance system

The Group believes that it is important for the compliance system to function effectively in order to sustainably increase corporate value. In addition to formulating internal regulations on compliance, the Group conducts internal training for officers and employees to ensure that the importance of compliance is well known. However, in spite of these efforts, it is difficult to completely eliminate compliance risks, and future events that may cause the Group’s business operations to conflict with laws and regulations may affect the Group’s business, financial condition, and performance.

⑤ Information management

Some of the information that the Group’s AI learns may include information that is extremely important and sensitive to our customers’ business strategies. In addition, the services provided by the Group deal with personal information of users and personal information of third parties held by users. With regard to the handling of this information, we have obtained information security management system (ISMS) certification and are striving to establish and properly operate regulations related to information management. However, in the event that information is leaked, misused, or improperly handled due to intent, negligence, accident, disaster, unauthorized access by a third party in bad faith, or other unforeseen factors of employees and subcontractors, we may be liable for damages and may bear a large expense for renovation of the security system, and may be subject to administrative sanctions by the authorities. In addition, our business relationships may deteriorate due to loss of trust from customers, which may seriously affect the Group’s business, financial condition and performance.

⑥ Continuous recording of losses

The Group recorded net loss attributable to shareholders of parent company through FY03/22 due to upfront investment in the AI product business. This is due to hiring costs associated with organizational growth, system investment for new service development, and labor costs being incurred upfront.

However, the AI platform business has recorded a surplus, sales have grown significantly, and we are steadily increasing our profitability centered on this AI platform business. Our management strategy assumes that future sales of the AI platform business will continue to grow, and that the Group will continue and expand its surplus, improve profitability, and actively invest in the AI product business.

However, if the upfront investment for future sales growth is larger than expected, or if the sales growth is not achieved as expected, the Group’s performance and cash flow may be affected due to the inability to recover the amount invested.

(3) Other risks

① Large-scale natural disasters, etc.

Although the Group is striving to establish a crisis management system to prepare for emergencies, if natural disasters such as typhoons, earthquakes, tsunamis, or infectious diseases occur on a scale that greatly exceeds expectations, they may affect the business activities of the Group or its counterparties and affect the Group’s business, financial condition, and performance.

② Impact of the spread of the novel coronavirus (COVID-19)

The long-term social impact of COVID-19 has spread to various industries in Japan and major overseas countries, and it is still difficult to predict future economic trends.

In order to cope with the long-term risks associated with the spread of COVID-19, the Group strives to develop and strengthen remote working environments and promote internal communication online. In addition, we are strengthening our business foundation by providing vaccination opportunities for all employees and thoroughly disseminating our work policies for dealing with suspected infections and ill health. Also, with regard to the Group’s sales and recruitment activities, engineer development processes, and service infrastructure operation and maintenance systems, we are striving to establish systems that will allow us to continue our business activities with customers flexibly under the premise of remote working environments.

At present, the spread of COVID-19 does not have a significant impact on the Group’s business development and operating results. However, if COVID-19 leads to changes in the business environment that the Group does not anticipate in the future and business development does not progress as planned, it may affect the Group’s operating results and financial condition.

③ Litigation, etc.

At this time, there are no litigation cases pending in the Group. However, we cannot deny the possibility of unforeseen troubles or lawsuits in the future, regardless of whether our directors or employees violate laws and regulations. If such litigation occurs, it may affect the Group’s performance, financial condition, and business development, depending on the content and amount of the litigation.

④ Dilution of share value through exercise of share options

The Company have granted share options for the purpose of providing incentives to the officers and employees of the Group. The percentage of potential shares in relation to the total number of issued shares at the end of March 2022 is 13.0%. If these share options are exercised, the Company’s shares will be issued, and the value of the shares held by existing shareholders and the proportion of voting rights may be diluted.

⑤ Dividend policy

The Company recognizes the return of profits to shareholders as an important management issue. However, we believe that the Group is currently in the process of growth, and that improving internal retention, allocating funds to invest in future business development and strengthening management structure, and aiming for further business expansion will lead to maximum return of profits to shareholders. In the future, while strengthening profitability and improving the business base, we will implement a policy of stable and continuous profit return to shareholders, taking into consideration the situation of improving internal retention and the business environment surrounding the Group. However, the possibility of dividend payment and payment timing are currently undetermined.

⑥ Use of funds

We plan to allocate funds raised in a public offering at the time of listing to product development investments, recruitment costs, marketing costs, repayment of borrowings, working capital, and research and development expenses.

However, to be more flexible in a rapidly changing business environment, funds may also be used for purposes other than those currently planned. In addition, even when funds are used in accordance with the plan, if the effect of investments is not achieved as expected, it may have an impact on the Group’s operating results and financial condition.

⑦ Deficit carried forward

The Group has a deficit carried forward for tax purposes. This has the effect of reducing our corporate tax liability and is expected to contribute to improving cash flow by reducing the amount of tax payable within the scope of the usage restriction for the carry-forward period of the deficit carried forward.

However, in the event that taxable income exceeds deficit carried forward due to the Group’s steady performance, and in the event of deficit carried forward due to the lapse of the carry-forward deadline due to under-performance of the Group, etc., deductions from taxable income will not be received, and tax liabilities such as corporation tax based on the normal tax rate may be incurred, which may affect the Group’s performance and cash flow.

⑧ Number of years elapsed since the establishment of the Company

The Company was founded in February 2016 and has a short history. As the Group recognizes that it is currently in the process of growth and will continue to require aggressive growth investments, the profit and loss may temporarily deteriorate depending on the timing and outcome of such investments. In addition, although the Group has a policy of actively disclosing the state of its business through IR and public relations activities, the Company’s operating results for the past fiscal years are not sufficient analytical materials for comparisons of the performance of the period, and therefore may not be sufficient as basic information for forecasts of future performance.

Translation: This document a translation of the original Japanese document and is only for reference purposes. In the event of any discrepancy between this translated document and the original Japanese document, the latter shall prevail.