PART I

ITEM 1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.      OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.      KEY INFORMATION

3.A.       SELECTED FINANCIAL DATA

You should read the U.S. GAAP selected consolidated financial information presented below together with “Operating and Financial Review and Prospects” and FRONTEO’s consolidated financial statements together with the notes included in this annual report.

U.S. GAAP Selected Consolidated Financial Data

The following selected financial data have beenare derived from FRONTEO’s audited consolidated financial statements. These consolidated financial statements were prepared underin accordance with U.S. GAAP.

covenant states that FRONTEO and the Companyits consolidated subsidiaries and FRONTEO as a stand-alone entity shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2017.

There are restrictive covenants measured annually as of March 31 of each year related to the revolving credit facilitybank borrowings of ¥1,000,000¥1,402,127 thousand as of March 31, 2017,2019, including requirements to maintain a minimum level of net assets and ordinary income in consolidated financial statements of the Company, measured under Japanese GAAP. The Company is required to maintain net assets at a level that is at least 75% of the greater of (a) net assets as of March 31, 2015, which was ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets as of the end of the previous year. The ordinary income covenant states that FRONTEO and its consolidated subsidiaries and FRONTEO as a stand-alone entity shall not record ordinary losses in any two consecutive fiscal years.

There are restrictive covenants measured annually as of March 31 of each year related to borrowings of ¥1,100,000 thousand as of March 31, 2019 under the revolving credit facility agreement, including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of the Company, measured under Japanese GAAP. FRONTEOThe Company is required to maintain net assets at a level whichthat is at least 75% of the greater of (a) net assets as of March 31, 2012; ¥2,607,3382018, which was ¥7,187,629 thousand on a stand-alone basis and ¥2,655,320¥4,353,601 thousand on a consolidated basis under Japanese GAAP or (b) net assets atas of the end of the previous year, whichever is higher.year. The ordinary income covenant states that FRONTEO and the Companyits consolidated subsidiaries and FRONTEO as a stand-alone entity shall not record ordinary losses in any fiscal years. As of

At March 31, 2017, FRONTEO is2018, the Company was not in compliance with these restrictive covenants.covenants, primarily due to recording of ordinary losses in two consecutive fiscal years measured under Japanese GAAP. Subsequent to the year end, one of Japanese banks determined not to execute the loans andMarch 31, 2018, the Company repaid in an aggregate principal amount of ¥200 million to the bank. The other Japanese banks executed the loans in June and July 2017 and the remaining principal amount of ¥800 million are classified as short-term bank borrowing and will become due on December 22, 2017, unless further extensionobtained waivers from all of the maturityrelated lending institutions and implemented a restructuring plan streamlining the cost structure of its US operations. As a result of the credit facility will be submitted and approved byrestructuring effort, the consortium.

As ofCompany recorded an ordinary income for the fiscal year ended March 31, 2017,2019; consequently, the Company pledged the common stock of its subsidiaryis in the United Statescompliance with carrying value of  ¥4,394,269 thousand as security for a borrowing from bank of ¥1,999,582 thousand.these restrictive covenants at March 31, 2019.

Dividends

The Companies Act of Japan (Companies Act) permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to certain limitations and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Boarda company’s board of Directorsdirectors if the articles of incorporation so stipulate.provide. The Companies Act provides certain limitations on the amounts available forto be distributed as dividends or theused to purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥ 3 million.

The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings and other capital surplus recorded in the Company’s general books of account prepared using generally acceptedstand-alone financial statements under Japanese accounting practices.GAAP. The adjustments included in the accompanying consolidated financial statements for U.S.GAAPU.S. GAAP purposes but not recorded in the general books of accountstand-alone financial statements have no effect on the determination of retained earnings available for dividends under the Companies Act.

On June 25, 2013, our Board of Directors declared a year-end cash dividend of ¥50 per share of common stock to shareholders of record as of June 26, 2013. The aforementioned per share cash dividends do not reflect a 2-for-1 share split effective on October 1, 2011 and April 1, 2012 and a 10-for-1 share split effective on April 1, 2014. We did not declare a cash dividend in 2014. On June 23, 2015, our Board of Directors declared a year-end cash dividend of ¥3 per share of common stock, payable to shareholders of record as of March 31, 2015. On June 29, 2016, our Board of Directors declared a year-end cash dividend of ¥3 per share of common stock, payable to shareholders of record as of March 31, 2016. The dividends declared in June 2013, 2015 and 2016 totaled ¥159.7 million, ¥106.5 million and ¥107.3 million respectively. We did not declare a cash dividend in 2017.2017 or 2018.  On June 29, 2019, our Board of Directors declared a year-end cash dividend of ¥3 per share of common stock, payable to shareholders of record as of March 31, 2019. The dividends declared in June 2015, 2016 and 2019 were ¥106.5 million, ¥107.3 million and ¥114.4 million respectively. 

In appropriate circumstances, our Board of Directors may determine in its discretion, within the limits of the Companies Act, to declare dividends in the future, but there can be no assurance that any such dividends will be declared or paid at any time.

Exchange Rates

The following table sets forth, for the periods and dates indicated, information concerning the noon buying rate for Japanese yen announced by the Federal Reserve Bank of New York, expressed in Japanese yen per $1.00. The noon buying rate as of June 30, 201728, 2019 was $1.00 = ¥112.40.¥107.84. The Company does not intend to imply that the

Japanese yen or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Japanese yen, as the case may be, at any particular rate, or at all.

Our acquisitions may not achieve expected benefits, and may increase our liabilities, disrupt our existing business and harm our operating results.

We completed the acquisition of TechLaw Solutions, Inc. (now “FRONTEO Government Services, Inc.”) and EvD, Inc. (now “FRONTEO USA”) and the business of Essential Discovery, Inc. (“EDI”) in order to efficiently develop sales channels in the U.S. and enhance our business competitiveness.

We incurred significant expenses to acquire and integrate business. The benefits we expect to receive from these and other acquisitions depend on our ability to successfully conduct due diligence, negotiate the terms of the acquisition and integrate the acquired business into our systems, procedures and organizational structure. Any inaccuracy in our acquisition assumptions or any failure to uncover liabilities or risks associated with the acquisition, make the acquisition on favorable terms, integrate the acquired business or assets as and when expected or retain key employees of the acquired company may reduce or eliminate the expected benefits of the acquisition to us, increase our costs, disrupt our operations, result in additional liabilities, investigations and litigation, and may also harm our strategy, our business and our operating results. The failure to achieve expected acquisition benefits may also result in impairment charges for goodwill and purchased intangible assets.

Our business may be adversely affected if our forensics or eDiscovery systems suffer interruptions, errors or delays.

Interruptions, errors or delays with respect to our forensics or eDiscovery systems may be caused by human errors or natural factors, many of which are beyond our control, including, but not limited to, damage from fire, earthquakes or other natural disasters, power loss, sabotage, computer hackers, human errors, computer viruses and other similar events. Some of our computer and networking equipment is located in earthquake-prone areas. Any disruption, outages, or delays or other difficulties experienced by any of our technological and information systems and networks could result in a decrease in new or existing accounts, loss or exposure of confidential information, reduction in revenues and profits, costly repairs or upgrades, reputational damage and decreased consumer and corporate customer confidence in our business, any or all of which could have a material adverse effect on our business, financial condition and results of operations.

We may not achieve our financial targets or maintain our current level of total revenue, operating income or net income if the economy in the United States or Asian countries, including Japan, deteriorates or does not improve.

Our business is principally conducted in Japan, other Asian countries and the United States and most of our revenues are from clients operating in the United States and Asia. If U.S. and Asian economies deteriorate or do not improve, it may become difficult to maintain our current level of revenue and margins or achieve our expected revenues, operating income or net income.

We have taken precautions to mitigate the inherent risks of natural disasters such as earthquakes and tsunamis by enhancing our business continuity planning and investing in additional data centers both inside and outside of Japan. However, if an environmental catastrophe were to occur or should regions in which our data centers are located experience the disruption of social infrastructure or power shortages and other impacts due to similar natural disasters, our backbone network and service facilities could fail and as a result, we may suffer direct and indirect damages, which may adversely affect our financial condition and results of operations.

We could incur asset impairment charges for goodwill, intangible assets or other long-lived assets.

We have significant amounts of goodwill, intangible assets and other long-lived assets. A decline in financial performance, market capitalization or changes in estimates and assumptions used in the impairment analysis, which in many cases requires significant judgment, could result in impairment charges of these assets.

Goodwill is not amortized and is tested annually for impairment of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. In assessing goodwill for impairment, we have the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Reporting units are our operating segments. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no additional tests to assess goodwill for impairment are required to be performed. If we conclude otherwise or elect not to perform the qualitative assessment, then it is required to perform the first step of a two-step impairment review process. If the carrying amount of a reporting unit exceeds its fair value, we then perform the second step of

We may be subject to infringement, misappropriation and indemnity claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services or technologies.

Our success depends, in part, on our ability to carry out our business without infringing the intellectual property rights of third parties. Patent and copyright law covering software-related technologies is evolving rapidly and is subject to a great deal of uncertainty. Some third partythird-party intellectual property rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way so as to avoid infringement of those intellectual property rights. Our proprietary or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now existing or to be issued in the future.

Third parties may raise claims against us alleging infringement or violation of their intellectual property and any such litigation may cause us to incur significant expenses. Third-party claims, if successfully asserted against us, may cause us to pay substantial damages, seek licenses from third parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

We may not achieve our financial targets or maintain our current level of total revenue, operating income or net income if the economy in the United States or Asian countries, including Japan, deteriorates or does not improve.

Our business is principally conducted in Japan, other Asian countries and the United States, and most of our revenues are from clients operating in the United States and Asia. If the United States and Asian economies deteriorate or do not improve, it may become difficult to maintain our current level of revenue and operating margins or achieve our expected revenues, operating income or net income.

Our mergers and acquisitions may not achieve expected benefits, and may increase our liabilities, disrupt our existing business and harm our operating results.

We may engage in mergers and acquisitions (“M&A”) of other businesses and incur significant expenses in any such M&A activities, as well as the integration process therefor. The benefits we expect to receive from any M&A transaction will depend on our ability to successfully conduct due diligence, negotiate the terms of the acquisition and integrate the acquired business into our systems, procedures and organizational structure. Any inaccuracy in our acquisition assumptions or any failure to uncover liabilities or risks associated with the acquisition, make the acquisition on favorable terms, integrate the acquired business or assets as and when expected or retain key employees of the acquired company may reduce or eliminate the expected benefits of the acquisition to us, increase our costs, disrupt our operations, result in additional liabilities, investigations and litigation, and may also harm our strategy, our business and our operating results. The failure to achieve expected acquisition benefits may also result in impairment charges for goodwill and purchased intangible assets.

We could incur impairment charges for goodwill, intangible assets and other long-lived assets.

We have significant amounts of goodwill, intangible assets and other long-lived assets. A decline in financial performance, market capitalization or changes in estimates and assumptions used in the impairment analysis, which in many cases requires significant judgment, could result in impairment charges of these assets.

Goodwill is not amortized and is tested annually for impairment of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. In assessing goodwill for impairment, pursuant to a Financial Accounting Standards Board (FASB) update effective April 1, 2020 for the Company, we will apply a one-step quantitative test to record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit, which unit is our relevant operating segment.

We may not be able to comply with the financial covenants related to our bank borrowings, syndicated loans and/or revolving credit facility with the financial institutions and we may not be able to obtain extensions of the maturity of the outstanding loans, causinga significant impact on the Company’s ability to continue as a going concern.

We have a significant amount of short-term and long-term bank borrowings that provide us with important sources of funds for acquisitions of business, capital equipment and working capital needs to support our business growth and technology development. 

There are restrictive covenants related to these borrowings, including requirements to maintain a minimum level of net assets and ordinary income in the stand-alone and consolidated financial statements of the Company, measured under Japanese GAAP. The ordinary income covenant states that the Company shall not record ordinary losses in any two consecutive fiscal years in the stand-alone and consolidated financial statements of the Company.

If we incur ordinary losses and fail to maintain the minimum level of net assets and ordinary income required by the financial covenants, the lending institutions may not be willing to extend the maturity of the outstanding loans and may accelerate the amounts we have borrowed under the various loan agreements, which would cause a significant impact on our ability to continue as a going concern.  For further information on financial covenants, see “Liquidity and Capital Resources” in Item 5B.

Future government legislation or changes in court rules could adversely affect our ability to sell our eDiscovery service in LegalTech AI business or healthcare service in AI Solution business.

The delivery of our eDiscovery services is not directly regulated by the United States or Japanese governments. Our eDiscovery solutions and the clients we serve are directly or indirectly affected by federal and state laws and regulations and court rules. For example, any amendments to the Federal Rules of Civil Procedure regarding discovery of “electronically stored information” could affect our clients, and indirectly, our ability to productively market and sell our eDiscovery solutions. Future federal or state legislation or court rules, or court interpretations of those laws and rules, could have an adverse impact on our revenues and results of operations. In addition, our healthcare service is highly regulated by the Japanese government, and any material change in the laws or regulations would have material impact on our healthcare solutions business.

Undetected programming errors could harm our reputation or decrease market acceptance of our services, which would materially and adversely affect our results of operations.

Our software solutions are complex and may contain defects, errors or bugs when first introduced to the market or to a particular client, or as new versions are released. Because we cannot test for all possible scenarios, our solutions may contain errors that may not be discovered until after they are installed, and we may not be able to timely correct these problems. These defects, errors or bugs could interrupt or delay completion of projects or sales to our clients. Consequently, our reputation may be compromised, and we may lose opportunities for new business with existing or new clients. Although we can rectify software issues in general, we cannot assure you that we will be able to detect and resolve all these programming flaws and errors in a timely manner. Undetected programming errors, defects and resulting unsatisfactory customer service to clients can disrupt our operations, adversely affect the client experience, harm our reputation, or cause our clients to reduce their use of our services, any of which could materially and adversely affect our results of operations.

Our business may be adversely affected if the systems used in the eDiscovery and forensics services provided by our LegalTech AI business segment or in the Business Intelligence and healthcare services provided by our AI Solution business segment suffer interruptions, errors or delays due to natural disasters.

Interruptions, errors or delays with respect to the systems used in the eDiscovery and forensics services provided by our LegalTech AI business segment or in the business intelligence and healthcare services provided by our AI Solution business segment may be caused by natural factors, many of which are beyond our control, including, but not limited to, damage from fire, flood, earthquakes or other natural disasters, power loss, and other similar events. Some of our computer and networking equipment is located in earthquake-prone areas. Any natural disaster could interrupt our services for an indeterminate length of time and severely damage our business, prospects, financial condition and results of operations. Any disruption, outages, or delays or other difficulties experienced by any of our technological and information systems and networks could result in a decrease in new or existing accounts, loss or exposure of confidential information, reduction in revenues and profits, costly repairs or upgrades,

reputational damage and decreased consumer and corporate customer confidence in our business, any or all of which could have a material adverse effect on our business, financial condition and results of operations.

We have taken precautions to mitigate the inherent risks of natural disasters such as earthquakes and tsunamis by enhancing our business continuity planning and investing in additional data centers both inside and outside of Japan. However, if an environmental catastrophe were to occur or should regions in which our data centers are located experience the disruption of social infrastructure or power shortages and other impacts due to similar natural disasters, our backbone network and service facilities could fail and as a result, we may suffer direct and indirect damages, which may adversely affect our financial condition and results of operations.

If we fail to maintain and manage our confidential customer information, or if our technical systems suffer interruption or damage, we could be subject to lawsuits, incur expenses associated with our security systems or suffer damage to our reputation.

We maintain and manage confidential information and/or privileged data obtained from our clients. We exercise care in protecting the confidentiality and integrity of such information and take steps to ensure its security. However, we can give no assurance that the steps taken by us in this regard will be adequate to protect our clients’ confidential information or privileged data. Our systems and operations are vulnerable to damage or interruption, not only from natural disasters, but also from network failure, hardware failure, software failure, power loss, telecommunication failures, computer viruses, penetration of our network by unauthorized computer users and computer hackers, cyberattack, sabotage and other unanticipated events. In addition, despite internal controls, misconduct by an employee could result in the improper use or disclosure of confidential information.

Any of the disruptions or events listed above could cause material interruptions or delays in our business, resulting in the loss of data or rendering us unable to provide services to our clients. In addition, a breach of our security measures could result in the destruction or misappropriation of valuable information or disrupt our operations. Although we have taken measures that we consider to be prudent and adequate to protect against these events, we may not have developed or implemented adequate protections or safeguards to overcome the damage they may cause. We also may not have anticipated or addressed many of the potential events that could threaten or undermine our data systems. If any material leak of clients’ information were to occur, we could be subject to lawsuits for damages from our clients, incur expenses associated with repairing or upgrading our security systems and suffer damage to our reputation that could result in a material decline in clients as well as an increase in service cancellations. The realization of these or similar risks may have a material adverse effect on our business, financial condition and result of operations. We are required to continuously evaluate and enhance our security measures, including systems designed to block unauthorized access and have made expenditures for these purposes in recent years to continuously enhance our security measures including systems to block unauthorized access. Although we have not had significant cybersecurity incidents, if we fail to protect our data center facilities and client confidential information from unforeseeable incidents, we may suffer direct and indirect damages, which may adversely affect our financial conditions and results of operations.

We face significant competition and may be unable to compete successfully against our competitors, which may have a material adverse effect on our business and results of operations.

Our primary competitors are companies with long established eDiscovery operations having significant, and often multi-faceted, operations with law firms and companies operating internationally. Many of our competitors have significantly greater financial resources, longer operating histories and more experience in attracting and retaining clients and managing relationships with the law firms and companies that constitute our target clients than we do. They may compete with us for clients in a variety of ways, including, without limitation, with respect to price and their more extensive eDiscovery and other analytical experience. If any of our competitors provide or develop comparable or superior computer forensic or eDiscovery services, the results may have a material adverse effect on our results of operations.

If we are not able to successfully market our services to new and existing clients and to build our brand and achieve market acceptance for our solutions and services, we may not be able to maintain and expand our operations and our results may be adversely affected.

While we derive a significant portion of our revenue from a small number of substantial clients, the specific clients change from year to year, and we expect this trend to continue. The vast majority of our revenue is derived from limited scope engagements that do not include long-term commitments. Our clients use eDiscovery

and forensic services, for the most part, on an “as needed basis,” when a specific legal or administrative proceeding, investigation or other legal challenge requires them to rapidly analyze and produce large amounts of digitally-formatted information. In the absence of such a demand, our clients’ demand for our services and solutions tends to be much less extensive. This means that contracts for our eDiscovery services tend to be time and subject specific. The fact that we have sold our solutions to a client in one fiscal year or quarter does not ensure on-going use by that client in any subsequent period unless a new need for our services arises.

In light ofConsidering this situation, in order to expand our business, it is imperative for us to continuously market our services and solutions to existing and potential clients and to build market recognition of our capabilities and our brand so that when companies havea company has a need for eDiscoveryour LegalTech AI services (eDiscovery and forensic services, weforensic) and/or AI Solution (business intelligence, digital communications and our solutions are perceivedhealthcare), they will look to us as an attractive alternative. Ifa qualified service provider. On the other hand, if our marketing and brand buildingbranding efforts are not successful, existing or potential customers may not elect to do business with us, which might have a negative impact on our results of operations.

Our ability to maintain and weexpand our operations and increase our revenue is dependent on the quality of our customer service and support staff, and our failure to perform at a high level and provide high quality service could have a material adverse effect on our results of operations.

Our clients depend upon our customer service and support staff to meet their eDiscovery and forensic analysis needs. High-quality support services are not able to secure new mandates when existing contracts reach their conclusion, we may have difficulty maintainingcritical for the success and increasing the usesale of our services and solutions. If we fail to provide high-quality support on an ongoing basis, our quarterlyclients may react negatively and annualour reputation in the marketplace could be materially and adversely affected, which would negatively impact our ability to secure contracts from existing and potential clients. Our failure to maintain high-quality support services could have a material and adverse effect on our business, results of operations could be materially adversely affected.

We and our subsidiaries have changed names of entities recently in order to strengthen our corporate identity. If this change impair our brand recognition among existing and new clients, our business would have a material adverse effect.financial condition.

Our solutions incorporate and work in conjunction with third-party hardware and software products. If thisthe hardware orand software were not available to us at reasonable cost or not available at all, our results of operations could be adversely impacted.

Although our solutions primarily rely on our own core technologies, some of our solutions incorporate third-party hardware and software products. In addition, our solutions are designed to work in conjunction with the third-party hardware and software in our clients’ existing systems. If any third party were to discontinue making their products available to us or our clients on a timely basis, or were to increase materially the cost of their products, or if our solutions failed to properly function or interoperate with replacement hardware or software products, we may need to incur costs in finding replacement products and, if necessary, redesigning our solutions to function with or on replacement third-party products. Replacement products may not be available on terms

management or other key employees, we may not be able to locate suitable or qualified replacements and we may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and growth. In addition, if any of these key executives or employees joins a competitor or forms a competing company, we could lose clients. Each of our executive officers has entered into an employment agreement with us. We do not maintain key-man life insurance for any of our key executives. Competition for qualified individuals could cause us to offer higher compensation and other benefits to attract and retain them, which could materially and adversely affect our financial condition and results of operations.

We require additional qualified professionals and incur related costs to comply with requirements of being a public company.

As a public company in the United States, we are subject to a number of regulatory requirements, including the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and the regulations promulgated thereunder, and the listing standards of the Nasdaq. Effective April 1, 2018, we are no longer an emerging growth company as defined in Section 2(a) of the Securities Act of 1933, as amended (“Securities Act”), and therefore no longer able to take advantage of the exemption provided by the Jumpstart Our Business Startups Act of 2012. As a result, we are required to comply with Section 404(a) of the Sarbanes-Oxley Act in filing our annual report on Form 20-F for the fiscal year ended March 31, 2019. As a foreign private issuer, we must comply with legal, accounting and financial reporting requirements in the United States, and the cost of financial reporting and the related administrative workload remain significant.

We have determined during our reporting process for the fiscal year ending March 31, 2019 that there were material weaknesses in our internal controls over financial reporting as of that date. If we fail to re-establish and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely impacted.

Our management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Under auditing standards established by the U.S. Public Company Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk controls and may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

In our assessment of internal controls as of March 31, 2019, we have determined that material weaknesses in internal control over financial reporting that existed in the prior years have not been completely remediated at FRONTEO USA, Inc., our consolidated subsidiary in the U.S. (“FUSA”) related to the entity level controls, the financial statement closing and reporting process, and revenue recognition. We believe we have made some improvements as a result of our remediation efforts during the year ended March 31, 2019. However, the impact of the remaining material weaknesses of FUSA continues to have a negative impact on the overall financial statement close process, resulting in material weaknesses in internal controls therein at the consolidation level, specifically in the area of revenue accounting. In addition, we have detected a material weakness in the process for making certain adjustments to bring local accounting principles into conformity with U.S. GAAP. The process, determined to be ineffective or inadequate control design and operation, resulted in material adjustments to the consolidated financial statements identified by the independent auditor that should have been detected by the internal controls on financial reporting at the Company level. Given the aforementioned material weaknesses in internal controls over financial reporting which existed as of March 31, 2019, we were not able to receive an unqualified opinion in the attestation report from the independent auditor as of March 31, 2019, therefore, do not satisfy the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.

Our management fully recognizes the importance of design, implementation, and maintenance of internal controls related to financial reporting. We will continue to make efforts to improve the control environment, strengthen the personnel with U.S. GAAP expertise in the accounting and finance departments of FUSA and

establish effective measures to prevent the reoccurrence of such material weaknesses. Our management has been devoting and will continue to devote a substantial amount of time to reviewing and remediating of these remaining material weaknesses. However, until this remediation is complete, we cannot assure you that it will be completed in a timely manner. Furthermore, we expect to incur additional costs to remediate the material weaknesses that exist in our internal control over financial reporting. 

Significant movements in foreign currency exchange rates or change in monetary policy may materially harm our financial results.

Our reporting currency is the Japanese yen and our operations in other countries, including the United States, South Korea, and Taiwan, use the applicable local currency.currencies. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies which, among other factors, may be influenced by government policies and domestic and international economic and political developments.

Any significant change in the value of the currencies of the countries in which we do business against the Japanese yen could have a material adverse effect on our financial condition and results of operations, expressed in Japanese yen.

We recognize foreign currency transaction gains and losses arising from our operations in the period incurred. As a result, currency fluctuations between the Japanese yen and the other currencies in which we do business have caused and will continue to cause foreign currency transaction and translation gains and losses, which historically have sometimes been material and could be material in future periods. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. We do not take actions to manage our foreign currency exposure, such as entering into hedging transactions.

the market price of our ADSs. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. Any such class action suit or other securities litigation would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, could materially adversely affect our business, financial condition, results of operations and prospects.

Certain judgments obtained against us by holders of the American Depositary SharesADSs may not be enforceable.

We are a company incorporated under the laws of Japan and our principal assets are located in Tokyo. In addition, all of our directors reside in jurisdictions outside of the United States and substantially all of the assets of these persons are located in those non-U.S. jurisdictions. As a result, it may not be possible to effect service of process within the United States or elsewhere upon these directors, including with respect to matters arising under the U.S. federal securities laws or applicable state securities laws. For example, Japan does not have treaties with the United States and many other countries providing for the reciprocal recognition and enforcement of judgments of courts. As a result, it may be difficult or impossible for a holder of American Depositary SharesADS to bring an original action against us or against these individuals in a Japanese court in the event that a holder believes that its rights have been infringedpursues a lawsuit under the U.S. federal securities laws or otherwise.

There is no statutory recognition in Japan of judgments obtained in the United States, although the courts of Japan will in certain circumstances recognize and enforce a civil, final judgment of a foreign court of competent jurisdiction without retrial on the merits. While there is no binding authority on this point, it may be difficult to enforce a civil judgment of a United States court imposing a monetary award based on the civil liability provisions of the U.S. federal securities laws.

The depositary has agreed to pay ADSsADS holders the cash dividends or other distributions it or the custodian receives on our common stock or other deposited securities after deducting its fees and expenses. However, because of these deductions, ADSsADS holders may receive less, on a per share basis with respect to their ADSs than they would if they owned the number of shares or other deposited securities directly. ADSsADS holders will receive these distributions in proportion to the number of common stock the ADSs represent. In addition, the depositary may, at its discretion, decide that it is not lawful or practical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and ADSsADS holders will not receive such distribution.

Sales of a substantial number of shares of our common stock or ADSs in the public markets by our existing shareholders could cause the price of our ADSs to fall.

Sales of a substantial number of shares of our common stock or ADSs in the public market or the perception that these sales might occur could depress the market price of the ADSs and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that any such sales may have on the prevailing market price of the ADSs.

Rights of shareholders under Japanese law may be different from those under the laws of the United States.

Our articles of incorporation, the regulations of our Board of Directors and the Companies Act govern our corporate affairs. Legal principles relating to such matters such as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholdersshareholders’ rights are different from those that would apply if we were a company incorporated in the United States. Shareholders’ rights under Japanese law are different in some significant respects from shareholders’ rights under the laws of the United States. These differences include, but are not limited to,

books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We are exempt from certain corporate governance requirements of Nasdaq. This may afford less protection to the holders of our ADSs.

We are exempt from certain corporate governance requirements of Nasdaq by virtue of being a “foreign private issuer” as defined in Rule 405 under the Securities Act. As a foreign private issuer, we are permitted to, and plan to, follow the practice of Japan and of the TSE, on which our common stock is listed, in lieu of certain corporate governance requirements of Nasdaq.

This means that we will be exempt from certain of Nasdaq’s corporate governance rules, including those that require:

As a result, we cannot assure youholders that the compensation of our officers will be determined, or recommended to the Board of Directors for determination, by a majority of the independent directors or by a compensation committee comprised solely of independent directors. There also can be no assurance that director nominees will be selected or recommended for the Board of Directors’ selection by a majority of the independent directors or a nominating committee comprised solely of independent directors.

ITEM 4.      INFORMATION ON THE COMPANY

4.A.       HISTORY AND DEVELOPMENT OF THE COMPANY

We were established in 2003 in Japan and commenced our operations under the name Universal Business Incubators, Inc. under the Commercial Code of Japan.Japan focusing on importing and selling computer forensics tools within Japan, targeting domestic clients such as the National Police Agency and Japan’s Ministry of Defense. In August 2004, we changed our name to UBIC, Inc., and in 2005, we entered the eDiscovery and electronic data forensic investigations markets by leveraging the skills we had developed and refined through the application of our computer forensic tools.

In 2007, we listed our shares on the Mothers Marketplace of the Tokyo Stock Exchange (“TSE”), which is the primary market for high-growth and emerging technology companies on the TSE. During that year, we established our wholly-owned subsidiary UBIC North America, Inc. (“UNA”) with an office in Redwood City, California.

In 2009, we opened two overseas offices in overseas: Seoul, South Korea and Hong Kong, China.

In 2010, we established Payment Card Forensics, Inc., a Japanese subsidiary with ana 60% ownership interest. In 2011, we established UBIC Risk Consulting, Inc., a Japanese subsidiary with an 80% ownership interest. During that year, we also established two wholly-owned subsidiaries:subsidiaries, UBIC Korea, Inc. and UBIC Taiwan, Inc. with offices in Seoul, South Korea and in Taipei, Taiwan, respectively. In addition, werespectively, and opened ouran office in Reston, VA during the year.Virginia.

In 2012, we established UBIC Patent Partners, Inc. as our wholly-owned subsidiary in Japan. During that year, we also opened our office in New York.

Effective July 1, 2016, the names of UBIC and its group companies were changed as follows:

The integration ofWe have integrated our eDiscovery services, products and client support under the FRONTEO brand to amplify the Company’s global leadership role in the delivery of legal technology, litigation support services, Business Intelligence (“BI”)business intelligence applications and Artificial Intelligence (“AI”)artificial intelligence solutions. The newly unified FRONTEO will beis well positioned as a leading provider of comprehensive services across the eDiscovery spectrum, as well as in other vertical markets leveraging its AI platform:

English, and we apply this expertise in connection with litigations,litigation, administrative proceedings and investigations. Our clients include leading law firms, corporate legal departments and government agencies. While we serve these clients from our offices in Japan, the United States, South Korea Taiwan and Hong Kong,Taiwan, we have strongly been expanding our resources bythrough mergers and acquisitions in the biggest market, the U.S. Thus, our revenue in the U.S. has increased and now constitutes 60%approximately 50% of our consolidated group revenue. On the other hand,In addition, based on our expertise in the legal business, we have developed our own Artificial Intelligence (AI)AI engine, KIBIT.KIBIT and Concept Encoder. It does not only addadds a competitive edge in our existing business, but also has become a driver infor recent expansion into new businesses that we started recently,areas, such as digital marketing, healthcarebusiness intelligence and business intelligence.healthcare.

In our eDiscovery solutions business, we assist clients involved in cross-border litigation, administrative proceedings and internal investigations, including those related to antitrust investigations, intellectual property (IP) litigation, the Foreign Corrupt Practices Act (FCPA) and product liability (PL) investigations. The particular matters in which we are engaged by clients typically involve Asian language information. A particular challenge of eDiscovery involving Asian-language information is the accurate electronic recognition of Japanese, Korean and Chinese characters and the organization of the collected information in a format that can be effectively and efficiently reviewed and identified as relevant to the particular investigation. For example, when most conventional eDiscovery technologies are applied to Asian language content, the result is garbled text or otherwise inaccurate outputs. We believe our proprietary Lit i View eDiscovery solution accurately handles Asian-language characters, encoding schemes and native file systems. Lit i View also streamlines and consolidates our and our clients’ workflows. Our Intelligence Cloud formerly known as Legal Cloud hosting solution complements and integratesinterfaces with Lit i View and helps to address the substantial complexity and cost associated with these international investigations and litigations. Because of the flexible, comprehensive and integrated nature of our solutions, we can address the entire electronic discovery reference model (EDRM) life-cycle in connection with these matters, which we believe enables us to optimize outcomes and provide significant cost savings to our clients.

We have assisted clients in more than 1,5007,700 administrative and legal proceedings in the United States, including Department of Justice (DOJ), International Trade Commission (ITC) and Securities and Exchange Commission (SEC) investigations, and more than 1,0001,400 corporate investigations in Japan, South Korea, China and Singapore.

The AI market is rising rapidly. In June 2017, the Cabinet announced a strategic initiative titled “Future Investment Strategy 2017,” which is a full-scale social implementation of innovative technologies such as IoT (Internet of Things) and AI in order to achieve medium- to long-term growth for Japan. In addition, various examples that demonstrate the effect of AI are being mentioned frequently as a way to solve social issues such as labor population decrease, long work hours and business process improvement. As a front runner that has been implementing AI in business settings, the Company will further strive to develop the AI market in two fields: business intelligence and healthcare.

eDiscovery is fundamentally different from paper-based evidence discovery primarily because of the much higher volume of electronic information produced and maintained by businesses and other organizations. For example, enterprise information stored in one personal computer is equivalent to an estimated four to six thousand boxes of printed material. In addition, in recent days, a growing number of corporations introducehave recently introduced mobile terminals and SNS into their operations. Because of the sheer volume of information that must be analyzed in investigations or other legal matters, it is extremely challenging to investigate archives of electronic information manually. Accordingly, in order to achieve success in a lawsuit and avoid sanctions, we believe that attorneys must employ an automated process to analyze this trove of information, identifying and producing only information relevant to the matter. Providing only relevant documents is a very important consideration for organizations, which generally prefer to keep confidential those documents and other materials they are not legally required to produce.

The majority of eDiscovery solutions deployed are in response to a specific investigation or lawsuit; however, there are a growing number of proactive enterprises that are deploying eDiscovery solutions to provide better readiness and ongoing protection against potential legal issues. In addition, some enterprises have begun to show more interest in cloud-based eDiscovery services. While historically most organizations have tended to prefer to deploydeployment of eDiscovery solutions on-site, greater recognition of the benefits of cloud-based solutions together with diminishing concerns regarding data safety and accessibility have contributed to wider adoption of cloud-based solutions.

The various stages of the eDiscovery process are referred to as the electronic discovery reference model (EDRM) and are set forth below:

brand so that when companies have a need for eDiscovery and forensic services, we and our solutions are perceived as an attractive alternative.provider. In addition, to the extent that, as discussed above, we are able to expand our client base among non-Asian law firms since we believe that they will need our services to review the Asian-language materials. We believe that this will expand our revenue base.

The overall market for eDiscovery and forensic services has benefited from the growing volume of ESI and a rapid increase in the number of lawsuits filed and investigations commenced in the United States which involve patents, intellectual property, product safety, price cartels, the U.S. Foreign Corrupt Practices Act and other issues. Our financial performance has also benefited from this trend, due mainly to lawsuits filed and investigations commenced in the United States against not only U.S. companies but also Japanese and other Asian multinational corporations. Recently, we have also benefited more from engagements for large and midsize international government investigations. However, our market share and brand awareness in the United States have not sufficiently improved even after the acquisitions of TLS and EvD. Our financial performance is more likely to be driven by increasing lawsuits and investigations involving Asian companies or U.S. companies with Asian operations, and by building out our sales and marketing presence and increasing our brand awareness and capabilities in the United States.

While the global eDiscovery market is forecast to grow at a CAGR of 16.2%9.5% from 20142017 to 2022,2023, the highest growth is expected in the off-premise, or “cloud,” software market and its CAGR is forecast at 23.3%10.1%. We provide a one-stop, cloud-based eDiscovery solution with the AI-based software that saves cost and time significantly. As our solutions demonstrate their value in the market place, we anticipate that they will provide a basis for our expanded and durable growth of total revenues and improved operating income and net income in the future.

The AI market is rising rapidly. As a front runner that has been implementing the AI in business settings, the Company will further strive to develop the AI market in two fields: business intelligence and healthcare.

i) Business Intelligence: In the business intelligence field, the Company is marketing AI-based software such as “KIBIT Email Auditor,” “KIBIT Patent Explorer (patent search and analysis system),” “KIBIT Knowledge Probe” and “KIBIT Find Answer” while providing implementation support and data analysis.

ii) Healthcare:  In the healthcare field, by utilizing “Concept Encoder,” an AI engine developed independently for the purpose of promoting the utilization of healthcare related big data, FRONTEO Healthcare, Inc., a subsidiary established to focus on support of medical institutions and private companies, develops and sells software and systems that support business improvement at medical sites and equipment that supports doctor's diagnosis.

Challenges in eDiscovery

In April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure (FRCP) regarding the discovery in litigation of certain Electronically Stored Information (ESI).ESI. These amendments have placed a substantial burden on organizations to produce ESI in a very limited time period. Additionally, given the fact that complying with such discovery requests may cost in excess of $1.0 million or more for a single matter and multinational corporations may be involved in dozens of such lawsuits at any given time, organizations are seeking to contain the escalating costs of such discovery.

In recent years, the amount of data created by companies which may be deemed ESI has increased greatly and is expected to continue to even further grow in the future. According to an IDC Digital Universe Survey, the total amount of digital information created, captured or replicated worldwide every year is increasing at a rate of 40% annually, and is expected to reach 44 trillion gigabytes by 2020. Because the cost of eDiscovery is generally proportional to the volume of data to be collected, processed, reviewed and produced for litigation, costs for this function are rising. The problem is compounded if plaintiffs’ lawyers deliberately request discovery in such a broad a manner so as to impose prohibitive eDiscovery costs, in the hope that many organizations will simply prefer to settle than incur such costs. In addition, there has also been a dramatic increase in overall eDiscovery cost in

Our Competitive Advantages

We have designed our products and services to provide comprehensive solutions to meet the challenges of managing eDiscovery and electronic data forensic investigations. The principal ways in which our solutions address these challenges include: