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
FY04/2020 Q3 Financial Results

March 6, 2020

HEROZ, Inc.（4382）
1

1. Business Overview
2. FY04/2020 Q3
Performance
3. Growth Strategy
4. Reference Materials

Company Overview
2019
Listed on the First Section of Tokyo Stock Exchange (TSE)
Name

HEROZ, Inc.

Location

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

Established

April 2009

Representatives

Takahiro Hayashi/Tomohiro Takahashi

Business
Description

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

MembershipJapan 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 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 national
champion)
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
MBA from Wharton School, University of Pennsylvania(delivered graduation speech as student body representative)
Investment Banking Division, Goldman Sachs

Founded HEROZ

3

Our Vision

Creating the future throughartificial intelligence (AI)revolutions

4

Global Leader in Mind Game AI

Chess AI

Shogi AI

Go AI

Deep Blue (’97)
defeated aprofessional ChessplayerAI developed by ourengineers defeated aprofessional Shogi(Japanese Chess)player (’13)

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

IBM

Google5

B-to-B Services: Machine Learning by Replacing
Shogi Game Records with Other 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: 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 various
industries 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 fees7

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
Media
OptimalsolutionsearchengineClassificationengineAnomalydetectionengineTextprocessing
engineImage
recognitionengineOptimization,etc

HRMatching
jobseekers withcorporations

OthersRoute search,etc

We aim to create the industry standard for AI in each sector throughcollaboration with companies which own high-quality private data8

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

Finance

Structural design support, etc.

Entertainment

Investment 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)

Depending on the types of projects,
ongoing fees in the form of revenue sharing is also introduced
9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 increase of paid users
compared with FY04/2019 Q3

Shogi Wars

Animal
Shogi Wars

Igo Wars

CHESS HEROZ(English)

BackgammonAce(English)Earning structure: monthly membership fees,
Kishin (AI) usage fees, etc.
10

1. Business Overview

2. FY04/2020 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

12Performance Overview (May 2019-January 2020)◼ Although new and ongoing AI (B-to-B) projects increased, some of the projects aredelayed compared with the original plan in Q3◼ EBITDA, our key indicator, progressed almost as planned although it is negative on a
year-on-year basis due to increased labor cost. In addition, other profits/income below
are affected by incurred expenses associated with the listing market change and capitalincrease in December 2019, etc. represented in page 15(Units: JPY millions)

FY04/2020
Q1-Q3
Actual(Reference)
FY04/2019
Q1-Q3
ActualFY04/2020
Forecast

YoY

Progress

Net Sales

1,121

1,041

+7.8%

1,630

68.8%

EBITDA*372

404△ 8.1%

570

65.3%

EBITDA Margin

33.2%

38.9%

－

35.0%

－

Operating Profit

324

375

△13.5%

520

62.4%

Operating Margin

28.9%

36.0%

－

31.9%

－

Ordinary Profit

270

369

△ 27.0%

510

53.0%

Net Income

184

255

△ 27.9%

350

52.7%

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

13Net sales and EBITDA Trends◼ We forecast that revenues from AI (B-to-B) services, which is the core pillar of our
growth strategy, will grow faster than the industrial average, CAGR 43% calculated in
Reference Materials, and exceed revenues of AI (B-to-C) services in FY04/2020◼ We expect revenues from AI (B-to-C) services to decrease on a year-on-year basis by
the termination of "Pokémon Duel" in October, 2019. However, we expect a steady
performance of Shogi Wars, etc(Units: JPY millions)

30.9%

1,377
34.2%

1,155
877

828
908

824

33.2%

94

372
578

549

53

247

FY04/2017

FY04/2018

Net Sales（BtoB）

542
470

357

10.7%

Net Sales（BtoC）

1,121

FY04/2019
EBITDA

FY04/2020 Q1-Q3
EBITDA margin

14

COGS and SG&A Trends◼ Labor cost has increased on a year-on-year basis and is expected to keep growing toincrease our engineering capacity, which will lead to our medium-to-long term growth◼ Size-based business tax and one-time incurred expenses associated with the listing market
change and capital increase in December 2019 as well as depreciation cost negatively
affected operating/ordinary profit and net income on a year-on-year basis(Units: JPY millions)

956
788

800

339

338

797

372
37

8
191

18
150

49

46

305

287

FY04/2019

FY04/2020 Q1-Q3

9
187
4

2

215

248

235

FY04/2017

FY04/2018292

labor costdepreciation costadvertisement expenses

others(COGS/SG&A)

app commission fees15Balance Sheet (as of January 31, 2020)◼ Cash and deposits increases via public offering in December 2019. We plan to invest
them in efforts to achieve the medium-to-long term growth strategy (e.g. hiring for AI
engineers, in-house computing servers and external cloud computing services, expansion
of office space, investments to companies with peripheral technologies which can beapplied to our operations, working capital)
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(Reference)
As of 4/30/2019

As of 1/31/2020
5,828

1,659

5,581

1,494

474

498

107

150

5

5

361

342

6,302

2,157

190

178

-

-

6,111

1,979
16

1. Business Overview
2. FY04/2020 Q3
Performance

3. Growth Strategy
4. Reference Materials

Medium-to-long term Growth Strategy◼ We aim to achieve EBITDA growth by investing our cash flows and leveraging
our know-how from our AI (B-to-C) services to our AI (B-to-B) services, which
are positioned as our key medium-to-long-term pillar of growth

・EBITDA◼ In our AI (B-to-B) services, we aim to achieve more projects in the initial
setup fee phase, to complete development as rapidly as possible, and toconvert to the ongoing fee phase
B-to-B
Provide AI services
to businesses
B-to-C
Shogi AI,
other mind games AI
stable cash cow

Growth area
→core operation forthe medium-to-longterm

AI B-to-B
ongoing fee（profitable,
growth market） ￥AI B-to-B
initial setup fee(growthmarket)￥￥AI B-to-C(stable CF)
Time
18

Initiatives Aimed at Achieving the Growth Strategy (1)◼ Listing of our shares was changed to the 1st section of the Tokyo Stock Exchange on
December 25, 2019. At the same time, we completed a capital increase via public
offering and secondary sale of shares aimed at achieving medium-to-long-term growthand increasing liquidity of our shares◼ The uses of proceeds, equivalent to the approximately ¥4 billion, are as follows:◼ Personnel expense to increase our AI engineering capacity◼ Investment in in-house computing servers and expenses to utilize external cloudcomputing services◼ Security deposit and expenses relating to expansion of office space◼ Investments to companies with peripheral technologies which can be applied toour operations◼ Working capital for business operations

19

Initiatives Aimed at Achieving the Growth Strategy (2)◼ Commenced full-scale operation of the housing loan abuse detection system “ARUHI
Hawkeye”◼ We co-developed “ARUHI Hawkeye”, the housing loan abuse detection systemleveraging our deep learning capabilities, with ARUHI Corporation (“ARUHI”).
ARUHI launched the system in December 2019
◼ ARUHI Hawkeye is an AI-based system which engages in deep learning based onscreening information from past housing loans to detect applications which havethe potential to be used illicitly for real estate investments◼ Netmarble Monster’s Magic: ManaStrike, for which we cooperated in AI development,
was officially released worldwide on January 29, 2020
◼ We cooperated in some aspects of Magic: ManaStrike’s development using ourstate-of-the-art AI technology, including game balance adjustment◼ Magic: ManaStrike is a real-time strategic battle mobile game developed byNetmarble utilizing IP (intellectual property) rights from Magic: The Gathering, thepioneer in TCG (Trading Card Games). Magic: ManaStrike recreates the original
cards and world perspective using high quality 3D graphics
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1. Business Overview
2. FY04/2020 Q3
Performance
3. Growth Strategy

4. Reference Materials

Global Market Forecasts: AI Software (B-to-B)◼ AI demand is accelerating globally in each industry, leading us to believe that our AI(B-to-B) service carries strong growth potential◼ AI software market in Japan is also required to grow so rapidly due to the decrease of
the domestic working population that AI will support to increase labor productivity.

◼ Our AI (B-to-B) service is growing up faster than the overall market. In FY04/2020,
revenues from our AI (B-to-B) service are forecasted to grow up by more than 43%,
the expected market growth
Annual AI Software）

Revenue, World Markets

US$ billion（

Expected market growth in global AI software

118.6

CAGR: about 43% from 2018(A) to 2025(E)
Sales growth rate of our B-to-B business
CAGR: about 220% from FY04/2017 to FY04/2019

9.5

2018(A)2025(E)
Source: Tractica, Artificial Intelligence Market Forecasts (1Q 2019)22

Japan:Potential AI Demand is Among the Largest Worldwide◼ Potential AI demand in Japan can be expected to be among the largest worldwide, as
the working population is expected to decrease significantly going forward
Projection of Population Age 15-64(Median Prediction Interval, 2015=100)◼ When defining the working population as
those aged 15-64, the world average is
forecasted to increase by about 14%
from 2015 to 2030 and by about 27%
from 2015 to 2050. On the other hand,
the working population is expected to
About 29%
decrease by about 10% and about 29%
decreaseduring the same periods, respectively

140
120
100
80

60
40
20
0

2015
2020
2025
2030
2035
2040
2045
2050
2015年 2020年
2025年 2030年
2035年
2040年 2045年
2050年
Global
全世界

Japan
日本

US
米国

China
中国

◼ Based on such forecasts, the Japaneseworking population will show the largest
decrease among leading GDP nations

Source: Prepared by HEROZ based on United Nations,
World Population Prospects, The 2017 revision23

Potential AI Demand in Our Areas of Focus◼ We believe there is also significant potential demand for enhancing operational
efficiency through AI in the construction industry, which is one of our areas of focus◼ There will be a shortage of 110,000 construction technicians by 2025
(source: Human Touch Research Institute, “status quo” scenario in the Proprietary
Analysis Monthly Report, December 2017)

Challenges
faced by theConstruction
Industry

Chronic
Shortageof Manpower◼ Over 1/3 of first-class registered architects are over 60 (average: 56.2 years old)(source: Report on Construction-related Administration Aimed at Securing Safety ofArchitecture, Social Infrastructure Council, August 2006)◼ The number of construction and mining industry workers is expected to decrease
from 5.05 million in 2014 to 4.16–4.24 million in 2030, with some variability
depending on future economic growth and labor market participation trends(source: JILPT, 2015 Estimated Labor Supply/Demand)

Soaring
Materials
Prices◼ The national construction materials price index has increased by 17% since 2010(source: Economic Research Association)◼ We entered into a capital and business alliance with Takenaka Corporation in2017 and became a member of i-Construction. We aim to create theindustry standard AI for the construction industry, enhancing productivity
and creating a new, attractive construction site24

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 by
HEROZ, Inc. and may therefore be subject to change without prior notice due to changes
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 touncertainties 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, andforeign exchange fluctuations. HEROZ, Inc. shall not undertake any obligations to updateor revise any forward-looking information set out in this material even in the event thatnew 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.

25