NoticeThis document is an excerpt translation of the original Japanese document andis only for reference purposes. In the event of any discrepancy between thistranslated document and the original Japanese document, the latter shallprevail.

Presentation Material for
FY04/2019 Q3 Financial Results

March 8, 2019

HEROZ, Inc.（4382）
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1. Business Overview
2. FY04/2019 Q3
Performance
3. Growth Strategy
4. Reference Materials

Our Vision

Creating the future throughartificial intelligence (AI)revolutions

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Global Leader in Mind Game AI

Chess AI

Shogi AI

Go AI

Deep Blue (’97)
defeated a humanbeing champion

AI developed by ourengineers defeated aprofessional shogi(Japanese Chess)player (’13)

Google acquired Deep Mind(’14)
AlphaGo, developed byDeep Mind, defeated aprofessional Go player(’16)

IBMGoogle4

B-to-B Services: Profit Model and High Switching Costs
Research/develop Shogi AI
Standardize AI technology accumulated
through shogi AI
Establish “HEROZ Kishin”=MLaaS（Machine Learning as a Service）

Client’s data sent
to HEROZ Kishin

Output after machinelearning throughdeep learning, etc.

Output applied inbusiness settings

Establish an infrastructure which allows
HEROZ to provide AI services efficiently
to solve various challenges in variousindustries just by changing input data
Provide comprehensive AI services withmassive servers

Results measured and used for further
machine learning

Output precision increases throughrepeated machine learning

Achieve stable, sustained earnings andhigh switching costs

Earning structure: initial setup fee
and ongoing fees5

B-to-B Services: Provide Services by Replacing
Shogi Game Records with Corporate Data

Shogi game records

Structural design data,
financial data, etc.

HEROZ Kishin
Deep learning and other machine learning:
MLaaS (Machine Learning as a Service)

Shogi AI

Construction AI, Finance AI, etc.

MLaaS： What is Machine Learning as a Service?
Business model which provides machine learning/deep learning as service, similar to
SaaS (Software as a Service) and IaaS (Infrastructure as a Service)6

B-to-B Services: Engines included in HEROZ Kishin
and Examples of Applications
 Create AI products by combining engines and achieve an efficient operating structure

Know-how ondevelopment andservice operations

AI-related technology
and R&D capabilities(deep learning, etc.)(massive servers, etc.)
Construction

Mind gameengineGameprocessing
enginePlacement
Route
optimization optimizationengineenginePredictionengineFinance

Structuraldesign support

Investment
support /market forecast

Entertainment

Mind game AI,etc.

HEROZ Kishin
HR

QC
OptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessing
engineImage
recognitionengineAutomated
testing

Matching
jobseekers withcorporations

Robot

Route search In construction AI, which is one area of our focus, we entered into a
capital and business alliance with Takenaka Corporation in 2017 andbecame a member of i-Construction, aiming to create a new,productive and attractive construction site using AI
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B-to-B Services:
Areas of Focus and Examples of Services Provided
 Focusing on construction, finance, and entertainment for the foreseeable future
 Earning structure is initial setup fee and ongoing fees
*Examples of clients served
Construc-tion

Structural design support, etc.

FinnanceEntertainmentInvestment support,
market forecasts, etc.

Creation of high-quality NPCs,
game balance adjustment, etc.
(In B-to-B service, HEROZ is not agame operator/publisher but abackground AI provider)

In addition to fixed ongoing fees, ongoing fees in the form of revenue
sharing will be introduced in FY04/20198

B-to-C Services: Fees from Application Users
Charging fees for B-to-C content which user AI Leveraging AI-related technology to provide mind games such as
shogi, chess, and backgammon worldwide
 Shogi Wars has remained cash cow backed by increasing # of paid
users in Q3

Shogi Wars

Animal
Shogi Wars

Igo Wars

CHESS HEROZ(English)

BackgammonAce(English)

Pokémon Comaster(Pokémon Duel）

Earning structure: monthly membership fees,Kishin (AI) usage fees, etc.
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1. Business Overview

2. FY04/2019 Q3
Performance
3. Growth Strategy
4. Reference Materials

Our Key Performance Indicator We believe that EBITDA, as calculated below, is our key performance indicator

EBITDA = Operating Profit +Depreciation/Amortization
Expenses In AI-related businesses, server investments, etc. are required to engage in advanced
machine learning, leading to various depreciation/amortization expenses. We aim tocontinuously enhance enterprise value/equity value via EBITDA growth, without being
concerned about fluctuations in one-time depreciation/amortization expenses.

11Performance Overview (May 2018–January 2019) We made steady progress towards achievement of fiscal year forecasts
 However, in Q4, we plan to engage in proactive efforts to standardize development tools
and to step up our advertising and publicity efforts, leading to a one-time cost increase.
As a result, we forecast that EBITDA and operating margin will decrease in Q4.

(Units: JPY millions)

FY04/2019
Q1-Q3
ActualFY04/2019
Forecast

Progress (%)(Reference)
FY04/2018
Results

Net Sales

1,041

1,300

80.1%

1,155EBITDA*

404

450

90.0%

357

EBITDA Margin

38.9%

34.6%

Operating Profit

375400Operating Margin

36.0%

30.8%

Ordinary Profit

369

400

92.3%

338

Net Income

255

280

91.4%

247

30.9%
354

93.7%

30.6%

* EBITDA = Operating Profit + Depreciation Expenses + Amortization of Lease Deposits

12Performance Trends
 We forecast that revenues from AI (B-to-B) services, which is the core pillar of our
growth strategy, will more than double on a year-on-year basis in FY04/2019
 On the other hand, we expect revenues from AI (B-to-C) services to decrease on a yearon-year basis as full year revenue contributions will not be recorded from several
unprofitable services terminated during the last fiscal year. We expect a slight increase in(Units: JPY millions)revenues from Shogi Wars, etc.
38.9%
1,155

30.9%

1,041

878

404

357

10.7%
94

FY04/2017

FY04/2018
Net Sales

EBITDA

FY04/2019 Q1-Q3
EBITDA margin

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Service Overview and Marginal Profit
 Characteristics of AI (B-to-B) and AI (B-to-C) services are summarized below
ServiceSummaryInput DataAI（B-to-B) Services
B-to-B machine learning service
HEROZ Kishin
Structural Design data, financial data,etc.

Earning Structure Initial setup and ongoing fees
Major Costs ofGoods/Services(Fixed) labor cost, server related cost

 HEROZ’s overall marginal profit ratio,
defined as “(net sales – app
commission fees – royalties)/net sales,”is as shown on the right.

AI（B-to-C） Services
Shogi Wars, etc.
Shogi game records
Monthly membership fees, Kishin (AI)usage fees, etc.
(Fixed) labor cost, server related cost
(Variable) app commission fees,
royalties
marginal profit ratio
76.3%

84.1%

67.6%

 Note that marginal profit ratio
improves as the composition of AI (Bto-B) services increases.
FY04/2017

FY04/2018

FY04/2019 Q1-Q3
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Balance Sheet (as of January 31, 2019) We expect to continue to invest cash and deposits in efforts to achieve the medium-tolong-term growth strategy (computing servers, R&D, etc.)
 Tangible fixed assets increased due to the purchase of computing servers for about 200
million yen totally during Q1-Q3. Investments and other assets are also increasing as aresult of the capital/business alliance and other strategic investments
Units: JPY millions

Current Assets
Cash and deposits
Fixed Assets
Property, plant and equipment

Intangible assets
Investments and other assets
Total Assets
Current Liabilities
Fixed Liabilities
Net Assets

As of 1/31/2019

As of 4/30/2018

1,568

1,684

1,419

1,555

523

63169

30

00354

32

2,091

1,748

154

243--

1,937

1,50415

1. Business Overview
2. FY04/2019 Q3
Performance

3. Growth Strategy
4. Reference Materials

Medium-to-long-term Growth Strategy
B-to-B

・Net Sales
・EBITDA

Provide AI services
to businesses

AI B-to-B(Growthmarket)

Growth area
→core operation forthe medium-to-longterm￥

B-to-C
Shogi AI,
other mid games AIIPO

cash cow→stable growth• Focus on partnership strategy, IPstrategy, and recruiting• Enhance competitiveness throughinvestments in servers, etc.
• Aggressive development in coretechnology areas: construction,finance, entertainment, etc.

￥• Develop/operate world-leading Smartphone shogi application
Shogi Wars (over 5.0 million members)• Leverage AI-related technology to deliver other brain games
such as chess and backgammon

AI B-to-C(Stable CF)

Time17

Initiatives Aimed at Achieving the Growth Strategy
 Completed investment of about 200 million yen in proprietary computing server formachine learning by the third quarter Established the largest DGX-1 cluster environment among domestic AI start-ups
 Allows for R&D efforts using larger, more complicated data (e.g. CAD or BIM data) Can shorten time required for initial setup in the AI (B-to-B) services
 Server depreciation costs (by 5-year declining balance method), etc. will increase butthe focus will be placed on continued EBITDA growth<Comment from the manager of the Enterprise Division at NVIDIA G.K. >NVIDIA Tesla V100 GPU is a state-of-the-art data center GPU optimized for high-speed AIprocessing, including deep learning. NVIDIA DGX-1 is an AI system equipped with 8 Tesla V100GPUs, allowing for ultrahigh-speed processing, and can also be easily installed and operated. We
have high expectations that HEROZ will leverage the largest DGX-1 cluster environment among
domestic AI ventures to develop and provide innovative AI services

 HEROZ’s Go AI “Kishin” mounted on our mobile app “Go Wars” defeated a professional Goplayer in a best-of-five match (3 wins, 2 ties) using a 9x9 board in Japanese TV program This victory follows in the footsteps of Shogi (Japanese chess) AI developed by ourengineers, which defeated a professional shogi player in 201318

1. Business Overview
2. FY04/2019 Q3
Performance
3. Growth Strategy

4. Reference Materials

Company Overview
Name

HEROZ, Inc.

Location

PMO Tamachi 2F, 5-31-17 Shiba, Minato-ku,
Tokyo

EstablishedApril 2009

Representatives Takahiro Hayashi/Tomohiro Takahashi
BusinessDescription

AI (B-to-B) services: HEROZ Kishin
AI (B-to-C) services: “Shogi Wars”, etc.

Membership Japan Deep Learning Association,

The Japanese Society for Artificial Intelligence

2018
Listed on Tokyo Stock Exchange (TSE) Mothers
Capital and business alliance with Netmarble Games Corporation
2017
Capital and business alliances with Takenaka Corporation, Hearts
United Group, and Koei Tecmo Games2016
Capital and business alliance with Bandai Namco Entertainment
2013
Shogi AI, developed by HEROZ engineers, defeated a shogi
professional
2012
Launched mobile app, “Shogi Wars”

Representative Director and CEO

Takahiro Hayashi

Graduated from Waseda University
Joined NEC as a technology engineer
Experience at IT strategy division, businessplanning division
Founded HEROZ

Shogi Track Record
Amateur 6th dan (highest rank after becoming
national amateur champion)
7th dan, Shogi Wars
Amateur Kisen Champion (7-time title defender as nationalchampion)
Played against Yoshiharu Habu (permanent 7 title holder)

Representative Director and COO

Director and CFO, Business Planning Manager

Tomohiro Takahashi

Daisuke Asahara

Graduated from Waseda University
Joined NEC as a technology engineer
Experience at Business Planning Division, BIGLOBE

Graduated from Kyoto University Graduate School
MBO from Wharton School, University of Pennsylvania(delivered graduation speech as student body representative)
Investment Banking Division, Goldman Sachs

Founded HEROZ

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Disclaimer
The contents set out in this material are prepared based on generally acknowledged
economic, social and other conditions, and on certain assumptions deemed rational byHEROZ, Inc. and may therefore be subject to change without prior notice due tochanges in the managerial environment or for other reasons.
The forward-looking statements set out in this material including performance outlooks
are based on information currently available to HEROZ, Inc. and on certain
assumptions deemed rational, and may therefore differ materially from actual results
due to uncertainties in judgements or assumptions, or for other reasons.
Such factors of uncertainty and change include both general, domestic and international
economic conditions, such as general industry and market conditions, interest rates,and foreign exchange fluctuations. HEROZ, Inc. shall not undertake any obligations to
update or revise any forward-looking information set out in this material even in theevent that new information becomes available or certain events occur hereafter.
This material is an excerpt translation of the original Japanese material and is only forreference purposes. In the event of any discrepancy between this translated material
and the original Japanese material, the latter shall prevail.
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