Autonomous Control Laboratory : Notice of Medium-Term Management Direction "ACSL Accelerate 2020"

August 14, 2020

Autonomous Control Systems Laboratory Ltd.

Notice of Medium-Term Management Direction "ACSL Accelerate 2020"

Autonomous Control Systems Laboratory Ltd. (ACSL) has decided to announce that it has developed a new mid-term management direction, "ACSL Accelerate 2020," covering the period from fiscal year ending March 31st, 2021 to fiscal year ending March 31st 2023.

With a mission of "Liberate Humanity through Technology" and a vision of "Revolutionizing social infrastructure by pursuing cutting-edge robotics technology," ACSL has solved a variety of onsite problems by creating systems that realizes operational efficiency and unmanned operations with autonomous control technology and by implementing industrial drones in society.

While the drone market shifts from a "Trial" phase to "Social Implementation" phase, new lifestyle and measures against infectious diseases and progression of Society 5.0 have brought great changes to our business environment.

In this environment, ACSL has developed a set of mid-term management directions, goals and key milestones to ensure that all stakeholders involved, both internal and external, focus on common value creation for our clients and continuous corporate value growth.

An overview of this medium-term management direction is shown in the Appendix.

Attention

This document is an unofficial translation of the timely disclosure on August 14, 2020 by ACSL and this is for reference purpose only. In case of a discrepancy between the

English and Japanese versions, the Japanese original shall prevail

1

ACSL Accelerate FY20

Autonomous Control Systems Laboratory 2020年8月14日

CONFIDENTIAL

This materials should not be used without prior consent from Autonomous Control Systems Laboratory Ltd.

Disclaimer

Copyright © 2020 Autonomous Control Systems Laboratory Ltd.

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

Information in this material is subject to change without notice, its accuracy is not guaranteed and it may not contain all material information concerning Autonomous Control Systems Laboratory Ltd. (the "Company"). The Company makes no representation regarding, and assumes no responsibility or liability for, the accuracy or completeness of, or any errors or omissions in, any information contained herein.

In addition, the information contains projections and forward-looking statements that may reflect the Company's current views with respect to future events and financial performance. These views are based on current assumptions which are subject to various risks and which may change over time. No assurance can be given that future events will occur, that projections will be achieved, or that the Company's assumptions are correct. It is not the intention to provide, and you may not rely on this presentation as providing, a complete or comprehensive analysis of the Company's financial or trading position or prospects.

This presentation does not constitute an offer or invitation to purchase or subscribe for any securities or financial instruments or to provide any investment service or investment advice, and no part of it shall form the basis of or be relied upon in connection with any contract, commitment or investment decision in relation thereto.

© 2020 ACSL Ltd. All Rights Reserved.

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Objective of the "ACSL Accelerate"

While the drone market shifts from a "Trial" phase to "Social Implementation" phase, new lifestyle and measures against infectious diseases and progression of Society 5.0 have brought great changes to our business environment.

ACSL has developed a set of mid-term management directions, goals and key milestones to ensure that all stakeholders involved, both internal and external, focus on common value creation for our clients and continuous corporate value growth:

・A Masterplan defining the "To-Be" State in 10 years, and

・A Mid-term Management Direction (FY20-22)to realize the masterplan

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Highlights of ACSL Accelerate FY20

The market environment for industrial drones is likely to change significantly in three years, unlocking an unprecedented market

1. Regulations enacted by 2022 to enable beyond-visual-line-of-sight flight over manned areas
2. Drone security becoming more essential for both the public and private sectors
3. Drones gain attention for new use cases to combat the spread of infectious diseases

In ten years, ACSL will shift its core business area to flight over populated areas, which will constitute the majority of the market, and aim to achieve 100 Bn JPY sales and 10 Bn JPY profit

Mid-term Management Direction aims for 5.5 Bn JPY sales and 0.75 Bn JPY profit

• Commercialization of application-specific drones, introduction of subscription models, full-scale entry into ASEAN region, and establishment of CVC for technology procurement
• Annual 2,500 drones shipped, 50% gross profit margin, 0.8 Bn JPY for R&D investment

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Agenda

1. Business environment
2. Changes in the industrial drone market environment
3. Masterplan

. Mid-term Management Direction

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1. Business environment

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Megatrend

With its declining birthrate and aging population, Japan is expected to be one of the first countries in the world to face a variety of social issues, and the imbalance between supply and demand of labor is fast approaching

Supply of labor force

Population	-26%
decline rate*2
	(2020~2060)
Labor force*1	-35%
	(2020~2060)

Demand for labor force

50-yrs old	x 2.5
infrastructure*3

(2018~2023)

Logistics flow*4	x 5
	(1988~2018)

*1: White Paper on Aging Society (Entire Version), Cabinet Office, Government of Japan

*2: White Paper on Aging Society 2019" by the Cabinet Office

*3: Ministry of Land, Infrastructure and Transport, "Social Infrastructure Today and in the Future, Social Infrastructure Today and in the Future

*4: Ministry of Land, Infrastructure, Transport and Tourism, "Fiscal Year 2018 Delivery Service Performance Data" (Japanese only)

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Robotics technology to solve social issues

The use of robotics technology to solve social problems is being addressed in many areas, and the push for labor-saving and unmanned systems is underway. Drones are also beginning to attract attention as a new potential solution

Robotics	RPA	Inspection robots	Auto-delivery	Care robots
Technology	using 27%→51%*1)	market: 18 to 24.5 bn yen*2.)	market: 4,00 to 500 billion	1.7 to 2.9 billion yen*4)
	(# of major companies	(Infrastructure image processing	(Next-gen logistics system	(Care robot market
(Example)			yen*3)

Drones

Social Issues

Labor			Decreasing
Aging	Increasing	birthrate and
population
infrastructure	logistical flow	aging
decline
		population

*1: MM Research Institute, "RPA Domestic Usage Trend Survey 2020" (June 2018 to November 2019)

*2: Fuji Research Institute, "2018 Edition of Next Generation Infrastructure Maintenance and Management Technology and System-Related Market Status and Future Prospects" (2015 to 2018)

*3: Fuji Research Institute, "Next Generation Logistics Business Systems and Future Prospects 2019," January 23, 2020 (transition from 2016 to 2019)

*4: Yano Research Institute, "The Potential and Future of Nursing Care Robots 2018" (transition from 2016 to 2019)

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What Drones as next-gen social infrastructure can do

Drones can overcome the limitations of surface area, both indoors and outdoors, to achieve automation and labor savings. The potential fields of application of drones for labor-saving and unmanned systems are many

Movement in 3D space	＋ Remote Control/Automation
	Outdoor	Remote control
	Semi-Indoor	(4G, 5G / radio
"Void"	communication)
(e.g., Tunnels)
	Indoor	Autonomous Flight
	Automated Controls
	(e.g., factories)

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2. Changes in the industrial drone

market environment

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Expanding market opportunities through legislation is advancing

Regulations for beyond-visual-line-of-sight (BVLOS) flight in populated areas (including urban areas) are expected to be in place soon, allowing drones to fly in environments where they could not be flown before, opening a huge market

Level 4	Lifeline
infrastructure

City

patrol

Urban

Populated areas (including cities)

Aerial photography, Pesticide distribution,
bridge inspection, etc.	surveys, etc.

BVLOS flight in populated areas

(including cities)

Safe and reliable drones will be able to fly over people, such as in cities, both remotely controlled and automated

Japan roadmap has regulations in place by 2022.

delivery

Security

Traffic

management

	Level 1	Level 2
Unpopulated
Visual flight
areas (islands,	Visual flight
(manual
mountains)
control)

Visual

Level 3

BVLOS flight in unpopulated areas

(islands, mountains)Remote islands, inter-mountain logistics, and Disaster response in mountainous areas, etc.

Beyond-visual-line-of-sight (BVLOS)

1: Roadmap for Small UAV Utilization and Technological Development (April 28, 2016, Public-Private Sector Council for the Improvement of the Environment for Small UAVs)

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Increasing demand for drone security as an IoT device

Drones are being recognized as an IoT device and accordingly the demand for cyber security is increasing. Both public and private sectors are increasing awareness towards data security for image and operational location data.

Legislation to promote	Drone development	Chinese drone security risk
intended for government
drone security*1	reports
procurement

Government passed legislation to promote adoption of 5G and drones while ensuring cyber security

NEDO has allocated 1.61 billion yen*2 for development of a high-security,low-cost standard drone and a standard flight controller designed for government procurement.

The New York Times reports that personal information is being collected in Chinese drone Android applications

"Google's Android operating system that

powers drones made by China-based….

collects large amounts of personal information that could be exploited by the Beijing government"

（The New York Times; 2020年7月23日; Popular Chinese-Made Drone Is Found to Have Security Weakness）

*1: "Outline of the Draft Law on Promotion of Development, Supply and Introduction of Specified Advanced Information and Communications Technology Systems" February 19, 2020 Ministry of Economy, Trade and Industry

*2: "Development of Basic Safety Drone Technology" June 25, 2020 New Energy and Industrial Technology Development Organization (NEDO)

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New use cases emerging as world adapts to new lifestyle

The world is adapting to a "new normal" with measures against the spread of infectious diseases, demand for remote

work and reduced inter-personal contact. Recognition of benefits of drones is creating a tailwind for the drone industry.

Non-contact

Remote control

Monitoring

Reduced opportunities for contact through automated drone deliveries (e.g., transporting medical and daily commodities)

Business continuity through remote, automated drone control (e.g., infrastructure inspections)

Use of drones as a means of managing residents' health conditions, monitoring streets and disseminating information

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3. Masterplan

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What ACSL will accomplish

MISSION

Liberate Humanity Through Technology

VISION

Revolutionizing social infrastructure by pursuing cutting-edge robotics technology

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"To-Be" state in 10 years

1

2

3

4

5

6

7

Global pioneer in solving social infrastructure issues

More than 100 bn JPY sales, 10 bn JPY sales profit

Mass production manufacturer that produces 30,000 units/year

Supporting the country with de facto standards

Developing cutting-edge technologies for autonomous control (cerebellar and cerebral)

Nurturing the industry's most advanced and talented human resources Constantly working to improve its corporate value and financial KPIs

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Core areas of the drone business in the next 10 years

Master plan for the drone business in 10 years' time is to shift our core business area from visual-line-of-sight flight (Levels 1 and 2), which generated 1.16 billion yen in FY19, to the huge growth potential of BVLOS flight (Levels 3 and 4)

Populated areas (including cities)

		Level 1	Level 2
	Visual flight
Unpopulated	Visual flight
	(manual
areas (islands,
	control)
mountains)
	FY19: 1.16 bn JPY

Visual

Level 4

BVLOS flight in populated areas (including cities)

FY30 Core Business

Level 3

BVLOS flight in unpopulated areas (islands, mountains)

FY19: 0.1 bn JPY

Beyond-visual-line-of-sight (BVLOS)

Lifeline City infrastructure patrol

Urban

delivery

Security Traffic management

Build a solid drone business base in the huge Level 3 and Level 4 markets Potential market:

・Delivery shifts to the sky

- Post Office 24,000 offices

- Populated islands 416 islands

・Labor saving in inspection

- Smokestacks	90k stacks in JPN
- Water pipelines	470k km

・Risk saving for dangerous tasks

- Large disasters 67 cases（2011-18)

1: Roadmap for Small UAV Utilization and Technological Development (April 28, 2016, Public-Private Sector Council for the Improvement of the Environment for

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4. Mid-term Management Direction

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Business strategy highlight

Evolve from "prototype factory" that focused on demonstration testing and custom development to promote the development, production, and sale of mass-produced,application-specific drones to achieve rapid business expansion

New business strategy

Development of application- specific drones

Introduction of subscription model

Full scale entry into

ASEAN region

Technology procurement through CVC

Commercialization of small aerial drones (for government procurement and the private sector), medium logistics drones (Level 4 compliant), smokestack inspection drones, and enclosed environment inspection drones

Subscription-based fixed income/recurring sales model to be introduced to meet various customer needs, in addition to one-off drone sales

Establish an office in Singapore, the core city in the ASEAN region, and hire local talents to conduct development and sales activities, and begin full-scale overseas expansion

Establish CVC (or equivalent function) and actively procure technologies with potential for technology synergies, such as AI, blockchain, security, image processing and sensors

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Sales

Aiming for sales of approximately 5.5 billion yen in FY22 in conjunction with the commercialization of application-specific drones from FY20, and steadily build up a pipeline for future sales of application-specific drones after FY22.

Sales (base scenario)

Mass production and

100 mn JPY			Aggressive Investment for	55
			Growth		5	Other
						Application-specific Drones Sales
Strengthening Product			~35	20	（incl. selling off and subscriptions）
		-	Small Aerial drones	1bn
Capabilities and Market
				-	Other drones	1bn
Opportunity Identification
		12.7	14~17			Development of application-
	8.0			30	specific drones
				- PoC and development 2 bn
3.7
					-	Platform drone sales	1 bn
FY17	FY18	FY19	FY20	FY21	FY22

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Sales breakdown

Aiming for an annual shipment of more than 2,000 units by commercialization and mass production of application- specific drone toward FY22, with a significant increase in sales of drones, including subscription

		FY20		FY22
	Units		Value	Units		Value
			(100mn JPY)			(100mn JPY)
Sales of application-specific drones				1300~		20
Small aerial photo（low ASP）	-		-	1,000~		10
Other （high ASP）				300~		10
Development of application-specific	~200		12.5~15	~300		30
drones
PoC and Development	-		7.5~10	-		20
Sales of Platform/Evaluation drones	~200		~5.0	~300		10
Other	-		~1.5	-		5

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KPI in the Mid-term Management Direction

Established new KPIs in the Mid-term Management Direction in order to accurately track the progress of new business models.

From

To

Summary KPI

Drone Sales	Sales of drones	Units
in STEP 3~4

Sales of application -specific drones

Summary

• Sales of Development of application-specific drones (incl. selling off and subscriptions)

KPI

• Units
• Applications

Solution	PoC and custom	Projects
development in
Develop-
STEP 1~2
ment

Development of application -specific drones

▪	PoC and custom	▪	Projects
	development using platform	▪	Units of
	drones		platform
▪	Sales of platform/evaluation		drones
	drones

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Numerical targets

By commercializing small aerial photo drones, ACSL aims to achieve a solid business foundation of 5.5 billion yen in sales and 750 million yen in operating income by FY22, despite a decline in profit margins due to the rapid increase in sales.

	FY17	FY18	FY19	FY20	FY22
Revenue [JPY]	370 mn	800 mn	1.2 bn	1.4~1.7 bn	5.5 bn
Gross profit	48%	53%	63%	57%	50%
R&D	320 mn	360 mn	270 mn	410 mn	800 mn
Sales profit	▲540 mn	▲300 mn	10 mn	▲250~0 mn	750 mn

In FY22, the commercialization of small drones for public and private sector will help build a solid sales profit, despite a decline in gross margin.

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R&D Expenditure Themes

ACSL will continue to spend on human resources, consigned development, equipment purchases, etc. on technologies that will increase the value of its products, including exploratory themes, with a focus on its core control technology.

• Visual SLAM
• Point cloud, 3D modelling
• Camera optimization
• Control AI
• Big data
• Tracability
• Collision avoidance
• Remote sensing
• Point cloud sensors

Image processing

AI /	Smart
Block chain Control	devices
technology

SensorsCertification

Security

• Smartphones
• Applications
• Smart glasses
• Aircraft
• Environmental/ production
• Security
• Data security
• Anti-hijacking
• Control safety

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Financial policy, governance and HR strategy

Maintain a certain level of cash while aggressively pursuing R&D and investment to capture new business growth opportunities. As the business expands, strengthen corporate governance, recruit talented people and increase diversity

Continue aggressive

investment

Maintain healthy

financials

Strengthen corporate

governance

Attract top talents

© 2020 ACSL Ltd. All Rights Reserved.

• Aggressive investment in the business to achieve ACSL Accelerate FY20
• Promote M&A and strategic investment to accelerate growth and establish CVCs for flexible investment
• Active use of external partners instead of making large investments to secure production facilities in-house
• Retain a certain level of cash and invest for growth in an agile manner
• Continuously strengthen our corporate governance, internal control and IT systems to withstand future market changes
• Retention and acquisition of top talent in line with the expansion of business scale, mainly in research and development
• Introduction of stock compensation-type stock options for executives and employees
• Strengthen diversity. Targeting to increase the number of nationalities of our employees

from 12 to 15 or more in three years.

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Autonomous Control Systems Laboratory Ltd.