Certificate
As filed with the Securities and Exchange Commission on July 31, 2017
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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☐ |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report……….
For the transition period from to
Commission file number: 001-35884
KABUSHIKI KAISHA FRONTEO |
(Exact name of registrant as specified in its charter) |
FRONTEO, INC. |
(Translation of registrant’s name into English) |
Japan |
(Jurisdiction of incorporation or organization) |
Meisan Takahama Building 2-12-23 Konan Minato-ku Tokyo 108-0075 Japan |
(Address of principal executive offices) |
Masahiro Morimoto, +81 (3) 5463-6344, +81 (3) 5463-6345 Meisan Takahama Building 2-12-23 Konan Minato-ku Tokyo 108-0075 Japan |
(Name, telephone, facsimile number and address of company contact person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: |
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Name of each exchange on which registered: |
American Depositary Shares |
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NASDAQ Global Market |
Common Stock* |
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* Not for trading, but only in connection with the registration of the American Depositary Shares, with each one American Depositary Share representing two shares of Common Stock.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
As of March 31, 2017, 37,921,862 shares of Common Stock were outstanding, including shares represented by American Depositary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ◻ |
Accelerated filer ☒ |
Non-accelerated filer ◻ |
Emerging growth company ◻ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ◻
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ |
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International Financial Reporting Standards as issued
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Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
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ii
Unless otherwise noted, all references and discussions of the financial position of FRONTEO, Inc. and its consolidated subsidiaries (collectively, the Company or FRONTEO), results of operations and cash flows in this annual report are made with reference to FRONTEO’s consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Cautionary Statement with Respect to Forward-Looking Statements
To the extent that any statements made in this annual report contain information that is not historical, these statements are essentially forward looking. Forward looking statements may be identified by the use of words such as “expects,” “plans,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words or phrases of similar meaning. Although we believe that the expectations reflected in these forward looking statements are reasonable and achievable, these statements are subject to a number of risks and uncertainties discussed under the heading “Item 3.D. Risk Factors” and elsewhere in this annual report. All forward looking statements attributable to us are expressly qualified by these and other factors. We cannot assure you that actual results will be consistent with these forward looking statements.
Information regarding market and industry statistics contained in this annual report is included based on information available to us that we believe is accurate. Forecasts and other forward looking information obtained from this available information is subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. The forward looking statements made in this annual report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update any forward looking statements. As a result, you should not place undue reliance on these forward looking statements.
iii
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
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 been derived from FRONTEO’s audited consolidated financial statements. These consolidated financial statements were prepared under U.S. GAAP.
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For the years ended March 31, |
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2013 |
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2014 |
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2015 |
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2016 |
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2017 |
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(thousands of yen, except per share data) |
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Consolidated Statement of Operations Data: |
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Revenue |
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¥ |
4,699,693 |
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¥ |
4,173,694 |
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¥ |
6,279,615 |
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¥ |
10,529,287 |
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¥ |
11,208,041 |
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Operating revenue from reimbursed direct costs |
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12,407 |
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18,874 |
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25,311 |
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26,949 |
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12,734 |
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Total revenue |
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4,712,100 |
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4,192,568 |
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6,304,926 |
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10,556,236 |
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11,220,775 |
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Cost of revenue |
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1,845,236 |
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2,314,348 |
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3,140,080 |
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5,746,069 |
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6,904,980 |
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Reimbursed direct costs |
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12,407 |
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18,874 |
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25,311 |
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26,949 |
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12,734 |
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Selling, general and administrative expenses |
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1,949,023 |
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2,497,339 |
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2,864,113 |
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4,853,497 |
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5,481,912 |
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Total operating expense |
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3,806,666 |
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4,830,561 |
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6,029,504 |
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10,626,515 |
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12,399,626 |
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Operating income (loss) |
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905,434 |
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(637,993) |
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275,422 |
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(70,279) |
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(1,178,851) |
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Interest income |
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1,326 |
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691 |
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1,699 |
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1,672 |
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3,634 |
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Interest expense |
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(23,474) |
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(30,867) |
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(28,177) |
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(54,793) |
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(125,743) |
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Gain (loss) on derivatives |
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— |
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— |
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— |
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(258,205) |
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43,594 |
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Foreign currency exchange gains (losses) |
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165,664 |
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120,246 |
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200,438 |
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161,680 |
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(13,751) |
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Dividend income |
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4,500 |
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6,750 |
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9,000 |
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11,250 |
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14,400 |
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Other—net |
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(3,055) |
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(8,030) |
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(85) |
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(20,075) |
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(60,255) |
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Income (loss) before income taxes |
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1,050,395 |
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(549,203) |
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458,297 |
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(228,750) |
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(1,316,972) |
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Income taxes (benefit) |
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449,884 |
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(105,651) |
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238,094 |
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183,125 |
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(458,109) |
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Net income (loss) |
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600,511 |
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(443,552) |
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220,203 |
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(411,875) |
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(858,863) |
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Less: Net income attributable to noncontrolling interests |
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4,490 |
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4,798 |
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1,750 |
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5,757 |
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6,224 |
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Net income (loss) attributable to FRONTEO, Inc. shareholders |
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¥ |
596,021 |
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¥ |
(448,350) |
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¥ |
218,453 |
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¥ |
(417,632) |
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¥ |
(865,087) |
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1
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For the years ended March 31, |
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2013 |
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2014 |
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2015 |
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2016 |
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2017 |
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Per Share Data: |
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Net income (loss) attributable to FRONTEO, Inc. shareholders per share (1) |
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Basic |
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¥ |
18.9 |
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¥ |
(13.2) |
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¥ |
6.3 |
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¥ |
(11.7) |
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¥ |
(23.8) |
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Diluted |
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18.3 |
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(13.2) |
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6.1 |
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(11.7) |
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(23.8) |
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Weighted average shares outstanding (1) |
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Basic |
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31,584,220 |
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34,058,003 |
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34,956,728 |
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35,582,665 |
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36,372,576 |
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Diluted |
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32,527,780 |
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34,058,003 |
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35,798,753 |
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35,582,665 |
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36,372,576 |
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Cash dividends declared per common share (1) |
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5.0 |
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— |
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3.0 |
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3.0 |
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— |
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*(1) Share and per share data give effect to 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, which represented one ADS for two common shares, as if such share split had occurred on April 1, 2011.
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As of March 31, |
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2013 |
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2014 |
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2015 |
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2016 |
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2017 |
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(thousands of yen) |
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Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
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¥ |
1,195,142 |
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¥ |
1,378,444 |
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¥ |
2,718,261 |
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¥ |
1,795,960 |
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¥ |
4,533,182 |
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Total current assets |
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2,770,210 |
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2,765,612 |
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4,632,401 |
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5,414,705 |
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9,088,088 |
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Total noncurrent assets |
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2,307,067 |
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2,235,211 |
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3,060,776 |
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7,451,950 |
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7,157,520 |
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Total assets |
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5,077,277 |
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5,000,823 |
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7,693,177 |
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12,866,655 |
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16,245,608 |
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Total current liabilities |
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1,070,451 |
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840,652 |
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1,504,984 |
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3,573,540 |
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3,840,089 |
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Working capital |
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1,699,759 |
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1,924,960 |
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3,127,417 |
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1,841,165 |
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5,247,999 |
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Long-term debt |
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447,284 |
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445,186 |
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775,340 |
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3,636,987 |
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5,937,293 |
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Total noncurrent liabilities |
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629,854 |
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538,557 |
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939,842 |
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4,852,567 |
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7,401,159 |
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Total liabilities |
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1,700,305 |
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1,379,209 |
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2,944,826 |
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8,426,107 |
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11,241,248 |
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Total FRONTEO, Inc. shareholders’ equity |
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3,360,464 |
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3,600,308 |
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5,234,907 |
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4,421,350 |
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4,972,016 |
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Total equity |
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3,376,972 |
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3,621,614 |
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5,248,351 |
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4,440,548 |
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5,004,360 |
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Operating Data: |
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Capital expenditures |
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1,014,617 |
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521,024 |
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689,287 |
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1,369,471 |
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Net cash provided by (used in): |
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Operating activities |
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118,407 |
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(2,400) |
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1,013,980 |
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(390,794) |
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Investing activities |
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(1,132,703) |
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(630,180) |
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(1,413,188) |
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(4,710,421) |
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(953,077) |
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Financing activities |
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(282,979) |
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762,915 |
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1,684,300 |
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4,066,472 |
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Financial covenants
There are restrictive covenants related to the bank borrowings of ¥3,608,150 thousand as of March 31, 2017, 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 accounting principles generally accepted in Japan (“Japanese GAAP”). FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015 of ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO, Inc. and the Company 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 related to the bank borrowings of ¥210,337 thousand as of March 31, 2017, 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. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015; ¥5,032,824 thousand on a stand-alone basis and ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2017.
2
There are restrictive covenants related to the syndicated loan of ¥1,300,000 thousand as of March 31, 2017, 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. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2016; ¥5,187,455 thousand on a stand-alone basis and ¥4,657,450 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company 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 related to the revolving credit facility of ¥1,000,000 thousand as of March 31, 2017, 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. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2012; ¥2,607,338 thousand on a stand-alone basis and ¥2,655,320 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any fiscal years. As of March 31, 2017, FRONTEO is not in compliance with these restrictive covenants. Subsequent to the year end, one of Japanese banks determined not to execute the loans and 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 extension of the maturity of the credit facility will be submitted and approved by the consortium.
As of March 31, 2017, the Company pledged the common stock of its subsidiary in the United States with carrying value of ¥ 4, 394 ,269 thousand as security for a borrowing from bank of ¥ 1,999,582 thousand.
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 Board of Directors if the articles of incorporation so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the 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 recorded in the Company’s general books of account prepared using generally accepted Japanese accounting practices. The adjustments included in the accompanying consolidated financial statements for U.S.GAAP purposes but not recorded in the general books of account 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.
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, 2017 was $1.00 = ¥112.40. The Company does not intend to imply that the
3
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.
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Average of |
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At end of |
|
month-end- |
|
|
|
|
|
Fiscal years ended March 31, |
|
period |
|
rates |
|
High |
|
Low |
|
|
|
|
|
|
|
(¥ per $1.00) |
|
||
2013 |
|
94.16 |
|
83.26 |
|
96.16 |
|
77.41 |
|
2014 |
|
102.98 |
|
100.46 |
|
105.25 |
|
92.96 |
|
2015 |
|
119.96 |
|
110.78 |
|
121.50 |
|
101.26 |
|
2016 |
|
112.42 |
|
120.13 |
|
125.58 |
|
111.30 |
|
2017 |
|
111.41 |
|
108.31 |
|
114.19 |
|
100.07 |
|
2018* |
|
112.40 |
|
111.52 |
|
118.32 |
|
108.40 |
|
|
|
|
|
|
|
Month ended |
|
High |
|
Low |
|
|
|
(¥ per $1.00) |
|
||
January 2017 |
|
117.68 |
|
112.72 |
|
February 2017 |
|
114.34 |
|
111.74 |
|
March 2017 |
|
115.02 |
|
110.48 |
|
April 2017 |
|
111.52 |
|
108.40 |
|
May 2017 |
|
114.19 |
|
110.68 |
|
June 2017 |
|
112.42 |
|
109.16 |
|
|
|
|
|
|
|
* For fiscal years, calculated from the average of the exchange rates on the last day of each month during the period. Average exchange rate of fiscal year ending March 31, 2018, calculated based on the month-end exchange rates of April 1, 2017 through July 14, 2017.
3.B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
Risks Related to Our Business
We may not be able to achieve our expected revenues, operating income or net income in the future due to several factors involving our business operations, including a decrease in our revenue from our eDiscovery business.
Our expected levels of revenue, operating income or net income may not be achieved due to several other factors, including, but not limited to:
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· |
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a decrease in revenues from our core eDiscovery business if more law firms that use our services perform their own manual review of documents we have identified in the eDiscovery process; |
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· |
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a decrease in revenue if we fail to successfully differentiate our technical skills from those of our competitors, if the average revenue per project decreases, if there is cancellation or scale-down of large accounts or if the prices we charge for our services fall dramatically; |
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· |
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failure to control personnel and outsourcing costs, or if we fail to manage personnel elsewhere; or |
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· |
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an increase in selling, general and administrative costs above expected levels, such as personnel expenses, advertising expenses and office rent-related expenses, in conjunction with our planned business expansion. |
4
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
5
the goodwill impairment test to measure the amount of impairment loss, if any, and an impairment charge is recorded for the amount.
If we fail to keep 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 keep 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. A disaster could interrupt our services for an indeterminate length of time and severely damage our business, prospects, financial condition and results of operations. Our systems and operations are vulnerable to damage or interruption from fire, floods, network failure, hardware failure, software failure, power loss, telecommunication failures, computer viruses, denial of service attacks, penetration of our network by unauthorized computer users and “hackers” and other similar events, and other unanticipated problems. 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, if anyone can circumvent our security measures, he or she could destroy or misappropriate 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 damages 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.
If we fail to effectively manage our growth, our business, financial condition, results of operations and business prospects may be materially adversely affected.
We have limited operational, administrative and financial resources, which may be inadequate to sustain our rapid growth and planned expansion. If our customer base continues to expand, investments in our technology platform, facilities and other areas of operations, including customer service and sales and marketing, will also increase. Our future success will depend on, among other things, our ability to effectively maintain our relationships with our key clients, to continue training, motivating and retaining our key employees and attract and integrate new employees, and to maintain adequate controls and procedures to ensure that our periodic public disclosure under applicable laws, including U.S. and Japanese securities laws, is complete and accurate.
We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management personnel, systems and resources. To accommodate our current and planned growth we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, all of which require substantial commitment of financial and management resources. We also will need to continue to expand, train, manage and motivate our workforce, and manage our relationships with clients. These efforts require substantial management efforts and skills and may incur additional expenditures.
If we fail to keep up with the rapid technological changes in our industry, we may lose clients due to obsolete services.
Our markets are characterized by:
|
· |
|
frequent new product and service introductions; |
|
· |
|
continually changing customer requirements; and |
|
· |
|
evolving industry standards. |
Although we believe that the most recent version of Lit i View (version 7.13, released in June 2017), which features improvements in predictive coding and, therefore, the speed and accuracy of our primary eDiscovery
6
software, is a significant stride forward, not only compared to the previous version of Lit i View but also compared with Asian language products of our competitors, if we fail to obtain access to new or important technologies or to develop and introduce new services and enhancements that are compatible with changing industry technologies and standards and customer requirements, we may lose clients.
Our pursuit of necessary technological advances will require us to display unwavering commitment and a substantial investment in time and expense. Some of our competitors have greater financial and other resources than we do and, therefore, may be better able to meet the time and expense demands of achieving technological advances. This may allow our competitors to respond more quickly to new and emerging technologies and standards or invest more heavily in upgrading or replacing equipment to take advantage of new technologies and standards.
We face significant competition and may be unable to compete successfully against our competitors, which would have a material adverse effect on our business and results of operations.
Our primary competitors are companies with long established eDiscovery operations, which have 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 would have a material adverse effect on our results of operations.
We depend on our key personnel for the success of our business, and losing their services would severely disrupt our business.
Our future success is heavily dependent upon the continued service of our key executives, including Masahiro Morimoto, our founder, Chairman and Chief Executive Officer, and Naritomo Ikeue, our Executive Vice-President, Group Chief Financial Officer, and Chief Operating Officer, among others. If we lose the services of senior members of our management or other key employees, we may not be able to locate suitable or qualified replacements, and 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 human resources and incur increased costs and administrative workload as a result of being a U.S. 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. Although we are required to comply with Section 404(a) of the Sarbanes-Oxley Act when filing our annual report on Form 20-F for the fiscal year ended March 31, 2017, as an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended (Securities Act), we have decided to take advantage of the exemption provided by the Jumpstart Our Business Startups Act of 2012 (JOBS Act), which, assuming we continue to be an emerging growth company, allows us to delay complying with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 until we are required to file our annual report on Form 20-F for the fiscal year ending March 31, 2019. Even though, as a foreign private issuer, some of these requirements may be more relaxed than they would be if we were a U.S. corporation, we will incur significant legal, accounting and other expenses that we did not incur prior to becoming a public company in the United States. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make certain corporate activities more time-consuming and costly.
7
We have determined during our reporting process for the fiscal year ending March 31, 2017 that there were material weaknesses in our internal controls over financial reporting as of that date. If we fail to re-establish and maintain the effective system 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.
In connection with the Company’s assessment of internal controls as of March 31, 2017, the Company has determined that, the material weaknesses in internal controls over financial reporting exist at FRONTEO USA, Inc. (FUSA) identified in the prior year remain, specifically in the areas of revenue recognition, income taxes and financial closing including other major recurring and non-recurring transactions. There have been notable improvements related to revenue recognition processes because of the Company’s focused remediation efforts during the year. 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 a material weakness in internal controls therein at the consolidation level.
Our management fully recognizes the importance of design, implementation, and maintenance of internal controls related to financial reporting. We will continue to put efforts to improve the control environment, strengthen the personnel in the accounting and finance departments of both FRONTEO and FUSA and establish effective measures to prevent the continuation or reoccurrence of such material weaknesses, in particular, by strengthening the controls related to revenue recognition, income taxes, financial closing including other major recurring and non-recurring transactions. Our management has been and will continue to be required to devote a substantial amount of time to review and implement remediation of these 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 in remediating the material weakness that exist in our internal control over financial reporting.
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 that the degree of compliance with the policies or procedures may deteriorate.
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 which are not discovered until after they have been 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. In addition, our reputation may be damaged and we may fail to acquire new projects from existing clients or new clients. We generally have been able to resolve such flaws and errors. However, 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 failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights.
A substantial portion of our software solutions and systems are proprietary and we rely on statutory copyright, trademark, patent, trade secret laws, client license agreements, employee and third-party non-disclosure agreements and other methods to protect our proprietary rights. Nevertheless, these resources afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. We cannot assure you that we have secured, or will be able to secure, appropriate protections for all of our proprietary rights. In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. In
8
addition, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of any such litigation may not be in our favor. Furthermore, any such litigation may be costly and may divert management attention as well as other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
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 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.
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 of 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 have a need for eDiscovery and forensic services, we and our solutions are perceived as an attractive alternative. If our marketing and brand building efforts are not successful and we are not able to secure new mandates when existing contracts reach their conclusion, we may have difficulty maintaining and increasing the use of our services and our quarterly and annual 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.
Our solutions incorporate and work in conjunction with third-party hardware and software products. If this hardware or software were not available to us at reasonable cost or 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
9
acceptable to us or at all, and we may be unable to develop alternative solutions or redesign our solutions on a timely basis or at a reasonable cost. If any of these were to occur, our results of operations could be adversely impacted.
Future government legislation or changes in court rules could adversely affect our ability to sell our eDiscovery systems.
The delivery of our eDiscovery services is not directly regulated by the U.S. or Japanese governments. Our eDiscovery solutions and the clients we serve are, however, 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.
Our ability to expand our operations and maintain or increase our revenue is dependent on the quality of our offerings of solutions and services, 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 critical for the successful and sale of our services and solutions. If we fail to provide high-quality support on an ongoing basis, our clients may react negatively and our 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 and financial condition.
Our principal shareholders, directors and executive officers own a large percentage of our shares and have significant voting power, allowing them to exercise substantial influence over matters subject to shareholder approval.
Our executive officers, directors and principal shareholders holding 5% or more of our outstanding shares and their respective affiliates beneficially own a significant percentage of our issued and outstanding voting shares. Accordingly, these executive officers, directors and principal shareholders have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction, and their interests may not align with the interests of our other shareholders. These shareholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other shareholders.
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. 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.
10
Risks Related to the Ownership of Our American Depositary Shares (ADSs)
We expect that the price of our ADSs will fluctuate substantially.
The market price of our ADSs could be affected by a number of factors, including:
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· |
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introduction of new products, services or technologies offered by us or our competitors; |
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any failure to meet or exceed revenue and financial projections we provide to the public; |
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actual or anticipated variations in our quarterly operating results or those of other companies in our industry; |
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our failure to meet or exceed the estimates and projections of the investment community; |
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general market conditions and overall fluctuations in United States or Japanese equity markets; |
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; |
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disputes or other developments relating to proprietary rights, including patents and our ability to obtain protection for our intellectual property; |
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additions or departures of our key management personnel; |
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issuances by us of debt or equity securities; |
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litigation involving our company, including: shareholder litigation; investigations or audits by regulators into the operations of our company; or proceedings initiated by our competitors or clients; |
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changes in the market valuations of similar companies; |
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significant sales of the ADSs or common stock by our shareholders in the future; and |
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· |
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the trading volume of the ADS. |
In the past, securities markets have experienced significant price and volume fluctuations not related to the operating performance of particular companies. Future market fluctuations may also materially adversely affect 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 Shares 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 holder of American Depositary Shares 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 infringed 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.
11
If securities or industry analysts publish negative reports or cease to publish reports about our business, the price and trading volume of our securities could decline.
The trading market for our ADSs depends in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering us downgrade their estimates or evaluation of our common stock, the price of the ADSs could decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the market for the ADSs, which in turn could cause the price of the ADSs or trading volume to decline or adversely affect the liquidity of the market for the ADSs.
The value of our ADSs may not perfectly track the price of our common stock.
Our common stock currently trades on the Tokyo Stock Exchange (TSE) under stock code number 2158. Active trading volume and efficient pricing for our common stock on the TSE will usually, but not necessarily, indicate similar characteristics in respect of our ADSs. In addition, the terms and conditions of our agreement with our depositary may result in less liquidity or lower market value of our ADS than for our common stock. Since the holders of our ADSs may surrender our ADSs to take delivery of and trade our common stock (a characteristic that allows investors in ADSs to take advantage of price differentials between different markets), an illiquid market for our common stock may result in an illiquid market for our ADSs. Therefore, the trading price of our common stock may not be correlated with the price of our ADSs.
The right of holders of ADSs to participate in any future rights offerings may be limited, which may cause dilution to their holdings and holders of ADSs may not receive cash dividends if it is impractical to make them available to them.
We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to our ADS holders in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to ADSs holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, ADSs holders may be unable to participate in our rights offerings and may experience dilution.
The depositary has agreed to pay ADSs 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, ADSs 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. ADSs 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 ADSs 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 as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholders 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,
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limitations on voting shares that comprise less than one full unit of our shares, the right to participate in a demand for the convocation of a general meeting of shareholders, and the right to join with other shareholders to propose an agenda item to be addressed at a general meeting of shareholders. ADSs holders may have more difficulty in asserting rights as a shareholder than they would as a shareholder of a corporation organized in the United States.
ADS holders may not have the same voting rights as the holders of our common stock and must act through the depositary to exercise their rights.
Except as described in the deposit agreement, holders of the ADSs will not be able to directly exercise voting rights attaching to the shares evidenced by the ADSs. In accordance with the terms of the deposit agreement, holders of the ADSs have the right to instruct the depositary how to vote the amount of common shares represented by their ADSs. However, ADSs holders may not receive voting materials in time to instruct the depositary to vote, and it is possible that, persons who hold ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to ADSs holders a shareholder meeting notice which contains, among other things, a statement as to the manner in which voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from ADSs holders on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects the rights of shareholders. We make all reasonable efforts to cause the depositary to extend voting rights to ADSs holders in a timely manner, but holders may not receive the voting materials in time to ensure that they can instruct the depositary to vote. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, ADSs holders may not be able to exercise the right to vote and may lack recourse if the ADSs are not voted as requested. In addition, ADSs holders are not be able to call a shareholders’ meeting.
ADS holders may be subject to limitations on transfer of your ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the 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:
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a majority of our Board of Directors to be comprised of “independent directors” as defined by Nasdaq rules; and |
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our compensation committee and nominating committee to be comprised solely of “independent directors.” |
As a result, we cannot assure you 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 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.
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Unless we no longer qualify, or choose to no longer rely on these exemptions in the future, you will not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.
We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to emerging growth companies, our ADSs may be less attractive to investors.
We are a “foreign private issuer” and are not required to comply with certain periodic disclosure and current reporting requirements of the Exchange Act. In addition, we are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict if investors will find our ADSs less attractive because we rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and the trading price of our ADSs may be more volatile. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” upon the earliest of the following conditions to occur: (i) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities; (iii) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; or (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. If any of the conditions previously listed occurs, we would cease to be an emerging growth company as of the following March 31.
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. 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 offices in overseas: Seoul, South Korea and Hong Kong, China.
In 2010, we established Payment Card Forensics, Inc., a Japanese subsidiary with an 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: UBIC Korea, Inc. and UBIC Taiwan, Inc. with offices in Seoul, South Korea and in Taipei, Taiwan, respectively. In addition, we opened our office in Reston, VA during the year.
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.
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In May 2013, we completed the initial public offering of our American Depositary Shares on the Nasdaq Global Market under the symbol “UBIC” (since July 1, 2016, “FTEO”) and relocated our Reston office to Washington D.C.
In August 2014, we acquired TechLaw Solutions, Inc. (“TLS”), as our wholly-owned U.S. subsidiary, to expand our presence in the U.S. market for complete eDiscovery services. Headquartered in Chantilly, Virginia, TLS had a review center in New York and an operating center in Golden, Colorado. We also opened our office in Los Angeles, California during that year.
In February 2015, we acquired the remaining 20% ownership shares of UBIC Risk Consulting, Inc. and subsequently absorbed into the Company through an absorption-type merger. In April 2015, we established UBIC Medical, Inc., as our wholly-owned subsidiary in Japan. In July 2015, we acquired EvD, Inc., (“EvD”) as our wholly-owned U.S. subsidiary to further expand our capabilities and service network. Headquartered in San Francisco, California, EvD had branch offices in New York, New York, Phoenix, Arizona, Houston, Texas, Portland, Oregon and Los Angeles, California, in addition to an operating center in Manila, Philippines. In September 2015, we established Rappa, Inc., as our wholly-owned subsidiary in Japan, and in October 2015, we merged UBIC Patent Partners, Inc. into the Company through an absorption-type merger. During that year, we opened a new review center in Washington D.C. and in February 2016, a new flagship review center in New York to further expand our review capabilities and service offerings in the U.S. and internationally.
In 2016, we launched the “FRONTEO” rebranding strategy in support of the Company’s vision and mission of creating a brighter future for its clients and society, and we changed the names to FRONTEO as our new worldwide brand, including wholly-owned subsidiaries. The word FRONTEO was derived from the word ‘FRONT’ and the Latin word ‘EO’, with a combined meaning of ‘moving forward’. FRONTEO has the experience and vision to move forward, by fully engaging and servicing our clients, driving innovation into our product development cycles, and expanding our global capabilities to continue to create deep value for clients and consumers alike. As part of the rebranding strategy and expected synergy, we have integrated the operations of our three U.S. subsidiaries, i.e., UNA, EvD and TLS, whereby UNA was merged into and with EvD, and TLS became a wholly-owned subsidiary of EvD, primarily responsible for government contracts. Effective July 1, 2016, the names of UBIC and its group companies were changed as follows:
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From July 1, 2016 |
UBIC, Inc. |
FRONTEO, Inc. |
UBIC MEDICAL, Inc. |
FRONTEO Healthcare, Inc. |
Rappa, Inc. |
FRONTEO Communications, Inc. |
EvD, Inc. / UBIC North America, Inc. |
FRONTEO USA, Inc. |
Tech Law Solutions, Inc. |
FRONTEO Government Services, Inc. |
UBIC Korea, Inc. |
FRONTEO Korea, Inc. (주식회사 프론테오코리아) |
UBIC Taiwan, Inc. |
FRONTEO Taiwan, Inc. (幅銳態科技股份有限公司) |
The integration of 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”) applications and Artificial Intelligence (“AI”) solutions. The newly unified FRONTEO will be well positioned as a leading provider of comprehensive services across the eDiscovery spectrum, as well as in other vertical markets leveraging its AI platform:
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Global eDiscovery |
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Managed Review Services |
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Multi-language Specialization |
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Advanced Forensic |
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FRONTEO TRUST BI Portal |
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Early Case Assessment |
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Analytics and Technology Assisted Review and AI Engine and Applications for Healthcare |
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Digital Marketing and Retail Sectors |
In August 2016, we established FRONTEO EMEA, Ltd. as a wholly-owned subsidiary of FRONTEO USA, Inc. in London, England to expand our service offerings in European market, and in November 2016, we acquired the business of Essential Discovery, Inc. (“EDI”), a boutique eDiscovery firm with specialization in document reviews with Fortune 250 corporations and AM Law 100 clients. We believe that EDI is a strategic fit into the expansive network that FRONTEO already has in place.
We apply our capital expenditures primarily to develop new eDiscovery technologies, to improve the delivery of
services and to expand global operating capabilities as well as to promote AI technologies by focusing on client needs in each market we serve. Our capital expenditures were ¥689.3 million, ¥1,125.8 million and ¥1,369.5 million in fiscal years ended March 31, 2015, 2016 and 2017, respectively.
Corporate Information
Our executive offices are located at Meisan Takahama Building, 2-12-23, Konan, Minato-ku, Tokyo, Japan and our telephone number is: +81 (3) 5463-6344. Our corporate website is http://www.fronteo.com/global/. Our agent for the service of process in the U.S. is FRONTEO USA, Inc., 1114 Avenue of the Americas, 4 th Floor, New York, NY 10036.
Overview
We are a leading provider of Asian-language eDiscovery solutions and services. We have extensive eDiscovery and forensic experience and expertise with information documented in Japanese, Korean, Chinese as well as English, and we apply this expertise in connection with litigations, 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, we have strongly been expanding our resources by mergers and acquisitions in the biggest market, the U.S. Thus our revenue in the U.S. has increased and now constitutes 60% of consolidated group revenue. On the other hand, based on our expertise in the legal business, we have developed our own Artificial Intelligence (AI) engine, KIBIT. It does not only add a competitive edge in our existing business, but also has become a driver in new businesses that we started recently, such as digital marketing, healthcare and business intelligence.
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 integrates 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 1,500 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 1,000 corporate investigations in Japan, South Korea, China and Singapore.
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Industry Overview
eDiscovery solutions enable organizations to identify, preserve, collect, process, review, analyze and produce data in order to meet compliance, records management and/or legal discovery requirements. Data that can be subject to investigation include texts, email, calendar files, images, databases, video, audio files, web sites, spreadsheets and computer programs. In addition, the form of data storages are not limited to servers, hard disks or other data storage media but can take various forms including smartphones and tablets, and they are diversifying with the advancement of technology. The volume of such electronically stored information (ESI) is continuing to grow at an extraordinary rate. 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. While email remains the primary application driving eDiscovery growth, it is expected that there will be dramatic growth being driven by explosively increasing data due to social networking and cloud computing.
According to the latest analysis about eDiscovery market by Transparency Market Research (TMR), the global eDiscovery market, in both services and software, is forecast to grow from US$5,563.7 million to US$21,089.1 million by 2022 at a CAGR of 16.2% from 2014 to 2022. TMR’s analysis includes several reasons for the projected growth, including increases in ESI volume, the continued domination of ESI in legal proceedings thanks to reliance on electronic communications and records, regulatory requirements for archiving electronic information for compliance purposes, and the emergence of social media as a source of evidence in civil litigation through its inclusion in eDiscovery.
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 introduce 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 deploy 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:
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Information Management—Getting your electronic house in order to mitigate risk & expenses should eDiscovery become an issue, from initial creation of ESI (electronically stored information) through its final disposition. |
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Identification—Locating potential sources of ESI & determining its scope, breadth & depth. |
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Preservation—Ensuring that ESI is protected against inappropriate alteration or destruction. |
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Collection—Gathering ESI for further use in the eDiscovery process (processing, review, etc.). |
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Processing—Reducing the volume of ESI and converting it, if necessary, to forms more suitable for review & analysis. |
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Review—Evaluating ESI for relevance & privilege. |
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Analysis—Evaluating ESI for content & context, including key patterns, topics, people & discussion. |
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Production—Delivering ESI to others in appropriate forms & using appropriate delivery mechanisms. |
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Presentation—Displaying ESI before audiences (at depositions, hearings, trials, etc.), especially in native & near-native forms, to elicit further information, validate existing facts or positions, or persuade an audience. |
Many eDiscovery solution providers do not offer end-to-end coverage of the EDRM, and instead focus on one or more of identification, preservation, collection, and processing, review and analysis of data. Other eDiscovery solution providers are able to offer end-to-end coverage of the EDRM, either on their own or by utilizing technology partnerships to offer full coverage of all phases of the EDRM.
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, a company’s demand for eDiscovery services and solutions tends to be much less extensive. This means that contracts for eDiscovery services tend to be time and subject specific. The fact that we have sold our eDiscovery 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 of 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 have a need for eDiscovery and forensic services, we and our solutions are perceived as an attractive alternative. 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 eDiscovery market is forecast to grow at a CAGR of 16.2% from 2014 to 2022, the highest growth is expected in the off-premise, or “cloud,” software market and its CAGR is forecast at 23.3%. We provide a one-stop, cloud-based eDiscovery solution with 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.
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). 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
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situations where data needs to be collected overseas, searched, reviewed, produced in a foreign language and translated by bi-lingual attorneys and paralegals.
Because compliance with even the most basic eDiscovery request is expensive, organizations need to identify the appropriate technology and service providers in order to reduce costs and stay within their budget. The overall cost of eDiscovery is directly related to the number of documents to be reviewed for relevance and privilege. The overall cost of eDiscovery can be dramatically reduced if the right technology is used to conduct automated first level review before the more costly human review of such information. The skill and experience to select appropriate keywords while searching electronic documents and usage of a forensic lab capable of processing and sorting a huge amount of electronic data safely are crucial. In addition to managing costs, organizations need to utilize products and solutions that limit the eDiscovery production to disclosure of information that is relevant and responsive to the eDiscovery request, thereby reducing disclosure and leakage of valuable information that is not germane to the lawsuit.
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:
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Accurate Processing of Asian-language Characters. Our proprietary text mining technology allows us to accurately handle Asian-language (as well as English) characters, encoding schemes and native file systems. Our solutions and services allow us to accurately assess and convert different Asian-language character sets into the traditional Unicode Transformation Format (UTF), and also convert, as necessary, into several other complex encoding schemes which are frequently utilized by Asian companies, thus maintaining the fidelity of the search methodology and preserving the integrity and nuance of the underlying information. Many competitive solutions first translate Asian-language information to English and ASCII format which can result in garbled text and/or lack of accuracy. Processing and analysis is then conducted on this translated information, which, in our experience often is inaccurate and obscures or eliminates subtleties and nuances that are often critical to the legal assessment and applicability of the information. |
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Speed, Efficiency and Cost Effectiveness. Our solutions and services enable a process that permits the automated identification of relevant text and documents in Asian languages, including Japanese, Chinese and Korean, thus reducing the number of steps in the review process and thereby providing significant savings in time and cost of document review; because our solutions more accurately identify Asian characters and documents responsive to the search, we reduce the number of documents that need to be manually handled and reviewed by persons, and we are less likely to fail to identify an important document. These benefits are further amplified by the comprehensive and integrated nature of our solutions. |
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Technology Assisted Review. Technology assisted review (TAR) is the use of software tools, increasingly comprised of artificial intelligence-based predictive coding, to perform mechanical document review. TAR reduces the amount of manual review of data produced in the collection process, which is traditionally the most expensive phase of the eDiscovery process. We believe that our TAR is very effective in Asian-language document review and our product development efforts incorporate all of our experience and know-how with TAR into our main platform, Lit i View. Our TAR applies our proprietary algorithms that progressively predict and refine the automated work flow involved in TAR by accurately increasing the review weight of relevant documents. These proprietary algorithms are designed to bring our “recall rate” (the accuracy rate of identifying information relevant to a particular TAR) to 90% or better, which results in noticeable improvements in the efficiency of our review work as a whole, and significant savings in time and expense for our clients. |
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Seamless Interaction with Numerous Software Applications. Since our inception in 2003, our solutions and services have been continuously expanded, tested, improved and refined as a result of our extensive experience and technical knowledge and skills accumulated in analyzing electronic data of Asian companies. The design of our solutions enables us to work seamlessly with more than 20 software applications, including Microsoft Outlook and several unique email applications to produce documents without garbled text and also capture responsive documents that could be missed by many of our competitors. This is particularly important to existing and prospective Asian clients given the |
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larger range of email and office software programs and protocols in general use in Asia than in the United States. |
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Multiple Convenient Data Processing Sites. We believe we are the only eDiscovery provider with a data processing center in each of Japan, U.S., South Korea, Philippines and Taiwan. Thus, we can conduct the entire process of eDiscovery in Asia and avoid sending non-responsive electronic data to law firms or other parties in the United States, thereby potentially making such confidential and proprietary data subject to the jurisdiction of U.S. courts. Additionally, we believe the proximity of our data processing sites to many of our clients enables us to secure and process information more quickly than our competitors. |
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Flexible and Scalable Cloud Hosting Service. While we have been able to host our clients’ data in a traditional cloud environment, we have introduced our Intelligence Cloud solution that features a flexible and scalable cloud data hosting capability, and employs a secure, Internet-enabled storage solution that enables authorized users across the globe to access data and collaborate in connection with an investigation or litigation. Our Intelligence Cloud hosting technology helps to address the problem of rising complexity and cost from the growth and dispersion of electronic data volumes and the extended duration of many investigations and litigations. Our Intelligence Cloud hosting service coupled with our experience in handling large volumes of data enables us to deliver our eDiscovery solutions in a flexible and cost-efficient manner. |
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Big Data Compatible Cloud Infrastructure. Once a review project is complete, the documents and data collected for the case are usually tossed aside. When a similar case arises at a later time, the same data has to be re-collected, re-processed and re-reviewed. FRONTEO’s Lit i View BIG DATA CASE MANAGER (BDCM) treats data as “information capital” with the goal that it can be re-used in similar future matters to greatly reduce costs and time associated with eDiscovery. The BDCM can consolidate huge volumes of electronic data from past cases into one unified system. This enables parties to effectively access information from past cases for current and future litigation matters. |
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Expanded Electronic Data Forensic Investigations. We have adapted the technology that we developed in the area of electronic data forensic investigations, including the provision of solutions and services to government, police and military agencies, to create powerful eDiscovery solutions and services; in turn, the expertise we have developed in our eDiscovery business, such as how to construct electronic searches that yield the most accurate and complete results, have enabled us to further develop our consulting and audit services and to improve our electronic data forensic investigations, tools and training. |
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The Solution Operated with FRONTEO Artificial Intelligence (AI) System. We developed KIBIT, a powerful AI system to automatically analyze documents and offer deeper insight into ESI. Lit i View EMAIL AUDITOR was released in 2014 as the first solution powered by KIBIT. It is provided to clients both by on-premise and through the cloud. It automatically audits large volumes of emails based on its extensive experience in assisting clients with their compliance issues. |
Business Strategy
As a leading eDiscovery company in Asia, we have developed our own eDiscovery software, Lit i View which supports Asian languages (Japanese, Chinese and Korean), and provide one-stop solutions with the highest levels of technology and know-how to analyze and process ESI for litigation.
With an established foundation for the eDiscovery legal business, we now believe that we are entering a new period of growth. Meanwhile, we are also in the process of launching new business lines using artificial intelligence. We are dedicated to continued growth on a Company-wide basis to achieve our goals with a focus on the following:
Expansion of Existing Legal Business in the United States
We will continue to seek to expand and optimize our existing United States legal business operations after the acquisition of TLS, EvD, and EDI. The Company will seek to expand its U.S.-based business by streamlining operations of its U.S. subsidiaries and acquiring large-scale projects from Asian and North American companies.
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We will also aim to boost sales in the review services using Lit i View, eDiscovery support software equipped with predictive coding, powered by the Company’s unique artificial intelligence technology.
Development of the Information Analysis Business Leveraging Artificial Intelligence Technology
We have been expanding the provision of solutions in the fields of healthcare, digital marketing, and business intelligence, utilizing the Company’s unique artificial intelligence technology, “KIBIT.” In each of these three fields, we will continue to advance the development of our products and our suite of services, including continuous analysis support and intensified consulting. We will also proactively recruit talented personnel to help complement our technological developments.
Enhancements to implement business strategies
We will robustly control regional business activities through our headquarters in Japan, while providing more authority to country managers to strengthen the autonomy and unique qualities of each region. The centralized administrative framework along with the development and implementation of unique business strategies in each country will build global management systems suited for improving and expanding our business operations.
Our Solutions and Services
Our eDiscovery and electronic data forensics solutions and services help our clients employ a series of scientific investigation methods that conduct evidence preservation and investigation analysis for incident response or litigation, as well as research to detect falsification and damage of electronic data. Our solutions and services also retroactively identify acts which result in unauthorized use of computer or network resources, service obstruction, and unintentional disclosure of information.
eDiscovery Business
Our eDiscovery solutions and services enable the preservation, processing, review and production of Electronically Stored Information (ESI). Our solutions (i) copy electronic data from personal computers, servers, mobile devices, website and various types of storage, (ii) search and identify relevant documents and evidence with TAR driven by KIBIT technology, our artificial intelligence (AI) technology, (iii) permit the inspection of evidence and on-line hosting for review and translation, and (iv) produce the final disclosure of evidence in the court-requested format. All of our solutions and services can be provided seamlessly in the same secured environment, providing a one-stop shop for our customers.
In civil lawsuits, the plaintiff and the defendant disclose evidence before commencement of the trial. Pursuant to the Federal Rules of Civil Procedure (FRCP) in the United States, disclosure of electronic evidence in electronic format through “eDiscovery” has been mandated, and more than 90% of enterprise information is typically stored in electronic format. Our eDiscovery support service helps to ensure secure and effective information disclosure.
Lit i View, our online eDiscovery software powered by KIBIT, makes it possible for corporate customers and outside counsel to more efficiently review electronic evidence. Lit i View is designed to ensure that only necessary information is disclosed through a disclosure approval process undertaken by assigned lawyers. The inherent risk of information leakage in an eDiscovery process is a concern for enterprises. Using Lit i View, only those files identified as containing evidence are hosted to our inspection servers, and the remainder of the information is stored in our local secure data centers at many places in the world to ensure the safety and confidentiality of critical data.
We believe that we are the only eDiscovery service provider with data processing centers not only in the United States but also in Japan, South Korea, Philippines and Taiwan, and thus we can conduct the entire process of eDiscovery in Asia. This allows us to avoid sending non-responsive electronic data to other parties abroad and potentially making such confidential and proprietary data subject to the jurisdiction of the courts in other countries.
Though typically more than 90% of enterprise data is available in electronic formats, the volume of paper documents may also be significant. We perform paper based evidence discovery by scanning and subsequently digitizing the documents, utilizing Optical Character Recognition (OCR) techniques. We utilize methods to avoid loss of potentially responsive evidence. Once available in digital formats, the techniques followed for analysis of these documents follows identical methods employed for ESI.
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Lit i View Solution
Our advanced technology platform, Lit i View, is an innovative eDiscovery solution that accurately handles Asian-language characters, encoding schemes and native file systems. Developed entirely in-house at FRONTEO, Lit i View incorporates processing and filtering software specifically for Asian encoding schemes and language sets as well as for information stored in English. Lit i View allows the enterprise or its legal advisors to work efficiently and effectively by handling Chinese, Japanese and Korean as well as English information conveniently at a remote location or on-site in the enterprise offices.
Lit i View more accurately identifies Asian characters and documents responsive to the eDiscovery search than competing products, and thus enables us to reduce the number of documents that need to be handled and reviewed by persons, and reduces the chances to fail to identify an important document. Lit i View works seamlessly with more than 20 software applications, including Microsoft Outlook and several unique email applications, and thus we are able to produce documents without garbled text and also capture responsive documents that would be missed by many of our competitors.
Lit i View incorporates KIBIT language capabilities such as “concept search,” which searches not only words, but also general concepts, similar meanings and relevant categorizations. Searches conducted in Asian languages are more difficult because Asian languages typically contain no spaces between words. In addition, because there are numerous ways to express different words and their combinations, keyword searches are usually insufficient to find all relevant documents. Lit i View’s use of concept searches can be very useful because users can take a case-by-case approach to determine what will be the most effective search tools.
Lit i View also permits the extracted data to be reviewed simultaneously by our reviewers, clients, and the clients’ law firm or legal team. We believe this facilitates faster and more accurate analysis of the produced data.
Intelligence Cloud Solution
Our customizable Intelligence Cloud solution addresses the problem of rising costs associated with the growth and dispersion of ESI volumes across the globe, along with prolonged investigations and litigations. Because large enterprises are generating electronic data at a rapid rate, there are a growing number of proactive enterprises that are seeking to deploy data hosting solutions to provide better readiness and ongoing protection against potential eDiscovery issues. Some enterprises have begun to show increasing interest in cloud-based data hosting. While historically most organizations have tended to prefer to host data on-site in local servers, concerns regarding data preservation, confidentiality and accessibility of cloud-based services have begun to diminish. In addition to moving data into the cloud in connection with a specific investigation or lawsuit, enterprises are choosing to host data in a medium that allows for rapid preservation, collection, processing and review.
We believe that the competing cloud hosting services available are not experienced and capable of hosting the large volume of data produced by litigation. Because competing cloud hosting services typically handle a more limited amount of data, their cost structure is not conducive to handling the large volume of data produced by litigation. As a result, we are more experienced in handling large volumes of data in connection with our eDiscovery solutions, we are both equipped and experienced in dealing with these materials and are able to host litigation data in a cost-efficient manner. Our Intelligence Cloud solution allows us to maintain client data during and after a particular litigation or investigation, and to maintain the data and documents in a relational database of our clients’ data and documents, along with all of the tagging and coding that was completed in connection with such project. We believe that the analysis and indexing we conduct in order to build a relational database provides a superior and distinct data hosting solution for our clients by allowing them to more rapidly access relevant data and documents for future litigations, investigations and other corporate needs.
For large multinational clients, we have started offering Lit i View BIG DATA CASE MANAGER (BDCM), which enables those clients conducting multiple, simultaneous matters to significantly reduce time and costs by allowing them to efficiently manage multiple data environments and eliminate redundancy. This has become a key factor that enhances our superiority over our competitors.
Legal / Compliance Professional Services
Lit i View Software
We developed KIBIT, a powerful AI system to automatically analyze documents and offer deeper insight into ESI. Lit i View EMAIL AUDITOR (renamed KIBIT Email Auditor) was released in 2014 as the first solution powered by KIBIT. It is provided to clients both by on-premise and through the cloud and automatically audits large
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volumes of emails based on its extensive experience in assisting clients with their compliance issues. In the fiscal year ended on March 31, 2016, we also began to provide and sell an intellectual property strategy support system for analyzing a large patent-related information “Lit i View PATENT EXPLORER (renamed KIBIT Patent Explorer),” as well as a business data analysis system “Lit i View AI Sukedachi Samurai (renamed KIBIT Knowledge Probe) to global financial institutions and manufacturers.
Forensic Investigations
Our electronic data forensic investigation solutions and services enable the preservation, analysis, processing and production of ESI in connection with fraud and corporate information leakage. We work with a large number of enterprises and their law firms to investigate corporate violations, such as leakage of sensitive information or illegal trading, handle them in a timely manner and in accordance with relevant laws, and provide objective analysis to the stakeholders. We also perform due diligence investigations in connection with corporate mergers and acquisitions as well as new business investments that require accurate assessment of the target company or market.
In most instances of evidence gathering and analysis, solutions emerge by making proper inferences from detailed information. Often such information may not be clearly visible or even readily identifiable or available within the enterprise. Meticulously sifting through digital data by employing computer forensics enhances an enterprise’s ability to infer intelligently and make evidence gathering more efficient.
Consulting and Corporate Risk Audit
Enterprises today consider compliance and corporate social responsibility measures as important steps in building accountability, implementing crisis management systems, and improving risk mitigation processes. Based on extensive litigation support experience, we help clients create document management procedures, conduct corporate risk audits, and comply with legal requirements to provide information to relevant stakeholders.
Storage of enterprise information in electronic format raises the risk of corporate fraud and information leakage. Putting preventive processes in place is therefore an important corporate objective. Unlike measures such as forensic analysis, which are performed after a fraud has been detected, corporate risk audit is a defensive strategy against fraud before it happens. We institute regular corporate risk audit mechanisms for identifying and monitoring the flow of confidential enterprise information out of the company by departing employees.
Forensic Tools
Besides computer forensic investigation for our clients, we also sell the necessary hardware and software. We offer forensic tools to deal with our clients’ computer forensic related needs, such as acquisition of proof, data analysis, establishment or the provision of a forensic laboratory. Additionally, we also sell imported litigation infrastructure from international vendors.
Forensic Training
Successful computer forensics entails practical knowledge and relevant skills. For clients conducting the process themselves, training is essential. We make available continuous training for conducting computer forensics. We provide training to employees of law enforcement and military agencies, employees of public enterprises, and other investigation experts that take part in various investigations in the United States and Europe, and are leaders in the field of computer forensics. Our investigation specialists, whose acquired capability meets international standards, offer world class training to such investigators in Japan to help them achieve their goals.
Clients
We provide solutions and services to enterprises, government agencies, law firms and other organizations in the United States, Europe and Asia. Since our inception, approximately 750 clients have purchased our solutions and services. Our target markets are not confined to certain industries as we are focused on providing eDiscovery and electronic data forensics solutions and services that meet the needs of any organization. We have historically focused our efforts on organizations that utilize Asian-language characters, encoding schemes and native file systems. Our clients that represented more than approximately 10% of total revenue during one or more of the last three fiscal years include TMI Associates. Because we are retained by these clients for specific projects as they arise, we expect that we will have different major clients from year to year. In the future, the expansion of our Lit i View BIG DATA CASE MANAGER solution may provide an opportunity to develop ongoing and more stable client relationships.
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Sales and Marketing
Our sales executives market solutions and services directly to prospective clients and referral law firms through on-site sales calls and longstanding relationships. We focus on attracting and retaining clients by providing superior integrated technology solutions and exceptional client service. Our client support specialists are responsible for providing ongoing support services for existing clients.
Our marketing efforts and lead generation activities consist primarily of client referrals, telemarketing, trade shows, industry events and press releases. Additionally, we maintain a website that clients and potential clients may access to obtain additional information related to solutions we offer. We believe that our hosting of educational seminars with respect to eDiscovery topics for legal professionals has been very beneficial to brand awareness and sales and marketing efforts generally.
Sales by Market and Segment
Operating segments are defined as components of the Company that engage in business activities from which the Company earns revenues and incurs expenses and for which separate financial information is available that is evaluated regularly by the chief operation decision maker in deciding how to allocate resources and in assessing performance.
We provide a variety of eDiscovery and forensic services (“legal service”) which are provided by FRONTEO and its domestic subsidiaries for domestic (Japanese) clients, by FRONTEO USA, Inc. and FRONTEO Government Services, Inc., U.S. based wholly-owned subsidiaries of FRONTEO, for clients based in the U.S. or represented by U.S. -based attorneys who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc., and by other foreign subsidiaries for foreign clients other than those who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc.
FRONTEO, Inc. and its domestic subsidiaries also provide AI based business, such as healthcare and data marketing.Our legal service operations in Japan, the U.S. and Other (which includes South Korea and Taiwan), and AI based service in Japan have been identified as the four operating segments of the Company.
Our chief executive officer, who is also the Company’s chief operating decision maker, regularly reviews the performance of the four operating segments and makes decisions regarding allocation of resources. Our chief operating decision maker utilizes various measurements which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
AI based service in Japan segment has met a quantitative threshold for the year ended March 31, 2017 and the segment data for the year ended March 31, 2016 were presented for comparative purposes. No segment data for the year ended March 31, 2015 has been presented because AI based service did not exist in that period.
Each legal service segment recognizes revenue for which the segment has a direct contractual relationships with its clients. Most of the our clients are either corporate clients in Asia or U.S.- based law firms representing corporate clients in Asia. If our services are contracted between a law firm in the U.S. and FRONTEO USA, Inc. or FRONTEO Government Services, Inc., revenue is recorded by the U.S. segment although the end corporate client may be located in areas other than the U.S.
Our reportable segments are the same as our operating segments.
For information related to our total revenues by geographic market for each of the last three financial years, see “Item 5.A — Operating Results — Results of Operations — Operating Segments.”
Seasonality
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, a company’s demand for eDiscovery services and solutions tends to be much less extensive. This means that contracts for our 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.
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Research and Development
Our development efforts in AI technology were initially focused on the niche, big-data field of cross-border litigation support, but with the creation of our KIBIT, we now have the capability to analyze various types of big data. Our research is focused on addressing two key questions: how to identify information that’s important to our clients from big data, particularly information about people’s intentions and behavior, and how to effectively use the advanced knowledge of experts to analyze vast volumes of information. We are currently working to dramatically improve the quality of human intellectual activity through research that taps the knowledge of experts.
Our basic R&D policies and priorities are as follows:
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To sustain a fast R&D cycle where the knowledge acquired from our research is leveraged to develop products, and then incorporating user feedback to evaluate the product and drive further R&D efforts in order to take the lead in this industry and to benefit society. |
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To use Behavior Informatics to identify human traits and errors in software data containing bugs— a combination of behavioral science and information science. |
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To drive further advances in our KIBIT to help users gain insights from big data analysis and to assist users in stripping away large volumes of information to pinpoint the data they really need. |
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To energize and improve societies by contributing to safe and stable communities and a more equitable global business environment. |
Intellectual Property
We are strong believers in intellectual property, attaching the same level of importance to our intellectual property strategy as the Company does to its technology and business strategies. We believe that a strong intellectual property strategy is vital for achieving our goal of growth and expansion through the data analysis business. We look at ways of developing new types of technology, while simultaneously searching for ways to make those new technologies commercially viable. The goal of our intellectual property strategy is to find ways of protecting and strengthening those technologies, which means securing intellectual property rights so as to be able to apply their versatility to future products. Our intellectual property strategy has focused on protecting our proprietary technologies and on maintaining our competitive advantage over our rivals by building close relationships between our research centers, our clients and the market to accurately identify future business opportunities. Mirroring our business growth, our intellectual assets have expanded rapidly — quantitatively and qualitatively — and we have secured intellectual property rights not only in Japan, but also in the U.S. and other countries.
As of July 1, 2017, in Japan, we have applied for patents for 67 inventions and have been granted patents on 55 of them and in the United States, we have applied for patents for 38 inventions and have been granted patents on 5 of them. Moreover, many trademarks have been registered in many countries across the world, including “FRONTEO,” “KIBIT,” “Lit i View,” and “Landscaping,” as brands representing the uniqueness of the above technologies
Competition
The eDiscovery and digital forensics solutions and services markets in the United States and Asia are intensely competitive, highly fragmented and characterized by rapidly changing technology, frequent solution introductions, changes in client demands and evolving industry standards. Competitors vary in size, scope and breadth of solutions and services offered. Competitors include Guidance Software Inc., HP Autonomy Corporation plc, IBM Corporation, Symantec Corporation, EMC Corporation, Epiq System Inc., Catalyst, Access Data Group, FTI Consulting, Inc., Xerox Corporation, Navigant Consulting, Inc., Hewlett-Packard Development Company. L. P., Integreon, Inc., Merrill Corporation, Transperfect, KPMG, Kroll, Inc., and Consolio.
Many of our primary competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition and broader solution offerings. These competitors can devote greater resources to the development, promotion, sale and support of their solutions than we can.
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In addition to the competitors mentioned above, certain law firms, accounting firms, management consultant firms, turnaround specialists, and crisis management firms offer solutions and services that compete with our solutions and services.
We believe the principal competitive factors in the eDiscovery and electronic data forensics solutions and services markets include:
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performance, scalability, functionality, flexibility and reliability of the solution offerings; |
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ease of integration with existing applications and infrastructure; |
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price and the cost efficiency of deployment and ongoing support; |
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quality of professional services, as well as client support and maintenance; and |
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name recognition and reputation. |
Although many of our competitors have greater resources and greater name recognition, we believe we compete favorably on the basis of the other competitive factors listed above. We believe our solutions and services, supported by our artificial intelligence technologies based on tacit knowledge, enable a process that permits the automated identification of relevant text in Asian languages, thus improving accuracy, reducing the number of steps in the review process and generating significant savings in time and cost of document review. Specifically, we believe that our predictive coding solution powered by our AI technology allows us to accurately handle English- and Asian-language characters, encoding schemes and native file systems, and provides us with a significant competitive advantage over our competition, including those with greater financial resources, a higher level of name recognition and broader solution offerings.
Government Regulation
The eDiscovery industry, solutions and services are not directly regulated by any governmental authorities. However, our clients must comply with certain governmental and judicial requirements. Class action and mass tort cases, as well as eDiscovery requirements related to litigation, are subject to various federal and state laws, as well as rules of evidence and rules of procedure established by the courts.
For example, in April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure regarding the discovery in litigation of certain electronically stored information. These amendments became effective on December 1, 2006. Among other things, these amendments (i) require early attention by parties in litigation to meet and confer regarding discovery issues and to develop a discovery plan that identifies and addresses the parties’ electronically stored information, (ii) expand the reach of federal court subpoenas to include electronically stored information, (iii) allow for parties to object to production of electronically stored information that is not reasonably accessible due to the undue burden or cost associated with such retrieval, and (iv) provide a “safe harbor” to parties unable to provide electronically stored information lost or destroyed as a result of the routine, good-faith operation of an electronic information system.
While these federal rules do not apply in state court proceedings, the civil procedure rules of many states have been closely modeled on these provisions. We anticipate the federal and state court discovery rules relating to electronic documents and information will continue to evolve and affect the way we develop and implement technology and service solutions to those changing discovery rules.
Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.
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As of July 1, 2017, FRONTEO has three Japanese subsidiaries and four overseas subsidiaries. The following table sets forth for each of our consolidated subsidiaries, the proportion of ownership and voting interest, the country of incorporation and the principal activities of the subsidiary.
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Proportion of |
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Name of Consolidated |
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Jurisdiction of |
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ownership and |
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Subsidiary |
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Incorporation |
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voting interest |
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Principal Activities |
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Payment Card Forensics, Inc. (1) |
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Japan |
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Credit card forensic investigation business |
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FRONTEO Healthcare, Inc. (2) |
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Japan |
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Analysis of large volume medical data |
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FRONTEO Communications, Inc. (3) |
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Japan |
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Digital product marketing and sales |
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FRONTEO Government Service, Inc. (4) |
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U.S. |
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eDiscovery product marketing and sales |
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FRONTEO USA, Inc. (5) |
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U.S. |
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eDiscovery product marketing and sales |
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FRONTEO Korea, Inc. (6) |
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South Korea |
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eDiscovery product marketing and sales |
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FRONTEO Taiwan, Inc. (7) |
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Taiwan |
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eDiscovery product marketing and sales |
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The FRONTEO group consists of FRONTEO, Inc. and seven consolidated subsidiaries. The group companies are engaged in large volume data analysis business activities as represented by eDiscovery services.
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Payment Card Forensics, Inc. was established in 2010 as a subsidiary of FRONTEO, Inc. and International Certificate Authority of Management System Co., Ltd. which owns 40%. |
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FRONTEO Healthcare, Inc. was established in April, 2015 as a wholly-owned subsidiary of FRONTEO, Inc. |
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(3) |
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FRONTEO Communications, Inc. was established in September 2015 as a wholly-owned subsidiary of FRONTEO, Inc. |
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FRONTEO Government Services, Inc. was acquired by FRONTEO, Inc. in 2014, and is currently a wholly-owned subsidiary of FRONTEO USA, Inc. |
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FRONTEO USA, Inc. (formerly EvD, Inc.) was acquired by FRONTEO, Inc. in July, 2015, and absorbed UBIC North America, Inc. in 2016, which was established in 2007 as a wholly-owned subsidiary of FRONTEO, Inc. |
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(6) |
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FRONTEO Korea, Inc. was established in 2011 as a wholly-owned subsidiary of FRONTEO, Inc. |
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(7) |
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FRONTEO Taiwan, Inc. was established in 2011 as a wholly-owned subsidiary of FRONTEO, Inc. |
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(8) |
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FRONTEO, Inc. acquired the outstanding capital stock of UBIC Risk Consulting, Inc. which were not owned by us and 20% of all to make it our wholly-owned subsidiary in February 2015, and subsequently absorbed it through an absorption-type merger in March 2015. |
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UBIC Patent Partners, Inc. was our wholly-owned subsidiary and was merged with and into FRONTEO, Inc. in October 2015. |
4.D. PROPERTY, PLANT AND EQUIPMENT
Property and equipment and capitalized computer software costs recorded on our consolidated balance sheet as of March 31, 2016 and March 31, 2017 consisted of the following:
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As of March 31, |
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2016 |
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2017 |
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(thousands of yen) |
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Leasehold improvement |
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¥ |
604,647 |
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¥ |
710,576 |
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Furniture and fixtures |
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133,207 |
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140,952 |
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Computers |
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1,352,862 |
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1,257,079 |
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Assets under capital lease, principally office equipment |
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17,471 |
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131,318 |
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Motor vehicles and transport equipment |
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3,969 |
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11,223 |
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Capitalized computer software costs |
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2,257,898 |
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2,328,190 |
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Other |
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— |
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4,029 |
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Total |
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4,370,054 |
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4,583,367 |
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Accumulated depreciation and amortization |
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(2,329,870) |
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(2,442,871) |
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Property and equipment and capitalized computer software, net |
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¥ |
2,040,184 |
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¥ |
2,140,496 |
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Our fixed assets consist mainly of (i) internally developed software used to offer services in legal technology market, (ii) leasehold improvements at leased facilities in Japan and other countries and (iii) computer equipment, such as servers, routers and other network equipment. Other than the above assets recorded on our consolidated balance sheet, we use operating lease assets such as office premises and data centers. There are no known environmental issues that may affect our utilization of our property and equipment.
Our corporate headquarters are located in Tokyo, Japan, where we lease approximately 35,580 square feet of commercial space under a lease that expires in September 2019. We use this space for our principal sales, research and development, client service and administrative purposes.
In connection with our global sales and marketing efforts, we lease office space typically on a short-term renewable basis in the United States in New York, New York; Redwood City, Los Angeles, San Francisco, California; Washington D.C.; Chantilly, Virginia; Golden, Colorado; Phoenix, Arizona; and internationally in London, United Kingdom; Seoul, South Korea; Taipei, Taiwan; Manila, Philippines; and Hong Kong, China.
We believe that our facilities are generally suitable to meet our needs for the foreseeable future and could be replaced with no difficulty at similar cost; however, we will continue to seek additional space as needed to satisfy our growth.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial condition and results of operations together with Item 3.A., Selected Financial Data of the annual report on Form 20-F and our consolidated financial statements and the notes to those financial statements beginning on page F-1 of this annual report. These consolidated financial statements have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors including but not limited to those in Item 3.D., Risk Factors of this annual report on Form 20-F.
Overview
We generate the great majority of our revenue from the sale of eDiscovery support services and a small minority of our revenue from computer forensic investigation services, the sale of forensic tools and training, a variety of other legal support services such as compliance support, or “Legal and Compliance Services (LCPS)”, and software products driven by our AI technology. 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, a client’s demand for our services and solutions tends to be much less extensive. This means that contracts for our 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 of 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 have a need for eDiscovery and forensic services, we and our solutions are perceived as an attractive alternative. In addition, to the extent that we are able to expand our client base among non-Asian law firms, we believe that they will need our services to review the Asian language materials we have collected and processed. This will, in our view, expand our revenue base.
The overall market for eDiscovery and forensic services has benefited from the growing volume of ESI and a continuing 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 these trends, but primarily from lawsuits filed and
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investigations commenced in the United States against Japanese and other Asian multinational corporations. We have also benefited more recently from engagements for large and midsize international government investigations.
We believe the highest growth and most important segments of our eDiscovery services are those that rely on our proprietary eDiscovery software and technologies (collection and processing, production, hosting and technology assisted review (TAR)). In the future, it is our intent to focus on our TAR solutions where we provide a more direct and differentiated value proposition to our customers. Our TAR solutions are powered by KIBIT, our AI technology, and designed to perform reviews of large volumes of data and are intended to identify relevant documents with 90% accuracy, providing meaningful time and cost savings by significantly reducing the need for manual review. We believe that, as our TAR based solutions demonstrate their value in the marketplace, they will provide a basis for our expanded and durable growth of total revenues and improved operating income and net income in the future.
Currently, our advantages in the eDiscovery market reside in our technical competencies for dealing with Asian languages and the strong local support capabilities within Asia. As such, many customers are Asian enterprises, including Japanese, South Korean and Taiwanese companies. In the past, we were disadvantaged in the vendor selection process because the discovery vendor selection by Asian enterprises is under significant influence of U.S. law firms, despite our distinct competitive advantages based on quality, cost and data security.
Our countermeasures against this situation include the enhancement of sales and marketing personnel in the U.S., joint marketing with U.S. law firms, and increasing our brand awareness in the U.S. market through public relations activities. Our acquisitions of TLS, EvD and EDI resulted in a significant, positive impact in the growth and development of our business and revenue. Since TLS joined us in the latter half of 2014, a number of orders from non-Asian clients or their U.S. law firms have been received, and sales in the U.S. have been increasingly a major part of our revenue after the acquisition of EvD in July 2015 and EDI in November 2016.
Of the various components of eDiscovery including evidence identification and retention, data collection and processing, analysis and hosting, hosting has shown steady growth. While historically the review of gathered documents and data was performed manually, significant increases in the volume of information maintained by enterprises have made the manual review procedures difficult, inefficient and costly. Recent technology called predictive coding has been developed, and as the overall industry transforms from manual review processes to technology-assisted review through the use of predictive coding and other technology, many eDiscovery vendors have been downsizing or eliminating their manual review services. We have successfully developed advanced predictive coding technology, powered by our AI technology and tacit knowledge derived from human experiences and reasoning. We believe that our predictive coding technology will enable us to manage the transition away from manual review services better than our competitors.
Currency Fluctuations
We are affected to some extent by fluctuations in foreign currency exchange rates, particularly in the value of the Japanese yen against the U.S. dollar. Our consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.
Translation risk is the risk that our consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which our subsidiaries prepare their financial statements against the Japanese yen. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior accounting periods and among the geographic markets in the U.S, South Korea and Taiwan, the translation effect is a reporting consideration and does not affect our underlying results of operations.
Transaction risk is the risk that the currency structure of our costs and liabilities will deviate from the currency structure of sales proceeds and assets. A portion of our receivables is denominated in the U.S. dollar, as such, the effects of foreign currency exchange rate fluctuations against the Japanese yen can be significant.
Generally, the weakening of the Japanese yen against other foreign currencies, particularly the U.S. dollar, has a positive effect on our revenue, operating income and net income. Likewise the strengthening of the Japanese yen against the U.S. dollar has the opposite effect.
For the year ended March 31, 2015, the Japanese yen gradually increased against the U.S. dollar to approximately ¥101 by July, but then generally weakened and, after recording an annual high of ¥122 to the U.S. dollar for the fiscal year, ended at approximately ¥120 to the U.S. dollar on March 31, 2015.
29
For the year ended March 31, 2016, the Japanese yen gradually depreciated against the U.S. dollar to approximately ¥126 by June, but then generally strengthened and, after recording an annual low of ¥111 to the U.S. dollar for the fiscal year, ended at approximately ¥113 to the U.S. dollar on March 31, 2016.
For the year ended March 31, 2017, the Japanese yen gradually increased against the U.S. dollar to approximately ¥100 by August, but then generally weakened and, after recording an annual high of ¥114 to the U.S. dollar for the fiscal year, ended at approximately ¥111 to the U.S. dollar on March 31, 2017.
Results of Operations
The following table summarizes our consolidated statements of operations for the periods indicated in thousands of yen and as a percentage of total revenues, which represented ¥6,304.9 million, ¥10,556.2 million and ¥11,220.8 million in the fiscal years ended March 31, 2015, 2016 and 2017, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31, |
|
|||||||||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||||||||
|
|
(thousands of yen, except per share data) |
|
|||||||||||||
Revenue |
|
¥ |
6,279,615 |
|
|
|
¥ |
10,529,287 |
|
|
|
¥ |
11,208,041 |
|
|
|
Operating revenue from reimbursed direct costs |
|
|
25,311 |
|
0.4 |
|
|
26,949 |
|
0.3 |
|
|
12,734 |
|
0.1 |
|
Total revenue |
|
|
6,304,926 |
|
100.0 |
|
|
10,556,236 |
|
100.0 |
|
|
11,220,775 |
|
100.0 |
|
Cost of revenue |
|
|
3,140,080 |
|
49.8 |
|
|
5,746,069 |
|
54.4 |
|
|
6,904,980 |
|
61.5 |
|
Reimbursed direct costs |
|
|
25,311 |
|
0.4 |
|
|
26,949 |
|
0.3 |
|
|
12,734 |
|
0.1 |
|
Selling, general and administrative expenses |
|
|
2,864,113 |
|
45.4 |
|
|
4,853,497 |
|
46.0 |
|
|
5,481,912 |
|
48.9 |
|
Total operating expense |
|
|
6,029,504 |
|
95.6 |
|
|
10,626,515 |
|
100.7 |
|
|
12,399,626 |
|
110.5 |
|
Operating income (loss) |
|
|
275,422 |
|
4.4 |
|
|
(70,279) |
|
(0.7) |
|
|
(1,178,851) |
|
(10.5) |
|
Interest income |
|
|
1,699 |
|
* |
|
|
1,672 |
|
* |
|
|
3,634 |
|
* |
|
Interest expense |
|
|
(28,177) |
|
(0.4) |
|
|
(54,793) |
|
(0.5) |
|
|
(125,743) |
|
(1.1) |
|
Gain (loss) on derivatives |
|
|
― |
|
― |
|
|
(258,205) |
|
(2.4) |
|
|
43,594 |
|
0.4 |
|
Foreign currency exchange gains (losses) |
|
|
200,438 |
|
3.2 |
|
|
161,680 |
|
1.5 |
|
|
(13,751) |
|
(0.1) |
|
Dividend income |
|
|
9,000 |
|
0.1 |
|
|
11,250 |
|
0.1 |
|
|
14,400 |
|
0.1 |
|
Other—net |
|
|
(85) |
|
* |
|
|
(20,075) |
|
(0.2) |
|
|
(60,255) |
|
(0.5) |
|
Income (loss) before income taxes |
|
|
458,297 |
|
7.3 |
|
|
(228,750) |
|
(2.2) |
|
|
(1,316,972) |
|
(11.7) |
|
Income taxes (benefit) |
|
|
238,094 |
|
3.7 |
|
|
183,125 |
|
1.7 |
|
|
(458,109) |
|
(4.1) |
|
Net income (loss) |
|
|
220,203 |
|
3.6 |
|
|
(411,875) |
|
(3.9) |
|
|
(858,863) |
|
(7.7) |
|
Less: Net income attributable to noncontrolling interests |
|
|
1,750 |
|
* |
|
|
5,757 |
|
* |
|
|
6,224 |
|
* |
|
Net income (loss) attributable to FRONTEO, Inc. shareholders |
|
¥ |
218,453 |
|
|
|
¥ |
(417,632) |
|
(4.0)% |
|
¥ |
(865,087) |
|
(7.7)% |
|
* Less than 0.1%
Fiscal Year Ended March 31, 2017 Compared to Fiscal Year Ended March 31, 2016
Total revenue
Total revenue for the year ended March 31, 2017, increased by ¥664.5 million, or 6.3%, to ¥11,220.8 million compared with the year ended March 31, 2016 of ¥10,556.2 million. The increase in total revenue came primarily from FRONTEO USA and the emerging Artificial Intelligence business (“AI”) in Japan. Revenue from the U.S. segment for outside customers for the year ended March 31, 2017 increased by ¥577.3 million, or by 9.3% to ¥6,801.0 million representing 60.6% of consolidated revenue.
Revenue from our eDiscovery services increased by ¥415.2 million, or 4.1%, to ¥10,461.4 million in the year ended March 31, 2017 from ¥10,046.1 million in the comparable period in the previous year. The increase in revenue from our eDiscovery business was due to the acquisition of EvD and EDI, as described above.
Revenue from legal and compliance professional services (LCPS) and other services were ¥759.4 million, which increased 48.9% from the previous fiscal year. The increase was attributable primarily to “Lit i View XAMINER”, “Lit i View EMAIL AUDITOR” and other software driven by KIBIT, our AI technology.
30
Cost of revenue
Cost of revenue for the year ended March 31, 2017 increased by ¥1,158.9 million, or 20%, to ¥6,905.0 million from ¥5,746.1 million for the year ended March 31, 2016. The majority of this increase was primarily due to labor and facility costs in the U.S. which increased by ¥1,600.9 million to ¥3,427.6 million. The increase was partially offset by decreases in the cost of outside labor and Software License fees to run or review business which decreased by ¥104.6 million to ¥567.5 million.
Selling, general and administrative expenses
Selling, general and administrative expenses increased for the year ended March 31, 2017 by ¥628.4 million, or 12.9%, to ¥5,481.9 million from ¥4,853.5 million for the year ended March 31, 2016. This was due primarily to labor and facility costs in the U.S., sales and marketing spending to launch rebranding write off of fixed assets and increased audit fees owing to our material weaknesses in internal control over financial reporting in the U.S.
Operating income (loss)
We incurred an operating loss of ¥1,134.7 million for the year ended March 31, 2017, which was ¥1,064.4 million higher than our operating loss of ¥70.3 million for the year ended March 31, 2016. This increase was primarily due to the increases in labor and facility spending in the U.S., combined with increases in sales and marketing expenses.
Other
|
· |
|
Interest income for the year ended March 31, 2017 increased to ¥3.6 million or by ¥2.0 million from ¥1.7 million for the year ended March 31, 2016, due primarily to increase in cash and cash equivalent balances during the year. |
|
· |
|
Interest expense for the year ended March 31, 2017 increased to ¥125.7 million or by ¥71.0 million from ¥54.8 million for the year ended March 31, 2016, due primarily to an increase in debt balances for the during the year. |
|
· |
|
We recorded gain on derivatives for the year ended March 31, 2017 of ¥43.3 million compared to loss on derivatives of ¥258.2 million in the prior year which was resulted primarily from the cross currency interest rate swaps. |
|
· |
|
We incurred foreign exchange loss of ¥13.8 million for the year ended March 31, 2017, compared to gain of ¥161.7 million for the year ended March 31, 2016. The negative impact was due to an increase in U.S dollar denominated receivables from foreign subsidiaries and the continuing strong Japanese yen. |
|
· |
|
Dividend income for the year ended March 31, 2017 was ¥14.4 million, compared to ¥11.3 million for the year ended March 31, 2016. |
|
· |
|
Other loss for the year ended March 31, 2017 was ¥60.3 million, or increased by ¥40.2 million, compared to ¥20.1 million for the year ended March 31, 2016, primarily related to increase in miscellaneous income deductions. |
Income taxes (benefit)
Income tax (benefit) for the year ended March 31, 2017 was ¥ (458.1) million, compared with an income tax of ¥183.1 million for the year ended March 31, 2016. Our effective tax rates for the years ended March 31, 2016 and 2017 were negative 80.1% and positive 34.7%, respectively. The negative effective tax rate in the prior year was primarily due to an increase in acquisition-related costs and earn-out expenses which are not deductible for tax purpose and an increase in valuation allowance against deferred tax assets related to net operating loss carryforwards of certain subsidiaries. The positive effective tax rate of 34.7% for the year ended March 31, 2017 was primarily due to a decrease in valuation allowance of deferred tax assets as we expect to utilize net operating losses of foreign subsidiaries.
31
Net income (loss) attributable to FRONTEO, Inc. shareholders
Net loss attributable to FRONTEO, Inc. shareholders for the year ended March 31, 2017 was ¥865.1 million compared with net loss attributable to FRONTEO, Inc. shareholders of ¥417.6 million in the prior year, due to an increases in the cost of revenue and selling, general and administrative expenses as described above, partially offset by income tax benefit attributable to operating loss for the year.
Fiscal Year Ended March 31, 2016 Compared to Fiscal Year Ended March 31, 2015
Total revenue
Total revenue for the year ended March 31, 2016, increased by ¥4,251.3 million, or 67.4%, to ¥10,556.2 million compared with the year ended March 31, 2015 of ¥6,304.9 million. The increase in total revenue was due primarily to the acquisition of EvD, the successful acquisition of new large accounts in the United States, and the strengthened pipeline contributed by the acquisitions of TLS and EvD. Revenue from the U.S. segment for outside customers for the year ended March 31, 2016 increased by ¥3,439.2 million, or by 123.5% to ¥6,223.7 million representing 59.0% of consolidated revenue.
Revenue from our eDiscovery services increased by ¥4,186.5 million, or 71.4%, to ¥10,046.1 million in the year ended March 31, 2016 from ¥5,859.6 million in the comparable period in the previous year. The increase in revenue from our eDiscovery business was due to the acquisition of EvD, as described above.
Revenue from legal and compliance professional services (LCPS) and other services were ¥510.1 million, which increased 14.5% from the previous fiscal year. The increase was due primarily to increase in revenue from forensic tool and software. The increase was attributable to “Lit i View XAMINER”, “Lit i View EMAIL AUDITOR” and other software driven by KIBIT, our AI technology.
Cost of revenue
Cost of revenue for the year ended March 31, 2016 increased by ¥2,606.0 million, or 83.0%, to ¥5,746.1 million from ¥3,140.1 million for the year ended March 31, 2015. The majority of this increase was primarily due to labor and facility cost caused by our acquisition of TLS and EvD, and related facility consolidation in the U.S. Total of those cost for the year ended March 31, 2016 increased by ¥1,474.6 million to ¥1,826.6 million. The increase was also attributable to outside labor cost and software license fees to run our review business which increased by ¥438.1 million to ¥672.1 million.
Selling, general and administrative expenses
Selling, general and administrative expenses increased for the year ended March 31, 2016 by ¥1,989.4 million, or 69.5%, to ¥4,853.5 million from ¥2,864.1 million for the year ended March 31, 2015. This was due primarily to labor and facility costs for TLS and EvD of ¥1,145.7 million, increased sales and marketing spending to launch new business in healthcare and digital marketing area, EvD acquisition-related costs of ¥254.9 million, earn-out expenses of ¥198.7 million, and the amortization cost of intangible assets of ¥151.8 million that was expensed during the year ended March 31, 2016.
Operating income (loss)
We incurred an operating loss of ¥70.3 million for the year ended March 31, 2016, which is ¥345.7 million lower than our operating income of ¥275.4 million for the year ended March 31, 2015. This decrease was primarily due to the increase of sales and marketing spending for new business in healthcare and digital marketing area, and EvD acquisition-related expenses and earn-out expenses.
Other
|
· |
|
Interest income for the year ended March 31, 2016 decreased by 1.6% to ¥1.7 million, from ¥1.7 million for the year ended March 31, 2015, due primarily to decrease in cash and cash equivalent balances during the year. |
|
· |
|
Interest expense for the year ended March 31, 2016 increased by 94.5% to ¥54.8 million, from ¥28.2 million for the year ended March 31, 2015, due primarily to an increase in debt balances for the acquisition of EvD during the year. |
32
|
· |
|
We recorded loss on derivatives for the year ended March 31, 2016 of ¥258.2 million which was resulted primarily from the cross currency interest rate swaps. |
|
· |
|
Foreign currency exchange gain for the year ended March 31, 2016 was ¥161.7 million, compared to ¥200.4 million for the year ended March 31, 2015. The negative impact was due to an increase in U.S dollar denominated long term bank borrowings and the continuing strong Japanese yen. |
|
· |
|
Dividend income for the year ended March 31, 2016 increased by 25.0% to ¥11.3 million, compared to ¥9.0 million for the year ended March 31, 2015. |
|
· |
|
Other loss for the year ended March 31, 2016 increased by ¥20.1 million, compared to ¥0.1 million for the year ended March 31, 2015, due primarily to an increase in loss on disposal of fixed assets related to the facility consolidation in the U.S. |
Income taxes (benefit)
Income tax for the year ended March 31, 2016 was ¥183.1 million, compared with an income tax of ¥238.1 million for the year ended March 31, 2015. Our effective tax rates for the years ended March 31, 2015 and 2016 were 52.0% and negative 80.1%, respectively. The increase in our effective tax rate was primarily due to an increase in acquisition-related costs and earn-out expenses which were not deductible for tax purpose and an increase in valuation allowance against deferred tax assets related to net operating loss carryforwards of certain subsidiaries.
Net income (loss) attributable to FRONTEO, Inc. shareholders
Net loss attributable to FRONTEO, Inc. shareholders for the year ended March 31, 2016 was ¥417.6 million compared with net income in the prior year of ¥218.5 million, due to an increases in the selling, general and administrative expenses to launch healthcare and digital marketing business, costs and earn-out expenses related to acquisition of EvD and loss on derivatives.
Operating Segments
Operating segments are defined as components of the Company that engage in business activities from which the Company earns revenues and incurs expenses and for which separate financial information is available to be evaluated regularly by the chief operation decision maker in deciding how to allocate resources and in assessing performance.
The Company provides a variety of eDiscovery and forensic services which are provided by FRONTEO and its domestic subsidiaries for domestic (Japanese) clients, FRONTEO USA, Inc. and FRONTEO Government Services, Inc. , and U.S. based wholly-owned subsidiaries of FRONTEO, Inc., for clients based in the U.S. or represented by U.S. -based attorneys who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc., and by other foreign subsidiaries for foreign clients other than those who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc.
FRONTEO and its domestic subsidiaries also provide AI based business, such as healthcare and data marketing.
Our legal service operations in Japan, the U.S. and other (which includes South Korea and Taiwan), and AI based service in Japan have been identified as the four operating and reportable segments of the Company.
Our Chief Executive Officer, who is also the Company’s chief operating decision maker, regularly reviews the performance of the four operating segments and makes decisions regarding allocation of resources. Our chief operating decision maker utilizes various measurements which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
AI based service in Japan segment has met a quantitative threshold for the year ended March 31, 2017 and the segment data for the year ended March 31, 2016 were presented for comparative purposes. No restated segment data for the year ended March 31, 2015 has been presented because AI based service did not exist in that period.
Each legal service segment recognizes revenue for which the segment has a direct contractual relationships with its clients. If our services are contracted between a law firm in the U.S. and FRONTEO USA, Inc. or FRONTEO Government Services, Inc., revenue is recorded by the U.S. segment although the end corporate client may be located in areas other than the U.S.
33
Our reportable segments are the same as our operating segments. Segment information for the years ended March 31, 2015, 2016 and 2017 is as follows:
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Japan-legal |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
¥ |
3,105,983 |
|
¥ |
3,726,683 |
|
¥ |
3,740,903 |
|
Intersegment *(1) |
|
|
739,796 |
|
|
844,455 |
|
|
571,889 |
|
Total |
|
|
3,845,779 |
|
|
4,571,138 |
|
|
4,312,792 |
|
|
|
|
|
|
|
|
|
|
|
|
Japan-AI |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
¥ |
― |
|
¥ |
118,915 |
|
¥ |
288,012 |
|
U.S. |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
|
2,784,470 |
|
|
6,223,652 |
|
|
6,800,966 |
|
Intersegment *(1) |
|
|
121,546 |
|
|
101,628 |
|
|
179,763 |
|
Total |
|
|
2,906,016 |
|
|
6,325,280 |
|
|
6,980,729 |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
|
384,007 |
|
|
483,758 |
|
|
377,850 |
|
Intersegment *(1) |
|
|
124,488 |
|
|
138,977 |
|
|
47,876 |
|
Total |
|
|
508,495 |
|
|
622,735 |
|
|
425,726 |
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
(985,830) |
|
|
(1,085,061) |
|
|
(799,529) |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue after eliminations |
|
|
6,274,460 |
|
|
10,553,007 |
|
|
11,207,730 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(2) |
|
|
30,466 |
|
|
3,229 |
|
|
13,045 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenue |
|
¥ |
6,304,926 |
|
¥ |
10,556,236 |
|
¥ |
11,220,775 |
|
*(1) Intersegment transaction prices and other conditions are determined based on market prices and total costs of transactions.
*(2) These amounts primarily represent the net impact of adjustments arising from the differences in timing of the revenue recognition under U.S. GAAP and Japanese GAAP.
34
Segment Performance Measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
303,149 |
|
¥ |
557,597 |
|
¥ |
698,608 |
|
Japan-AI |
|
|
|
|
|
(527,420) |
|
|
(728,926) |
|
U.S. |
|
|
39,926 |
|
|
35,013 |
|
|
(1,132,981) |
|
Other |
|
|
(77,006) |
|
|
3,933 |
|
|
(43,363) |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit after eliminations |
|
|
266,069 |
|
|
69,123 |
|
|
(1,206,662) |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(3) |
|
|
9,353 |
|
|
(139,402) |
|
|
27,811 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income (loss) |
|
|
275,422 |
|
|
(70,279) |
|
|
(1,178,851) |
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,699 |
|
|
1,672 |
|
|
3,634 |
|
Interest expense |
|
|
(28,177) |
|
|
(54,793) |
|
|
(125,743) |
|
Gain(loss) on derivatives |
|
|
— |
|
|
(258,205) |
|
|
43,594 |
|
Foreign currency exchange gains (losses) |
|
|
200,438 |
|
|
161,680 |
|
|
(13,751) |
|
Dividend income |
|
|
9,000 |
|
|
11,250 |
|
|
14,400 |
|
Other-net |
|
|
(85) |
|
|
(20,075) |
|
|
(60,255) |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated income (loss) before income taxes |
|
¥ |
458,297 |
|
¥ |
(228,750) |
|
¥ |
(1,316,972) |
|
*(3) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, amortization of goodwill, remeasurement of earn-out and vacation allowance expenses for employees.
Segment Assets:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Segment assets |
|
|
|
|
|
|
|
Japan |
|
¥ |
11,586,133 |
|
¥ |
12,334,732 |
|
Japan-AI |
|
|
358,045 |
|
|
3,468,157 |
|
U.S. |
|
|
7,658,961 |
|
|
8,600,034 |
|
Others *(4) |
|
|
720,152 |
|
|
734,277 |
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
(7,404,501) |
|
|
(8,978,328) |
|
|
|
|
|
|
|
|
|
Total segment assets after eliminations |
|
|
12,918,790 |
|
|
16,158,872 |
|
|
|
|
|
|
|
|
|
Adjustments *(5) |
|
|
(52,135) |
|
|
86,736 |
|
|
|
|
|
|
|
|
|
Total consolidated assets |
|
¥ |
12,866,655 |
|
¥ |
16,245,608 |
|
*(4) The Company recognized an impairment loss on long-lived assets of ¥5,144 thousand for the year ended March 31, 2016 consisted of property, plant and equipment owned by a subsidiary in Taiwan.
*(5) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, depreciation and amortization and deferred tax assets.
Capital expenditures on long-lived assets:
35
Capital expenditures relate to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis, other than those disclosed in Note 2 of the notes to the consolidated financial statements.
Other Significant Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
431,287 |
|
¥ |
474,533 |
|
¥ |
444,094 |
|
Japan-AI |
|
|
― |
|
|
48,504 |
|
|
125,715 |
|
U.S. |
|
|
113,768 |
|
|
313,025 |
|
|
429,618 |
|
Others |
|
|
42,703 |
|
|
47,545 |
|
|
39,769 |
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
|
587,758 |
|
|
883,607 |
|
|
1,039,196 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(6) |
|
|
1,774 |
|
|
12,218 |
|
|
9,431 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
¥ |
589,532 |
|
¥ |
895,825 |
|
¥ |
1,048,627 |
|
*(6) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for depreciation and amortization.
Entity-Wide Information:
For the year ended March 31, 2015, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,969,335 thousand and ¥641,074 thousand, respectively, representing approximately 31.4% and 10.2%, respectively, of the total revenue.
For the year ended March 31, 2016, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,657,074 thousand and ¥1,022,656 thousand, respectively, representing approximately 15.6% and 9.7%, respectively, of the total revenue.
For the year ended March 31, 2017, revenue from TMI Associates amounted to ¥1,253,860 thousand, representing approximately 11.2% of the total revenue.
The information concerning revenue by service categories for the years ended March 31, 2015, 2016 and 2017, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
eDiscovery |
|
|
|
|
|
|
|
|
|
|
Review |
|
¥ |
832,492 |
|
¥ |
1,998,276 |
|
¥ |
2,630,785 |
|
Other |
|
|
5,027,090 |
|
|
8,047,850 |
|
|
7,830,595 |
|
Total |
|
|
5,859,582 |
|
|
10,046,126 |
|
|
10,461,380 |
|
Investigation |
|
|
299,095 |
|
|
283,957 |
|
|
304,233 |
|
AI |
|
|
— |
|
|
118,914 |
|
|
288,011 |
|
Sales of software |
|
|
24,344 |
|
|
41,054 |
|
|
44,523 |
|
Sales of forensic tools |
|
|
21,926 |
|
|
41,794 |
|
|
29,971 |
|
Forensic training |
|
|
6,325 |
|
|
9,990 |
|
|
12,485 |
|
Other |
|
|
93,654 |
|
|
14,401 |
|
|
80,172 |
|
Total revenue |
|
¥ |
6,304,926 |
|
¥ |
10,556,236 |
|
¥ |
11,220,775 |
|
Long-lived assets held in Japan, Japan-AI, the U.S., and Other as of March 31, 2017 were ¥308.4 million, ¥66.9 million, ¥771.7 million and ¥29.8 million, respectively. Long-lived assets include property and equipment.
Application of Critical Accounting Policies and Estimates
In reviewing our consolidated financial statements, you should consider the sensitivity of our reported financial condition and results of operations to changes in the conditions and assumptions underlying the estimates and judgments made by management in applying critical accounting policies.
36
The preparation of financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from these estimates, judgments and assumptions. Note 1 to our annual consolidated financial statements includes a summary of the significant accounting policies used in the preparation of our financial statements. Certain accounting policies are particularly critical their significance to our reported results and the possibility that future events may differ significantly from the conditions and assumptions underlying the estimates used and judgments made by management in preparing our financial statements.
We have discussed the development and selection of critical accounting policies and estimates with our Board of Directors, and the Board of Directors has reviewed the disclosure relating to these, which are included in this annual report. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates may require adjustment.
Revenue recognition
We have agreements with customers pursuant to which we perform various services. A majority of the our revenue relates to fees earned for the month-to-month performance of eDiscovery and forensic services. Such services include data collection, data processing, data hosting, data review, and document production services. The fees that we earn and bill for these services vary primarily based on the hours of service provided, the volume of documents reviewed or produced, the amount of data processed or stored. The scope and volume of services to be performed can change depending on customers’ requests, which are made on an optional and “as needed” basis, and customers may choose not to request additional services or may obtain similar services from other service providers.
We recognize revenue for eDiscovery and forensic services based on the agreed-upon prices and volume of services performed during the period. For these contractual arrangements, we have identified each deliverable service element. Based on management’s evaluation of each element, it was determined that each element delivered has standalone value to the customers because we or other vendors sell such services separately from any other services/deliverables. Accordingly, each of the service elements in the multiple element case qualifies as a separate unit of accounting. We use the best estimate of sales price based on the price it charges when it sells an element on a standalone basis, which is generally consistent with the stated prices in the arrangements, and allocates revenue to the various units of accounting in the arrangements based on the stated prices.
We also enter into multiple-element arrangements for software sales which includes undelivered elements that are not essential to the functionality of the delivered software and such undelivered elements only consist of post contract support. We account for them in accordance with ASC 985-605, “Software-Revenue Recognition.” We have not been able to establish a vendor-specific objective evidence of fair value(“VSOE”) of fair value to allocate the fee to the separate elements and thus recognize the entire arrangement fee on a straight-line basis over the contract period.
We recognize revenue for each separate unit of accounting when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured.
We have revenue related to the reimbursement of certain direct costs by customers, primarily transportation. Reimbursed transportation and other reimbursable direct costs are recorded gross in the consolidated statements of operations as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs.”
Useful lives of property and equipment
Property and equipment, net, recorded on our balance sheet was ¥1,177.2 million as of March 31, 2017, representing 7.2% of our total assets. The values of our property and equipment, including assets under capital leases which are primarily office equipment, are recorded in our financial statements at cost, while depreciation and amortization are computed using the straight-line method based on either the estimated useful lives of assets or the lease period, whichever is shorter.
Our depreciation expenses for property and equipment for the years ended March 31, 2015, 2016 and 2017 were ¥246.0 million, ¥341.0 million and ¥351.8 million, respectively.
37
We estimate the useful lives of property and equipment in order to determine the amount of depreciation and amortization expense to be recorded in each fiscal year. We determine the useful lives of our assets at the time the assets are acquired and base our determinations on expected use, experience with similar assets as well as taking into account anticipated technological or other changes. Estimated useful lives by major asset classes as of March 31, 2017, were as follows:
If technological or other changes were to occur more rapidly or in a different form than anticipated or the intended use changes, the useful lives assigned to these assets may need to be shortened, or we may need to sell or write off the assets, resulting in recognition of increased depreciation and amortization or losses in future periods.
Useful lives of capitalized computer software
Capitalized computer software costs, net recorded on our balance sheet were ¥963.2 million as of March 31, 2017, representing 5.9% of our total assets. The values of our capitalized computer software costs are recorded in our financial statements at cost, and amortization is computed using the straight-line method based on the estimated useful life of the software.
Certain internal software development costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is completed and when management, with the relevant authority, authorizes and commits funding to the project and it is probable that the project will be completed and the software will be used to perform the function intended. Amortization of capitalized computer software costs begins in the period each module or component of the product is ready for its intended use.
Our amortization expense for capitalized computer software costs for the fiscal years ended March 31, 2015, 2016 and 2017 were ¥302.8 million, ¥374.5 million and ¥455.9 million, respectively.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in process research and development (“IPR&D”), if any, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Goodwill and Intangible Assets
Goodwill is not amortized and is tested annually for impairment of each 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 or one level below the 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. In the fiscal year ended March 31, 2015 and thereafter, we elected to perform the aforementioned qualitative assessment of goodwill as of the measurement date of January 1. During the year ended March 31, 2017, we performed quantitative assessment of goodwill and confirmed that the carrying amount of a reporting unit exceeded its fair value. Intangible assets with finite useful lives are amortized on a straight-line basis over the estimated useful life.
38
Intangible assets primarily consist of customer relationships and trademarks. We have estimated the weighted average amortization periods for the customer relationship, noncompete agreement, favorable leases, trademarks to be 15 years, 3 years and 3 years, and 10 years, respectively.
Valuation of investments
We have investments in securities, and the valuation of investments requires us to make judgments using information that is generally uncertain at the time, such as assumptions regarding near-term prospects. As of March 31, 2017, we had available-for-sale securities of ¥500.4 million and cost method investments of ¥15 thousand. We routinely assess the impairment of our investments by considering whether any decline in value is other-than-temporary. The factors we consider are:
|
· |
|
the duration of the decline in value of the security and the severity of the decline; |
|
· |
|
the financial condition and near term prospects of the investee; and |
|
· |
|
our intent and ability to hold the equity security until forecasted recovery. |
No losses on impairment of investments in certain marketable equity securities were recognized for the years ended March 31, 2015, 2016, and 2017.
Investments in equity securities that have readily determinable fair value and are classified as available-for-sale securities are accounted for at fair value with unrealized gains and losses excluded from earnings. The changes in fair value of investment in equity securities which are reported in other comprehensive income, net of tax are an increase of ¥89.7 million, an increase of ¥78.2 million and a decrease of ¥15.8 million for the years ended March 31, 2015, 2016 and 2017, respectively.
Share-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments at the fair value of the award on the grant-date and recognize the cost over the period which the employee is required to provide services in exchange for the award. Compensation expenses are recognized on a straight-line basis over the requisite service period of the awards which are expected to vest. We measure the cost of non-employee services received in exchange for an award of equity instruments at fair value. The fair value of awards granted to non-employees is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. We recognize the cost on a straight-line basis over the vesting period, which is generally the service contract term during which services are rendered by the non-employees.
The Black-Scholes valuation model is used to determine the fair value of our stock option awards and related share-based compensation expense. Determining the fair value of share based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by common stock price at grant date as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes valuation model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. In valuing our options, we make assumptions about risk-free interest rates, expected dividend yields, expected volatility, and expected term (contractual term for non-employees), including estimated forfeiture rates of the options.
|
· |
|
Risk-free interest rate: Risk-free interest rates are derived from the Japanese government bond interest rate for the expected or contractual term as of the option grant date. |
|
· |
|
Expected dividend yields: Expected dividend yields are based on actual dividend payments and expected payments in the future which are approved by the Board of Directors before the option grant date. |
|
· |
|
Expected Volatility: Expected volatility is estimated based upon the historical volatility of our share price over a period commensurate with the expected or contractual term, adjusted for the effect of changes expected in the future. |
39
|
· |
|
Expected term (contractual term for non-employees): The expected term of the stock options granted to employees is estimated based on historical employee exercise patterns associated with prior similar option grants. The term of the stock options granted to non-employees is estimated based on the contractual term. |
|
· |
|
Forfeiture rate: Based on historical forfeiture information, we estimate the number of forfeitures prior to vesting on the grant date. The effect of subsequent changes in estimated forfeitures is recognized through a cumulative adjustment in the period in which the forfeitures occurs. |
We recorded ¥27.2 million, ¥78.4 million and ¥53.0 million as share-based compensation expense for the years ended March 31, 2015, 2016 and 2017, respectively.
Income taxes
Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the temporary differences or tax loss carryforwards are expected to reverse. Valuation allowances are provided against deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the financial statement effect of uncertain tax positions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Accrued interest and penalties related to the unrecognized tax benefits are included in income tax expense in the consolidated statements of operations. We had no unrecognized tax benefits during the years ended March 31, 2015, 2016 and 2017.
Although we believe that the amount of net deferred tax assets will be realized, this could change in the near term if estimates of future taxable income are revised and the effect on our consolidated financial position and results of operations could be significant.
Reconciliations between the amount of reported income tax expense (benefit) and the amount of income tax expense (benefit) computed using the normal statutory tax rate for the years ended March 31, 2015, 2016 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Amount computed using normal Japanese statutory tax rate |
|
¥ |
163,336 |
|
¥ |
(75,716) |
|
¥ |
(403,257) |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
31,545 |
|
|
44,004 |
|
|
48,845 |
|
Change in statutory tax rate |
|
|
15,798 |
|
|
18,074 |
|
|
— |
|
Share-based compensation expense |
|
|
6,927 |
|
|
21,531 |
|
|
(7,814) |
|
Earnings of foreign subsidiaries taxed at different rates from the statutory rate in Japan |
|
|
15,776 |
|
|
14,475 |
|
|
(104,407) |
|
Officers’ remuneration not deductible for tax purpose |
|
|
4,870 |
|
|
— |
|
|
— |
|
Research and development tax credit |
|
|
(7,513) |
|
|
— |
|
|
(5,748) |
|
Non-deductible acquisition costs and earn-out liabilities adjustment |
|
|
— |
|
|
157,739 |
|
|
— |
|
Others-net |
|
|
7,355 |
|
|
3,018 |
|
|
14,272 |
|
Income tax expense (benefit) as reported |
|
¥ |
238,094 |
|
¥ |
183,125 |
|
¥ |
(458,109) |
|
The change in the valuation allowance for the year ended March 31, 2015 includes an increase of ¥20,536 thousand in the valuation allowance of the foreign subsidiaries in Taiwan and a domestic subsidiary as of March 31, 2015 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2015 and an increase of ¥28,395 thousand in the valuation allowance for the deferred tax assets arising from acquisition-related costs, and a decrease of ¥16,262 thousand in the valuation allowance for the deferred tax assets arising from research and development tax credits.
The change in the valuation allowance for the year ended March 31, 2016 includes an increase of ¥61,670 thousand in the valuation allowance of foreign subsidiaries in Taiwan and U.S. and domestic subsidiaries as of March 31, 2016 for the deferred tax assets arising from their operating loss carryforwards incurred during the year
40
ended March 31, 2016 and a decrease of ¥17,666 thousand in the valuation allowance for the deferred tax assets of the foreign subsidiary in Korea.
The change in the valuation allowance for the year ended March 31, 2017 includes an increase of ¥50,528 thousand in the valuation allowance of foreign subsidiaries in U.S. and domestic subsidiaries as of March 31, 2017 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2017 and a decrease of ¥1,683 thousand in the valuation allowance for the deferred tax assets of the foreign subsidiary in Taiwan.
On March 31, 2015, amendments to Japanese tax regulations were enacted into law. As a result, the combined Japanese statutory rate was reduced from 35.64 percent to 33.10 percent from the fiscal year beginning April 1, 2015 and from 33.10 percent to 32.34 percent from the fiscal year beginning April 1, 2016. The impact of the tax law changes was a net deferred income taxes benefit of ¥15,798 thousand for the year ended March 31, 2015.
On March 29, 2016, amendments to Japanese tax regulations were enacted into law. As a result, the combined Japanese statutory rate was reduced from 32.34 percent to 30.86 percent for the two years from April 1, 2016 to March 31, 2018 and from 32.34 percent to 30.62 percent from the fiscal year beginning April 1, 2018. The impact of the tax law changes was a net deferred income taxes benefit of ¥18,074 thousand for the year ended March 31, 2016.
JOBS Act
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies.
Additionally, we are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and complying with any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our initial public offering although if we complete a fiscal year in which we have more than $1.0 billion in annual revenues, we qualify as a “large accelerated filer,” with at least $700 million of equity securities or we issue more than $1.0 billion in non-convertible debt securities to non-affiliates in any three-year period, we would cease to be an emerging growth company as of the following March 31.
Recent Accounting Pronouncements
See Note 1 of the notes to the consolidated financial statements.
5.B. LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Our principal sources of liquidity are cash and cash equivalents, cash flows from operating activities, and issuances of short-term and long-term bank borrowings and equity securities. As of March 31, 2017, we had cash and cash equivalents of ¥4,533.1 million.
Short-term and long-term bank borrowing
Short-term and long-term bank borrowings provide us with important sources of funds for acquisitions of business and capital equipment as well as for working capital needs to support business growth and technology development.
As of March 31, 2016 and 2017, the Company’s short-term debt consisted of bank borrowings of ¥52,000
41
thousand and ¥1,000,000 thousand, respectively with a weighted average interest rate of 0.5%.
Under a ¥700.0 million five-year syndicated loan arrangement entered into with a consortium of banks on September 27, 2011, we borrowed ¥350 million when the arrangement was signed and an additional ¥350 million in May 2012. As of March 31, 2016 and 2017, the balance of such borrowings was ¥87.5 million and ¥0, respectively, as the loan balance was fully paid off on September 30, 2016 upon the maturity of the loan arrangement.
On December 28, 2012, we entered into a short-term revolving credit facility agreement with a consortium of Japanese banks in an aggregate principal amount of ¥1,000 million that originally matured on December 27, 2013. The Company renewed the agreement to extend the maturity to December 22, 2017. Any further extension of the maturity date of the credit facility is subject to the consortium’s approval. As of March 31, 2017, the balance of borrowings under this facility was ¥1,000 million. The Company entered into a ¥90 million one year bank overdraft agreement with certain bank for which the unused balance outstanding as of March 31, 2017 was ¥90 million.
Bank of Tokyo Mitsubishi UFJ has been our main financing bank since our founding. Bank of Tokyo Mitsubishi UFJ arranged our syndicated loan and short-term revolving credit facility. On July 26, 2016, we entered in to a ¥1,000 million syndicated loan arrangement with a consortium of banks, and on September 27, 2016, we entered into a ¥300 million six year syndicated loan arrangement with a consortium of banks. The Company borrowed ¥1,300 million with both agreements, and the balance of such borrowings as of March 31, 2017 was ¥1,300 million.
On July 28, 2015, we entered into a short-term loan agreements with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (“MUFJ”) and Sumitomo Mitsui Banking Corporation (“SMBC”) of a principal of ¥1,800 million for an each institution, to meet the financial requirements arising from the acquisition of EvD. The maturity date was January 29, 2016 for MUFJ and October 28, 2015 for SMBC. We refinanced twice for the borrowing from SMBC in the same institute which had the maturity dates of November 27, 2015 and 24 December 24, 2015 respectively. The borrowing rates for MUFJ and SMBC were TIBOR plus 0.2% per annum and the institution’s procurement interest rate in short-run market plus 0.3% per annum, respectively. After the acquisition of EvD, our management decided to implement a refinancing with long-term loans as part of a loan program through the Japan Bank for International Cooperation (“JBIC”) that supports the investments of Japanese companies in foreign countries. On November 30, 2015, we entered into a long-term loan agreements (the “JBIC-loan”) with MUFJ and SMBC in an aggregated principal of $20,440 thousand and ¥1,706 million from each institution utilizing the program of JBIC, and one of two tranches was executed on December 24, 2015. The borrowing is provided in twice, and the borrowing rates vary by currency and tranche. For MUFJ the borrowing rates are LIBOR plus 0.5% per annum for U.S. dollar-dominated borrowings and TIBOR plus 0.2% per annum for Japanese yen-dominated borrowings. For SMBC, LIBOR plus 0.3% per annum for US dollar-dominated borrowings and 0.5% or TIBOR plus 0.3% per annum for Japanese yen-dominated borrowings. The maturity date for both loans is December 24, 2020. As of March 31, 2016 and 2017, the balances of such borrowings were ¥3,565.3 million and ¥3,621.4 million, respectively. There are restrictive covenants related to the JBIC-loan including requirements to maintain a minimum level of net assets and ordinary income in our stand-alone and consolidated financial statements, measured under Japanese GAAP. We are required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015; ¥5,032,824 thousand on a stand-alone basis and ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years.
In December 2016, the Company issued zero coupon convertible bonds due November 2019 in the aggregate face amount of ¥2,500 million for ¥2,500 million. The notes were convertible to equity shares at the option of the holders at a price of ¥813 per share at any time on or after December 1, 2016. The Company was required to bifurcate the embedded features contained in the notes for accounting purposes and recognized additional paid-in capital of ¥100.3 million. During the year ended March 31, 2017, prior to the maturity date, convertible bonds with a face amount of ¥1,250 million were converted into 1,537,502 equity shares of the Company at a conversion price of ¥813 per share. FRONTEO recorded an increase of ¥625 million in “Common stock” and ¥619.4 million, net of issuance cost of ¥5.6 million in “Additional paid-in capital.” The carrying amount of these notes, with the accretion of discounts, is included in “Long-term debt” in the Company’s consolidated balance sheets.
42
Cash flows from operating activities
We generated (used) ¥1,014.0 million, ¥616.2 million and ¥(390.8) million of cash from operating activities for the years ended March 31, 2015, 2016 and 2017, respectively. The following table sets out information on our cash flows for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31, |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
|
|
(thousands of yen) |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
¥ |
1,013,980 |
|
¥ |
616,240 |
|
¥ |
(390,794) |
|
Net cash used in investing activities |
|
|
(1,413,188) |
|
|
(4,710,421) |
|
|
(953,077) |
|
Net cash provided by financing activities |
|
|
1,684,300 |
|
|
3,212,916 |
|
|
4,066,472 |
|
Effect of foreign currency exchange rate changes on cash and cash equivalents |
|
|
54,725 |
|
|
(41,036) |
|
|
14,621 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,339,817 |
|
|
(922,301) |
|
|
2,737,222 |
|
Cash and cash equivalents, beginning of year |
|
|
1,378,444 |
|
|
2,718,261 |
|
|
1,795,960 |
|
Cash and cash equivalents, end of year |
|
¥ |
2,718,261 |
|
¥ |
1,795,960 |
|
¥ |
4,533,182 |
|
Year ended March 31, 2017 as compared to the year ended March 31, 2016
Net cash used in operating activities was ¥390.8 million in the year ended March 31, 2017, a decrease of ¥1,007.0 million compared to net cash provided by operating activities of ¥616.2 million in the year ended March 31, 2016. This was primarily due to an increase in net loss by ¥447.0 million to ¥858.9 million in the year ended March 31, 2017 compared to net loss of ¥411.9 million in the year ended March 31, 2016 and an increase in deferred income tax benefit by ¥468.7 million to ¥498.9 million in the year ended March 31, 2017 compared to ¥30.2 million in the year ended March 31, 2016. We paid ¥515.6 million of income taxes during the year ended March 31, 2016 and received income tax refund of ¥10.8 million during the year ended March 31, 2017. Our days of sales outstanding in trade accounts receivable as of March 31, 2016 and 2017 were approximately 82 days and 88 days, respectively.
Net cash used in investing activities decreased to ¥953.1 million in the year ended March 31, 2017 from ¥4,710.4 million in the year ended March 31, 2016, or a decrease by ¥3,757.3 million. This decrease was primarily attributable to the prior year acquisition of EvD, the cost of which was amounted to ¥3,433.1 million. The decrease was partially offset by the capitalized software of ¥486.2 million and property and equipment of ¥328.4 million to support the expansion of our business for the year ended March 31, 2017.
Net cash provided by financing activities in the year ended March 31, 2017 was ¥4,066.5 million, an increase of ¥853.6 million from ¥3,212.9 million in the year ended March 31, 2016. Net cash provided by financing activities in the year ended March 31, 2017 primarily consisted of the proceeds from the ¥4,370.0 million of short-term borrowing, the proceeds from ¥1,855.9 million of long-term bank borrowing and proceeds from the ¥2,500.0 million of issuance of convertible bonds, while net cash provided by financing activities in the year ended March 31, 2016 primarily consisted of the proceeds from the ¥3,800.0 million of short-term borrowing and the proceeds from ¥3,761.5 of long-term bank borrowing. The increases were partially offset by net cash used for repayment of short-term debt in the years ended March 31, 2016 and 2017 of ¥3,784.0 million and ¥3,422.0 million, respectively.
Year ended March 31, 2016 as compared to the year ended March 31, 2015
Net cash used in operating activities was ¥616.2 million in the year ended March 31, 2016, a decrease of ¥397.7 million compared to net cash used in operating activities of ¥1,014.0 million in the year ended March 31, 2015. This was primarily due to a decrease in net income. Net income in the year ended March 31, 2016 decreased by ¥632.1 million due to our acquisition of EvD, and the inclusion of its sales and marketing resources, and the acquisition-related expenses and earn-out liability-related expenses of ¥438 million that was expensed during the year ended March 31, 2016. We paid ¥515.6 million of income taxes during the year ended March 31, 2016 and ¥36.7 million during the year ended March 31, 2015. Our days of sales outstanding in trade accounts receivable as of March 31, 2015 and 2016 were approximately 81 days and 82 days, respectively.
Net cash used in investing activities increased to ¥4,710.4 million in the year ended March 31, 2016 from ¥1,413.2 million in the year ended March 31, 2015, an increase of ¥3,927.2 million. This increase was primarily attributable to our acquisition of EvD, the cost of which was amounted to ¥3,433.1 million. Our investment in the acquisition of property and equipment, mainly leasehold improvements of our new review center in New York, additional data storage servers to support the expansion of our business amounted to ¥673.7 million for the year ended March 31, 2016, an increase of ¥471.2 million from the year ended March 31, 2015 of ¥202.5 million.
43
Further, our investments in development and upgrade of internal-use software to improve increased by ¥19.5 million during the year ended March 31, 2016 to ¥382.0 million, compared to ¥362.5 million in the year ended March 31, 2015.
Net cash provided by financing activities in the year ended March 31, 2016 was ¥3,212.9 million, an increase of ¥1,528.6 million from ¥1,684.3 million in the year ended March 31, 2015. Net cash provided by financing activities in the year ended March 31, 2016 primarily consisted of the proceeds from the ¥3,800.0 million of short-term borrowing and the proceeds from ¥3,761.5 million of long-term bank borrowing, while net cash provided by financing activities in the year ended March 31, 2015 primarily consisted of the proceeds from the ¥1,157.1 million issuance of our common stock. On the other hand, net cash used by financing activities in the year ended March 31, 2016 primarily consisted of the ¥3,784.0 million of repayment of short-term debt.
Material capital requirements
Our principal capital and liquidity needs in recent years have been for capital expenditures for the development of internal-use software and acquisition of property and equipment, mainly computers, lease payments, payments of principal and interest on outstanding borrowings and other working capital requirements.
Our capital expenditures relate primarily to the facility improvement including but not limited to our offices and review centers, the amounts paid for development of internal-use software for providing eDiscovery services and purchases of property and equipment for the development and expansion of data server storage. For the years ended March 31, 2015, 2016 and 2017, our capital expenditures were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31, |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
|
|
(thousands of yen) |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
¥ |
689,287 |
|
¥ |
1,125,853 |
|
¥ |
1,369,471 |
|
Our capital expenditures for the year ended March 31, 2015 related to the acquisition of data storage servers, the development of the upgraded Lit i View software and the acquisition of third-party software for internal use.
Our capital expenditures for the year ended March 31, 2016 related to the leasehold improvement in a new review center in New York, the acquisition of data storage servers, the development and upgrade of Lit i View software and the acquisition of third-party software for internal use. Our capital expenditures for the year ended March 31, 2017 relate to the development and upgrade of our Lit i View software and the acquisition of third-party software for internal use. Higher capital expenditure is expected in future years as we grow our business and expand our network of offices in Japan and the U.S.
Short-term and long-term bank borrowing
As of March 31, 2017, our short-term bank borrowings stood at ¥1,000.0 million with a weighted average interest rate of 0.5%. As of March 31, 2017, our long-term bank borrowings amounted to ¥5,439.8 million with a weighted average interest rate of 0.4%. Their maturities are at various dates through 2020.
As is customary in Japan, both short-term and long-term bank loans are made under general agreements that provide that securities and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations.
Working capital needs
Our principal working capital requirements are for payments for outsourced activities, rent of data center facilities and office premises, and personnel expenses. FRONTEO, Inc. leases data center facilities and office premises under cancellable operating lease arrangements with mainly two-year lease periods. FRONTEO USA,Inc. leases office premises under non-cancellable operating lease arrangements. Lease expenses related to operating leases for the years ended March 31, 2015, 2016 and 2017, were approximately ¥380.0 million, ¥823.8 million and ¥1,047.4 million, respectively. Higher levels of working capital needs are expected in future years as we grow our business and expand our network of offices in the United States, South Korea and Taiwan.
As noted in multiple parts of this annual report, we are committed to growing our sales and marketing force, expanding our internal administrative and finance capabilities and making strategic acquisitions of businesses and technologies, all with the intention of continuing the rapid growth of our operations, total revenue, operating
44
revenue and net income. In order to do so, we intend to use our cash on hand, short term credit facility, bank borrowings and the net proceeds from convertible bonds. We believe that these resources are sufficient to permit us to implement our strategic plan and achieve these objectives.
Indebtedness
The following table shows our indebtedness as of March 31, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
||||
|
|
2016 |
|
2017 |
|
||
|
|
(thousands of yen) |
|
||||
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
Secured bank loans |
|
¥ |
1,782,642 |
|
¥ |
1,810,694 |
|
Unsecured bank loans |
|
|
2,552,718 |
|
|
3,629,079 |
|
Capital lease obligations |
|
|
5,613 |
|
|
120,247 |
|
Convertible bonds |
|
|
— |
|
|
1,185,502 |
|
Less: current portion of long-term debt |
|
|
(703,986) |
|
|
(808,229) |
|
Long-term debt, net |
|
|
3,636,987 |
|
|
5,937,293 |
|
Short-term debt: |
|
|
52,000 |
|
|
1,000,000 |
|
Current portion of long-term debt |
|
|
703,986 |
|
|
808,229 |
|
Total short-term debt |
|
|
755,986 |
|
|
1,808,229 |
|
Total debt |
|
¥ |
4,392,973 |
|
¥ |
7,745,522 |
|
5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Research and Development and Product Enhancement
Research and Development
Our ability to compete in the eDiscovery and digital forensics solutions and services markets depends in part on our continuous commitment to research and development and our ability to timely introduce new solutions, technologies, features and functionality. Our research and development personnel are responsible for the design, development, testing and certification of our software solutions.
Our development efforts in AI technology were initially focused on the niche, big-data field of cross-border litigation support, but with the creation of our KIBIT, we now have the capability to analyze various types of big data. Our research is focused on addressing two key questions: how to identify information that’s important to our clients from big data, particularly information about people’s intentions and behavior, and how to effectively use the advanced knowledge of experts to analyze vast volumes of information. We are currently working to dramatically improve the quality of human intellectual activity through research that taps the knowledge of experts.
A primary goal of our research and development is to anticipate client demands and bring new solutions and new versions of existing solutions to market quickly in order to remain competitive in the marketplace. Our research and development activities are directed by individuals with significant expertise and industry experience.
Intellectual Property
Our intellectual property strategy has focused on protecting our proprietary technologies and on maintaining our competitive advantage over our rivals by building close relationships between our research centers, our clients and the market to accurately identify future business opportunities. Mirroring our business growth, our intellectual assets have expanded rapidly — quantitatively and qualitatively — and we have secured intellectual property rights not only in Japan, but also in the U.S. and other countries.
As of July 1 st , 2017, in Japan, we have applied for patents for 67 inventions and have been granted patents on 55 of them and in the United States, we have applied for patents for 38 inventions and have been granted patents on 5 of them. Moreover, many trademarks have been registered in many countries across the world, including “FRONTEO,” “KIBIT,” “Lit i View,” and “Landscaping” as brands representing the uniqueness of the above technologies.
We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any patents that may be granted to us in the future will be commercially useful in protecting our technology. In addition, despite our efforts
45
to protect our intellectual property, unauthorized parties may attempt to copy aspects of our solutions or obtain and use information that we regard as proprietary. While we cannot determine the extent to which piracy of our software solutions occurs, we expect software piracy could be a problem. For this and more comprehensive risks related to our intellectual property, please see “Risk Factors — Our failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights.”
For a discussion of the trends that affect FRONTEO’s business and financial condition and results of operations, see “Information on the Company—Business Overview,” “Operating and Financial Review and Prospects — Operating Results” and “Analysis of Operating Results” and “Liquidity and Capital Resources.”
5.E. OFF-BALANCE SHEET ARRANGEMENTS
Although we generally do not utilize off-balance sheet arrangements in our operation, we enter into operating leases in the normal course of business. Our operating lease obligations are disclosed below under ‘‘Tabular Disclosure of Contractual Obligations’’ and also in Note 8 to our consolidated financial statements, beginning on page F-1.
5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth a summary of our contractual obligations and commitments as of March 31, 2017.
Payments due by period (thousands of yen)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
Thereafter |
|
Total |
|
|||||||
Long-term bank borrowings |
|
¥ |
774,278 |
|
¥ |
873,082 |
|
¥ |
752,734 |
|
¥ |
2,690,105 |
|
¥ |
260,000 |
|
¥ |
85,551 |
|
¥ |
5,435,750 |
|
Capital lease obligations |
|
|
33,951 |
|
|
33,301 |
|
|
29,892 |
|
|
19,001 |
|
|
8,125 |
|
|
— |
|
|
124,270 |
|
Convertible bonds |
|
|
— |
|
|
— |
|
|
1,185,502 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,185,502 |
|
Operating lease obligations |
|
|
353,645 |
|
|
296,852 |
|
|
218,960 |
|
|
158,841 |
|
|
148,950 |
|
|
— |
|
|
1,177,248 |
|
Retirement and severence benefits |
|
|
8,468 |
|
|
8,209 |
|
|
9,086 |
|
|
10,533 |
|
|
9,405 |
|
|
36,759 |
|
|
82,460 |
|
Total |
|
¥ |
1,170,342 |
|
¥ |
1,211,444 |
|
¥ |
2,196,174 |
|
¥ |
2,878,480 |
|
¥ |
426,480 |
|
¥ |
122,310 |
|
¥ |
8,005,230 |
|
All information that is not historical in nature disclosed under “Item 5. Operating and Financial Review and Prospects—Off-Balance Sheet Arrangements” and “—Tabular Disclosure of Contractual Obligations” is deemed to be a forward-looking statement. See “Cautionary Statement with Respect to Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. DIRECTORS AND SENIOR MANAGEMENT
Directors, statutory auditors and executive officers of the Company as of June 30, 2017, and their respective business experience are listed below. None of the persons listed below was selected as director, statutory auditor or executive officer pursuant to an arrangement or understanding with our major shareholders, customers, suppliers or others. There are no family relationships between any of the persons listed below.
46
Directors and Executive Officers
|
|
|
|
|
|
Directors and Executive Officers |
|
Born |
|
Position/Title |
|
Masahiro Morimoto |
|
1966 |
|
Chief Executive Officer and Chairman of the Board |
|
Naritomo Ikeue |
|
1972 |
|
Executive Vice-President, Group Chief Financial Officer, Chief Operating Officer and Director |
|
Hideki Takeda |
|
1973 |
|
Director, Chief Technology Officer, Behavior Informatics Laboratories |
|
Makoto Funahashi |
|
1945 |
|
Director |
|
Hirooki Kirisawa |
|
1966 |
|
Director |
|
Yoshikatsu Shirai |
|
1965 |
|
Corporate Officer, Chief Client Technology Officer |
|
Syusaku Nozaki |
|
1975 |
|
Corporate Officer, Regional Operations Japan |
|
Seiji Tezuka |
|
1964 |
|
Corporate Officer |
|
Kentaro Yamagishi |
|
1967 |
|
Corporate Officer |
|
Kenji Yamanami |
|
1972 |
|
Corporate Officer |
|
Yongmin Cho |
|
1973 |
|
Corporate Officer |
|
Craig Carpenter |
|
1971 |
|
Corporate Officer |
|
Masahiro Morimoto: Mr. Morimoto founded FRONTEO, Inc. (formerly known as UBIC, Inc.) in August 2003 and has been our Chief Executive Officer and Chairman of the Board of Directors since the formation of the Company. Mr. Morimoto has also been a member of the Board of Directors of FRONTEO USA, Inc., our principal subsidiary in the U.S., which was formerly known as EvD, Inc. and UBIC North America, Inc. prior to the merger in July 2016. From 1989 to 1995, he worked for the Japan Maritime Self-Defense Force in various professional positions, and from 1995 to 2003, he served in various capacities for Applied Materials Japan, Inc., a wholly-owned subsidiary of Applied Materials, Inc. (Nasdaq: AMAT), a provider of manufacturing equipment, services and software in the semiconductor equipment industry. We believe that Mr. Morimoto is qualified to serve on our Board of Directors because of his intimate familiarity with our company, his business experience and prior service as our director.
Naritomo Ikeue: Mr. Ikeue is a Co-founder of the Company and has been a member of the Board of Directors since December 2003 and Executive Vice President (EVP) and Chief Operating Officer (COO) since November 2007. He has held various senior executive positions prior to becoming EVP and COO. He has also been a member of the Board of Directors of FRONTEO USA, Inc. and was President of UBIC North America, Inc. In April 2017, he was appointed Group Chief Financial Officer of the Company. From 1996 to 2003, he worked in various capacities for Applied Materials Japan, Inc. We believe that Mr. Ikeue is qualified to serve on our Board of Directors because of his intimate familiarity with our company, his business experience and his prior service as our director.
Hideki Takeda : Mr. Takeda has been our Corporate Officer and Chief Technology Officer since January 2013. He has been instrumental in the development of Lit i View and has been in the leadership role as a director of technology for the behavior informatics laboratories. He has been a member of the Board of Directors since June 2016. Mr. Takeda joined the Company in July 2009 as assistant manager of software development department and has served in key roles. Prior to joining the Company, he has held various management positions at software development companies for 13 years. We believe that Mr. Takeda is qualified to serve on our Board of Directors because of his technological expertise and extensive management experience in the behavior informatics.
Makoto Funahashi: Mr. Funahashi has been an independent member of the Board of Directors of FRONTEO, Inc. since June 2008. Prior to becoming the Company’s independent director, Mr. Funahashi served in various senior capacities with the National Police Agency of Japan from 1968 to 2001, including as Deputy Minister for police technology from 1999 until his retirement. From March 2001 to April 2003, Mr. Funahashi served as special advisor to USE, Inc., a company in the information technology industry. From June 2003 to March 2011, he served in various capacities at NTT Data i and its predecessor, NTT Data Creation, including as a director from 2003 to 2008 and a senior advisor from 2008 to March 2011. We believe that Mr. Funahashi is qualified to serve on our Board of Directors because of his extensive management experience in the public sector and his technological expertise.
Hirooki Kirisawa: Mr. Kirisawa has been an independent member of the Board of Directors of FRONTEO, Inc. since June 2010. Prior to becoming the Company’s independent director, Mr. Kirisawa served as one of our statutory auditors from August 2005 to June 2010. Mr. Kirisawa founded Kirisawa Tax Accounting Office in 2004 and has been Chairman of Kirisawa Tax Accounting Office since its formation. We believe that Mr. Kirisawa is qualified to serve on our Board of Directors due to his extensive accounting and business background and experience.
47
Yoshikatsu Shirai : Mr. Shirai has been our Corporate Officer, Chief Client Technology Officer and Director of Total Product Support since August 2012. In his capacity, he has been responsible for managing global support for Lit i View. From September 2007 until August 2012, he served as a director of Technology Group, where he led the development of Lit i View. Prior to joining the Company, he served in various management positions at Applied Materials Japan, Inc., including as an engineering manager and a product manager from 1996 through December 2007.
Syusaku Nozaki: Mr. Nozaki has been our Corporate Officer and General Manager of Regional Operations Japan since December 2008. Mr. Nozaki joined FRONTEO in August 2004 Director of Legal Tech Operation and has been responsible for managing eDiscovery Operations Group. In addition, he has served as President of Payment Card Forensics, Inc., our subsidiary company, since August 2010. Prior to joining the Company, he served in various capacities at Applied Materials Japan, Inc. including as a service engineer from April 1997 to July 2004.
Seiji Tezuka: Mr. Tezuka joined the Company as Head of Business Solutions Division in January 2017, primarily responsible for creating a new market that utilizes AI for business, and he was appointed Corporate Officer in February 2017. Prior to joining the Company, he worked for various Japanese corporations such as Panasonic Corporation, HIKARI TSUSHIN, INC., CHINTAI Corporation and Recruit Co., Ltd., and held key executive management positions. At these companies, he was involved in key projects such as launching internet service and e-commerce business in Japan and introducing digital broadcast equipment for Japanese TV stations. At CHINTAI Corporation, as Representative Director and President, he successfully completed an initial public offering and established a joint holding company with ABLE & PARTNERS INC.
Kentaro Yamagishi: Mr. Yamagishi has been serving as Corporate Officer since he joined the Company in February 2017, responsible for promotion and expansion of “B to B” and “B to C” businesses utilizing Kibiro, which is an artificial intelligence (“AI”) equipped robot; establishment of digital communication business utilizing KIBIT; and construction of business model. Prior to joining the Company, he served at HRR Inc. (currently Recruit Management Solutions Co., Ltd.), responsible for development of appropriate assessment and web test development in the R & D department. He was transferred to Human Resource Development Division of Recruit Co., Ltd., engaged in human resource education solution business for management, and was responsible for product development related to training. He also served at Recruit Management Solutions Co., Ltd. and conducted research, product development and business development of training products for human resource companies. Subsequently, Mr. Yamagishi joined Poppins Corporation in 2015. As head of the headquarters, he was responsible for projects focusing on childcare and nursing care market.
Kenji Yamanami: Mr. Yamanami has been serving as Corporate Officer since he joined the Company in February 2017, responsible for overseeing legal business in Japan, creation of cross-border transactions and launch of AI business in the U.S. Prior to joining the Company, he worked for the Ministry of Economy, Trade and Industry (“MITI”) and engaged in the fields of IT industry, science and technology, intellectual property and high-tech industry and played a central role in the creation of privacy mark. He also worked for McKinsey & Company and engaged in projects such as strategy formulation, M & A, and improvement of operation, particularly in the technology industry. In addition, he worked for Rakuten, Inc. as an executive officer responsible for cross-border and marketing, contributing to an expansion of "Rakuten Ichiba" business, then he transferred to "Rakuten.com" which develops e-commerce business in the U.S., and he was responsible for a wide range of operations, such as introduction of point marketing in the U.S., maintenance of e-commerce site and branding.
Yongmin Cho: Mr. Cho has been Corporate Officer since December 2013 and CEO of FRONTEO Korea since May 2012. He joined the Company in October 2011 as a sales manager. Prior to joining the Company, he worked for Samsung Electronics for 6 years as a new business development manager, and he also worked for Diapad Communications, a successful Silicon Valley start-up company as a marketing and IR manager during the early stage of the company.
Craig Carpenter: Mr. Carpenter has been Corporate Officer since April 2017 and President and CEO of FRONTEO USA, Inc. since he joined the Company in March 2017. Mr. Carpenter is an industry veteran with strong executive leadership experience and has assisted global clients in managing data intelligence while enabling the efficient resolution of complex legal, compliance and governance matters. Prior to joining the Company, he was Senior Vice President of Sales for Kroll Ontrack, a leading eDiscovery provider, and he was President, Chief Operating Officer and Chief Marketing Officer at Access Data, a leading cyber security, forensics and eDiscovery provider. He also worked for Recommind as VP of Marketing and Business Development and General Counsel.
48
Statutory Auditors
|
|
|
|
|
|
Name |
|
Born |
|
Title |
|
Kunihiro Sudo |
|
1945 |
|
Standing Statutory Auditor |
|
Takaharu Yasumoto |
|
1954 |
|
Statutory Auditor |
|
Kei Okubo |
|
1976 |
|
Statutory Auditor |
|
Kunihiro Sudo: Mr. Sudo has been serving as one of our corporate statutory auditors since April 2011. Prior to becoming one of our auditors, Mr. Sudo served as an advisor to XING Co. from March 2007 to August 2007. In August 2007, Mr. Sudo joined Aqua Cast Co. as an advisor and became a director of Aqua Cast Co. in October of 2007. In January 2008, Mr. Sudo retired from Aqua Cast Co.
Takaharu Yasumoto: Mr. Yasumoto has been serving as one of our corporate statutory auditors since June 2010. Mr. Yasumoto has also served as a statutory auditor of Fast Retailing Co., Ltd. from June 1993 to the present. In addition, Mr. Yasumoto served as a special professor in the International Financing Research School of Chuo University in Tokyo, Japan.
Kei Okubo: Mr. Okubo has been serving as one of our corporate statutory auditors since June 2016. Mr. Okubo joined Nagashima Ohno & Tsunematsu as a registered attorney in 2000 and has been a partner there since 2008.
Executive Compensation
For the fiscal year ended March 31, 2017, the aggregate cash compensation that we paid to our directors and statutory auditors was ¥145.1 million, all of which was comprised of base salary. We do not have a requirement to, and have not, set aside pension or retirement benefits for our directors or statutory auditors.
The compensation for directors and statutory auditors was authorized by resolutions of the general meeting of shareholders on June 22, 2012 and to the extent compensation is within the authorized range, further authorization is not required.
Board of Directors
As a foreign private issuer, we are generally permitted to, and do, follow the corporate governance requirements of the Companies Act of Japan rather than those of U.S. law. Our Board of Directors has determined that Messrs. Funahashi and Kirisawa qualify as independent directors under NASDAQ rules. Our Board of Directors directs the management of our business and affairs and conducts its business through meetings of the Board of Directors. Consistent with the Companies Act, the rules of the Tokyo Stock Exchange (TSE) and corporate practice in Japan, we do not have any standing committees. Our Board of Directors as a whole performs the functions of a compensation committee and a nominating and corporate governance committee. From time to time, special committees may be established under the direction of the Board of Directors when necessary to address specific issues.
No director has been the subject of any order, judgment or decree of any governmental agency or administrator or of any court of competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation in which he or she is a director or executive officer, to engage in normal business activities of such person or corporation.
Terms of Directors
Each of our directors’ terms of office terminates at the conclusion of the annual shareholders meeting following the end of our second business year of the date of their election. Our directors automatically retire from office (unless vacated sooner) upon the expiration of that term, unless elected for an additional term. Each of our current directors’ term is set to expire in June 2018. Directors may be removed from office by an extraordinary resolution of two-thirds of the shareholders in attendance at a meeting. A director will be removed from office automatically if, among other things, the director becomes bankrupt or becomes of unsound mind. Our officers are nominated by and serve at the discretion of our Board of Directors.
49
Our shareholders have the power to appoint any person as a director either to fill a vacancy or as an addition to our board. The term of office of any director so appointed will be the same as the remaining period of the other remaining directors and he or she will then be eligible for re-election.
Since we qualify as a foreign private issuer under current NASDAQ rules, our Board of Directors is not required to have a majority of independent directors.
Our Board of Directors may receive such remuneration as determined by at the meeting of our shareholders. In addition, as long as such practice is permitted under the Companies Act, shareholders shall not have the right to vote regarding the issuance of stock options to members of the Board of Directors, or to any employee or consultant of the Company, when such options are issued at fair market value.
Duties of Directors
Under applicable Japanese law, our directors have a duty of loyalty to act honestly, in good faith and with a view to the best interests of our company. Our directors also have a duty to exercise the skill and care of a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same actions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that particular director has. In fulfilling their duty of care to us, our directors must act in accordance with our articles of association. A shareholder has the right to seek damages if a director has intentionally or by gross negligence breached their duties.
The functions and powers of our Board of Directors include, among others:
|
· |
|
convening shareholders’ annual general meetings and reporting on its work and our operations to shareholders at such meetings; |
|
· |
|
declaring interim dividends and distributions; |
|
· |
|
appointing and determining the term of office of officers; and |
|
· |
|
borrowing money and mortgaging our property. |
Interested Transactions
There is no provision in our articles of incorporation as to a director’s power to vote on a proposal, arrangement or contract in which the director is materially interested, but the Companies Act provides that such director is required to refrain from voting on such matters at meetings of the Board of Directors. Therefore, our directors will abstain from any discussion or vote on transactions in which they are interested. There are no family relationships between any of the named directors and executive officers.
Remuneration
Our shareholders determine the total amount of remuneration to be paid to our directors. The Board of Directors then determines the actual remuneration to be paid to each director. The compensation committee assists the directors in reviewing and approving the compensation structure for the directors.
Power to Obligate our Company
The directors may raise or borrow money and mortgage or charge all or any part of its undertaking, property and assets (present and future) and uncalled capital, and to issue debentures, bonds or other securities whether outright or as collateral security for any debt liability or obligations of our company or of any third party.
Qualification
There is no shareholding qualification for directors.
Indemnification Agreements
We may enter into indemnification agreements that will provide our directors, statutory auditors and executive officers with contractual rights to indemnification and rights to advances against certain expenses to the extent permitted by the Companies Act and our articles of incorporation. These could include legal fees and other expenses actually and reasonably incurred in connection with pending or threatened legal proceedings because of such director’s, statutory auditor’s or executive officer’s position with us or another entity that the director serves at
50
our request, subject to various conditions. We may obtain D&O liability insurance to cover some of these potential liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us pursuant to the indemnification agreements, we have been informed that in the opinion of the staff of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Compensation Committee
Our Board of Directors acts as our compensation committee. In such capacity, it reviews and approves our compensation structure, including all forms of compensation, relating to our directors and executive officers. Among other things, our Board of Directors:
|
· |
|
reviews and approves the total compensation package for our five most senior executives; |
|
· |
|
reviews and determines the compensation of each director’s compensation within the upper limit approved by our shareholders; and |
|
· |
|
periodically reviews and approves any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Nominating and Corporate Governance Committee
Our Board of Directors acts as our corporate governance and nominating committee. In that capacity, subject to the approval of the shareholders, the board selects individuals qualified to become our directors, fills vacancies and adds directors between shareholders’ meetings. Among other things, our Board of Directors:
|
· |
|
identifies and nominates qualified candidates as directors for election by the shareholders to the Board of Directors; |
|
· |
|
reviews the current composition of the Board of Directors with regard to characteristics such as independence, age, skills, experience and availability of service to us; |
|
· |
|
considers significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations on all matters of corporate governance and determines any remedial actions to be taken; and |
|
· |
|
monitors compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Board of Statutory Auditors
Consistent with applicable Japanese law and regulation and the rules of the TSE, we have a separate board of statutory auditors elected by our shareholders, which currently consists of three outside statutory auditors, rather than an audit committee. Our board of statutory auditors is a legally separate and independent body from our board of directors. Under the Companies Act, none of our outside statutory auditors is, may be, or has been a director, officer or employee of FRONTEO, Inc. or any of our subsidiaries. At least one of the statutory auditors, in our case, Mr. Sudo, must be appointed as a full-time statutory auditor by the board of statutory auditors. Among other functions, the board of statutory auditors prepares an audit report, appoints and removes the full-time statutory auditor(s) and establishes audit policies. We have determined that this board of statutory auditors satisfies the “independence” requirements for audit committees under current NASDAQ rules and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. At least one of the members of our board of statutory auditors qualifies as an “audit committee financial expert” under applicable SEC rules. Our board of statutory auditors is responsible for: the retention and oversight of our independent registered public accounting firm and the preparation of their audit; addressing complaints related to accounting, internal accounting controls, and auditing matters; engaging any advisors necessary to perform its duties; and funding necessary to carry out its duties. In addition, our statutory auditors participate in all meetings of our Board of Directors.
Set forth below is a table listing the total number of full-time employees and a breakdown of persons employed by geographic location as of March 31, 2015, 2016 and 2017. Virtually all employees serve in the legal
51
technology service line. The increase in our number of employees as of March 31, 2017 was primarily due to expanding our operations to support current and future business growth.
|
|
|
|
|
|
|
|
|
|
(Number of employees) |
|
||||
|
|
2015 |
|
2016 |
|
2017 |
|
For the fiscal year ended March 31, |
|
|
|
|
|
|
|
Full-Time Employees |
|
191 |
|
423 |
|
486 |
|
By Geographic Location: |
|
|
|
|
|
|
|
Japan |
|
102 |
|
123 |
|
146 |
|
U.S. |
|
59 |
|
201 |
|
180 |
|
Philippines |
|
— |
|
73 |
|
134 |
|
Other |
|
30 |
|
26 |
|
26 |
|
We consider our labor relations to be good, and to our knowledge, none of our employees is a member of any union. During the fiscal years ended March 31, 2015, 2016 and 2017, we had an annual average of three, three and three temporary employees, respectively.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 30, 2017 on a fully diluted basis, assuming the exercise of all stock options to purchase common stock which are exercisable within 60 days of the date of this annual report, for each of our directors, statutory auditors and executive officers. Any director, statutory auditor or executive officer who is not listed on the following table does not beneficially own any of our common stock. In general, a person is deemed to be a “beneficial owner” of a security if that person has the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. Percentage of shares owned is based upon 38,001,862 shares of our common stock outstanding as of June 30, 2017.
|
|
|
|
|
|
|
|
Number of Shares Owned (2) |
|
||
Name and Address of Beneficial Owners (1) |
|
Number |
|
Percent |
|
Executive Officers and Directors |
|
|
|
|
|
Masahiro Morimoto |
|
6,920,400 |
|
|
|
Naritomo Ikeue |
|
2,730,800 |
|
|
|
Hirooki Kirisawa |
|
93,800 |
|
* |
|
Hideki Takeda |
|
62,700 |
|
* |
|
Makoto Funahashi |
|
3,900 |
|
* |
|
Yoshikatsu Shirai |
|
100,000 |
|
* |
|
Syusaku Nozaki |
|
116,800 |
|
* |
|
Seiji Tezuka |
|
— |
|
— |
|
Kentaro Yamagishi |
|
— |
|
— |
|
Kenji Yamanami |
|
— |
|
— |
|
Yongmin Cho |
|
— |
|
— |
|
Craig Carpenter |
|
— |
|
— |
|
All directors and executive officers as a group (7 persons) |
|
10,028,400 |
|
|
|
* Less than 1%
|
(1) |
|
Unless otherwise noted, the address for each of the named beneficial owners is: Meisan Takahama Building 7th Floor, 2-12-23 Konan, Minato-ku, Tokyo 108-0075, Japan. |
Shares of common stock subject to options or convertible securities exercisable or convertible within 60 days of the date hereof are deemed outstanding for computing the percentage of the person or entity holding such options or convertible securities but are not deemed outstanding for computing the percentage of any other person. To the best of our knowledge, subject to community and martial property laws, all persons named have sole voting and investment power with respect to such shares, except as otherwise noted.
As of March 31, 2017, there were no exercisable stock options owned by the Company’s directors, statutory auditors and executive officers.
Stock Option Plan
At the general ordinary meetings of shareholders or meeting of Board of Directors held in June 2012, June 2013, June 2014, June 2015 and June 2016, the shareholders or the Board Directors of the Company approved
52
stock option plans for selected directors, statutory auditors, executive officers and employees of the Company. The following table shows selected information related to these stock options, as of June 30, 2017.
June 2012
Date of grant: June 21, 2012
Number of shares to be issued/ delivered: 81,000
Exercise price per share: ¥810
Beginning of exercise period: June 22, 2015
End of exercise period: June 21, 2018
Number of directors, statutory auditors and executive officers: 6
Number of other employees: 5
June 2013
Date of grant: May 31, 2013
Number of shares to be issued/ delivered: 179,000
Exercise price per share: ¥469
Beginning of exercise period: June 1, 2016
End of exercise period: May 31, 2019
Number of directors, statutory auditors and executive officers: 5
Number of other employees: 20
June 2014
Date of grant: May 22, 2014
Number of shares to be issued/ delivered: 144,000
Exercise price per share: ¥489
Beginning of exercise period: May 23, 2017
End of exercise period: May 22, 2020
Number of directors, statutory auditors and executive officers: 3
Number of other employees: 13
June 2015
Date of grant: May 28, 2015
Number of shares to be issued/ delivered: 129,500
Exercise price per share: ¥1,029
Beginning of exercise period: May 29, 2018
End of exercise period: May 28, 2021
Number of directors, statutory auditors and executive officers: 4
Number of other employees: 25
August 2015
Date of grant: August 1, 2015
Number of shares to be issued/ delivered: 35,000
Exercise price per share: ¥930
Beginning of exercise period: August 1, 2018
End of exercise period: August 1, 2021
Number of other employees: 10
June 2016
Date of grant: June 22, 2016
Number of shares to be issued/ delivered: 127,500
Exercise price per share: ¥1,181
Beginning of exercise period: June 23, 2019
End of exercise period: June 22, 2022
Number of other employees: 37
53
August 2016
Date of grant: August 26, 2016
Number of shares to be issued/ delivered: 59,500
Exercise price per share: ¥809
Beginning of exercise period: August 27, 2019
End of exercise period: August 26, 2022
Number of directors, statutory auditors and executive officers: 1
Number of other employees: 30
December 2016
Date of grant: December 23, 2016
Number of shares to be issued/ delivered: 15,000
Exercise price per share: ¥901
Beginning of exercise period: December 24, 2019
End of exercise period: December 23, 2022
Number of directors, statutory auditors and executive officers: 1
April 2017
Date of grant: April 21, 2017
Number of shares to be issued/ delivered: 90,000
Exercise price per share: ¥774
Beginning of exercise period: April 22, 2020
End of exercise period: April 21, 2023
Number of directors, statutory auditors and executive officers: 4
Number of other employees: 1
July 2017
Date of grant: July 7, 2017
Number of shares to be issued/ delivered: 751,000
Exercise price per share: ¥731
Beginning of exercise period: July 1, 2019
End of exercise period: July 6, 2022
Number of directors, statutory auditors and executive officers: 3
Number of other employees: 36
June 2017
Date of grant: June 23, 2017
Number of shares to be issued/ delivered: 70,000
Exercise price per share: ¥730
Beginning of exercise period: June 24, 2020
End of exercise period: June 23, 2023
Number of other employees: 39
July 2017
Date of grant: July 21, 2017
Number of shares to be issued/ delivered: 6,000
Exercise price per share: ¥806
Beginning of exercise period: July 22, 2020
End of exercise period: July 21, 2023
Number of other employees: 2
54
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 30, 2017 on a fully diluted basis, assuming the exercise of all stock options to purchase common stock which are exercisable within 60 days of the date of this annual report, for each stockholder known to be the beneficial owner of 5% or more of our outstanding common stock. In general, a person is deemed to be a “beneficial owner” of a security if that person has the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. Percentage of shares owned is based upon 38,001,862 shares of our common stock outstanding as of June 30, 2017.
Beneficial ownership of the Company’s common stock in the table below was prepared from publicly available records of the filings made by the Company’s shareholders regarding their ownership of the Company’s common stock under the Financial Instruments and Exchange Law of Japan. Under the Financial Instruments and Exchange Law of Japan, any person who becomes, beneficially and solely or jointly, a holder, including, but not limited to, a deemed holder who manages shares for another holder pursuant to a discretionary investment agreement, of more than 5% of the shares with voting rights of a company listed on a Japanese stock exchange (including ADSs representing such shares) must file a report concerning the shareholding with the Director of the relevant local finance bureau. A similar report must be filed, with certain exceptions, if the percentage of shares held by a holder, solely or jointly, of more than 5% of the total issued shares of a company increases or decreases by 1% or more, or if any change to a material matter set forth in any previously filed reports occurs.
Based on publicly available information, the following table sets forth the beneficial ownership of holders of more than 5% of the Company’s common stock as of the dates indicated in the reports described below.
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
Name of Beneficial Owner |
|
Number of Shares |
|
Outstanding Shares |
|
Masahiro Morimoto |
|
6,920,400 |
|
|
|
Focus Systems Corporation |
|
2,984,720 |
|
|
|
Naritomo Ikeue |
|
2,730,800 |
|
|
|
|
|
|
|
|
|
According to our register of shareholders, as of March 31, 2017, there were 20,030 holders of common stock of record worldwide. As of June 30, 2017, The Bank of New York Mellon, depositary for our ADSs, held 0.35% of the outstanding common stock on that date. Of the 38,001,862 shares of our common stock outstanding as of June 30, 2017, 133,980 shares were held in the form of 66,990 ADSs. As of June 30, 2017, the Company held 630 shares of the Company as treasury stock.
7.B. RELATED PARTY TRANSACTIONS
Business Relationships
During the year ended March 31, 2016 and 2017, the Company entered into transactions with Consultoris, Inc. (“CI”) and IIOSS, Inc. (“IIOSS”), which are managed by management of foreign subsidiaries. CI provides consulting services and IIOSS provides outsourcing support services to the Company.
For the year ended March 31, 2016, the total amount of transactions with CI and IIOSS was ¥40,363 thousand. For the year ended March 31, 2017, the amount of transactions with CI was ¥44,419 thousand, and the amount of transactions with IIOSS was not material.
7.C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
FRONTEO’s audited consolidated financial statements are included under “Item 18—Financial Statements.” Except for FRONTEO’s consolidated financial statements included under Item 18, no other information in this annual report has been audited by FRONTEO’s independent registered public accounting firm.
55
Except as otherwise disclosed in this annual report on Form 20-F, there have been no significant changes in our financial condition since March 31, 2017, the date of our last audited financial statements.
9.A. OFFER AND LISTING DETAILS
The following table sets forth for the period shown the reported high and low sales prices of our common stock on the Tokyo Stock Exchange and the ADSs on the Nasdaq Global Select Market. The current ADS/share ratio is one (1) ADS per two (2) shares of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSE (1) (2) (3) |
|
NASDAQ (1) (3) |
|
||||||||
|
|
(per share of common stock) |
|
(per ADS) |
|
||||||||
|
|
High |
|
Low |
|
High |
|
Low |
|
||||
For the year ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
¥ |
920 |
|
¥ |
114 |
|
$ |
|
|
$ |
|
|
2010 |
|
|
265 |
|
|
140 |
|
|
|
|
|
|
|
2011 |
|
|
1,195 |
|
|
40 |
|
|
|
|
|
|
|
2012 |
|
|
994 |
|
|
163 |
|
|
|
|
|
|
|
2013 |
|
|
935 |
|
|
372 |
|
|
|
|
|
|
|
2014 |
|
|
554 |
|
|
219 |
|
|
|
|
|
|
|
2015 |
|
|
1,421 |
|
|
325 |
|
|
33.50 |
|
|
5.90 |
|
2016 |
|
|
1,065 |
|
|
559 |
|
|
20.00 |
|
|
10.03 |
|
2017 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Financial quarter ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
¥ |
319 |
|
¥ |
163 |
|
$ |
|
|
$ |
|
|
September 30, 2011 |
|
|
882 |
|
|
174 |
|
|
|
|
|
|
|
December 31, 2011 |
|
|
950 |
|
|
599 |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
994 |
|
|
588 |
|
|
|
|
|
|
|
June 30, 2012 |
|
|
935 |
|
|
581 |
|
|
|
|
|
|
|
September 30, 2012 |
|
|
690 |
|
|
500 |
|
|
|
|
|
|
|
December 31, 2012 |
|
|
832 |
|
|
554 |
|
|
|
|
|
|
|
March 31, 2013 |
|
|
666 |
|
|
372 |
|
|
|
|
|
|
|
June 30, 2013 |
|
|
554 |
|
|
275 |
|
|
9.00 |
|
|
5.55 |
|
September 30, 2013 |
|
|
455 |
|
|
303 |
|
|
9.00 |
|
|
6.00 |
|
December 31, 2013 |
|
|
422 |
|
|
242 |
|
|
8.57 |
|
|
4.23 |
|
March 31, 2014 |
|
|
419 |
|
|
219 |
|
|
12.66 |
|
|
4.36 |
|
June 30, 2014 |
|
|
845 |
|
|
325 |
|
|
15.87 |
|
|
5.90 |
|
September 30, 2014 |
|
|
864 |
|
|
828 |
|
|
33.50 |
|
|
14.11 |
|
December 31, 2014 |
|
|
824 |
|
|
778 |
|
|
|
|
|
|
|
March 31, 2015 |
|
|
972 |
|
|
931 |
|
|
22.77 |
|
|
10.00 |
|
June 30, 2015 |
|
|
939 |
|
|
920 |
|
|
22.00 |
|
|
13.44 |
|
September 30, 2015 |
|
|
969 |
|
|
559 |
|
|
20.00 |
|
|
10.03 |
|
December 31, 2015 |
|
|
965 |
|
|
674 |
|
|
15.08 |
|
|
11.90 |
|
March 31, 2016 |
|
|
1,029 |
|
|
605 |
|
|
16.93 |
|
|
11.05 |
|
June 30, 2016 |
|
|
1,346 |
|
|
687 |
|
|
24.57 |
|
|
15.08 |
|
September 30, 2016 |
|
|
870 |
|
|
696 |
|
|
18.50 |
|
|
13.00 |
|
December 31, 2016 |
|
|
1,025 |
|
|
751 |
|
|
19.33 |
|
|
14.06 |
|
March 31, 2017 |
|
|
920 |
|
|
702 |
|
|
15.27 |
|
|
12.73 |
|
June 30, 2017 |
|
|
868 |
|
|
559 |
|
|
15.00 |
|
|
9.06 |
|
Month ended/ending |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017 |
|
¥ |
920 |
|
¥ |
833 |
|
$ |
15.27 |
|
$ |
15.00 |
|
February 2017 |
|
|
878 |
|
|
769 |
|
|
14.24 |
|
|
13.76 |
|
March 2017 |
|
|
800 |
|
|
702 |
|
|
13.26 |
|
|
12.73 |
|
April 2017 |
|
|
710 |
|
|
559 |
|
|
12.68 |
|
|
9.06 |
|
May 2017 |
|
|
805 |
|
|
617 |
|
|
14.30 |
|
|
11.20 |
|
June 2017 |
|
|
868 |
|
|
702 |
|
|
15.00 |
|
|
12.52 |
|
|
(1) |
|
Price data are based on prices throughout the sessions for each corresponding period at each stock exchange. |
|
(2) |
|
Our shares of common stock have been quoted on Mothers of the TSE since June 26, 2007. |
|
(3) |
|
Our ADSs have been listed on the Nasdaq Global Market since May 16, 2013 and Global Select Market since January 2, 2014 through a sponsored ADSs facility operated by the Bank of New York Mellon. |
56
Not applicable.
Our shares of common stock have been quoted on the Mothers market of the TSE since June 26, 2007 under the stock code number “2158” in the First Section of the TSE.
Our ADSs have been listed and traded on the Nasdaq Global Market since May 16, 2013 under the symbol “FRONTEO” through a sponsored ADR facility operated by the Bank of New York Mellon, the depository. Each ADS represents two shares of the Company’s common stock.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
Not applicable.
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is information relating to the Company’s common stock, including brief summaries of the relevant provisions of the Company’s articles of incorporation and share handling regulations and of the Companies Act and related legislation, all as currently in effect.
Description of Our Common Stock
As of June 30, 2017, our authorized capital stock consists of 72,000,000 shares of common stock, and there are 38,001,862 shares of common stock outstanding. All outstanding shares of common stock are fully paid and non-assessable.
Share Units
Our shares are organized into units comprised of ten shares of common stock each. Shareholders who hold less than one unit’s worth of our common shares have access to a restricted set of shareholder rights, as described below.
Voting Rights
The holders of our common shares are entitled to one vote for each ten shares held of record on all matters submitted to a vote of stockholders. Holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Shareholders who hold less than one unit’s worth of our common shares are not entitled to vote.
Dividend Rights
Holders of our common shares are entitled to receive ratably any dividend declared at a shareholders’ meeting or by the Board of Directors.
57
Rights Upon Liquidation
In the event of a liquidation, dissolution or winding up of the company, holders of common shares are entitled to share ratably in the assets remaining after payment of liabilities.
Other Rights and Preferences
Holders of our common shares have no preemptive, conversion or redemption rights.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mitsubishi UFJ Trust.
Limitations on Liability
Our articles of incorporation limit the liability of our directors, statutory auditors and accountants to the fullest extent permitted by the Companies Act. The effect of these provisions is to eliminate our rights and those of our stockholders to file stockholders’ derivative suits on behalf of our company to recover monetary damages from a director, a statutory auditor or an accountant for breach of their duties under the Companies Act. However, exculpation does not apply to any director, statutory auditor or accountant if they have intentionally ( koi ) or by gross negligence ( ju-kashitsu ) breached their duties under the Companies Act. Additionally, we may enter into contracts for limitation of liability with our outside directors and outside statutory auditors. If we do so, we expect that these contracts will eliminate our rights and those of our stockholders as described above. We also may obtain directors’ and statutory auditors’ liability insurance.
Articles of Incorporation
Organization
FRONTEO, Inc. is a joint stock corporation ( kabushiki kaisha ) incorporated in Japan under the Companies Act. It is registered in the Commercial Register ( shogyo tokibo ) maintained by the Legal Affairs Bureau.
Objects and Purposes in Our Articles of Incorporation
Article 2 of our articles of incorporation states our objects and purposes:
|
· |
|
To sell, export and import forensic products; |
|
· |
|
To develop, manufacture, sell, export and import products with forensic technology; |
|
· |
|
To undertake forensic investigations; |
|
· |
|
To invest, research, educate, train, guide, advise and consult regarding forensic investigations; |
|
· |
|
To support information asset management; |
|
· |
|
To support strategic, preventive legal management; and |
|
· |
|
To conduct any other activities relating to the above items. |
Provisions Regarding Our Directors
There is no provision in our articles of incorporation as to a director’s power to vote on a proposal, arrangement or contract in which the director is materially interested, but the Companies Act provides that such director is required to refrain from voting on such matters at the Board of Director’s meetings.
The Companies Act provides that compensation for directors is determined at a general meeting of shareholders of a company. Within the upper limit approved by the shareholders’ meeting, the board of directors will determine the amount of compensation for each director. The board of directors may, by its resolution, leave such decision to the president’s discretion.
58
The Companies Act provides that a significant loan from third party by a company should be approved by the board of directors. We have adopted this policy.
There is no mandatory retirement age for directors under the Companies Act or our articles of incorporation.
There is no requirement concerning the number of shares one individual must hold in order to qualify him or her as a director under the Companies Act or our articles of incorporation.
Rights of Shareholders of our Common Stock
We have issued only one class of shares, our common stock. Rights of holders of shares of our common stock have under the Companies Act and our articles of incorporation include:
|
· |
|
the right to receive dividends when the payment of dividends has been approved at a shareholders’ meeting, with this right lapsing three full years after the due date for payment according to a provision in our articles of incorporation; |
|
· |
|
the right to receive interim dividends as provided for in our articles of incorporation, with this right lapsing three full years after the due date for payment according to a provision in our articles of incorporation; |
|
· |
|
the right to vote at a shareholders’ meeting (cumulative voting for the election of directors is not allowed under our articles of incorporation); |
|
· |
|
the right to receive surplus in the event of liquidation; |
|
· |
|
the right to require us to purchase shares subject to certain requirements under the Companies Act when a shareholder opposes certain resolutions including (i) the transfer of all or material part of the business, (ii) an amendment of the articles of incorporation to establish a restriction on share transfer, (iii) a share exchange or share transfer to establish a holding company, (iv) company split or (v) merger, all of which must in principle, be approved by a special resolution of a shareholders’ meeting; and |
|
· |
|
the right to require our company to purchase shares less than one unit’s worth of our common shares. |
Under the Companies Act, a company is permitted to make distribution of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable Amount provided for under the Companies Act and the Ordinance of the Ministry of Justice as of the effective date of such distribution of surplus.
The amount of surplus at any given time shall be the amount of a company’s assets and the book value of company’s treasury stock after subtracting and adding the amounts of the items provided for under the Companies Act and the applicable Ordinance of the Ministry of Justice.
A shareholder is generally entitled to one vote for each unit of ten of our shares at a shareholders’ meeting. In general, under the Companies Act and our articles of incorporation, shareholders’ meeting may adopt an ordinary resolution by a majority of the voting rights presented at the meeting. The Companies Act and our articles of incorporation require a quorum for the election of directors and statutory auditors of not less than one-third of the total number of voting rights. A corporate shareholder, having not less than one-quarter of its voting rights directly or indirectly held by us, does not have voting rights. We have no voting rights with respect to our own common stock. Shareholders may exercise their voting rights through proxies, provided that a shareholder may appoint only one shareholder who has a voting right as its proxy. Our Board of Directors shall entitle our shareholders to cast their votes in writing. Our Board of Directors may also entitle our shareholders to cast their votes by electronic devices.
As for a special resolution, while the Companies Act, in general, requires a quorum of the majority of the total number of voting rights and approval of two-thirds of the voting rights presented at the meeting of any material corporate actions, it allows a company to reduce the quorum for such special resolutions by its articles of incorporation to one-third or greater than one-third of the total number of voting rights. We adopted a quorum of not
59
less than one-third of the total number of voting rights in our articles of incorporation for special resolutions for material corporate actions, such as:
|
· |
|
a reduction of the stated capital, (except when a company reduces the stated capital within certain amount provided for under the Companies Act); |
|
· |
|
amendment of our articles of incorporation; |
|
· |
|
establishment of a 100% parent-subsidiary relationship through a share exchange or share transfer requiring shareholders’ approval; |
|
· |
|
a dissolution, merger or consolidation requiring shareholders’ approval; |
|
· |
|
a company split requiring shareholders’ approval; |
|
· |
|
a transfer of the whole or an important part of our business; |
|
· |
|
the taking over of the whole of the business of any other corporation requiring shareholders’ approval; |
|
· |
|
issuance of new shares at a specially favorable price, or issuance of stock acquisition rights or bonds with stock acquisition rights with specially favorable conditions to persons other than shareholders; and |
|
· |
|
other material corporate actions provided in the Companies Act (except for the termination of our directors). |
The Companies Act provides additional specific rights for shareholders owning a substantial number of voting rights.
Shareholders holding 10% or more of the total number of voting rights of all shareholders (or 10% or more of the total number of our outstanding shares) have the right to apply to a court of competent jurisdiction for our dissolution.
Shareholders who have held 3% or more of the total number of voting rights of all shareholders for six months or more have the right to demand the convening of a general meeting of shareholders.
Shareholders who have held 3% or more of the total number of voting rights of all shareholders (or 3% or more of the total number of our outstanding shares) for six months or more have certain rights under the Companies Act which includes the right to:
|
· |
|
apply to a competent court for removal of a director or a statutory auditor; and |
|
· |
|
apply to a competent court for removal of a liquidator. |
Shareholders who have held 3% or more of the total number of voting rights of all shareholders have the right to refuse the exculpation of a director or a statutory auditor from certain liabilities.
Shareholders holding 3% or more of the total number of voting rights of all shareholders (or 3% or more of the total number of our outstanding shares) have certain rights under the Companies Act, which include the right to:
|
· |
|
examine our accounting books and documents and make copies of them; and |
|
· |
|
apply to a competent court for appointment of an inspector to inspect our operation or financial condition. |
Shareholders who have held 1% or more of the total number of voting rights of all shareholders for six months or more have the right to apply to a competent court for appointment of an inspector to review the correctness of the convocation and voting procedures of a general meeting of shareholders.
Shareholders who have held 1% or more of the total number of voting rights of all shareholders or 300 or more voting rights for six months or more have the right to demand that certain matters be added to the agenda items at a general meeting of shareholders.
60
Shareholders who have held any number of shares for six months or more have the right to demand that we take certain actions under the Companies Act which include the rights to demand:
|
· |
|
the institution of an action to enforce the liability of one of our directors or statutory auditors; |
|
· |
|
the institution of an action to recover from a recipient the benefit of a proprietary nature given in relation to the exercise of the right of a shareholder; and |
|
· |
|
a director on our behalf for the cessation of an illegal or ultra vires action. |
There is no provision under the Companies Act or our articles of incorporation which forces shareholders to make additional contributions when requested by us.
Under the Companies Act, in order to change the rights of shareholders which are stipulated and defined in our articles of incorporation, we must amend our articles of incorporation. Amendments must, in principle, be approved by a special resolution of shareholders.
Annual general meetings and extraordinary general meetings of shareholders are convened by our President and Director based on the resolution of our Board of Directors. Under our articles of incorporation, shareholders of record as of March 31 of each year have the right to attend the annual general meeting of our shareholders. We may by prescribing a Record Date, determine the shareholders who are stated or recorded in the shareholder registry on the Record Date as the shareholders entitled to extraordinary general meetings of our shareholders, and in this case, we are required to make a public notice of Record Date at least two weeks prior to the Record Date. A convocation notice will be sent to these shareholders at least two weeks prior to the date of the shareholders’ meeting.
Acquisition of Own Shares
Under applicable laws of Japan, we may acquire our own shares:
|
(i) |
|
through market transactions on a stock exchange on which our shares are listed or by way of tender offer (in either case pursuant to a resolution of the Board of Directors, which is currently authorized by our articles of incorporation); |
|
(ii) |
|
from a specific shareholder other than any of our subsidiaries (pursuant to a special resolution of a general meeting of shareholders); or |
|
(iii) |
|
from any of our subsidiaries (pursuant to a resolution of the Board of Directors). |
In case acquisition is made by way of (ii) above, any other shareholder may request within a certain period of time provided under the applicable Ordinance of the Ministry of Justice before a general meeting of shareholders that we also purchase our shares held by the requesting shareholder, unless the purchase price or any other consideration to be delivered in exchange for the acquisition of one of our shares does not exceed the market price of one of our shares calculated by the method prescribed in the applicable Ordinance of the Ministry of Justice.
In general, an acquisition by us of our own shares must satisfy certain requirements, including that the total amount of the acquisition price may not exceed the Distributable Amount, as described above.
We may hold the shares which we acquired by way of (i) through (iii) above, and may cancel such shares by a resolution of the Board of Directors. We may also dispose of such shares subject to a resolution of the Board of Directors and subject also to other requirements applicable to the issuance of shares under the Companies Act.
Restrictions on Holders of our Common Stock
There is no restriction on non-resident or foreign shareholders on the holding of our shares or on the exercise of voting rights, except for filing requirements with respect to an acquisition of shares by Non-Resident of Japan under The Foreign Exchange and Foreign Trade Act of Japan and related regulations. However, pursuant to a provision of our share handling regulations, a shareholder who does not have an address or residence in Japan is required to file its temporary address to receive notices in Japan or that of a standing proxy having any address or residence in Japan with our transfer agent and Japan Securities Depository Center, Inc.
61
There is no provision in our articles of incorporation that would have the effect of delaying, deferring or preventing a change in control that would operate only with respect to a merger, acquisition or corporate restructuring involving us.
There is no provision in our articles of incorporation or other subordinated rules regarding the ownership threshold, above which shareholder ownership must be disclosed. Pursuant to the Financial Instruments and Exchange Act of Japan and related regulations, a shareholder who has become, solely or jointly, a holder more than 5% of the total issued shares in a company that is listed on any stock exchange in Japan is required to file a report with the Finance Bureau of the Ministry of Finance, and with certain exceptions, a similar report must also be filed in respect of any subsequent change of 1% or more in the holding or of any change in material matters set forth in any previously filed report.
There is no provision in our articles of incorporation governing changes in the capital more stringent than is required by law.
For a discussion of rights of holders of ADSs, please see the “Description of American Depositary Shares” section of our Form F-1 Registration Statement (Reg. No. 333-184691), declared effective on May 14, 2013, as amended, hereby incorporated by reference.
The Company has not entered into any material contracts during the preceding two years which were outside the ordinary course of business.
The Foreign Exchange and Foreign Trade Act and related regulations regulate certain transactions involving a “Non-Resident of Japan” or a “Foreign Investor” including “inward direct investment” by a Foreign Investor, and a payment from Japan to a foreign country or by a resident of Japan to a Non-Resident of Japan.
“Non-Residents of Japan” is defined as individuals who are not resident in Japan and corporations whose principal offices are located outside of Japan. Generally, branches and other offices of Japanese corporations which are located outside of Japan are regarded as Non-Residents of Japan, but branches and other offices of non-resident corporations which are located within Japan are regarded as residents of Japan.
“Foreign Investors” is defined as:
|
· |
|
individuals who are Non-Residents of Japan; |
|
· |
|
corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and |
|
· |
|
corporations (i) of which 50% or more of their voting rights are held by individuals who are Non-Residents of Japan and/or corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan or (ii) a majority of whose officers, or officers having the power of representation, are individuals who are Non-Residents of Japan. |
Under the Foreign Exchange and Foreign Trade Act and related regulations, dividends paid on, and the proceeds of sales in Japan of, shares held by Non-Residents of Japan may in general be converted into any foreign currency and repatriated abroad.
Under the Foreign Exchange and Foreign Trade Act and related regulations, in general, a Non-Resident of Japan who acquires shares from a resident of Japan in a capital markets transaction is not subject to any prior filing requirement, although the Foreign Exchange and Foreign Trade Act and related regulations require such Non-Resident to obtain prior approval for any such acquisition from the Minister of Finance of Japan in certain limited circumstances. While such prior approval is not required in general, in each case where a resident of Japan receives a single payment of more than ¥30 million from a Non-Resident of Japan for a transfer of shares in a Japanese company, such resident of Japan is required to report each receipt of payment to the Minister of Finance of Japan.
If a Foreign Investor acquires our shares and together with parties who have a special relationship with that Foreign Investor, holds 10% or more of our issued shares as a result of such acquisition, the Foreign Investor must, with certain limited exceptions, file a report of such acquisition with the Minister of Finance and any other
62
competent Minister by the 15th day of the month immediately following the month in which such acquisition occurs. In certain limited circumstances, however, a prior notification of such acquisition must be filed with the Minister of Finance and any other competent Minister, who may modify or prohibit the proposed acquisition.
The following is a discussion of the material Japanese and U.S. federal income tax consequences of an investment in the ADSs or common stock based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This discussion does not address all possible tax consequences relating to an investment in the ADSs or common stock, such as the tax consequences under state, local and other tax laws. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of the ADSs or common stock.
Japanese Taxation
The following is a discussion summarizing material Japanese tax consequences to an owner of common stock or ADSs who is a non-resident of Japan or a non-Japanese corporation without a permanent establishment in Japan to which the relevant income is attributable. The statements regarding Japanese tax laws set forth below are based on the laws in force (including the laws regarding Special Reconstruction Income Tax which are effective from January 1, 2013) and as interpreted by the Japanese taxation authorities as of the date hereof. These statements are subject to changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor. Potential investors should satisfy themselves as to:
|
· |
|
the overall tax consequences of the acquisition, ownership and disposition of ADSs or common stock, including specifically the tax consequences under Japanese law; |
|
· |
|
the laws of the jurisdiction of which they are a resident; and |
|
· |
|
any tax treaty between Japan and their respective countries of residence, by consulting their own tax advisors. |
For purposes of the Convention (as defined below) and Japanese tax law, U.S. holders of ADRs will be treated as the owners of the common stock underlying the ADSs evidenced by the ADRs.
Generally, a non-resident individual of Japan or a non-Japanese corporation as a holder of ADSs or common stock is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits, in general, are not subject to Japanese income tax.
In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident individual of Japan or a non-Japanese corporation is 20%. With respect to dividends paid on listed shares issued by Japanese corporations (such as our common stock) to a non-resident individual of Japan or a non-Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends to be paid by December 31, 2012, (ii) 7.147% for dividends to be paid from January 1, 2013 to December 31, 2013, (iii) 15.315% for dividends to be paid from January 1, 2014 to December 31, 2037, and (iv) 15% for dividends to be paid thereafter, except for dividends paid to any individual shareholder who holds 5% or more of the issued shares of a company. As of the date of this annual report, Japan has entered into income tax treaties, or conventions, whereby the above-mentioned withholding tax rate is reduced, in most cases to 15% or 10% for portfolio investors (15% under the income tax treaties with, among other countries, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, and Switzerland, and 10% under the income tax treaties with Australia, France, the United Kingdom and the United States).
Under the Convention between the Government of Japan and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Convention”), the maximum rate of Japanese withholding tax that may be imposed on dividends paid by a Japanese corporation to a U.S. holder that does not have a permanent establishment in Japan is limited to 10% for most of qualified portfolio investors and 5% if the beneficial owner is a qualified company that owns, directly or indirectly, on the date on which entitlement to the dividend is determined, at least 10% (but not more than 50% in certain cases) of the voting stock of the Japanese corporation. The Convention provides that no Japanese tax will be
63
imposed on dividends paid to a qualified pension fund that is a United States resident, if such dividends are not derived from the carrying on of a business, directly or indirectly, by such pension fund.
Under Japanese tax law, the maximum rate applicable under the Convention shall be applicable, subject to completion of below-described application procedures, except when such maximum rate is higher than the Japanese statutory rate, in which case the Japanese statutory rate is applicable.
Non-resident holders who are entitled to a reduced rate of Japanese withholding tax on payment of dividends by FRONTEO, Inc. must submit the required form in advance through FRONTEO, Inc. to the relevant tax authority before payment of dividends. The required form is the Application Form for Income Tax Convention regarding Relief from Japanese Income Tax on Dividends. A standing proxy for non-resident holders may provide such application service. With respect to ADSs, the reduced rate is applicable if The Bank of New York Mellon, as depositary, or its agent submits in duplicate two Application Forms for Income Tax Convention (one is Form 4 subtitled “Extension of Time for Withholding of Tax on Dividends with respect to Foreign Depositary Receipt” to the payer of dividends, who has to file the original with the district director of the competent tax office for the place where the payer resides, by the day before the payment of dividends and the other is Form 5 subtitled “Relief from Japanese Income Tax on Dividends with respect to Foreign Depositary Receipt” to the district director of the competent tax office through the payer of dividends in eight months from the day following the base date of payment of dividends for application purposes for which Form 4 has been submitted). To claim the reduced rate, a non-resident holder of ADSs will be required to file proof of taxpayer status, residence and beneficial ownership, as applicable. The non-resident holder will also be required to provide information or documents clarifying its entitlement to the tax reduction as may be required by the depositary. A non-resident holder of ADSs or common stock who does not submit an application in advance will be entitled to claim from the relevant Japanese tax authority a refund of withholding taxes withheld in excess of the rate of an applicable tax treaty.
Gains derived from the sale of the ADSs or common stock outside Japan, or from the sale of ADSs or common stock within Japan by a non-resident individual of Japan or a non-Japanese corporation, are in general not subject to Japanese income or corporation taxes provided that such gains are from portfolio investments where the shareholding ratio is within a certain prescribed level.
An individual who has acquired ADSs or common stock as a distributee, legatee or donee may have to pay Japanese inheritance and gift taxes at progressive rates.
U.S. Federal Income Tax Consequences
The following is a summary of the material U.S. federal income tax consequences to a U.S. Holder (as defined below) of the acquisition, ownership and disposition of our ADSs or common stock purchased by a U.S. Holder pursuant to this offering. As used in this discussion, references to “we”, “our” and “us” refer only to FRONTEO, Inc.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ADSs or common stock that is for U.S. federal income tax purposes:
|
· |
|
an individual citizen or resident of the United States; |
|
· |
|
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; |
|
· |
|
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
|
· |
|
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only
64
holders that will own our ADSs or common stock as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
|
· |
|
financial institutions or financial services entities; |
|
· |
|
broker-dealers; |
|
· |
|
taxpayers that are subject to the mark-to-market accounting rules under Section 475 of the Code; |
|
· |
|
tax-exempt entities; |
|
· |
|
governments or agencies or instrumentalities thereof; |
|
· |
|
insurance companies; |
|
· |
|
regulated investment companies; |
|
· |
|
real estate investment trusts; |
|
· |
|
certain expatriates or former long-term residents of the United States; |
|
· |
|
persons that actually or constructively own 5 percent or more of our voting stock; |
|
· |
|
persons that acquired our ADSs or common stock pursuant to an exercise of employee stock options, in connection with employee stock incentive plans or otherwise as compensation; |
|
· |
|
persons that hold our ADSs or common stock as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or |
|
· |
|
persons whose functional currency is not the U.S. dollar. |
|
· |
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persons who are not a U.S. Holder. |
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations of a holder of our ADSs or common stock. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our ADSs or common stock through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our ADSs or common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.
We have not sought, and will not seek, a ruling from the Internal Revenue Service (IRS) or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ADSS OR COMMON STOCK. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR ADSS OR COMMON STOCK IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ADSS OR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX TREATIES.
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U.S. Holders
Taxation of Distributions
A U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on our ADSs or common stock. A cash distribution on such ADSs or common stock generally will be treated as a dividend for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that such distributions (including any Japanese taxes withheld) will be reported to U.S. Holders as dividends. As it is our intention to pay such dividends in Japanese yen, the amount of the dividend a U.S. Holder will be required to include in income will equal the U.S. dollar value of the Japanese yen, calculated by reference to the exchange rate in effect on the date the payment is received by the U.S. Holder, regardless of whether the payment is converted into U.S. dollars on the date of receipt. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt. If a U.S. Holder realizes gain or loss on a sale or other disposition of Japanese yen, it will be U.S. source ordinary income or loss.
Corporate U.S. Holders will not be entitled to claim the dividends received deduction with respect to dividends paid by us.
We expect to be treated as a “qualified foreign corporation,” as contemplated by Code Section 1(h)(11)(C). Thus, with certain exceptions, if the applicable holding period and other requirements are satisfied, dividends we pay to a non-corporate U.S. Holder generally will constitute “qualified dividends” that will be subject to tax at the maximum regular tax rate accorded to long-term capital gains for tax years beginning before January 1, 2013, after which the regular U.S. federal income tax rate applicable to dividends is scheduled to return to the regular tax rate generally applicable to ordinary income. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at this favorable rate.
Dividends paid on our ADSs or common stock generally will be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or common stock. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. Holder is advised to consult its tax advisor regarding the availability of the foreign tax credit under its particular circumstances.
Taxation on the Disposition of Our ADSs or Common Stock
Upon a sale or other taxable disposition of our ADSs or common stock, a U.S. Holder generally will recognize U.S. source capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in such ADSs or common stock.
The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum regular rate of 15% for taxable years beginning before January 1, 2013 (and 20% thereafter, unless current rates are extended). Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for the ADSs or common stock exceeds one year. The deductibility of capital losses is subject to various limitations.
Additional Taxes After 2012
Recently enacted legislation requires certain U.S. Holders that are individuals, estates or trusts to pay an additional 3.8% Medicare tax on, among other things, dividends on, and capital gains from, the sale or other disposition of stock for taxable years beginning after December 31, 2012. U.S. Holders should consult their tax advisors regarding the effect, if any, of this legislation on their acquisition, ownership and disposition of our ADSs or common stock.
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Passive Foreign Investment Company
A non-U.S. corporation will be a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more its average quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s unhooked intangibles associated with active business activities may generally be classified as active assets. A non-U.S. corporation will be treated as owning a proportionate share of the assets, and earning a proportionate share of the income, of any other corporation in which such non-U.S. corporation owns, directly or indirectly, more than 25% (by value) of the stock of such other corporation.
We believe that we will not be a PFIC for U.S. federal income tax purposes for our current taxable year and do not expect to become one in the foreseeable future. However, because PFIC status depends upon the composition of our income and assets, there can be no assurance that we will not be considered a PFIC for any taxable year. Because we have valued our goodwill based on the market value of our equity, a decrease in the price of our ADSs and/or common stock may also result in our becoming a PFIC. The composition of our income and our assets will also be affected by how, and how quickly, we spend the cash raised in this offering. Under circumstances where the cash is not deployed for active purposes, our risk of becoming a PFIC may increase. If we were treated as a PFIC for any taxable year during which a U.S. Holder held ADSs or common stock, as discussed below certain adverse tax consequences could apply to the U.S. Holder.
If we were treated as a PFIC for any taxable year during which a U.S. Holder held our ADSs or common stock, gain recognized by a U.S. Holder on a sale or other disposition of such ADSs or common stock would be allocated ratably over the U.S. Holder’s holding period for such ADSs or common stock. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the resulting tax liability. The same treatment would apply to any distribution in respect of our ADSs or common stock to the extent it exceeds 125% of the average of the annual distributions on such ADSs or common stock received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs and/or common stock.
In addition, if we were treated as a PFIC in a taxable year in which we pay a dividend or in the prior taxable year, the favorable dividend rate discussed above with respect to dividends paid to certain non-corporate U.S. Holders in taxable years prior to January 1, 2013 would not apply.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.- related financial intermediaries generally are subject to information reporting and to backup withholding unless the U.S. Holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder generally will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
10.F. DIVIDENDS AND PAYING AGENTS
Not applicable.
Not applicable.
We file periodic reports and other information with the SEC. The SEC maintains a web site at www.sec.gov that contains reports and other information regarding us and other registrants that file electronically with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call SEC at 1-800-SEC-0330 for further information on the operation of its
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public reference room. Copies of the Company’s annual report on Form 20-F and other periodic reports on Form 6-K are also available on our website at http://www.fronteo.com/global/ir/financial/sec-filings.html . In addition, you may also inspect reports filed with the SEC and other information at our Tokyo headquarters, located at a 7F Meisan Takahama Building, 2-12-23, Konan, Minato-ku, Tokyo 108-0075, Japan.
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we are exposed include fluctuations in interest rates on long-term bank borrowing, equity market price and foreign currency exchange rates giving rise to translation gain/loss.
Interest Rate Risk
As of March 31, 2017, outstanding balance of our long-term bank borrowings is ¥5,439.7 million.
We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average monthly borrowings of the syndicated loan. As of March 31, 2017, our analysis indicated that such a movement would have increased our interest expense by approximately ¥12.1 million.
Equity Market Price Risk
The fair value of our investments in marketable equity securities exposes us to equity market price risks. As of March 31, 2017, the fair value of such investments was ¥500.4 million. The potential loss in fair value resulting from a 10% adverse change in equity market prices would be approximately ¥50.0 million as of March 31, 2017. See Note 4 to our consolidated financial statements.
Foreign Currency Risk
We have operations outside of Japan, therefore, a portion of our revenues and expenses are incurred in a currency other than Japanese yen. We do not utilize hedge instruments to manage the exposures associated with fluctuating currency exchange rates. Our operating results are exposed to changes in exchange rates between our functional currency, the Japanese yen, and the currency of the countries where we have operations. When Japanese yen weakens against foreign currencies, the Japanese yen value of revenues and expenses denominated in foreign currencies increase. When the Japanese yen strengthens, the opposite situation occurs.
We performed a sensitivity analysis assuming a hypothetical 100 basis point increase in foreign currency exchange rates applied to our historical fiscal 2016 results of operations. For the year ended March 31, 2017, the analysis indicated that such a movement would have decreased our revenues by approximately ¥71.7 million and would not have had a material effect on our operating income or net income.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
Not applicable.
Not applicable.
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12.D. AMERICAN DEPOSITARY SHARES
Fees and charges payable by ADS holders
The Bank of New York Mellon (Depositary), as depositary of our ADSs, collects the following fees from holders of ADRs or intermediaries acting in their behalf. The Depositary may sell (by public or private sale) sufficient securities and property received prior to such deposit to pay such fees.
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Services |
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Fees(USD) |
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Taxes and other governmental charges |
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As applicable |
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Such registration fees as may from time to time be in effect for the registration of transfers of shares generally on our shareholders’ register and applicable to transfers of shares to the name of the Depositary or its nominee or the custodian or its nominee on the making of deposits or withdrawals hereunder |
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As applicable |
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Such cable, telex and facsimile transmission expenses as are expressly provided in the deposit agreement |
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As applicable |
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Such expenses as are incurred by the Depositary in the conversion of foreign currency |
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As applicable |
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The execution and delivery of Receipts and the surrender of Receipts |
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$5.00 or less per 100 ADR |
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Any cash distribution made pursuant to the Deposit Agreement |
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$.05 or less per ADR |
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D Annual fee for depositary services |
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$.05 or less per ADR |
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The distribution of securities, such fee being in an amount equal to the fee for the execution and delivery of American Depositary Shares referred to above which would have been charged as a results of the deposit of such securities, but which securities are instead distributed by the Depositary to Owners |
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As applicable |
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Fees and other payments made by the Depositary
The Depositary has agreed to reimburse us for certain reasonable expenses related to our ADR program and incurred by us in connection with the ADR program. The Depositary will reimburse us for up to $50,000 for expenses related to the establishment of our ADR program and up to $30,000 annually for expenses related to the administration and maintenance of the our ADR program. As of March 31, 2017, our ADR program had been established. However, no reimbursements from the Depositary had been received.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Internal Control
(a) Disclosure Controls and Procedures
As of the end of the period covered by this report, management of FRONTEO conducted an evaluation, under the supervision and with the participation of FRONTEO’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of FRONTEO’s disclosure controls and procedures as such term is defined in Rules 13a-15(e) of the Securities Exchange Act of 1934 as amended (the Exchange Act). The term means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the Chief Executive Officer and the Chief Finance Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2017.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
FRONTEO’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of FRONTEO’s Chief Executive Officer and Chief Financial Officer, management of FRONTEO conducted an evaluation of the effectiveness of FRONTEO’s internal control over financial reporting based upon the framework in “Internal Control – Integrated Framework (2013)” issued by the Committee of sponsoring Organizations of the Treadway Commission. Under Rules 13a-15(f) of the Exchange Act, internal control over financial reporting means a process designed by, or under the supervision of, our Chief Executive and Chief Financial Officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and |
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have material effect on our financial statements. |
Based on that evaluation, management concluded that owing to the existence of certain material weakness in internal control, our internal control over financial reporting was not effective as of March 31, 2017. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatements of the Company’s annual financial statements will not be prevented or detected on a timely basis.
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Internal Control
In connection with the Company’s assessment of internal controls as of March 31, 2017, the Company has determined that material weaknesses in internal controls over financial reporting exist at FRONTEO USA, Inc. (FUSA) specifically in the areas of revenue recognition, income taxes and financial closing. There have been some improvements because of the Company’s remediation efforts during the year. However, the impact of the remaining material weaknesses of FUSA continues to have a negative impact on the financial statement close process at FUSA and also resulting in a material weakness in internal controls therein at the consolidated level.
Based on our evaluation, we have concluded that the following material weaknesses existed as of March 31, 2017:
Revenue Recognition
The Company determined that it had a material weakness in internal control over revenue recognition addressed in the prior year for FUSA and that this was not remediated as of March 31, 2017. Specifically, the Company failed to design and implement effective internal controls to ensure that all criteria of revenue recognition were met prior to revenue being recognized in the Company’s accounting records. In addition, the Company determined that it had a material weakness in internal control over FUSA’s customer contracts, credit risk assessment and collectability analysis that resulted in material adjustments to the FUSA’s revenue and accounts receivables that were required to be, and were, recorded at March 31, 2017.
Income Taxes
The Company determined that the material weakness in internal control over income taxes at FUSA as of March 31, 2017. Specifically, the Company failed to design and implement effective internal controls to ensure that appropriate supervision and review of accounting for income taxes, including that relating to their external third party service provider who maintains the material part of the Company’s income tax accounting process and that relating to complex, non-routing transactions. This resulted in material adjustments to the FUSA’s income tax accounts that were required to be, and were, recorded at March 31, 2017.
Financial Statement Close Process
The Company determined that the material weakness in internal control over the close process of the Company for the consolidated financial statements addressed in the prior year for FUSA was not fully remediated as of March 31, 2017. Although the Company implemented corrective actions and placed key controls near the year end, the remediation efforts were not sufficient, resulting in material adjustments to FUSA’s financial statements and the Company’s consolidated financial statements at March 31, 2017. Specifically, the material weaknesses related to insufficient resources in accounting and tax functions who are technically qualified to process complex, non-routine transactions completely and accurately in a timely manner in accordance with U.S. GAAP.
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 that may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Notwithstanding the aforementioned material weaknesses, however, FRONTEO’s management has concluded that the consolidated financial statements for the periods covered by and included in this Annual Report on Form 20-F are fairly stated in all material respects in accordance with generally accepted accounting principles in the U.S. for each of the periods presented herein.
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(c) Changes in Internal Controls
Remediation Efforts
Subsequent to March 31, 2017, we have taken additional steps to remediate the existing material weaknesses and to improve our internal control environment including the following:
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Addition of Qualified Personnel in Accounting and Finance – We have hired a seasoned Chief Financial Officer of FUSA and additional accounting personnel with sufficient technical knowledge and experience in U.S. GAAP and SEC reporting requirements. We will continue to evaluate the structure of the finance organization to effectively improve our internal control environment. |
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Implementation of Formalized Policies and Procedures – We have implemented a more structured monthly and quarterly close process to improve the completeness, timeliness and accuracy of our financial reporting and disclosures including, but not limited to, those regarding proper financial statement classification, propriety of revenue recognition, formalized customer credit management and recording of income taxes and accruals. We will continue to formalize and standardize closing, consolidation and financial reporting policies and procedures as well as to create a uniform set of accounting standards and guidelines for FRONTEO’s accounting and finance personnel. This approach will allow us to streamline and enhance consistency of our reporting processes and to strengthen our processes for interim and year-end reporting. |
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Implementation of Financial Data Reviews – With additional qualified resources in the accounting and finance functions, we will have greater lead times between closing, consolidation and financial reporting, which will provide additional time for management to review and analyze financial data and information in a timely manner. |
These actions we are taking are subject to continued review supported by confirmation and testing by FRONTEO’s management. While we continue to focus on the remediation activities, we cannot assure you that we will be able to remediate these weaknesses, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. See “Risk Factors—for additional information thereon.
Other than as disclosed above, there were no changes to our internal control over financial reporting that occurred during the year that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Statutory Auditors has determined that Mr. Sudo is an “audit committee financial expert” as defined by Item 16.A. of Form 20-F. Mr. Sudo met the independence requirements, as the term is defined under the Nasdaq Global Select Market listing standards. For details regarding Mr. Sudo’s business experiences, see “Item 6.A. Directors and Senior Management.”
We have adopted a code of ethics that applies to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our code of ethics is attached as an exhibit to this annual report for reference.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young ShinNihon LLC (“EYSN”) has served as our independent registered public accounting firm since the years ended March 31, 2012.
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The chart below sets forth the aggregate fees for professional services rendered by EYSN and other Ernst & Young member firms for the years ended March 31, 2016 and 2017.
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For the year ended March 31, |
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2017 |
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(in millions) |
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Audit Fees (1) |
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153 |
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316 |
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Tax Fees (2) |
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Total |
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153 |
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317 |
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Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor reasonably can provide, and include the group audit and statutory audits. |
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Tax fees consist of fees billed for transfer pricing related services. |
Board of Company Auditors Pre-Approval Policies and Procedures
Our Board of Statutory Auditors has adopted policies and procedures for pre-approving all audit and permissible non-audit work performed by our independent registered public accounting firm in accordance with Rule 2-01 (c)(7)(i)(B) under Regulation S-X. Under those policies and procedures, our Board of Statutory Auditors must pre-approve individual audit and non-audit services to be provided to us by our independent registered accounting firm and its affiliates. Those policies and procedures also describe prohibited non-audit services that may never be provided by an independent registered public accounting firm.
All of the services provided by our independent registered public accounting firm from March 22, 2012, when our pre-approval policies went into effect, through the end of the fiscal year ended March 31, 2017 were pre-approved by our Board of Statutory Auditors pursuant to the pre-approval policies described above, and none of such services were approved pursuant to the procedures described in Rule 2-01 (c) (7)(i)(C) of Regulation S-X, which waives the general requirement for pre-approval in certain circumstances.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 relating to listed company audit committees, which apply to us through Rules 5605(c) of the NASDAQ Listing Rules, we rely on an exemption provided by paragraph (c)(3) of that Rule available to foreign private issuers with Boards of Statutory Auditors meeting certain requirements. For a NASDAQ-listed Japanese company with a Board of Statutory Auditors, the requirements for relying on paragraph (c)(3) of Rule 10A-3 are as follows:
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The Board of Statutory Auditors must be established, and its members must be selected, pursuant to Japanese law expressly requiring such a board for Japanese companies that elect to have a corporate governance system with statutory auditors; |
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Japanese law must and does require the Board of Statutory Auditors to be separate from the Board of Directors; |
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None of the members of the Board of Statutory Auditors may be elected by management, and none of the listed company’s executive officers may be a member of the Board of Statutory Auditors; |
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Japanese law must and does set forth standards for the independence of the members of the Board of Statutory Auditors from the listed company or its management; and |
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The Board of Statutory Auditors, in accordance with Japanese law or the registrant’s governing documents, must be responsible, to the extent permitted by Japanese law, for the appointment, retention and oversight of the work of any registered public accounting firm engaged (including, to the extent permitted by Japanese law, the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed company, including its principal accountant which audits its consolidated financial statements included in its annual reports on Form 20-F. |
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To the extent permitted by Japanese law:
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The Board of Statutory Auditors must establish procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; |
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The Board of Statutory Auditors must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties; and |
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The listed company must provide for appropriate funding, as determined by its Board of Statutory Auditors, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us, (ii) compensation to any advisers employed by the Board of Statutory Auditors, and (iii) ordinary administrative expenses of the Board of Statutory Auditors that are necessary or appropriate in carrying out its duties. |
In our assessment, our Board of Statutory Auditors, which meets the requirements for reliance on the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without relying on any exemption provided by that Rule) at acting independently of management and performing the functions of an audit committee as contemplated therein.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Nasdaq Listing Rule 5615 provides that a foreign private issuer may follow its home country practice in lieu of the requirements of Rule 5600, provided that such foreign private issuer discloses in its annual reports filed with the Securities and Exchange Commission or on its website each requirement of Rule 5600 that it does not follow and describes the home country practice followed by the issuer in lieu of such requirements.
Nasdaq Listing Rule 5605(b), Rule 5605(d) and Rule 5605(e) require that (i) a majority of our Board of Directors be independent directors as defined in Rule 5605(a)(2), (ii) independent directors have regularly scheduled meetings at which only they are present, (iii) compensation of the chief executive officer and other executive officers be determined, or recommended to the Board of Directors for determination, either by a majority of the independent directors or by a compensation committee comprised solely of independent directors, and (iv) director nominees be selected, or recommended for selection by our Board of Directors, either by a majority of the independent directors or by a nominations committee comprised solely of independent directors, in accordance with the nominations process set forth in a formal written charter or board resolution. For large Japanese companies under the Companies Act of Japan, including us, there is no independence requirement with respect to directors. The task of overseeing management and accounting firms is assigned to our board of statutory auditors, who are separate and independent from the company’s management. 50% or more of our statutory auditors are required to be “outside” statutory auditors who must meet additional independence requirements under the Companies Act of Japan. An “outside” statutory auditor is defined in the Companies Act of Japan as a company auditor who had not served as a director, manager or any other employee of the company or any of its subsidiaries at any time prior to the appointment.
Nasdaq Listing Rule 5605(c) requires that (i) each issuer have adopted a formal written audit committee charter meeting the requirements of Rule 5605(c)(1) and (ii) the issuer have an audit committee of at least three members who are independent as defined under Rule 5605(a)(2), meet the independence criteria set forth in Rule 10A-3(b)(1) under the U.S. Securities Exchange Act of 1934 and satisfy certain other criteria. We employ a board of statutory auditors as described above. With respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees, we rely on an exemption under paragraph (c)(3) of that rule which is available to foreign private issuers with boards of company auditors meeting certain criteria.
74
Nasdaq Listing Rule 5620(c) provides that each issuer provide for a quorum as specified in its by-laws for any meeting of holders of common stock, which shall be at least 33 1/3% of the outstanding shares of the issuer’s voting common stock. We provide for a quorum as specified in our articles of incorporation for a special resolution for resolution of material corporate actions, which shall be at least one-third of our outstanding shares of voting common stock. Also, the Companies Act of Japan requires a quorum for the election or removal of directors or statutory auditors.
Nasdaq Listing Rule 5620(b) provides that each issuer solicit proxies and provide proxy statements for all meetings of shareholders and provide copies of such proxy solicitation to Nasdaq. As a Japanese company whose shares are listed on the securities exchanges defined in the Financial Instrument and Exchange Act of Japan, we may, but are not required to, solicit proxies for meetings of shareholders. If we solicit proxies for a meeting of shareholders, we are required to provide proxy statements and documents for reference as provided for in the Financial Instrument and Exchange Act of Japan and provide copies of such proxy statements and documents for reference to the Kanto Local Finance Bureau.
Nasdaq Listing Rule 5630(a) provides that each issuer conduct appropriate review and oversight of all related party transactions for potential conflict of interest situations on an ongoing basis by the issuer’s audit committee or another independent body of the Board of Directors. Following the requirements of the Companies Act of Japan, we require a director to obtain the approval of the Board of Directors in order for such director to accept a transfer of one of our products or any of our other assets, to transfer a product or any other asset of such director to us, to receive a loan from us, or to effect any other transaction with us, for himself or a third-party.
Nasdaq Listing Rule 5635 provides that shareholder approval be obtained prior to the issuance of designated securities under subparagraphs (a), (b), (c) or (d) of Rule 5635. Where a Japanese joint stock company (kabushiki kaisha) like us issues common shares under the Companies Act of Japan, it is necessary for the Board of Directors to determine the conditions of issuance; provided, however, that this shall not apply if the articles of incorporation provide that such conditions shall be determined by the shareholders’ meeting. Currently, our articles of incorporation do not provide for any such exception. Additionally, if we issue common stock to persons other than shareholders at an especially favorable issue price, even when there are provisions related thereto in the articles of incorporation, some matters related to such issuance shall be resolved by special resolution of the shareholders’ meeting.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
75
Not applicable.
The following financial statements are filed as part of this annual report on Form 20-F.
Index to Exhibits
|
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||
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* |
Articles of Incorporation of the Registrant (English translation), dated July 1, 2016 |
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Specimen certificate evidencing American Depositary Receipt (included in Exhibit 2.2) (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 11, 2013) |
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Form of Deposit Agreement among the Registrant, the depositary and all registered holders and beneficial owners of the American Depositary Shares (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 11, 2013) |
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Form of Underwriters’ Warrant Agreement (incorporated by reference to Exhibit 4.3 to Amendment No. 3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 11, 2013) |
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Basic Distribution Agreement, dated as of December 26, 2005, between UBIC, Inc. and Focus Systems (incorporated by reference to Exhibit 10.3 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Fifth Stock Option Agreement, dated as of April 28, 2011 (incorporated by reference to Exhibit 10.5 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Sixth Stock Option Agreement, dated as of June 21, 2012 (incorporated by reference to Exhibit 10.6 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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|
|
||
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Seventh Stock Option Agreement, dated as of May 31, 2013 (incorporated by reference to Exhibit 4.5 to the Company’s annual report on Form 20-F (File No. 001-35884) filed on July 31, 2013) |
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||
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Ninth Stock Option Agreement, dated as of May 22, 2014 (incorporated by reference to Exhibit 4.6 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 31, 2014) |
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|
|
||
|
|
Eleventh Stock Option Agreement, dated as of May 28, 2015 (incorporated by reference to Exhibit 4.7 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 30, 2015) |
||
|
|
|
76
|
|
Twelfth Stock Option Agreement, dated as of August 1, 2015 (incorporated by reference to Exhibit 4.7 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
||
|
|
|
||
|
|
Thirteenth Stock Option Agreement, dated as of June 22, 2016 (incorporated by reference to Exhibit 4.8 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
|
|
||
|
* |
Fourteenth Stock Option Agreement, dated as of August 26, 2016 |
||
|
|
|
||
|
* |
Fifteenth Stock Option Agreement, dated as of December 23, 2016 |
||
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|
|
||
|
* |
Sixteenth Stock Option Agreement, dated as of April 21, 2017 |
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|
|
||
|
* |
Seventeenth Stock Option Agreement, dated as of July 7, 2017 |
||
|
|
|
||
|
* |
Eighteenth Stock Option Agreement, dated as of Jun 23, 2017 |
||
4.14 |
*
|
Ninteenth Stock Option Agreement, dated as of July 21, 2017
|
||
|
|
Basic Agreement on Bank Transaction, dated as of November 15, 2005, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.7 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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|
||
|
|
Basic Agreement on Mutual Payment, dated as of May 27, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
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Deed of Bank Loan Agreement, dated as of May 30, 2008, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.9 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
||
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||
|
|
Deed of Bank Loan Agreement, dated as of November 30, 2009, between UBIC Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 10.10 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
||
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|
|
||
|
|
Basic Agreement on Bank Transaction, dated as of December 17, 2008, between UBIC Inc. and the Bank of Yokohama, Ltd. (incorporated by reference to Exhibit 10.11 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
||
|
|
|
||
|
|
Amendment Letter to the Basic Agreement on Bank Transaction, dated as of November 30, 2011, between UBIC Inc. and the Bank of Yokohama, Ltd. (incorporated by reference to Exhibit 10.12 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
||
|
|
|
||
|
|
Basic Agreement on Bank Transaction, dated as of March 31, 2005, between UBIC Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 10.13 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
||
|
|
|
77
|
|
Syndicated Term Loan Agreement, dated as of September 27, 2011, among UBIC Inc., the Bank of Tokyo-Mitsubishi UFJ, Ltd, the Bank of Yokohama, Ltd, Sumitomo Mitsui Banking Corporation and Resona Bank, Ltd (incorporated by reference to Exhibit 10.14 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on November 1, 2012) |
||
|
|
|
||
|
|
Syndicated Revolving Line of Credit Facility Agreement, dated December 28, 2012, among UBIC, Inc. and Bank of Tokyo-Mitsubishi UFJ, Bank of Yokohama, Ltd., Sumitomo Mitsui Banking Corporation, Mizuho Bank, and Resona Bank, Ltd. (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the Company’s registration statement on Form F-1 (Reg. No. 333-184691) filed on April 3, 2013) |
||
|
|
|
||
|
|
Extension of Syndicated Revolving Line of Credit Facility Agreement, dated as of December 12, 2013, among UBIC, Inc. and Bank of Tokyo-Mitsubishi UFJ, Bank of Yokohama, Ltd., Sumitomo Mitsui Banking Corporation, Mizuho Bank, and Resona Bank, Ltd. (incorporated by reference to Exhibit 4.16 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 31, 2014) |
||
|
|
|
||
|
|
Loan Agreement, dated October 15, 2013, by and between UBIC, Inc. and Nippon Life Insurance Company (incorporated by reference to Exhibit 4.17 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 31, 2014) |
||
|
|
|
||
|
|
Stock Purchase Agreement, dated as of August 28, 2014, by and among UBIC, Inc., TechLaw Holdings, Inc. and TechLaw Solutions, Inc. (incorporated by reference to Exhibit 99.1 to the Company’s report on Form 6-K (File No. 001-35884) filed on August 28, 2014) |
||
|
|
|
||
|
|
Loan Agreement, dated February 5, 2015, by and between UBIC, Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 4.20 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 30, 2015) |
||
|
|
|
||
|
|
Loan Agreement, dated February 2, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.21 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on July 30, 2015) |
||
|
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||
|
|
Stock Purchase Agreement, dated as of July 31, 2015, by and among UBIC, EVD and Andatha International, Inc., a California Corporation, Evolve Discovery PA, LLC, a California limited liability company, Evolve Discovery LA, LLC, a California limited liability company, Evolve Discovery Portland, LLC, an Oregon limited liability company, and Evolve Discovery Seattle, LLC, a Washington limited liability company. (incorporated by reference to Exhibit 99.1 to the Company’s report on Form 6-K (File No. 001-35884) filed on August 3, 2015) |
||
|
|
|
||
|
|
Bridge Loan Agreement, dated as of July 28, 2015, by and between UBIC, Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 4.24 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
|
||
|
|
Bridge Loan Agreement, dated as of July 27, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.25 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
||
|
|
|
||
|
|
Bridge Loan Agreement, dated as of October 26, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.26 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
||
|
|
|
78
|
|
Bridge Loan Agreement, dated as of November 20, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.27 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
|
|
|||
|
|
Pledge Agreement dated as of December 24, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.28 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
|
|||
|
|
Loan Agreement, dated November 30, 2015, by and between UBIC, Inc. and the Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference to Exhibit 4.29 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
|
|
|||
|
|
Loan Agreement, dated November 30, 2015, by and between UBIC, Inc. and Sumitomo Mitsui Banking Corporation (incorporated by reference to Exhibit 4.30 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
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|
|
Syndicated Term Loan Agreement, dated as of July 26, 2016, among FRONTEO Inc., the Bank of Tokyo-Mitsubishi UFJ, Ltd, the Bank of Yokohama, Ltd, Sumitomo Mitsui Banking Corporation and Resona Bank, Ltd (incorporated by reference to Exhibit 4.31 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
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|
|||
|
* |
Investment Agreement, dated November 14, 2016, by and between FRONTEO, Inc. and Whiz Partners, Inc. |
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|
|||
|
|
Subsidiaries of the Registrant (incorporated by reference to Exhibit 8.1 to the Company’s annual report on Form 20-F (File No, 001-35884) filed on August 15, 2016) |
|||
|
|
|
|||
|
* |
Code of Ethics of the Registrant applicable to its directors and executive officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (English translation), dated February 26, 2015 |
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|
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|
* |
Certification of the Registrant’s Chief Executive Officer and Chairman of the Board pursuant to Section 302 of the Sarbanes-Oxley Act |
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|
|||
|
* |
Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
|||
|
|
|
|||
|
* |
Certifications of the Registrant’s Chief Executive Officer and Chairman of the Board, and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act |
|||
|
|
|
|||
101.INS |
* |
Instance Document |
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|
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|
|||
101.SCH |
* |
Schema Document |
|||
|
|
|
|||
101.CAL |
* |
Calculation Linkbase Document |
|||
|
|
|
|||
101.DEF |
* |
Definition Linkbase Document |
|||
|
|
|
|||
101.LAB |
* |
Label Linkbase Document |
|||
|
|
|
|||
101.PRE |
* |
Presentation Linkbase Document |
|||
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|
|||
|
|
|
* Filed herewith
79
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: July 31, 2017
|
|
|
|
FRONTEO, INC. |
|
|
By: |
/s/ Masahiro Morimoto |
|
Name: |
Masahiro Morimoto |
|
Title: |
Chief Executive Officer and Chairman of the Board |
80
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of FRONTEO, Inc.
We have audited the accompanying consolidated balance sheets of FRONTEO, Inc. and Subsidiaries as of March 31, 2016 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended March 31, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FRONTEO, Inc. and Subsidiaries at March 31, 2016 and 2017, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2017, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young ShinNihon LLC
Tokyo, Japan
July 31, 2017
F-2
FRONTEO, Inc. and Subsidiaries
March 31, 2016 and 2017
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
ASSETS |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
¥ |
1,795,960 |
|
¥ |
4,533,182 |
|
Current portion of investments |
|
|
1,084 |
|
|
1,104 |
|
Trade accounts receivable, net of allowance for doubtful accounts of ¥75,269 thousand and ¥165,635 thousand as of March 31, 2016 and 2017 |
|
|
2,795,855 |
|
|
3,150,875 |
|
Inventories |
|
|
9,002 |
|
|
73,470 |
|
Prepaid expenses |
|
|
377,740 |
|
|
403,111 |
|
Deferred tax assets |
|
|
149,495 |
|
|
657,541 |
|
Other current assets |
|
|
285,569 |
|
|
268,805 |
|
Total Current Assets |
|
|
5,414,705 |
|
|
9,088,088 |
|
|
|
|
|
|
|
|
|
Property and equipment—net |
|
|
1,120,720 |
|
|
1,177,255 |
|
Capitalized computer software costs—net |
|
|
919,464 |
|
|
963,241 |
|
Goodwill |
|
|
2,132,137 |
|
|
2,038,710 |
|
Customer relationship–net |
|
|
1,954,416 |
|
|
1,913,459 |
|
Other intangible assets—net |
|
|
237,203 |
|
|
135,138 |
|
Investments in securities |
|
|
639,935 |
|
|
500,415 |
|
Investments |
|
|
225,360 |
|
|
224,380 |
|
Rental deposits |
|
|
141,071 |
|
|
140,642 |
|
Deferred tax assets |
|
|
45,831 |
|
|
4,253 |
|
Other assets |
|
|
35,813 |
|
|
60,027 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
¥ |
12,866,655 |
|
¥ |
16,245,608 |
|
See notes to the consolidated financial statements.
F-3
FRONTEO, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2016 and 2017
See notes to the consolidated financial statements.
F-4
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Revenue |
|
¥ |
6,279,615 |
|
¥ |
10,529,287 |
|
¥ |
11,208,041 |
|
Operating revenue from reimbursed direct costs |
|
|
25,311 |
|
|
26,949 |
|
|
12,734 |
|
Total revenue |
|
|
6,304,926 |
|
|
10,556,236 |
|
|
11,220,775 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
3,140,080 |
|
|
5,746,069 |
|
|
6,904,980 |
|
Reimbursed direct costs |
|
|
25,311 |
|
|
26,949 |
|
|
12,734 |
|
Selling, general and administrative expenses |
|
|
2,864,113 |
|
|
4,853,497 |
|
|
5,481,912 |
|
Total operating expense |
|
|
6,029,504 |
|
|
10,626,515 |
|
|
12,399,626 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
275,422 |
|
|
(70,279) |
|
|
(1,178,851) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,699 |
|
|
1,672 |
|
|
3,634 |
|
Interest expense |
|
|
(28,177) |
|
|
(54,793) |
|
|
(125,743) |
|
Gain (loss) on derivatives |
|
|
― |
|
|
(258,205) |
|
|
43,594 |
|
Foreign currency exchange gains (losses) |
|
|
200,438 |
|
|
161,680 |
|
|
(13,751) |
|
Dividend income |
|
|
9,000 |
|
|
11,250 |
|
|
14,400 |
|
Other—net |
|
|
(85) |
|
|
(20,075) |
|
|
(60,255) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
458,297 |
|
|
(228,750) |
|
|
(1,316,972) |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) |
|
|
238,094 |
|
|
183,125 |
|
|
(458,109) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
220,203 |
|
|
(411,875) |
|
|
(858,863) |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
1,750 |
|
|
5,757 |
|
|
6,224 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to FRONTEO, Inc. shareholders |
|
¥ |
218,453 |
|
¥ |
(417,632) |
|
¥ |
(865,087) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Net income (loss) attributable to FRONTEO, Inc. shareholders per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
¥ |
6.3 |
|
¥ |
(11.7) |
|
¥ |
(23.8) |
|
Diluted |
|
|
6.1 |
|
|
(11.7) |
|
|
(23.8) |
|
See notes to the consolidated financial statements.
F-5
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Thousands of Yen |
|
|||||||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||||||
Net income (loss) |
|
¥ |
220,203 |
|
¥ |
(411,875) |
|
¥ |
(858,863) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
|
138,130 |
|
|
(449,944) |
|
|
(51,994) |
|
||||
Unrealized holding gains on securities: |
|
|
|
|
|
|
|
|
|
|
||||
Amount arising during the period |
|
|
89,693 |
|
|
78,215 |
|
|
(15,759) |
|
||||
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
||||
Amount arising during the period |
|
|
(1,703) |
|
|
(17,495) |
|
|
13,759 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
Total other comprehensive income (loss) |
|
|
226,120 |
|
|
(389,224) |
|
|
(53,994) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
Total comprehensive income (loss) |
|
|
446,323 |
|
|
(801,099) |
|
|
(912,857) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
Less: Comprehensive income attributable to noncontrolling interests |
|
|
1,750 |
|
|
5,757 |
|
|
6,224 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
Total comprehensive income (loss) attributable to FRONTEO, Inc. shareholders |
|
¥ |
444,573 |
|
¥ |
(806,856) |
|
¥ |
(919,081) |
|
See notes to the consolidated financial statements.
F-6
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Equity
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen, except share data |
|
|||||||||||||||||||||
|
|
FRONTEO, Inc. Shareholders |
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
Additional |
|
|
|
|
Other |
|
|
|
|
Non- |
|
|
|
|
|||
|
|
Common Stock |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
controlling |
|
Total |
|
|||||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Earnings |
|
Income |
|
Stock |
|
Interests |
|
Equity |
|
|||||||
Balance at March 31, 2014 |
|
34,411,360 |
|
¥ |
1,404,139 |
|
¥ |
890,478 |
|
¥ |
1,171,098 |
|
¥ |
134,619 |
|
¥ |
(26) |
|
¥ |
21,306 |
|
¥ |
3,621,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
218,453 |
|
|
|
|
|
|
|
|
1,750 |
|
|
220,203 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
226,120 |
|
|
|
|
|
|
|
|
226,120 |
|
Stock issuance |
|
1,000,000 |
|
|
577,800 |
|
|
567,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145,187 |
|
Share-based compensation |
|
|
|
|
|
|
|
27,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,160 |
|
Exercise of stock options |
|
80,000 |
|
|
15,275 |
|
|
2,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,642 |
|
Acquisition of noncontrolling interests in a consolidated subsidiary |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
(9,612) |
|
|
(9,575) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2015 |
|
35,491,360 |
|
¥ |
1,997,214 |
|
¥ |
1,487,429 |
|
¥ |
1,389,551 |
|
¥ |
360,739 |
|
¥ |
(26) |
|
¥ |
13,444 |
|
¥ |
5,248,351 |
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen, except share data |
|
|||||||||||||||||||||
|
|
FRONTEO, Inc. Shareholders |
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
Additional |
|
|
|
|
Other |
|
|
|
|
Non- |
|
|
|
|
|||
|
|
Common Stock |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
controlling |
|
Total |
|
|||||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Earnings |
|
Income(Loss) |
|
Stock |
|
Interests |
|
Equity |
|
|||||||
Balance at March 31, 2015 |
|
35,491,360 |
|
¥ |
1,997,214 |
|
¥ |
1,487,429 |
|
¥ |
1,389,551 |
|
¥ |
360,739 |
|
¥ |
(26) |
|
¥ |
13,444 |
|
¥ |
5,248,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(417,632) |
|
|
|
|
|
|
|
|
5,757 |
|
|
(411,875) |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(389,224) |
|
|
|
|
|
|
|
|
(389,224) |
|
Share-based compensation |
|
|
|
|
|
|
|
78,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,411 |
|
Exercise of stock options |
|
260,000 |
|
|
17,498 |
|
|
3,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,197 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
(106,472) |
|
|
|
|
|
|
|
|
|
|
|
(106,472) |
|
Other |
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
|
(3) |
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016 |
|
35,751,360 |
|
¥ |
2,014,712 |
|
¥ |
1,569,539 |
|
¥ |
865,610 |
|
¥ |
(28,485) |
|
¥ |
(26) |
|
¥ |
19,198 |
|
¥ |
4,440,548 |
|
See notes to the consolidated financial statements.
F-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen, except share data |
|
||||||||||||||||||||||
|
|
FRONTEO, Inc. Shareholders |
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
||
|
|
Shares of |
|
|
|
|
Additional |
|
|
|
|
Other |
|
|
|
|
Non- |
|
|
|
|
||||
|
|
Common Stock |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
controlling |
|
Total |
|
||||||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Earnings |
|
Income |
|
Stock |
|
Interests |
|
Equity |
|
||||||||
Balance at March 31, 2016 |
|
35,751,360 |
|
¥ |
2,014,712 |
|
¥ |
1,569,539 |
|
¥ |
865,610 |
|
¥ |
(28,485) |
|
¥ |
(26) |
|
¥ |
19,198 |
|
¥ |
4,440,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
(865,087) |
|
|
|
|
|
|
|
|
6,224 |
|
|
(858,863) |
|
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,994) |
|
|
|
|
|
|
|
|
(53,994) |
|
|
Conversion of convertible note |
|
1,537,502 |
|
|
625,000 |
|
|
719,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344,715 |
|
|
Share-based compensation |
|
|
|
|
|
|
|
53,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,032 |
|
|
Exercise of stock options |
|
633,000 |
|
|
150,690 |
|
|
33,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,375 |
|
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
(107,253) |
|
|
|
|
|
|
|
|
|
|
|
(107,253) |
|
|
Other |
|
|
|
|
|
|
|
(5,122) |
|
|
|
|
|
|
|
|
|
|
|
6,922 |
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017 |
|
37,921,862 |
|
¥ |
|
|
¥ |
2,370,849 |
|
¥ |
(106,730) |
|
¥ |
(82,479) |
|
¥ |
(26) |
|
¥ |
32,344 |
|
¥ |
|
|
See notes to the consolidated financial statements.
F-9
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
¥ |
220,203 |
|
¥ |
(411,875) |
|
¥ |
(858,863) |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
589,532 |
|
|
895,825 |
|
|
1,048,627 |
|
Adjustment to earn-out liabilities |
|
|
— |
|
|
198,658 |
|
|
— |
|
Share-based compensation expense |
|
|
27,160 |
|
|
78,411 |
|
|
53,032 |
|
Impairment of property and equipment |
|
|
— |
|
|
5,144 |
|
|
— |
|
Deferred income taxes (benefit) |
|
|
155,223 |
|
|
(30,190) |
|
|
(498,899) |
|
Foreign currency exchange (gains) losses |
|
|
(172,114) |
|
|
156,395 |
|
|
(214,400) |
|
Interest expense |
|
|
28,177 |
|
|
54,793 |
|
|
125,743 |
|
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
Increase in trade accounts receivable |
|
|
(287,953) |
|
|
(386,852) |
|
|
(293,771) |
|
Increase in inventories |
|
|
— |
|
|
(1,832) |
|
|
(64,436) |
|
Decrease (increase) in prepaid expenses |
|
|
40,977 |
|
|
(128,602) |
|
|
(32,929) |
|
Decrease (increase) in other current assets |
|
|
28,019 |
|
|
(159,205) |
|
|
15,392 |
|
Decrease (increase) in rental deposits |
|
|
16,062 |
|
|
(1,035) |
|
|
775 |
|
Increase (decrease) in trade accounts payable |
|
|
58,718 |
|
|
340,926 |
|
|
8,260 |
|
Increase (decrease) in accrued income taxes |
|
|
84,942 |
|
|
(256,967) |
|
|
8,913 |
|
Increase (decrease) in accrued expense and other current liabilities |
|
|
227,600 |
|
|
302,828 |
|
|
(75,451) |
|
Increase in other liabilities |
|
|
10,514 |
|
|
23,113 |
|
|
391,185 |
|
Other—net |
|
|
(13,080) |
|
|
(63,295) |
|
|
(3,972) |
|
Net cash provided by (used in) operating activities |
|
|
1,013,980 |
|
|
616,240 |
|
|
(390,794) |
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
(891,575) |
|
|
(3,433,114) |
|
|
(230,341) |
|
Purchase of investment |
|
|
— |
|
|
(225,360) |
|
|
— |
|
Proceeds from sales of investment |
|
|
100,000 |
|
|
|
|
|
— |
|
Proceeds from sales of available-for-sale securities |
|
|
— |
|
|
— |
|
|
100,000 |
|
Purchase of property and equipment |
|
|
(202,542) |
|
|
(673,724) |
|
|
(328,436) |
|
Payment for capitalized computer software costs |
|
|
(362,535) |
|
|
(382,049) |
|
|
(486,185) |
|
Other—net |
|
|
(56,536) |
|
|
844 |
|
|
(8,115) |
|
Net cash used in investing activities |
|
|
(1,413,188) |
|
|
(4,710,421) |
|
|
(953,077) |
|
F-10
FRONTEO, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt |
|
|
200,000 |
|
|
3,800,000 |
|
|
4,370,000 |
|
Repayment of short-term debt |
|
|
(164,000) |
|
|
(3,784,000) |
|
|
(3,422,000) |
|
Proceeds from long-term bank borrowings |
|
|
800,000 |
|
|
3,761,546 |
|
|
1,855,897 |
|
Repayment of long-term bank borrowings |
|
|
(287,931) |
|
|
(454,592) |
|
|
(750,641) |
|
Proceeds from issuance of common stock, including stock options exercised |
|
|
1,157,102 |
|
|
21,197 |
|
|
184,375 |
|
Proceeds from issuance of convertible notes |
|
|
— |
|
|
— |
|
|
2,500,000 |
|
Purchase of subsidiary stock from a noncontrolling shareholder |
|
|
(9,574) |
|
|
— |
|
|
— |
|
Payments of contingent and accrued consideration |
|
|
— |
|
|
— |
|
|
(497,459) |
|
Dividends paid |
|
|
— |
|
|
(106,472) |
|
|
(107,253) |
|
Other—net |
|
|
(11,297) |
|
|
(24,763) |
|
|
(66,447) |
|
Net cash provided by financing activities |
|
|
1,684,300 |
|
|
3,212,916 |
|
|
4,066,472 |
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
|
|
54,725 |
|
|
(41,036) |
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
1,339,817 |
|
|
(922,301) |
|
|
2,737,222 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
1,378,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
¥ |
2,718,261 |
|
¥ |
1,795,960 |
|
¥ |
4,533,182 |
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized |
|
¥ |
|
|
¥ |
|
|
¥ |
22,833 |
|
Income taxes paid–net of refunds (Refund of income taxes) |
|
|
|
|
|
|
|
|
(10,845) |
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes to equity |
|
¥ |
— |
|
¥ |
— |
|
¥ |
1,344,715 |
|
Outstanding payments for acquisition of property and equipment, and capitalized computer software costs included in trade accounts payable |
|
|
|
|
|
|
|
|
121,567 |
|
Asset retirement obligation |
|
|
|
|
|
— |
|
|
— |
|
Capital lease obligation |
|
|
— |
|
|
— |
|
|
113,847 |
|
See notes to the consolidated financial statements.
F-11
Nature of Operations — FRONTEO, Inc. (“FRONTEO”) is a Japanese corporation established on August 8, 2003 under the name of UBIC, Inc. (“UBIC”), whose principal office is located in Tokyo, Japan. On July 1, 2016, UBIC changed its name to FRONTEO, Inc. FRONTEO and its subsidiaries (collectively, the “Company”) provide solutions, employing advanced technologies, for corporate litigation strategy and crisis management. The Company mainly offers eDiscovery and forensic services, such as data collection, data processing, data review and document production. The Company’s customers include leading law firms, corporate legal departments, government agencies and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise. The Company currently expands its business operations by applying AI based technology to new fields such as healthcare and marketing.
Basis of Financial Statements — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Because the Company maintains its records and prepares its financial statements in accordance with accounting principles prevailing in the respective country of incorporation, certain adjustments have been made to conform to U.S. GAAP. The major adjustments include those relating to goodwill, depreciation of property and equipment, share-based compensation, valuation of deferred tax assets, appropriation of accumulated deficit, stock issuance cost and fair value measurements of certain derivatives.
Reclassification— Certain reclassifications have been made to prior periods to conform to the current year presentations. These reclassifications had no impact on net income or shareholders’equity for any period.
Principles of Consolidation — The consolidated financial statements include the accounts of FRONTEO and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates — The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used are primarily in the areas of evaluation of investments, valuation of deferred tax assets, determination of fair values of stock options, fair value measurement of assets acquired and liabilities assumed in a business combination, impairment of goodwill, useful lives of fixed assets and intangible assets with finite useful lives and valuation of those assets and allowance for doubtful accounts. Actual results could differ from those estimates.
Business Combinations — For business combinations, the assets acquired, the liabilities assumed, and any non-controlling interest are recognized at the acquisition date and measured at their fair values as of that date. The Company accounts for business combinations using the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations.” Identifiable assets acquired and liabilities assumed are recorded at their fair values at the acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed as a result of the business combination. Acquisition-related costs, which include advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred.
Foreign Currency Translation — The assets and liabilities of foreign subsidiaries with functional currencies other than Japanese yen are translated into Japanese yen at the rate of exchange at the balance sheet date. Income and expense accounts are translated at the average rates of exchange for the respective reporting period. The resulting translation adjustments are included in other comprehensive income (loss).
Cash Equivalents — The Company defines cash equivalents as all highly liquid investments with insignificant risk of changes in value which have original maturities of three months or less at the time of purchase.
Investments — Investments consist of time deposits with an original maturity of more than three months.
Allowance for Doubtful Accounts — Allowance for doubtful accounts is established in amounts considered to be appropriate based primarily upon an evaluation of potential losses in the outstanding receivables.
F-12
Inventories — Inventories are stated at the lower of cost or net realizable value. Cost is principally determined by the specific identification method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale. The Company routinely reviews its inventories for their salability and for indications of obsolescence to determine if inventories should be written down to market value. Judgments and estimates must be made and used in connection with establishing such allowances in any accounting period. In estimating the net realizable value of its inventories, the Company considers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories.
Property and Equipment — Property and equipment are stated at cost. Depreciation and amortization of property and equipment, including assets under capital lease, are computed using the straight-line method based on either the estimated useful lives of the assets or the lease period, whichever is shorter.
The useful lives for depreciation and amortization by major asset classes are as follows:
|
|
|
|
Leasehold improvements |
|
6 to 15 years |
|
Furniture and fixtures |
|
4 to 20 years |
|
Computers |
|
5 years |
|
Assets under capital leases, primarily office equipment |
|
5 to 7 years |
|
Capitalized Computer Software Costs — The Company capitalizes costs of computer software developed and purchased for internal use. The costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is completed and when management, with the relevant authority, authorizes and commits funding to the project and it is probable that the project will be completed and the software will be used to perform the function intended. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Capitalized costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated useful life of the product, mainly five years. In addition, the Company develops certain computer software to be sold where related costs are capitalized after establishment of technological feasibility in accordance with ASC 985, “Software.” The annual amortization of such capitalized costs is the greater of the amount computed using the ratio of each software’s current year gross revenues to the total of current and anticipated future gross revenues or the straight-line method over the remaining estimated economic life of each software product.
Leases — Capital leases are capitalized at the inception of the lease at the present value of the minimum lease payments. All other leases are accounted for as operating leases. Lease payments for capital leases are apportioned to interest expense and a reduction of the lease obligation so as to achieve a constant rate of interest on the balance of the obligation. Operating lease payments are recognized as an expense on a straight-line basis over the lease term.
Impairment of Long-lived Assets — The Company reviews the carrying value of long-lived assets or a related group of assets to be held and used, including intangible assets with finite useful lives, for impairment whenever events or circumstances occur that indicate that the carrying value of the assets may not be recoverable. The assets are considered to be impaired when the estimated undiscounted cash flows expected to result from the use of the assets and their eventual disposition are less than their carrying values. The impairment loss is measured as the amount by which the carrying value of the asset or asset group exceeds its fair value. In determining the fair value, the Company uses available quoted market prices and present value techniques, if appropriate, based on the estimated future cash flows expected to result from the use of the assets and their eventual dispositions.
Goodwill and Intangible Assets — Goodwill is not amortized and is tested annually for impairment of each 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, the Company has 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 the Company’s operating segments or one level below the operating segments. If the Company determines 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.
F-13
If the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform the first step of a two-step impairment review process. The measurement date for goodwill impairment testing is January 1, annually. During the year ended March 31, 2017, the Company performed quantitative assessment of goodwill and confirmed that the fair value of a reporting unit exceeded its the carrying amount. Intangible assets with finite useful lives are amortized using straight-line method over the estimated useful life.
The useful lives for amortization by major asset classes are as follows:
|
|
|
Customer relationships |
|
10 to 15 years |
Noncompete agreement |
|
3 years |
Favorable lease |
|
3 years |
Trademarks |
|
10 years |
Investments in Securities — The Company classifies investments in equity securities that have readily determinable fair values and debt securities as available-for-sale securities, which are accounted for at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss) in equity on a net-of-tax basis. The cost of securities sold is determined based on the average cost method.
The Company reviews the fair values of available-for-sale securities on a regular basis to determine if the fair value of any individual security has declined below its cost and if such decline is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the investment is written down to fair value. Other-than-temporary declines in fair value are determined taking into consideration the duration of the decline in fair value of the security and the severity of the decline, the financial condition and near term prospects of the investee and the intent and ability of the Company to hold the equity security until forecasted recovery. The resulting realized loss is included in the consolidated statements of operations in the period in which the decline is deemed to be other than temporary.
Retirement and Severance Benefits — The Company has defined benefit severance indemnities plans. The projected benefit obligation at March 31, the measurement date, is recognized in the consolidated balance sheet. The projected benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. Net periodic retirement cost is recorded in the consolidated statement of operations and includes service cost and interest cost. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Actuarial gains and losses included in accumulated other comprehensive income (loss) are amortized using the straight-line method over the average remaining service period of active employees if it exceeds the corridor, which is defined as 10 percent of the projected benefit obligation.
Asset Retirement Obligations — The Company records asset retirement obligations when the obligation is incurred. The obligation is measured at fair value and included in other liabilities. When the liability is initially recorded, the Company capitalizes the related cost by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the asset’s useful life.
Convertible bonds —The Company accounts for convertible bonds according to their stated redemption value net of discount. The Company classifies the convertible bonds as a liability on the consolidated balance sheets. The Company allocates proceeds equal to the intrinsic value of the beneficial conversion features contained in the bonds and are recognized in “Additional paid-in capital” on the Company’s consolidated balance sheets. There is no other embedded features which are required to bifurcate and are accounted for separately from the bonds. Discounts on convertible bonds are amortized as interest expense over the redemption period.
Derivative Financial Instruments — The Company recognizes all derivative financial instruments, such as cross currency interest rate swaps and interest rate swap contracts, in the consolidated balance sheets as either assets or liabilities and they are measured at fair value regardless of the purpose or intent for using them.
F-14
The Company does not designate derivative financial instruments as hedging instruments nor apply hedge accounting. Accordingly, changes in fair values of derivative financial instruments are recognized in earnings immediately.
Revenue Recognition — The Company has agreements with customers pursuant to which we perform various services. A majority of the Company’s revenue relates to fees earned for the month-to-month performance of eDiscovery and forensic services. Such services include data collection, data processing, data hosting, data review, and document production services. The fees that the Company earns and bills for these services vary primarily based on the hours of service provided, the volume of documents reviewed or produced, the amount of data processed or stored. The scope and volume of services to be performed can change depending on customers’ requests, which are made on an optional and “as needed” basis, and customers may choose not to request additional services or may obtain similar services from other service providers.
The Company recognizes revenue for eDiscovery and forensic services based on the agreed-upon prices and volume of services performed during the period. For these contractual arrangements, the Company has identified each deliverable service element. Based on management’s evaluation of each element, it was determined that each element delivered has standalone value to the customers because the Company or other vendors sell such services separately from any other services/deliverables. Accordingly, each of the service elements in the multiple element case qualifies as a separate unit of accounting. The Company uses the best estimate of sales price based on the price it charges when it sells an element on a standalone basis, which is generally consistent with the stated prices in the arrangements, and allocates revenue to the various units of accounting in the arrangements based on the stated prices.
The Company also enters into multiple-element arrangements for software sales which includes undelivered elements that are not essential to the functionality of the delivered software and such undelievered elements only consist of post contract support. The company accounts for them in accordance with ASC 985-605, “Software-Revenue Recognition.” The Company has not been able to establish a vendor-specific objective evidence of fair value (“VSOE”) of fair value to allocate the fee to the separate elements and thus recognizes the entire arrangement fee on a straight-line basis over the contract period.
The Company recognizes revenue for each separate unit of accounting when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured.
The Company has revenue related to the reimbursement of certain direct costs by customers, primarily transportation. Reimbursed transportation and other reimbursable direct costs are recorded gross in the consolidated statements of operations as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs.”
Consumption tax — Consumption tax collected and remitted to tax authorities is excluded from revenues, cost of sales and expenses in the consolidated statements of operations.
Advertising — Advertising costs are expensed as incurred and are recorded in “Selling, general and administration expenses.”
Research and Development Expenditures — Costs related to the research, design and development of products are charged to research and development expenses as incurred.
Share-Based Compensation — The Company measures the cost of employee services received in exchange for an award of equity instruments at the fair value of the award on the grant date and recognizes the cost over the period which the employee is required to provide services in exchange for the award. Compensation expenses are recognized on a straight-line basis over the requisite service period of the awards which are expected to be vested.
Income Taxes — Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the temporary differences or tax loss carryforwards and tax credit are expected to reverse. Valuation allowances are provided against deferred tax assets when it is more likely than not that a tax benefit will not be
F-15
realized. The Company recognizes the financial statement effect of uncertain tax positions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Accrued interest and penalties related to the unrecognized tax benefits are included in income tax expense in the consolidated statements of operations.
Net Income (Loss) Attributable to FRONTEO, Inc. Shareholders Per Share — Basic net income (loss) attributable to FRONTEO, Inc. shareholders per share is computed using the weighted-average number of shares of common stock outstanding during each year. Diluted net income (loss) attributable to FRONTEO, Inc. shareholders per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Other Comprehensive Income (Loss) — Other comprehensive income (loss) consists of translation adjustments resulting from the translation of financial statements of the foreign subsidiaries, unrealized holding gains or losses on available-for-sale securities and adjustments related to retirement and severance benefits.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-05, Intangibles – Goodwill and Other – Internal Use of Software (Subtopic 350-40) , for fees paid in a cloud computing arrangement. The guidance requires entities to account for a cloud computing arrangement that includes a software license element in a manner consistent with the acquisition of other software licenses. Cloud computing arrangements without a software license element are to be accounted for as service contracts. This guidance does not affect the accounting for service contracts by a customer. This guidance was effective for the Company as of April 1, 2016. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In September 2015, the FASB issued ASU 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments , for measurement-period adjustments in business combinations. The guidance eliminates the requirement for acquirers in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance was effective for the Company as of April 1, 2016. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606) . This ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:
|
1. |
|
Contracts with customers—including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations) |
|
2. |
|
Significant judgments and changes in judgments—determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations |
|
3. |
|
Assets recognized from the costs to obtain or fulfill a contract. |
F-16
The effective date of this ASU was revised to annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period, by ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which was issued in August 2015.
In December 2016, the FABS issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which amends guidance in the new standard on disclosure of performance obligations, provisions for losses on certain types of contracts, scoping, and other areas. These standard updates have the same effective date as the original standard.
The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company currently anticipates using the modified retrospective method. The Company has begun its process for implementing this guidance, including performing a preliminary review of selected revenue streams for eDiscovery in Japan and US, and for AI business in Japan to identify any differences in the timing, measurement or presentation of revenue recognition and we are in the initial stage of the implementation process. Based on our preliminary review of selected revenue streams, we currently are not aware of any potential material impacts on the timing of revenue recognition including allocation of revenue that we currently allocate to various units of accounting in the arrangements based on the stated prices. The Company will continue to assess the overall impact the adoption will have on the consolidated financial statements and our preliminary assessments are subject to change.
In November 2015, the FASB issued ASU 2015-17 for balance sheet classification of deferred taxes. The guidance requires entities to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance will be effective for the Company as of April 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , for the classification and measurement of financial instruments. The guidance requires entities to carry all investments in equity securities at fair value through net income, except for investments that qualify for the equity method of accounting or those that result in consolidation of the investee or for which the entity has elected the practicability exception to fair value measurement. In addition, for investments whose fair value are measured with the practicability exception, the guidance requires entities to qualitatively consider indicators which were added by the guidance to determine whether the investment is impaired and eliminated the requirement in the current U.S. GAAP to assess whether an impairment of such an investment is other than temporary. Furthermore, the guidance establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , for lease accounting. The guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than twelve months and provides that recognition, presentation and measurement in the financial statements depend on its classification as a finance or operating lease. In addition, the guidance requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This guidance will be effective for the Company as of April 1, 2019. The Company is currently evaluating the impact of adopting this guidance.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , to amend new revenue recognition standard on assessing whether an entity is a principal or agent in a revenue transaction. This amendment will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this amendment.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , for employee share-based payment accounting. The guidance requires entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee's shares than it currently can for tax withholding purposes without triggering liability accounting and to make a policy election
F-17
to account for forfeitures as they occur. This guidance will be effective for the Company as of April 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , to amend certain aspects of the new revenue recognition standard including amending the guidance on identifying performance obligations and the implementation guidance on licensing. The amendments clarify how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether the entity recognizes revenue over time or at a point in time. In addition, the amendments clarify how entities will determine whether promised goods or services are separately identifiable, which is an important step in determining whether goods and services should be accounted for as separate performance obligations. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , to amend the new revenue recognition standard to reduce the potential for diversity in practice upon the initial application and the cost and complexity of applying the new revenue recognition standards both upon transition and on an ongoing basis. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , to reduce the diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance will be effective for the Company as of April 1, 2018. The Company is currently evaluating the impact of adopting this guidance.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , related to the two-step goodwill impairment test. The amendments remove the second step of the test and allow the application of 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. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance will be effective for the Company as of April 1, 2020. The Company is currently evaluating the impact of adopting this guidance.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost , to amend the requirements related to the income statement presentation of the components of net periodic benefit cost for sponsored defined benefit pension and other postretirement plans. This guidance will be effective for the Company as of April 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
2. BUSINESS COMBINATION
TechLaw Solutions, Inc.
On August 28, 2014, the Company acquired TechLaw Solutions, Inc. (“TLS”), which conducts eDiscovery business in the United States of America (the “U.S.”), from TechLaw Holdings, Inc. This acquisition was completed by acquiring all issued and outstanding shares of TLS for ¥891,575 thousand in cash. There were no future contingent payments. This business combination was accounted for using the acquisition method. The Company has completed its measurement of the fair values of the assets acquired, including customer relationships, and liabilities assumed as of the acquisition date.
The Company allocated the fair value of purchase consideration to assets acquired and liabilities assumed based on their fair value. The Company engaged an independent third-party appraisal firm to assist in determining the fair values of assets acquired and liabilities assumed. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recognized as goodwill.
The Company believes that the ties between the Company, having advanced technology and innovative products and services, and TLS with its strong reputation and sales channel in the U.S., will result in a more efficient expansion of the Company’s business, especially in the U.S. The Company will also be able to more easily understand the needs of customers in the U.S. market, which will enable the Company to optimize its investment in research and development to develop new products and services. Further, the Company believes that it will be
F-18
able to improve its corporate value as a whole by positively promoting the sharing and use of management resources such as connecting TLS's customers and know-how to the Company’s technology, products and/or services. Goodwill is mainly attributable to the expected synergies from this acquisition. The total amount of goodwill expected to be deductible for tax purpose is approximately ¥166 million.
Acquisition-related costs incurred and expensed during the year ended March 31, 2015 were ¥87,803 thousand, and are recorded as a component of Selling, general and administrative expenses on the consolidated statement of operations.
The following table summarizes the final allocation of the purchase price based on the fair values of the assets acquired and liabilities assumed from TLS on August 28, 2014.
|
|
|
|
|
|
|
Thousands of Yen |
|
|
Trade accounts receivable |
|
¥ |
|
|
Prepaid expense |
|
|
72,431 |
|
Property and equipment |
|
|
57,805 |
|
Other intangible assets |
|
|
384,626 |
|
Other |
|
|
9,692 |
|
Total assets acquired |
|
|
789,363 |
|
|
|
|
|
|
Current liabilities |
|
|
48,669 |
|
Total liabilities assumed |
|
|
48,669 |
|
|
|
|
|
|
Total identified net assets |
|
|
740,694 |
|
|
|
|
|
|
Goodwill |
|
|
150,881 |
|
Purchase price |
|
¥ |
891,575 |
|
Revenues and net loss attributable to TLS before income taxes which were included in the Company's consolidated statement of income for the year ended March 31, 2015 were ¥963,666 thousand and ¥15,438 thousand, respectively.
EvD, Inc.
On July 31, 2015, the Company acquired all of the outstanding shares of EvD, Inc. (“EvD” and conducting business as “Evolve Discovery”), pursuant to the terms of a stock purchase agreement (the “Agreement”), by and among UBIC, EvD and Andatha International, Inc. (“Andatha”), Evolve Discovery PA, LLC, (“EvD PA”), Evolve Discovery LA, LLC, (“EvD LA”), Evolve Discovery Portland, LLC, (“EvD PDX”), Evolve Discovery Seattle, LLC, (“EvD SEA”, and together with Andatha, EvD PA, EvD LA, and EvD PDX, the “Sellers”). EvD is an eDiscovery corporation, founded in 1997, that provides electronic discovery services, litigation consulting and project management to corporations and law firms. This business combination was accounted for using the acquisition method. The Company has completed its measurements of the fair values of the assets acquired, including customer relationships, and liabilities assumed as of the acquisition date.
Under the terms of the Agreement, the Company acquired the shares for aggregate cash consideration of ¥4,381,175 thousand, including the acquisition date fair value of the earn-out payment of ¥135,948 thousand, which the sellers are entitled to receive subject to the achievement of certain EBITDA targets of Evolve Discovery during the 2015 calendar year. In July 2016, the Company and the sellers reached an agreement of the final earn-out amount, and the payment in cash of ¥334,837 thousand was made to the sellers. The change in the earn-out liability from the acquisition date was included in selling, general and administrative expenses in the consolidated statement of operations for the year ended March 31, 2016. The liability related to the earn-out payment was recorded in Accrued expense in the consolidated balance sheet as of March 31, 2016 and paid in the year ended March 31, 2017. The Company also settled promissory note of ¥361,511 thousand due in July 2016 and made other payments to the seller totaling ¥132,084 thousand.
The acquisition of TLS in the prior fiscal year and TLS’s promotion of the Company’s services resulted in an extension of the Company’s market in the east coast region of the U.S. The combination of the acquisitions of TLS and EvD, based in the west coast region of the U.S., will further expand the Company’s presence the U.S., and “Lit i View ® ” will be able to reach a broader base of customers more speedily. The Company has decided
F-19
that the best approach is to increase the Company’s market share in eDiscovery services in the U.S., where there is a trend of industry consolidation, and therefore acquired the whole of the outstanding shares of EvD. Goodwill is mainly attributable to the synergies expected to arise from this acquisition.
The Company allocated the fair value of purchase consideration to assets acquired and liabilities assumed based on their fair value. The Company engaged an independent third-party appraisal firm to assist in determining the fair values of assets acquired and liabilities assumed. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recognized as goodwill. The goodwill is not deductible for income tax purposes.
Acquisition-related costs incurred and expensed during the year ended March 31, 2016 were ¥254,884 thousand and were recorded as a component of Selling, general and administrative expenses on the consolidated statement of operations.
The following table summarizes the final allocation of the purchase price based on the fair values of the assets acquired and liabilities assumed from EvD on July 31, 2015.
|
|
|
|
|
|
Thousands of Yen |
|
Cash and cash equivalents |
|
¥ |
179,050 |
Trade accounts receivable |
|
|
1,055,767 |
Prepaid expense |
|
|
100,412 |
Other current assets |
|
|
355,844 |
Other intangible assets |
|
|
2,136,610 |
Other |
|
|
135,598 |
Total assets acquired |
|
|
3,963,281 |
|
|
|
|
Trade accounts payable |
|
|
178,623 |
Deferred tax liabilities |
|
|
878,767 |
Income tax payable |
|
|
276,143 |
Other current liabilities |
|
|
386,211 |
Other |
|
|
25,306 |
Total liabilities assumed |
|
|
1,745,050 |
|
|
|
|
Total identified net assets |
|
|
2,218,231 |
|
|
|
|
Goodwill |
|
|
2,162,944 |
Purchase price |
|
¥ |
4,381,175 |
Revenues and net income attributable to EvD before income taxes included in the Company's consolidated statement of operations for the year ended March 31, 2016 were ¥3,419,285 thousand and ¥108,475 thousand, respectively.
Essential Discovery, Inc.
On November 4, 2016, the Company acquired the business of Essential Discovery, Inc. (“EDI”), which conducts eDiscovery business, especially review services to AM Law 100 firms and Fortune Global 250 in San Francisco, New York and Las Vegas. The Company acquired 100 percent of EDI’s member interests for cash consideration, and in addition to the cash consideration, the Company will pay an earn-out based on calendar year 2017 sales. This business combination was accounted for using the acquisition method. The Company has not completed its initial measurements of the fair values of the assets acquired, including customer relationships, and liabilities assumed as of the acquisition date.
The acquisition date fair value of the earn-out payment of ¥53,467 thousand, which the sellers are entitled to receive subject to the achievement of certain sales targets of former clients of the seller during the 2017 calendar
F-20
year. The maximum earn-out payment is ¥65,065 thousand. The earn-out payment will be due in April 2018. The liability related to the earn-out payment was recorded in Accrued expense in the consolidated balance sheet as of March 31, 2017.
The acquisition of EDI allows the Company to expand in presence to reach a broader base of customers across the United States of America including AM Law 100 firms and Fortune Global 250, leveraging the Company’s review teams who are highly skilled and experienced attorneys. The Company has decided that the best approach is to increase the Company’s market share in eDiscovery services in the U.S., where there is a trend of industry consolidation, and therefore the Company’s board of directors resolved to acquire the business of EDI. Goodwill is mainly attributable to the synergies expected to arise from this acquisition.
The Company allocates the fair value of purchase consideration to assets acquired and liabilities assumed based on their fair value. The Company engaged an independent third-party appraisal firm to assist in determining the fair values of assets acquired and liabilities assumed. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recognized as goodwill. The goodwill is deductible for income tax purposes.
Acquisition-related costs incurred and expensed during the year ended March 31, 2017 were ¥16,415 thousand and were recorded as a component of Selling, general and administrative expenses in the consolidated statement of operations.
The following table summarizes the preliminary allocation of the purchase price based on the fair values of the assets acquired and liabilities assumed from EDI on November 4, 2016. The Company is in the process of completing the valuation of the assets acquired and the liabilities assumed since the acquisition date of EDI was near the balance sheet date. Accordingly, the preliminary fair values reflected in the following table are subject to change.
|
|
|
|
|
|
|
Thousands of Yen |
|
|
Trade accounts receivable |
|
¥ |
27,710 |
|
Property and equipment |
|
|
951 |
|
Other intangible assets |
|
|
10,198 |
|
Customer relationships |
|
|
109,632 |
|
Total assets acquired |
|
|
148,491 |
|
|
|
|
|
|
Trade accounts payable |
|
|
20,485 |
|
Total liabilities assumed |
|
|
20,485 |
|
|
|
|
|
|
Total identified net assets |
|
|
128,006 |
|
|
|
|
|
|
Goodwill |
|
|
127,449 |
|
Purchase price |
|
¥ |
255,455 |
|
Pro forma results of operations were not presented because the effect of the acquisition was not material.
3. INVENTORIES
The components of inventories as of March 31, 2016 and 2017, consists of the following:
|
|
|
|
|
|
|
|
|
Thousands of Yen |
||||
|
|
2016 |
|
2017 |
||
|
|
|
|
|
|
|
Merchandise |
|
¥ |
2,169 |
|
¥ |
69,397 |
Supplies |
|
|
6,833 |
|
|
4,073 |
Total |
|
|
9,002 |
|
|
73,470 |
F-21
4. INVESTMENTS IN SECURITIES
Available-for-sale securities
Information regarding securities classified as available-for-sale securities as of March 31, 2016 and 2017, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
||
|
|
|
|
|
unrealized |
|
unrealized |
|
|
|
||
March 31, 2016 |
|
Cost |
|
gain |
|
loss |
|
Fair value |
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
107,550 |
|
¥ |
431,550 |
|
¥ |
— |
|
¥ |
539,100 |
Debt securities |
|
|
102,441 |
|
|
— |
|
|
1,621 |
|
|
100,820 |
Total |
|
¥ |
209,991 |
|
¥ |
431,550 |
|
¥ |
1,621 |
|
¥ |
639,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
107,550 |
|
¥ |
392,850 |
|
¥ |
— |
|
¥ |
500,400 |
The following table provides the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired as of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
Less than 12 months |
|
More than 12 months |
|
||||||||
|
|
|
|
|
Gross unrealized |
|
|
|
|
Gross unrealized |
|
||
March 31, 2016 |
|
Fair value |
|
loss |
|
Fair value |
|
loss |
|
||||
Debt securities |
|
¥ |
— |
|
¥ |
— |
|
¥ |
100,820 |
|
¥ |
1,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available‑for‑sale securities were ¥100,000 thousand for the year ended March 31, 2017. Gross realized loss of ¥2,441 thousand were included in "Other income (expenses)" for the year ended March 31, 2017.
F-22
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An analysis of the movement in the allowance for doubtful accounts for the years ended March 31, 2015, 2016 and 2017, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Balance at beginning of year |
|
¥ |
— |
|
¥ |
25,374 |
|
¥ |
75,269 |
|
Provision for doubtful accounts |
|
|
26,431 |
|
|
59,358 |
|
|
89,474 |
|
Translation adjustment |
|
|
(1,057) |
|
|
(9,463) |
|
|
892 |
|
Balance at end of year |
|
¥ |
25,374 |
|
¥ |
75,269 |
|
¥ |
165,635 |
|
6. PROPERTY AND EQUIPMENT
Property and equipment recorded on the Company’s consolidated balance sheets as of March 31, 2016 and 2017, consists of the following:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Leasehold improvements |
|
¥ |
604,647 |
|
¥ |
710,576 |
|
Furniture and fixtures |
|
|
133,207 |
|
|
140,952 |
|
Computers |
|
|
1,352,862 |
|
|
1,257,079 |
|
Assets held under capital lease, principally office equipment |
|
|
17,471 |
|
|
131,318 |
|
Motor vehicles and transport equipment |
|
|
3,969 |
|
|
11,223 |
|
Other |
|
|
— |
|
|
4,029 |
|
Total |
|
|
2,112,156 |
|
|
2,255,177 |
|
Accumulated depreciation |
|
|
(991,436) |
|
|
(1,077,922) |
|
Property and equipment —net |
|
¥ |
1,120,720 |
|
¥ |
1,177,255 |
|
For the years ended March 31, 2015, 2016 and 2017, the Company recognized depreciation expenses of ¥246,028 thousand, ¥341,018 thousand and ¥351,834 thousand, respectively.
The Company recognized an impairment loss on certain long-lived assets of ¥5,144 thousand for the year ended March 31, 2016, which is included in “Selling, general and administrative expenses.” The impairment loss on long-lived assets for the year ended March 31, 2016 consisted of leasehold improvements and computers, which were owned by a subsidiary in Taiwan. The amount of impairment was determined based on projected future cash flows. The impairment mainly resulted from a delay in the start-up of business in Taiwan.
The Company recognized no impairment loss on long-lived assets for the years ended March 31, 2015 or 2017.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets subject to amortization acquired during the year ended March 31, 2016 except for capitalized computer software costs, including ¥2,136,610 thousand recorded from the acquisition of EvD, totaled ¥2,167,070 thousand, which primarily consist of customer relationship, noncompete agreement, favorable lease arrangements and trademark of ¥1,876,725 thousand, ¥51,601 thousand, ¥163,382 thousand and ¥44,902 thousand, respectively.
Intangible assets subject to amortization acquired during the year ended March 31, 2017 except for capitalized computer software costs, including ¥119,830 thousand recorded from the acquisition of business of EDI, totaled ¥143,974 thousand, which primarily consist of customer relationship, noncompete agreement and favorable lease arrangements of ¥109,632 thousand, ¥1,012 thousand, and ¥9,186 thousand, respectively.
F-23
The components of intangible assets subject to amortization except for capitalized computer software costs as of March 31, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
2016 |
|
2017 |
|
||||||||
|
|
Gross |
|
|
|
|
Gross |
|
|
|
|
||
|
|
carrying |
|
Accumulated |
|
carrying |
|
Accumulated |
|
||||
|
|
amount |
|
amortization |
|
amount |
|
amortization |
|
||||
Customer relationships |
|
¥ |
2,068,580 |
|
¥ |
|
|
¥ |
2,168,992 |
|
¥ |
255,532 |
|
Trademarks |
|
|
84,307 |
|
|
|
|
|
37,362 |
|
|
24,588 |
|
Noncompete agreements |
|
|
46,875 |
|
|
|
|
|
47,680 |
|
|
26,069 |
|
Favorable leases |
|
|
114,522 |
|
|
|
|
|
130,408 |
|
|
68,911 |
|
Other |
|
|
72,629 |
|
|
|
|
|
83,319 |
|
|
44,064 |
|
|
|
¥ |
2,386,913 |
|
¥ |
195,294 |
|
¥ |
2,467,761 |
|
¥ |
419,164 |
|
There were no intangible assets not subject to amortization at March 31, 2016 and 2017.
The weighted average amortization periods for intangible assets except for capitalized computer software costs acquired during the year ended March 31, 2016 are approximately 10 years. The weighted average amortization periods for customer relationship, trademark, noncompete agreement and favorable lease acquired during the year ended March 31, 2016 are 15 years, 4 years, 3 years and 3 years, respectively.
The weighted average amortization periods for intangible assets except for capitalized computer software costs acquired during the year ended March 31, 2017 are approximately 14 years. The weighted average amortization periods for customer relationship, trademark, noncompete agreement and favorable lease acquired during the year ended March 31, 2017 are 15 years, 10 years, 3 years and 3 years, respectively.
The amortization expenses for the years ended March 31, 2016 and 2017 were ¥180,297 thousand and ¥254,176 thousand, respectively. The estimated aggregate amortization expense of intangible assets except for capitalized computer software costs for each of the next five years is as follows:
|
|
|
|
|
|
Year Ending March 31, |
|
Thousands of Yen |
|
||
2018 |
|
¥ |
219,821 |
|
|
2019 |
|
|
181,302 |
|
|
2020 |
|
|
156,575 |
|
|
2021 |
|
|
156,378 |
|
|
2022 |
|
|
156,025 |
|
The 13th General Meeting of Shareholders, held on June 29, 2016, approved amendments to the Articles of Incorporation, and the Company changed its corporate name on July 1, 2016. In association with the amendments, the Company reviewed the useful lives of the old company name-related trademarks held by the Company to reflect the substance of the use of the assets. The original amortization period on the company name-related trademarks was ten years from the registration date of the company name. In July 2016, the Company amortized the entire remaining book value of the old company name-related trademarks. The balance of the old company name-related trademarks amounted to zero as of March 31, 2017. Additional amortization of ¥ 35,601 thousand was recorded during the year ended March 31, 2017.
F-24
The following table shows changes in the carrying amount of goodwill for the years ended March 31, 2016 and 2017, by operating segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|||||||||||||
|
|
Japan |
|
Japan-AI |
|
U.S. |
|
Other |
|
Total |
|||||
Fiscal year ended March 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
¥ |
— |
|
¥ |
— |
|
¥ |
150,881 |
|
¥ |
— |
|
¥ |
150,881 |
Translation adjustments and other |
|
|
— |
|
|
— |
|
|
24,546 |
|
|
— |
|
|
24,546 |
Goodwill |
|
|
— |
|
|
— |
|
|
175,427 |
|
|
— |
|
|
175,427 |
Accumulated impairment losses |
|
|
— |
|
|
— |
|
|
― |
|
|
— |
|
|
— |
Balance at March 31, 2015 |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
— |
|
|
— |
|
|
2,162,944 |
|
|
— |
|
|
2,162,944 |
Translation adjustments and other |
|
|
— |
|
|
— |
|
|
(206,234) |
|
|
— |
|
|
(206,234) |
Goodwill |
|
|
— |
|
|
— |
|
|
2,132,137 |
|
|
— |
|
|
2,132,137 |
Accumulated impairment losses |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Balance at March 31, 2016 |
|
|
— |
|
|
— |
|
|
2,132,137 |
|
|
— |
|
|
2,132,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
— |
|
|
— |
|
|
127,449 |
|
|
— |
|
|
127,449 |
Translation adjustments and other |
|
|
— |
|
|
— |
|
|
(220,876) |
|
|
— |
|
|
(220,876) |
Goodwill |
|
|
— |
|
|
— |
|
|
2,038,710 |
|
|
— |
|
|
2,038,710 |
Accumulated impairment losses |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Balance at March 31, 2017 |
|
¥ |
— |
|
¥ |
— |
|
¥ |
2,038,710 |
|
¥ |
— |
|
¥ |
2,038,710 |
8. LEASES
The Company enters into various leases for data center facilities, office premises and office equipment in the normal course of business.
Capital Leases — The Company uses office equipment leased under capital lease arrangements. The amount of leased assets at cost under capital leases and accumulated depreciation amounted to ¥17,471 thousand and ¥12,510 thousand, respectively, at March 31, 2016 and ¥131,318 thousand and ¥17,738 thousand, respectively, at March 31, 2017.
Operating Leases —The Company leases its data center facilities and office premises under cancellable operating lease arrangements with mainly two-year lease periods, for which refundable lease deposits are recorded as rental deposits. The U.S.-based subsidiary leases office premises under noncancellable operating lease arrangements.
Expenses related to operating leases for the years ended March 31, 2015, 2016 and 2017, were ¥379,972 thousand, ¥823,790 thousand and ¥1,047,405 thousand , respectively, and are included in “Cost of revenue” and “Selling, general and administrative expenses.”
F-25
Future Minimum Lease Payments — As of March 31, 2017, the future minimum lease payments under noncancellable operating leases and capital leases are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
Operating |
|
|
|
|
|
Years ending March 31, |
|
Leases |
|
Capital Leases |
|
||
2018 |
|
¥ |
353,645 |
|
¥ |
33,951 |
|
2019 |
|
|
296,852 |
|
|
33,301 |
|
2020 |
|
|
218,960 |
|
|
29,892 |
|
2021 |
|
|
158,841 |
|
|
19,001 |
|
2022 |
|
|
148,950 |
|
|
8,125 |
|
Total minimum lease payments |
|
¥ |
1,177,248 |
|
|
124,270 |
|
|
|
|
|
|
|
|
|
Less amounts representing interest |
|
|
|
|
|
4,023 |
|
Present value of minimum lease payments |
|
|
|
|
|
120,247 |
|
Less current portion |
|
|
|
|
|
31,787 |
|
Noncurrent portion |
|
|
|
|
¥ |
88,460 |
|
9. CAPITALIZED COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of computer software developed or purchased for internal use or to be sold.
The following is a summary of capitalized computer software costs as of March 31, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Balance at beginning of year |
|
¥ |
1,928,106 |
|
¥ |
2,257,898 |
|
Costs capitalized during year |
|
|
361,456 |
|
|
486,185 |
|
Foreign currency translation adjustment |
|
|
(2,949) |
|
|
545 |
|
Disposal and other |
|
|
(28,715) |
|
|
(416,438) |
|
Balance at end of year |
|
|
2,257,898 |
|
|
2,328,190 |
|
Accumulated amortization, end of year |
|
|
(1,338,434) |
|
|
(1,364,949) |
|
Capitalized computer software costs—net |
|
¥ |
919,464 |
|
¥ |
963,241 |
|
Included in the above are capitalized software costs for projects in progress of ¥59,895 thousand and ¥67,265 thousand at March 31, 2016 and 2017, respectively. For the years ended March 31, 2015, 2016 and 2017, the Company recognized amortization expenses related to capitalized software development costs of ¥302,809 thousand, ¥374,510 thousand and ¥455,876 thousand, respectively.
The following table shows the estimated amortization of capitalized computer software costs for the next five years:
|
|
|
|
|
||
|
|
Thousands of |
|
|||
Years ending March 31, |
|
Yen |
|
|||
2018 |
|
¥ |
347,506 |
|
||
2019 |
|
|
243,184 |
|
||
2020 |
|
|
171,943 |
|
||
2021 |
|
|
109,248 |
|
||
2022 |
|
|
24,097 |
|
F-26
10. LONG-TERM DEBT
Short-term debt of ¥52,000 thousand and ¥1,000,000 thousand as of March 31, 2016 and 2017 consists of bank borrowings with a weighted average interest rate of 0.5% and 0.36%.
The components of long-term debt as of March 31, 2016 and 2017, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||
|
|
2016 |
|
|
|
|
2017 |
|
|
|
|
|
|
Weighted |
|
|
|
|
Weighted |
|
|
|
|
|
|
average |
|
|
|
|
average |
|
|
|
|
|
|
interest |
|
2016 |
|
interest |
|
2017 |
|
||
|
|
rate |
|
Balance |
|
rate |
|
Balance |
|
||
Bank borrowings: |
|
|
|
|
|
|
|
|
|
|
|
Secured by equity securities, various rates, and various maturities due 2020 |
|
|
|
¥ |
1,782,642 |
|
|
|
¥ |
1,810,694 |
|
Unsecured, various rates and various maturities, due 2019 through 2022 |
|
|
|
|
2,552,718 |
|
|
|
|
3,629,079 |
|
Capital lease obligations, due 2018 |
|
|
|
|
5,613 |
|
|
|
|
120,247 |
|
Zero coupon convertible bonds, due 2019 |
|
― |
|
|
— |
|
― |
|
|
1,185,502 |
|
|
|
|
|
|
4,340,973 |
|
|
|
|
6,745,522 |
|
Less: current portion |
|
|
|
|
703,986 |
|
|
|
|
808,229 |
|
|
|
|
|
¥ |
3,636,987 |
|
|
|
¥ |
5,937,293 |
|
The aggregate annual maturities of long-term debt after March 31, 2017, are as follows:
|
|
|
|
|
Years ending |
|
|
|
|
March 31, |
|
Thousands of Yen |
|
|
2018 |
|
¥ |
808,229 |
|
2019 |
|
|
906,383 |
|
2020 |
|
|
1,968,128 |
|
2021 |
|
|
2,709,106 |
|
2022 |
|
|
268,125 |
|
Thereafter |
|
|
85,551 |
|
|
|
¥ |
6,745,522 |
|
As is customary in Japan, both short-term and long-term bank borrowings are made under general agreements that provide that securities and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations.
In the year ended March 31, 2016 and 2017, the Company borrowed ¥3,761,546 thousand and ¥1,855,897 thousand from two banks, respectively. The balance of such borrowings as of March 31, 2016 and 2017 was ¥4,247,860 thousand and ¥4,336,877 thousand, respectively.
Credit Line
Under a ¥700,000 thousand five year syndicated loan arrangement entered into with a consortium of banks on September 27, 2011, the Company borrowed ¥350,000 thousand when the arrangement was signed and an additional ¥350,000 thousand in May 2012. As of March 31, 2016 and 2017, the balance of such borrowings was ¥87,500 thousand and ¥0 thousand, respectively.
On December 28, 2012, the Company entered into a short-term revolving credit facility agreement with a consortium of Japanese banks in an aggregate principal amount of ¥1,000,000 thousand that originally matured on December 27, 2013. The Company renewed the agreement to extend the maturity to December 22, 2017. Any
F-27
further extension of the maturity date of the credit facility is subject to the consortium’s approval. As of March 31, 2017, the balance of borrowings under this facility was ¥1,000,000 thousand.
Under a ¥ 1,000,000 thousand syndicated loan arrangement entered into with a consortium of banks on July 26, 2016, and a ¥300,000 thousand six year syndicated loan arrangement entered into with a consortium of banks on September 27, 2016, the Company borrowed ¥1,300,000 thousand with both agreements. As of March 31, 2017, the balance of such borrowings was ¥1,300,000 thousand.
The Company entered into a ¥90,000 thousand one year bank overdraft arrangement with certain bank for which the unused balance outstanding as of March 31, 2017 was ¥90,000 thousand.
Convertible bonds
In December 2016, the Company issued unsecured zero coupon convertible bonds due in November 2019 in the aggregate face amount of ¥2,500,000 thousand at par for ¥2,500,000 thousand. The conversion price is ¥813 per common stock and are convertible to the Company’s common stock at the option of the holders at any time on or after December 2016. The bond holder may require the Company to redeem the bonds outstanding on or after December 1, 2016 through November 30, 2017, December 1, 2017 through November 30, 2018 and December 1, 2018 through November 30, 2019 at 100.5%, 101.0% and 101.5% of the face amount, respectively. In addition, the Company has the option to redeem all of the bonds outstanding at 110.0% of the face amount. The bonds contain beneficial conversion features and the proceeds equal to the intrinsic value of the features amounted to ¥100,272 thousand are recognized in “Additional paid-in capital” on the Company’s consolidated balance sheets. There are no other embedded features which the Company is required to bifurcate and are accounted for separately from the bonds.
During the year ended March 31, 2017, prior to the maturity date, convertible bonds with a face amount of ¥1,250,000 thousand were converted into 1,537,502 equity shares of the Company at a conversion price of ¥813 per share. The Company recorded an increase of ¥625,000 thousand in "Common stock" and ¥719,715 thousand, net of issuance cost of ¥5,557 thousand in "Additional paid-in capital." The carrying amount of the bonds, with the accretion of discounts, is included in "Long-term debt" in the Company's consolidated balance sheets.
Financial Covenants
There are restrictive covenants related to the bank borrowings of ¥3,608,150 thousand as of March 31, 2017, 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 accounting principles generally accepted in Japan (“Japanese GAAP”). FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015 of ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company 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 related to the bank borrowings of ¥210,337 thousand as of March 31, 2017, 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. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2015; ¥5,032,824 thousand on a stand-alone basis and ¥5,220,772 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company 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 related to the syndicated loan of ¥1,300,000 thousand as of March 31, 2017, 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. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2016; ¥5,187,455 thousand on a stand-alone basis and ¥4,657,450 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any two consecutive fiscal years. FRONTEO is in compliance with these restrictive covenants at March 31, 2017.
F-28
There are restrictive covenants related to the revolving credit facility of ¥1,000,000 thousand as of March 31, 2017, 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. FRONTEO is required to maintain net assets at a level which is at least 75% of (a) net assets as of March 31, 2012; ¥2,607,338 thousand on a stand-alone basis and ¥2,655,320 thousand on a consolidated basis under Japanese GAAP or (b) net assets at the end of the previous year, whichever is higher. The ordinary income covenant states that FRONTEO and the Company shall not record ordinary losses in any fiscal years. As of March 31, 2017, FRONTEO is not in compliance with these restrictive covenants. Subsequent to the year end, one of Japanese banks determined not to extend the maturity on the outstanding loans and the Company repaid in an aggregate principal amount of ¥200,000 thousand to the bank. The other Japanese banks extended the maturity on the outstanding loans in June and July 2017 and the remaining principal amount of ¥800,000 thousand are classified as short-term bank borrowing and will become due on December 22, 2017, unless further extension of the maturity of the credit facility will be submitted and approved by the consortium.
As of March 31, 2017, the Company pledged the common stock of its subsidiary in the U.S. with carrying value of ¥ 4,394,269 thousand as security for a borrowing from bank of ¥1,999,582 thousand.
11 . RETIREMENT AND SEVERANCE BENEFITS
The Company has defined benefit plans which consist primarily of the defined benefit indemnities plan covering substantially all employees in Japan. Under the severance indemnities plans, employees are entitled to severance payments based on their earnings and the length of service until retirement or termination of employment for reasons other than dismissal for cause.
Reconciliations of the beginning and ending balances of the benefit obligation and the fair value of plan assets for the years ended March 31, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Change in benefit obligation: |
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
¥ |
41,990 |
|
¥ |
79,839 |
|
Service cost |
|
|
17,468 |
|
|
24,641 |
|
Interest cost |
|
|
35 |
|
|
123 |
|
Actuarial loss (gain) |
|
|
27,856 |
|
|
(15,518) |
|
Benefits paid |
|
|
(5,448) |
|
|
(11,539) |
|
Foreign currency exchange rate changes |
|
|
(2,062) |
|
|
811 |
|
Benefit obligation at end of year |
|
¥ |
79,839 |
|
¥ |
78,357 |
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
¥ |
5,866 |
|
¥ |
20,486 |
|
Employer contributions |
|
|
19,590 |
|
|
14,329 |
|
Benefits paid |
|
|
(3,564) |
|
|
(11,539) |
|
Foreign currency exchange rate changes |
|
|
(1,406) |
|
|
552 |
|
Fair value of plan assets at end of year |
|
|
20,486 |
|
|
23,828 |
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
¥ |
(59,353) |
|
¥ |
(54,529) |
|
The accumulated benefit obligations as of March 31, 2016 and 2017 are ¥62,390 thousand and ¥70,688 thousand, respectively.
F-29
Amounts recognized in the consolidated balance sheets as of March 31, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Retirement and severance benefits—current |
|
¥ |
3,201 |
|
¥ |
8,468 |
|
Retirement and severance benefits—noncurrent |
|
|
56,152 |
|
|
46,061 |
|
Amount recognized |
|
¥ |
59,353 |
|
¥ |
54,529 |
|
Net periodic retirement cost for the years ended March 31, 2015, 2016 and 2017 consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Service cost |
|
¥ |
16,843 |
|
¥ |
17,468 |
|
¥ |
24,641 |
|
Interest cost |
|
|
28 |
|
|
35 |
|
|
123 |
|
Amortization of net gain |
|
|
1,594 |
|
|
2,001 |
|
|
4,313 |
|
Net periodic retirement cost |
|
¥ |
18,465 |
|
¥ |
19,504 |
|
¥ |
29,077 |
|
Amounts recognized in other comprehensive income (loss), net of tax, for the years ended March 31, 2015, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Actuarial (gain) loss |
|
¥ |
(1,703) |
|
¥ |
(17,495) |
|
¥ |
13,759 |
|
Amounts recognized in accumulated other comprehensive income (loss), net of tax, as of March 31, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Accumulated actuarial loss |
|
¥ |
(23,276) |
|
¥ |
(9,517) |
|
The estimated net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic retirement cost in the fiscal year ending March 31, 2018 is ¥2,652 thousand.
The Company uses its year-end as the measurement date for the benefit obligation. The assumptions used to determine the year-end benefit obligation are as follows:
|
|
|
|
|
|
|
|
2016 |
|
2017 |
|
Discount rate |
|
|
|
|
|
Rate of compensation increase |
|
|
|
|
|
The assumptions used to determine the net periodic retirement cost for the years ended March 31, 2015, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
2015 |
|
2016 |
|
2017 |
|
Discount rate |
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
|
|
|
|
|
F-30
The expected future benefit payments, which reflect expected future service, are as follows:
|
|
|
|
|
Years ending March 31, |
|
Thousands of Yen |
|
|
2018 |
|
¥ |
8,468 |
|
2019 |
|
|
8,209 |
|
2020 |
|
|
9,086 |
|
2021 |
|
|
10,533 |
|
2022 |
|
|
9,405 |
|
2023 through 2028 |
|
|
36,759 |
|
The Company expects to contribute ¥8,468 thousand to its defined benefit pension plan in the year ending March 31, 2018.
Plan assets cover the defined benefit plan for employees of a certain subsidiary. The Company’s funding policy with respect to the plan is to contribute annually its employees’ monthly salary to the plan. Plan assets are life insurance pooled investment portfolios, which are managed by an insurance company and guarantee a rate of return. The life insurance pooled investment portfolios are valued at conversion value and are classified as Level 2. Refer to Note 15 for the definition of Level 2.
12. ASSET RETIREMENT OBLIGATIONS
The Company’s asset retirement obligations, which are included in “Other liabilities” in the Company’s consolidated balance sheets, are related to leasehold office premises which the Company is contractually obligated to restore at the end of the lease to their original condition. The movements in asset retirement obligations for the years ended March 31, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Balance at beginning of year |
|
¥ |
48,041 |
|
¥ |
49,005 |
|
Liabilities incurred during the year |
|
|
— |
|
|
— |
|
Accretion expense |
|
|
964 |
|
|
976 |
|
Balance at end of year |
|
¥ |
49,005 |
|
¥ |
49,981 |
|
13. FINANCIAL INSTRUMENTS
Fair value estimates and information about valuation methodologies regarding financial instruments are as follows:
Quoted market prices, where available, are used to estimate the fair values of financial instruments. In the absence of quoted market prices, fair values for such financial instruments are estimated using an income approach, based on discounted cash flows, or other valuation techniques.
Cash and cash equivalents, Current portion of investment, Trade accounts receivable and Trade accounts payable
The carrying amount approximates fair value because of the short maturity of these instruments.
Investments
Investments consisted of time deposits with fixed interest rate of which contract was entered into in March 2016. As there have been no significant changes in credit environment, the carrying amount approximates fair value. The fair value of time deposits with stated maturities was based on the discounted value of contractual cash flows. The discount rate was estimated using rates currently available in the local market.
F-31
Short-term and long-term debt
The fair value of bank borrowings is estimated based on the present value of future cash flows using the Company’s borrowing rate for the same contractual terms.
The fair value of the convertible bonds is estimated based on the present value of future cash flows using the Company’s borrowing rate for the same contractual terms as the Company’s share price was lower than the conversion price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
2016 |
|
2017 |
|
||||||||
|
|
Carrying |
|
|
|
|
Carrying |
|
Fair |
|
|||
|
|
Amount |
|
Fair Value |
|
Amount |
|
Value |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowing |
|
¥ |
52,000 |
|
¥ |
52,000 |
|
¥ |
1,000,000 |
|
¥ |
1,000,000 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings |
|
|
4,335,360 |
|
|
4,294,286 |
|
|
5,439,773 |
|
|
5,443,352 |
|
Convertible bonds |
|
|
― |
|
|
― |
|
|
1,185,502 |
|
|
1,231,903 |
|
Refer to Note 11 for fair value of plan asset which are comprised of the life insurance pooled investment portfolios, Note 15 for fair values of equity and debt securities and Note 14 for derivative financial instruments.
The level of the fair value hierarchy within the fair value measurement of cash equivalents is Level 1 and that of current portion of investments, investments, short-term debt and long-term debt is Level 2.
Significant Customers and Concentration of Credit Risk — Trade accounts receivable from the Company’s three largest customers accounted for approximately 33.6% and 17.1% of the Company’s trade accounts receivable as of March 31, 2016 and 2017, respectively.
The Company conducts business based on periodic evaluations of the customers’ financial conditions and generally does not require collateral to secure their obligations to the Company. The Company does not believe a significant risk of loss exists from a concentration of credit risk.
14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s exposure to risks arising from fluctuations in foreign currencies and interest rates related to underlying long-term bank borrowings and forecasted borrowing transactions. In order to minimize the variability caused by those risks, the Company enters into cross currency interest rate swaps and forward currency exchange contracts to manage fluctuations in cash flows. The cross currency interest rate swaps entered into during the year ended March 31, 2016 and 2017 are converting U.S. dollar basis borrowings with variable interest rates into Japanese yen basis borrowings with fixed interest rates. The forward currency exchange contracts entered into during the year ended March 31, 2016 and 2017 are to receive Japanese yen amounts from forecasted borrowing transactions on a U.S. dollar basis and expired during the year ended March 31, 2017. The forward currency exchange contracts existing as of March 31, 2017 are to receive Japanese yen amounts for receivables denominated in U.S. dollar.
The Company does not designate the cross currency interest rate swaps and forward currency exchange contracts as hedging instruments for the purpose of applying hedge accounting. Accordingly, those contracts are measured at fair value as either assets or liabilities and changes in their fair value are immediately recognized in earnings.
F-32
Volume of Derivative Activities
Notional amounts of cross-currency interest rate swaps and forward currency exchange as of March 31, 2016 and 2017 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Cross currency interest rate swaps |
|
¥ |
2,251,545 |
|
¥ |
2,156,055 |
|
Forward currency exchange |
|
|
136,488 |
|
|
1,151,272 |
|
Impacts on the Consolidated Financial Statements
The fair values of derivatives in the consolidated balance sheets as of March 31, 2016 and 2017 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
Balance sheet |
|
Fair value |
|
||||
|
|
|
2016 |
|
2017 |
|
||
Derivative liabilities |
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Cross currency interest rate swaps |
Derivative liabilities |
|
¥ |
254,262 |
|
¥ |
214,611 |
|
Forward currency exchange |
Derivative liabilities |
|
|
3,943 |
|
|
― |
|
|
Other current liabilities |
|
|
― |
|
|
7,624 |
|
Gains and losses related to derivatives recorded in the consolidated statements of operations for the year ended March 31, 2016 and 2017 are summarized as follows:
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
||||
|
Statement of operations |
|
Gains (Losses) recognized
|
||||
|
|
|
2016 |
|
2017 |
||
Cross currency interest rate swaps |
Gain (loss) on derivatives |
|
¥ |
(254,262) |
|
¥ |
39,651 |
Forward currency exchange |
Gain (loss) on derivatives |
|
|
(3,943) |
|
|
3,681 |
15. FAIR VALUE MEASUREMENTS
ASC Topic 820, “ Fair Value Measurements, ” establishes a fair value hierarchy that prioritizes the use of observable inputs in markets over the use of unobservable inputs when measuring fair value as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 — Directly or indirectly observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets in inactive markets, or inputs derived principally from or corroborated by observable market data
Level 3 — Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability
F-33
Investments in equity and debt securities
Investments in certain equity securities for which quoted market prices are available to determine their fair value are included in Level 1. The fair value of debt securities presented in Level 2 is estimated based on quotes from financial institutions.
Derivative instruments
The fair value of derivative instruments presented in Level 2 is estimated based on quotes from financial institutions.
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|||||||||||||
Items Measured at Fair Value on a |
|
Carrying |
|
Total Fair |
|
Fair Value Hierarchy Classification |
|||||||||
Recurring Basis |
|
Value |
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||||
March 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
539,100 |
|
¥ |
539,100 |
|
¥ |
|
|
¥ |
— |
|
¥ |
— |
Debt securities |
|
|
100,820 |
|
|
100,820 |
|
|
— |
|
|
100,820 |
|
|
— |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
258,205 |
|
|
258,205 |
|
|
— |
|
|
258,205 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
¥ |
500,400 |
|
¥ |
500,400 |
|
¥ |
500,400 |
|
¥ |
— |
|
¥ |
— |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
222,235 |
|
|
222,235 |
|
|
— |
|
|
222,235 |
|
|
— |
Assets and liabilities measured at fair value on a non-recurring basis
Assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended |
|
|
Items Measured at Fair Value on a |
|
Carrying |
|
Total Fair |
|
Fair Value Hierarchy Classification |
|
March 31, |
|
|||||
Non-recurring Basis |
|
Value |
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
2016 |
|
|
March 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
— |
|
— |
|
— |
|
— |
|
— |
|
¥ |
5,144 |
|
There are no assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2017. See Note 6 for additional information.
F-34
16. INCOME TAXES (BENEFIT)
Income (loss) from operations before income taxes and income taxes (benefit) for the years ended March 31, 2015, 2016 and 2017, consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Income (loss) from operations before income taxes: |
|
|
|
|
|
|
|
|
|
|
Domestic |
|
¥ |
502,845 |
|
¥ |
(235,186) |
|
¥ |
(638,940) |
|
Foreign |
|
|
(44,548) |
|
|
6,436 |
|
|
(678,032) |
|
Total |
|
¥ |
458,297 |
|
¥ |
(228,750) |
|
¥ |
(1,316,972) |
|
Income taxes―current |
|
|
|
|
|
|
|
|
|
|
Domestic |
|
¥ |
82,915 |
|
¥ |
121,253 |
|
¥ |
40,669 |
|
Foreign |
|
|
(44) |
|
|
92,062 |
|
|
121 |
|
Total |
|
¥ |
82,871 |
|
¥ |
213,315 |
|
¥ |
40,790 |
|
Income taxes (benefit)―deferred |
|
|
|
|
|
|
|
|
|
|
Domestic |
|
¥ |
132,995 |
|
¥ |
5,122 |
|
¥ |
(55,977) |
|
Foreign |
|
|
22,228 |
|
|
(35,312) |
|
|
(442,922) |
|
Total |
|
¥ |
155,223 |
|
¥ |
(30,190) |
|
¥ |
(498,899) |
|
For the years ended March 31, 2015, 2016 and 2017, ¥238,094 thousand, ¥183,125 thousand and (¥458,109) thousand were recorded as income tax expenses (benefit) attributable to operations, and ¥50,902 thousand, ¥32,779 thousand and (¥15,694) thousand were recognized as income tax expenses (benefit) attributable to other comprehensive income, respectively.
The tax effects of temporary differences and operating loss carryforwards and tax credits giving rise to deferred tax balances at March 31, 2016 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
2016 |
|
2017 |
|
||||||||
|
|
Deferred Tax |
|
Deferred Tax |
|
Deferred Tax |
|
Deferred Tax |
|
||||
|
|
Asset |
|
Liability |
|
Asset |
|
Liability |
|
||||
Impairment loss on investments in securities |
|
¥ |
38,130 |
|
¥ |
— |
|
¥ |
38,130 |
|
¥ |
— |
|
Depreciation and amortization |
|
|
11,085 |
|
|
37,478 |
|
|
22,137 |
|
|
83,958 |
|
Accrued municipal governments tax |
|
|
9,812 |
|
|
— |
|
|
6,702 |
|
|
— |
|
Allowance for doubtful accounts |
|
|
23,144 |
|
|
— |
|
|
74,855 |
|
|
— |
|
Accrued bonus |
|
|
49,354 |
|
|
|
|
|
68,127 |
|
|
|
|
Accrued vacation |
|
|
63,984 |
|
|
|
|
|
97,497 |
|
|
|
|
Other accrued expense |
|
|
— |
|
|
— |
|
|
146,324 |
|
|
— |
|
Asset retirement obligations |
|
|
16,591 |
|
|
— |
|
|
17,864 |
|
|
— |
|
Operating loss carryforwards |
|
|
109,413 |
|
|
— |
|
|
396,055 |
|
|
— |
|
Derivatives |
|
|
20,174 |
|
|
— |
|
|
828 |
|
|
— |
|
Accounts payable |
|
|
4,754 |
|
|
— |
|
|
— |
|
|
— |
|
Prepaid expenses |
|
|
— |
|
|
21,635 |
|
|
— |
|
|
— |
|
Unrealized gain on available-for-sale securities |
|
|
— |
|
|
141,653 |
|
|
— |
|
|
120,291 |
|
Acquisition related cost |
|
|
26,885 |
|
|
— |
|
|
26,885 |
|
|
— |
|
Share-based compensation expense |
|
|
4,070 |
|
|
— |
|
|
— |
|
|
— |
|
Intangible assets |
|
|
— |
|
|
707,315 |
|
|
— |
|
|
679,131 |
|
Others |
|
|
40,600 |
|
|
8,260 |
|
|
156,229 |
|
|
50,901 |
|
Total |
|
|
417,996 |
|
|
916,341 |
|
|
1,051,633 |
|
|
934,281 |
|
Valuation allowance |
|
|
(132,874) |
|
|
— |
|
|
(181,719) |
|
|
— |
|
Total |
|
¥ |
285,122 |
|
¥ |
916,341 |
|
¥ |
869,914 |
|
¥ |
934,281 |
|
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in specific tax jurisdictions during the period in which these differences become deductible. Based on these factors, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance as of March 31, 2016 and 2017.
F-35
As of March 31, 2016 and 2017, the valuation allowance for deferred tax assets related primarily to operating loss carryforwards of Taiwanese and domestic subsidiaries, and was provided at the amounts which are considered not more likely than not to be realized.
An analysis of the movement in the valuation allowance for deferred tax assets for the years ended March 31, 2015, 2016 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Balance at beginning of year |
|
¥ |
57,324 |
|
¥ |
88,870 |
|
¥ |
132,874 |
|
Additions |
|
|
48,931 |
|
|
61,670 |
|
|
50,528 |
|
Deductions |
|
|
(17,385) |
|
|
(17,666) |
|
|
(1,683) |
|
Balance at end of year |
|
¥ |
88,870 |
|
¥ |
132,874 |
|
¥ |
181,719 |
|
As of March 31, 2017, the Taiwan subsidiary, the U.S. subsidiary and domestic subsidiaries had operating loss carryforwards of ¥318,557 thousand, ¥1,024,402 thousand and ¥224,778 thousand, respectively. These operating loss carryforwards are available to offset future taxable income and will expire in March 2026 for Taiwan taxes, March 2037 for U.S. taxes and March 2025 for Japanese income tax, respectively.
Income taxes imposed by the national, prefectural and municipal governments of Japan resulted in a statutory tax rate of approximately 35.64 percent, 33.06 percent and 30.62 percent for the years ended March 31, 2015, 2016 and 2017, respectively.
Reconciliations between the amount of reported income tax expense (benefit) and the amount of income tax expense (benefit) computed using the normal statutory tax rate for the years ended March 31, 2015, 2016 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Amount computed using normal Japanese statutory tax rate |
|
¥ |
163,336 |
|
¥ |
(75,716) |
|
¥ |
(403,257) |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
31,545 |
|
|
44,004 |
|
|
48,845 |
|
Change in statutory tax rate |
|
|
15,798 |
|
|
18,074 |
|
|
— |
|
Share-based compensation expense |
|
|
6,927 |
|
|
21,531 |
|
|
(7,814) |
|
Earnings of foreign subsidiaries taxed at different rates from the statutory rate in Japan |
|
|
15,776 |
|
|
14,475 |
|
|
(104,407) |
|
Officers’ remuneration not deductible for tax purpose |
|
|
4,870 |
|
|
— |
|
|
— |
|
Research and development tax credit |
|
|
(7,513) |
|
|
— |
|
|
(5,748) |
|
Non-deductible acquisition costs and earn-out liabilities adjustment |
|
|
— |
|
|
157,739 |
|
|
— |
|
Others-net |
|
|
7,355 |
|
|
3,018 |
|
|
14,272 |
|
Income tax expense (benefit) as reported |
|
¥ |
238,094 |
|
¥ |
183,125 |
|
¥ |
(458,109) |
|
The change in the valuation allowance for the year ended March 31, 2015 includes an increase of ¥20,536 thousand in the valuation allowance of a foreign subsidiary in Taiwan and a domestic subsidiary as of March 31, 2015 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2015, an increase of ¥28,395 thousand in the valuation allowance for the deferred tax assets arising from acquisition related costs, and a decrease of ¥16,262 thousand in the valuation allowance for the deferred tax assets arising from research and development tax credits.
The change in the valuation allowance for the year ended March 31, 2016 includes an increase of ¥61,670 thousand in the valuation allowance of foreign subsidiaries in Taiwan and U.S. and domestic subsidiaries as of March 31, 2016 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2016 and a decrease of ¥17,666 thousand in the valuation allowance for the deferred tax assets of the foreign subsidiary in Korea.
F-36
The change in the valuation allowance for the year ended March 31, 2017 includes an increase of ¥50,528 thousand in the valuation allowance of foreign subsidiaries in U.S. and domestic subsidiaries as of March 31, 2017 for the deferred tax assets arising from their operating loss carryforwards incurred during the year ended March 31, 2017 and a decrease of ¥1,683 thousand in the valuation allowance for the deferred tax assets of the foreign subsidiary in Taiwan.
On March 31, 2015, amendments to Japanese tax regulations were enacted into law. As a result, the combined Japanese statutory rate was reduced from 35.64 percent to 33.10 percent from the fiscal year beginning April 1, 2015 and from 33.10 percent to 32.34 percent from the fiscal year beginning April 1, 2016. The impact of the tax law changes was a net deferred income taxes benefit of ¥15,798 thousand for the year ended March 31, 2015.
On March 29, 2016, amendments to Japanese tax regulations were enacted into law. As a result, the combined Japanese statutory rate was reduced from 32.34 percent to 30.86 percent for the two years from April 1, 2016 to March 31, 2018 and from 32.34 percent to 30.62 percent from the fiscal year beginning April 1, 2018. The impact of the tax law changes was a net deferred income taxes benefit of ¥18,074 thousand for the year ended March 31, 2016.
17. SHARE-BASED COMPENSATION
In April 2011, the Company granted options to purchase a total of 800,000 equity shares to one employee/director and five employees (“5 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On June 21, 2012, the Company granted options to purchase a total of 160,000 equity shares with an exercise price per share of ¥810 to two employee/directors, two statutory auditors, twelve employees and six external advisors (“6 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On May 31, 2013, the Company granted options to purchase a total of 300,000 equity shares with an exercise price per share of ¥469 to five employee/directors, seventeen employees and twenty five employees of subsidiaries (“7 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On May 15, 2013, the Company granted options to purchase a total of 88,000 equity shares with an exercise price per share of $5.03 to underwriters (“8 th series Stock Option Grant”). Options are immediately vested and are exercisable from May 16, 2013 to May 17, 2017.
On May 22, 2014, the Company granted options to purchase a total of 200,000 equity shares with an exercise price per share of ¥489 to five employee/directors and 19 employees (“9 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On May 28, 2015, the Company granted options to purchase a total of 200,000 equity shares with an exercise price per share of ¥1,029 to six employee/directors and 38 employees (“11 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On August 1, 2015, the Company granted options to purchase a total of 60,000 equity shares with an exercise price per share of ¥930 to 12 employees (“12 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On June 22, 2016, the Company granted options to purchase a total of 140,000 equity shares with an exercise price per share of ¥1,181 to 45 employee (“13 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
On August 26, 2016, the Company granted options to purchase a total of 70,000 equity shares with an exercise price per share of ¥809 to 34 employee/directors (“14 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
F-37
On December 23, 2016, the Company granted options to purchase a total of 15,000 equity shares with an exercise price per share of ¥901 to a director (“15 th series Stock Option Grant”). Options are vested three years after the grant date and will be exercisable for three years from the vesting date.
The Company issues new shares upon the exercise of stock options.
Share-based compensation is measured at the grant date, based on the fair value of the award. Share-based compensation for non-employees is measured as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete, based on the fair value of the award. For options granted to non-employees, the share-based payments are measured at their current fair values at each interim and year-end financial reporting date, and the change in fair value is recorded with an offsetting entry to additional paid-in capital, because (1) the quantity and terms of the equity instruments are known up front and prior to the measurement date, (2) the date at which the counterparty’s performance is complete is earlier than the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of no sufficiently large disincentives for nonperformance, and (3) the counterparty’s performance is required over a period of time. The compensation expense is recognized on a straight-line basis over the vesting period.
The following table presents total share-based compensation expense, which is a noncash charge, included in the consolidated statements of operations for the years ended March 31, 2015, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Cost of revenue |
|
¥ |
5,200 |
|
¥ |
26,818 |
|
¥ |
24,758 |
|
Selling, general and administrative expenses |
|
|
21,960 |
|
|
51,593 |
|
|
28,274 |
|
Pre-tax share-based compensation expense |
|
|
27,160 |
|
|
78,411 |
|
|
53,032 |
|
Income tax benefit |
|
|
(2,722) |
|
|
(8,471) |
|
|
― |
|
Total share-based compensation expense, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
¥ |
24,438 |
|
¥ |
69,940 |
|
¥ |
53,032 |
|
Cash received from stock options exercised during the year ended March 31, 2016 and 2017 was ¥21,197 thousand and ¥184,375 thousand, respectively. The tax deductions related to stock options exercised during the year ended March 31, 2016 was ¥1,349 thousand, and there we no tax deductions during the year ended March 31, 2017.
The expected term of the stock options granted to e mployees is estimated based on historical employee exercise patterns associated with prior similar option grants. The term of the stock options granted to non-employees is estimated based on the contractual term. The Company estimates the number of forfeitures prior to vesting at the grant date. The effect of a subsequent change in estimated forfeitures is recognized through a cumulative adjustment when the actual forfeitures exceed the Company’s estimate. As of March 31, 2017, the total unrecognized compensation expense related to the unvested portion of the 9 th , 11 th , 12 th , 13 th , 14 th , and 15 th series Stock Option Grants was ¥83,316 thousand. As of March 31, 2017, the expense will be recognized over a remaining weighted-average period of 1.2 years.
The estimated fair value of stock options is determined using the Black-Scholes valuation model. Key inputs and assumptions to estimate the fair value of stock options include the exercise price of the award, the expected option term, the volatility of the Company’s share price, the risk-free interest rate and the Company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards.
F-38
The following table presents the weighted-average assumptions used in estimating the fair value of options granted to employees during the years ended March 31, 2015, 2016 and 2017.
|
|
|
|
|
|
|
|
|
|
2015 |
|
2016 |
|
2017 |
|
Expected life of stock option (years) |
|
|
|
|
|
|
|
Expected volatility |
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
|
|
|
|
|
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Weighted-average grant-date fair value per option |
|
¥ |
|
|
¥ |
600 |
|
¥ |
|
|
The expected volatility is estimated based upon on the historical volatility of the Company’s share price for the last two and half years adjusted for the effect of changes expected in the future. The expected risk-free interest rate is based on the Japanese government bond interest rate for the expected term. The expected dividend yield is based on the actual dividends paid and expected payment in the future.
A summary of stock option activity during the year ended March 31, 2017, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
Aggregate |
|
|
|
|
|
|
|
|
remaining |
|
intrinsic value |
|
||
|
|
|
|
Weighted-average |
|
contractual term |
|
(Thousands of |
|
||
|
|
Shares |
|
exercise price |
|
(in years) |
|
Yen) |
|
||
Outstanding―March 31, 2016 |
|
1,285,000 |
|
¥ |
476 |
|
2.7 |
|
¥ |
|
|
Granted |
|
225,000 |
|
|
1,047 |
|
|
|
|
|
|
Exercised |
|
(545,000) |
|
|
248 |
|
|
|
|
|
|
Forfeited |
|
(70,000) |
|
|
862 |
|
|
|
|
|
|
Outstanding—March 31, 2017 |
|
895,000 |
|
¥ |
729 |
|
3.3 |
|
¥ |
117,016 |
|
Vested and expected to vest ― March 31, 2017 |
|
895,000 |
|
¥ |
729 |
|
3.3 |
|
¥ |
117,016 |
|
Exercisable—March 31, 2017 |
|
376,000 |
|
¥ |
513 |
|
3.1 |
|
¥ |
86,960 |
|
Exercises of Stock Options
The total intrinsic values of options exercised during the year ended March 31, 2015, 2016 and 2017 were ¥66,560 thousand, ¥191,100 thousand and ¥333,700 thousand, respectively. The amount of cash received from exercise of stock options for the year ended March 31, 2015, 2016 and 2017 were ¥17,642 thousand, ¥21,197 thousand and ¥184,375 thousand, respectively. Cash received from exercise of options for the year ended March 31,2017 includes ¥49,412 thousand of options which were granted to underwriters (“8 th series of Stock option Grant”) on May 15, 2013 and fully exercised during the year ended March 31, 2017. The total intrinsic value of 8 th series of Stock Option Grant were 52,184 thousand. The total intrinsic values of options which were granted to non-employees during the year ended March 31, 2014 and exercised during the year ended March 31, 2017 was ¥52,184 thousand.
Nonvested Stock Options
A summary of the status of the Company’s nonvested stock options and their weighted-average grant date fair value at March 31, 2017, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
Shares |
|
Value |
|
|
Nonvested—April 1, 2016 |
|
544,000 |
|
¥ |
396 |
|
Granted |
|
225,000 |
|
|
373 |
|
Vested |
|
(180,000) |
|
|
262 |
|
Forfeited |
|
(70,000) |
|
|
462 |
|
Outstanding—March 31, 2017 |
|
519,000 |
|
¥ |
422 |
|
F-39
18. EQUITY
Japanese companies are subject to the Companies Act of Japan (the “Companies Act”). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:
Dividends
Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Statutory Auditors, and (4) the term of service of the directors being prescribed as one year rather than the normal two-year term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet criteria (4) above. The 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 Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the 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.
Increases / decreases and transfer of common stock, reserve and surplus
The Companies Act requires that an amount equal to 10% of dividends must be appropriated as legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of the aggregate amount of legal reserve and additional paid-in capital equals 25% of common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, and other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.
The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings recorded in the Company’s general books of account prepared using generally accepted Japanese accounting practices. The adjustments included in the accompanying consolidated financial statements for U.S. GAAP purposes but not recorded in the general books of account have no effect on the determination of retained earnings available for dividends under the Companies Act. Retained earnings available for dividends shown in FRONTEO’s general books of account, as determined under Japanese GAAP, amounted to ¥1,316,504 thousand at March 31, 2017.
19. OTHER COMPREHENSIVE INCOME
The changes in each component of other comprehensive income for the years ended March 31, 2015, 2016 and 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
Foreign |
|
|
|
|
related to |
|
Accumulated |
|
|||
|
|
currency |
|
Unrealized |
|
retirement and |
|
other |
|
||||
|
|
translation |
|
holding gain on |
|
severance |
|
comprehensive |
|
||||
|
|
adjustments |
|
securities |
|
benefits |
|
income |
|
||||
Balance at April 1, 2014 |
|
¥ |
42,237 |
|
¥ |
96,460 |
|
¥ |
(4,078) |
|
¥ |
134,619 |
|
Period change |
|
|
138,130 |
|
|
89,693 |
|
|
(1,703) |
|
|
226,120 |
|
Balance at April 1, 2015 |
|
|
180,367 |
|
|
186,153 |
|
|
(5,781) |
|
|
360,739 |
|
Period change |
|
|
(449,944) |
|
|
78,215 |
|
|
(17,495) |
|
|
(389,224) |
|
Balance at March 31, 2016 |
|
|
(269,577) |
|
|
264,368 |
|
|
(23,276) |
|
|
(28,485) |
|
Period change |
|
|
(51,994) |
|
|
(15,759) |
|
|
13,759 |
|
|
(53,994) |
|
Balance at March 31, 2017 |
|
¥ |
(321,571) |
|
¥ |
248,609 |
|
¥ |
(9,517) |
|
¥ |
(82,479) |
|
F-40
The tax effects allocated to each component of other comprehensive income for the years ended March 31, 2015, 2016 and 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
|||||||
|
|
Before Tax |
|
Tax Benefit |
|
Net of Tax |
|
|||
|
|
Amount |
|
(Expense) |
|
Amount |
|
|||
Foreign currency translation adjustments |
|
¥ |
139,688 |
|
¥ |
(1,558) |
|
¥ |
138,130 |
|
Unrealized holding gain on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
139,410 |
|
|
(49,717) |
|
|
89,693 |
|
Net unrealized holding gain during the period |
|
|
139,410 |
|
|
(49,717) |
|
|
89,693 |
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
(2,076) |
|
|
373 |
|
|
(1,703) |
|
Net adjustments related to retirement and severance benefits |
|
|
(2,076) |
|
|
373 |
|
|
(1,703) |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income(loss) |
|
¥ |
277,022 |
|
¥ |
(50,902) |
|
¥ |
226,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|||||||
|
|
Before Tax |
|
Tax Benefit |
|
Net of Tax |
|
|||
|
|
Amount |
|
(Expense) |
|
Amount |
|
|||
Foreign currency translation adjustments |
|
¥ |
(459,187) |
|
¥ |
9,243 |
|
¥ |
(449,944) |
|
Unrealized holding gain on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
127,612 |
|
|
(49,397) |
|
|
78,215 |
|
Net unrealized holding gain during the period |
|
|
127,612 |
|
|
(49,397) |
|
|
78,215 |
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
(24,870) |
|
|
7,375 |
|
|
(17,495) |
|
Net adjustments related to retirement and severance benefits |
|
|
(24,870) |
|
|
7,375 |
|
|
(17,495) |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income(loss) |
|
¥ |
(356,445) |
|
¥ |
(32,779) |
|
¥ |
(389,224) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|||||||
|
|
Before Tax |
|
Tax Benefit |
|
Net of Tax |
|
|||
|
|
Amount |
|
(Expense) |
|
Amount |
|
|||
Foreign currency translation adjustments |
|
¥ |
(52,440) |
|
¥ |
446 |
|
¥ |
(51,994) |
|
Unrealized holding gain on securities: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
(37,079) |
|
|
21,320 |
|
|
(15,759) |
|
Net unrealized holding gain during the period |
|
|
(37,079) |
|
|
21,320 |
|
|
(15,759) |
|
Adjustments related to retirement and severance benefits: |
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
19,831 |
|
|
(6,072) |
|
|
13,759 |
|
Net adjustments related to retirement and severance benefits |
|
|
19,831 |
|
|
(6,072) |
|
|
13,759 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income(loss) |
|
¥ |
(69,688) |
|
¥ |
15,694 |
|
¥ |
(53,994) |
|
F-41
The changes in accumulated other comprehensive income (loss) by component for the years ended March 31, 2015, 2016 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||||||||
|
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
related to |
|
|
|
|
|
|
|
Foreign currency |
|
Unrealized |
|
retirement and |
|
|
|
|
|||
|
|
translation |
|
holding gain |
|
severance |
|
|
|
|
|||
|
|
adjustments |
|
on securities |
|
benefits |
|
Total |
|
||||
Balance at March 31, 2014 |
|
¥ |
42,237 |
|
¥ |
96,460 |
|
¥ |
(4,078) |
|
¥ |
134,619 |
|
Other comprehensive income (loss) before reclassifications |
|
|
138,130 |
|
|
89,693 |
|
|
(2,782) |
|
|
225,041 |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
— |
|
|
1,079 |
|
|
1,079 |
|
Net current-year other comprehensive income (loss) |
|
|
138,130 |
|
|
89,693 |
|
|
(1,703) |
|
|
226,120 |
|
Balance at March 31, 2015 |
|
¥ |
180,367 |
|
¥ |
186,153 |
|
¥ |
(5,781) |
|
¥ |
360,739 |
|
Other comprehensive income (loss) before reclassifications |
|
|
(449,944) |
|
|
78,215 |
|
|
(18,883) |
|
|
(390,612) |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
— |
|
|
1,388 |
|
|
1,388 |
|
Net current-year other comprehensive income (loss) |
|
|
(449,944) |
|
|
78,215 |
|
|
(17,495) |
|
|
(389,224) |
|
Balance at March 31, 2016 |
|
¥ |
(269,577) |
|
¥ |
264,368 |
|
¥ |
(23,276) |
|
¥ |
(28,485) |
|
Other comprehensive income (loss) before reclassifications |
|
|
(51,994) |
|
|
(17,453) |
|
|
10,767 |
|
|
(58,680) |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
1,694 |
|
|
2,992 |
|
|
4,686 |
|
Net current-year other comprehensive income (loss) |
|
|
(51,994) |
|
|
(15,759) |
|
|
13,759 |
|
|
(53,994) |
|
Balance at March 31, 2017 |
|
¥ |
(321,571) |
|
¥ |
248,609 |
|
¥ |
(9,517) |
|
¥ |
(82,479) |
|
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated statements of operations, with affected line items, for the years ended March 31, 2015, 2016 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affected line items in the |
|
Details about accumulated other comprehensive |
|
Thousands of Yen |
|
consolidated statements of |
|
|||||||
income (loss) |
|
2015 |
|
2016 |
|
2017 |
|
operations |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related to retirement and severance benefits |
|
¥ |
1,594 |
|
¥ |
2,001 |
|
¥ |
4,313 |
|
*(1) |
|
|
|
|
(515) |
|
|
(613) |
|
|
(1,321) |
|
Income taxes (benefit) |
|
|
|
|
1,079 |
|
|
1,388 |
|
|
2,992 |
|
Net income (loss) |
|
Adjustments related to unrealized holding gain on securities |
|
|
― |
|
|
― |
|
|
2,441 |
|
Other income |
|
|
|
|
― |
|
|
― |
|
|
(747) |
|
Income taxes (benefit) |
|
|
|
|
― |
|
|
― |
|
|
1,694 |
|
Net income (loss) |
|
Total reclassifications for the year |
|
¥ |
1,079 |
|
¥ |
1,388 |
|
¥ |
4,686 |
|
|
|
*(1) These are included in the computation of net periodic pension cost (See Note 11).
20. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed on the basis of weighted-average outstanding common shares. Diluted net income (loss) per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options and convertible bonds, if dilutive. Potentially dilutive common shares from series of stock option plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options. Potentially dilutive common shares are determined by applying the if-converted method for the convertible bonds. The numerator of the diluted net income (loss) per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible bonds if the net impact is dilutive.
F-42
The computation of basic and diluted net income per share for the years ended March 31, 2015, 2016 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
||||||
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
(Thousands of Yen) |
|
Common |
|
|
|
|
|
|
|
Net Income |
|
Shares Outstanding |
|
Per Share |
|
||
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
Basic net loss attributable to FRONTEO, Inc. shareholders |
|
¥ |
218,453 |
|
34,956,728 |
|
¥ |
6.3 |
|
Effect of dilutive securities: Stock options *(1) |
|
|
|
|
842,025 |
|
|
|
|
Diluted net loss attributable to FRONTEO, Inc. shareholders |
|
¥ |
218,453 |
|
35,798,753 |
|
¥ |
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
||||||
|
|
(Thousands of |
|
Weighted-Average |
|
|
|
|
|
|
|
Yen) |
|
Common |
|
|
|
|
|
|
|
Net Income |
|
Shares Outstanding |
|
Per Share |
|
||
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
Basic net loss attributable to FRONTEO, Inc. shareholders |
|
¥ |
(417,632) |
|
35,582,665 |
|
¥ |
(11.7) |
|
Effect of dilutive securities: Stock options *(1) |
|
|
|
|
|
|
|
|
|
Diluted net loss attributable to FRONTEO, Inc. shareholders |
|
¥ |
(417,632) |
|
35,582,665 |
|
¥ |
(11.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
||||||
|
|
(Thousands of |
|
Weighted-Average |
|
|
|
|
|
|
|
Yen) |
|
Common |
|
|
|
|
|
|
|
Net Loss |
|
Shares Outstanding |
|
Per Share |
|
||
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
Basic net loss attributable to FRONTEO, Inc. shareholders |
|
¥ |
(865,087) |
|
36,372,576 |
|
¥ |
(23.8) |
|
Effect of dilutive securities: Stock options *(1) |
|
|
|
|
— |
|
|
|
|
Diluted net loss attributable to FRONTEO, Inc. shareholders |
|
¥ |
(865,087) |
|
36,372,576 |
|
¥ |
(23.8) |
|
*(1) The calculation of diluted net loss per share for the years ended March 31, 2016 and 2017 does not include potentially dilutive securities because their inclusion would be anti-dilutive (i.e., reduce the net loss per share).
21. SEGMENT REPORTING
Operating segments are defined as components of the Company that engage in business activities from which the Company earns revenues and incurs expenses and for which separate financial information is available that is evaluated regularly by the chief operation decision maker in deciding how to allocate resources and in assessing performance. The Company provides a variety of eDiscovery and forensic services (“legal service”) which are provided by FRONTEO and its domestic subsidiaries for domestic (Japanese) clients, by FRONTEO USA, Inc. (formerly UBIC North America, Inc. and EvD, Inc.) and FRONTEO Government Services, Inc. (formerly TechLaw Solutions, Inc.), U.S. based wholly-owned subsidiaries of FRONTEO, for clients based in the U.S. or represented by U.S. -based attorneys who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc., and by other foreign subsidiaries for foreign clients other than those who contracted FRONTEO USA, Inc. and FRONTEO Government Services, Inc. FRONTEO and its domestic subsidiaries also provide AI based business, such as healthcare and data marketing. The Company’s legal service operations in Japan, the U.S. and Other (which includes South Korea and Taiwan), and AI based service in Japan have been identified as the four operating segments of the Company. The Company’s chief executive officer, who is also the Company’s chief operating decision maker, regularly reviews the performance of the four operating segments and makes decisions regarding allocation of resources. The Company’s chief operating decision maker utilizes various measurements which include revenues, operating income or loss and segment assets to assess segment performance and allocate resources to segments.
F-43
AI based service in Japan segment has met a quantitative threshold for the year ended March 31, 2017 and the segment data for the year ended March 31, 2016 were presented for comparative purposes. No segment data for the year ended March 31, 2015 has been presented because AI based service did not exist in that year.
Each legal service segment recognizes revenue for which the segment has a direct contractual relationships with its clients. Most of the Company’s clients are either corporate clients in Asia or U.S.- based law firms representing corporate clients in Asia. If the Company’s services are contracted between a law firm in the U.S. and FRONTEO USA, Inc. or FRONTEO Government Services, Inc., revenue is recorded by the U.S. segment although the end corporate client may be located in areas other than the U.S.
The Company’s reportable segments are the same as its operating segments.
Segment information for the years ended March 31, 2015, 2016 and 2017 is presented below:
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Japan-legal |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
¥ |
3,105,983 |
|
¥ |
3,726,683 |
|
¥ |
3,740,903 |
|
Intersegment *(1) |
|
|
739,796 |
|
|
844,455 |
|
|
571,889 |
|
Total |
|
|
3,845,779 |
|
|
4,571,138 |
|
|
4,312,792 |
|
|
|
|
|
|
|
|
|
|
|
|
Japan-AI |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
¥ |
― |
|
¥ |
118,915 |
|
¥ |
288,012 |
|
U.S. |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
|
2,784,470 |
|
|
6,223,652 |
|
|
6,800,966 |
|
Intersegment *(1) |
|
|
121,546 |
|
|
101,628 |
|
|
179,763 |
|
Total |
|
|
2,906,016 |
|
|
6,325,280 |
|
|
6,980,729 |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Outside customers |
|
|
384,007 |
|
|
483,758 |
|
|
377,850 |
|
Intersegment *(1) |
|
|
124,488 |
|
|
138,977 |
|
|
47,876 |
|
Total |
|
|
508,495 |
|
|
622,735 |
|
|
425,726 |
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
(985,830) |
|
|
(1,085,061) |
|
|
(799,529) |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue after eliminations |
|
|
6,274,460 |
|
|
10,553,007 |
|
|
11,207,730 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(2) |
|
|
30,466 |
|
|
3,229 |
|
|
13,045 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenue |
|
¥ |
6,304,926 |
|
¥ |
10,556,236 |
|
¥ |
11,220,775 |
|
______________________________
*(1) Intersegment transaction prices and other conditions are determined based on market prices and total costs of transactions.
*(2) These amounts primarily represent the net impact of adjustments arising from differences in the timing of the revenue recognition under U.S. GAAP and Japanese GAAP.
F-44
Segment Performance Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Segment profit (loss) |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
303,149 |
|
¥ |
557,597 |
|
¥ |
698,608 |
|
Japan-AI |
|
|
— |
|
|
(527,420) |
|
|
(728,926) |
|
U.S. |
|
|
39,926 |
|
|
35,013 |
|
|
(1,132,981) |
|
Other |
|
|
(77,006) |
|
|
3,933 |
|
|
(43,363) |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit after eliminations |
|
|
266,069 |
|
|
69,123 |
|
|
(1,206,662) |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments *(3) |
|
|
9,353 |
|
|
(139,402) |
|
|
27,811 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income (loss) |
|
|
275,422 |
|
|
(70,279) |
|
|
(1,178,851) |
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,699 |
|
|
1,672 |
|
|
3,634 |
|
Interest expense |
|
|
(28,177) |
|
|
(54,793) |
|
|
(125,743) |
|
Gain (loss) on derivatives |
|
|
— |
|
|
(258,205) |
|
|
43,594 |
|
Foreign currency exchange gains (losses) |
|
|
200,438 |
|
|
161,680 |
|
|
(13,751) |
|
Dividend income |
|
|
9,000 |
|
|
11,250 |
|
|
14,400 |
|
Other-net |
|
|
(85) |
|
|
(20,075) |
|
|
(60,255) |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated income (loss) before income taxes |
|
¥ |
458,297 |
|
¥ |
(228,750) |
|
¥ |
(1,316,972) |
|
* (3) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, amortization of goodwill, remeasurement of earn-out and vacation allowance expenses for employees.
Segment Assets:
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
||||
|
|
2016 |
|
2017 |
|
||
Segment assets |
|
|
|
|
|
|
|
Japan |
|
¥ |
11,586,133 |
|
¥ |
12,334,732 |
|
Japan-AI |
|
|
358,045 |
|
|
3,468,157 |
|
U.S. |
|
|
7,658,961 |
|
|
8,600,034 |
|
Others *(4) |
|
|
720,152 |
|
|
734,277 |
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
(7,404,501) |
|
|
(8,978,328) |
|
|
|
|
|
|
|
|
|
Total segment assets after eliminations |
|
|
12,918,790 |
|
|
16,158,872 |
|
|
|
|
|
|
|
|
|
Adjustments *(5) |
|
|
(52,135) |
|
|
86,736 |
|
|
|
|
|
|
|
|
|
Total consolidated assets |
|
¥ |
12,866,655 |
|
¥ |
16,245,608 |
|
*(4) The Company recognized an impairment loss on long-lived assets of ¥5,144 thousand for the year ended March 31, 2016 related to property, plant and equipment owned by a subsidiary in Taiwan.
*(5) Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for revenue recognition, depreciation and amortization and deferred tax assets.
F-45
Capital expenditures on long-lived assets:
Capital expenditures relate to property and equipment, capitalized computer software costs and other intangible assets on an accrual basis, other than those disclosed in Note 2 of the notes to the consolidated financial statements.
Other Significant Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Japan |
|
¥ |
431,287 |
|
¥ |
474,533 |
|
¥ |
444,094 |
|
Japan-AI |
|
|
|
|
|
48,504 |
|
|
125,715 |
|
U.S. |
|
|
113,768 |
|
|
313,025 |
|
|
429,618 |
|
Others |
|
|
42,703 |
|
|
47,545 |
|
|
39,769 |
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
|
587,758 |
|
|
883,607 |
|
|
1,039,196 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments |
|
|
1,774 |
|
|
12,218 |
|
|
9,431 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
¥ |
589,532 |
|
¥ |
895,825 |
|
¥ |
1,048,627 |
|
Adjustments primarily relate to differences between U.S. GAAP and Japanese GAAP for depreciation and amortization.
Entity-Wide Information:
For the year ended March 31, 2015, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,969,335 thousand and ¥641,074 thousand, respectively, representing approximately 31.4 percent and 10.2 percent, respectively, of consolidated revenue. For the year ended March 31, 2016, revenue from Samsung Electronics Co., Ltd. and TMI Associates amounted to ¥1,657,074 thousand and ¥1,022,656 thousand, respectively, representing approximately 15.6 percent and 9.7 percent, respectively, of consolidated revenue. For the year ended March 31, 2017, revenue from TMI Associates amounted to ¥1,253,860 thousand representing approximately 11.2 percent of consolidated revenue. These customers are attributable to Japan except revenues of ¥1,969,335 thousand and ¥1,657,074 thousand for Samsung Electronics Co., Ltd. for the years ended March 31, 2015 and 2016, respectively, which are reported in the U.S. and Other. For the year ended March 31, 2017, revenue from TMI Associates amounted to ¥1,253,860 thousand, representing approximately 11.2% of the total revenue.
F-46
The information concerning revenue by service category for the years ended March 31, 2015, 2016 and 2017, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Yen |
|
|||||||
|
|
2015 |
|
2016 |
|
2017 |
|
|||
eDiscovery |
|
|
|
|
|
|
|
|
|
|
Review |
|
¥ |
832,492 |
|
¥ |
1,998,276 |
|
¥ |
2,630,785 |
|
Other |
|
|
5,027,090 |
|
|
8,047,850 |
|
|
7,830,595 |
|
Total |
|
|
5,859,582 |
|
|
10,046,126 |
|
|
10,461,380 |
|
Investigation |
|
|
299,095 |
|
|
283,957 |
|
|
304,233 |
|
AI |
|
|
— |
|
|
118,914 |
|
|
288,011 |
|
Sales of software |
|
|
24,344 |
|
|
41,054 |
|
|
44,523 |
|
Sales of forensic tools |
|
|
21,926 |
|
|
41,794 |
|
|
29,971 |
|
Forensic training |
|
|
6,325 |
|
|
9,990 |
|
|
12,485 |
|
Other |
|
|
93,654 |
|
|
14,401 |
|
|
80,172 |
|
Total revenue |
|
¥ |
6,304,926 |
|
¥ |
10,556,236 |
|
¥ |
11,220,775 |
|
Long-lived assets held in Japan, Japan-AI, the U.S., and Other as of March 31, 2017 were ¥308,415 thousand, ¥66,879 thousand, ¥771,734 thousand and ¥29,828 thousand, respectively. Long-lived assets include property and equipment.
22. ADVERTISING COSTS
Advertising costs, which are included in “Selling, general and administrative expenses” incurred during the years ended March 31, 2015, 2016 and 2017, relate primarily to advertisements in magazines and journals and amounted to ¥179,064 thousand, ¥151,214 thousand and ¥200,946 thousand, respectively.
23.RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are included in “Selling, general and administrative expenses” relate primarily to costs incurred in the research and development of new internal use software products and enhancements to existing internal use software products, which do not meet the criteria for capitalization, and new solutions. Such costs are expensed as incurred. Research and development costs incurred during the years ended March 31, 2015, 2016 and 2017 amounted to ¥89,451 thousand, ¥91,600 thousand and ¥83,679 thousand, respectively.
24. RELATED PARTY TRANSACTIONS
During the year ended March 31, 2016 and 2017, the Company entered into transactions with Consultoris, Inc. (“CI”) and IIOSS, Inc. (“IIOSS”), which are managed by management of foreign subsidiaries. CI provides consulting services and IIOSS provides outsourcing support services to the Company.
For the year ended March 31, 2016, the total amount of transactions with CI and IIOSS was ¥40,363 thousand. For the year ended March 31, 2017, the amount of transactions with CI was ¥44,419 thousand, and the amount of transactions with IIOSS was not material.
25. SUBSEQUENT EVENTS
Stock options
On June 29, 2016, the 16 th series Stock Option Grant was approved at FRONTEO’s ordinary general meeting of shareholders. On April 20, 2017, FRONTEO’s board of directors resolved and approved the issuance of stock options under the 16 th series Stock Option Grant.
F-47
The key terms and conditions for the 16 th series Stock Option Grant are as follows:
|
|
|
Grant date |
|
April 22, 2017 |
Number of shares to be issued |
|
105,000 shares |
Exercise price per share |
|
¥774 |
Vesting period |
|
3 years |
Exercise period of the stock options |
|
April 22, 2020 to |
|
|
April 21, 2023 |
Total number of recipients – employee/directors and employees of the Company |
|
6 |
Conditions for the stock options to be vested |
|
Enrolled as director or employee of the Company |
On June 14, 2017, FRONTEO’s board of directors resolved and approved the issuance of stock options under the 17th series Stock Option Grant.
The key terms and conditions for the 17th series Stock Option Grant are as follows:
|
|
|
Number of shares to be issued |
|
870,000 shares |
Issue price per share |
|
¥42 |
Exercise price per share |
|
¥731 |
Vesting period |
|
3 years |
Exercise period of the stock options |
|
July 1, 2019 to |
|
|
July 6, 2022 |
On June 29, 2016, the 18th series Stock Option Grant was approved at FRONTEO’s ordinary general meeting of shareholders. On June 22, 2017, FRONTEO’s board of directors resolved and approved the issuance of stock options under the 18th series Stock Option Grant.
The key terms and conditions for the 18th series Stock Option Grant are as follows:
|
|
|
Grant date |
|
June 23, 2017 |
Number of shares to be issued |
|
70,000 shares |
Exercise price per share |
|
¥730 |
Vesting period |
|
3 years |
Exercise period of the stock options |
|
June 24, 2020 to |
|
|
June 23, 2023 |
Total number of recipients – employee/directors and employees of the Company |
|
39 |
Conditions for the stock options to be vested |
|
Enrolled as director or employee of the Company |
On June 29, 2016, the 19th series Stock Option Grant was approved at FRONTEO’s ordinary general meeting of shareholders. On July 20, 2017, FRONTEO’s board of directors resolved and approved the issuance of stock options under the 19th series Stock Option Grant.
F-48
The key terms and conditions for the 19th series Stock Option Grant are as follows:
|
|
|
Grant date |
|
July 21, 2017 |
Number of shares to be issued |
|
6,000 shares |
Exercise price per share |
|
¥806 |
Vesting period |
|
3 years |
Exercise period of the stock options |
|
July 22, 2020 to |
|
|
July 21, 2023 |
Total number of recipients – employee/directors and employees of the Company |
|
2 |
Conditions for the stock options to be vested |
|
Enrolled as director or employee of the Company |
Issuance of stocks by exercise of stock options
On April 24, 2017, we issued stocks by exercise of the 5 th series Stock Option Grant as follows:
|
|
|
Number of shares to be issued |
|
80,000 shares |
Proceeds from issuance of stocks |
|
¥30,552 thousand |
Amount of increased common stock |
|
¥15,276 thousand |
Amount of increased additional paid-in capital |
|
¥15,276 thousand |
* * * * * *
F-49
Exhibit 1.1
Articles of Incorporation of
FRONTEO, Inc.
Effective Date
August 8, 2003
Amendment
August 3, 2004
April 20, 2005
June 29, 2006
February 6, 2007
June 25, 2008
June 23, 2009
January 6, 2010
June 25, 2010
September 26, 2011
April 1, 2012
June 24, 2014
June 23, 2015
July 1, 2016
CHAPTER I
GENERAL PROVISIONS
Article 1 Company Name
The name of the Company is KABUSHIKI KAISHA FRONTEO. The Company shall be styled “FRONTEO, Inc.” in English.
Article 2 Purposes
The purposes of the Company are to engage in the following business activities:
|
1. |
|
to sell, maintain, export and import forensic products; |
|
2. |
|
to develop, manufacture, sell, maintain, export and import products with forensic technology; |
|
3. |
|
to undertake forensic investigation; |
|
4. |
|
to invest, research, educate, train, guide, advise and consult regarding forensic investigation; |
|
5. |
|
to develop, manufacture, sell, maintain, export and import products related to discovery and other international litigation support; |
|
6. |
|
to provide discovery and other international litigation support services; |
|
7. |
|
to support information asset management; |
|
8. |
|
to support strategic preventive law management; and |
|
9. |
|
to develop, manufacture, sell, maintain, export and import, and provide services as to, products with information analysis technology; |
|
10. |
|
to plan, plot, develop, support and provide technology through computer system and software, and manufacture, sell, maintain, export and import related products; |
|
11. |
|
to conduct any other businesses that are related to or incidental to those matters described above. |
Article 3 Location of Head Office
The head office of the Company shall be located in Minato-ku, Tokyo.
Article 4 Establishment of Organs
In addition to its General Meeting of Shareholders and appointment of Directors, the Company shall have:
|
1. |
|
Board of Directors |
|
2. |
|
Statutory Auditor(s) |
|
3. |
|
Board of Statutory Auditors; and |
|
4. |
|
Accounting Auditor |
Article 5 Method of Making Public Notices
Public notices of the Company shall be carried in electronic public notice; provided, however, when it is unable to make a public notice by electronic public notice due to an accident or any other inevitable reasons, public notices of the Company shall be published in Japan Economic Newspaper (Nihon Keizai Shinbun) .
2
CHAPTER II
SHARES
Article 6 Number of Shares Authorized to be Issued
The total number of shares authorized to be issued by the Company shall be seven million and two hundred thousand (72,000,000) shares.
Article 7 Acquisition of Treasury Shares
Subject to Article 165 Paragraph 2 of the Company Act, the Company may acquire treasury shares through market transactions by a resolution of the board of directors.
Article 8 Unit of Share
One (1) unit of the share of the Company shall be composed of ten (100) shares of the Company.
Article 9 Restriction on Rights in relation to Shareholdings less than One Unit
A shareholder who holds shares less than one unit is not entitled to exercise any rights except for those as follows:
|
1. |
|
The rights provided in any of Article 189 Paragraph 2 of the Company Act |
|
2. |
|
The right to receive dividends of surplus |
|
3. |
|
The right to demand for acquisition of shares with put option |
|
4. |
|
The rights to be allotted to shares for subscription or share options for subscription |
Article 10 Administrator of the Shareholder Registry
|
1. |
|
The Company shall appoint the administrator of the shareholder registry. |
|
2. |
|
The administrator of the shareholder registry and its business office shall be determined by a resolution of the board of directors. |
|
3. |
|
The shareholder registry and the share option registry of the Company shall be kept at the business office of the administrator of shareholder registry. Stating, recording to the shareholder registry or the share option registry, or any other work with respect to the share or the share option of the Company shall not be dealt with by the Company but by the administrator of the shareholder registry. |
Article 11 Share Handling Regulations
Matters of stating or recording to the shareholder registry or the share option registry, any handlings with regard to procedure for exercise of rights by shareholders or any matters with respect to shares and share options, and fees shall be governed by the share handling regulations established by the board of directors, except as otherwise provided for in relevant laws or regulations or in these Articles of Incorporation.
Article 12 Record Date
|
1. |
|
The Company shall treat the shareholders with voting rights appearing in the shareholder registry as of the last day of each business year as the shareholders entitled to exercise their rights at the ordinary general meeting of shareholders for such business year. |
|
2. |
|
In addition to the preceding paragraph, when it is necessary to do so in order to determine who shall be entitled to |
3
exercise their rights as shareholders or pledgees, the Company, by a resolution of the board of directors, may fix a special record date, after giving a prior public notice thereof. |
4
CHAPTER III
GENERAL MEETING OF SHAREHOLDERS
Article 13 Convening General Meeting
An ordinary general meeting of shareholders ( teiji kabunushi sokai ) of the Company shall be convened within three (3) months after the following day of the close of each business year, and an extraordinary general meeting of shareholders ( rinji kabunushi sokai ) shall be convened whenever necessary.
Article 14 Convener and Chairperson
|
1. |
|
Unless otherwise provided by laws or regulations, a general meeting of shareholders shall be convened by a president-director and he/she shall preside over the conduct of it as a chairperson in accordance with a decision by a resolution of the board of directors. |
|
2. |
|
In the event that a president-director is not available, one of the other directors shall convene a general meeting of shareholders and act as a chairperson in accordance with the procedures previously established by the board of directors. |
Article 15 Internet Disclosure and Deemed Provision of Reference Documents
Upon convocation of a general meeting of shareholders, internet disclosure of any information that should be stated or presented in reference documents for a general meeting of shareholders, business reports, financial statements and consolidated financial statements in accordance with the Ordinance of the Ministry of Justice may deemed as provision of such information to shareholders.
Article 16 Proxy Vote
|
1. |
|
Shareholders may exercise their votes by proxy who is a shareholder of the Company. |
|
2. |
|
In such case set forth in the preceding paragraph, the shareholder or the proxy holder must present to the Company at each general meeting of shareholders a document evidencing his or her proxy authority. |
Article 17 Requirements of Resolution
|
1. |
|
Unless otherwise provided by laws or regulations or these Articles of Incorporation, resolutions of a general meeting of shareholders shall be adopted by a majority vote of shareholders present with voting rights exercisable at such meeting. |
|
2. |
|
Resolutions of a general meeting of shareholders set forth in Article 309 paragraph 2 of the Company Act shall be adopted by a majority of two thirds or more of shareholders with voting rights exercisable at such meeting and in attendance at a meeting which is attended by shareholders representing one third or more of the voting rights. |
Article 18 Minutes of General Meeting of Shareholders
The minutes of a shareholders meeting, which describe or record such as its proceedings, results and any other matters provided in laws or regulations, shall be prepared.
5
CHAPTER IV
DIRECTORS AND BOARD OF DIRECTORS
Article 19 Disposition of Board of Directors
The board of directors shall be settled at the Company.
Article 20 Number of Directors
The Company shall install no more than ten (10) directors.
Article 21 Appointment and Removal of Directors
|
1. |
|
The directors of the Company shall be appointed at a general meeting of shareholders. |
|
2. |
|
The directors of the Company shall be appointed by a resolution of the majority votes in a general meeting of shareholders, at which shareholders representing one-third or more of the voting rights of the shareholders entitled to exercise their voting rights shall be present. |
|
3. |
|
The appointment of directors shall not be made by cumulative voting. |
|
4. |
|
The directors of the Company shall be removed by two-thirds or more of votes of shareholders with voting rights exercisable and in attendance at a general meeting of shareholders which is attended by shareholders representing more than one half of the voting rights. |
Article 22 Term of Office of Directors
|
1. |
|
The term of office of a director shall be until the termination of the ordinary general meeting of shareholders for the last business term which ends within two (2) years as from his/her assumption of office. |
|
2. |
|
The term of office of a director appointed as a substitute of another director or appointed due to the increase in the number of directors shall be the same as the remaining period of the other remaining directors. |
Article 23 Representative Director and Titled Director
|
1. |
|
A representative director shall be appointed by a resolution of the board of directors. |
|
(1) |
|
One (1) president-director ( torishimariyaku-shacho ) shall be appointed by a resolution of the board of directors, and one (1) chairperson of the board, one or more vice-presidents, senior managing directors ( senmu torishimari-yaku ) and ordinary managing directors ( jomu torishimari-yaku ) may be respectively appointed by a resolution of the board of directors, when deemed necessary. |
Article 24 Convener and Chair Person of Board of Directors
|
1. |
|
Unless otherwise provided by laws or regulations, a meeting of the board of directors shall be convened by a president-director and he/she shall preside over the conduct of it as a chairperson. |
|
2. |
|
In the event that the a president-director is not available, one of the other directors shall convene a meeting of the board of directors and act as a chairperson in accordance with the procedures previously established by the board of directors. |
6
Article 25 Notice to Convene Meeting of Board of Directors
|
1. |
|
In convening a meeting of the board of directors, a notice to that effect shall be given to each director and statutory auditor by no later than three (3) days prior to the day of such meeting. However, such period may be shortened in time of an emergency. |
|
2. |
|
A meeting of the board of directors may be held without any such convening procedures if all of the directors and the statutory auditors consent to the omission. |
Article 26 Requirements of Resolution of Board of Directors
Resolutions of the board of directors of the Company shall be adopted by a majority vote of directors present, where a majority of the directors with voting rights exercisable are present at the meeting.
Article 27 Omission of resolution of meeting of the board of directors
In cases where directors submit a proposal with respect to a matter which is the purpose of the resolution of meeting of the board of directors, if all directors (limited to those who are entitled to participate in votes with respect to such matter) manifest their intention to agree to such proposal in writing or by means of electromagnetic records, it shall be deemed that the resolution to approve such proposal at the board of directors meeting has been made, unless a statutory auditor raises an objection with respect to the same.
Article 28 Minutes of Board of Directors
The minutes of a meeting of the board of directors, which describe or record such as its proceedings, results and any other matters provided in laws or regulations, shall be prepared and directors and statutory auditors who attended the meeting shall place their signature, or place their names and seals or electronic signature thereto.
Article 29 Board of Directors Regulations
Matters with regard to the board of directors shall be governed by the board of directors regulations established by the board of directors of the Company, except as otherwise provided for in relevant laws or regulations or in these Articles of Incorporation.
Article 30 Reward for Directors
The reward, bonus, and any other financial benefit that directors receive as compensation for its execution of duty (“ Reward ”) shall be determined by a resolution of the general meeting of shareholders.
Article 31 Limitation of Liability for Directors
|
1. |
|
Liability for damages of directors (including former directors) to the Company due to their failures in duty may be exempted by a resolution of the board of directors in accordance with Article 426 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
|
2. |
|
The Company may enter into contracts with directors (excluding Executive Members of the Board of Directors, etc.) to exempt the outside directors from liability for damages that arises from their failures in duty in accordance with Article 427 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
7
CHAPTER V
STATUTORY AUDITORS AND BOARD OF STATUTORY AUDITORS
Article 32 Disposition of Statutory Auditors and Board of Statutory Auditors
Statutory auditors and board of statutory auditors shall be settled at the Company.
Article 33 Number of Statutory Auditors
The Company shall install no more than five (5) statutory auditors.
Article 34 Appointment of Statutory Auditors
|
1. |
|
The statutory auditors shall be appointed at a general meeting of shareholders. |
|
2. |
|
The statutory auditors shall be appointed by a resolution of the majority votes in a general meeting of shareholders, at which shareholders representing one-third or more of the voting rights of the shareholders entitled to exercise their voting rights shall be present. |
Article 35 Term of Office of Statutory Auditors
|
1. |
|
The term of office of a statutory auditor shall be until the termination of the ordinary general meeting of shareholders for the last business term which ends within four (4) years as from his/her assumption of office. |
|
2. |
|
The term of office of a statutory auditor appointed as a substitute of another statutory auditor resigned prior to expiry of his/her term of office shall be the same as the remaining term of office of its predecessor. |
Article 36 Full-Time Statutory Auditors
Full-time statutory auditor(s) shall be determined by a resolution of the board of statutory auditors.
Article 37 Notice to Convene Meeting of Board of Statutory Auditors
|
1. |
|
In convening a meeting of the board of statutory auditors, a notice to that effect shall be given to each statutory auditor by no later than three (3) days prior to the day of such meeting. However, such period may be shortened in time of an emergency. |
|
2. |
|
A meeting of the board of statutory auditors may be held without any such convening procedures if all of the statutory auditors consent to the omission. |
Article 38 Requirements of Resolution of Board of Statutory Auditors
Unless otherwise provided by laws or regulations, resolutions of the board of statutory auditors shall be adopted by a majority vote of the statutory auditors.
Article 39 Minutes of Board of Statutory Auditors
8
The minutes of a meeting of the board of statutory auditors, which describe or record such as its proceedings, results and any other matters provided in laws or regulations, shall be prepared and statutory auditors who attended the meeting shall place their signature, or place their names and seals or electronic signature thereto.
Article 40 Reward for Statutory Auditors
Reward for statutory auditors shall be determined by a resolution of the general meeting of shareholders.
Article 41 Limitation of Liability for Statutory Auditors
|
1. |
|
Liability for damages of statutory auditors (including former statutory auditors) to the Company due to their failures in duty may be exempted by a resolution of the board of directors in accordance with Article 426 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
|
2. |
|
The Company may enter into contracts with statutory auditors to exempt the outside statutory auditors from liability for damages that arises from their failures in duty in accordance with Article 427 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
9
CHAPTER VI ACCOUNTING AUDITOR
Article 42 Appointment of Accounting Auditor
The accounting auditors shall be appointed at a general meeting of shareholders.
Article 43 Term of Office of Accounting Auditors
|
1. |
|
The term of office of an accounting auditor shall be until the termination of the ordinary general meeting of shareholders for the last business term that ends within one (1) year as from his/her assumption of office. |
|
2. |
|
The accounting auditors shall be reappointed at the ordinary general meeting of shareholders set forth in the immediately preceding paragraph, unless otherwise resolved at such ordinary general meeting of shareholders. |
Article 44 Reward for Accounting Auditors
Reward for accounting auditors shall be determined by a representative director upon obtaining consent of the board of statutory directors.
Article 45 Limitation of Liability for Accounting Auditors
|
1. |
|
Liability for damages of accounting auditors (including former accounting auditors) to the Company due to their failures in duty may be exempted by a resolution of the board of directors in accordance with Article 426 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
|
2. |
|
The Company may enter into contracts with accounting auditors to exempt the accounting auditors from liability for damages that arises from their failures in duty in accordance with Article 427 Paragraph 1 of the Company Act only to the extent laws or regulations allow. |
10
CHAPTER VII ACCOUNT
Article 46 Business Term
The business term of the Company shall be one (1) term per year from the first day of April every year through the last day of March of the following year.
Article 47 Final Dividend
Final dividend limited to money shall be distributed to those shareholders or registered pledgees listed in the final shareholder registry as of the last day of March every year by a resolution of the general meeting of shareholders.
Article 48 Interim Dividend
An interim dividend may be distributed to those shareholders or registered pledgees listed in the final shareholder registry as of the last day of September every year in accordance with Article 454 Paragraph 5 of the Company Act.
Article 49 Limitations
|
1. |
|
When the final dividend or the interim dividend is not received even after a lapse of three (3) years as from the day offered for the payment thereof, the Company shall be relieved of the obligation to pay such dividend. |
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2. |
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Any dividend shall not yield interest. |
11
Exhibit 4.10
Translation of the Agreement for Subscription for the Fifteenth Share Option Offering
This Agreement is made and entered into by and between FRONTEO, Inc. (hereinafter referred to as the “Company”) and ************** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the thirteenth share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the thirteenth annual shareholders’ meeting held on June 29, 2016 and the resolution of the board meeting held on December 22, 2016, the Company has determined the following requirements for the thirteenth share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for **** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
(1) Class and number of shares covered by the Share Options
15,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
(2) Total number of Share Options
150
(3) Amount payable in exchange of the Share Options
No payment is required in exchange of the Share Options
(4) Manner of calculating the value of assets contributed in exercising the Share Options
90,100 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 901 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price
1
shall be adjusted as follows.
(i) For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise Price after adjustment |
= |
Exercise Price before
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× |
1 |
ratio of share split or reverse split |
(ii) If the Company issues new shares or dispose of the treasury stock at a price below the market price, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise |
= |
Exercise |
× |
number of |
+
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number of newly issued shares × amount paid per share |
Price after |
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Price before |
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issued shares |
market price per share |
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adjustment |
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Adjustment |
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number of issued shares + number of newly issued shares |
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions.
(5) Period during which the Share Options can be exercised
From December 24, 2019 to December 23, 2022
(6) Conditions to exercise the Share Options
(i) A person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) may exercise the Share Options only when both of the following conditions (A) and (B) are satisfied:
(A) the Share Option Holder has been either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary for three straight years or more at the time of exercising the option; and
(B) the Share Option Holder must be either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary at the time of exercising the option.
Notwithstanding the condition (B) above, when the condition (A) is satisfied, the Share Option Holder may exercise the Share Options during the period provided in Article 1. (5) above and limited to within ninety (90) days from the date of loss of such status as described in (B) above, only in the case that the Share Option Holder resigned due to expiry of term of office, retired by age limit or if otherwise justified by the resolution of the board of directors.
(ii) No Share Option shall be inherited.
(iii) No fractional Share Option shall be exercised.
(iv) All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting.
(7) Reason and conditions for acquisition of the Share Options
In the event that a proposal to approve a merger agreement where the Company is to be
2
extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
(8) Restriction on acquisition of the Share Options by assignment
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options
(i) Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen.
(ii) Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above.
(10) Handling of the Share Options in case of corporate reorganization
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
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(i) |
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Number of share options of the Reorganized Company to be delivered |
The same number as the Remaining Share Options in the possession of the Share Option Holder shall be delivered.
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(ii) |
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Type of stock of the Reorganized Company covered by the share options |
Common shares of the Reorganized Company
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(iii) |
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Number of shares of the Reorganized Company covered by the share options |
To be determined in accordance with the above “(1) Class and number of shares covered by the Share Options” taking into account the conditions for Corporate Reorganization.
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(iv) |
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Manner of calculation of the value of assets contributed to exercise the share options |
3
Value of assets contributed in exercising one (1) share option to be delivered shall be obtained by multiplying the Exercise Price after adjustment prescribed in the item (4) (iii) above by the number of shares of the Reorganized Company covered by such share option as determined under the item (iii) above.
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(v) |
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Period during which the share options can be exercised |
From the day when the above “(5) Period during which the Share Options can be exercised” commences or the day when the Corporate Reorganization comes into effect, whichever is the later, to the day when the above “(5) Period during which the Share Options can be exercised” expires
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(vi) |
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Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options |
To be determined in accordance with the above “(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options”
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(vii) |
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Restriction on acquisition of the share options by assignment |
Acquisition of the share options by assignment shall require an approval of the board of directors of the Reorganized Company.
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(viii) |
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Reason and conditions for acquisition of the share options |
To be determined in accordance with the above “(7) Reason and conditions for acquisition of the Share Options”
(11) Fractional share delivered upon exercise of the Share Options
Fractional share delivered upon exercise of the Share Options shall be discarded.
(12) Date of Allotment
December 23 , 2016
Article 2 (Special Provisions for Exercise of Option)
1. Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options.
2. If the Subscriber falls under any of the situations stated below, the Share Options shall expire automatically at that time, and the Subscriber and its successor shall not exercise the Share Options.
(1) A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation.
(2) A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation.
(3) There are other reasons that objectively show a significant worsening financial status of the Subscriber.
(4) The Subscriber is sentenced to imprisonment without work or a heavier criminal punishment (including the case of suspension of the sentence for execution) and such court judgement has become final and binding. The Subscriber may not exercise the Share Options during the criminal procedure, i.e. the period from the time that the Subscriber is arrested or prosecution is instituted against the Subscriber and until when the prosecutor has decided not to institute the prosecution or the court sentence becomes final and binding. .
(5) The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction.
4
(6) The Subscriber who is/was an employee of the Company or its subsidiary violates any terms of agreements that the Subscriber undertook an obligation to the Company.
3. The Company shall issue the shares (including issuing new shares or transferring or assigning existing shares) to the Subscriber for its exercise of option in accordance with the requirements for offering of the Share Options.
Article 3 (Manner of Exercising the Option)
1. In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form.
2. To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company.
3. Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust.
4. If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1.
Article 4 (Manner of Expressing Intention and Giving a Notice)
1. The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company.
2. Any change in any one of the following items must be notified by the Subscriber to the Company.
(1) Name of the Subscriber
(2) Address of the Subscriber
(3) E-mail address for the purpose of the preceding paragraph
3. If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder.
4. The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived.
5. Provisions of the preceding paragraphs shall be applied to the Subscriber who may exercise the Share Options under Article 1(6)(i).
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
5
Article 6 (Right to Establish Bylaws)
1. The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement.
2. The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph.
3. The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost.
Article 7 (Amendment to Agreement)
1. If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws.
2. In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary.
3. If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company.
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
December 23 , 2016
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Company: |
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FRONTEO, Inc. |
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Masahiro Morimoto, CEO and Representative Director |
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2-12-23, Kounan, Minato Ward, Tokyo |
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Subscriber: |
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(Address) |
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(Name) |
7
Exhibit 4.11
Translation of the Agreement for Subscription for the Sixteenth Share Option Offering
This Agreement is made and entered into by and between FRONTEO, Inc. (hereinafter referred to as the “Company”) and ******** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the sixteenth share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the thirteenth annual shareholders’ meeting held on June 29, 2016 and the resolution of the board meeting held on April 20, 2017, the Company has determined the following requirements for the sixteenth share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for **** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
(1) Class and number of shares covered by the Share Options
105,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
(2) Total number of Share Options
1,050
(3) Amount payable in exchange of the Share Options
No payment is required in exchange of the Share Options
(4) Manner of calculating the value of assets contributed in exercising the Share Options
77,400 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 774 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price shall be adjusted as follows.
1
(i) For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise Price after |
= |
Exercise Price before |
× |
1 |
adjustment |
adjustment |
ratio of share split or reverse split |
(ii) If the Company issues new shares or dispose of the treasury stock at a price below the market price, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions.
(5) Period during which the Share Options can be exercised
From April 22, 2020 to April 21, 2023
(6) Conditions to exercise the Share Options
(i) A person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) may exercise the Share Options only when both of the following conditions (A) and (B) are satisfied:
(A) the Share Option Holder has been either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary for three straight years or more at the time of exercising the option; and
(B) the Share Option Holder must be either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary at the time of exercising the option.
Notwithstanding the condition (B) above, when the condition (A) is satisfied, the Share Option Holder may exercise the Share Options during the period provided in Article 1. (5) above and limited to within ninety (90) days from the date of loss of such status as described in (B) above, only in the case that the Share Option Holder resigned due to expiry of term of office, retired by age limit or if otherwise justified by the resolution of the board of directors.
(ii) No Share Option shall be inherited.
(iii) No fractional Share Option shall be exercised.
(iv) All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting.
(7) Reason and conditions for acquisition of the Share Options
In the event that a proposal to approve a merger agreement where the Company is to be extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be
2
wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
(8) Restriction on acquisition of the Share Options by assignment
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options
(i) Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen.
(ii) Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above.
(10) Handling of the Share Options in case of corporate reorganization
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
(i) Number of share options of the Reorganized Company to be delivered
The same number as the Remaining Share Options in the possession of the Share Option Holder shall be delivered.
(ii) Type of stock of the Reorganized Company covered by the share options
Common shares of the Reorganized Company
(iii) Number of shares of the Reorganized Company covered by the share options
To be determined in accordance with the above “(1) Class and number of shares covered by the Share Options” taking into account the conditions for Corporate Reorganization.
(iv) Manner of calculation of the value of assets contributed to exercise the share options
Value of assets contributed in exercising one (1) share option to be delivered shall be obtained by multiplying the Exercise Price after adjustment prescribed in the item (4) (iii)
3
above by the number of shares of the Reorganized Company covered by such share option as determined under the item (iii) above.
(v) Period during which the share options can be exercised
From the day when the above “(5) Period during which the Share Options can be exercised” commences or the day when the Corporate Reorganization comes into effect, whichever is the later, to the day when the above “(5) Period during which the Share Options can be exercised” expires
(vi) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options
To be determined in accordance with the above “(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options”
(vii) Restriction on acquisition of the share options by assignment
Acquisition of the share options by assignment shall require an approval of the board of directors of the Reorganized Company.
(viii) Reason and conditions for acquisition of the share options
To be determined in accordance with the above “(7) Reason and conditions for acquisition of the Share Options”
(11) Fractional share delivered upon exercise of the Share Options
Fractional share delivered upon exercise of the Share Options shall be discarded.
(12) Date of Allotment
April 21, 2017
Article 2 (Special Provisions for Exercise of Option)
1. Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options.
2. If the Subscriber falls under any of the situations stated below, the Share Options shall expire automatically at that time, and the Subscriber and its successor shall not exercise the Share Options.
(1) A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation.
(2) A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation.
(3) There are other reasons that objectively show a significant worsening financial status of the Subscriber.
(4) The Subscriber is sentenced to imprisonment without work or a heavier criminal punishment (including the case of suspension of the sentence for execution) and such court judgement has become final and binding. The Subscriber may not exercise the Share Options during the criminal procedure, i.e. the period from the time that the Subscriber is arrested or prosecution is instituted against the Subscriber and until when the prosecutor has decided not to institute the prosecution or the court sentence becomes final and binding. .
(5) The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction.
(6) The Subscriber who is/was an employee of the Company or its subsidiary violates any terms of agreements that the Subscriber undertook an obligation to the Company.
4
3. The Company shall issue the shares (including issuing new shares or transferring or assigning existing shares) to the Subscriber for its exercise of option in accordance with the requirements for offering of the Share Options.
Article 3 (Manner of Exercising the Option)
1. In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form.
2. To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company.
3. Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust.
4. If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1.
Article 4 (Manner of Expressing Intention and Giving a Notice)
1. The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company.
2. Any change in any one of the following items must be notified by the Subscriber to the Company.
(1) Name of the Subscriber
(2) Address of the Subscriber
(3) E-mail address for the purpose of the preceding paragraph
3. If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder.
4. The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived.
5. Provisions of the preceding paragraphs shall be applied to the Subscriber who may exercise the Share Options under Article 1(6)(i).
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
Article 6 (Right to Establish Bylaws)
1. The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options
5
Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement.
2. The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph.
3. The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost.
Article 7 (Amendment to Agreement)
1. If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws.
2. In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary.
3. If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company.
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
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|
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April 21, 2017 |
|
|
|
Company: |
FRONTEO, Inc. |
|
Masahiro Morimoto, CEO and Representative Director |
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2-12-23, Konan, Minato Ward, Tokyo |
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Subscriber: |
(Address) |
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(Name) |
7
Exhibit 4.12
Summary of the Terms of the Seventeenth Stock Option Agreement
1. Number of the stock options
7,510 units
The total number of shares that could be allotted upon exercise of the stock option shall be 751,000 common shares of the Company. If the number of shares to be allotted in relation to each stock option is adjusted in accordance with 3 (1) below, the total number shall be calculated by multiplying the number of shares to be allotted for one stock option after adjustment by the number of stock options above.
2. Money to be paid in exchange for grant of the stock option
The issue price per stock option shall be 4,200 yen. Such amount was determined to be equal to the result of a calculation undertaken by Plutus Consulting Co., Ltd., an independent third party evaluation agency, using the Monte Carlo simulation, a general option price calculation model, based on the Company’s share price information and other data.
3. Details of the stock options
(1) Class and number of shares underlying the stock options
The number of shares to be issued upon exercise of each stock option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 common shares of the Company.
In the event that the Company conducts a stock split (including allotment of its common shares free of charge; hereinafter the same shall apply to descriptions of stock splits) or a stock consolidation after the date of allotment of the stock options, the Number of Granted Shares shall be adjusted according to the following formula. Provided, however, that such adjustment shall be made only to the Number of Granted Shares for the stock options that have not yet been exercised at the time of the adjustment. Any fraction less than one share arising from the adjustment shall be rounded down.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × Ratio of stock split (or consolidation)
In addition, after the date of allotment of stock options, if the Company implements a merger, company split, reduction of capital stock, or engages in any other similar matters where the adjustment of the Number of Granted Shares becomes necessary, the Number of Granted Shares shall be adjusted appropriately within the scope deemed reasonable.
(2) Amount of the property to be contributed upon exercise of the stock options and the calculation method
The amount of the property to be contributed upon exercise of each stock option shall be the amount obtained by multiplying the amount to be paid per share (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 731 yen, which is equal to the closing price of the Company’s common stock on the Tokyo Stock Exchange on the previous day (June 13, 2017) of the resolution of the board of directors of the Company.
If the Company conducts a stock split or stock consolidation after the date of allotment of the stock options, the Exercise Price shall be adjusted according to the following formula, and any resulting fraction less than one yen shall be rounded up.
Exercise Price after adjustment = Exercise Price before adjustment × |
1 |
Ratio of split (or consolidation) |
If the Company issues new common shares or disposes of its treasury shares after the date of allotment of the stock options at a price below the market price of its shares (excluding the case of the issuance of new shares and the disposal of treasury shares upon exercise of stock options and the transfer of treasury shares through the exchange of shares), the Exercise Price shall be adjusted according to the following formula, and any resulting fraction less than one yen shall be rounded up.
In the above formula, the “number of outstanding shares” shall be the amount obtained by subtracting the number of treasury shares consisting of its common stock from the total number of issued shares of common stock of the Company. If the Company undertakes the disposal of treasury shares consisting of its common stock, the “number of shares to be issued” shall be read as the “number of treasury shares to be disposed of.”
In addition to the above, if the Company implements a merger with another company, company split, or any other similar matter where the adjustment of the Exercise Price becomes necessary, after the date of the allotment of the stock options, the Exercise Price may be adjusted by the Company within the scope deemed reasonable.
(3) Period during which the stock options are exercisable
The period during which the stock options are exercisable (hereinafter referred to as the “Exercise Period”) shall be from July 1, 2019 up to and including July 6, 2022.
(4) Matters concerning capital and capital reserve to be increased
i. The amount of capital to be increased as a result of the issuance of shares upon the exercise of the stock options shall be one half (1/2) of the maximum amount of increase
in stated capital, etc. as calculated pursuant to Article 17, Paragraph 1 of the Rules of Corporate Accounting, with any fraction less than one yen arising from such calculation to be rounded up.
ii. The amount of capital reserve to be increased as a result of the issuance of shares upon the exercise of the stock options shall be the amount obtained by deducting the amount of capital to be increased set forth in i. above, from the maximum amount of increases of capital, etc. set forth in i. above.
(5) Restriction on transfer of the stock options
Any acquisition of stock options through transfer shall require approval by resolution of the board of directors of the Company.
(6) Terms and conditions of the exercise of the stock options
i. A holder of stock options may exercise the following predetermined number of units of stock options from those allotted to him/her (hereinafter referred to as the “ratio of exercisable stock options”) if the cumulative amount of the operating income or the operating loss reported in the consolidated income statement (income statement if the consolidated income statement has not been prepared) which is to be included in the annual securities report for the fiscal year ending March 31, 2018 and the fiscal year ending March 31, 2019 satisfies the conditions described in (a) or (b) below. Provided, however, that any fraction less than one yen arising from the number of exercisable stock options shall be rounded down and in the event that there has been a significant change in the concept of items to be referred to due to the application, etc. of the International Financial Reporting Standards, the Company shall determine another indicator to be referred to at a meeting of the board of directors.
(a) When the operating income exceeds 800 million yen: Ratio of exercisable stock options: 50 %
(b) When the operating income exceeds 1,000 million yen: Ratio of exercisable stock options: 100%
ii. In order to exercise his/her stock options, a holder is required to (i) continuously serve in the position of either a director (including an officer in the U.S.), auditor or employee (including non-regular staff under the reemployment regulations) of the Company or its subsidiaries for two years or more by the time of the exercise of stock options and (ii) remain in said position at the time of the exercise of stock options. Provided, however, that a holder who has only satisfied the requirement (i) may still exercise the stock options within 90 days after he/she loses said positon if the reason why he/she failed to satisfy the requirement (ii) was due to retirement upon expiration of the term of office, mandatory retirement or other reason as deemed justifiable by the board of directors of
the Company.
iii. No heir of stock options shall be permitted to exercise stock options.
iv. If the total number of issued shares of the Company exceeds the number of issuable shares upon the exercise of stock options, the exercise of stock options may not be executed.
x. Any fraction less than one unit of the stock options may not be exercised.
4. Allotment date of stock options
July 7, 2017
5. Matters concerning acquisition of the stock options
In the case where holders of stock options become unable to exercise stock options because of failing to satisfy the conditions prescribed in 3 (6) above before exercising such stock options, the Company may acquire such stock options free of charge.
6. Treatment of stock options at the time of conducting organizational restructuring
In the event that the Company is to engage in a merger (limited to cases where the Company is to be disappearing as a result of the merger), performs an absorption-type company split or an incorporation-type company split, or conducts a share exchange or share transfer (hereafter collectively referred to as the “Organizational Restructuring Activities”), the stock options described in Article 236, Paragraph 1, Items 8 (a) through (e) of the Companies Act (hereafter referred to as the “Restructured Company”) shall be issued to each holder of the stock options under the following conditions at the effective date of the Organizational Restructuring Activities. The foregoing shall apply only to cases where it is indicated in the absorption-type merger agreement, incorporation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, share exchange agreement or share transfer plan that the stock options of the Restructured Company are to be issued in accordance with the following conditions.
(1) Number of stock options of Restructured Company to be issued
The number of stock options to be issued in relation to the Restructured Company shall be the same as the number of stock options held by the holders of the stock options of the Company.
(2) Class of shares of the Restructured Company to be issued upon the exercise of the stock options
Common shares of the Restructured Company
(3) Number of shares of Restructured Company to be issued upon the exercise of the stock options
To be decided according to 3 (1) above after taking into consideration the conditions, etc.
of the Organizational Restructuring Activities
(4) Amount of the property to be contributed upon exercise of stock options
The amount of the property to be contributed upon the exercise of each unit of stock options shall be the amount obtained by multiplying the Exercise Price after the Organizational Restructuring obtained by adjusting the Exercise Price stipulated in 3 (2) above by the number of shares of the Restructured Company to be issued upon the exercise of the said stock options to be determined pursuant to 6 (3) above, after taking into consideration the conditions of the Organizational Restructuring Activities.
(5) Exercise period of stock options
Starting from the later of either the first date of the Exercise Period of the stock options as stipulated in 3 (3) above or the date on which the Organizational Restructuring Activities become effective, and ending on the expiration date of the Exercise Period as stipulated in 3 (3) above.
(6) Matters concerning any increase in capital and capital reserve by issuance of shares upon exercise of stock options
To be determined in accordance with 3 (4) above
(7) Restriction on transfer of the stock options
The acquisition of the stock options through transfer shall be subject to approval of the board of directors of the Restructured Company.
(8) Other conditions for exercise of stock options
To be determined in accordance with 3 (6) above
(9) Reasons and conditions for acquisition of the stock options
To be determined in accordance with 5 above
(10) Other conditions shall be determined in accordance with conditions of Restructured Company.
7. Matters concerning the stock option certificates
The Company shall not issue any stock option certificates for stock options.
8. Date of cash payment in exchange for stock options
July 7, 2017
9. Date of subscription
June 24, 2017
10. Persons to whom stock options shall be allotted and number of stock options to be allotted
Directors and employees of the Company, and directors and employees of the Company’s
|
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3 corporate officers |
(1,702 units) |
22 employees |
(1,188 units) |
14 employees of subsidiaries |
(4,620 units) |
Exhibit 4.13
Translation of the Agreement for Subscription for the Eighteenth Share Option Offering
This Agreement is made and entered into by and between FRONTEO, Inc. (hereinafter referred to as the “Company”) and ************** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the thirteenth share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the thirteenth annual shareholders’ meeting held on June 29, 2016 and the resolution of the board meeting held on June 22, 2017, the Company has determined the following requirements for the eighteenth share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for **** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
(1) Class and number of shares covered by the Share Options
70,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
(2) Total number of Share Options
700
(3) Amount payable in exchange of the Share Options
No payment is required in exchange of the Share Options
(4) Manner of calculating the value of assets contributed in exercising the Share Options
73,000 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 730 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price shall be adjusted as follows.
1
(i) For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise Price after adjustment |
= |
Exercise Price before adjustment |
× |
1 |
ratio of share split or reverse split |
(ii) If the Company issues new shares or dispose of the treasury stock at a price below the market price, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions .
(5) Period during which the Share Options can be exercised
From June 24, 2020 to June 23, 2023
(6) Conditions to exercise the Share Options
(i) A person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) may exercise the Share Options only when both of the following conditions (A) and (B) are satisfied:
(A) the Share Option Holder has been either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary for three straight years or more at the time of exercising the option; and
(B) the Share Option Holder must be either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary at the time of exercising the option.
Notwithstanding the condition (B) above, when the condition (A) is satisfied, the Share Option Holder may exercise the Share Options during the period provided in Article 1. (5) above and limited to within ninety (90) days from the date of loss of such status as described in (B) above, only in the case that the Share Option Holder resigned due to expiry of term of office, retired by age limit or if otherwise justified by the resolution of the board of directors.
(ii) No Share Option shall be inherited.
(iii) No fractional Share Option shall be exercised.
(iv) All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting.
(7) Reason and conditions for acquisition of the Share Options
In the event that a proposal to approve a merger agreement where the Company is to be extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be
2
wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
(8) Restriction on acquisition of the Share Options by assignment
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options
(i) Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen.
(ii) Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above.
(10) Handling of the Share Options in case of corporate reorganization
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
(i)
Number of share options of the Reorganized Company to be delivered
The same number as the Remaining Share Options in the possession of the Share Option Holder shall be delivered.
(ii)
Type of stock of the Reorganized Company covered by the share options
Common shares of the Reorganized Company
(iii)
Number of shares of the Reorganized Company covered by the share options
To be determined in accordance with the above “(1) Class and number of shares covered by the Share Options” taking into account the conditions for Corporate Reorganization.
(iv)
Manner of calculation of the value of assets contributed to exercise the share options
Value of assets contributed in exercising one (1) share option to be delivered shall be obtained by multiplying the Exercise Price after adjustment prescribed in the item (4) (iii)
3
above by the number of shares of the Reorganized Company covered by such share option as determined under the item (iii) above.
(v)
Period during which the share options can be exercised
From the day when the above “(5) Period during which the Share Options can be exercised” commences or the day when the Corporate Reorganization comes into effect, whichever is the later, to the day when the above “(5) Period during which the Share Options can be exercised” expires
(vi)
Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options
To be determined in accordance with the above “(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options”
(vii)
Restriction on acquisition of the share options by assignment
Acquisition of the share options by assignment shall require an approval of the board of directors of the Reorganized Company.
(viii)
Reason and conditions for acquisition of the share options
To be determined in accordance with the above “(7) Reason and conditions for acquisition of the Share Options”
(11)
Fractional share delivered upon exercise of the Share Options
Fractional share delivered upon exercise of the Share Options shall be discarded.
(12) Date of Allotment
June 23, 2017
Article 2 (Special Provisions for Exercise of Option)
1. Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options.
2. If the Subscriber falls under any of the situations stated below, the Share Options shall expire automatically at that time, and the Subscriber and its successor shall not exercise the Share Options.
(1) A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation.
(2) A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation.
(3) There are other reasons that objectively show a significant worsening financial status of the Subscriber.
(4) The Subscriber is sentenced to imprisonment without work or a heavier criminal punishment (including the case of suspension of the sentence for execution) and such court judgement has become final and binding. The Subscriber may not exercise the Share Options during the criminal procedure, i.e. the period from the time that the Subscriber is arrested or prosecution is instituted against the Subscriber and until when the prosecutor has decided not to institute the prosecution or the court sentence becomes final and binding. .
(5) The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction.
(6) The Subscriber who is/was an employee of the Company or its subsidiary violates any terms of agreements that the Subscriber undertook an obligation to the Company.
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3. The Company shall issue the shares (including issuing new shares or transferring or assigning existing shares) to the Subscriber for its exercise of option in accordance with the requirements for offering of the Share Options.
Article 3 (Manner of Exercising the Option)
1. In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form.
2. To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company.
3. Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust.
4. If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1.
Article 4 (Manner of Expressing Intention and Giving a Notice)
1. The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company.
2. Any change in any one of the following items must be notified by the Subscriber to the Company.
(1) Name of the Subscriber
(2) Address of the Subscriber
(3) E-mail address for the purpose of the preceding paragraph
3. If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder.
4. The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived.
5. Provisions of the preceding paragraphs shall be applied to the Subscriber who may exercise the Share Options under Article 1(6)(i).
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
Article 6 (Right to Establish Bylaws)
1. The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options
5
Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement.
2. The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph.
3. The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost.
Article 7 (Amendment to Agreement)
1. If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws.
2. In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary.
3. If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company.
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
June 23, 2017
Company: |
FRONTEO, Inc. |
|
Masahiro Morimoto, CEO and Representative Director |
|
2-12-23, Kounan, Minato Ward, Tokyo |
|
|
Subscriber: |
(Address) |
|
(Name) |
7
Exhibit 4.14
Translation of the Agreement for Subscription for the Nineteenth Share Option Offering
This Agreement is made and entered into by and between FRONTEO, Inc. (hereinafter referred to as the “Company”) and ************** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the thirteenth share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the fourteenth annual shareholders’ meeting held on June 29, 2017 and the resolution of the board meeting held on July 20, 2017, the Company has determined the following requirements for the Nineteenth share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for **** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
(1) Class and number of shares covered by the Share Options
6,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
(2) Total number of Share Options
60
(3) Amount payable in exchange of the Share Options
No payment is required in exchange of the Share Options
(4) Manner of calculating the value of assets contributed in exercising the Share Options
80,600 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 806 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price shall be adjusted as follows.
1
(i) For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise Price after adjustment |
= |
Exercise Price before adjustment |
× |
1 |
ratio of share split or reverse split |
(ii) If the Company issues new shares or dispose of the treasury stock at a price below the market price, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions .
(5) Period during which the Share Options can be exercised
From July 22, 2020 to July 21, 2023
(6) Conditions to exercise the Share Options
(i) A person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) may exercise the Share Options only when both of the following conditions (A) and (B) are satisfied:
(A) the Share Option Holder has been either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary for three straight years or more at the time of exercising the option; and
(B) the Share Option Holder must be either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary at the time of exercising the option.
Notwithstanding the condition (B) above, when the condition (A) is satisfied, the Share Option Holder may exercise the Share Options during the period provided in Article 1. (5) above and limited to within ninety (90) days from the date of loss of such status as described in (B) above, only in the case that the Share Option Holder resigned due to expiry of term of office, retired by age limit or if otherwise justified by the resolution of the board of directors.
(ii) No Share Option shall be inherited.
(iii) No fractional Share Option shall be exercised.
(iv) All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting.
(7) Reason and conditions for acquisition of the Share Options
In the event that a proposal to approve a merger agreement where the Company is to be extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be
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wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
(8) Restriction on acquisition of the Share Options by assignment
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options
(i) Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen.
(ii) Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above.
(10) Handling of the Share Options in case of corporate reorganization
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
(i)
Number of share options of the Reorganized Company to be delivered
The same number as the Remaining Share Options in the possession of the Share Option Holder shall be delivered.
(ii)
Type of stock of the Reorganized Company covered by the share options
Common shares of the Reorganized Company
(iii)
Number of shares of the Reorganized Company covered by the share options
To be determined in accordance with the above “(1) Class and number of shares covered by the Share Options” taking into account the conditions for Corporate Reorganization.
(iv)
Manner of calculation of the value of assets contributed to exercise the share options
Value of assets contributed in exercising one (1) share option to be delivered shall be obtained by multiplying the Exercise Price after adjustment prescribed in the item (4) (iii)
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above by the number of shares of the Reorganized Company covered by such share option as determined under the item (iii) above.
(v)
Period during which the share options can be exercised
From the day when the above “(5) Period during which the Share Options can be exercised” commences or the day when the Corporate Reorganization comes into effect, whichever is the later, to the day when the above “(5) Period during which the Share Options can be exercised” expires
(vi)
Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options
To be determined in accordance with the above “(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options”
(vii)
Restriction on acquisition of the share options by assignment
Acquisition of the share options by assignment shall require an approval of the board of directors of the Reorganized Company.
(viii)
Reason and conditions for acquisition of the share options
To be determined in accordance with the above “(7) Reason and conditions for acquisition of the Share Options”
(11) Fractional share delivered upon exercise of the Share Options
Fractional share delivered upon exercise of the Share Options shall be discarded.
(12) Date of Allotment
July 21, 2017
Article 2 (Special Provisions for Exercise of Option)
1. Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options.
2. If the Subscriber falls under any of the situations stated below, the Share Options shall expire automatically at that time, and the Subscriber and its successor shall not exercise the Share Options.
(1) A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation.
(2) A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation.
(3) There are other reasons that objectively show a significant worsening financial status of the Subscriber.
(4) The Subscriber is sentenced to imprisonment without work or a heavier criminal punishment (including the case of suspension of the sentence for execution) and such court judgement has become final and binding. The Subscriber may not exercise the Share Options during the criminal procedure, i.e. the period from the time that the Subscriber is arrested or prosecution is instituted against the Subscriber and until when the prosecutor has decided not to institute the prosecution or the court sentence becomes final and binding. .
(5) The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction.
(6) The Subscriber who is/was an employee of the Company or its subsidiary violates any terms of agreements that the Subscriber undertook an obligation to the Company.
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3. The Company shall issue the shares (including issuing new shares or transferring or assigning existing shares) to the Subscriber for its exercise of option in accordance with the requirements for offering of the Share Options.
Article 3 (Manner of Exercising the Option)
1. In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form.
2. To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company.
3. Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust.
4. If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1.
Article 4 (Manner of Expressing Intention and Giving a Notice)
1. The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company.
2. Any change in any one of the following items must be notified by the Subscriber to the Company.
(1) Name of the Subscriber
(2) Address of the Subscriber
(3) E-mail address for the purpose of the preceding paragraph
3. If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder.
4. The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived.
5. Provisions of the preceding paragraphs shall be applied to the Subscriber who may exercise the Share Options under Article 1(6)(i).
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
Article 6 (Right to Establish Bylaws)
1. The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options
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Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement.
2. The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph.
3. The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost.
Article 7 (Amendment to Agreement)
1. If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws.
2. In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary.
3. If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company.
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
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July 21, 2017 |
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Company: |
FRONTEO, Inc. |
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Masahiro Morimoto, CEO and Representative Director |
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2-12-23, Konan, Minato Ward, Tokyo |
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Subscriber: |
(Address) |
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(Name) |
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Exhibit 4.38
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[TRANSLATION]
Investment Agreement
This Investment Agreement ( the “ Agreement ”) is entered into as of November 14, 2016 (the “ Date of Execution ”), by and between Whiz Partners, Inc. (“ Whiz ,” which enters into this Agreement for the benefit of the Investor and therefore its rights and obligations set forth herein shall be interpreted and understood on such assumption), which is a general partner of Whiz Healthcare Japan 2.0 Investment Limited Partnership (the Investor ”) and FRONTEO, Inc. (“ FRONTEO ”), in relation to the Investor’s acquisition of securities issued by FRONTEO and the Investor’s management of FRONTEO and related matters.
WITNESSETH:
Article 1 (Definitions)
For the purpose of this Agreement each of the terms set forth on the left side below shall have the meaning as defined in the Article, Paragraph or Item given on the right side on the same line.
Defined Term |
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Article, Paragraph or Item which defines
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Date of Issuance |
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Article 2 |
Terms and Conditions of Issuance |
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Article 2 |
Securities |
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Article 2 |
Investment |
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Article 2 |
Healthcare Business |
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Article 3, Paragraph 1 |
FRONTEO Entities |
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Article 6, Paragraph 1, Item 5 |
Business and Other Conditions |
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Article 6, Paragraph 1, Item 5 |
Lent Shares |
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Article 6, Paragraph 1, Item 6 |
FRONTEO Closing Documents |
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Article 7, Paragraph 2 |
Whiz Closing Documents |
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Article 8, Paragraph 2 |
Lock-up Period |
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Article 9, Paragraph 2 |
Period for Discussion |
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Article 9, Paragraph 2 |
Material Fact |
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Article 9, Paragraph 3 |
Notice of Material Information Obtained |
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Article 9, Paragraph 3 |
Causes for Requesting Advanced Redemption |
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Article 10 |
Obtained Shares |
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Article 12, Paragraph 2 |
Intended Assignment Notice |
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Article 12, Paragraph 2 |
Large-Volume Holdings Report |
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Article 12, Paragraph 2 |
Change Report |
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Article 12, Paragraph 2 |
New Bond |
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Article 12, Paragraph 4 |
Legal Insolvency Proceedings |
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Article 14, Paragraph 1, Item 2 |
Damage and/or Expense |
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Article 15, Paragraph 1 |
Party Entitled to Compensation |
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Article 15, Paragraph 1 |
Confidential Information |
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Article 16, Paragraph 1 |
Article 2 (Issuance of Securities)
Subject to the terms and conditions set forth herein and on condition that all the premises listed in Items of Article 6, Paragraph 2 are satisfactorily met FRONTEO shall issue warrant bonds (the “ Securities ”) as of December 1,
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2016 (the “ Date of Issuance ”) whose terms and conditions (the “ Terms and Conditions of Issuance ”) are described in Exhibit 2, allot all of them to the Investor, and subject to the terms and conditions set forth herein Whiz shall cause the Investor to subscribe for all such Securities (the “ Investment ”) on condition that all of the premises set forth in Items of Paragraph 1 of Article 6 hereof are satisfied. Subject to the terms and conditions set forth herein Whiz shall cause the Investor to pay on the Date of Issuance the total amount to be paid for the Securities by transferring it to the bank account separately designated by FRONTEO, incurred transfer charges being for the Investor’s account.
Article 3 (Presumptions)
Before execution of this Agreement the parties hereto mutually acknowledge the following:
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1. |
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The Investment is made for the purpose of expanding/promoting FRONTEO’s healthcare business (the “ Healthcare Business ”) with the goal of applying the artificial intelligence KIBIT, which has been developed independently by FRONTEO, to the area of healthcare. |
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2. |
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The Investor is an investment limited partnership established under the Limited Partnership Act for Investment (Law No. 90 of 1998 including subsequent revisions), whose investment is principally intended to support, and engage to a certain extent in, FRONTEO’s business and thereby increase its corporate value. The parties understand the above situation and agree to the Investment by the Investor and hereby execute this Agreement. |
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3. |
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FRONTEO has expressed its intent to expand in the future the Healthcare Business which utilizes the artificial intelligence KIBIT of its own independent development in the area of healthcare and plans to develop and propose the optimum method of diagnosis and treatment in the area of cancer, and provide products and services applied to the support for efficient development of new drugs and thereby perform a business aimed at contributing to society. On its part, Whiz, established an investor who engages in a business intended to invest in firms dedicated to development of drugs and related products drawing on creative, original scientific discoveries or technological innovations, evaluated the potential of FRONTEO’s business and the social contribution to be made by such business in case of a success, and decided to invest in FRONTEO and support its business. The parties understand each other’s business and objective thereof, promise mutually to cooperate for, and contribute to, the realization of each other’s development of its own business and therefore execute this Agreement. |
Article 4 (Use of Fund)
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1. |
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FRONTEO shall apply all the proceeds of the Investment (or the amount paid for the Securities) to the fund related to FRONTEO’s Healthcare Business and to the cost and expense incurred in the issuance of the Securities and shall not apply the money to any other purpose or business without the prior written consent of Whiz. |
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2. |
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To the extent necessary for Whiz’s control of FRONTEO’s performance of its obligations set forth in the foregoing Paragraph, FRONTEO shall, when so requested by Whiz, permit Whiz to view or copy FRONTEO’s books, documents and records which are related to the Healthcare Business and inspect its office, |
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other facilities and property during FRONTEO’s normal business hours in the presence of its employees in a manner which does not interfere with FRONTEO’s ordinary business operations.
Article 5 (Representations and Warranties)
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1. |
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Whiz represents and warrants to FRONTEO that as of the Date of Execution and the Date of Issuance all matters described in Exhibit 5.1 are true and correct. |
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2. |
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FRONTEO represents and warrants to Whiz that as of the Date of Execution and the Date of Issuance (or as of such other date if any particular date is set forth in Exhibit 5.2) all matters described in Exhibit 5.2 are true and correct. |
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3. |
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If a party finds that any of the matters it represents or warrants pursuant to the foregoing two (2) Paragraphs is found to be, or threatens to be, untrue or incorrect the party shall promptly notify the other to such effect in writing, giving a detailed report thereof if so requested by the other party. The parties hereby acknowledge without objection, however, that such notice or report shall not affect the effect of the relevant representation or warranty or cure the relevant breach. |
Article 6 (Premises)
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1. |
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Whiz shall cause the Investor to subscribe and pay for the Securities on condition that all of the premises set forth in Items below are satisfied as of the Date of Issuance. However, even in a case where any or all of the premises set forth in Items below are yet to be satisfied, at its discretion Whiz may cause the Investor to choose to perform its obligation to subscribe and pay for the Securities, however, Whiz shall not cause the Investor to perform its obligation to subscribe and pay for the Securities in a case where Item 4 below is not satisfied. Even if Whiz waives any of the premises which remains to be satisfied FRONTEO shall not be relieved of its obligation or responsibility arising out of such premise not being satisfied, including the liability for compensation due to a breach of its representations or warranties. |
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(1) |
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The representations and warranties given in Article 5, Paragraph 2 hereof are true and correct in their material points; |
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(2) |
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FRONTEO is not in material breach of this Agreement; |
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(3) |
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All of FRONTEO Closing Documents (as defined in Article 7, Paragraph 2 hereof) have been delivered to Whiz; |
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(4) |
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The statement of registration of financial statements submitted to competent local Financial Bureau for the purpose of issuing the Securities has become effective; |
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(5) |
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Except as otherwise expressly provided herein, no change has occurred by the Date of Issuance which causes a material adverse effect on the research and development, business, operations, personnel matter, financial condition, business performance, credit standing, profit and loss situation or other situation (“ Business and Other Conditions ”) of FRONTEO or FRONTEO USA, Inc. ( “ FRONTEO Entities ”) or any circumstance which can reasonably be predicted to cause such material adverse effect. Changes which cause a material adverse effect include, but not limited to, (i) a change which shall cause, or can reasonably be predicted to cause, FRONTEO Entities to incur by the Date of Issuance a loss or an expense |
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in an amount not lower than thirty million (30,000,000) yen per incident, and (ii) a change which shall cause an adverse effect resulting from an important matter which is required to be disclosed by the Securities Listing Regulations implemented by Tokyo Stock Exchange, Inc. as a matter which significantly affects Investors’ investment judgment, with the exception, however, of those changes which result from the activities carried out in line with FRONTEO’s business plan for the period ending in March 2017 as disclosed to Whiz and changes which are reasonably necessary for performing FRONTEO’s obligations hereunder;
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(6) |
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FRONTEO’s common shares held by its representative director and president Masahiro Morimoto (not exceeding 1,000,000 shares) are lent to the Investor in a manner reasonably satisfactory to Whiz (such lent shares are hereinafter referred to as the “ Lent Shares ”). |
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2. |
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FRONTEO shall perform the issuance and allotment of the Securities on condition that all of the premises set forth in Items below are satisfied as of the Date of Issuance; provided, however, that at its discretion FRONTEO may choose to perform its obligation to issue and allot the Securities even in a case where any or all of the premises set forth in Items below are yet to be satisfied (however, FRONTEO shall not perform its obligation to issue and allot the Securities in a case where the premise (4) below fails to be satisfied). Note that even if FRONTEO waives any of the premises which remains to be satisfied Whiz shall not be relieved of its obligation or responsibility arising out of such premise not being satisfied (including the liability for compensation due to a breach of its representations or warranties). |
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(1) |
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The representations and warranties given in Article 5, Paragraph 1 hereof are true and correct in their material points; |
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(2) |
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Whiz is not in material breach of this Agreement; |
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(3) |
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All of Whiz Closing Documents (as defined in Article 8, Paragraph 2 hereof) have been delivered to FRONTEO; |
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(4) |
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The statement of registration of financial statements submitted to competent local Financial Bureau for the purpose of issuing the Securities has become effective; and |
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(5) |
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It is reasonably assured that the amount of money for the bond related to the Investment will be paid in exchange for the Securities. |
Article 7 (FRONTEO’s Promise Prior to Date of Issuance)
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FRONTEO hereby promises Whiz that |
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(1) |
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FRONTEO shall manage FRONTEO Entities’ business with the care of a good manager until and including the Date of Issuance (the same being applicable hereinafter) and, without the prior written consent of Whiz, which shall not be unreasonably refused or withheld, shall not perform any of the acts enumerated in Exhibit 7.1 before the Date of Issuance, except where such act is expressly provided for separately herein; and |
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(2) |
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During the period until the Date of Issuance FRONTEO shall promptly provide Whiz any necessary information required by Whiz relating to FRONTEO Entities’ Business and Other Conditions, to the extent such request is reasonable. |
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2. |
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FRONTEO shall deliver to Whiz all of the documents stated below (the “ FRONTEO Closing Documents ”) no later than the Date of Issuance: |
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(1) |
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A (certified) copy of the minutes of FRONTEO’s board meeting which approved the execution of this Agreement; |
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(2) |
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A (certified) copy of the minutes of FRONTEO’s board meeting which approved the issuance and allotment of the Securities; |
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(3) |
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A report prepared by a third party engaged by FRONTEO about the evaluation of the Securities; and |
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(4) |
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A copy of the instructions delivered by FRONTEO to the securities firm when providing the Lent Shares. |
Article 8 (Whiz’ Promise Prior to Date of Issuance)
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Whiz shall organize an investment committee meeting of the Investor to discuss the Investment and approve it on condition that all of the conditions enumerated in Article 6, Paragraph 1 hereof have been satisfied by the Date of Issuance. |
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2. |
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No later than the Date of Issuance Whiz shall deliver to FRONTEO all of the documents described below (the “ Whiz Closing Documents ”): |
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(1) |
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A (certified) copy of the minutes of Whiz’ board meeting which approved the execution of this Agreement; |
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(2) |
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A (certified) copy of the minutes of Whiz’ board meeting which approved the execution of the Investment; |
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(3) |
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A (certified) copy of the Investor’s partnership agreement; and |
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(4) |
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A certificate of full registry records of the Investor’s investment limited partnership. |
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3. |
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If requested by FRONTEO to provide necessary information about the status of the Business and Other Conditions of Whiz and the Investor between the Date of Execution hereof and the Date of Issuance Whiz shall timely provide FRONTEO with requested information, to the extent such request is reasonable. |
Article 9 (Promises after Date of Issuance)
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If prior to the Date of Issuance FRONTEO has already formulated a medium-term business plan and an annual budget which comprises the fiscal term ending in March 2017 and upon mutual discussion Whiz and FRONTEO decide that such plan and budget are not in line with the content of the statement of registration of financial statements to be submitted on the Date of Execution, as soon as practically possible on or after the Date of Issuance and premised upon the execution of the Investment the FRONTEO shall hold a board meeting and afresh review and discuss, and when necessary, confirm or modify the content of such plan and budget to a reasonable extent in accordance with the content of the statement of registration of financial statements. |
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2. |
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During the period on or after the Date of Execution and within ninety (90) days of the Date of Issuance while the Investor holds the whole of the Securities or the whole or a part of FRONTEO’s common shares (the “ Lock-up Period ”), FRONTEO shall not issue any number of shares of any type or any number of Warrant Bonds for any type of intended shares including shares attached to corporate bonds without the prior written approval of Whiz. If in either of the two (2) cases below FRONTEO decides to issue a share of any type or a Warrant Bond for any type of intended shares including shares attached to corporate bonds, on or after the |
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Date of Execution, and within the shorter of a three (3)-year period after the Date of Issuance or the period during which the Investor holds all of the Securities or the whole or a part of FRONTEO’s common shares (the “ Period for Discussion ,” excluding the Lock-up Period) FRONTEO shall discuss such decision in advance with Whiz in a manner satisfactory to Whiz, except where during the Period for Discussion (i) the company which has a license agreement, a joint development agreement or other business tie-up agreement with FRONTEO wants to invest in FRONTEO, or (ii) under the Item 16 (3) of the Terms and Conditions of Issuance Whiz requests to have early redeemed the whole of the Securities held by the Investor, or (iii) under the Item 16 (2) of the Terms and Conditions of Issuance FRONTEO requests to have early redeemed the whole of the Securities held by the Investor; or (iv) the parties hereto agree otherwise.
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(1) |
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While Whiz has made a proposal to FRONTEO for an additional investment and has not withdrawn such proposal another company makes a proposal to FRONTEO for an investment in terms and conditions which are more favorable to such other company than those of the additional proposal made by Whiz to FRONTEO; |
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FRONTEO issues a warrant bond with a strike price revision clause or an equity warrant with a strike price revision clause. |
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3. |
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If during the period during which the Investor holds the Securities, Whiz discovers any Material Fact not disclosed by FRONTEO (referring to the “ Material Fact ” as stipulated in the Financial Instruments and Exchange Act, Article 166, Paragraph 2, hereinafter the same being applicable) or obtains information which might potentially qualify as Material Fact, Whiz may notify FRONTEO in writing about such information and the date of receipt thereof, within five (5) Business Days of the receipt of such information, FRONTEO shall either (i) explain to Whiz in writing that such information does not fit into any Material Fact, or (ii) discuss with Whiz and decide how to treat such information, or (iii) release such information to the general public. For the purposes of this Agreement, “ Business Day ” shall mean any day other than a Saturday, Sunday or other day on which commercial banks in Japan are required or authorized by law to be closed. |
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4. |
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Subsequent to the Date of Issuance FRONTEO shall be under obligation to build and operate its own compliance system to prevent itself and its employees from engaging in an illegal act which might cause a material adverse effect to FRONTEO’s business. If an illegal act is committed by FRONTEO or its employees which causes a material adverse effect to FRONTEO’s business and such illegal act results from FRONTEO’s defective compliance system, such act shall constitute a non-performance of such obligation. |
Article 10 (Advanced Redemption)
The parties hereto acknowledge the following about advanced redemption of the Securities in addition to the Terms and Conditions of Issuance laid out in Exhibit 2.
Notwithstanding the Item 16 (3) of the Terms and Conditions of Issuance, Whiz or the Investor may request FRONTEO to redeem the Securities before their maturity in the amount described in Item 16 (3) of the Terms and Conditions of Issuance during the period between the Date of Issuance and November 30, 2018, both inclusive, in a case where (i) either of the matters (1) or (4) below is decided or approved, or (ii) either of the
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matters (5) or (6) below occurs (the matters set forth in (i) and (ii) are hereinafter collectively referred to as “ Causes for Requesting Advanced Redemption ”):
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(1) |
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FRONTEO Entities reorganize themselves (meaning a merger whereby FRONTEO Entities becomes the non-surviving company, or a stock exchange or stock transfer whereby FRONTEO Entities become a wholly owned subsidiary of another, or an absorption-type split or incorporation-type split); |
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(2) |
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Assignment to another of the whole or a material part of FRONTEO Entities’ business, or receipt by FRONTEO Entities of an assignment of the whole or a material part of another’s business; |
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(3) |
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FRONTEO Entities are dissolved or a petition is filed against FRONTEO Entities for institution of bankruptcy, corporate reorganization, civil rehabilitation, special liquidation, or other insolvency proceedings, except where such petition is withdrawn or rejected by the court within fourteen (14) days of the filing; |
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(4) |
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Common shares issued by FRONTEO are delisted from Tokyo Stock Exchange, Inc. or a decision is taken for such delisting; |
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(5) |
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FRONTEO Entities had their own loan obligations, except for the Warrant Bonds, due and payable immediately (the so-called loss of the benefit of time), or are unable to perform their obligation resulting from a guarantee provided for a bond issued, or other loan obligations owed, by a third party other than FRONTEO Entities, except where the total of such obligations does not exceed one hundred million (100,000,000) Japanese yen when converted into Japanese yen. |
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(6) |
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Whiz notifies FRONTEO of its breach hereof and FRONTEO fail to correct such breach within two (2) weeks of receipt thereof. |
For the avoidance of doubt the exercise by Whiz or the Investor of its right stipulated in Item 16 (3) of the Terms and Condition of Issuance of the Securities set forth in Exhibit 2 should fit into any of the Causes for Requesting Advanced Redemption set forth in this Paragraph. On and after December 1, 2018, Item 16 (3) of the Terms and Condition of Issuance of the Securities set forth in Exhibit 2 will not be applicable and therefore neither Whiz nor the Investor may exercise such right.
Article 11 (Exercise of Voting Right)
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1. |
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Whiz shall cause the Investor to exercise its voting right at a general shareholders’ meeting in line with the terms set forth herein and shall not unreasonably cause the Investor to reserve its voting right. |
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2. |
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To a reasonable extent Whiz shall endeavor to cooperate in FRONTEO’s publicity activities including those targeted at investors. Whiz shall not be held legally or contractually liable for any damage, loss or expense incurred by FRONTEO arising out of or in connection with Whiz’ such cooperation (except where it is attributable to Whiz’ willful misconduct or gross negligence). |
Article 12 (Assignment of Securities or Shares of Stock)
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1. |
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If the Investor assigns the Securities to a third party Whiz shall discuss the issue with FRONTEO no later than two (2) weeks before the scheduled date of assignment and obtain the prior approval of FRONTEO’s board of directors under Item 24 of the Terms and Conditions of Issuance. |
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2. |
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If the Investor intends to assign FRONTEO’s common shares obtained by exercising the equity warrants attached to the Securities (the “ Obtained Shares ”), not via trading in the financial instruments exchange market (meaning not via trading in the financial instruments market established by a financial instruments exchange as set forth in the Financial Instruments and Exchange Act, Article 2, Paragraph 17, hereinafter the same being applicable), Whiz shall cause the Investor to notify FRONTEO in writing of the name of the assignee, the number of the shares being assigned, the scheduled date of assignment, and the planned assignment price (the “ Intended Assignment Notice ”) no later than three (3) Business Days before the scheduled date of assignment. In this case, Whiz shall confer with FRONTEO in advance if (i) the Investor assigns or sells the Obtained Shares to, or put them up as collateral in favor of, the same third party in a number superior to five percent (5%) of the total number of FRONTEO’s then issued shares, or if (ii) the Investor assigns or sells the Obtained Shares to, or put them up as collateral in favor of, a third party who has submitted before the date of the Intended Assignment Notice a report on massive holdings of FRONTEO’s common shares (meaning a Large-Volume Holdings Report as defined in Article 27-23, Paragraph 1 of the Financial Instruments and Exchange Act, hereinafter the same being applicable) or submitted a change report on the same (meaning a Change Report as defined in Article 27-25, Paragraph 1 of the Financial Instruments and Exchange Act, hereinafter the same being applicable). If Whiz assigns the Obtained Shares to a third party via trading in the financial instruments exchange market Whiz shall notify FRONTEO of the detail of such trade within three (3) subsequent Business Days. |
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3. |
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At its discretion Whiz may cause the Investor not to carry out the assignment described in the Intended Assignment Notice referred to in the foregoing Paragraph. |
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4. |
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On condition that the Investor holds the Securities on and after the Date of Issuance FRONTEO may request the Investor or the investment limited partnership or other fund in which Whiz holds the status of a general partner or an equivalent status, to consider investing in a convertible bond which shall be newly issued by FRONTEO in an amount equal to the amount of the Securities outstanding as of the date of such request (the “ New Bond ”). When requested by FRONTEO to discuss the allotment of such New Bond Whiz shall discuss the matter with FRONTEO in good faith. The terms and conditions applicable to the issuance of the New Bond shall be substantially equal to those applied to the Securities, with the exception of its conversion price, which shall be reasonably decided in consideration of the market value of FRONTEO’s common shares as of the date when the issuance of the New Bond is decided. FRONTEO’s request under this Paragraph may be made after FRONTEO’s announcement of an important change to its business plan or of a revision to its earnings forecast, regardless of which FRONTEO may make such request. |
Article 13 (Term)
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1. |
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This Agreement shall become valid and effective on the Date of Execution, with the exception of Article 2, which shall take effect at the time when the statement of registration of financial statements set forth in Article 6, Paragraph 1, Item 4 hereof becomes effective. |
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2. |
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This Agreement shall continue to be valid and effective unless it terminates or is terminated under Article 14 hereof. |
8
Article 14 (Termination for Cause)
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1. |
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This Agreement shall automatically terminate if any of the events below occurs: |
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(1) |
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It becomes definitive that the Securities will not be issued; |
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(2) |
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A decision is taken to institute bankruptcy, corporate reorganization, civil rehabilitation, special liquidation or similar legal insolvency proceedings against a party (“ Legal Insolvency Proceedings ”); |
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(3) |
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A party ceases to be a corporation as the result of its dissolution, except where its Securities-related obligation is assumed by the new company or the surviving company in a case of an incorporation-type merger or absorption-type merger; |
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(4) |
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The Investor is dissolved; |
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(5) |
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The parties agree in writing to terminate this Agreement; |
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(6) |
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Whiz or the Investor ceases to hold the Securities or the Obtained Shares on or after the Date of Issuance (however, if under applicable laws or regulations or an agreement with a third party Whiz is able to take a substantial and final decision relating to the exercise of voting rights conferred by FRONTEO’s shares, Whiz shall be deemed to hold the Securities). |
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2. |
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If a party is in breach of its obligations which shall be performed or complied with under this Agreement and fails to remedy such breach within one (1) month of notice from the other party requesting such remedy, the other party may terminate this Agreement by giving the breaching party written notice. |
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3. |
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Even when this Agreement is terminated or terminates under the provisions of this Article, those of Articles 17, 18, 19 and 22 shall continue to be in full force and effect. |
Article 15 (Compensation)
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1. |
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If a party causes the other party to incur damage, loss or expense (including reasonable attorney fees to the extent that they are deemed causatively related) (“ Damage and/or Expense ”) which arises out of or in connection with the events set forth in any of the Items below which concerns itself the party shall be liable to immediately indemnify or compensate such other party (the “ Party Entitled to Compensation ”) for the full amount of the Damage and/or Expense. If the Investor incurs Damage and/or Expense set forth in this Paragraph Whiz may demand compensation for the Investor under this Article. |
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(1) |
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A party’s representations or warranties turn out not to be true or correct; |
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(2) |
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A party has committed willful misconduct or gross negligence in not including any material item in its representations or warranties made hereunder; |
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(3) |
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A party is in breach of any of its obligations to be performed or complied with hereunder. |
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2. |
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Each party hereby acknowledges and agrees that FRONTEO shall not be relieved wholly or partially of its indemnification or compensation obligation owed to Whiz under Paragraph 1, Item 1 of this Article for the reason that (i) Whiz conducted due diligence on FRONTEO or that (ii) Whiz or the Investor knew or could have known that what is represented or warranted by FRONTEO in Article 5, Paragraph 2 hereof is not true or correct. |
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3. |
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Each party hereby acknowledges and agrees that Whiz shall not be relieved wholly or partially of its indemnification or compensation obligation owed to FRONTEO under Paragraph 1, Item 1 of this Article for the reason that FRONTEO knew or could have known that what is represented or warranted by Whiz in Article 5, Paragraph 1 hereof is not true or correct. |
Article 16 (Confidentiality)
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1. |
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All parties shall maintain in strict secrecy and shall not disclose, divulge or suggest to a third party (excluding the parties hereto) without the prior written approval of the other party, and use only for the purpose of exercising its rights or performing its obligations hereunder or for the management of FRONTEO, the existence of this Agreement, historical developments and content of this Agreement, the existence of discussions, negotiations and agreements relating to this Agreement, and information obtained about Whiz or FRONTEO Entities in connection with the discussion, negotiation or performance hereof (including technological, trade or other business information about FRONTEO Entities, “ Confidential Information ”); provided, however, that information given in Items below shall not fit into Confidential Information. |
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(1) |
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Information which is publicly known at the time when it is obtained or which becomes publicly known through no fault on the part the receiving party; |
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(2) |
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Information which is obtained from a third party which owes no confidentiality obligation to the disclosing party after it is disclosed by the other (disclosing) party; |
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(3) |
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Information which is developed by the receiving party independently of the information which is disclosed by or obtained from the other party; |
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(4) |
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Information which is rightfully owned by the receiving party before it is disclosed by or obtained from the other party and relating to which the receiving party is under no confidentiality obligation toward the other (disclosing) party. |
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2. |
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The provisions under the foregoing Paragraph shall not apply to information |
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(1) |
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which is disclosed in connection herewith and to the extent necessary to lawyers, certified public accountants or certified public tax accountants who are engaged by Whiz, FRONTEO or the Investor and who are under legal confidentiality obligation; |
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(2) |
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which is disclosed in connection herewith and to the extent necessary to officers, employees, financial institutions or consultants of Whiz or Whiz’ subsidiaries, or of FRONTEO or FRONTEO Entities’ subsidiaries, or of the Investor or to the entities or individuals relating to disclosure to whom as of the Date of Execution a party has obtained in advance from the other party a written approval (on condition that the disclosing party causes such recipient to be under the same confidentiality obligation and that the disclosing party shall be responsible for such recipient’s breach of such obligation); or |
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(3) |
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which is disclosed to the extent necessary in accordance with applicable laws or regulations, provisions of the securities exchange, or an order of a public agency. |
10
Article 17 (Publication)
Without the prior consent of the other party (which shall not be unreasonably refused or withheld by the other party) a party shall not publish to outside parties the execution, performance, non-performance or termination of this Agreement, the content, timing or method of whose publication shall be separately discussed and decided by the parties, with the exception of cases where the parties fail to timely agree in discussion in a case where a party is required to publish information as required by applicable laws or regulations or regulations of the securities exchange.
Article 18 (Notice)
Any and all notices to be made under this Agreement shall be deemed to be effective only when sent via certified mail or facsimile or hand-delivered to the addresses below or to the other address notified to the other party in accordance with this Article. If notice is sent via facsimile the sender shall notify the other party by phone of such transmission. If sent via facsimile, such notice shall be deemed to have arrived at the destination address on the day of transmission and subsequent telephone communication, and if sent via certified mail, on the day of their hand-delivery, respectively (provided, however, that the notice shall be deemed to have been delivered to the other party upon the lapse of three (3) Business Days after it is sent in case the other party fails to receive it within three (3) Business Days).
If to Whiz:
Address: Atago Green Hills Mori Tower 36th Floor, 2-5-1 Atago, Minato-ku, Tokyo
Telephone: 03-6430-6773
Fax: 03-6430-6774
Addressee: Administration Department, Whiz Partners, Inc.
General Partner of Whiz Healthcare Japan 2.0 Investment Limited Partnership
If to FRONTEO:
Address: 2-12-23 Konan, Minato-ku, Tokyo
Telephone: 03-5463-6344
Fax: 03-5463-6345
Addressee: Administration Division, FRONTEO, Inc.
Article 19 (Payment of Expenses)
Except where otherwise provided in this Agreement each party hereto shall bear all expenses it incurs in relation to the negotiation, execution and performance of this Agreement (including fees payable to attorneys, certified public accountant, certified tax accountants, and other advisors).
11
Article 20 (Assignment)
Without the prior written approval of the other party a party shall not assign or cause to be assigned, create a security interest in, or otherwise dispose of, this Agreement or the whole or part of its rights or obligations hereunder to, or in favor of, a third party.
Article 21 (Entire Agreement)
This Agreement constitutes an entire agreement between the parties with respect to the Investment and subsequent management of FRONTEO’s business, and invalidates and supersedes all agreements, representations, promises and other matters made in writing or verbally prior to the execution of this Agreement.
Article 22 (Governing Law and Jurisdiction)
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1. |
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This Agreement shall be governed by, and construed in accordance with, the laws of Japan. |
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2. |
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For all disputes arising in connection of this Agreement the parties shall submit to the exclusive jurisdiction by agreement of the Tokyo District Court for the first instance. |
Article 23 (Discussion in Good Faith)
If there should arise a matter not provided for herein or any doubt about the interpretation of this Agreement the parties shall discuss in good faith for an amicable solution.
(The remainder of this page is intentionally left blank)
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IN WITNESS WHEREOF the parties hereto have affixed their respective names and seals to this Agreement in duplicate as of the date below, each party holding one copy.
November 14, 2016.
For Whiz:
Toshio Ando
Representative Director & CEO
Whiz Partners, Inc.
2-1-5 Atago, Minato-ku, Tokyo
For Whiz as a general partner of the Investor:
Toshio Ando
Representative Director & CEO
Whiz Partners, Inc.
2-1-5 Atago, Minato-ku, Tokyo
For FRONTEO:
Masahiro Morimoto
Representative Director & President
FRONTEO, Inc.
2-12-23 Konan, Minato-ku, Tokyo
13
Exhibit 2
2 nd Unsecured Bonds with Convertible Bond Type Stock Acquisition Rights
Summary of Terms and Conditions of Issuance
The terms and conditions as set forth below with respect to the issuance of the Subscription for the 2 nd Unsecured Bonds with Convertible Bond Type Stock Acquisition Rights on December 1, 2016 was approved at the Board of Directors of FRONTEO, Inc. on November 14, 2016
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in Article 2, Paragraph 22 of the Companies Act, and Article 1, Paragraph 3 related to exercising Stock Acquisition Rights), FRONTEO will set up the same level of the security interest of the unredeemed balance of the Bonds in accordance with the Companies Act and Secured Bonds Trust Act. Furthermore, FRONTEO will promptly and properly register and make the publicly announcement in accordance with the provision of Article 41, Paragraph 4 of Secured Bonds Trust Act. (2) Other provision - Other than the above, no special requirements for financial matters attached to Warrants |
16. Method of Redemption |
(1) The Bonds will mature on November 29, 2019 (Redemption Period) and to be redeemed at Par Value of Japanese Yen 100 (2) For the period from December 2, 2016 to November 28, 2018, FRONTEO if it chooses to make advance redemption to the holders of Warrant Bonds (Bond Holders) by notifying in writing at least one month advance, FRONTEO may make advanced redemption, partially or entirely as follows: a. January 4, 2017 - November 30, 2017: 100.5% b. December 1, 2017-November 30, 2018: 101.0% c. December 1, 2018-November 28, 2019: 101.5% (3) Bond Holder has the right to redeem partially or entirely at Par Value multiplied by 110.0%, subsequent to the issuance of Warrant Bonds, if so chooses, by notifying in writing 15 business date prior to redemption date (one day prior to Redemption Period). (4) In the event the date of redeeming Warrant Bonds falls under bank holiday, the redemption date will be one prior business date of bank. |
17. Special Provision on Forfeiture of Benefit of Time |
In the following cases FRONTEO (“the Company”) will lose the benefit of time with respect to the Bonds, in which case the Company will immediately make a public announcement to the Bond Holders: (1) The Company is in violation of Article 15, Paragraph 1 or Article 16 of Terms and Conditions of Issuance and unable to perform as stipulated within thirty (30) days (2) The Company forfeits the benefit of time of other bonds or unable to repay when becomes due. (3) When the Company forfeits the benefit of time with respect to its loan liability excluding the Bonds, or the Company is unable to perform |
15
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duty regarding its guaranteed liability of external bonds or other loan liability if more than Japanese Yen 100,000,000. (4) The Company enters plea of bankruptcy proceeding, civil rehabilitation proceeding, receivership proceeding or special liquidation proceeding, or the Company’s dissolution resolved by the Board of Directors (except when, as a result of a new merger or an absorption type merger, the responsibility arising from Warrant Bonds is transferred to the new company or the surviving company.) (5) The Company receives a decision to commence bankruptcy proceeding, civil rehabilitation proceeding, receivership proceeding or an order to commence special liquidation. (6) When a compulsory execution, temporary seizure or provisional disposition of the Company’s assets indispensable to operate its business occurred, when a plea to auction (including public auction) is entered or attached as a result of disposition for failure to pay, or when other reason that causes to impair the credibility of the Company. |
18. Number of Warrants related to the Bonds |
Total number of Warrants to be issued is 40 units, and each Bond has one unit of Warrant. |
19. Contents of Warrants |
The type of stock is the Company’s common stock. Upon exercising Warrant, the Company will issue new shares of common stock. The number of the Company’s common stock to be issued or disposed of will be based on the total amount of the Bonds associated with Warrants and its conversion price. Adjusted conversion price will be used based on the formula. Less than one share is rounded off to the nearest one share, and there will be no cash adjustment to the fractional share. Conversion Price Conversion price is Japanese Yen 813 per share to arrive at the number of common stock to be issued upon exercising Warrant. Adjustment to conversion price The Company will adjust the conversion price based on the formula below in the event a change in the number of Company’s outstanding common stock is to occur or a possibility of change to occur. Conversion price adjustment formula Conversion price adjustment formula will be used when new common stock is issued at less than market value. The adjusted conversion price is determined subsequent to payment date. Delivery method The Company will notify the records of Warrant |
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exercise and related common stock to transfer agents who handle our common stock in accordance with Article 130, paragraph 1 of Ordinance and other related regulations. Location to request Warrant exercise FRONTEO, Inc., Administration Division 2-12-23 Konan, Minato-ku, Tokyo |
End
17
Exhibit 5.1
Representations and Warranties by Whiz
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(1) |
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Establishment and existence |
Whiz is a corporation which was lawfully and validly established and lawfully and validly exists in accordance with the laws of Japan. The Investor is an investment limited partnership which was lawfully and validly formed and lawfully and validly exists in accordance with the laws of Japan. Whiz has authority and capacity necessary for executing and performing this Agreement and the Investor has authority and capacity necessary for performing the transactions contemplated in this Agreement.
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(2) |
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Execution and performance of this Agreement |
For the execution and performance by Whiz of this Agreement Whiz and the Investor each have completed by the required time all the procedures which are required under the law, regulation, adjudication or legal disposition applicable to themselves (the “ Laws, Regulations, Etc. ”) or by their articles of incorporation or other internal regulations or by an agreement signed with a third party which is binding to themselves or their property (meaning all legally binding agreements whether verbal or written, which hereinafter shall be referred to as “Other Agreements ”).
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(3) |
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Nonexistence of conflict with Laws, Regulations, Etc. |
The execution and performance by Whiz of this Agreement is not in breach of, or in conflict with, the Laws, Regulations, Etc. applicable to Whiz or the Investor, or their articles of incorporation or other internal regulations, or any Other Agreements entered into with a third party which are binding to themselves or their property.
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(4) |
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Enforceability |
This Agreement is lawfully and validly executed by Whiz, whereupon pursuant to its terms this Agreement constitutes Whiz’ lawful, valid and legally binding obligations, which are enforceable to Whiz subject to each of the terms set forth therein except where they are restricted in accordance with the Bankruptcy Act, Civil Rehabilitation Act, Corporate Reorganization Act or other similar Laws, Regulations, Etc. which are generally applicable to creditors’ rights.
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(5) |
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Permits and licenses |
For the execution and performance by Whiz of this Agreement Whiz or the Investor is not required to obtain any permit, license, approval, consent, etc., from any government office or public agency or to submit to such office or agency any notification, report or other document.
18
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(6) |
|
Antisocial forces |
There exists no financial or other relationship, whether direct or indirect, between Whiz, its officers, employees and contributors, the Investor and its contributors (hereinafter collective referred to as “ Whiz, Etc. ”) and any antisocial forces. Whiz, Etc. does not at present, and will not in the future, provide any fund of whatever name to, or engage in any transaction with, any antisocial forces. Whiz does not have, nor will have in the future, any officer elected or any employee hired who belongs to, or is closely related to, any antisocial forces. No antisocial forces are currently, or in the future will be, involved in the management of Whiz, at which there exists no fact which is reasonably predicted to cause any such antisocial forces to be involved in its management.
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(7) |
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Solvency |
As of the Date of Issuance the Investor has a necessary and sufficient financial ability to carry out its subscription for the Securities.
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(8) |
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Personal information, other confidential information |
Without good reason Whiz has never disclosed or divulged personal information or other confidential information it has obtained in the course of business. Whiz appropriately manages and controls such information.☐
End
19
Exhibit 5.2
Representations and Warranties by FRONTEO
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(1) |
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Establishment and existence |
FRONTEO is a corporation which was lawfully and validly established and lawfully and validly exists in accordance with the laws of Japan. FRONTEO has authority and capacity necessary for executing and performing this Agreement. EvD, Inc. and TechLaw Solutions, Inc. each were lawfully and validly established in accordance with applicable laws and regulations.
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(2) |
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Execution and performance of this Agreement |
For its execution and performance of this Agreement FRONTEO has completed by the required time all the procedures which are required under the applicable Laws, Regulations, Etc., its articles of incorporation or other internal regulations, or Other Agreements entered into with a third party which is binding to FRONTEO or its property.
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(3) |
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Nonexistence of conflict with Law, Regulation and Other |
The execution and performance by FRONTEO of this Agreement is not in breach of or in conflict with Laws, Regulations, Etc., applicable to FRONTEO, its articles of incorporation or other internal regulations, or any Other Agreements, with any third party which are binding to FRONTEO or its property.
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(4) |
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Enforceability |
This Agreement is lawfully and validly executed by FRONTEO, whereupon pursuant to the terms set forth therein this Agreement constitutes FRONTEO’s lawful, valid and legally binding obligations, which are enforceable to FRONTEO subject to the terms set forth therein except where they are restricted in accordance with the Bankruptcy Act, Civil Rehabilitation Act, Corporate Reorganization Act or other similar Laws, Regulations, Etc. which are generally applicable to creditors’ rights.
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(5) |
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Permits and Licenses |
Except for the disclosures to be made in accordance with the statement of registration of financial statements which are submitted to the competent local Financial Bureau for the issuance of the Securities, the regulations of Tokyo Stock Exchange, Inc. and U.S. laws (if any), for it execution and performance of this Agreement FRONTEO is not required to obtain any permit, license, approval, consent, etc., from any government office or other public agency or to submit to such office or agency any notification, report or other document (except relating to FRONTEO’s future business). FRONTEO validly obtained and maintains all such licenses, permits and approvals necessary for its business, validly made necessary registrations and notifications (including, but not limited to, those required under the Survey Act or the Travel Agency Act (Law No. 239 of 1952 including subsequent revisions) (the “ Permits and Licenses ” in this Article). All the Permits and Licenses validly exist. No violation by FRONTEO of any law or regulation or other cause or event has arisen which
20
can reasonably be predicted to become a cause for restriction, change or extinguishment of the Permits and Licenses. No administrative procedures are pending which may reasonably be predicted to result in a restriction, change or extinguishment of the Permits and Licenses. The execution and performance of this Agreement does not constitute a cause for restriction, change, revocation or invalidation of the Permits and Licenses.
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(6) |
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U.S. Securities Act |
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(i) |
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FRONTEO has never engaged in efforts for sales of the Securities for the United States (as defined in the Regulation S under the U.S. Securities Act of 1933 (including subsequent revisions), hereinafter referred to as the “ U.S. Securities Act ”), and is a “foreign issuer” as defined in the Regulation S. |
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(ii) |
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As of the date of this Agreement (a) there exists no substantial U.S. market interest in the Securities as defined in Rule 902 (j) of the U.S. Securities Act, or (b) the Securities are offered for sale and sold only in Japan targeted at residents in Japan and conform to the domestic laws and common practices of Japan (referring to those related to acts and documentation). |
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(7) |
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Related-party transaction |
No contractual or debt-credit relationships exist between FRONTEO Entities and the company where any of FRONTEO Entities’ directors or auditors becomes a shareholder, director or auditor.
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(8) |
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FRONTEO’s shareholder structure and other matter |
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(i) |
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As of the Date of Execution FRONTEO has 72,000,000 shares authorized for issuance in total consisting only of common shares, of which FRONTEO has lawfully and validly issued so far 35,904,360 shares, all of which exist validly. |
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(ii) |
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There exists no security or other right which shall cause FRONTEO to issue any equity warrants or warranty bonds or otherwise issue any new shares (“ Potential Shares ”) and there exists no agreement, arrangement or resolution which relates to the issuance or grant of such warrants, bonds or shares except for those granted under the terms hereof. Neither exists a right which demands that FRONTEO acquire or retire the whole or a part of its issued shares or Other Agreements or FRONTEO’s resolution which obligates FRONTEO to make such acquisition or retirement except for those granted under the terms hereof. |
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(9) |
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Financial statements |
FRONTEO’s financial statements for the business year between April 1, 2013 and March 31, 2014, for the business year between April 1, 2014 and March 31, 2015, and for the business year between April 1, 2015 and March 31, 2016, and for the period between April 1, 2016 and September 30, 2016 (the “ Financial Statements ”) were prepared in accordance with the corporate accounting standards which are generally accepted as fair and appropriate in Japan, and appropriately and correctly represent FRONTEO’s financial condition and business performance as of the record date, record year or record period which served for their preparation. Except for those which were granted under the terms hereof or which were disclosed or provided
21
for in the Financial Statements or which arose in the course of normal business operations on or after March 31, 2016 (the “ Record Closing Date ”) FRONTEO bears no liability, obligation or responsibility (including but not limited to the responsibility for liability for compensation of damages (whether due to default on obligations or to a tort), guarantee obligations, tax obligations, other off-balance-sheet obligations, potential or contingent obligations). The statements of registration of financial statements which were submitted by FRONTEO or the documents which were prepared or published by FRONTEO under Laws, Regulations, Etc. during the past three years are true and correct in all material points, are free from misleading representations and are not lacking in any facts that are necessary for avoiding misunderstandings.
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(10) |
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Non-existence of change |
There exists no event, which is not stated in the Financial Statements and which, on or after the Record Closing Date, will, or is reasonably predicted to, cause a material adverse effect on FRONTEO Entities’ assets, liabilities, business, financial condition, business performance or future earnings plan (including, but not limited to, the possibility of FRONTEO Entities’ key officers or employees resigning). Further, FRONTEO Entities have not disposed of any material property or changed its accounting standards or performed any act which may give rise to a liability burden beyond the scope of its normal business or cause a material adverse effect on its assets, liabilities, business, financial condition, business performance or future earnings plan.
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(11) |
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Assets |
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(i) |
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FRONTEO Entities hold a valid, perfected, sole, complete title or a leasehold right to material immovable and movable properties which are necessary for running the present business and which are not mortgaged, pledged, hypothecated by way of assignment or otherwise hypothecated (being, however, subject to a statutory lien which arises in the normal course of business) or which are free from other legal burdens which restrict FRONTEO Entities’ use, profit or disposal. Such assets are usable without any problem in the business where they are used and are appropriately maintained and repaired except relating to usually and customarily permitted wear and tear. |
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(ii) |
|
FRONTEO Entities validly hold all intellectual property rights and other rights that are necessary for running its present business (including those rights not registered yet as well as trademarks, service marks, patent rights, copyrights, trade secrets, technologies, know-how and customer information, licenses and other rights for their use or working, as well as all other intangible assets, which are hereinafter collectively referred to as “ Intellectual Property Rights and Other Rights ”) and are appropriately taking all measures necessary for their maintenance and management including payment of fees for their registration and therefore there exists no burden such as a pledge, hypothecation by way of assignment, other hypothecation or any burden which limits the execution of its business in the manner currently practiced by FRONTEO Entities. There exists no cause or fact either which gives rise to or is reasonably predicted to give rise to a dispute over the ownership of the Intellectual Property Rights and Other Rights or the exercise of rights thereto between FRONTEO Entities and the other party to the joint development agreement, nor exists a cause or fact which is reasonably predicted to prevent the ownership or use of the Intellectual Property |
22
Rights and Other Rights such as an allegation by a third party of a right infringement. FRONTEO Entities are not in infringement of any intellectual property right of a third party.
|
(iii) |
|
FRONTEO (i) lawfully and validly acquired all of the shares issued by EvD, Inc. as of July 31, 2015 in accordance with the applicable law, (ii) lawfully and validly acquired all of the shares issued by TechLaw Solutions, Inc. as of August 28, 2014 in accordance with the applicable law, and (iii) as of the Date of Execution and the Date of Issuance lawfully and validly holds all of the shares issued by FRONTEO USA, Inc. (“ FRONTEO USA ”) (“ FRONTEO USA Shares ”) and therefore is the actual and registered holder of FRONTEO USA Shares. As of the Date of Execution and the Date of Issuance FRONTEO USA lawfully and validly holds all of the shares issued by FRONTEO Government Services, Inc. (“ FRONTEO GS ”) (“ FRONTEO GS Shares ”) and therefore is the actual and registered holder of FRONTEO GS Shares. |
|
(12) |
|
Liabilities |
FRONTEO Entities are not a party to any guarantee agreement, guarantee promise, letter of management guidance commitment, loss compensation agreement, damage coverage agreement, or to any other agreement which pays for, guarantees payment for, compensates for, or provides coverage for, a third party’s obligation or loss.
|
(13) |
|
Agreements |
|
(i) |
|
Each of the important agreements, to which FRONTEO Entities are a party (“ Important Agreement ”) has all FRONTEO Entities’ necessary internal procedures performed including the resolutions to be taken by its board meeting, was lawfully and validly executed by individuals at FRONTEO Entities who have the power and authority necessary for such execution, lawfully and validly exists, and, except where restricted on the basis of the Bankruptcy Act, Civil Rehabilitation Act, Corporate Reorganization Act or other similar laws or regulations (including foreign laws and regulations) which apply to creditors’ rights, constitutes each party’s lawful, valid and legally binding obligations, which are enforceable to the party in accordance with the applicable terms set forth therein. There exists no dispute between FRONTEO Entities and the other party or any other related party relating to such Important Agreement nor exists any fact that is reasonably predicted to give rise to any such dispute. Neither FRONTEO Entities nor the other party to such Important Agreement is in breach of its obligations thereunder and FRONTEO Entities have not been notified by the other party of a claim alleging the invalidity of such agreement or demanding revocation or withdrawal thereof, or a refusal of renewal thereof, or a proposal for rescission or termination thereof. In such Important Agreement, the execution or performance of this Agreement or a change in FRONTEO’s shareholder structure resulting from such execution or performance shall not constitute a cause for its modification, rescission or termination or a cause that requires notice, reporting or notification to be made to the other party thereto or a cause for an acceleration clause applicable to the obligations thereunder. |
|
(ii) |
|
There exists no Other Agreements to which FRONTEO Entities are a party and which substantially prohibits FRONTEO Entities from performing, or significantly restricts FRONTEO Entities in performing, their business in the same manner that FRONTEO Entities employed before the Date of Execution. The execution |
23
or performance by FRONTEO Entities of this Agreement does not cause any significant burden or constraint on FRONTEO Entities’ business or property or a material adverse effect on FRONTEO Entities’ business, financial position or relations with customers.
|
(iii) |
|
The insurance contracts currently held by FRONTEO Entities were lawfully and validly entered into with insurance companies and are in full force and effect, and provide coverage for reasonable risks owed by those who engage in a type of business similar to the business engaged in by FRONTEO Entities and will continue to be in full force and effect after the performance of this Agreement. FRONTEO Entities have paid all premiums which have become due and payable and therefore there exists no cause for default on such insurance contracts. |
|
(14) |
|
Personal information, other confidential information |
FRONTEO Entities have never disclosed or divulged without good reason any personal information, specific personal information or other confidential information which it has obtained in the course of business, and appropriately controls and manages all such information.
|
(15) |
|
Officers |
FRONTEO Entities have no agreement for compensation, retirement gratuities or other monetary benefits of any name signed with its directors, auditors or other officers (who are not limited to the directors, auditors and other officers existing as of the Date of Execution, “ Directors and Other Officers ”) except for the compensations which are stipulated in the service agreements (including the Executive Employment Agreement signed as of July 31, 2015 between UBIC, Inc. and its U.S. subsidiary and affiliate and Mr. Alejandrino F. Jimenez) and in FRONTEO Entities’ regulations. There exists no dispute between FRONTEO Entities and Directors and Other Officers or any fact that causes any such dispute to reasonably be predicted to arise. FRONTEO Entities have paid to its present and past Directors and Other Officers all compensation, retirement gratuities, redemption expense and all other obligations owed to them under Other Agreements for appointments, internal regulations or applicable Laws, Regulations, Etc. and have no payment pending. FRONTEO Entities are in no material breach of any of the agreements entered into with its Directors and Other Officers. There exists no Other Agreements signed between FRONTEO Entities and their Directors and Other Officers whereby such Directors and Other Officers acquire any right with respect to FRONTEO or are relieved of any obligation owed thereto on condition that this Agreement is executed or performed or a change occurs in FRONTEO’s shareholder structure because of such execution or performance. FRONTEO Entities have no practice or precedent whereby any amount of money, shares or other property is provided or delivered to any of its Directors and Other Officers upon retirement.
|
(16) |
|
Employees |
There exists no labor union at FRONTEO Entities, which does not have any dispute with their present or past employees (including regular employees, non-regular employees, temporary workers, part-time workers and moonlighters, the same being applicable hereinafter in this Paragraph). There exists no fact either that
24
reasonably and concretely permits any such dispute to be predicted to arise in the future. FRONTEO Entities have no employment-related trouble such as strikes, picketing, suspension of business, sabotage or other similar labor problem or material breach of obligations. FRONTEO Entities have duly paid to all of its past and present employees’ salaries, bonuses, allowances, retirement benefits, redemption expense and all other obligations which shall be payable under employment Other Agreements, working regulations, or applicable laws and regulations, and have no payment pending. With respect to FRONTEO Entities’ employees there exists no payment which is not stipulated in FRONTEO Entities’ working regulations, other internal regulations, employment agreements or collective labor contracts relating to salaries, bonuses, allowances, retirement benefits or other proprietary benefits provided by FRONTEO Entities or which is not customary, nor exists any agreement or obligation related thereto.
|
(17) |
|
Compliance with Laws, Regulations, Etc. |
Except relating to the overtime work in excess of the limits set to monthly overtime work provided for in the labor-management agreement under Article 36 of Labor Standards Act FRONTEO Entities complies with applicable Laws, Regulations, Etc. and is not engaged in any act which is, or is reasonably predicted to be, in breach of such Laws, Regulations, Etc. FRONTEO Entities’ Directors and Other Officers and employees are not in breach of, or in conflict with, any applicable Laws, Regulations, Etc., FRONTEO Entities’ articles of incorporation or other internal regulations or any agreement with a third party that is binding to FRONTEO Entities’ property.
|
(18) |
|
Dispute |
|
(i) |
|
There exists no lawsuit, arbitration, conciliation, mediation or other judicial, administrative or private dispute settlement procedures which are pending or ongoing in connection with FRONTEO Entities, their assets, liabilities or business nor any fact which is reasonably predicted to have in the future any such dispute settlement procedures pending or ongoing. FRONTEO Entities have had none of its assets subjected to attachment, provisional attachment, provisional disposition, compulsory execution or auction, or has a petition filed against itself for such measure, or finds any fact which is reasonably predicted to give rise to such measure. |
|
(ii) |
|
FRONTEO Entities have no damage claim, injunction claim, complaint or other material claim filed against itself by any trade partner, customer, employee or other third party which will adversely affect its business nor finds any fact which is reasonably and concretely predicted to give rise to any such material claim in the future from a scientific or other perspective. |
|
(19) |
|
Legal insolvency procedure |
There exists no petition filed against FRONTEO Entities for institution of legal insolvency proceedings (meaning those defined in Article 14 hereof, but including those applied in foreign countries) or any fact that may cause such proceedings to commence.
25
|
(20) |
|
Taxes and public dues |
Within the stipulated period FRONTEO Entities have filed a truthful and appropriate tax return with competent tax or other authorities relating to taxes, social insurance premiums, labor insurance premiums and all other taxes and public dues which shall be paid to the state or local governments and therefore is not in arrears with any such item. FRONTEO Entities have not received from competent tax authorities any request for correction of its tax return, or has any correction made thereto, or has been advised of such a decision, each of which should adversely affects its profit, nor has any review or investigation being conducted by competent tax authorities or has any filed appeal or judicial or administrative proceedings pending or has any dispute or difference in opinion explicit between FRONTEO Entities and the competent tax authorities or finds any fact that is reasonably predicted to give rise to such dispute or difference in opinion in the future.
|
(21) |
|
Antisocial forces |
There exists no financial or other relationship, whether direct or indirect, between FRONTEO Entities, their officers and employees (“Relevant FRONTEO Entities Employees”) and any antisocial forces, and Relevant FRONTEO Entities Employees do not provide or will ever provide any fund to, or engage or will ever engage in any transaction with, any antisocial forces on whatever pretext. FRONTEO Entities have, or will have in the future, no officer appointed or employee hired who belongs to, or has close relationships with, any antisocial forces. No antisocial forces are currently or will in the future be involved in FRONTEO Entities’ management and there exists no fact that reasonably permits any antisocial forces to be involved in its management.
|
(22) |
|
Accuracy of disclosed information |
All of the documents, materials and other information (in whatever form) that FRONTEO Entities submitted or presented to Whiz for review in relation to the execution of this Agreement or the issuance of the Securities are true and accurate in all material aspects and are not lacking in any necessary or important information in order not to give rise to any misunderstanding on the part of Whiz and there exists no material fact about FRONTEO Entities which is not disclosed to Whiz.
End
26
Exhibit 7.1
Acts outside the scope of FRONTEO Entities’ normal business operations
|
(1) |
|
To establish, modify or repeal articles of incorporation or other important internal regulations. |
|
(2) |
|
To execute, modify, refuse to renew, or terminate an important agreement. |
|
(3) |
|
To acquire or dispose of important assets (including, but not limited to, FRONTEO Entities’ shares) or create a security interest in assets held by FRONTEO Entities. |
|
(4) |
|
To lend money to a third party or subscribe for and acquire bonds or other similar securities issued by a third party. |
|
(5) |
|
To subscribe for and acquire shares or other ownership (including interests which can be converted or changed into such shares or ownership) issued by a third party. |
|
(6) |
|
To borrow from a third party, provide guarantee for a third party’s obligation or otherwise owe debts. |
|
(7) |
|
To waive any important right. |
|
(8) |
|
To increase compensation paid to directors, auditors, other officers, employees, representatives or advisers (except a minor increase in an amount not exceeding thirty million yen) or introduce significant changes in the working conditions applied to employees. |
|
(9) |
|
To introduce a significant change into accounting policies or practice or the business year. |
|
(10) |
|
To elect, appoint or dismiss directors, auditors or other officers or employ or dismiss important employees. |
|
(11) |
|
To increase or decrease capital or reserves. |
|
(12) |
|
To conduct a reorganization (including a merger whereby FRONTEO becomes the non-surviving company, a stock exchange or transfer whereby FRONTEO becomes a wholly-owned subsidiary of another company, or absorption-type split or incorporation-type split). |
|
(13) |
|
To distribute earned surplus as dividends or otherwise dispose of them. |
|
(14) |
|
To issues shares, dispose of treasury shares, issue potential shares, dispose of FRONTTEOs’ own equity warrants, acquire or retire treasury shares or FRONTTEOs’ own equity warrants. |
|
(15) |
|
To conduct a stock split or reverse stock split. |
|
(16) |
|
To conduct a significant change of business, assign the whole or a substantial part of its business to another, or receive an assignment from another the whole or a substantial part of its business. |
|
(17) |
|
To file an important lawsuit, institute important proceedings, end a lawsuit which has a material effect on FRONTEO Entities’ business via reconciliation or any means other than judgment, decide an important policy relating to any lawsuit or similar proceedings. |
|
(18) |
|
Other matters, besides those set forth in Items above, which require a resolution of FRONTEO Entities board meeting pursuant to its internal regulations or applicable laws or regulations. |
End
27
Exhibit 4.9
Translation of the Agreement for Subscription for the Fourteenth Share Option Offering
This Agreement is made and entered into by and between FRONTEO, Inc. (hereinafter referred to as the “Company”) and ************** (hereinafter referred to as the “Subscriber”) with respect to the subscription for the thirteenth share option offering.
Article 1 (Subscription for Share Options)
In accordance with the resolution of the thirteenth annual shareholders’ meeting held on June 29, 2016 and the resolution of the board meeting held on August 25, 2016, the Company has determined the following requirements for the thirteenth share option offering (hereinafter referred to as the “Share Options”), of which the Subscriber subscribes for **** options. Since this Agreement shall be made integrally at the same time with other subscribers in accordance with Article 244 of the Companies Act of Japan, the Subscriber shall subscribe for the Share Options simultaneously with the other subscribers collectively for the total number of Share Options.
Description
Requirements for the offering of Share Options
(1) Class and number of shares covered by the Share Options
70,000 Class A common shares, which, in case of adjustment set forth below, shall be revised to the number of granted shares after adjustment multiplied by the total number of Share Options.
Number of shares covered by one (1) Share Option (hereinafter referred to as the “Number of Granted Shares”) shall be 100 class A common shares. In the event of a stock split (including a gratis allotment of common stock and this being applicable hereinafter, as well) or a reverse split by the Company after the day when the Share Options are allotted (hereinafter referred to as the “Date of Allotment”), the following formula shall be used to adjust the Number of Granted Shares covered by the Share Options that have not been exercised at the time of adjustment. Fractional share resulting from adjustment shall be discarded.
Number of Granted Shares after adjustment = Number of Granted Shares before adjustment × ratio of split or reverse split
Any adjustment of the Number of Granted Shares which may be required in other situations shall be made to a reasonable extent.
(2) Total number of Share Options
700
(3) Amount payable in exchange of the Share Options
No payment is required in exchange of the Share Options
(4) Manner of calculating the value of assets contributed in exercising the Share Options
80,900 yen for one (1) Share Option
Value of assets contributed in exercising one (1) Share Option shall be obtained by multiplying the amount paid per share for the shares delivered upon exercise of the Share Option (hereinafter referred to as the “Exercise Price”) by the Number of Granted Shares.
The Exercise Price shall be 809 yen
If any of the following events occurs on or after the Date of Allotment, the Exercise Price
1
shall be adjusted as follows.
(i) For the share split or reverse split by the Company, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise Price after |
= |
Exercise Price before |
× |
1 |
adjustment |
adjustment |
ratio of share split or reverse split |
(ii) If the Company issues new shares or dispose of the treasury stock at a price below the market price, the Exercise Price shall be adjusted in accordance with the formula stated below and fractional yen resulting from the adjustment shall be rounded up to the nearest yen.
Exercise
|
= |
Exercise
|
× |
number of |
+ |
number of newly issued shares × amount paid per share |
issued shares |
market price per share |
|||||
number of issued shares + number of newly issued shares |
In the above formula, the “number of issued shares” means the total number of shares issued by the Company less the number of treasury stock in the possession of the Company. In case of the disposition of treasury stock, the “number of newly issued shares” shall read “number of treasury stock disposed of.”
(iii) In case of other inevitable situations which require the adjustment of the Exercise Price, the adjustment shall be made to a reasonable extent taking into account the conditions.
(5) Period during which the Share Options can be exercised
From August 27, 2019 to August 26, 2022
(6) Conditions to exercise the Share Options
(i) A person to whom the Share Options are allotted (hereinafter referred to as the “Share Option Holder”) may exercise the Share Options only when both of the following conditions (A) and (B) are satisfied:
(A) the Share Option Holder has been either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary for three straight years or more at the time of exercising the option; and
(B) the Share Option Holder must be either a board director (including an “Officer” in US), statutory auditor, corporate officer or employee (including a fixed-term employee rehired under the Company’s rehiring rules) of the Company or its subsidiary at the time of exercising the option.
Notwithstanding the condition (B) above, when the condition (A) is satisfied, the Share Option Holder may exercise the Share Options during the period provided in Article 1. (5) above and limited to within ninety (90) days from the date of loss of such status as described in (B) above, only in the case that the Share Option Holder resigned due to expiry of term of office, retired by age limit or if otherwise justified by the resolution of the board of directors.
(ii) No Share Option shall be inherited.
(iii) No fractional Share Option shall be exercised.
(iv) All other conditions shall be as set forth in the “Agreement for Share Options Allotment” to be entered into between the Company and the Share Option Holder pursuant to the relevant resolution of the board meeting.
(7) Reason and conditions for acquisition of the Share Options
In the event that a proposal to approve a merger agreement where the Company is to be
2
extinguished is approved at the shareholders’ meeting of the Company or that a proposal to approve either a stock swap agreement or a stock transfer plan where the Company is to be wholly owned is approved at the shareholders’ meeting of the Company (or, if a resolution of the shareholders’ meeting is not required, is resolved by the board meeting of the Company), the Company may acquire the Share Options at free on the day separately designated by the board of directors.
(8) Restriction on acquisition of the Share Options by assignment
Acquisition of the Share Options by assignment shall require an approval of the board of directors of the Company.
(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options
(i) Amount of capital increase when the shares are issued upon exercise of the Share Options shall be one half of the maximum capital increase calculated in accordance with paragraph 1, Article 17 of the Ordinance on Company Accounting and fractional yen resulting from the calculation shall be rounded up to the nearest yen.
(ii) Amount of capital reserve increase when the shares are issued upon exercise of the Share Options shall be the maximum capital increase referred to in the item (i) above less the amount of capital increase obtained under the item (i) above.
(10) Handling of the Share Options in case of corporate reorganization
In the event of a merger (limited to the cases where the Company is to be extinguished), absorption-type company split or incorporation-type company split (limited to the cases where the Company is to be split), or stock swap or stock transfer (limited to the cases where the Company is to be a wholly-owned subsidiary) (hereinafter collectively referred to as the “Corporate Reorganization”), the Company shall deliver the share options of a stock company prescribed in Section 236.1.8 (a) to (e) of the Companies Act of Japan (hereinafter referred to as the “Reorganized Company”) to the Share Option Holder who has the Share Options remaining (hereinafter referred to as the “Remaining Share Options”) immediately prior to the day when the Corporate Reorganization comes into effect (that is, for a absorption-type merger, the day when the absorption-type merger comes into effect; for a consolidation-type merger, the day when a stock company is incorporated through consolidation; for an absorption-type company split, the day when the absorption-type company split comes into effect; for an incorporation-type company split, a stock company is incorporated from the incorporation-type company split; for a stock swap, the day when the stock swap comes into effect; and for a stock transfer, the day when a wholly owning parent company incorporated through stock transfer, and these being applicable hereinafter, as well). In this case, the Remaining Share Options shall be extinguished and the Reorganized Company shall newly issue the share options, provided that the absorption-type merger agreement, consolidation-type merger agreement, absorption-type company split agreement, incorporation-type company split plan, stock swap agreement or stock transfer plan shall contain the statement that the Reorganized Company will deliver the share options in accordance with the following provisions.
(i) Number of share options of the Reorganized Company to be delivered The same number as the Remaining Share Options in the possession of the Share Option Holder shall be delivered.
(ii) Type of stock of the Reorganized Company covered by the share options Common shares of the Reorganized Company
(iii) Number of shares of the Reorganized Company covered by the share options To be determined in accordance with the above “(1) Class and number of shares covered by the Share Options” taking into account the conditions for Corporate Reorganization.
(iv) Manner of calculation of the value of assets contributed to exercise the share options
3
Value of assets contributed in exercising one (1) share option to be delivered shall be obtained by multiplying the Exercise Price after adjustment prescribed in the item (4) (iii) above by the number of shares of the Reorganized Company covered by such share option as determined under the item (iii) above.
(v) Period during which the share options can be exercised From the day when the above “(5) Period during which the Share Options can be exercised” commences or the day when the Corporate Reorganization comes into effect, whichever is the later, to the day when the above “(5) Period during which the Share Options can be exercised” expires
(vi) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the share options To be determined in accordance with the above “(9) Conditions for the capital and capital reserve increase by issuance of shares upon exercise of the Share Options”
(vii) Restriction on acquisition of the share options by assignment Acquisition of the share options by assignment shall require an approval of the board of directors of the Reorganized Company.
(viii) Reason and conditions for acquisition of the share options To be determined in accordance with the above “(7) Reason and conditions for acquisition of the Share Options”
(11) Fractional share delivered upon exercise of the Share Options
Fractional share delivered upon exercise of the Share Options shall be discarded.
(12) Date of Allotment
August 26 2016
Article 2 (Special Provisions for Exercise of Option)
1. Notwithstanding the provisions of paragraph (8) of Article 1, the Subscriber shall not assign, or place the security right on, the Share Options.
2. If the Subscriber falls under any of the situations stated below, the Share Options shall expire automatically at that time, and the Subscriber and its successor shall not exercise the Share Options.
(1) A petition is filed by third party against the Subscriber for the attachment, provisional attachment, provisional disposition or auction or the commencement of procedures of bankruptcy or civil rehabilitation.
(2) A petition is filed by the Subscriber itself for the commencement of procedures of bankruptcy or civil rehabilitation.
(3) There are other reasons that objectively show a significant worsening financial status of the Subscriber.
(4) The Subscriber is sentenced to imprisonment without work or a heavier criminal punishment (including the case of suspension of the sentence for execution) and such court judgement has become final and binding. The Subscriber may not exercise the Share Options during the criminal procedure, i.e. the period from the time that the Subscriber is arrested or prosecution is instituted against the Subscriber and until when the prosecutor has decided not to institute the prosecution or the court sentence becomes final and binding. .
(5) The Subscriber who is an employee of the Company or its subsidiary is punished under the office rules of the Company or its subsidiary as disciplinary dismissal or retirement under instruction.
4
(6) The Subscriber who is/was an employee of the Company or its subsidiary violates any terms of agreements that the Subscriber undertook an obligation to the Company.
3. The Company shall issue the shares (including issuing new shares or transferring or assigning existing shares) to the Subscriber for its exercise of option in accordance with the requirements for offering of the Share Options.
Article 3 (Manner of Exercising the Option)
1. In exercising the Share Options, the Subscriber shall transfer the amount paid to the bank account designated by the Company and shall provide the Company with the application (claim) for exercise of the share options in a given form.
2. To exercise the options in a manner set forth in the preceding paragraph, the Subscriber shall open an account in his name with the Financial Instruments Business Operator in a manner prescribed by the Company.
3. Immediately after completion of the procedures for the Subscriber to exercise the Share Options, the Company shall take measures required for the entrustment of the entry or registration of the shares acquired by the Subscriber by exercising the Share Options in the account in name of the Subscriber opened with the Financial Instruments Business Operator under the preceding paragraph and the storage at a branch or an office of the Financial Instruments Business Operator or required for the Management Trust.
4. If the tax exemption measures under Article 29-2 of the Act on Special Measures concerning Taxation are not applied to the exercise of the Share Options, the Subscriber shall pay the amount equal to the withholding income tax imposed on the economic profit from the acquisition of shares by exercising the Share Options together with the amount paid under the paragraph 1.
Article 4 (Manner of Expressing Intention and Giving a Notice)
1. The Company shall express its intention or give a notice to the Subscriber by sending documents either by mail to the address of the Subscriber recorded in the Share Option Registry or by sending an e-mail to the address preliminarily notified by the Subscriber to the Company.
2. Any change in any one of the following items must be notified by the Subscriber to the Company.
(1) Name of the Subscriber
(2) Address of the Subscriber
(3) E-mail address for the purpose of the preceding paragraph
3. If the Subscriber fails to notify as set forth in the preceding paragraph, the address recorded in the Share Option Registry shall be considered as the current address of the Share Option Holder.
4. The notice set forth in the paragraph 1 shall be deemed to have arrived at the time when it would have ordinarily arrived.
5. Provisions of the preceding paragraphs shall be applied to the Subscriber who may exercise the Share Options under Article 1(6)(i).
Article 5 (Abandonment of Claim for Damages)
The Subscriber shall not hold the Company, its director or any other parties to whom the Company entrusted the business transactions liable for covering losses, adding profits, compensating damages, nor claim or pursue any responsibilities against the parties above in connection with this Agreement irrespective of reasons.
5
Article 6 (Right to Establish Bylaws)
1. The Company may establish, amend or abolish the “Bylaws to Agreement for Share Options Allotment” (hereinafter referred to as the “Bylaws”) to provide for the rules regarding the enforcement of this Agreement.
2. The Company must promptly notify the Subscriber of the Bylaws which may be established, amended or abolished under the preceding paragraph.
3. The Subscriber may request the Company to allow access to the Bylaws during its business hours and may copy the same at the Subscriber’s cost.
Article 7 (Amendment to Agreement)
1. If any provision hereof proves to be incompliant with any provision of the Income Tax Act, Corporation Tax Act or other tax laws or becomes incompliant with the same due to revisions after execution of this Agreement, the Company may amend or abolish such provision by giving a notice to the Subscriber. This rule shall be applied if any provision hereof proves to be or becomes incompliant with the Companies Act, Financial Instruments and Exchange Act or other relevant laws.
2. In addition to the preceding paragraph, the Company may make a proposal to the Subscriber to amend this Agreement if deemed necessary.
3. If the Subscriber does not lodge any objection with the Company in writing stating due reasons within three (3) weeks after the proposal under the preceding paragraph, this Agreement shall be deemed to have been automatically amended as proposed by the Company.
Article 8 (Taxation Process)
The Subscriber shall pay at his cost and responsibility the income tax and any other taxes and dues imposed as a result of the subscription and exercise of the Share Options and the sale of the Company’s shares acquired upon exercise thereof.
Article 9 (Handling of Issues Not Specified)
Handling of issues not specified in this Agreement or the Bylaws shall be faithfully negotiated by the Company and the Subscriber and, if the Subscriber does not agree to negotiate or no agreement is reached between both parties after negotiation, shall be determined by the Company.
Article 10 (Governing and Jurisdiction)
The Company and the Subscriber agree that the Japanese law shall govern this Agreement and any dispute hereunder shall be submitted to the Tokyo District Court which has the exclusive jurisdiction for the first trial.
6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies with their respective names and seals and the Company and the Subscriber shall retain the original copies, respectively.
|
|
August 26, 2016 |
|
|
|
Company: |
FRONTEO, Inc. |
|
Masahiro Morimoto, CEO and Representative Director |
|
2-12-23, Kounan, Minato Ward, Tokyo |
|
|
Subscriber: |
(Address) |
|
(Name) |
7
Exhibit 11.1
COMPLIANCE MANUAL
Compliance Manual
Version 1.4
Came in to force on August 1, 2008
First revision on March 26, 2009
Second revision on July 23, 2009
Third revision on February 26, 2015
UBIC, Inc.
Contents
Introduction ---------------------------- (2)
I. Purpose and basic stance ---------------------------- (4)
(1) Positioning of compliance manual and our frame of mind
(2) Conscience-based ethical decisions
(3) Our mission
(4) Management system pertaining to compliance
1. Communication system
2. Procedure at the time of occurrence of problem
II. Fundamental Principles ---------------------------- (7)
III. Compliance Provisions ---------------------------- (8)
(1) Our code of conduct towards clients ---------------------------- (8)
1. Confidentiality obligation
2. Obligation of explanation and principle of suitability
3. Prohibition of providing a conclusive judgment
4. Sincere attitude
5. Exclusion of relationship with client
6. Elimination of business transactions based on personal considerations
(2) Our code of conduct towards business partners or institutions other than the client ---------------------------- (9)
1. Fair selection of business partners
2. Prohibition of requests for making rebates
3. Prohibition of excessive gifts and business entertainment
4. Follow-up actions
5. Handling the offers of other facilities
6. Healthy relationship with government officials
(3) Our code of conduct towards ---------------------------- (10)
1. Disclosure
2. Accurate records
3. Emphasis on internal audit
4. Communication with investors
(4) Our code of conduct towards society ---------------------------- (10)
1. Compliance with related laws
2. Compliance with Antitrust Law
3. Compliance with insider trading regulations
4. Compliance with tax law
5. Respect for intellectual property rights
6. Confronting antisocial forces
7. Reporting to the concerned authorities and cooperation for investigations
(5) Our code of conduct for better corporate culture ---------------------------- (11)
1. Prohibition of discrimination
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2. Prohibition of sexual harassment
3. Protection of personal information
4. Elimination of non-transparent practices
5. Prohibition of power harassment
(6) Code of conduct as a part of organization ---------------------------- (12)
1. Adherence to internal rules
2. Prohibition of acts conflicting with interests
3. Respect for company’s property
4. Precautions concerning use of information systems
5. Fair treatment of expenses
6. Handling non-public information
7. Awareness about daily management of information
8. Participation in political campaigns
9. External affairs
IV. Pledge ---------------------------- (14)
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Introduction
Compliance Manual released herewith describes the basic principles that must be followed by all corporate executives and employees of UBIC Inc. and its operating subsidiaries (hereinafter called “UBIC Group”) without any exceptions. Our aim is to establish a fair and appropriate management and fulfill social responsibilities entrusted on to this business.
Hereby, along with the preparation and publication of UBIC Group's compliance manual, we take an oath that we will strive to create more enriched ethical organization culture and we will sincerely and wholeheartedly abide by this manual and laws and rules relevant to our business, irrespective of whether it is a management executive or ordinary employee and irrespective of one's position or job content.
In addition, with the prior approval of the headquarters of UBIC Inc., operating subsidiaries of UBIC Inc. can make partial changes to this compliance manual to accommodate and comply with local laws, rules and regulations and business practices of various countries and regions. However, under no circumstances they can lay down details contrary to this compliance manual.
Masahiro Morimoto, President
UBIC, Inc.
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I. Purpose and basic stance
(1) Positioning of compliance manual and our frame of mind
This compliance manual summarizes the matters requiring attention regarding the issues which are especially considered important during the course of executing the business of UBIC Group. However, this does not encompass everything. It only represents the basic thought process.
Important thing is that incase of any doubts about business customs or procedures, we must voice them out. For example, whenever we encounter any problem, we must not turn a blind eye on it. We get carried away in our daily busy routines and tend to forget to take up the question itself. However, it is important to always give a second thought to what we are doing, what we have done so far and what we are going to do now onwards from the compliance point of view.
Attitude of leaving things on others such as “I have nothing to do with this, perhaps someone else will resolve it”, or irresponsible attitude such as “Since business is not a mere lip service, it is OK to do the way everyone is doing” may harm the company, but they will certainly not help the company. Does not creating a workplace which we all value and where we can work with pride essentially means that we gather courage and strive to abide by ethics and laws?
We emphasis that the criterion of judgment of compliance with ethics; finally lies in our own conscience and noble character. No matter how much detailed compliance manual we prepare or how many legal documents we distribute, it is not possible to encompass everything or understand everything.
In this age of internationalization and computerization where rules and regulations are increasingly getting relaxed, and where business needs to be speedy, the most important thing is courage and compliance, and attitude of each person based on the spirit of compliance manual. Therefore, it is important to set conscience-based ethical decisions as the foundation of business.
(2) Conscience-based ethical decisions
"Conscience-based ethical decisions" refers to detaching one's personal interests, or company or business interests and question the appropriateness of the act performed by oneself from a standpoint of a fair third party. If that particular act is approved without criticisms from anybody's standards, there may not be any issues in performing that act.
However, when the situation is extremely complex and it is difficult to make decision, make sure to discuss with immediate superior personnel or concerned division without hesitation. Moreover, when the particular action as a company is deviating or appears to be deviating from law, articles of incorporation, compliance manual etc., immediately report the situation. Since privacy of everyone will be protected, please use this without any worries.
If some kind of retaliation is likely against such consultation or reporting, we will investigate the situation and promptly correct it. Therefore, in case of any problem, please gather courage and voice it out. This is the best method for creating friendly workplace and winning the trust of society and markets.
(3) Our mission
Our mission is only. Contribute to the development of society through our work by creating fair workplace and health business relationships. Our mission is to enrich the society on the basis of fair business.
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(4) Management system pertaining to compliance
(1) Responsibility
1. The management divisions of UBIC Japan is responsible for the compliance at UBIC group.
And head of the management divisions of UBIC Japan is in charge of the compliance.
(2) Communication system
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Although the reporting and consultation regarding compliance will be disclosed, details of the person reporting the same will be kept strictly confidential. However, reporting to external point of contact can be done anonymously. |
Company ensures that the person reporting will not be treated with prejudice or in adverse manner based on the reason that he performed an act of reporting or consultation.
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Apart from reporting and consulting through hierarchy, we call also report and consult through internal and external point of contacts, internal audit division of UBIC group or Administration division (hereafter called Internal Audit Division or Administration Division). |
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Internal Audit Division and Administration Division will feedback the treatment of matters reported or consulted to the personnel who had reported the same. |
(3) Procedure at the time of occurrence of problems
Following steps shall be taken when compliance related problems have occurred.
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1. When we come to know about a situation which is questionable from compliance point of view, we will immediately report it through our superior or directly to the Internal Audit Division or Administration Division. |
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2. Based on the nature of the problem, Internal Audit Division or Administration Division shall ask the concerned division to investigate and resolve the problem as appropriate. |
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3. Internal Audit Division or Administration Division will report about the problem to President. |
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4. Regarding the problem that needs to be resolved from company wide standpoint, attempts to shed light on the truth shall be made by promptly forming an investigation committee under Internal Audit Division or Administration Division shall make recommendations to the management committee for stipulating the measures including measures to prevent reoccurrence of the problem. Also, important matters shall be reported to the board meeting for the approval of board. |
Based on decision making authority and employment regulations, measures including punitive dismissal will be taken for violating acts.
Apart from the above, as per the internal reporting regulations, we can also report to or consult with the following external point of contact or compliance desk.
- External point of contact and consult- Idesawa & Partners
Kakimi Kojimachi Building Annex 5F,
3-2-5 Kojimachi, Chiyoda-ku, Tokyo 102-0083, Japan.
TEL: 03-5215-2293
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E-mail: hl-ubic@idesawalaw.gr.jp
-Point of contact of UBIC Group (Compliance desk) - Internal Audit Division,UBIC Inc.
Meisan Takahama Building 7F,
2-12-23 Kounan, Minato-ku, Tokyo 108-0075, Japan.
TEL: 03-5463-6390
E-mail : ubiccomp@ubic.co.jp
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II. Basic principles
(1) We will recognize the social responsibility and public mission of this business, and carry out robust business operations.
(2) Not only the provisions of law, we will also abide by the spirit of law.
(3) We will conduct fair and transparent business based on the principle of self-responsibility.
(4) We will place top most priority on safety and satisfaction of clients, and sincerely provide products and services at fair prices.
(5) We will respect the individuality of all the persons concerned, and contribute to robust development of social economy.
(6) In this age of globalization, we will respect different culturual tradiations and customs.
(7) In case of conflict between profits and ethics, we will select ethics without question.
(8) We will take a firm stance against antisocial forces.
(9) We will strive to leave behind an abudant and a fair sociefy for future generations.
(10) When we have encountered a difficult ethical issue, we will aggressively implement resolution measures that will satisfy everyone.
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III. Compliance provisions
(1) Our code of conduct towards clients
“Profits of the company” is not meant to rationalize the act of increasing profits by unfair means. We shall adhere to laws and their spirits, and conduct fair and transparent business with all the clients based on the principle of self-responsibility. This is because we firmly believe that this finally leads to the profits of the company.
1. (Confidentiality obligations)
Our most fundamental rule is to preserve the confidentiality of clients. We must not leak the information obtained through our dealings with the clients to other parties without the consent of the concerned person or without valid reasons such as when the disclosure is required by the law.
2. (Obligation of explanation and principle of suitability)
UBIC Group has in its possession a lot of information concerning products and services. This means that in business dealing, we are in a favorable position than the client. Therefore, when offering the products or services, we must explain the outline of such products or services and risks in such a way that the other party can understand. Moreover, we must not recommend such products or services when they are found unsuitable for the client based on the status of knowledge, experience, assets etc of the client. Although it is needless to say, it is necessary to avoid misrepresentation and excessive advertising that may leave misleading impression on the client.
3. (Prohibition of providing a conclusive judgment)
When selling products and services with inherent risks, we must not persuade by make conclusive judgments. Regarding persuasion, explanation should be based on logical material to the extent possible, and adequate care should be taken to ensure that it does not lead client to misunderstanding.
4. (Sincere attitude)
As a part of our work, we consult our clients on various matters; however, we shall not give irresponsible replies to any form of consultation whatsoever. In case of a complaint from client, we shall investigate the situation faithfully and handle is sincerely from client’s position.
5. (Exclusion of relationship with client)
Whatever may be the act, we shall not comply with the requests that will create ambiguity between the differences related to the position of the client and the company. Client focus does not mean that we will accommodate any request from a specific client.
6. (Elimination of business transactions based on personal considerations)
When entering into a client relationship with a friend or someone known to us, or someone who is personally related to us in some way or the other, we shall report to direct superior or Head of Administration Division for necessary instructions. Reason is, our target is to become a company which “always conducts fair business” from everyone’s point of view.
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(2) Our code of conduct towards business partners or institutions other than the clients
In order to conduct fair business transactions, we shall maintain fair and transparent relationship with vendors, audit agencies, other work related organizations and personnel.
1. (Fair selection of business partners)
We shall select the business partners based on comprehensive evaluation including quality, service contents, price, past performance, trustworthiness etc. Therefore, we shall not receive money, goods or business entertainment from direct business partners such as vendors. Reason is, this may distort our appropriate business decisions. Even if it does not distort, it may make a third party suspicious about non-transparent and unfair relationship.
2. (Prohibition of making requests for rebate)
Using our position, we shall not ask our business partners directly or even indirectly for money, goods or business entertainment. Such acts are in violation of law and they also damage trust-based business relationship. Also, even acts which might be considered within the permissible range may be unnatural from the viewpoint of a third party, and therefore we shall refrain from such acts. Whenever, we feel that our act may create misunderstanding, we shall refrain from it.
3. (Prohibition of excessive gifts and business entertainment)
We shall avoid gifts and business entertainment that may beyond a reasonable range, even in the cases where there is no direct business relationship. Reason is, it may adversely affect our decision making in some way or the other in future. When we have run into a situation which is problematic or which may be considered problematic, we shall report such situation to our superior or Head of Administration Division for further instructions.
4. (Follow-up actions)
In an inevitable situation, where we have received gifts or business entertainment that conflict with regulations of the company, we shall inform and discuss with our superior or Head of Administration Division and take appropriate measures. Appropriate measures could be, returning such gifts along with a polite refusal letter at the company’s expense, returning items of equivalent amount at the company’s expense, detaching the personnel who have received such gifts etc. from the dealings with that business partner for a certain period of time.
5. (Handling the offers of other facilities)
During the relationship with business partners, not only money, goods and business entertainment, offers of other facilities may also come up. For example, the other party may discuss about changing jobs or employment after retirement, offer to employ friends or relatives, or offer real estate at favorable prices. When confronted with this kind of situation, we shall promptly report the situation to immediate superior for further instructions.
6. (Healthy relationship with government officials)
We shall ensure that we maintain healthy relationship with government officials and deemed government officials. For example, payment for business entertainment can be made at the responsibility of Section Manager as long as it is within reasonable range, however, if expenses exceed it, approval of the Division Head is required. Also, even for common business entertainment, if it may appear to be unnatural from the standpoint of position
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or title of the concerned government official, then we shall refrain from it.
(3) Our code of conduct towards investors
We conduct business using precious capital received from shareholders and creditors. Therefore, we are responsible to conduct the business safely and efficiently and we are also responsible for accurately explaining the details of business to investors. In order to fulfill these responsibilities, we take measures such as accurate financial reporting, thoroughly conducting internal audits and active disclosures.
1. (Disclosure)
We shall accurately inform the details of business and important information required for the judgment by investors. It is necessary to disclose most of this information in a form, which can be easily understood by the investors. For example, in case of several extraordinary losses, it is necessary to clearly mention segments under each item.
2. (Accurate records)
Precondition to disclosure is accurate records. Every piece of information related to the business shall be recorded correctly as per laws and rules. We shall pay sufficient attention to ensure that there are no false records or mistakes in every price of internal document, and such documents are preserved for stipulated time period.
3. (Emphasis on internal audit)
In order to protect the interests of investors, UBIC Group has prepared an internal audit system that checks the desirable state of business from a neutral standpoint. When this audit system appears to be losing its substance, immediately report to the concerned division.
4. (Communication with investors)
We shall convey to the investors that “We will select ethics in case of conflict between profits and ethics" as it finally results in profit for the company. We will actually be able to create compliance system only after obtaining the understanding of investors.
(4) Our code of conduct towards the society
Apart from clients and business partners, we have legal, social and ethical responsibilities towards numerous interested parties. In that, our minimum responsibility towards society is to abide by laws and rules based on social agreement.
1. (Compliance with related laws)
We shall correctly understand the laws and guidelines related to our business and abide by them.
2. (Compliance with antitrust law)
During the course of business, we shall not interact with and conclude and arrangement with our competitors. Moreover, we shall also refrain from language and behavior that may create such suspicions. Also, acts that may lead to misuse of dominant bargaining position or excessive interference in appointment of executive officers shall not be allowed. There is a high possibility that such acts may be in violation of Antitrust Law.
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3. (Compliance with insider trading regulations)
With reading to handling of important information, we will thoroughly understand the provisions of insider trading regulations and strictly abide by them with reference to “Insider Trading Prevention Rules” stipulated separately. When the company personnel have learnt about important non-public matters of other company during the course of work, irrespective of the position of the personnel, he shall not purchase or sell the shares of that company. Moreover, when he has learnt about important matters of the company, he shall not sell or purchase the shares of the company or its competitors. In addition, giving a tip to other person based on such information will also become a problem.
4. (Compliance with tax law)
We will fulfill our legal obligation to pay taxes in accordance with the relevant laws. Corporate executives and employees concerned with this shall perform the necessary office work for fulfilling this obligation sincerely. We shall not perform any act whatsoever that might be called tax evasion.
5. (Respect for intellectual property rights)
We shall respect the intellectual property rights such as copyrights etc. of other persons. Especially, we shall not illegally copy computer software or published items. It is necessary to check copyright related provisions when downloading the information available on the internet.
6. (Confronting antisocial forces)
We shall take a firm stance against anti-social forces. Moreover, it is necessary to eliminate all the relationships that may be suspected as non-transparent ties or alliance. If we have unintentionally entered into any sort of relationship with such groups or personnel, we shall promptly report the situation to concerned division for further instructions.
7. (Reporting to the concerned authorities and cooperation for investigations)
If socially-prohibited issues such as acts of violation of law have been originated at UBIC Group or in case of such suspicions, UBIC Group shall report to concerned authorities and fully cooperate with investigations. Each one of us shall be careful to act responsibly in accordance with the basic stance of UBIC Group.
(5) Our code of conduct for better corporate culture
Maintenance of compliance is precondition for fine corporate culture. Let each one of us strive to create better corporate culture.
1. (Non-discrimination)
Regarding recruitment or appraisal, we shall conduct fair evaluation based on the job content or performance of each person. Moreover, whatever the case may be, we shall not discriminate based on gender, ethnicity, nationality, religion, beliefs, physical identity or any other personal characteristics. Even when it does not clearly fall under discrimination, we shall refrain from language and behavior that may put someone at discomfort. Tongue-in-cheek using physical peculiarities of a person conflicts with UBIC Group’s purpose of creating a motivating workplace.
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2. (Prohibition of sexual harassment)
UBIC Group strives to create appropriate workplace in accordance with Labor Law and other related laws. Therefore, whatever the case may be, insisting on sexual relationship using one’s status or position shall not be permissible. Moreover, repetitive tongue-in-cheek that may be disliked by the opposite sex, and other acts that adversely affect the environment of workplace are prohibited.
3. (Protection of personal information)
Personal information of our clients (including a corporation) that is in possession of the company shall be strictly managed in accordance with “Personal Information Protection Policy of Detailed Regulations Concerned Management of Information Assets”, and shall not be used except intended purpose. Moreover, such information shall not be disclosed to outside without the consent of the person or unless there are valid reasons such as court order etc.
4. (Elimination of non-transparent practices)
UBIC Group does not allow giving of money or goods including mid-year and year-end gifts from a subordinate to his superior. Reason is, this may shake up the trust towards fairness in decision making for promotion or transfers. However, gifts within reasonable range are permissible on ceremonial occasions for the coming of age, marriage, funeral and ancestral worship.
5. (Prohibition of power harassment)
Whatever may be the case, language and behavior that damages the character and dignity of a person, or makes him suffer mental anguish or feel employment insecurity based on hierarchical relationship such as official authority are not permissible. Acts such as excessive follow-ups for mistakes of subordinate staff while suggesting dismissal or reallocation, excessive reprehensions in front of other employees, using offensive language denying someone's integrity as a human being are prohibited. Managerial staff shall assess the personality of subordinate staff and instruct appropriately.
(6) Code of conduct as a part of organization
We are responsible to act from the standpoint of “Profits of the Company”. Therefore, we must refrain from putting the company at a disadvantage for profits of oneself or third party and using the tangible and intangible properties of company for personal purpose.
1. (Adherence to internal rules)
We will abide by the provisions stipulated in company rules, and execute our duties in fair manner in accordance with internal rules and regulations. Activities of business decisions and implementing such decisions must not conflict with the internal rules, and whether they correspond to benefit of the company must also be considered.
2. (Prohibition of acts of conflicts of interests)
We will act in such a way that it does not conflict with our interests or company’s interests. For example, pursuing personal interests using the business opportunities, personnel network, client list, credit information of client etc. acquired during the course of work is not allowed.
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3. (Respect for company’s property)
We shall clearly separate public and private matters and respect company's property. All the company property is loaned or provided to us for carrying out official duties. Needless to say about carrying home the fixtures and consumables of the company, we shall refrain from using the internet or email for nonofficial purpose.
4. (Precautions concerning use of information systems)
Regarding the use of internet, we must not leak any information that may be inappropriate, offensive or contempt other person, and access to such sites is also not allowed. UBIC Group becoming a source of spreading virus may results in loss of trust for UBIC Group, therefore it is essential to always keep anti-virus software on the computer updated as per the instructions of Information Systems/Information Security Division of the headquarters of UBIC Group.
5. (Fair treatment of expenses)
We shall accurately report travel expenses or entertainment expenses, total work hours, paid holidays etc. Moreover, in case of amount paid by the company for settlement of accounts is more or less than the correct amount, or in case of any questions, inquire with your immediate superior or concerned division.
6. (Handling non-public information)
We must keep the confidentiality of non-public information obtained during the course of work. Moreover, we must take adequate precautions so that this information is not leaked to outside due to negligence. For example, since is unsafe to send the confidential information through fax, in principle, please refrain from such acts.
7. (Awareness about daily management of information)
We shall strictly maintain confidentiality of client information, trade secrets and any other confidential whatsoever obtained during execution of official duties and must not leak it to outside. Especially, talking about personal or company matters with friends or colleagues, or at public places such as restaurant or in a car or train may result in leakage of information to outside. Moreover, even after retirement, confidential information obtained during tenure of office shall not be discussed with or disclosed to other person.
8. (Participation in political campaigns)
We shall participate in political campaigns etc. only as an individual. Participating in political campaigns using company name may cause misunderstanding that such opinions and activities are of the company.
9. (External affairs)
Disclosure of company information shall be made officially through public relations officer. In case of requests from external media organizations or analysts, if personal opinion is conveyed, it may be interpreted as the opinion of the company. Moreover, there is a possibility that the information that must be not conveyed is also disclosed. Therefore, whenever we encounter such situation, we shall contact our immediate superior staff member or public relations officer for further instructions.
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IV. Pledge
Society expects us to conduct business in a responsible manner. Instead of meeting this expectation, if we move in a wrong direction, not only UBIC Group, it will ruin the credibility of the entire industry. Therefore, as a part of UBIC Group and as a part of the industry, and also as a part of the society, we have double or even triple responsibility of conducting fair business.
We deeply recognize this and take an oath that we will practice the compliance and strive for robust development of the company’s business for creating motivating workplace.
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Exhibit 12.1
CERTIFICATION
I, Masahiro Morimoto, certify that:
1. I have reviewed this annual report on Form 20-F of FRONTEO, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (and persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 31, 2017
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FRONTEO, INC. |
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By: |
/s/ Masahiro Morimoto |
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Name: |
Masahiro Morimoto |
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Title: |
Chief Executive Officer and Chairman of the Board |
Exhibit 12.2
CERTIFICATION
I, Naritomo Ikeue, certify that:
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1. |
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I have reviewed this annual report on Form 20-F of FRONTEO, Inc. (the “registrant”); |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (and persons performing the equivalent function): |
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(a) |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: July 31, 2017
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FRONTEO, Inc. |
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By: |
/s/ Naritomo Ikeue |
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Name: |
Naritomo Ikeue |
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Title: |
Executive Vice-President, Group Chief Financial Officer, Chief Operating Officer and Director |
Exhibit 13.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of FRONTEO, Inc., a Japanese corporation (the “Company”), does hereby certify that, to such officer’s knowledge:
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The accompanying Annual Report of the Company on Form 20-F for the period ended March 31, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: July 31, 2017
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By: |
/S/ Masahiro Morimoto |
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Name: |
Masahiro Morimoto |
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Title: |
Chief Executive Officer and Chairman of the Board |
Date: July 31, 2017
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By: |
/S/ Naritomo Ikeue |
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Name: |
Naritomo Ikeue |
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Title: |
Executive Vice-President, Group Chief Financial Officer, Chief Operating Officer and Director |