FRONTEO, Inc.

Client needs are changing significantly due to rapid technological change and rising service standards. A delayed response could have a material impact on the Company's business and operating results. The Company strives to maintain competitiveness with its proprietary equation-driven AI "KIBIT" (patented in Japan, the United States, and Europe) as its technological foundation.

Because the Company handles highly confidential information such as medical information, confidential information of pharmaceutical companies, financial information, intellectual property, and supply chain-related information, there is a risk of information leakage due to unauthorized external access or employee misconduct. If such risk materializes, it could lead to significant impacts such as business interruption, claims for damages, and loss of credibility. The Company has implemented measures including ISO27001 and JISQ27001 certification, distributed data processing centers, and vein authentication and entry/exit management.

Natural disasters, communication failures, malware infections such as ransomware, and cyberattacks may cause failures, errors, or delays in AI services and analysis systems. This could affect the Company's business and operating results through loss of credibility, recovery costs, lost order opportunities, and claims for damages. The Company has implemented measures such as network equipment redundancy, EDR, IDS/IPS, and penetration testing.

In the AI utilization business, projects may not materialize or generate revenue as expected due to delays in market formation, prolonged customer adoption decisions, delays in transitioning from PoC to full-scale implementation, changes in the competitive landscape both domestically and internationally, and the development or tightening of AI-related regulations. Business and operating results may also be affected if major business partners are impacted by geopolitical risks or international trade and sanction measures. The Company continuously monitors market conditions, regulatory trends, and the political and economic situation and responds accordingly.

Personnel with specialized expertise in the life science AI, risk management, and DX businesses are limited, and there is a risk that the Company may be unable to secure the necessary headcount due to a declining working population from the falling birthrate and aging population, as well as increasing demand for talent. If capable personnel leave the Company, it could hinder management activities and affect business and operating results. The Company continues to actively strengthen recruitment activities and promotes talent development tailored to each phase of development, sales promotion, and service implementation.

As part of its growth strategy, the Company utilizes M&A; however, if contingent liabilities, unrecognized liabilities, or internal control issues are discovered after execution, or if the profitability of an acquired business falls short of initial expectations, impairment of goodwill or other assets and business restructuring costs may occur. This poses a risk to the Company's business, performance, and financial condition. The Company strives to strengthen its management control structure through due diligence at the time of execution and PMI (post-merger integration) thereafter.

AI-related laws and guidelines are being developed both domestically and internationally, requiring responses to transparency, accountability, safety, and data management. The life science AI business also requires compliance with the Pharmaceuticals and Medical Devices Act, and the enactment of new laws and regulations or demands for self-regulation may necessitate increased compliance expenditure and revisions to business plans. Continued compliance with existing laws such as the Act on the Protection of Personal Information, the Copyright Act, and the Unfair Competition Prevention Act is also required.

In the AI business domain, where technological innovation progresses rapidly, it is difficult to fully grasp third parties' intellectual property rights, and the Company's products and services may be alleged by third parties to infringe intellectual property rights. This could affect business and operating results through injunctions against use, claims for damages, royalty payments, product specification changes, and loss of credibility. In addition, if the Company's proprietary technology and know-how are misappropriated by third parties, its competitiveness could be affected.

Due to foreign currency-denominated transactions priced based on the Japanese yen and the existence of overseas consolidated subsidiaries, fluctuations in exchange rates affect revenue and the yen-converted amounts in financial statements. The Company aims to reduce foreign exchange risk by decreasing receivables and payables between parent and subsidiary companies and accelerating receivable collection, and plans to minimize risk by utilizing forward exchange contracts and other means as necessary.

If programming errors, deficiencies in analysis accuracy, or operational shortcomings occur in the Company's proprietary products and services, this could damage its reputation and reduce market acceptance. If a newly launched product fails to meet customer requirements and an incident such as business delays or information leakage occurs, this could affect business and operating results through claims for damages and other consequences. The Company strives to maintain and improve quality by establishing testing and review systems prior to product release and by reflecting customer feedback in development and operations.