And Factory / 7035

R and factory / 7035

COVERAGE INITIATED ON: 2019.04.12 LAST UPDATE: 2021.04.30

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------7 Quarterly trends and results ------7 1H FY08/21 results ------9 Business ------17 Business description ------17 Segment overview and business model ------20 Smartphone Apps business (FY08/20 sales of JPY2.5bn, operating profit of JPY352mn) ------20 IoT business (FY08/20 sales of JPY337mn, operating loss of JPY187mn) ------28 Advertising Agency business (FY08/20 sales of JPY79mn) ------31 Market and value chain------32 Japan’s e-book market ------32 Internet advertising industry ------33 IoT industry ------36 Hotel industry ------36 Competitors ------38 Strengths and weaknesses ------40 Historical results and financial statements ------41 Income statement ------41 Balance sheet ------42 Cash flow statement ------43 Historical performance ------44 Q1 FY08/21 results ------44 Other information ------52 History ------52 Mission ------53 News and topics ------53 Corporate governance and top management ------55 Dividend policy ------56 Major shareholders (as of end-August 2020) ------56 Employees ------57 Glossary ------57 Profile ------58

02/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Executive summary

Business overview

A startup company with businesses in two areas, smartphone apps and IoT. In FY08/20, sales were JPY2.9bn (-24.8% YoY), ◤ and operating loss was JPY203mn (profit of JPY512mn in FY08/19). Earnings primarily come from manga apps in the Smartphone Apps business. The IoT business was severely impacted by delays and cancellations of in-house development projects due to the COVID-19 pandemic, as the previous target customer base for the &AND HOSTEL smart hostels were inbound tourists.

In the Smartphone Apps business (FY08/20 sales of JPY2.5bn, +41.4% YoY; operating profit of JPY352mn, -41.4% YoY), the ◤ company primarily develops and offers manga apps. The company has developed free-to-use manga apps with Square Enix and large publishers such as Hakusensha, Shueisha, and Shogakukan. In manga apps, the company obtains revenue by charging e-comic download fees (rental fees). These apps also draw advertising revenue based on the number of clicks made on banner ads placed through ad networks. Monthly active users (MAUs) in Q2 FY08/21 numbered 10.54mn, mainly young people, ranking it first in the industry despite its late entry. Average revenue per user, or ARPU, after revenue sharing is approximately JPY20 for manga apps.

In the IoT business (FY08/20 sales of JPY337mn, -83.6% YoY; operating loss of JPY187mn, versus profit of JPY194mn in ◤ FY08/19), the company plans, develops, and operates the &AND HOSTEL brand of smart hostels, where visitors can experience services made possible by IoT. In this segment, the company also provides IoT solutions for lodging facilities, including innto (a property management system), tabii (a tablet-based service), and totono (a tenant communication app). &AND HOSTEL (eight locations as of end-March 2021) breaks down into two business categories. The first category encompasses planning and developing &AND HOSTEL facilities on property owned by other parties. The company receives planning- and development-related compensation through consulting, real estate brokerage, and other means. The company manages the hostels and receives compensation from hostel owners in return. Outside of the hostel business, innto (installed at 292 locations on a contract basis as of end-February 2021) revenue comes from proceeds from sales and system maintenance and operation fees, which are shared with business partner Almex. tabii (5,181 tablets on a contract basis) also draws advertising revenue for the company. As for totono, the company launched the service in August 2020. Tenants will be charged a usage fee for the app as part of the property’s management fee. Revenue will be shared by and factory and Sumasapo (or split three ways in the case of a third-party management company). and factory will develop, operate, and plan the app while Sumasapo will be responsible for sales.

Impact of COVID-19 pandemic and the company’s response: Manga app advertising revenue declined as some advertisers ◤ reduced the unit price of reward advertising (with some even halving the unit price) and ad volume and prices on ad networks declined due to deteriorating advertising market conditions caused by the COVID-19 pandemic. Meanwhile, there were delays and cancellations for &AND HOSTEL in-house development projects. The company invested in manga app advertisements as planned. In light of the current environment, the company decided it would not be starting any new in-house development projects of &AND HOSTEL properties, and that it would switch its target from inbound tourists to domestic customers.

Earnings structure: Based on the sales mix of 2H FY8/20, GPM is around 50%. In terms of SG&A expenses, annualized fixed ◤ costs were around JPY6.0bn in 2H FY08/20, and the company plans to spend JPY1.2bn on advertising in FY08/21 (JPY1.1bn in FY08/20), mainly for manga apps. While the company does not plan to start any new in-house development projects for &AND HOSTEL, it completed some developments in FY08/20 and holds JPY3.2bn in real estate for sale as of March 2021.

Trends and outlook

In FY08/20, and factory reported sales of JPY2.9bn (-24.8% YoY), an operating loss of JPY203mn (from operating profit of ◤ JPY512mn in FY08/19), a recurring loss of JPY260mn (from recurring profit of JPY484mn), and a net loss of JPY362mn (from net income of JPY328mn). Sales, operating loss, and recurring loss improved from the revised company forecast announced on June 2, 2020 by JPY85mn, JPY46mn, and JPY41mn, respectively, but the net loss was JPY142mn lower. This is mainly due

03/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

to an impairment loss on head office fixed assets (approximately JPY21.9mn), an impairment loss on some software (JPY28.6mn), and reversal of deferred tax assets in Q4.

For FY08/21, the company forecasts sales of JPY3.5bn (+20.2% YoY), an operating loss of JPY27mn (versus JPY203mn ◤ operating loss in FY08/20), a recurring loss of JPY177mn (JPY260mn loss), a net loss of JPY182mn (JPY362mn loss), and EPS of -JPY18.66 (-JPY37.01). Although and factory targets 30% CAGR for the Smartphone Apps business, it expects continued losses in FY08/20 due to the impact of the COVID-19 pandemic, which is forcing the company to change its policy for &AND HOSTEL in the IoT business. The company explained that FY08/21 will be a period of investment to return the company to profitability in FY08/22.

Medium-term management plan: The company does not disclose its medium-term management plans. In addition to ◤ monetization through revenue sharing programs with business partners, the company plans to expand its business over the medium- to long-term by creating new earnings bases, promoting M&A, and building a manga app ecosystem in the Smartphone Apps business. In the IoT business, the company plans to rebrand &AND HOSTEL to capture domestic demand and expand the business into new areas such as the residential sector. As for its tenant communication app, totono, the company aims to monetize by partnering with external services such as utility and insurance companies, as well as by integrating smart lock, security, and rent payment functions.

Strengths and weaknesses Strengths Provides a manga app-related one-stop service and is capable of making improvements more quickly than competing ◤ companies

Has secure relationships (including capital and business alliances) with publishers who hold intellectual property and are ◤ strong in terms of manga

Provides a wide variety of manga app types and has established a structure that minimizes the risk of cannibalization ◤ between different manga apps

Weaknesses Most intellectual property is owned by business partners ◤ Susceptible to impact from external environmental changes because most of its profit comes from the development and ◤ operation of manga apps

Concept and target customer base revision needed for &AND HOSTEL smart hostels in the IoT business ◤

04/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Key financial data Income statement FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 FY08/21 (JPYmn) Parent Cons. Parent Parent Parent Parent Par. Est. Sales 112 372 689 1,916 3,917 2,946 3,540 YoY - 231.9% 85.2% 178.3% 104.4% -24.8% 20.2% Gross profit - 166 506 1,114 1,567 1,574 YoY - - 204.4% 120.0% 40.7% 0.4% GPM - 44.7% 73.5% 58.1% 40.0% 53.4% Operating profit -40 35 224 365 512 -203 -27 YoY - - 543.8% 63.2% 40.3% - - OPM - 9.3% 32.5% 19.1% 13.1% - - Recurring profit -42 37 223 361 484 -260 -177 YoY - - 500.8% 61.5% 34.2% - - RPM - 10.0% 32.4% 18.8% 12.4% - - Ne t in c o me -43 -6 174 261 328 -362 -182 YoY - - - 49.9% 25.8% - - Net margin - - 25.3% 13.6% 8.4% - - Per share data (JPY) Shares issued (year-end; '000) 8,421.0 8,421.0 8,421.0 8,421.0 9,494.6 9,827.1 EPS -5.2 -0.8 20.7 30.9 34.8 -37.0 -18.7 EPS (fully diluted) - - - - 33.3 - Dividend per share ------Book value per share 3.0 2.2 22.9 53.8 189.4 147.4 Balance sheet (JPYmn) Cash and cash equivalents - 79 172 672 1,353 1,028 Accounts receivable - 103 129 302 484 623 Inventories - 0 108 16 284 3,171 Total current assets - 193 480 1,126 2,453 5,662 Tangible fixed assets - 1 48 74 77 21 Investments and other assets - 26 33 103 381 529 Intangible fixed assets - 0 32 41 130 132 Total fixed assets Total assets - 220 594 1,323 3,040 6,344 Accounts payable - 21 13 63 98 359 Short-term debt - 80 97 136 404 786 Total current liabilities - 159 262 653 1,095 1,858 Long-term debt - 27 140 216 147 3,027 Total fixed liabilities - 27 140 216 147 3,036 Total liabilities - 185 401 870 1,242 4,894 Total liabilities and net assets - 220 594 1,323 3,040 6,344 Total interest-bearing debt - 107 237 352 551 3,812 Cash flow statement (JPYmn) Cash flows from operating activities - 36 46 516 -115 -3,283 Cash flows from investing activities - -27 -94 -131 -416 -316 Cash flows from financing activities - 22 130 116 1,211 3,274 Financial ratios ROA (RP-based) - 33.9% 54.9% 37.7% 22.2% -5.5% ROE - -18.9% 164.7% 80.7% 29.1% -22.3% Equity ratio 18.6% 15.6% 32.4% 34.3% 59.1% 22.9%

Source: Shared Research based on company data; per-share data has been adjusted for stock splits. Note: The YoY comparison in the consolidated results for FY08/16 is based on the simple calculation versus non-consolidated results for FY08/15. The YoY comparison in the non-consolidated results for FY08/17 is based on the simple calculation versus consolidated results for FY08/16.

05/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Recent updates Highlights On April 30, 2021, Shared Research updated the report following interviews with and factory, inc.

On April 14, 2021, the company announced earnings results for 1H FY08/21; see the results section for details.

On February 17, 2021, the company announced a business and capital alliance with Skyfall Inc.

Details of business alliance (start date: February 17, 2021)

The two companies will strengthen their partnership with a view to earnings expansion using the reward offerwall service of ▷ Skyfall’s ad network SKYFLAG, which specializes in long cost-per-engagement (CPE) reward distribution targeting smartphone apps and web services. They explore joint development of new ad products for e-book publishers and support for comprehensive digital promotions ▷ specifically for e-book publishers. and factory has not disclosed its stake in Skyfall, but says it is not enough to make it an affiliate. ▷ Long CPE reward: Rewarded ad that rewards users when they reach a specific achievement point in the app. Long-term retention and billing rates can be maintained by guiding users to a specific outcome point that makes them experience the content as interesting. As well as the potential for acquiring highly engaged users who continue to actively use the app after reaching the achievement point, it is highly cost-effective, because there is no advertising cost for users who leave the app, unlike the conventional cost-per-click (CPC) and cost-per-install (CPI) models.

Outlook The company is working on optimizing ad design by incorporating SKYFLAG into some of the manga apps that it offers, collaborating with Skyfall to achieve further earnings expansion in the ad business. The company commented that it is assessing the earnings impact of the alliance and will disclose without delay if it expects any major impact on FY08/21 earnings.

For previous releases and developments, please refer to the News and topics section.

06/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Trends and outlook

Quarterly trends and results

Cumulative FY08/19 FY08/20 FY08/21 FY08/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 % of Est. FY Est. Sales 470 995 1,531 3,917 802 1,485 2,217 2,946 719 1,480 41.8% 3,540 YoY 84.1% 62.6% 51.1% 104.4% 70.9% 49.2% 44.8% -24.8% -10.4% -0.3% 20.2% Gross profit 261 586 889 1,567 466 841 1,208 1,574 360 781 YoY - - 22.0% 40.7% 78.3% 43.6% 35.9% 0.4% -22.6% -7.2% Gross profit margin 55.6% 58.8% 58.1% 40.0% 58.1% 56.6% 54.5% 53.4% 50.1% 52.8% SG&A expenses 219 483 734 1,054 429 892 1,254 1,776 491 988 YoY 55.2% 43.6% 41.2% 40.9% 95.9% 84.8% 70.9% 68.5% 14.6% 10.8% SG&A ratio 46.6% 48.5% 47.9% 26.9% 53.4% 60.1% 56.6% 60.3% 68.3% 66.8% Operating profit 42 103 155 512 37 -51 -46 -203 -131 -208 - -27 YoY -7.8% -15.6% -25.7% 40.3% -12.3% ------Operating profit margin 9.0% 10.3% 10.2% 13.1% 4.6% ------Recurring profit 37 82 131 484 37 -86 -89 -260 -156 -274 - -177 YoY - - -36.4% 34.2% -1.6% ------Recurring profit margin 7.9% 8.2% 8.6% 12.4% 4.6% ------Net income 25 55 89 328 20 -64 -102 -362 -157 -276 - -182 YoY - - -33.7% 25.8% -20.9% ------Net margin 5.3% 5.6% 5.8% 8.4% 2.5% ------Quarterly FY08/19 FY08/20 FY08/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Sales 470 526 536 2,386 802 682 732 729 719 761 YoY 84.1% 47.2% 33.5% 164.3% 70.9% 29.8% 36.6% -69.4% -10.4% 11.5% Gross profit 261 324 304 677 466 375 367 365 360 420 YoY - - -58.3% 76.2% 78.3% 15.7% 20.9% -46.1% -22.6% 12.0% Gross profit margin 55.6% 61.7% 56.7% 28.4% 58.1% 55.0% 50.2% 50.1% 50.1% 55.2% SG&A expenses 219 264 251 320 429 463 363 522 491 497 YoY 55.2% 35.3% 36.7% 40.2% 95.9% 75.5% 44.3% 62.9% 14.6% 7.4% SG&A ratio 46.6% 50.2% 46.9% 13.4% 53.4% 67.8% 49.5% 71.6% 68.3% 65.3% Operating profit 42 61 52 357 37 -88 5 -157 -131 -77 YoY -7.8% -20.3% -39.9% 129.0% -12.3% - -91.0% - - - Operating profit margin 9.0% 11.5% 9.8% 15.0% 4.6% - 0.6% - - - Recurring profit 37 44 49 353 37 -123 -2 -171 -156 -118 YoY - - -76.1% 128.0% -1.6% - - - - - Recurring profit margin 7.9% 8.5% 9.2% 14.8% 4.6% - - - - - Net income 25 30 34 239 20 -84 -37 -260 -157 -119 YoY - - -75.0% 88.7% -20.9% - - - - - Net margin 5.3% 5.7% 6.3% 10.0% 2.5% - - - - - Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

07/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Cumulative FY08/19 FY08/20 FY08/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Total sales 470 995 1,531 3,917 802 1,485 2,217 2,946 719 1,480 YoY 84.1% 62.6% 51.1% 104.4% 70.9% 49.2% 44.8% -24.8% -10.4% -0.3% Smartphone Apps 394 814 1,229 1,789 650 1,218 1,859 2,530 626 1,315 YoY 94.1% 74.7% 62.1% 62.8% 64.9% 49.6% 51.2% 41.4% -3.7% 8.0% % of total sales 83.9% 81.8% 80.3% 45.7% 81.0% 82.0% 83.8% 85.9% 87.1% 88.9% IoT 66 152 251 2,056 124 207 287 337 85 147 YoY 74.0% 13.1% 4.4% 157.0% 86.8% 36.7% 14.4% -83.6% -30.9% -28.9% % of total sales 14.1% 15.2% 16.4% 52.5% 15.4% 14.0% 12.9% 11.4% 11.9% 10.0% Advertising Agency 9 29 52 72 29 59 72 79 7 17 YoY -33.5% 8.6% 78.3% 320.4% 212.4% 102.4% 38.5% 10.7% -74.3% -71.4% % of total sales 2.0% 2.9% 3.4% 1.8% 3.6% 4.0% 3.2% 2.7% 1.0% 1.1% Operating profit 42 103 155 512 37 -51 -46 -203 -131 -208 YoY -7.8% -15.6% -25.7% 40.3% -12.3% - - - - - Operating profit margin 9.0% 10.3% 10.2% 13.1% 4.6% -3.4% -2.1% -6.9% -18.2% -14.0% Smartphone Apps 124 264 390 600 128 180 310 352 38 129 YoY 33.8% 36.5% 28.7% 25.0% 3.2% -31.8% -20.4% -41.4% -70.8% -28.3% Profit margin 31.6% 32.4% 31.8% 33.5% 19.8% 14.8% 16.7% 13.9% 6.0% 9.8% IoT -24 -35 -43 194 -14 -65 -112 -187 -70 -149 YoY - - - 36.7% ------Profit margin -35.6% -23.1% -17.2% 9.5% -11.2% -31.4% -39.1% -55.6% -82.3% -101.4% Advertising Agency 6 9 10 13 7 15 23 31 7 16 YoY - - 358.7% 1761.0% 14.6% 67.5% 121.7% 128.0% 10.2% 9.4% Profit margin 63.6% 29.6% 20.0% 18.7% 23.3% 24.5% 32.0% 38.6% 100.0% 93.7% Company-wide -64 -134 -202 -295 -84 -180 -267 -398 -106 -203 Quarterly FY08/19 FY08/20 FY08/21 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Total sales 470 526 536 2,386 802 682 732 729 719 761 YoY 84.1% 47.2% 33.5% 164.3% 70.9% 29.8% 36.6% -69.4% -10.4% 11.5% Smartphone Apps 394 420 415 560 650 568 641 672 626 689 YoY 94.1% 59.7% 41.9% 64.4% 64.9% 35.3% 54.5% 19.8% -3.7% 21.3% % of total sales 83.9% 79.9% 77.3% 23.5% 81.0% 83.3% 87.5% 92.1% 87.1% 90.6% IoT 66 85 99 1,805 124 84 80 50 85 62 YoY 74.0% -11.0% -6.6% 222.5% 86.8% -2.0% -19.7% -97.2% -30.9% -25.8% % of total sales 14.1% 16.3% 18.5% 75.7% 15.4% 12.3% 10.9% 6.8% 11.9% 8.2% Other 9 20 22 20 29 30 12 8 7 10 YoY -33.5% 53.8% 1019.4% -266.1% 212.4% 51.2% -45.2% -61.4% -74.3% -68.6% % of total sales 2.0% 3.8% 4.2% 0.8% 3.6% 4.4% 1.7% 1.1% 1.0% 1.2% Operating profit 42 61 52 357 37 -88 5 -157 -131 -77 YoY -7.8% -20.3% -39.7% 128.8% -12.3% - -91.0% - - - Operating profit margin 9.0% 11.5% 9.8% 15.0% 4.6% -12.9% 0.6% -21.5% -18.2% -10.1% Smartphone Apps 124 139 127 209 128 51 131 41 38 91 YoY 33.8% 39.0% 14.9% 18.8% 3.2% -63.1% 3.2% -80.3% -70.8% 78.0% Profit margin 31.6% 33.1% 30.5% 37.4% 19.8% 9.0% 20.4% 6.1% 6.0% 13.3% IoT -24 -12 -8 238 -14 -51 -47 -75 -70 -79 YoY - - - 226.5% ------Profit margin - -13.5% -8.2% 13.2% -11.2% -61.3% -59.3% -150.5% -82.3% -127.6% Advertising Agency 6 3 2 3 7 8 8 8 7 8 YoY - - - - 14.6% 181.4% 403.9% 149.3% 10.2% 8.7% Profit margin 63.6% 13.8% 7.4% 15.5% 23.3% 25.7% 68.4% 99.9% 100.0% 88.8% Company-wide -64 -70 -68 -93 -84 -96 -87 -131 -106 -97 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

Quarterly FY08/19 FY08/20 FY08/21 (mn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Monthly active users (MAU) Smartphone Apps 3.30 4.01 4.60 5.61 6.68 7.36 9.19 10.03 10.37 10.54 YoY 65.0% 82.3% 79.0% 96.8% 102.4% 83.5% 99.8% 78.8% 55.2% 43.2% QoQ 15.8% 21.5% 14.7% 22.0% 19.1% 10.2% 24.9% 9.1% 3.4% 1.6% Gamer-forum apps 0.51 0.39 0.30 0.29 0.27 0.16 0.13 0.09 0.11 - YoY -44.6% -44.3% -43.4% -38.3% -47.1% -59.0% -56.7% -69.0% -59.3% - QoQ 8.5% -23.5% -23.1% -3.3% -6.9% -40.7% -18.8% -30.8% 22.2% - % of total 15.5% 9.7% 6.5% 5.2% 4.0% 2.2% 1.4% 0.9% 1.1% - Manga apps 2.79 3.62 4.30 5.32 6.41 7.20 9.06 9.94 10.26 10.54 YoY 158.3% 141.3% 110.8% 123.5% 129.7% 98.9% 110.7% 86.8% 60.1% 46.4% QoQ 17.2% 29.7% 18.8% 23.7% 20.5% 12.3% 25.8% 9.7% 3.2% 2.7% % of total 84.5% 90.3% 93.5% 94.8% 96.0% 97.8% 98.6% 99.1% 98.9% 100.0% ARPU (Monthly sales / MAU; JPY) Gamer-forum apps 40 34 51 59 77 92 90 85 70 - YoY 6.8% -43.9% -14.5% -19.8% 92.0% 168.1% 75.6% 45.3% -8.9% - QoQ -45.4% -14.2% 49.5% 14.7% 30.6% 19.8% -2.1% -5.1% -18.2% - Manga apps 25 27 26 24 22 23 21 21 19 20 YoY 33.9% 32.0% 18.6% -6.0% -14.4% -13.2% -19.1% -12.3% -14.2% -14.7% QoQ 0.6% 7.0% -3.7% -9.3% -8.4% 8.5% -10.3% -1.7% -10.4% 7.9% Source: Shared Research based on company data. Due to a decline in impact on overall performance, the company stopped disclosing results for gamer-forum apps from Q2 FY08/21, so MAU and ARPU results after that time are for manga apps only. Note: Figures may differ from company data due to differences in rounding methods.

08/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

1H FY08/21 results Overview In 1H FY08/21, the company reported sales of JPY1.5bn (-0.3% YoY), an operating loss of JPY208mn (versus an operating loss ▷ of JPY51mn in 1H FY08/20), a recurring loss of JPY274mn (versus a recurring loss of JPY86mn), and a net loss of JPY276mn (versus a net loss of JPY64mn). Sales of JPY1.5bn were down 0.3% YoY, with the Smartphone Apps business reporting sales of JPY1.3bn (+8.0% YoY) and the ▷ IoT business reporting sales of JPY147mn (-28.9% YoY). The operating loss of JPY208mn was bigger than the operating loss of JPY51mn in 1H FY08/20, with the Smartphone Apps ▷ business reporting operating profit of JPY128mn (-28.3% YoY) and the IoT business reporting an operating loss of JPY149mn (versus an operating loss of JPY65mn in 1H FY08/20). Full-year FY08/21 forecast: The company has made no changes to its initial earnings forecast. As of end-1H, sales were 41.8% of ▷ the full-year target. The company indicates that 1H sales and operating profit were commensurate with its projections. Due to the long vacations (seasonal factor), and the operating plan that aims to actively spend on advertising over 1H then scale back spending in 2H (full-year advertising spending target of JPY1.2bn; actual results of JPY610mn in 1H), the company forecasts earnings to be concentrated in 2H. Ongoing economic impact from the COVID-19 pandemic is affecting the company’s business performance, having caused a ▷ deterioration in market conditions that shrank advertising revenue from manga apps and reduced both occupancy and average customer spend at the company’s &AND HOSTEL facilities in 1H. Furthermore, the government of Japan declared a

state of emergency effective on January 8, 2021, and although the state of emergency was lifted on March 21, 2021, it is currently difficult to make predictions regarding factors such as when the COVID-19 pandemic will subside. When making accounting estimates (e.g., appraising real estate held for sale, determining whether recording impairment loss on fixed assets is necessary, and judging the recoverability of deferred tax assets), based on information available when financial statements were prepared, the company has assumed that, impact from the pandemic will continue through FY08/21 and will begin to gradually abate in FY08/22.

Results by business Smartphone Apps business In 1H FY08/21, sales in the Smartphone Apps business were JPY1.3bn (+8.0% YoY), and operating profit was JPY129mn (-28.3% YoY).

Q2 tends to be a time when manga app sales grow, due in part to the New Year holiday falling over this time. ▷ In the three months of Q2, quarterly average MAUs of and factory’s manga apps grew 46.4% YoY to 10.54mn users (versus ▷ 10.26mn users in Q1). In Q1, the company encountered a notable exodus of existing users, which it surmises was likely due to increased use of websites offering pirated editions of manga. However, the company estimates that impact from piracy was less severe in Q2. It came to this conclusion because the MAUs of its competitors generally recovered in Q2 after tending to grow more slowly or decline in Q1. ARPU was mostly level YoY in Q2. ARPU from in-app purchases trended largely in line with seasonal trends. To generate higher ▷ sales by increasing MAUs, the company implemented measures aimed at acquiring new user bases for a portion of its apps (ARPU expected to be lower than that generated through its existing user base). As a result, overall rate of growth in ARPU

from in-app purchases slowed. Unit price of reward advertising rose thanks to the addition of a targeted ad network, and ARPU from in-app ads recovered after bottoming out in Q4 FY08/20.

09/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Advertising expenses were largely as expected in Q2 at JPY312mn (+11% YoY). Advertising prices are on the rise due to market ▷ conditions, but the company’s advertising expenses in 1H, at JPY610mn, were lower than its initial projections thanks to efficient spending. Consequently, the operating profit margin improved (6% in Q1, 13% in Q2). Sales generated by manga app development in Q1 FY08/20 were JPY140mn, but the company did not report any such sales in ▷ Q1 FY08/21. Excluding impact from these sales, overall sales in the Smartphone Apps business rose in 1H (+22% YoY). At end-March 2021, the company ceased providing the Comic every service, which it operated together with Beaglee Inc. At ▷ the time of its initial forecast, the company had not anticipated the conclusion of this service. However, impairment losses associated with corresponding assets were already recorded in FY08/20, and the conclusion of the service had a negligible impact on the company’s overall MAUs. In March 2021, major e-book agent Media Do Co., Ltd. (TSE1: 3678) acquired all shares in Nihon Bungeisha Co., Ltd., a partner ▷ with whom the company collaborates to provide the Manga TOP app. As of April 2021, this acquisition has had no impact on the company’s businesses, and the company plans to continue jointly operating Manga TOP through collaboration with Nihon Bungeisha. The company launched a consulting service associated with Magapoke (Magazine Pocket), a manga app operated by ▷ Kodansha Ltd. Through this endeavor, the company provides support related to monetization through advertising, distribution formats, and operation procedures, as well as KPI and market analysis services. Directly, consulting will only contribute to earnings on a limited basis. However, the company plans to use consulting as a gateway toward increasing the number of apps

it operates.

Capital and business alliance with Skyfall Inc.

apps and web services. They explore joint development of new ad products for e-book publishers and support for comprehensive digital promotions specifically for e-book publishers.

The company is working on optimizing ad design by incorporating SKYFLAG into some of the manga apps that it offers, ▷ collaborating with Skyfall to achieve further earnings expansion in the ad business. The company commented that it is assessing the earnings impact of the alliance and will disclose without delay if it expects any major impact on FY08/21 earnings.

and factory has not disclosed its stake in Skyfall, but says it is not enough to make it an affiliate. ▷ Long CPE reward: Rewarded ad that rewards users when they reach a specific achievement point in the app. Long-term retention and billing rates can be maintained by guiding users to a specific outcome point that makes them experience the content as interesting. As well as the potential for acquiring highly engaged users who continue to actively use the app after reaching the achievement point, it is highly cost-effective, because there is no advertising cost for users who leave the app, unlike the conventional cost-per-click (CPC) and cost-per-install (CPI) models.

IoT business In 1H FY08/21, sales in the IoT business were JPY147mn (-28.9% YoY), and the operating loss was JPY149mn (versus an operating loss of JPY65mn in 1H FY08/20).

In regard to the mainstay &AND HOSTEL smart hostels (lodging facilities that offer experiences made possible through IoT ▷ technology), the company opened no new facilities in Q2, retaining a total of eight facilities (with three closed temporarily). In March 2021, the company opened one new facility (property not owned by the company), and at end-March 2021, ceased

operating one facility, bringing its store count to eight as of March 31, 2021. Operating profit remained flat YoY at each facility in 1H. Despite a second state of emergency being declared over Q2, occupancy rates gradually recovered, particularly in

10/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Tokyo, where users of long-term stay plans are on the rise. Meanwhile, average customer spend remained low, but improved along with occupancy rates at some rebranded facilities. The states of emergency and their precursory five-pillar resurgence prevention measures have not had a substantial impact on average customer spend or occupancy rates because current hostel users are utilizing these facilities primarily for business purposes. The company continued to conduct marketing activities for properties developed in-house, but no progress was made in terms of sales. If any progress is made over Q3 and beyond, the company plans on promptly disclosing this.

With regard to its guest room tablet service, tabii, the total number of tabii tablets in operation at end-Q2 FY08/21 came to ▷ 5,181 (up 721 from end-FY08/20; the number of tablets increased by 248 in Q2). As of end-Q2 FY08/21, the number of

facilities using the company’s innto lodging management system came to 292 (up 20 from end-FY08/20; the number of

facilities increased by seven in Q2). With the reissuance of the state of emergency declaration on January 8, 2021,

accommodation-related businesses operated by the company’s clients incurred damages, and adoption of tabii and innto

stagnated. The closure of some facilities also led to contract cancellations. The number of contracts announced by the

company accounts for contract cancellations, and figures indicating quarterly change in this number of contracts represent

net change calculated by subtracting contract cancellations from the number of new contracts added.

The tenant communication app, totono, has been adopted by roughly 80,000 tenants (four real estate management ▷ companies).

Advertising Agency business In 1H FY08/21, sales in the Advertising Agency business were JPY17mn (-71.4% YoY), and operating profit was JPY16mn.

The internet advertising agency services business was previously included under Other businesses, but it became an ▷ independent reporting segment from Q2 due to its increased quantitative importance in terms of accounting.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

11/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Full-year company forecast for FY08/21

FY08/19 FY08/20 FY08/21 (JPYmn) 1H Act. 2H Act. FY A ct . 1H Act. 2H Act. FY A ct . 1H Act. 2H Est. FY Est . Sales 995 2,922 3,917 1,485 1,461 2,946 1,480 2,060 3,540 YoY 62.6% 124.0% 104.4% 49.2% -50.0% -24.8% -0.3% 41.0% 20.2% Cost of sales 410 1,941 2,350 644 729 1,372 699 Gross profit 586 981 1,567 841 733 1,574 781 Gross profit margin 58.8% 33.6% 40.0% 56.6% 50.1% 53.4% 52.8% SG&A expenses 483 572 1,054 892 885 1,776 988 SG&A rat io 48.5% 19.6% 26.9% 60.1% 60.5% 60.3% 66.8% Operating profit 103 409 512 -51 -152 -203 -208 181 -27 YoY -15.6% 68.3% 40.3% ------Operating profit margin 10.3% 14.0% 13.1% ------Recurring profit 82 403 484 -86 -174 -260 -274 97 -177 YoY - - 34.2% ------Recurring profit margin 8.2% 13.8% 12.4% ------Net in co me 55 273 328 -64 -298 -362 -276 94 -182 YoY - - 25.8% ------Net margin 5.6% 9.3% 8.4% ------Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

Supplementary information as of Q2 earnings announcement (April 16, 2021)

At end-March 2021, the company ceased providing the Comic every service, which it operated together with Beaglee Inc. At ▷ the time of its initial forecast, the company had not anticipated the conclusion of this service. However, impairment losses

associated with corresponding assets were already recorded in FY08/20, and the conclusion of the service had negligible impact on the company’s overall MAUs. In March 2021, major e-book agent Media Do Co., Ltd. (TSE1: 3678) acquired all shares in Nihon Bungeisha Co., Ltd., a partner ▷ with whom the company collaborates to provide the Manga TOP app. As of April 2021, this acquisition has had no impact on the company s businesses, and the company plans to continue jointly operating Manga TOP through collaboration with Nihon ’ Bungeisha. The company continued to conduct marketing activities for properties developed in-house, but no progress was made in ▷ terms of sales. If any progress is made over Q3 and beyond, the company plans on promptly disclosing this. The company indicates that costs related to the relocation of its headquarters and the subsequent cancellation of this ▷ relocation have not deviated substantially from its initial projections.

Initial company forecast for FY08/21 (out October 15, 2020) For FY08/21, and factory forecasts sales of JPY3.5bn (+20.2% YoY), an operating loss of JPY27mn (versus JPY203mn operating loss in FY08/20), a recurring loss of JPY177mn (JPY260mn loss), a net loss of JPY182mn (JPY362mn loss), and EPS of -JPY18.66 (-JPY37.01).

Although and factory targets 30% CAGR for the Smartphone Apps business, it expects continued losses in FY08/20 due to the ▷ impact of the COVID-19 pandemic, which is forcing the company to change its policy for &AND HOSTEL in the IoT business. The company explained that FY08/21 will be a period of investment to return the company to profitability in FY08/22. The company is continuing sales activities for self-developed &AND HOSTEL properties, and is not expecting to sell below cost. ▷ However, it has not factored this into its earnings forecast because of the uncertainty of outlook. The company says it will disclose without delay any property sale that is agreed in FY08/21. The business alliance with Mirror Fit Co., Ltd., which was announced at the same time as the FY08/21 forecast, has been ▷ factored into the company forecast.

12/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

The company expects GPM to be around 50%, in line with 2H FY08/20. Based on this, gross profit is estimated to come in at ▷ just under JPY1.8bn. Annualized fixed costs were around JPY6.0bn in 2H FY03/20, and the company expects similar levels in FY03/21. Additionally, it plans to spend JPY1.2bn in advertising expenses (JPY1.1bn in FY08/20). Directors’ pay cut (also announced at the same time as the FY08/21 forecast) has been factored into the company forecast. As a result of these factors, the company expects to book an operating loss of JPY27mn in FY08/21. Although the company expects operating loss to contract, having decided not to relocate its head office, it plans to book rent ▷ payable on the property it had planned to relocate to as a non-operating expense. As a result, rent on its current head office will be booked as an SG&A expense, and rent on the property it had planned to relocate to will be booked as a non-operating expense, resulting in a doubled rent burden at the recurring loss level. The company is considering canceling the rental agreement for the property it had planned to relocate to, but has not reflected rent reductions (reduction in non-operating expense) or cancellation fees (booking of extraordinary loss) in its plan as it is in the middle of negotiations. The company commented that it would disclose without delay any decision that will make a significant impact on FY08/21 earnings.

Smartphone Apps business The company targets 30% CAGR for manga apps sales, with plans to grow sales through continued MAU expansion. It aims to maintain high ARPU levels by turning around the downward trend in ARPU from in-app ads with a gradual recovery from a bottom in Q4 FY08/20. It also looks to keep ARPU from in-app purchases on par with FY08/20 levels. The company is not expecting significant changes in the sales mix of ARPU from in-app ads and in-app purchases.

The company aims to continue acquiring new manga app development projects, although plans have not taken shape yet as ▷ of October 2020. Additionally, it plans to continue aggressive spending on promotions with an advertising budget of JPY1.2bn, while taking profitability into consideration amid the expansion of the e-book market. It expects high MAU apps like Manga UP! and Manga Mee to account for a larger proportion of advertising spend. The company expects MAU growth to slow down in FY08/21 compared to FY08/20. With the mainstay Manga UP! and Manga ▷ Mee apps, it anticipates a gradual slowdown in new user acquisition performance as the apps get older. Additionally, the company noted that new manga app releases are not reflected in its plan and that it expects newer apps to drive MAU growth in FY08/21. In terms of plans by Apple Inc. (NASDAQ: AAPL) to implement restrictions on the use of IDFA (Identifier for Advertisers, used to ▷ identify users and deliver ads on iOS) from the beginning of 2021, the company believes that if this goes through, ARPU from

in-app ads could be adversely impacted. However, given the difficulty in reasonably assessing the degree of negative impact from the implementation of restrictions on the use of IDFA, the company has not incorporated this factor into its forecast. Should ARPU from in-app ads be substantially impacted, the company will seek to offset the downturn by either increasing ARPU from in-app purchases or working to increase revenue secured through Android devices.

IoT business In the past, the company focused on the accommodation business, but inbound tourism has dropped due to travel restrictions resulting from the COVID-19 pandemic. To address this situation, the company is taking the following short-term measures. For details on medium- and long-term measures, please refer to the Medium- to long-term initiatives section below.

&AND HOSTEL The company thinks that recovery of occupancy rates to pre-COVID 19 levels is not possible in the short term given that foreign visitors accounted for the majority of users and restrictions on foreign visitors entering Japan remain in place.

13/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

The company will temporarily close some locations where low occupancy is expected to reduce losses (one location in Tokyo ▷ and two in Osaka closed as of October 2020). The timing of eventual reopening will be based on a recovery in the market environment and occupancy conditions at other hostels. The company will take steps for switching its target to domestic demand to improve occupancy rates in the short term. As a ▷ measure to improve occupancy rates, it will provide services tailored to increasingly diverse lifestyles. Specifically, the company will partner with other companies to provide workspace and long-term accommodation services. However, its forecast is based on a continuation of recent occupancy rates and accommodation prices. It also clarified that it did not plan to hold any more properties for development, including for the residential sector. The ▷ company was not impacted by the Go to Travel campaign, an economic measure supporting the domestic tourism industry affected by the pandemic, as only a small number of guests staying at urban hostels have used the campaign.

Room reservation system innto Sales activities temporarily slowed down due to the COVID-19 pandemic, but demand is recovering. In addition, the number of facilities using the smart check-in app, an optional feature, is on the rise. Although small, the business is already profitable, and the company plans to steadily grow profits.

Guest room tablet service tabii Previously, the company’s strategy was to prioritize PVs and unique user growth, then monetize the business. In addition to this strategy, the company plans to focus on monetization through PR advertising, where profits are not dependent on the number of PVs or unique users.

Specifically, guests will watch a video ad on a tabii device in their room (recognize) and try out the product in the video ad ▷ (experience). Afterwards, they will be asked for feedback (share), and the company will plan and execute a PR and media

strategy not limited to tabii devices (expand). The strategy uses the tabii device as a hook for proposal-based advertising services centered on the recognize-experience-share-expand cycle. Revenue is set per project, rather than on a contingency fee model linked to the number of products sold. The total number of tabii tablets in operation leveled off from February 2020 to August 2020. Meanwhile, the total number of ▷ tablets ordered has been rising steadily since March 2020. The company explained that this is due to some installation and configuration work being postponed at the request of customers due to the COVID-19 pandemic.

Tenant communication app totono In FY08/21, the company will focus on increasing the number of units serviced through a nationwide rollout. Although recurring revenues will gradually build up in line with the number of units serviced, the company expects its contribution to earnings to be small in FY08/21 as the service was launched in August 2020.

The property management market is a long tail market where the top five players (led by Daito Corporation [TSE1: 1878] with ▷ approximately 1.13mn units, Sekisui House [TSE1: 1928] with 0.64mn units, and three other players with just under 0.60mn units) account for 20% of the market, while small and medium-sized local management companies (ranked sixth and below with under 0.25mn units; over 1,000 companies including small companies) account for 80% of the market (2020 Ranking of Units Under Management, Zenkoku Chintai Jutaku Shimbun). Small and medium-sized management companies lack the resources to develop and operate their own systems, so the company is targeting mid-tier management companies, which form the long tail market. According to the company, there are no players with high market share in tenant apps as of October 2020.

14/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Financials The company is targeting a shareholders’ equity ratio of around 40 50%. At end-August 2020, this was below target at 22.8%. – Additionally, the company had JPY3.2bn in real estate for sale and JPY3.8bn in interest-bearing debt at end-August 2020.

Results versus initial estimates Results vs. Initial Est. FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 (JPYmn) Parent Cons. Parent Parent Parent Parent Sales (Initial Est.) - - - 1,810 3,070 5,999 Sales (Results) 112 372 689 1,916 3,917 2,946 Results vs. Initial Est. - - - 5.9% 27.6% -50.9% Operating profit (Initial Est.) - - - 343 511 580 Operating profit (Results) -40 35 224 365 512 -203 Results vs. Initial Est. - - - 6.5% 0.3% - Recurring profit (Initial Est.) 337 504 560 Recurring profit (Results) -42 37 223 361 484 -260 Results vs. Initial Est. - - - 7.1% -3.9% - Net income (Initial Est.) 220 350 390 Net income (Results) -43 -6 174 261 328 -362 Results vs. Initial Est. - - - 18.4% -6.3% - Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

15/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Medium- to long-term initiatives

The company does not publicize its medium-term management plan. This section describes the company’s policy on the topics announced at the FY08/20 results briefing that are expected to be part of its medium- to long-term initiatives, including those that may take shape in FY08/21.

Smartphone Apps business The company reached 10.0mn MAUs in August 2020. In addition to monetization through revenue sharing programs with business partners, the company plans to expand its business over the medium- to long-term by creating new earnings bases, promoting M&A, and building a manga app ecosystem.

IoT business &AND HOSTEL Rebranding

The company will switch its target from inbound tourists to domestic customers, mainly targeting millennials highly receptive ▷ to information. In addition to being a hostel offering an IoT-enabled lifestyle experience, the company will redefine its concept to also provide ▷ a wellness experience that lightens the body and spirit. It aims to become a hostel that people go to for the accommodation experience.

Expanding into new areas As of October 2020, securing profits through selling hotel assets has become challenging, so the company plans to approach the residential sector, which is less susceptible to changes in the external environment. Even in the residential sector, however, the company intends to plan and develop properties without retaining ownership.

As an example, and factory will collaborate with Mirror Fit Co., Ltd., which offers an online live workout streaming service, to ▷ provide a service that adds the beauty concept to rental properties for residents.

Tenant communication app “totono”

The company aims to monetize totono by partnering with external services such as utility and insurance companies, as well as by integrating smart lock, security, and rent payment functions.

16/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Business Business description and factory is a startup company with businesses in two areas: Smartphone Apps*1 and IoT*2. In the Smartphone Apps business, the company explores and leverages the business potential of smartphones. In the IoT business, the company seeks to apply UI/UX technologies*3 accumulated in the Smartphone Apps business, along with expertise in data analysis and monetization methods. As a result, and factory aims to prompt innovation in areas where technology adoption is currently lagging, such as real estate, housing, and healthcare. In FY08/20, sales were JPY2.9bn (-24.8% YoY), and operating loss was JPY203mn (profit of JPY512mn in FY08/19). Earnings primarily come from manga apps in the Smartphone Apps business. Meanwhile, the IoT business was severely impacted by delays and cancellations of in-house development projects due to the COVID-19 pandemic, as the previous target customer base for the &AND HOSTEL smart hostels were inbound tourists.

*1 Software that can be downloaded on a smartphone and used to access games, bulletin boards, social networking sites, email, calendars, and music players. This software uses smartphone operating systems, typically Android or iOS. *2 Short for the Internet of Things, IoT describes the concept of physical items being connected over the internet. IoT may refer to new services that make this concept a reality, to a business model, or to elemental technologies. Some industry pundits believe that the ability to connect a wide range of items over the internet, collect resulting data, and analyze and make use of this data will make the provision of innovative, high-value-added functions and services possible. *3 A user interface (UI) refers to all information the user sees, such as designs, fonts, and external appearances. The user experience (UX) describes the feelings and sensations the user experiences through a product or service.

In the Smartphone Apps business (FY08/20 sales of JPY2.5bn, +41.4% YoY; operating profit of JPY352mn, -41.4% YoY), the company primarily develops and offers manga apps. In the IoT business (FY08/20 sales of JPY337mn, -83.6% YoY; operating loss of JPY187mn, versus profit of JPY194mn in FY08/19), the company plans, develops, and operates the &AND HOSTEL brand of smart hostels, where visitors can experience services made possible by IoT. In this segment, the company also provides IoT solutions for lodging facilities, including innto (a property management system), tabii (a tablet-based service for lodging facilities), and totono (a tenant communication app).

*4 A device that can be connected to the internet. The 2017 White Paper on Information and Communications in Japan describes an IoT device as “a device that has a unique IP address and can be connected to the internet. Such electronic devices are broad in scope, ranging from devices used as sensor network terminals to devices with computing functions.” Worldwide, the number of IoT devices is expected to grow from an estimated 17.3 billion in 2017 to more than 30.0 billion in 2020.

17/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Sales and operating profit

Smartphone Apps FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 Sales and profit (JPYmn) Act. Act. Act. Act. Act. Act. Sales na na 604 1,099 1,789 2,530 YoY - - - 82.0% 62.8% 41.4% % of total sales - - 87.7% 57.4% 45.7% 85.9% Gamer-forum apps na na 421 429 199 166 YoY - - - 1.9% -53.6% -16.6% % of total sales - - 61.1% 22.4% 11.1% 6.6% Manga apps na na 51 466 1,216 2,109 YoY - - - 813.7% 160.9% 73.4% % of total sales - - 7.4% 24.3% 68.0% 83.4% Other manga-related apps na na - 42 223 140 YoY - - - - 431.0% -37.2% % of total sales - - - 2.2% 12.5% 5.5% Other na na 132 163 151 116 YoY - - - 23.5% -7.4% -23.2% % of total sales - - 19.2% 8.5% 8.4% 4.6% Operating profit na na 394 480 600 352 YoY - - - 21.7% 25.0% -41.4% % of total OP - - - 77.0% 74.3% - Profit margin - - 65.2% 43.6% 33.5% 13.9% MAU (mn) - 0.26 1.32 2.85 5.61 10.03 YoY - - 407.7% 115.9% 96.8% 78.8% Gamer-forum apps - 0.26 0.67 0.47 0.29 0.09 YoY - - 157.7% -29.9% -38.3% -69.0% % of total MAU - 100.0% 50.8% 16.5% 5.2% 0.9% Manga apps - - 0.65 2.38 5.32 9.94 YoY - - - 266.2% 123.5% 86.8% % of total MAU - 0.0% 49.2% 83.5% 94.8% 99.1% MAU (mn) Gamer-forum apps - - 48 73 59 89 YoY - - - 52.9% -19.8% 51.6% Manga apps - - 18 25 24 21 YoY - - - 39.7% -5.8% -12.5%

IoT FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 Sales and profit (JPYmn) Act. Act. Act. Act. Act. Act. Sales na na 63 800 2,056 337 YoY - - - 1179.6% 157.0% -83.6% % of total sales - - 9.1% 41.7% 52.5% 11.4% Operating profit na na -30 142 194 -187 YoY - - - - 36.7% - % of total OP - - - 22.8% 24.1% - Profit margin - - - 17.8% 9.5% - &AND HOSTEL (no. of buildings) na na na 6 9 8 YoY - - - - 50.0% -11.1% innto installation (no. of facilities) na na na 89 232 272 YoY - - - - 160.7% 17.2% tabii (units) na na na 275 2,853 4,460 YoY - - - - 937.5% 56.3% Source: Shared Research based on company data Note: Figures for FY08/16 are consolidated. Other years are non-consolidated.

The Smartphone Apps business has been the core of the company since its establishment in September 2014. By developing smartphone apps, the company has accumulated in-house expertise in UI/UX design. UI/UX design is important because of the role it plays in the “conversion” of smartphone users (persuading users to tap on ads on their smartphone screens, register as

18/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

members, send inquiries, or buy products). UI/UX design expertise enables the company to develop apps for the IoT business and generate synergies that go beyond the boundaries of the two businesses.

Both businesses offer services that provide value through experience gained by operating smartphone apps and devices. and factory thinks the value of services is determined by their operability, and by the benefits and experience they deliver; in other words, the UI/UX design. As UI/UX design capabilities indicate the ability to predict and fulfill user needs from user perspectives, and factory thinks these abilities are important across all aspects of business, not just when developing apps and devices.

The company’s 90 employees (as of August 31, 2019) are young (average age of 31) and led by a youthful management team. Three board members were born in the 1980s, including Takamasa Ohara (chairman and representative director, born in 1984), Rinji Aoki (president and representative director and born in 1983 and in charge of the Smartphone Apps business), and Yuki Umemoto (born in 1980 and in charge of the IoT business). More than half of employees are engineers and designers, with producers and administrators making up the remainder. The company forms small teams to work on each app title, allocating the staff needed to handle all aspects of app production. Within these units, the company pursues a plan-do-check-act (PDCA) cycle, progressing from planning to development, operation, analysis, improvement, marketing, and then back to planning. The company handles all processes in-house for each unit.

Earnings structure Based on the sales mix of 2H FY8/20, GPM is around 50%. In terms of SG&A expenses, annualized fixed costs were around JPY6.0bn in 2H FY08/20, and the company plans to spend JPY1.2bn on advertising in FY08/21 (JPY1.1bn in FY08/20), mainly for manga apps. While the company does not plan to start any new in-house development projects for &AND HOSTEL, it completed some developments in FY08/20 and holds JPY3.2bn in real estate for sale as of October 2020.

19/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Segment overview and business model Smartphone Apps business (FY08/20 sales of JPY2.5bn, operating profit of JPY352mn) Smartphone Apps FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 Sales and profit (JPYmn) Act. Act. Act. Act. Act. Act. Sales na na 604 1,099 1,789 2,530 YoY - - - 82.0% 62.8% 41.4% % of total sales - - 87.7% 57.4% 45.7% 85.9% Gamer-forum apps na na 421 429 199 166 YoY - - - 1.9% -53.6% -16.6% % of total sales - - 61.1% 22.4% 11.1% 6.6% Manga apps na na 51 466 1,216 2,109 YoY - - - 813.7% 160.9% 73.4% % of total sales - - 7.4% 24.3% 68.0% 83.4% Other manga-related apps na na - 42 223 140 YoY - - - - 431.0% -37.2% % of total sales - - - 2.2% 12.5% 5.5% Other na na 132 163 151 116 YoY - - - 23.5% -7.4% -23.2% % of total sales - - 19.2% 8.5% 8.4% 4.6% Operating profit na na 394 480 600 352 YoY - - - 21.7% 25.0% -41.4% % of total OP - - - 77.0% 74.3% - Profit margin - - 65.2% 43.6% 33.5% 13.9% MAU (mn) - 0.26 1.32 2.85 5.61 10.03 YoY - - 407.7% 115.9% 96.8% 78.8% Gamer-forum apps - 0.26 0.67 0.47 0.29 0.09 YoY - - 157.7% -29.9% -38.3% -69.0% % of total MAU - 100.0% 50.8% 16.5% 5.2% 0.9% Manga apps - - 0.65 2.38 5.32 9.94 YoY - - - 266.2% 123.5% 86.8% % of total MAU - 0.0% 49.2% 83.5% 94.8% 99.1% MAU (mn) Gamer-forum apps - - 48 73 59 89 YoY - - - 52.9% -19.8% 51.6% Manga apps - - 18 25 24 21 YoY - - - 39.7% -5.8% -12.5% Source: Shared Research based on company data Note: Monthly active users (MAUs) are as of Q4 of each fiscal year.

Overview The Smartphone Apps business is made up of the &AND COMICS service that provides manga apps such as Manga UP!, Manga Park, Manga Mee, and others developed in collaboration with large publishers. In FY08/20, manga apps accounted for 83.4% of sales in the Smartphone Apps business, gamer-forum apps 6.6%, and other apps 4.6%. Manga apps generate revenue from both advertising and in-app fees. As of 1H FY08/20, advertising revenue made up about 30 to 40% of total sales.

*5 Multiplayer: the ability to play social media games with other users. and factory’s gamer-forum apps offer an online message board where mobile gamers can recruit co-players and exchange tips and tricks that help them advance their play within specific games.

20/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Service categories & AND COMICS & AND APPS

Source: Company data

Organization of the Smartphone Apps business

Sell Distribute in-app ads Sell ad spaces ad spaces

Prov ide services Provide services Receive ad fees Receive ad fees

Ad fees Prov ide Prov ide Operate Consulting Sell Sell services services apps services ad spaces ad spaces and factory and Prov ide

Customers (users) Customers materials agencies, other Ad Customers (advertisers) Customers Platform operators Partners Partners

Distribute Receive Receive Receive profits consulting ad fees ad fees fees Source: Shared Research based on company data

Manga apps (&AND COMICS) and factory offers a number of smartphone manga apps developed with other companies: Manga UP!, developed with Square Enix Co., Ltd. (TSE1: 9684); Manga Park, developed with Hakusensha, Inc.; Manga Mee, developed with Shueisha Inc.; and Sunday Webry, developed by Shogakukan. The company provides these apps to smartphone users via distribution platforms such as the App Store (operated by Apple Inc.) and Google Play (operated by Google Inc.).

Since the apps are typically developed in cooperation with publishers, only content from these publishers is included, unlike general bookstore apps. On the other hand, these apps are characterized by their strength in targeting users and enticing them with each publisher’s unique content. The company’s idea is to control a number of manga apps, each with their own unique characteristics.

Other manga apps typically charge users per comic viewed (around JPY300–400 per title). By comparison, the manga apps and factory provides are basically free to read, in one-story units or chapters. (When not free, they are around JPY20 per story.) The strength of the company’s manga apps lies in its knowledge of how to boost MAUs and ARPU, such as through mixing past well-known titles and original works, ending manga installments at cliff hangers to encourage continued reading, mixing free and paid-for manga, and the level and method of charging.

21/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Unlike companies simply focused on app development, and factory has in-house capabilities in planning, development, operations, analysis, improvement, and marketing. As such, it is able to provide a one-stop service to publishers, through which it can bring plans to fruition in a short amount of time. Manga apps (including “other manga-related apps”) accounted for 83.4% of sales in FY08/20.

Business model for manga apps The company receives both advertising revenue (obtained through ad networks*6 when users click on in-app advertising banners; there are also reward ads, also known as results-based ads) and fee revenue (download fees from the sale of e-comics) from the manga apps it develops and provides. Advertising is delivered primarily via ad networks, so the volume of ad placements across the ad networks as a whole have an impact on the company’s ARPU from in-app ads. The company only conducts initial app development in some cases, so sales generated through app development are not a leading indicator of MAU increase. and factory also provides consulting through which it furnishes support related to monetization through advertising, distribution formats, and operation procedures, as well as KPI and market analysis services. However, the company’s consulting is primarily significant as a gateway toward increasing the number of apps the company operates, and only directly contributes to earnings on a small scale.

*6 An ad network is an arrangement in which multiple advertising media (such as websites, social media, blogs, etc.) are bundled together to create an ad distribution network. It allows advertisers to place ads across multiple publishers without having to deal with each publisher individually.

The company’s main costs are expenses paid to app developers and advertising expenses associated with attracting new users. Sometimes, the company prioritizes spending during the initial implementation of apps and in some instances, in order to attract new users, it will pay advertising expenses equivalent to 100% of the preceding month’s income from the manga apps listed below for a specified period while keeping an eye on various key performance indicators (KPIs). The KPIs the company watches are cost per install (CPI), organic user acquisition rate (influx of users who discover the app due to its ranking), and various factors related to MAUs and ARPU (retention rate, charging rate, ad price, charging rate-to-sales and advertising-to-sales ratios). Both the company and the publisher pay advertising costs, which, when combined, amount to about three times as much as the amount the company pays.

In Q2 FY08/21, MAUs numbered 10.54mn people (+46.4% YoY). Despite being a latecomer to the business, launching manga apps first in January 2017, the company says its research shows it ranks first in the industry in terms of MAUs. ARPU during that period (revenue per month per MAU: based on the company’s share of net revenue after deducting platform fees and the share for publishers) was JPY20 (-14.7% YoY).

In November 2018, the company began collaborating with Shueisha Inc., launching a manga app called Manga Mee. Shueisha is a venerated member of Japan’s comics culture, having first published Ribon (a manga for young girls) in 1955. In December 2018, and factory began operating a manga app with Beaglee Inc. (TSE1: 3981). In August 2019, the company completely overhauled Sunday Webry through a business tie-up with Shogakukan Inc. The company added three manga apps in FY08/20: Mecha Comic Daily Serial Manga (Amutus), Young Jump! (Shueisha), and Manga TOP (Nihon Bungeisha).

The company’s manga apps publish a large volume of original manga content that is not published anywhere else.

Manga app ARPU typically rises to a certain level, but is difficult to increase beyond that level. Consequently, increases in MAUs are important in terms of securing sales growth. The company offers manga apps that are unique from one another (in terms of genre and reader attributes), thereby establishing a structure that minimizes the risk of cannibalization between different manga apps. Accordingly, new manga app releases are leading to increases in MAUs.

22/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

and factory’s manga apps Collaboration partner Notes App Launch date Key lineup

Square Enix Holdings (TSE1: 9684) Manga UP! (Jan. 2017) Monthly Shonen Gangan (Boys' comics) Co., Ltd. Monthly Big Gangan (Youth comics) Monthly Gangan Joker (Youth comics) Young Gangan (Youth comics) Monthly Gfantasy (Women and youth comics) + original content Hakusensha Co., Ltd. (Unlisted) Manga Park (Aug. 2017) Hana to Yume (Girls comics) LaLa (Girls comics) MELODY (Girls comics) Young Animal (Youth comics) Le Paradis (Romance comics) + original content Shueisha Inc. (Unlisted) Manga Mee (Nov. 2018) RIBON (Girls comics) Margaret (Girls comics) BETSUMA (Girls comics) Cocohana (Comics for female adults) Cookie (Girls comics) + original content Shogakukan Inc. (Unlisted) Sunday Web (Aug. 2019) Weekly Shonen Sunday (Boys' comics) Every Get The Sun! (Boys' comics) Gekkan Sunday GX (Youth comics) + original content Nihon Bungeisha Co., Ltd. (Unlisted) Manga TOP (Nov. 2019) Manga Goraku (Youth comics) Comic Heaven (Youth comics) Web Goraku (Youth comics) + original content Shueisha Inc. (Unlisted) Young Jump! (Apr. 2020) Weekly Young Jump (Youth comics) Ultra Jump (Youth comics) Grand Jump (Youth comics) Tonarino Young Jump (Youth comics) Dash-X Comic (Youth comics) + original content Amutus Corporation (a subsidiary of Mecha Comic (May 2020) Over 45,000 free episodes (one of the largest Infocom Corp. Daily Serial lineups in Japan) at the time of release (one of [TSE1: 4348]) Manga app the biggest among free comic apps) + original content Source: Shared Research based on company data

ARPU by quarter for manga apps

FY2017 FY2018 FY2019 FY2020 FY2021 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q 4 Q1 Q2

Source: Shared Research based on company data Note: Figures are indexed with ARPU for Manga UP! in March 2017 set at a value of “100.” ARPU figures for dates after March 2017 indicate simple averages for multiple apps.

23/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Manga app MAUs and ARPU by quarter FY08/19 FY08/20 FY08/21 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Monthly active users (MAU; mn) 2.79 3.62 4.30 5.32 6.41 7.20 9.06 9.94 10.26 10.54 YoY 158.3% 141.3% 110.8% 123.5% 129.7% 98.9% 110.7% 86.8% 60.1% 46.4% QoQ 17.2% 29.7% 18.8% 23.7% 20.5% 12.3% 25.8% 9.7% 3.2% 2.7% ARPU (Monthly sales / MAU; JPY) 25 27 26 24 22 23 21 21 19 20 YoY 33.9% 32.0% 18.6% -6.0% -14.4% -13.2% -19.1% -12.3% -14.2% -14.7% QoQ 0.6% 7.0% -3.7% -9.3% -8.4% 8.5% -10.3% -1.7% -10.4% 7.9% Source: Shared Research based on company data Note: MAU figures are average values for each quarter.

Manga apps business environment The paper-based manga market has continued to shrink, but in recent years, growth of the e-manga market has exceeded the rate of contraction of the paper-based manga market, and in a broad sense, the manga market as a whole is growing. In general, all players in the e-manga market are benefitting from growth of the e-manga market, but in the case of and factory, growth in MAUs of its apps is outstripping average growth of the market.

Manga is generally read for leisure, so it is in competition with other forms of entertainment for leisure time. With the spread of smartphones, though, manga can now be enjoyed even when time is short, and the company has been devising methods to encourage use of its apps even for a short period of time, such as by further dividing up manga apps instalments.

Manga UP! A smartphone manga app developed with Square Enix Co., Ltd. and launched on January 7, 2017. In addition to content from the manga magazine Gangan, the app distributes original Manga UP! content.

Features

Square Enix’s popular manga lineup: Serial publication of the company’s manga magazines, such as Monthly Shonen Gangan ▷ for boys, Young Gangan for young men, and Monthly Gangan JOKER, as well as original works and other companies’ titles. Usually contains more than 100 works and is updated daily. Free to use: Under this consumption pattern, users are allocated “manga points” (MPs), which indicate how much content ▷ they may view free-of-charge. The balance is automatically refilled to a maximum of 80 MPs twice each day, at 8:00 a.m. and

8:00 p.m. (Generally, 20 MPs are required to view one chapter, so a user could view up to eight chapters per day for free.) In addition to MPs, users can earn MP+ points or buy Cs (coins)*8. MP+ points are obtained when users view commercial content, respond to surveys, or register and apply for affiliated companies’ services. The number of MP+ points that can be accrued is

unlimited. Coins are used to make in-app purchases. An equivalent number of any of these types of points (20 MPs, 20 MP+ points, or 20 Cs) is needed to view one chapter, and exhausted points are subtracted in the same order (MPs first, then MP+ points, then and Cs). Some leading titles require MP+ points or Cs (cannot be viewed with MPs).

*8120 coins = JPY120; 240 coins (plus 10 MP+ for free) = JPY240; 360 coins (plus 20 MP+ for free) = JPY360

Manga Park A smartphone manga app developed with Hakusensha, Inc. (a Shueisha Inc. affiliate) and launched on August 2, 2017. For the first time in the history of manga apps, Manga Park offers audio content performed by voice actors.

Features

Hakusensha’s popular manga lineup: In addition to content from the manga magazines Young Animal*, for young men, and ▷ Hana to Yume, for girls, the app distributes original Manga Park content. Free to use: Under this consumption system, users are allocated FREE Coins, which indicate how much content they may view ▷ free-of-charge. The balance is automatically refilled to a maximum of 80 coins twice each day, at 6:00 a.m. and 9:00 p.m.

24/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

(Generally, 20 coins are required to view one chapter, so a user could view up to eight chapter per day for free.) In addition to FREE Coins, Bonus Coins and, simply, Coins are available. Bonus coins can be obtained by registering for other company services or installing certain apps, while Coins*9 are points that can be bought and used for in-app purchases. An equivalent number of any of these types of coins (20 FREE Coins, 20 Bonus Coins, or 20 Coins) is needed to view one chapter, and spent coins are subtracted in the same order (FREE Coins first, then Bonus Coins, and then Coins). Some leading titles require Bonus Coins or Coins (cannot be viewed with FREE Coins).

*9120 coins = JPY120; 240 coins = JPY240; 360 coins = JPY360

Other content: In addition to manga, the app offers audio content performed by voice actors and videos of pop idols. ▷

Manga Mee The company developed this free manga app together with Shueisha Inc. and launched it on November 1, 2018. This app provides Shueisha’s titles for girls and young women, including magazines Ribon, Margaret, Bessatsu Margaret, Cocohana, Cookie, The Margaret, and Monthly office YOU. The app also enables users to view original content and popular completed works that change daily. A number of projects are underway on the app to freshen up content, such as a special fan comic using the Chibi Maruko-chan character and a project that involves re-releasing past manga in color versions. The company has even created a new prize for popular new content.

Features

Shueisha’s popular manga catalog: Shueisha is one of Japan’s longest-selling comic publishers, having launched Ribon more ▷ than 60 years ago, in 1955. Users of the app have access to this catalog, which included some 90 works at the time the app was launched. Free to use: Content is distributed per chapter rather than per volume. The app adopts a “wait-to-read” formula, in which free ▷ app users need to wait 23 hours until they are issued a ticket to read the next installment. Users can also purchase coins that enable them to continue reading as much as they wish. Magazine subscription: Subscribers get access to the online editions of manga magazines, which are available on the app the ▷ day the print editions go on sale. Readers can avoid the hassle of carrying around printed magazines or forgetting to purchase the material. UI design: Two types of manga readers are available, allowing users to read horizontally or vertically. ▷

Sunday Webry In August 2019, the company completely overhauled Sunday Webry through a business tie-up with Shogakukan and now operates the app. The app carries manga from three publications (Weekly Shonen Sunday, Gessan, and Monthly Sunday Gene-X) in addition to original content.

Features

Free to use: Users can use three types of items to gain access to manga: tickets, coins, and points. It costs one ticket to view ▷ one chapter of manga. Tickets (and viewable manga works) refresh every 23 hours. All works can be viewed for the cost of one ticket per chapter. Users can also purchase individual volumes of manga that contain multiple chapters. Users can read popular manga serialized in publications such as Weekly Shonen Sunday, in addition to exclusive Sunday Webry ▷ originals. Users also have the option of subscribing to Weekly Shonen Sunday, Gessan, and Monthly Sunday Gene-X.

25/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Manga TOP A smartphone manga app developed through collaboration with Nihon Bungeisha Co., Ltd. and launched in November 2019. Manga TOP carries popular titles, including Manga Goraku, Comic Heaven, and Web Goraku. In March 2021, major e-book agent Media Do Co., Ltd. (TSE1: 3678) acquired all shares in Nihon Bungeisha Co., Ltd., a partner ▷ with whom the company collaborates to provide the Manga TOP app. As of April 2021, this acquisition has had no impact on the company s businesses, and the company plans to continue jointly operating Manga TOP through collaboration with Nihon ’ Bungeisha.

Features

Basically free to use: Grants points that are worth three story units at 7:00 a.m., 12:00 p.m., and 9:00 p.m., allowing users to ▷ read manga while commuting, taking lunch breaks, and eating dinner. Users can read more manga by viewing advertisements.

Offers a large amount of content for relatively older males, including titles of the horror, suspense, and outlaw genres. ▷

Young Jump! In addition to the latest serials of manga magazines including Weekly Young Jump, Ultra Jump, Grand Jump, Tonari no Young Jump, and Dash X Comics, Young Jump! distributes popular past (completed) works as well.

Features

Basically free to use: Users can view manga series one story unit at a time with free tickets distributed for each title. However, ▷ some content such as new releases of Weekly Young Jump cannot be viewed free of charge. Since “Young Jump!” is also the name of a manga magazine that targets young adult men, the content provided through the ▷ Young Jump! app mostly targets relatively older users.

Mecha Comic Daily Serial Manga app Mecha Comic Daily Serial Manga app is a general bookstore app providing content from multiple well-known publishers, including Shueisha, Kodansha, and Kadokawa Shoten.

Features

The app delivers one story from each work daily for free. ▷ In total, users can read more than 40,000 stories from about 2,000 works at no cost. ▷

Collaboration with multiple large publishers The value chain for e-comics includes the author, production company, publisher, e-comics agent, and e-comics store. and factory has adopted a strategy of working with multiple large publishers: Square Enix Co., Ltd. (TSE1: 9684), Hakusensha, Inc. (an affiliate of Shueisha Inc.), Shueisha Inc., and Shogakukan. The company collaborates with these publishers to develop manga apps for smartphones, operating a separate app for each publisher. For this reason, and factory differs from many e-comics stores in that it does not need to source individual content via agents.

The company’s strategy in manga apps is to form alliances with large publishers rather than aggressively develop and launch original titles that could either be very successful or very unsuccessful. and factory works with large publishers, providing the popular titles they own. The two sides share the development and promotional risks.

Distribution infrastructure

As of April 2020, the company outsources the development and operation of many manga app servers to Link-U inc. (TSE Mothers: 4446). Link-U provides original servers that are uniquely designed for individual services. The company uses servers

26/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

from Link-U because it collaborated with Link-U when launching joint manga app development with Square Enix. Publishers do not direct the company in how it constructs its distribution infrastructure. Rather, the company mostly considers these decisions independently. The company set up its first in-house server for its Young Jump! app.

Gamer-forum apps for social media games (&AND APPS) The company develops and operates official strategy apps as well as the Saikyo Series (a series of gamer-forum apps), which provides online forums for popular social media games run by other companies through which app users can recruit co-players and discuss tips and tricks to advance their play. and factory distributes apps via Apple Inc.’s App Store and Google Inc.’s Google Play. In FY08/20, this category generated 6.6% of sales. The company ceased releasing disclosures related to its Saikyo Series in Q2 FY08/21 because the series’ impact on results declined.

27/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

IoT business (FY08/20 sales of JPY337mn, operating loss of JPY187mn)

In this segment, the company plans, develops, and operates the &AND HOSTEL brand of smart hostels. Also, in this segment, and factory provides IoT solutions for lodging facilities, including innto (a property management system), tabii (a tablet-based service), and totono (a tenant communication app).

Business model for &AND HOSTEL smart hostels The company plans, develops, and operates the &AND HOSTEL brand of smart hostel facilities, which enable guests to experience IoT devices. These smart hostels use the company’s platform app (called &IoT) and IoT to provide comfortable guest environments. The company had opened eight such hostels as of end-March 2021.

&AND HOSTEL breaks down into two business categories: The first involves planning and developing facilities on property ▷ owned by other parties (seven locations planned as of end-2018). In the first instance, the company receives compensation for consulting, real estate brokerage and other services. In the second, and factory earns gains on the sale of real estate. The company runs the hostels itself in both cases and receives compensation from hostel owners in return. Hostels are dormitory-style (shared room accommodation facilities). Prior to the COVID-19 pandemic, accommodation prices ▷ did not vary significantly by season and inbound tourists accounted for 60–70% of guests, who were mostly male. However, since the outbreak of COVID-19, inbound tourism has essentially disappeared, so the bulk of guests are Japanese business travelers and young travelers. Accommodation prices have also dropped substantially due to low occupancy rates in the accommodation industry as a whole. The IoT business was severely impacted by delays and cancellations of in-house development projects due to the COVID-19 ▷ pandemic, as the previous target customer base for the &AND HOSTEL smart hostels were inbound tourists. In light of the current environment, the company decided it would not be starting any new in-house development projects of &AND HOSTEL properties. It would rebrand the hostels and switch its target from inbound tourists to domestic customers, primarily millennials highly receptive to information. In addition to being a hostel offering an IoT-enabled lifestyle experience, the company will redefine its concept to also provide a wellness experience that lightens the body and spirit. It aims to become a hostel that people go to for the accommodation experience. Costs associated with rebranding are minimal, but the company is incurring them. In accordance with existing agreements, the economic effects of these rebranding efforts will be measured and processed as fluctuations from normal occupancy rates and average customer spending.

28/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Exterior of &AND HOSTEL AKIHABARA &AND HOSTEL KURAMAE WEST (post-renovation internal view)

Source: and factory website

&AND HOSTEL locations (as of May 31, 2021)

Facility Location Opened Capacity No. of rooms ＆AND HOSTEL AKIHABARA Chiyoda-ku, Tokyo Jan 2018 54 12 rooms (Three minutes' walk from the nearest station) + 30 beds ＆AND HOSTEL ASAKUSA Taito-ku, Tokyo Feb 2019 56 14 rooms (Seven minutes' walk from the nearest station) + 28 beds ＆AND HOSTEL HOMMACHI EAST Chuo-ku, Osaka Aug 2019 150 66 rooms (Five minutes' walk from the nearest station) ＆AND HOSTEL KURAMAE WEST Taito-ku, Tokyo Oct 2019 58 17 rooms (Six minutes' walk from the nearest station) ＆AND HOSTEL SHINSAIBASHI EAST Chuo-ku, Osaka Nov 2019 150 63 rooms (Six minutes' walk from the nearest station) ＆AND HOSTEL MINAMISENJU Arakawa-ku, Tokyo Nov 2019 120 53 rooms (Six minutes' walk from the nearest station) &AND HOSTEL NAMBA Naniwa-ku, Osaka Feb 2020 138 62 rooms (Eight minutes' walk from the nearest station) &AND HOSTEL KAPPABASHI Taito-ku, Tokyo Mar 2021 60 30 rooms (Six minutes' walk from the nearest station) Source: Shared Research based on company data

Business model for innto innto is a property management system* for smart hostels that and factory developed jointly with open innovation partner Almex Inc., a wholly owned subsidiary of USEN-NEXT Holdings (TSE1: 9418). As of end-February 2021, the system had been installed at 292 locations on a contract basis. innto enables the centralized management of information related to guest rooms: reservations, room rates, available rooms, and fees.

To date, most systems of this sort have been aimed at medium- to large-scale facilities. Such systems were ill-suited to smaller ▷ properties because startup costs were high and the time between initial contract and the start of service was long. Aimed at simple lodging facilities, innto is cloud-based, can be launched quickly, and has low initial costs (no launch costs) and running

costs (monthly usage fees starting at JPY199). The service also draws on and factory’s UI/UX design expertise, which the company says makes operations intuitive and convenient.

29/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

The company shares revenue with Almex on system sales and also receives recurring revenue from system maintenance and ▷ operation. According to the company, the business was profitable as of August 2020.

* The broad definition refers to management systems that cover entire hotels or other facilities. In a narrow sense, a property management system is used for rooms only. innto, which is used only for rooms, aims to make the operation of lodging facilities more efficient and save resources. Its principal functions are reservation management, scheduling, room status monitoring, guest management, ledger and report generation, accommodation plan and fee scheduling, and master planning.

Comparison of property management systems Company System Description and factory innto and factory developed this property management system with an open innovation partner (Almex Inc., a wholly owned subsidiary of USEN-NEXT Holdings). Aimed at simple lodging facilities, this system enables the centralized management of information related to reservations, selling prices, room rates, availability, and fee. Almex Inc. Wincal This portal system is provided by Almex Inc., a wholly owned subsidiary of USEN-NEXT Holdings. Designed for use at business hotels and other hotels where lodging is the focus, the system has a simple interface and is designed to reduce the amount of work for front desk staff. The system is available in on-premise and cloud-based versions. NEC NEHOPS This cloud-based hotel system has a market share of around 70%. Use ranges widely, from lodging-focused hotels to large city hotels. The company has installed the system in numerous large-scale city hotels and nationwide chains of hotels with more than 300 locations. Fujitsu GLOVIA This cloud-based hotel system, provided by Fujitsu, has the top share of the market for simple, non-customized, multitenant cloud-based property management systems. TAP Co., Ltd. TAP This system has a high share of the market for resort hotels, its forte. Oracle Corporation Japan OPERA This cloud-based hotel system has a top share of the market at foreign-owned hotels and is installed at more than 40,000 locations worldwide.

Source: Shared Research based on data from the company and the Hotelier website (https: //www.hotelier.jp/support/pms.html)

Business model for tabii tabii is a service that and factory developed and is based around tablet devices placed in hotel guest rooms (5,181 tabii tablets on a contract basis as of end-February 2021). The tablets not only offer information specific to the facility but also information on local restaurants and tourist spots, as well as a wide range of selectable entertainment content (including music and comedy videos). According to the company, this service, designed to enhance the guest’s travel experience, raises the perceived room value for the hotel’s diverse customer bases.

Facilities that use tabii save costs by making service guides, terms and conditions, and other documents available electronically. ▷ The company explains that tabii-based help screens and Q&A chatbots address many guest questions, reducing the need for guests to telephone staff or request personal assistance. As a result, hotels can increase operating efficiency without boosting running costs. As tabii uses an advertising-based model, lodging facilities pay no monthly fees, and the service is available free of charge to ▷ guests. Previously, the company’s strategy was to prioritize PVs and unique user growth, then monetize the business. However, it shifted strategies to focus on monetization through PR advertising, where profits are not dependent on the number of PVs or unique users. Specifically, guests will watch a video ad on a tabii device in their room (recognize) and try out the product in the video ad (experience). Afterwards, they will be asked for feedback (share), and the company will plan and execute a PR and media strategy not limited to tabii devices (expand). The strategy uses the tabii device as a hook for proposal-based advertising services centered on the recognize-experience-share-expand cycle. Revenue is set per project, rather than on a contingency fee model linked to the number of products sold. Since tabii is not a cloud-based service, once the company receives an order, it procures tablets, adjusts settings, customizes ▷ the tablets, and provides them to the lodging facility. For this reason, it typically takes one or two months between receipt of a contract and booking of sales.

30/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Business model of tenant communication app “totono” The company entered the rental property business. In this field, the company makes use of the rental network of its capital and business alliance partner Sumasapo Co., Ltd., and leverages expertise it has cultivated in the accommodation business. The app allows tenants to contact the company managing their property in real time, and was released in August 2020. The company plans for the first release to include an FAQ section in addition to chat, application, message board, and optional services functions. Over the medium- to long-term, the company aims to monetize by partnering with external services such as utility and insurance companies, as well as by integrating smart lock, security, and rent payment functions. It plans to kick off the business by serving the approximately 20,000 units managed by Sumasapo, and four property management companies have decided to roll out the app to more than 80,000 tenants as of April 2021.

Tenants will be charged a usage fee for the app as part of the property’s management fee. Revenue will be shared by and ▷ factory and Sumasapo (or split three ways in the case of a third-party management company). and factory will develop, operate, and plan the app while Sumasapo will be responsible for sales. The rental property management market is large and earnings grow with the number of properties under management. The ▷ company has accordingly high expectations for this business. The property management market is a long tail market where the top five players (led by Daito Corporation [TSE1: 1878] with approximately 1.13mn units, Sekisui House [TSE1: 1928] with

0.64mn units, and three other players with just under 0.60mn units) account for 20% of the market, while small and medium-sized local management companies (ranked sixth and below with under 0.25mn units; over 1,000 companies including small companies) account for 80% of the market (2020 Ranking of Units Under Management, Zenkoku Chintai Jutaku Shimbun). Small and medium-sized management companies lack the resources to develop and operate their own systems, so the company is targeting mid-tier management companies, which form the long tail market. According to the company, there are no players with high market share in tenant apps as of October 2020.

Advertising Agency business (FY08/20 sales of JPY79mn)

In this segment, and factory mainly conducts an advertising agency business, distributing ads to smartphone apps and media operated by other companies. The internet advertising agency services business was previously included under Other businesses, but it became an independent reporting segment from Q2 FY08/21 due to its increased quantitative importance in terms of accounting.

31/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Market and value chain Japan ’s e-book market Market scale and composition E-book market scale In FY2019, the market for e-book publishing was estimated to be worth JPY375.0bn, up 20.1% YoY (2020 survey on the e-book business, by Impress Corporation).

The FY2019 e-books market turned out to be larger than the previous estimate of JPY332.0bn. Impress speculates that the ▷ growing public attention to the issue of internet piracy may have helped raise awareness of e-books, leading to an increase in readership and higher average user fees. The FY2020 projection was also significantly upgraded to JPY444.2bn (from JPY393.5bn previously). This is likely a reflection of shelter-in-place demand resulting from the COVID-19 pandemic. Japan’s e-book publishing market is set to keep growing in FY2020 onward, although the pace of growth may level off. By ▷ FY2024, Impress expects the e-book publishing market to have a value of around JPY566.9bn. This survey projects a value of JPY539.8bn for the e-book publishing market in FY2023. This figure represents a 24.7% upward ▷ revision from JPY433.0bn in its 2019 survey.

Survey on the e-book business, by Impress Corporation This survey does not include e-magazines within e-books; “e-publishing” includes both e-magazines and e-books.

E-book market scale

FY2020 FY2021 FY2022 FY2023 FY2024 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 (JPYbn) Forecast Forecast Forecast Forecast Forecast e-books 62.9 72.9 93.6 126.6 158.4 197.6 224.1 282.6 347.3 e-magazines 2.2 3.9 7.7 14.5 24.2 30.2 31.5 29.6 27.7 Total 65.1 76.8 101.3 141.1 182.6 227.8 255.6 312.2 375.0 444.2 481.2 512.4 539.8 566.9 YoY - 18.0% 31.9% 39.3% 29.4% 24.8% 12.2% 22.1% 20.1% 18.5% 8.3% 6.5% 5.3% 5.0% Source: Shared Research, based on “Results of 2020 Survey on E-Books” by Impress Corporation

Manga as a percentage of e-books Of the FY2019 e-book market, manga accounted for JPY298.9bn (86.1% market share), with text-based and other content (e.g., literature, practical guides, and photo collections) accounting for JPY48.4bn (13.9%), according to a 2020 survey on the e-book business by Impress Corporation. Media Do Holdings thinks the market for text-based e-book content will increase as people who are more accustomed to reading text electronically grow.

Manga as a percentage of e-books

(JPYbn) FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Comics 51.4 57.4 73.1 102.4 127.7 161.7 184.5 238.7 298.9 Text-based 11.5 15.5 20.5 24.2 30.8 35.9 39.6 43.9 48.4 Total 62.9 72.9 93.6 126.6 158.5 197.6 224.1 282.6 347.3 Comic rat io 81.7% 78.7% 78.1% 80.9% 80.6% 81.8% 82.3% 84.5% 86.1% Source: Shared Research, based on Results of 2020 Survey on E-Books by Impress Corporation “ ”

Size of market for manga (including printed manga) In 2014, the manga market had a total value of JPY313.8bn, with paper manga making up JPY225.6bn (72% market share) and e-manga JPY88.2bn (28%). In 2019, the market for paper manga had a value of JPY166.5bn (39.1% market share), and the e-manga market size was JPY259.3bn (60.9%) according to Research Institute for Publications.

The company summarizes that the growing popularity of smartphones has increased the number of reader contact points and ▷ prompted growth in the e-manga market. Also, the overall market for manga is increasing, and e-manga demand is replacing demand for paper manga, to some degree.

32/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

End-customers (readers) Individuals are the end-customers (readers) for e-books and e-book apps. Usage is high among people aged 10–39 (2020 survey on the e-book business, by Impress Corporation). ▷ People aged 10–19 are less likely than other groups to use paid content, but access to free content is high (ditto), likely ▷ because this age group has low disposable income.

E-book consumption by gender and age

10s 20s 30s 40s 50s 60s or older 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 Paid 14.6% 20.6% 24.7% 25.2% 27.0% 27.2% 22.0% 22.6% 18.5% 19.2% 14.9% 15.0% Male Free 30.3% 30.8% 26.8% 28.2% 25.4% 27.6% 24.3% 22.6% 19.5% 20.9% 17.1% 19.7% Paid 14.3% 14.5% 20.6% 21.4% 25.1% 23.6% 19.9% 18.8% 13.1% 15.3% 9.9% 10.3% Female Free 36.2% 38.9% 31.6% 29.2% 25.1% 25.0% 21.7% 25.0% 21.1% 22.3% 13.5% 15.8% Source: Shared Research, based on “Results of 2020 Survey on E-Books” by Impress Corporation

Internet advertising industry

The following is an overview of the online advertising market in Japan based on a survey by Dentsu Inc. (TSE1: 4324) titled Advertising Expenditures in Japan and a survey by Dentsu and its group companies D2C Inc., Cyber Communications Inc., and Dentsu Digital Inc. titled Advertising Expenditures in Japan: Detailed Analysis of Expenditures on Internet Advertising Media.

Total advertising expenditures (including offline advertising) have been in the range of 1.14–1.30% of nominal GDP since ▷ 2005, suggesting the level of total advertising expenses is affected by economic trends. The ratio of online advertising expenditures to total advertising expenditures is increasing year by year, reaching about 30% in ▷ 2019. Total advertising expenditures only grow by a few percent per year (exception being 2020 that was affected by the COVID-19 pandemic), which seems to suggest that offline advertising expenditures are being replaced by online advertising expenditures. In 2020, online advertising expenditures were JPY2.22tn, closing on those for four mass media (newspapers, magazines, radio, and TV), at JPY2.25tn. A new category of advertising expenditure was created in 2019: ad expenditures in e-commerce platforms dedicated to sale of ▷ goods (advertising expenditures invested in goods-retailing e-commerce platforms by businesses opening stores on those platforms; it does not indicate overall online advertising expenditures aimed at sales promotion in the e-commerce domain). This had the effect of making statistical growth in online advertising in 2019 slightly larger than it would otherwise be. In 2019, online advertising expenditures exceeded TV media advertising expenditures for the first time (even excluding the ▷ impact of the newly established product sales EC platform ad expenditures category). In 2020, total advertising spending fell sharply (-11.2% YoY) as fewer ads were placed during the COVID-19 pandemic. However, internet advertising bounced back quickly and maintained positive growth (+5.9% YoY) despite some slowdown. Online advertising expenditures are expected to increase by another 7.7% in 2021. Programmatic advertising accounts for the largest share of online advertising media expenditure, followed by social advertising, ▷ which accounts for just over 30% of online advertising, and video advertising, which accounts for just over 20%.

33/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Online advertising expenditures and their breakdown

(JPYbn) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F Total advertising expenditures 5,891.3 5,976.2 6,152.2 6,171.0 6,288.0 6,390.7 6,530.0 6,938.1 6,159.4 YoY 3.2% 1.4% 2.9% 0.3% 1.9% 1.6% 2.2% 6.2% -11.2% Internet advertising expenditures 868.0 938.1 1,051.9 1,159.4 1,310.0 1,509.4 1,758.9 2,104.8 2,229.0 % of total advertising expenditures 14.7% 15.7% 17.1% 18.8% 20.8% 23.6% 26.9% 30.3% 36.2% YoY 7.7% 8.1% 12.1% 10.2% 13.0% 15.2% 16.5% 19.7% 5.9% Medium expenditures 662.9 720.3 824.5 919.4 1,037.8 1,220.6 1,448.0 1,663.0 1,756.7 1,891.2 Product sales EC platform ad expenditures 106.4 132.1 Production costs 205.1 217.8 227.4 240.0 272.2 288.8 310.9 335.4 340.2 Transaction Performance-based 339.1 412.2 510.6 622.6 738.3 940.0 1,151.8 1,326.7 1,455.8 method Reserved 153.8 175.8 197.1 231.4 202.4 Affiliate 145.7 104.8 99.1 104.9 98.5 Dev ice Mobile 80.0 207.3 345.0 497.9 647.6 831.7 1,018.1 Desktop 582.9 513.0 479.5 421.5 390.2 388.9 429.9 Ad Display 498.8 563.8 554.4 573.3 category Paid search 483.1 570.8 668.3 678.7 Video 29.0 51.6 86.9 115.5 202.7 318.4 386.2 426.3 Instream 180.0 207.2 Outstream 206.3 219.1 Affiliate 104.9 99.0 104.9 98.5 Other 18.3 11.7 17.0 20.0 Social Social media ads 389.0 489.9 568.7 Social networking 228.0 248.8 Video sharing 113.9 158.5 Other 148.0 161.5 Other than social ads 1,059.0 1,173.1 1,188.0 Source: Shared Research based on Dentsu Group’s Advertising Expenditures in Japan and Advertising Expenditures in Japan: Detailed Analysis of Expenditures on Internet Advertising Media

Transaction methods Programmatic advertising: Paid search ads and bidding through digital platforms (tools) and ad networks. Reservation-based advertising: Pure ads and tie-up ads that are sold to advertisers directly or via agencies or media representatives, or those that are purchased through digital platforms (tools) and ad networks via non-bid (fixed price) transactions. Affiliate advertising: Ads in which advertisers reward the hosting media and browsing user when the user performs a preset action after viewing an online advertisement.

Types of advertisement Display ads: Text- and image-based ads that are displayed in frames or banners on websites or apps. Paid search ads: Ads that are displayed on search results pages when users query specific keywords. Video ads: Ads in video file format (video/audio). Affiliate ads: Ads in which advertisers reward the hosting media and browsing user when the user performs a preset action after viewing an online advertisement. Other online advertising: Online advertising in formats other than the above. Includes email ads, audio ads, and others.

Social advertising Advertisements deployed on social media* services *Media (platforms) that provide services for sharing and interaction between users and whose content comprises information posted by users (Source: JIAA Internet Advertising Basic Glossary FY2019) Examples of social media: Social networking services, blog services, mini (micro) blogs, video sharing sites, social bookmarking, electronic bulletin boards

Video advertising Video (video/audio) format ads. Includes following. In-stream ads: Video ads that play before, during, or after video content. Out-stream ads: Video ads that play in non-video environments such as display ad spaces. Includes in-feed video ads that play in online advertising spaces or article content screens.

Trends in online advertising Transition to mobile The Dentsu survey stopped disclosing the advertising expenditure breakdown by device at the end of 2018, but as of 2018, more than two-thirds of online advertising media expenditures were mobile advertising. We understand mobile advertising will continue to drive the whole as long as there are no major changes in consumer lifestyles.

34/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Video advertising In 2020, video ads accounted for over 20% (JPY386.2bn) of internet advertising media spending. Dentsu’s report “2020 Advertising Expenditures in Japan: Detailed Analysis of Expenditures on Internet Advertising Media” included data on video ad spending for the first time in 2020. As of 2020, 46.6% were in-stream ads and 53.4% out-stream ads. Dentsu forecasts 10.4% growth in video ads overall in 2021, including 15.1% YoY increase for in-stream ads and 6.2% YoY rise for out-stream ads.

Social advertising The Dentsu survey (Advertising Expenditures in Japan: Detailed Analysis of Expenditures on Internet Advertising Media) started providing information on social advertising and a breakdown of social advertising in 2019. Spending on social advertising, at JPY568.7bn, accounted for more than 30% of online advertising media expenditures in 2020.

Another survey, MIC Research Institute Ltd.’s “Current Status and Outlook of the Internet Advertising & Web Solutions Market ▷ FY2019,” estimates the market size in 2023 at JPY448.6bn (CAGR of 24% from FY2018). However, it should be noted that since this survey was announced in June 2020, it seems that the impact of the COVID-19 pandemic was not taken into consideration in the forecasts. Another survey (released on October 14, 2020) by CyberBuzz, Inc. (TSE Mothers: 7069) and Digital InFact, Inc., “Survey on ▷ Market Trends in Domestic Social Media Marketing,” forecasts the market at JPY1.0tn in 2025 (CAGR of roughly 15% versus the

2020 estimated size). This report factored in the impact from the COVID-19 pandemic. Note: Social ads included in the survey are those provided via YouTube, Facebook, Instagram, LINE, Twitter, and TikTok, and do not include those posted on blog sites. In 2019, the social ad market was already a force to be reckoned with. While forecasts vary depending on the research ▷ organization, timeframe, and methodology, a CAGR of roughly 10–20% appears to be in prospect until around 2023–2025.

The social advertising market

Market size 2015 2016 2017 2018 2019 2020 2021 2022 2023 (JPYbn) Act. Act. Act. Act. Est. Forecast Forecast Forecast Forecast Social media ad agency 34.0 61.4 114.3 154.0 214.3 260.0 307.4 361.5 448.6 YoY - 80.6% 86.2% 34.7% 39.2% 21.3% 18.2% 17.6% 24.1% Source: Shared Research based on MIC Research Institute Ltd.’s “Current Status and Outlook of the Internet Advertising & Web Solutions Market FY2019”

The social media advertising market (2018–2025)

Market size 2018 2019 2020 2021 2022 2023 2024 2025 (JPYbn) Act. Est. Forecast Forecast Forecast Forecast Forecast Forecast Social media ad agency 375.5 463.0 493.2 598.2 697.2 796.6 899.7 1,001.2 YoY - 23.3% 6.5% 21.3% 16.5% 14.3% 12.9% 11.3% Source: Shared Research based on CyberBuzz and Digital InFact survey

Long-term trends in advertising spending During the global financial crisis in 2009, despite total advertising spending falling by double digits, online advertising spending was able to barely maintain growth. As of 2020, a major difference from 2009 is that online advertising spending grew to account for over 30% of the total market. In 2020, total advertising spending fell sharply (-11.2% YoY) as fewer ads were placed during the COVID-19 pandemic. However, internet advertising bounced back quickly and maintained positive growth (+5.9% YoY) despite some slowdown.

35/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Long-term trends in advertising spending

(JPYbn) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total advertising expenditures 6,823.5 6,939.9 7,019.1 6,692.6 5,922.2 5,842.7 5,709.6 5,891.3 5,976.2 6,152.2 6,171.0 6,288.0 6,390.7 6,530.0 6,938.1 6,159.4 YoY 1.7% 1.1% -4.7% -11.5% -1.3% -2.3% 3.2% 1.4% 2.9% 0.3% 1.9% 1.6% 2.2% 6.2% -11.2% Traditional media 3,740.8 3,666.8 3,569.9 3,299.5 2,828.2 2,774.9 2,701.6 2,880.9 2,893.5 2,939.3 2,869.9 2,859.6 2,793.8 2,702.6 2,609.4 2,253.6 Newspapers 1,037.7 998.6 946.2 827.6 673.9 639.6 599.0 624.2 617.0 605.7 567.9 543.1 514.7 478.4 454.7 368.8 Magazines 484.2 477.7 458.5 407.8 303.4 273.3 254.2 255.1 249.9 250.0 244.3 222.3 202.3 184.1 167.5 122.3 Radio 177.8 174.4 167.1 154.9 137.0 129.9 124.7 124.6 124.3 127.2 125.4 128.5 129.0 127.8 126.0 106.6 Television 2,041.1 2,016.1 1,998.1 1,909.2 1,713.9 1,732.1 1,723.7 1,877.0 1,902.3 1,956.4 1,932.3 1,965.7 1,947.8 1,912.3 1,861.2 1,655.9 Terrestrial TV 2,041.1 2,016.1 1,998.1 1,909.2 1,713.9 1,732.1 1,723.7 1,775.7 1,791.3 1,834.7 1,808.8 1,837.4 1,817.8 1,784.8 1,734.5 1,538.6 Satellite media 101.3 111.0 121.7 123.5 128.3 130.0 127.5 126.7 117.3 Internet 377.7 482.6 600.3 698.3 706.9 774.7 806.2 868.0 938.1 1,051.9 1,159.4 1,310.0 1,509.4 1,758.9 2,104.8 2,229.0 % of total advertising expenditures 5.5% 7.0% 8.6% 10.4% 11.9% 13.3% 14.1% 14.7% 15.7% 17.1% 18.8% 20.8% 23.6% 26.9% 30.3% 36.2% YoY 27.8% 24.4% 16.3% 1.2% 9.6% 4.1% 7.7% 8.1% 12.1% 10.2% 13.0% 15.2% 16.5% 19.7% 5.9% Medium expenditures 280.8 363.0 459.1 537.3 544.8 607.7 618.9 662.9 720.3 824.5 919.4 1,037.8 1,220.6 1,448.0 1,663.0 1,756.7 Product sales EC platform ad expenditures 106.4 132.1 Production costs 96.9 119.6 141.2 161.0 162.1 167.0 187.3 205.1 217.8 227.4 240.0 272.2 288.8 310.9 335.4 340.2 Promotional media 2,656.3 2,736.1 2,788.6 2,627.2 2,316.2 2,214.7 2,112.7 2,142.4 2,144.6 2,161.0 2,141.7 2,118.4 2,087.5 2,068.5 2,223.9 1,676.8 Source: Shared Research based on Dentsu Group’s Advertising Expenditures in Japan and Advertising Expenditures in Japan: Detailed Analysis of Expenditures on Internet Advertising Media

IoT industry

According to data from Informa cited in the Ministry of Internal Affairs and Communications’ 2020 White Paper on Information and Communications in Japan, the number of IoT devices* connected to the internet is expected to rise from under 25.35bn in 2019 to over 34.83bn in 2022 (1.37x the 2019 figure). Due to the continuous progress of internet and sensor technologies, around the world a host of new items (such as consumer electronics, automobiles, buildings, and factories) are slated for connectivity, in addition to those that are already connected (such as PCs and smartphones). As of 2019, smartphones and other communication devices made up the largest share of IoT devices around the world. As this market is maturing, the authors of this white paper predict growth in this category will be relatively low. They anticipate sharp increases in the categories of “automobiles and transportation equipment,” due to the shift to IoT as connected cars become more common; in “healthcare” as the digital healthcare market expands; and in “industrial applications (factories, infrastructure, and logistics)” as the numbers of smart factories and smart cities increase.

* According to Informa’s definition, an IoT device is a device or sensor network terminal that has a unique IP address and can be connected to the internet.

IoT devices around the world

(bn units) 2015 2016 2017 2018 2019 2020 2021 2022 Forecast Forecast Forecast Automotive and aerospace 0.45 0.57 0.71 0.86 0.99 1.17 1.37 1.61 Medical 0.22 0.27 0.33 0.41 0.51 0.63 0.76 0.91 Industrial 2.64 3.20 3.76 4.40 5.39 6.48 7.73 9.27 Computer 2.13 2.22 2.24 2.23 2.23 2.23 2.23 2.29 Consumer 2.21 2.70 3.36 4.09 5.13 6.15 7.24 8.70 Communication 8.92 9.77 10.46 10.79 11.09 11.37 11.64 12.06 Total 16.56 18.73 20.87 22.78 25.35 28.04 30.98 34.83 YoY - 13.1% 11.4% 9.2% 11.3% 10.6% 10.5% 12.4% Source: Shared Research based on data from Informa from the 2020 White Paper on Information and Communications in Japan, Ministry of Internal Affairs and Communications

Hotel industry

According to the Ministry of Health, Labour and Welfare, 88,983 facilities provided accommodation to tourists as of March 31, 2020 (+3.9% YoY). Of this figure, 51,004 facilities were hotels or ryokan (Japanese-style inns; +3.0% YoY) and 37,308 fell under the simple lodging facility category (+5.2% YoY). The number of the latter (includes hostels) has been trending upward since 2015.

36/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Tourist accommodation in Japan

(facilit ies) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Ryokan and hotel 56,616 56,059 54,540 53,172 51,778 50,628 49,590 49,024 49,502 51,004 YoY - -1.0% -2.7% -2.5% -2.6% -2.2% -2.1% -1.1% 1.0% 3.0% Common lodging house 23,719 24,504 25,071 25,560 26,349 27,169 29,559 32,451 35,452 37,308 YoY - 3.3% 2.3% 2.0% 3.1% 3.1% 8.8% 9.8% 9.2% 5.2% Boarding house 752 839 801 787 771 722 693 675 663 671 YoY - 11.6% -4.5% -1.7% -2.0% -6.4% -4.0% -2.6% -1.8% 1.2% Total 81,087 81,404 80,412 79,519 78,898 78,519 79,842 82,150 85,617 88,983 YoY - 0.4% -1.2% -1.1% -0.8% -0.5% 1.7% 2.9% 4.2% 3.9% Source: Shared Research based on data from the 2019 Report on Public Health Administration and Services, Ministry of Health, Labour and Welfare Note: In accordance with revisions to the Hotel Business Act implemented on June 15, 2018, Hotels and ryokan have been combined under the Ryokan and Hotel category.

In 2020, there were 4.1mn overseas tourist arrivals in Japan (-87.1% YoY). Hotel occupancy rates had been trending upward, since bottoming out in 2011, as the number of overseas tourists to Japan has increased. However, in 2020, both the number of overseas tourists visiting Japan and hotel occupancy rates fell due to travel restrictions implemented in response to the COVID-19 pandemic and corresponding government requests asking citizens to remain indoors.

Number of international visitors to Japan (mn) and hotel occupancy rates (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Foreign t ravelers visit ing Japan (mn) 8.6 6.2 8.4 10.4 13.4 19.7 24.0 28.7 31.2 31.9 4.1 YoY - -27.9% 34.5% 24.1% 29.4% 47.1% 21.8% 19.4% 8.7% 2.2% -87.1% Occupancy (nationwide) 68.3% 62.3% 67.3% 69.5% 72.1% 74.2% 74.4% 75.3% 75.5% 75.4% 42.4% Occupancy (Tokyo) 80.6% 70.9% 80.0% 82.7% 84.2% 86.3% 83.3% 84.8% 84.5% 84.2% 34.8% Occupancy (Osaka) 72.7% 69.6% 73.9% 78.6% 83.2% 87.8% 85.2% 85.1% 80.7% 79.9% 31.7% Occupancy (Aichi) 65.0% 60.1% 67.0% 67.7% 74.1% 78.7% 76.6% 79.0% 77.7% 75.6% 38.4% Source: Shared Research based on Japan National Tourism Organization’s Foreign Tourists in Japan Statistics, and Ministry of Land, Infrastructure, Transport and Tourism, Accommodation Travel Survey

37/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Competitors Smartphone Apps business Manga apps Many companies in addition to and factory have manga apps (operate e-bookstores). The largest company is Amazon, followed by a number of listed companies and many others. Listed companies include Amutus Corporation (a subsidiary of Infocom Corporation [TSE1: 4348]), Papyless Co., Ltd. (TSE JASDAQ: 3641), Beaglee Inc. (TSE1: 3981), and eBOOK Initiative Japan Co., Ltd. (TSE1: 3658).

Main companies involved in e-comics

Category Store Operator Service since Ticker Fis c a l Sales OP OPM Notes (shareholding ratio) year (JPYmn) (JPYmn)

Manga UP! and factory, with Manga Park content from: Manga app Manga Mee - Square Enix Jan. 2017 7035 FY08/20 2,946 -203 - other - Hakusensha - Shueisha, other

E-comic LINE Manga Webtoon Entertainment Apr. 2013 Unlisted n.a. n.a. n.a. n.a.

Consolidated subsidiary of Mecha Comics Nov. 2016 Infocom (4348; wholly owned) E-comic amutus - FY03/20 32,983 4,951 15.0% ekubostore Nov. 2013

E-comic The E-book Store "Renta!" Papyless Global Apr. 2007 3641 FY03/20 23,347 1,532 6.6%

E-comic Manga Okoku (kingdom) Beaglee Apr. 2006 3981 FY12/20 12,378 1,136 9.2%

E-comic eBookJapan eBOOK Initiative Japan Dec. 2000 3658 FY03/20 16,236 702 4.3% Figures only for e-book business

E-book wholesaler comic navi Media Do Dec. 2012 3678 FY02/21 82,349 2,594 3.2% Figures only for e-book business

Portal iBooks Store Apple Mar. 2013 - n.a. n.a. n.a. n.a.

Portal Rakuten Kobo Rakuten Kobo Jul. 2012 - n.a. n.a. n.a. n.a.

Portal Google Play Google Sep. 2012 - n.a. n.a. n.a. n.a.

Portal Kindle Store Amazon Oct. 2012 - n.a. n.a. n.a. n.a.

NTT Solmare Wholly owned subsidiary of NTT Telecom Comic C'moA Aug. 2004 - n.a. n.a. n.a. n.a. (NTT West group) West

2Dfacto Succeeded by Dai Nippon Printing Printing honto Nov. 2010 Unlisted FY03/18 7,024 -1,038 - (Dai Nippon Printing group) in July 2018 Cons. Subsidiary (72.2%) of Toppan Printing (7911), Tsutaya, BookLive Printing BookLive! Feb. 2011 Unlisted FY03/18 11,723 668 5.7% Toshiba Client Solutions, (Toppan Printing group) Development Bank of Japan, NEC, Mitsui & Co.

Physical book store Kinoppy Kinokuniya Dec. 2010 - n.a. n.a. n.a. n.a.

Book Walker Wholly owned subsidiary of Publishing BOOK WALKER Dec. 2010 - n.a. n.a. n.a. n.a. (Kadokawa group) Kadokawa Sources: Shared Research based on official journals and individual company data

Manga apps: Comparison with major competitors

Ticker Company Fiscal Sales OP OPM ROA ROE year (JPY mn) (JPY mn) (RP-based) 4348 Infocom FY03/20 58,375 8,211 14.1% 12.1% 16.2% 3678 Media Do FY02/21 83,540 2,664 3.2% 7.0% 17.0% 3641 Papy less FY03/20 23,347 1,532 6.6% 12.0% 13.7% 3658 eBOOK Initiative Japan FY03/20 21,281 793 3.7% 9.8% 15.3% 3981 Beaglee FY12/20 12,378 1,136 9.2% 5.0% 9.0% 7035 and factory FY08/20 3,917 512 13.1% - - Source: Shared Research based on company data

IoT business Real estate transactions are often characterized by information asymmetry between buyer and seller. A wave of “real estate tech” companies has entered the market, aiming to reduce these asymmetries by using internet, big data, AI, and other technologies. For example, portal and online appraisal sites offer property pricing information. Builders can use crowdfunding to raise money from individual investors over the internet to construct condominiums or buildings, and AI can be used to analyze property values.

38/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Although these companies exist, few are taking the same approach as and factory, using smartphone apps as leverage to enter the real estate business. Shared Research believes Robot Home Co., Ltd. (subsidiary of TATERU, Inc. [TSE1: 1435]) serves as a useful reference.

Robot Home Co., Ltd. (subsidiary of TATERU, Inc.* [TSE1: 1435]) provides “Apartment kit,” a smartphone-based property ▷ management app for apartment owners and “TATERU kit,” an app aimed at people who live in TATERU apartments. TATERU kit can be used to open and close smartphone-activated doors and provide security by using smartphones linked with tags. The app for IoT-enabled equipment also allows the use of smartphones for controlling air conditioners, televisions, other home electronics, and lighting. It also offers features through which tablets inside of apartments serve as central controllers, facilitating chats with the management company.

* TATERU, Inc. (TSE1: 1435): The company operates TATERU Apartment**, an apartment management platform it developed. This platform handles a variety of services, such as providing land information, facilitating the planning and construction of designed apartments, and managing rentals. **This platform matches people online (via smartphone) who are interested in managing apartments with people who own land. It also provides a host of other services, such as proposing IoT apartments, construction services, and rental management.

39/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Strengths and weaknesses Strengths Provides a one-stop manga app-related service and is capable of making improvements more quickly than ◤ competing companies

The company forms teams for each manga app and provides fully inclusive services that cover design, development, operation, analysis, improvement, and marketing. As the company has internalized these functions, it is able to implement improvement proposals more quickly than other companies that outsource some of these functions. As a result, it is able to improve the MAUs and ARPUs of its manga apps at a higher rate of speed.

Has secure relationships (including capital and business alliances) with publishers who hold intellectual ◤ property and are strong in terms of manga

In July 2019, Square Enix Co., Ltd. announced that it would retain a 4% share in the company. Later, in October 2019, Shueisha, Shogakukan, and Hakusensha announced that they would each retain a 2% share in the company. One important factor that enables the company to offer a large number of original titles from publishers through its manga apps is the secure relationships it has built with publishers like these that are strong in terms of manga. This is one major attribute that helps set the company’s manga apps apart from the competition.

Provides a wide variety of manga app types and has established a structure that minimizes the risk of ◤ cannibalization between different manga apps

Weaknesses

Most intellectual property is owned by business partners: ◤ and factory is a platform provider rather than a content producer. The development of smartphone games, manga, and other IP requires huge investments of time and money, and the chances of failure are high. For this reason, rather than developing IP itself the company tends to source these assets from other companies or enter alliances for development and operation. Taking less risk means the company reaps commensurately lower rewards than IP owners obtain when their ventures are successful.

Susceptible to impact from external environmental changes because most of its profit comes from the ◤ development and operation of manga apps

Most of the company’s profit comes from the development and operation of manga apps. Since a portion of the revenue (about 30 40% as of 1H FY08/20) comes from advertising, the business is susceptible to fluctuations in ad prices. In – addition, with the rise in e-book demand triggered by the COVID-19 pandemic, competitors are aggressively investing in advertising, and the company needs to continue investing heavily in advertising to sustainably grow MAU.

Concept and target customer base revision needed for &AND HOSTEL smart hostels in the IoT business ◤ The previous target for &AND HOSTEL smart hostels in the IoT business were inbound tourists. Until 2019, this was one of the company’s strengths as inbound tourism continued to rise. However, the company needs to revise its concept and target customer base as it is unlikely to have many inbound tourists in 2H FY08/20 due to the COVID-19 pandemic. Although the company already started working on revising its concept and target customer base, the shift takes time, and there is uncertainty as to whether the company will be able to restore profits back to previous levels.

40/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Historical results and financial statements Income statement Income statement FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 (JPYmn) Parent Cons. Parent Parent Parent Parent Sales 112 372 689 1,916 3,917 2,946 YoY - 231.9% 85.2% 178.3% 104.4% -24.8% Cost of sales - 205 182 803 2,350 1,372 Gross profit - 166 506 1,114 1,567 1,574 YoY - - 204.4% 120.0% 40.7% 0.4% GPM - 44.7% 73.5% 58.1% 40.0% 53.4% SG&A expenses - 132 282 748 1,054 1,776 SG&A ratio - 35.4% 41.0% 39.1% 26.9% 60.3% Operating profit -40 35 224 365 512 -203 YoY - - 543.8% 63.2% 40.3% - OPM -35.7% 9.3% 32.5% 19.1% 13.1% - Non-operating income (expenses) - 4 5 2 2 1 Interest income - 0 0 0 0 0 Commission income - - 1 - - - Outsourcing fees - - 2 - - - Gain on donation of noncurrent assets - - 1 - - - Tax refunds - - - 0 - - Subsidy income - - - 2 - - Other income - 4 0 0 2 0 Non-operating expenses - 1 5 6 30 58 Interest expenses - 1 1 6 8 20 Rents - - 3 - - - Guarantee fees - - 0 1 - - Other expenses - 0 0 0 - - Recurring profit -42 37 223 361 484 -260 YoY - - 500.8% 61.5% 34.2% - RPM -37.5% 10.0% 32.4% 18.8% 12.4% - Extraordinary gains ------Extraordinary losses - 8 16 4 - 129 Income taxes - 20 34 97 156 -26 Implied tax rate - 68.6% 16.3% 27.0% 32.3% 6.8% Minority interests - - - - - Ne t in c o me -43 -6 174 261 328 -362 YoY - - - 49.9% 25.8% - Net margin -38.2% -1.7% 25.3% 13.6% 8.4% - Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

SG&A expenses FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 (JPYmn) Parent Cons. Parent Parent Parent Parent Directors' bonuses 35 41 Salaries and allowances 31 51 102 132 199 Hiring and training expenses 9 Advertising expenses 47 293 527 1,068 Compensations 16 29 R&D expenses 10 19 Depreciation 10 Provision for doubtful accounts 1 -0 0 Provision for bonuses 3 16 Other - 84 87 276 395 509 Total - 132 282 748 1,054 1,776 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

In FY08/20, sales and profits fell YoY due to the impact of the COVID-19 pandemic. Manga app advertising revenue declined as some advertisers reduced the unit price of reward advertising (with some even halving the unit price) and ad volume and prices on ad networks declined due to deteriorating advertising market conditions caused by the COVID-19 pandemic. Meanwhile, there were delays and cancellations for &AND HOSTEL in-house development projects.

41/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Balance sheet

Balance sheet FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 (JPYmn) Parent Cons. Parent Parent Parent Parent ASSETS Cash and deposits 79 172 672 1,353 1,028 Notes and accounts receivable 103 129 302 484 623 Inventories - - 108 16 284 3,171 Income taxes receivable - - - - 128 Consumption taxes receivable - - - - 213 Prepaid expenses 5 12 14 21 - Advances paid 5 42 86 278 - Deferred tax assets - 8 22 - - Other - 1 10 14 53 80 Allowance for doubtful accounts -1 -0 -1 - -0 Total current assets 193 480 1,126 2,453 5,662 Buildings 1 39 62 65 47 Machinery and equipment - - - - 1 Tools, furniture, and fixtures 2 16 28 45 53 Accumulated depreciation -2 -7 -16 -35 -80 Total tangible fixed assets 1 48 74 77 21 Software 130 132 Total intangible fixed assets - 32 41 130 132 Investment securities 1 1 11 79 229 Deferred tax assets - 8 35 28 - Other 25 24 8 11 11 Investments and other assets 26 33 103 381 529 Total fixed assets 27 113 218 587 682 Total assets 220 594 1,323 3,040 6,344

LIA BILITIES Notes and accounts payable 21 13 63 98 359 Short-term debt - 80 97 136 404 786 Accounts payable–other 30 101 285 401 662 Income taxes payable 20 39 91 109 - Provision for bonuses - 9 24 - 3 Provision for directors' bonuses - - 16 - - Other - 27 2 39 72 51 Total current liabilities 159 262 653 1,095 1,858 Long-term debt - 27 140 216 147 3,027 Other - - - - - 9 Total fixed liabilities 27 140 216 147 3,036 Total interest-bearing debt - 107 237 352 551 3,812 Total liabilities 185 401 870 1,242 4,894 NET A SSETS Capital stock 34 34 34 543 550 Capital surplus 33 33 33 542 548 Retained earnings -34 125 385 713 351 Treasury stock - - - -0 -1 Total net assets 34 192 453 1,798 1,450 Total liabilities and net assets 220 594 1,323 3,040 6,344 Working capital - 82 224 256 670 3,435 Total interest-bearing debt - 107 237 352 551 3,812 Net debt - 28 64 -320 -801 2,784 Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

The company is targeting a shareholders’ equity ratio of around 40 50%. At end-August 2020, this was below target at 22.8%. – Additionally, the company had JPY3.2bn in real estate for sale and JPY3.8bn in interest-bearing debt at end-August 2020.

42/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Cash flow statement

Cash flow statement FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 (JPYmn) Parent Cons. Parent Parent Parent Parent Cash flows from operating activities (1) 36 46 516 -115 -3,283 Pretax profit 29 208 357 484 -388 Depreciation 57 20 32 45 133 Amortization of goodwill - - - - - Increase (decrease) in accounts receivable -76 -38 -173 -182 -139 Increase (decrease) in inventories - -108 92 -267 -2,908 Increase (decrease) in accounts payable 19 -2 50 36 261 Other 8 -35 159 -231 -241 Cash flows from investing activities (2) -27 -94 -131 -416 -316 Purchase of tangible fixed assets -9 -60 -67 -19 -23 Purchase of intangible fixed assets -0 -34 -22 -108 -91 Payments and collection of guarantee deposits -17 3 -31 -218 -46 Purchase of investment securities - - -10 -69 -160 Other -0 -4 -11 -70 -156 Free cash flow (1+2) 10 -48 385 -531 -3,599 Cash flows from financing activities 22 130 116 1,211 3,274 Change in short-term borrowings 65 - - - 450 Change in long-term borrowings -43 130 116 199 2,811 Proceeds from issuance of stock Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.

In the past, the company invested in in-house &AND HOSTEL development projects, but it does not plan to make any new investments from FY08/21 on. As for properties developed in FY08/20, the company has JPY3.2bn in inventory as of end-August 2020, which contributed to a net cash outflow of JPY3.0bn from operating activities. This was funded by proceeds from long-term borrowings (financing activities).

43/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Historical performance Q1 FY08/21 results Overview

In Q1 FY08/21, the company reported sales of JPY719mn (-10.4% YoY), an operating loss of JPY131mn (versus operating profit ▷ of JPY37mn in Q1 FY08/20), a recurring loss of JPY156mn (versus recurring profit of JPY37mn), and a net loss of JPY157mn (versus net income of JPY20mn). Sales of JPY719mn were down 10.4% YoY, with the Smartphone Apps business reporting sales of JPY626mn (-3.7% YoY) and ▷ the IoT business reporting sales of JPY85mn (-30.9% YoY). The operating loss of JPY131mn was down from operating profit of JPY37mn in Q1 FY08/20, with the Smartphone Apps ▷ business reporting operating profit of JPY38mn (-70.8% YoY) and the IoT business reporting an operating loss of JPY70mn (versus operating loss of JPY14mn in Q1 FY08/20). Full-year FY08/21 forecast: The company has made no changes to its initial earnings forecast. As of end-Q1, sales were 20.3% of ▷ the full-year target. The company indicates that Q1 sales and operating profit were commensurate with its projections. Ongoing economic impact from the COVID-19 pandemic is affecting the company’s business performance, having caused a ▷ deterioration in market conditions that shrank advertising revenue from manga apps and reduced both occupancy and average customer spend at the company’s &AND HOSTEL facilities in Q1. Furthermore, the government of Japan declared a

state of emergency effective on January 8, 2021, and making predictions regarding factors such as when the COVID-19 pandemic will subside is currently difficult. When making accounting estimates (e.g., appraising real estate held for sale, determining whether recording impairment loss on fixed assets is necessary, and judging the recoverability of deferred tax assets), based on information available when financial statements were prepared, the company has assumed that, impact from the pandemic will continue through FY08/21 and will begin to gradually abate in FY08/22. With the number of new COVID-19 cases in Japan again rising from November 2020, the government in January 2021 declared ▷ a state of emergency for some areas of the country, the first such declaration since the previous state of emergency was lifted in May 2020. The company stated that the most recent declaration of a state of emergency had not significantly impacted its Smartphone Apps business. While highlighting concern over a decline in occupancy rates in the IoT business, management

noted that the actual impact has been limited to only a few cancellations. The company indicated that the tabii and innto services could be impacted by potential customers closing their accommodation facilities.

Results by business Smartphone Apps business In Q1 FY08/21, sales in the Smartphone Apps business were JPY626mn (-3.7% YoY), and operating profit was JPY38mn (-70.8% YoY). While the impact from website sites offering pirated materials exceeded the company’s initial expectations, earnings on an overall basis were generally in line with management’s forecasts thanks to outperformance in other areas.

The gains were driven by strong growth at existing apps such as Manga UP!, Manga Park, and Manga Mee. This growth was ▷ primarily thanks to aggressive advertising and promotion, new series launches, serialization of popular content, and new manga additions. Additionally, MAUs for manga apps Young Jump! (jointly developed with Shueisha Inc.) released in April 2020 and Mecha Comics Daily Serial Manga (jointly developed with Amutus Corporation) released in May 2020, have steadily grown since release. Quarterly average MAUs of and factory’s manga apps grew 60.1% YoY to 10.26mn users. The company encountered a notable exodus of existing users, which it surmises was likely due to increased use of websites offering pirated editions of manga.

44/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Meanwhile, ARPU was level YoY. ARPU from in-app purchases trended downward due primarily to reward points offered in ▷ exchange for short-term failures affecting some of the company’s apps and expansion in the use of websites offering pirated editions of manga. ARPU from in-app ads followed a recovery track as the unit price for reward advertising rose thanks to the addition of a targeted ad network, one of the company’s strategies aimed at improving ARPU from in-app ads. The company indicated that it started to recognize the impact from websites offering pirated materials only after October 15, ▷ 2020, when it announced its FY08/21 earnings forecasts. More specifically, the company recognized the potential impact when MAUs, the retention rate of existing users, and ARPU from in-app purchases began showing weakness relative to the company’s expectations, and management’s forecasts regarding the expected impact from these websites are the result of a subsequent analysis of relevant factors. Sales generated by manga app development in Q1 FY08/20 were JPY140mn, but the company did not report any such sales in ▷ Q1 FY08/21. Excluding impact from these sales, overall sales in the Smartphone Apps business rose (+23% YoY). While advertising expenses were flat YoY, acquisition efficiency deteriorated amid an increase in ad placement unit prices due ▷ to competitor manga app companies stepping up advertising. The company is considering developing a consulting business that leverages its expertise in the development and operation of ▷ manga apps. Rather that developing this consulting business as a mainstay standalone source of revenue, the company hopes to use it as a hook to help potential customers realize the benefits from using the company’s expertise in developing and operating manga apps, which in turn could lead to an increase in the number of apps being managed and, accordingly, an

increase in MAU.

IoT business In Q1 FY08/21, sales in the IoT business were JPY85mn (-30.9% YoY), and the operating loss was JPY70mn (operating loss of JPY14mn in Q1 FY08/20). Occupancy at &AND HOSTEL smart hostels recovered and exceeded management’s forecasts.

In regard to the mainstay &AND HOSTEL smart hostels (lodging facilities that offer experiences made possible through IoT ▷ technology), the company opened no new facilities, retaining a total of eight facilities (with three closed temporarily). In contrast with FY08/20, during which the company incurred substantial impact from the COVID-19 pandemic, occupancy of &AND HOSTEL facilities followed a path of recovery and exceeded management’s forecasts as remote workers utilized these facilities for business purposes and the company found success through long-term stay plans. However, average customer spend remains low (about half of what it was as of end-December 2019 and prior), and operating profit fell YoY at each facility.

While the company is moving forward in measures such as rebranding, it does not expect a full-fledged recovery in spending per customer until occupancy rates for the entire area, including at competitor hotels, recover. The Go To Travel campaign, which was launched by the Japanese government to support the tourism industries through subsidies, had a limited impact on the company’s business. The company is continuing to conduct marketing activities for properties developed in house, but as of the Q1 FY08/21 results announcement had made no progress in terms of sales. With regard to its guest room tablet service, tabii, the company worked to strengthen relations with partner companies (such ▷ as H.I.S. Hotel Holdings and TEPCO Energy Partners), expand its sales teams, and actively develop new functions aimed at boosting operating efficiency and increasing value-added. The total number of tabii tablets in operation at end-Q1 FY08/21 came to 4,933 (up 473 from end-FY08/20). As of end-Q1 FY08/21, the number of facilities using the company’s innto lodging management system came to 285 (up 13 facilities from end-FY08/20). Performance from both tabii and innto experienced recovery thanks to rising demand for improved operational efficiency and avoidance of the Three Cs (closed spaces, crowded places, close-contact settings) in response to the COVID-19 pandemic. The tenant communication app totono has been adopted by two real estate management companies serving 64,000 tenants. ▷

45/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Other businesses In Q1 FY08/21, sales in Other businesses were JPY7mn (-74.3% YoY), and operating profit was JPY7mn. The majority of earnings under this segment come from the company’s internet advertising agency services.

Full-year FY08/20 results Overview

In FY08/20, the company reported sales of JPY2.9bn (-24.8% YoY), an operating loss of JPY203mn (from operating profit of ▷ JPY512mn in FY08/19), a recurring loss of JPY260mn (from recurring profit of JPY484mn), and a net loss of JPY362mn (from net income of JPY328mn). Sales, operating loss, and recurring loss improved from the revised company forecast announced on June 2, 2020 by JPY85mn, JPY46mn, and JPY41mn, respectively, but the net loss was JPY142mn lower. This is mainly due to an impairment loss on head office fixed assets (approximately JPY21.9mn), an impairment loss on some software (JPY28.6mn), and reversal of deferred tax assets in Q4. Sales of JPY2.9bn were down 24.8% YoY, with the Smartphone Apps business reporting sales of JPY2.5bn (+41.4% YoY) and ▷ the IoT business reporting sales of JPY337mn (-83.6% YoY). The operating loss of JPY203mn was down from operating profit of JPY512mn in FY08/19, with the Smartphone Apps business ▷ reporting operating profit of JPY337mn (-41.4% YoY) and the IoT business reporting an operating loss of JPY187mn (from operating profit of JPY194mn in FY08/19). Accounting estimates: The company made accounting estimates, such as evaluation of real estate for sale, as well as ▷ determining whether to record impairment losses on fixed assets and assessing the recoverability of deferred tax assets, based on information available at the time of the preparation of financial statements, and the assumption that the economic impact of

the COVID-19 pandemic will continue through FY08/21 and gradually subside in FY08/22. Full-year FY08/21 forecast: For FY08/21, the company forecasts sales of JPY3.5bn (+20.2% YoY), an operating loss of JPY27mn ▷ (versus JPY203mn operating loss in FY08/20), a recurring loss of JPY177mn (JPY260mn loss), a net loss of JPY182mn (JPY362mn loss), and EPS of -JPY18.66 (-JPY37.01). Although and factory targets 30% CAGR for the Smartphone Apps business, it expects continued losses in FY08/20 due to the impact of the COVID-19 pandemic, which is forcing the company to change its policy for &AND HOSTEL in the IoT business. The company explained that FY08/21 will be a period of investment to return the

company to profitability in FY08/22. For details regarding the forecast, please refer to the Full-year company forecast for FY08/21 section. Policy for new in-house development properties: The company clarified that it would not be starting any new in-house ▷ development projects, including for the residential sector, going forward. The company is continuing sales activities for self-developed &AND HOSTEL properties, and is not expecting to sell below cost. However, it has not factored this into its earnings forecast because of the uncertainty of outlook. The company says it will disclose without delay any property sale that is agreed in FY08/21.

Results by business Smartphone Apps business In FY08/20, sales in the Smartphone Apps business were JPY2.5bn (+41.4% YoY), and operating profit was JPY352mn (-41.4% YoY).

The gains were driven by strong growth at existing apps such as Manga UP!, Manga Park, and Manga Mee, where a ▷ combination of aggressive advertising and promotion, new series launches, and stay-at-home demand led to an increase in

monthly active users (MAUs). Extending the availability of popular content and new manga additions also contributed to

46/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

growth. Additionally, MAUs for manga apps Young Jump! (jointly developed with Shueisha Inc.) released in April 2020 and Mecha Comics Daily Serial Manga (jointly developed with Amutus Corporation) released in May 2020, have steadily grown since release. Quarterly average MAUs of and factory’s manga apps grew 86.8% YoY to 9.94mn users. The number of monthly active users for its manga app exceeded 10.0mn in August 2020. Meanwhile, ARPU was flat, and advertising revenue declined due to lower unit price of reward advertising for some advertisers ▷ and an overall decline in advertising market conditions due to the COVID-19 outbreak. The downward trend in ARPU from in-app ads bottomed out in June and has been improving since July. ARPU from in-app purchases remained flat thanks to efforts to step up app operation by using return on advertising spend (ROAS), attract more paying users by providing content with a high purchase rate, and take steps to raise average revenue per paying user (ARPPU). The company booked impairment losses on Comic every and Final Fantasy Brave Exvius (FFBE) related software. Comic every ▷ sales did not grow as initially expected. The official FFBE strategy app was profitable despite a decline in users following the transition to a newer release of the game.

IoT business In FY08/20, sales in the IoT business were JPY337mn (-83.6% YoY), and the operating loss was JPY187mn (operating profit of JPY194mn in FY08/19).

Although the company continued the planning and development of &AND HOSTELs smart hostels (lodging facilities operated ▷ by the company that offer experiences made possible through IoT), all in-house development projects were either delayed or cancelled due to the COVID-19 outbreak, and the company closed some facilities due to ownership changes resulting in brand transfers. The company did not open any new hostels, keeping a total of eight hostels. Due to the declaration of a state of emergency by the Japanese government, all hostels were temporarily closed, and after they reopened, they were impacted by the slump in overseas visitors who were their main target, resulting in a YoY decline in operating profit for each hostel. With regard to its guest room tablet service, tabii, the company worked to strengthen relations with partner companies (such ▷ as H.I.S. Hotel Holdings and TEPCO Energy Partners), expand its sales teams, and actively develop new functions aimed at boosting operating efficiency and increasing value-added. However, sales activities were less than usual due to the worsening business conditions of target lodging facilities caused by the COVID-19 outbreak. As a result, the total number of tabii tablets in operation at end-Q4 FY08/20 came to 4,460 (up 1,607 from end-FY08/19 and up 210 from end-Q3 FY08/20). As of end-Q4 FY08/20, the number of facilities using the company’s innto lodging management system came to 272 (up 40 ▷ facilities from end-FY08/19, up four facilities from end-Q3 FY08/20). As for the tenant communication app, totono, two property management companies have decided to roll it out to over ▷ 600,000 tenants.

Other businesses In FY08/20, sales in Other businesses were JPY79mn (+10.7% YoY), and operating profit was JPY31mn. The majority of earnings under this segment come from the company’s internet advertising agency services.

Q3 FY08/20 results Overview

In cumulative Q3 FY08/20, the company reported sales of JPY2.2bn (+44.8% YoY), an operating loss of JPY46mn (from ▷ operating profit of JPY155mn in cumulative Q3 FY08/19), a recurring loss of JPY87mn (from recurring profit of JPY131mn), and a net loss of JPY102mn (from net income of JPY89mn). Manga app advertising revenue declined as some advertisers reduced

47/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

the unit price of reward advertising (with some even halving the unit price) and ad volume and prices on ad networks declined due to deteriorating advertising market conditions caused by the COVID-19 pandemic. Meanwhile, there were delays and cancellations for &AND HOSTEL in-house development projects. The company invested in manga app advertisements as planned. Sales of JPY2.2bn were up 44.8% YoY, with the Smartphone Apps business reporting sales of JPY1.9bn (+51.2% YoY) and the ▷ IoT business reporting sales of JPY287mn (+14.4% YoY). The Smartphone Apps business accounted for 83.8% of sales and the IoT business 12.9%. The operating loss of JPY46mn was down from a profit of JPY155mn in cumulative Q3 FY08/19, with the Smartphone Apps ▷ business reporting operating profit of JPY310mn (-20.4% YoY) and the IoT business an operating loss of JPY112mn (operating loss of JPY43mn in cumulative Q3 FY08/19). Extraordinary losses: The company recorded a JPY29mn loss on the temporary closure of &AND HOSTEL smart hostels as well ▷ as a JPY23mn impairment loss. The company made accounting estimates, such as determining whether to record impairment losses and assessing the recoverability of deferred tax assets, based on information available at the time of the preparation of financial statements and under the assumption that the COVID-19 pandemic will gradually come under control from July 2020 forward. Subsequent events: On June 30, 2020, the company obtained a five-year, unsecured, JPY300mn loan from Mizuho Bank, Ltd. ▷ Full-year FY08/20 forecasts: The company has made no changes to its FY08/20 forecasts revised on June 2, 2020. Cumulative ▷ Q3 sales progress against the revised forecast was 77.5%, progressing as expected as of July 14, 2020. Accordingly, the company decided there was no need to make additional revisions to its forecasts. For details regarding the revised forecasts, please refer to the Full-year company forecast for FY08/20 section. Outlook for ARPU from in-app ads for manga apps: The company expects the downward trend in ARPU from in-app ads to ▷ bottom out in June and improve from July. FY08/21 policy for in-house developed &AND HOSTEL properties: The company indicated that it would not be starting any ▷ new in-house development projects in FY08/21 (but will conduct development consulting depending on circumstances). The two properties it is currently holding should be completed on schedule, and the company says it will continue sales activities. As of July 2020, it still expects the selling prices of the properties to exceed cost, but believes they may fall short of the initial plan. As of end-Q3 FY08/20, the company conducted a real estate appraisal to decide whether a write-down was necessary due to any possible decline in profitability, and concluded that it was unnecessary. The company has not identified any events or changes in the environment that would significantly reduce profitability, and does not intend to write-down its properties in

FY08/20.

Results by business Smartphone Apps business

In cumulative Q3 FY08/20, the Smartphone Apps business reported sales of JPY1.9bn (+51.2% YoY) and operating profit of ▷ JPY310mn (-20.4% YoY). The gains were driven by strong growth at existing apps such as Manga UP! (jointly developed with Square Enix Co., Ltd.), Manga Park (jointly developed with Hakusensha, Inc.), and Manga Mee (jointly developed with Shueisha Inc.), where a combination of new series launches and aggressive advertising and promotion led to increases in monthly active users (MAUs). Extending the availability of popular content and new manga additions among other factors also contributed to growth. Additionally, MAUs for manga app Young Jump! (jointly developed with Shueisha Inc.) released in April 2020 and Mecha Comic Daily Serial Manga app (jointly developed with Amutus Corporation) released in May 2020, has steadily grown since release. Quarterly average MAUs of and factory’s manga apps grew 110.7% YoY to 9.06mn users.

48/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Stay-at-home demand and an increase in free users attributable to the release of free content contributed to growth in MAUs for existing apps in particular. Meanwhile, ARPU was flat, and advertising revenue declined due to lower unit price of reward advertising for some advertisers ▷ (with some even halving the unit price) and an overall decline in advertising market conditions due to the COVID-19 outbreak. Adoption of overseas ad mediation platforms for key manga apps was nearly completed in June. This adoption has effectively made up for the deterioration of the advertising market and the decline in unit price of reward advertising, halting the decline in ARPU from in-app ads. In addition, the company expects ARPU from in-app ads to improve from July. ARPU from in-app purchases remained flat due to an increase in stay-at-home demand (causing an increase in in-app fees, which is the numerator) and an increase in free users attributable to the release of free content (causing an increase in total user count, which is the denominator). With the hiring of personnel accompanying the release of the Young Jump! and Mecha Comic Daily Serial Manga apps, there ▷ was an increase in development-related personnel costs (cost of sales).

Mediation A system that calls on a network of third-party advertisers in order of profitability in response to an ad request. Companies can increase mobile app earnings by using such systems.

IoT business In cumulative Q3 FY08/20, the IoT business reported sales of JPY287mn (+14.4% YoY) and an operating loss of JPY112mn (operating loss of JPY43mn in cumulative Q3 FY08/19).

resulting in a YoY decline in operating profit for each hostel. On July 27, 2020, the company announced confirmation that two employees of the outsourcing vendor to which it had ▷ outsourced management of lodging facility &AND HOSTEL SHINSAIBASHI EAST (the employees worked at the front desk) had

contracted COVID-19. and factory cooperated with the outsourcing vendor and the relevant public health center to determine the recent actions of the affected employees and to disinfect the facility. In addition, the company worked to determine who had been in close contact with the two employees, saw that PCR testing was conducted, and had them work from home for 14 days. and factory says this incident expects to have no impact on the company’s FY08/20 performance and that it will promptly disclose the details if such disclosure is deemed necessary. As of end-Q3 FY08/20, the number of facilities using the company’s innto lodging management system came to 268 (up 36 ▷ facilities from end-FY08/19, but down 63 facilities from end-1H FY08/20). Some small lodging facilities ended their contracts to reduce their costs, being affected by an impact of the COVID-19 pandemic. With regard to its guest room tablet service, tabii, the company worked to strengthen relations with partner companies (such ▷ as H.I.S. Hotel Holdings and TEPCO Energy Partners), expand its sales teams, and actively develop new functions aimed at boosting operating efficiency and increasing value-added, although sales activities were less than usual due to the worsening business conditions of target lodging facilities caused by the pandemic. Lodging facilities have become rather reluctant when it comes to capital investment. As a result, the total number of tabii tablets in operation came to 4,250 (up 1,397 from end-FY08/19 and up 413 from end-1H FY08/20).

49/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Other businesses In cumulative Q3 FY08/20, Other businesses reported sales of JPY72mn (+38.5% YoY) and operating profit of JPY23mn. The majority of earnings under this segment come from the company’s internet advertising agency services.

1H FY08/20 results Overview

In 1H FY08/20, the company reported sales of JPY1.5bn (+49.2% YoY), an operating loss of JPY51mn (from operating profit of ▷ JPY103mn in 1H FY08/19), a recurring loss of JPY86mn (from recurring profit of JPY82mn), and a net loss of JPY64mn (from net income of JPY55mn).

Q2 (December–February) FY08/20 sales missed the company’s forecast. The main factors were an impact of approximately ▷ JPY51mn from ARPU for manga apps falling short of the target in the Smartphone Apps business, an impact of approximately JPY23mn from lower than forecast project orders in the manga-specific ad network business, COMIAD, and an impact of approximately JPY97mn from &AND HOSTEL development projects in the IoT business. The company has stated that it plans to book sales on &AND HOSTEL development projects in 2H.

Sales came in at 24.7% of full-year FY08/20 forecast. Against forecast for 1H FY08/20, sales came in at 88%, and operating profit ▷ missed the forecast by JPY140mn. The company invested JPY548mn in advertising expenses, which was an increase of more than double YoY (the figure for 1H FY08/19 was JPY263mn). Sales of JPY1.5bn were up 49.2% YoY, with the Smartphone Apps business reporting sales of JPY1.2bn (+49.6% YoY), the IoT ▷ business sales of JPY207mn (+36.7% YoY), and Other businesses sales of JPY59mn (+102.4% YoY). The Smartphone Apps business accounted for 82.0% of sales, the IoT business 14.0%, and Other businesses 4.0%. The operating loss of JPY51mn was down from a profit of JPY103mn in 1H FY08/19, with the Smartphone Apps business ▷ reporting operating profit of JPY180mn (-31.8% YoY), the IoT business an operating loss of JPY65mn (operating loss of JPY35mn in 1H FY08/19), and Other businesses operating profit of JPY15mn. As of the 1H earnings announcement, the company had made no changes to its FY08/20 forecast disclosed on October 11, ▷ 2019. Although some of the company’s businesses were being affected by the spread of the COVID-19 pandemic, the company believed the impact was not large enough to warrant the revision of its earnings forecast. However, based on the

impact of COVID-19 and recent earnings trends, the company decided to revise its earnings forecast on June 2, 2020. The revised full-year forecast for FY08/20 call for sales of JPY2.9bn (decrease of JPY3.1bn versus previous forecast of JPY6.0mn), operating loss of JPY248mn (decrease of JPY828mn versus previous operating profit forecast of JPY580mn), Recurring loss of JPY300mn (decrease of JPY860mn versus previous recurring profit forecast of JPY560mn), and net loss of JPY220mn (decrease of JPY610mn versus previous net income forecast of JPY390mn). See “Full-year FY08/20 forecasts” for more details.

Results by business Smartphone Apps business In 1H FY08/20, the Smartphone Apps business reported sales of JPY1.2bn (+49.6% YoY) and operating profit of JPY180mn (-31.8% YoY). The gains were driven by strong growth at existing apps such as Manga UP! (jointly developed with Square Enix Co., Ltd.), Manga Park (jointly developed with Hakusensha, Inc.), and Manga Mee (jointly developed with Shueisha Inc.), where a combination of new series launches and aggressive advertising and promotion led to increases in monthly active users (MAUs). Extending the availability of popular content and new manga additions among other factors also contributed to growth. MAUs have been increasing steadily since the release in August 2019 of Sunday Webry, a manga app jointly developed with Shogakukan Inc., and the release in November 2019 of Manga TOP, a manga app jointly developed with Nihon Bungeisha.

50/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

However, ARPU was weaker than planned, and project orders fell short of forecast in the manga-specific ad network business, COMIAD. Quarterly average MAUs of and factory’s manga apps grew 98.9% YoY to 7.20mn users.

Regarding ARPU from in-app ads for manga apps, while the ratio of active users is high, the clickthrough rate decreases when ▷ users become accustomed to seeing the ads. To improve on this front, the company plans to increase ARPU from in-app ads by using overseas mediation with its in-house system to increase the chances of displaying ads that achieve higher ad prices such as overseas game ads. However, even if measures to improve ARPU from in-app ads achieve the intended results, ARPU from in-app ads will still not be as high as the company’s initial plan, nor will it reach the highs achieved in 2H FY08/18–1H FY08/19.

Mediation A system that calls on a network of third-party advertisers in order of profitability in response to an ad request. Companies can increase mobile app earnings by using such systems.

The ARPU from in-app purchases for manga apps is growing steadily. The company plans to increase ARPU from in-app ▷ purchases (and the proportion of ARPU it represents) by providing content with a high purchase rate based on user analysis. If the measures to improve ARPU from in-app purchases yield the expected results, the company believes ARPU from in-app purchases may exceed the initial plan and hit a record high. ARPU from in-app ads currently accounts for around 30% to 40% of total ARPU, but the company expects this ratio to decrease ▷ due to greater focus on improving ARPU from in-app purchases moving forward. The company started the YouTube channel “Manga UP! TV” in collaboration with Square Enix Co., Ltd. This move has ▷ significance in terms of testing its ability to fill new demand for manga read through a video format. If the test results are good, the company will consider distributing similar content through the company’s manga app. Although the company expects to generate some ad revenue from “Manga UP! TV,” it does not expect this to be a significant amount in the short term.

IoT business In 1H FY08/20, the IoT business reported sales of JPY207mn (+36.7% YoY) and an operating loss of JPY65mn (operating loss of JPY35mn in 1H FY08/19). Thanks to progress in planning and development work for its mainstay &AND HOSTEL brand of smart hostels (lodging facilities offering experiences made possible through IoT), the total number of &AND HOSTEL brand lodging facilities in operation increased to 12 after the company opened &AND HOSTEL NAMBA. The company also brought the number of facilities using its innto lodging management system up to 331 as of end-1H FY08/20 (an increase of 99 facilities from end-FY08/19). With regard to its guest room tablet service, tabii, the company worked to strengthen relations with partner companies (such as H.I.S. Hotel Holdings and TEPCO Energy Partners), expand its sales teams, and actively develop new functions aimed at boosting operating efficiency and increasing added-value, although sales activities were less than usual due to the New Year holiday. As a result, the total number of tabii tablets in operation at end-1H increased to 3,837 (up 984 from end-FY08/19). At the same time, the company made active investments, including spending to support the openings of new &AND HOSTEL facilities, expand its innto and tabii services, and develop the tenant communication app, totono, as part of efforts to develop new services in the rental property market.

Other businesses In 1H FY08/20, Other businesses reported sales of JPY59mn (+102.4% YoY) and operating profit of JPY15mn. The majority of earnings under this segment come from the company’s internet advertising agency services.

51/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Other information

History

Date Description September 2014 Company established October 2014 Entered the Smartphone Apps business by acquiring Dokodemo Mirror, a smartphone app, from Ignis Ltd. Began offering an iOS version of the Saikyo Series bulletin board-style app where users can exchange tips and tricks and recruit co-players April 2015 Entered into a capital alliance with Ignis Ltd. June 2016 Opened &AND HOSTEL, a smart hostel, in Fukuoka, marking the launch of the IoT business January 2017 Launched iOS and Android versions of Manga UP!, a smartphone manga app, in collaboration with Square Enix Co., Ltd. April Opened &AND HOSTEL ASAKUSA NORTH May Opened &AND HOSTEL UENO June In collaboration with the city of Yokohama and NTT Docomo, Inc., began operating the Homes of the Future project, which leverages IoT Smart Home August Launched iOS and Android versions of Manga Park, a smartphone manga app, in collaboration with Hakusensha, Inc. February 2018 Opened &AND HOSTEL AKIHABARA March Opened &AND HOSTEL KANDA Began providing innto, a property management system for simple lodging facilities, which was developed in collaboration with Almec Corporation, of the USEN-NEXT Group May Developed and began offering tabii, a tablet-based service for hotel rooms September Listed on the Mothers Market of the Tokyo Stock Exchange October Announced business alliance with TEPCO Energy Partner, Inc., in the tablet service business November Launched iOS and Android versions of Manga Mee, a smartphone manga app, in collaboration with Shueisha Inc. Entered into a business alliance with Tepco Customer Service Co., Ltd. December Launched iOS and Android versions of Comic Every, a smartphone app, in collaboration with Beaglee Inc. February 2019 Opened &AND HOSTEL ASAKUSA and &AND HOSTEL MINOWA April Entered into a business alliance with Nihonbungeisha Co., Ltd. June Launched iOS and Android versions of uraraca, a fortunetelling app July Entered into a business alliance with Shogakukan Inc. Entered into a capital and business alliance with Square Enix Co., Ltd. Launched iOS and Android versions of Final Fantasy Brave Exvius (FFBE) Digital Ultimania, a smartphone app, co-developed with Square Enix Co., Ltd. August Launched iOS and Android versions of fully renewed Sunday Web Every, a smartphone app, in collaboration with Shogakukan Inc. Opened &AND HOSTEL HOMMACHI EAST October Opened &AND HOSTEL KURAMAE WEST Entered into a capital and business alliance with Shogakukan Inc., Shueisha Inc., and Hakusensha Co., Ltd. Entered into a business alliance with Amutus Corporation Entered into a business alliance with Smasapo inc. Ltd. Launched iOS and Android versions of Manga Top, a smartphone app, in collaboration with Nihonbungeisha Co., Ltd. November Opened &AND HOSTEL SHINSAIBASHI EAST Opened &AND HOSTEL MINAMISENJU February 2020 Opened &AND HOSTEL NAMBA Listed on the First Section of the Tokyo Stock Exchange April Launched iOS and Android versions of Young Jump!, full revamp of a smartphone app, in collaboration with Shueisha Inc. ( May Launched iOS and Android versions of Mecha Comics Daily Serial Manga, full revamp of a smartphone app, in collaboration with Amutus Corporation August Launched iOS and Android versions of totono, a smartphone app, in collaboration with Smasapo Co., Ltd. Source: Shared Research based on company data

52/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

The company was established in September 2014 as a wholly owned subsidiary of famous, Inc., which itself had been established in May 2012 by Takamasa Ohara (and factory’s CEO) to conduct business as an advertising agency. While running famous, Ohara became aware of business opportunities in the smartphone apps business, so he set up a subsidiary to pursue the business full time. In October 2014, Ohara and other directors of famous acquired the company’s shares, as they believed that further expansion of the smartphone apps business would require independence.

Mission and factory sees itself as a “smartphone idea company” that pursues business opportunities that smartphones make possible. The company’s employees have varied backgrounds and the company encourages them to leverage their areas of expertise to generate ideas and actively pursue areas with new potential. As the “and” in its name suggests, the company’s mission is to provide services that make people’s lives more fulfilling by bringing a little “something extra” to their everyday lives.

News and topics November 2020 On November 13, 2020, the company announced a change in representative directors.

Chairman and representative director Takamasa Ohara will resign from his post of representative director on November 25, 2020, and will become chairman and director of the company. The change is intended to speed up management decisions and consolidate representative rights to president to further enhance earnings. As chairman and director of the company, Mr. Ohara will promote development of new businesses and support and give advice on overall management.

September 2020 On September 23, 2020, the company announced that it is temporarily closing some &AND HOSTEL properties.

The company has decided to temporarily close some of its &AND HOSTEL locations as follows.

Target locations: &AND HOSTEL SHINSAIBASHI EAST (from October 1), &AND HOSTEL ASAKUSA (from November 1), and ▷ &AND HOSTEL NAMBA (from November 1) Reason for closure: The company has decided that, based on recent occupancy conditions at these stores, temporary closure ▷ of these units will reduce operating losses compared to if the hostels remained open. Impact on business performance and future approach: At present, the company thinks the impact of the temporary closures on ▷ business performance will be limited, but will promptly disclose any changes to this as required in future. The timing of eventual reopening will be based on a recovery in the market environment and occupancy conditions at other hostels.

On September 11, 2020, the company announced that the number of monthly active users for its manga app exceeded 10 million in August.

June 2020 On June 8, 2020, the company announced the reopening of all of its &AND HOSTEL smart hostels.

Effective July 1, the company has decided to reopen all of its &AND HOSTEL smart hotels, which it had previously closed temporarily in response to the state of emergency declared by the Japanese government on April 7, 2020. On the same day, the company will begin offering workspaces at some of these hostels to the rising number of remote workers, in addition to its previous lodging services. The company is currently conducting a minute investigation into this move’s potential impact on business results and will promptly make any necessary disclosures moving forward.

On June 2, 2020, the company announced a revision to its full-year earnings forecast for FY08/20.

53/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Revised FY08/20 forecast

Sales: JPY2.9bn (decrease of JPY3.1bn versus previous forecast of JPY6.0mn) ▷ Operating loss: JPY248mn (decrease of JPY828mn versus previous operating profit forecast of JPY580mn) ▷ Recurring loss: JPY300mn (decrease of JPY860mn versus previous recurring profit forecast of JPY560mn) ▷ Net loss: JPY220mn (decrease of JPY610mn versus previous net income forecast of JPY390mn) ▷

Reason for revision The company’s initial forecast called for significant Q3 and Q4 profit growth and full-year profitability. However, and factory revised its forecast based on the impact of the spread of COVID-19 and recent earnings trends. For details regarding the revised forecast and risk factors, please refer to the Full-year company forecast for FY08/20 section.

For Q3 and beyond, the company expects a JPY351mn decline in sales and a JPY261mn decline in operating profit in the ▷ Smartphone Apps business as well as a JPY2.5bn decline in sales and a JPY444mn decline in operating profit in the IoT business. Sales were revised down significantly as the deteriorating hotel industry environment greatly affected the company’s lodging ▷ businesses such as &AND HOSTEL and tabii. In addition, while the company implemented measures to improve ARPU from

in-app ads for manga apps and generated some positive results, it expects lower manga app advertising revenue due to a recent decline in unit price of reward advertising (prices halved for some advertisers) and the overall deterioration of the advertising market caused by the COVID-19 outbreak. These factors have been accounted for in the revised forecast. and factory also made downward revisions to profit items from operating profit and below as a result of the downward revision ▷ to its sales forecast. In addition, the company plans to book the losses incurred during the closure of &AND HOSTEL as an extraordinary loss, which is reflected in the revised forecast. Due to uncertainty over the impact of the COVID-19 outbreak, the company conservatively reflected various assumptions from ▷ Q3 FY08/20 in its earnings forecast.

54/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Corporate governance and top management

Corporate governance structure (as of January 2021) Form of organization and capital structure

Company with an Audit and Supervisory Form of organization Board Controlling shareholder none Directors and Auditors

Number of directors under Articles of Incorporation 10 Number of directors 6 Term of service for directors under Articles of Incorporation One year Chairman of the board of directors President Number of outside directors 2 Number of independent outside directors 1 Number of auditors under Articles of Incorporation 10 Number of auditors 3 Number of outside auditors 3 Number of independent outside auditors 3 Other

Participation in electronic voting platform N/A Summary of convocation notice in English No Status on measures related to director incentives Introduction of stock options program Internal directors, internal auditors, Personnel eligible for stock options employees Disclosure on director compensation Individual compensation not disclosed Policy on determining compensation and calculation Yes methodology Corporate takeover defenses No Source: Shared Research based on company data

Top management Takamasa Ohara, Chairman Born in August 1984, Ohara started a number of companies between his days as a university student and the launch of and factory. He joined CA Mobile in April 2009. That June, he was dispatched to a subsidiary, zeronana Inc. He established docks Inc. in 2011, famous Inc. and Tsutekoto Inc. (now Eichi, Inc.) in 2012, and Day’s Inc. in 2014. As explained in the History section above, and factory was formed in September 2014 as a wholly owned subsidiary of famous, Inc. In October, Ohara and other directors acquired and factory’s shares from famous, Inc., with the aim of expanding the company. In November 2020, Mr. Ohara became the chairman of the board with no representative rights in line with the company limiting representative directors to the president in order to accelerate the decision-making process. He continues to promote the development of new businesses and provide advice and support relevant to the general management of the business.

Ohara explains that when he established the company, he brought together people with whom he had come into contact through work since his 20s. Qian Kun, CEO of IGNIS Ltd. (TSE Mothers: 3689), was an older colleague of Ohara’s when they were both at zeronana, a subsidiary of CA Mobile. IGNIS is one of the major shareholders of the company.

Rinji Aoki, President and Representative Director Born in November 1983. Joined CA Mobile in 2006. Dispatched to zeronana Inc. in 2008. Joined docks, Inc. in 2012. Became a director of and factory in 2015. Was a colleague of Ohara at zeronana, a CA Mobile subsidiary, when Ohara was stationed there. Has led the company’s Smartphone Apps business since its founding.

Yuki Umemoto, Director (in charge of the IoT Division) Born in September 1980. Joined Fujitsu Ten Ltd. (now Denso Ten Corp.) in 2004. Joined GREE, Inc. in 2010. In 2013, joined FreakOut Inc. (now FreakOut Holdings, Inc.). Became an executive officer at curations Inc. in 2015. Joined the company in January 2016. Appointed executive officer in August 2016 and named director in 2017.

55/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Tomoki Hasumi (in charge of the Corporate Administrative Division) Born in September 1983. Joined KPMG AZSA & Co. (now KPMG AZSA LLC) in 2006. Joined and factory in April 2016. Became a director at and factory in November 2019.

Corporate governance and factory has put a management and administrative structure based on its fundamental shareholder orientation in place, with policies focused on expanding earnings as a sustainable company and enhancing corporate value. The company also strives to increase management efficiency and speed. Recognizing its corporate responsibility to society, the company provides various services that contribute to society and seeks to achieve harmony among parties that hold an interest in the company.

To ensure the transparency and objectivity of its business activities, when putting a management and administrative management system in place, the company intends to establish a structure for monitoring the business execution process and disclosing information in a timely manner.

Dividend policy

The company recognizes shareholder returns as an important management priority. However, having been established only recently, the company believes that, rather than dividends, the best ways to increase shareholder returns are augmenting retained earnings in preparation to expand the business; increasing working capital in order to build a robust financial system and increase the company’s operations; and making capital investments.

For this reason, and factory has paid no dividends since its establishment, and the company plans to continue expanding retained earnings for the foreseeable future. While concentrating on boosting profitability and expanding its base of operations, and factory plans to provide shareholders with stable ongoing returns, taking the status of retained earnings expansion and the business environment surrounding the company into consideration. Furthermore, the company has no current plans regarding the potential timing or amount of dividends.

If the company does pay dividends from surplus, its fundamental policy is to pay these dividends annually, at the end of the fiscal year, with the dividend amount determined at the general meeting of shareholders. The company’s Articles of Incorporation provide for the issuance of interim dividends, based on a resolution by the Board of Directors.

Major shareholders (as of end-August 2020)

Top shareholders Shares held Shareholding ratio

Takamasa Ohara 3,386,246 34.46% Custody Bank of Japan, Ltd. (Trust account) 800,000 8.14% Rinji Aoki 587,573 5.98% Square Enix Co., Ltd. 379,784 3.86% Shu Takehana 284,236 2.89% Shogakukan Inc. 193,627 1.97% Shueisha Inc. 193,627 1.97% Hakusensha Co., Ltd. 193,627 1.97% Kosuke Mishima 168,640 1.72% The Master Trust Bank of Japan, Ltd. (Trust account) 161,400 1.64% SUM 6,348,760 64.6% Source: Shared Research based on company data

Square Enix, Shogakukan, Shueisha, and Hakusensha are business partners from whom the company receives app content.

56/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Employees FY08/15 FY08/16 FY08/17 FY08/18 FY08/19 FY08/20 Number of employees 8 17 41 65 90 119 YoY - 112.5% 141.2% 58.5% 38.5% 32.2% Source: Shared Research based on company data

In order for and factory to release a new app, it needs to increase the number of engineers and marketing staff, so the employee count tends to trend upward.

Glossary

UI/UX: A user interface (UI), which refers to all information the user sees, such as designs, fonts, and external appearance. The user experience (UX) describes the feelings and sensations the user experiences through a product or service.

Ad network: An arrangement in which multiple advertising media (such as websites, social media, blogs, etc.) are bundled together to create an ad distribution network. It allows advertisers to place ads across multiple publishers without having to deal with each publisher individually.

Affiliate: An arrangement through which an advertiser’s products or services are made available within a third-party app or site. The company managing the app or site receives compensation (advertising revenue) if the user purchases the products or services.

API: An application programming interface is a set of subroutine definitions, communication protocols, and tools for building software that provides building blocks for computer programs. An API allows applications and programs to interact with other software and functions.

Fourth Industrial Revolution: Technological innovation in areas such as IoT (described below), big data, and artificial intelligence. (AI) is a core element of this revolution. “Big data” refers to massive quantities of data that are difficult to register, store, manage, and analyze using conventional database management systems. “Artificial intelligence” indicates intelligence that resides in artificial (i.e., not human) computer systems and is capable of learning, reasoning, recognizing, and decision-making. ICT: Information and communication technology

IoT: Short for the Internet of Things, IoT describes the concept of physical items being connected over the internet. IoT may refer to new services that make this concept a reality, to a business model, or to elemental technologies. Some industry pundits believe that the ability to connect a wide range of items over the internet, collect resulting data, and analyze and make use of this data will make the provision of innovative, high-value-added functions and services possible.

IoT device: A device that can be connected to the internet. The 2017 White Paper on Information and Communications in Japan describes an IoT device as “a device that has a unique IP address and can be connected to the internet. These electronic devices are broad in scope, ranging from devices used as sensor network terminals to devices with computing functions.” Worldwide, the number of IoT devices is expected to grow from an estimated 17.3 billion in 2017 to more than 30.0 billion in 2020.

Labor force: The number of people aged 15 years or more who are able and willing to work.

MAUs: The number of monthly active users (MAUs) indicates the number of people who use an app in a given month.

Multiplay: The ability to play smartphone game apps with other users.

On-premise: Servers, software, and other information systems located within facilities managed by their users

57/59 and factory/7035 RCoverage LAST UPDATE: 2021.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Open innovation: Bringing together knowledge and technologies from a broad range of sources when developing new technologies and products.

Platform: The foundation upon, or environment in, which applications operate.

Revenue share: The allocation of obtained revenue to partner companies according to standards set in advance.

Test marketing location: A location where products under development can be provided to target consumers to gauge their reactions.

Profile

Company Name Head Office 9F, Sumitomo Fudosan Aobadai Tower and factory, inc. 3-6-28 Aobadai, Meguro-ku, Tokyo, Japan Phone Listed On - The First Section of the Tokyo Stock Exchange Established Exchange Listing September 16, 2014 September 9, 2018 Website Fiscal Year-End https: //andfactory.co.jp/ August 31 IR Contact IR Web https: //andfactory.co.jp/ir/ -

58/59 About Shared Research Inc. RCoverage Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by presenting a continuously updated third-party view of business fundamentals, independent of investment biases. Shared Research can be found on the web at https://sharedresearch.jp.

Current Client Coverage of Shared Research Inc. Advance Create Co., Ltd. Digital Garage Inc. Kanamic Network Co.,LTD Raysum Co., Ltd. ADJUVANT COSME JAPAN CO., LTD. Doshisha Corporation kaonavi, inc. RESORTTRUST, INC. Aeon Delight Co., Ltd. Dream Incubator Inc. KFC Holdings Japan, Ltd. ROUND ONE Corporation Aeon Fantasy Co., Ltd. Earth Corporation KI-Star Real Estate Co., Ltd. RYOHIN KEIKAKU CO., LTD. Ai Holdings Corporation Edion Corporation KLab Inc. SanBio Company Limited AI inside Inc. Elecom Co., Ltd. Kondotec Inc. SANIX INCORPORATED AirTrip Corp. en Japan Inc. Kumiai Chemical Industry Co., Ltd. Sanrio Company, Ltd. and factory, inc. Estore Corporation. Lasertec Corporation SATO HOLDINGS CORPORATION ANEST IWATA Corporation euglena Co., Ltd. Locondo, Inc. SBS Holdings, Inc. AnGes Inc. FaithNetwork Co., Ltd. LUCKLAND CO., LTD. Seikagaku Corporation Anicom Holdings, Inc. Ferrotec Holdings Corporation Marumae Co., Ltd. Seria Co.,Ltd. Anritsu Corporation FIELDS CORPORATION MATSUI SECURITIES CO., LTD. Serverworks Co.,Ltd. Apaman Co., Ltd. Financial Products Group Co., Ltd. Media Do Co., Ltd. SHIFT Inc. ARATA CORPORATION First Brothers Col, Ltd. Medical System Network Co., Ltd. Shikigaku Co., Ltd Artspark Holdings Inc. FreeBit Co., Ltd. MEDINET Co., Ltd. SHIP HEALTHCARE HOLDINGS, INC. AS ONE CORPORATION Gamecard-Joyco Holdings, Inc. MedPeer,Inc. SIGMAXYZ Inc. Ateam Inc. GameWith, Inc. Mercuria Investment Co., Ltd. SMS Co., Ltd. Aucfan Co., Ltd. GCA Corporation Metaps Inc. Snow Peak, Inc. AVANT CORPORATION Good Com Asset Co., Ltd. Micronics Japan Co., Ltd. Solasia Pharma K.K. Axell Corporation Grandy House Corporation MIRAIT Holdings Corporation SOURCENEXT Corporation Azbil Corporation GiG Works Inc. Monex Goup Inc. Star Mica Holdings Co., Ltd. AZIA CO., LTD. Hakuto Co., Ltd. MORINAGA MILK INDUSTRY CO., LTD. Strike Co., Ltd. AZoom, Co., Ltd. Hamee Corp. Mortgage Service Japan Limited. SymBio Pharmaceuticals Limited Base Co., Ltd Happinet Corporation MRT Inc. Synchro Food Co., Ltd. BEENOS Inc. Harmonic Drive Systems Inc. NAGASE & CO., LTD TAIYO HOLDINGS CO., LTD. Bell-Park Co., Ltd. HENNGE K.K. NAIGAI TRANS LINE LTD. Takashimaya Company, Limited Benefit One Inc. Hosokawa Micron Corporation NanoCarrier Co., Ltd. Take and Give Needs Co., Ltd. B-lot Co.,Ltd. Hope, Inc. Net Marketing Co., Ltd. TEAR Corporation Broadleaf Co., Ltd. HOUSEDO Co., Ltd. Net One Systems Co.,Ltd. Tenpo Innovation Inc. CanBas Co., Ltd. H2O Retailing Corporation Nichi-Iko Pharmaceutical Co., Ltd. 3-D Matrix, Ltd. Canon Marketing Japan Inc. IDOM Inc. Nihon Denkei Co., Ltd. The Hokkoku Bank,Ltd. Career Design Center Co., Ltd. IGNIS LTD. Nippon Koei Co., Ltd. TKC Corporation Carna Biosciences, Inc. i-mobile Co.,Ltd. NIPPON PARKING DEVELOPMENT Co., Ltd. TKP Corporation CARTA HOLDINGS, INC Inabata & Co., Ltd. NIPRO CORPORATION Tsuzuki Denki Co., Ltd. CERES INC. Infocom Corporation Nisshinbo Holdings Inc. TOCALO Co., Ltd. Chiyoda Co., Ltd. Infomart Corporation Nisso Corporation TOKAI Holdings Corporation Chori Co., Ltd. Intelligent Wave, Inc. NS TOOL CO., LTD. Tokyu Construction Co., Ltd. Chugoku Marine Paints, Ltd. ipet Insurance CO., Ltd. OLBA HEALTHCARE HOLDINGS,Inc. TOYOBO CO., LTD. cocokara fine Inc. Itochu Enex Co., Ltd. OHIZUMI MFG. CO., LTD. Toyo Ink SC Holdings Co., Ltd COMSYS Holdings Corporation ItoKuro Inc. Oisix ra daichi Inc. Toyo Tanso Co., Ltd. COTA CO.,LTD. JAFCO Co.,Ltd. Oki Electric Industry Co., Ltd Tri-Stage Inc. CRE, Inc. JMDC Inc. ONO SOKKI Co., Ltd. TSURUHA Holdings CREEK & RIVER Co., Ltd. JSB Co., Ltd. ONWARD HOLDINGS CO.,LTD. VISION INC. Daiichi Kigenso Kagaku Kogyo Co., Ltd. JTEC Corporation Pan Pacific International Holdings Corporation VISIONARY HOLDINGS CO., LTD. Daiki Axis Co.,Ltd. J Trust Co., Ltd PARIS MIKI HOLDINGS Inc. World Holdings Co., Ltd. Daiseki Co., Ltd. Japan Best Rescue System Co., Ltd. PIGEON CORPORATION YELLOW HAT LTD. Demae-Can CO., LTD JINS HOLDINGS Inc. P3, inc. YOSHINOYA HOLDINGS CO., LTD. DIC Corporation JP-HOLDINGS, INC. QB Net Holdings Co., Ltd. ZAPPALLAS, INC. Digital Arts Inc. KAMEDA SEIKA CO., LTD. RACCOON HOLDINGS, Inc.

Attention: If you would like to see companies you invest in on this list, ask them to become our client, or sponsor a report yourself.

Disclaimer: This document is provided for informational purposes only. No investment opinion or advice is provided, intended, or solicited. Shared Research Inc. offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. We shall not be held responsible for any damage caused by the use of this report. The copyright of this report and the rights regarding the creation and exploitation of the derivative work of this and other Shared Research Reports belong to Shared Research. This report may be reproduced or modified for personal use; distribution, transfer, or other uses of this report are strictly prohibited and a violation of the copyright of this report. Our officers and employees may currently, or in the future, have a position in securities of the companies mentioned in this report, which may affect this report’s objectivity.

Japanese Financial Instruments and Exchange Law (FIEL) Disclaimer: The report has been prepared by Shared Research under a contract with the company described in this report (“the company”). Opinions and views presented are ours where so stated. Such opinions and views attributed to the company are interpretations made by Shared Research. We represent that if this report is deemed to include an opinion from us that could influence investment decisions in the company, such an opinion may be in exchange for consideration or promise of consideration from the company to Shared Research.

Contact Details Shared Research Inc. 3-31-12 Sendagi Bunkyo-ku Tokyo, Japan https://sharedresearch.jp Phone: +81 (0)3 5834-8787 Email: [email protected]

59/59