MEDIROM Healthcare Technologies(US:MRM)2025-04-29 20:15PART I Key Information This section details significant investment risks, including operational challenges, financial concerns, M&A integration issues, and risks related to ADS ownership and regulatory compliance Risk Factors This subsection comprehensively outlines operational, financial, market, and investor-specific risks, including M&A activities and governance concerns - The company's functional and reporting currency is the Japanese yen (JPY); convenience translations to U.S. dollars are made at an exchange rate of ¥157.37 = US$1.00 as of December 31, 202425 - The company is an 'emerging growth company' and a 'foreign private issuer', allowing reduced disclosure and home country governance practices, potentially offering less investor protection than U.S. domestic issuers29140144 - The company faces a risk of being delisted from the Nasdaq Capital Market for failing to meet continued listing requirements, such as the minimum bid price of $1.00 per share, for which it received a notification of non-compliance on February 27, 2025145147149 - The Chief Executive Officer, Kouji Eguchi, holds a 'golden share' (Class A common share) with veto rights on key corporate matters, limiting other shareholders' ability to influence the company's business154 - The company has identified several material weaknesses in its internal control over financial reporting, including issues with journal entry reviews, management review controls, user access controls (segregation of duties), and expertise in complex accounting transactions159163 - There is a risk that the company will be classified as a Passive Foreign Investment Company (PFIC), which could result in adverse U.S. federal income tax consequences for U.S. holders, a risk increased due to recent declines in the ADS market price104105 Information on the Company This section provides a detailed overview of MEDIROM's business, history, and strategic direction across its Relaxation Salons, Luxury Beauty, and Digital Preventative Healthcare segments, including key acquisitions and growth initiatives History and Development of the Company This subsection outlines the company's corporate evolution, key milestones, strategic acquisitions, and significant reorganizations, including the spin-off of its Digital Preventative Healthcare business and the planned acquisition of JGMC - The company was incorporated in Japan on July 13, 2000, and listed its ADSs on The Nasdaq Capital Market in December 2020209 - The company has grown through acquisitions, including ZACC (a high-end hair salon) in 2021 and SAWAN CO. LTD. (owner of 'Ruam Ruam' luxury relaxation salons) in 2021213216 - A significant reorganization occurred in July 2023, where the Digital Preventative Healthcare business was transferred to a new subsidiary, MEDIROM MOTHER Labs Inc. (MML), to accelerate its growth and external financing217219 - On June 30, 2024, the company signed an agreement to acquire 70% of Japan Gene Medicine Corporation (JGMC) to expand into the prenatal diagnosis business220 Business Overview The company operates three segments: Relaxation Salons, Luxury Beauty, and Digital Preventative Healthcare, with the Relaxation Salon segment being the largest contributor to FY2024 revenue, and aims for growth through network expansion and HealthTech investments Revenue by Business Segment (FY2024 vs FY2023) | Segment | FY2024 Revenue (JPY million) | FY2024 Revenue (%) | FY2023 Revenue (JPY million) | FY2023 Revenue (%) | | :--- | :--- | :--- | :--- | :--- | | Relaxation Salon | 7,446 | 89.7% | 6,060 | 88.8% | | Luxury Beauty | 699 | 8.4% | 568 | 8.3% | | Digital Preventative Healthcare | 154 | 1.9% | 200 | 2.9% | - As of December 31, 2024, the company's Relaxation Salon Segment had 308 locations across Japan, primarily in the Tokyo metropolitan area226 - The company is expanding its Digital Preventative Healthcare segment, which includes the government-sponsored Specific Health Guidance program via its Lav® app and the MOTHER Bracelet®, a fitness tracker that does not require electric charging228278 - A key growth strategy is the sale of company-owned salons to investors, from whom the company then charges management fees; revenue from salon sales accounted for 26.7% of consolidated revenue in FY2024234235 Organizational Structure This subsection details the company's principal operating subsidiaries as of December 31, 2024, including their ownership percentages, and outlines a post-year-end reorganization effective January 1, 2025 Principal Operating Subsidiaries as of Dec 31, 2024 | Subsidiary Name | Jurisdiction | Percentage Interest Held | | :--- | :--- | :--- | | Medirom Shared Services Inc. | Japan | 100% | | WING Inc. | Japan | 100% | | JOYHANDS WELLNESS Inc. | Japan | 100% | | Medirom Human Resources Inc. | Japan | 100% | | SAWAN CO. LTD. | Japan | 100% | | ZACC Kabushiki Kaisha | Japan | 100% | | MEDIROM MOTHER Labs Inc. | Japan | 93.73% | - Effective January 1, 2025, WING Inc. and Medirom Human Resources Inc. merged, with WING Inc. as the surviving entity, which was renamed 'MEDIROM Wellness Co.'; JOYHANDS WELLNESS Inc. transferred its spa business to the new entity and was subsequently sold400 Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting a 21.5% revenue increase in FY2024 to ¥8.30 billion, improved net income, and adjusted EBITDA, while addressing significant liquidity concerns and critical accounting estimates Operating Results In FY2024, total revenue increased by 21.5% to ¥8.30 billion, driven by growth in Relaxation Salon and Luxury Beauty segments, despite a decline in Digital Preventative Healthcare, leading to a narrowed operating loss and increased net income and Adjusted EBITDA Consolidated Statement of Operations Highlights (FY2024 vs. FY2023) | Metric (in thousands JPY) | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 8,299,134 | 6,827,943 | 21.5% | | Relaxation Salon Revenue | 7,446,200 | 6,059,851 | 22.9% | | Luxury Beauty Revenue | 699,301 | 567,695 | 23.2% | | Digital Preventative Healthcare Revenue | 153,633 | 200,397 | (23.3)% | | Operating Income (Loss) | (18,102) | (391,579) | 95.4% | | Net Income | 138,191 | 115,049 | 20.1% | | Adjusted EBITDA | 417,467 | 306,324 | 36.3% | - The increase in Relaxation Salon revenue was primarily due to increased sales of salons under the sale-and-outsource business model, which generated ¥2.22 billion in 2024 compared to ¥1.01 billion in 2023446 - Revenue from the Digital Preventative Healthcare Segment decreased primarily due to a temporary suspension of MOTHER Bracelet® and Gateway device shipments caused by technological issues449 - Selling, general and administrative (SG&A) expenses increased by 14.3% in 2024, mainly due to higher professional fees, allowance for doubtful accounts, amortization of store operating rights, directors' salaries, and recruiting expenses457 Liquidity and Capital Resources The company faces precarious liquidity with ¥329.4 million in cash as of December 31, 2024, and substantial doubt about its going concern ability due to a working capital deficit and negative operating cash flows, necessitating additional capital raising and salon sales - The company's cash and cash equivalents as of December 31, 2024, were ¥329.4 million; management has concluded that substantial doubt exists about the company's ability to continue as a going concern for at least 12 months466467468 Summary of Cash Flows (in thousands JPY) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | (1,331,681) | (631,737) | | Net cash provided by (used in) investing activities | 361,393 | (328,576) | | Net cash provided by financing activities | 1,193,340 | 461,206 | - As of December 31, 2024, total indebtedness was ¥1.88 billion, including ¥1.04 billion in business loans and ¥800 million in convertible bonds75481486 - The company is in negotiations for financing for its planned acquisition of 70% of JGMC, which is expected to significantly increase interest costs in the future435436 Critical Accounting Estimates This subsection details key accounting policies requiring significant management judgment and estimation, including revenue recognition for salon sales and franchise fees, lease accounting, impairment of long-lived assets, accounting for acquisitions, and valuation of deferred tax assets - Revenue from the sale of directly-owned salons is recognized at a point in time when control is transferred; the company also manages these salons for investors, recognizing management fees over the term of the service agreement501502 - Initial franchise fees are recognized as revenue ratably over the expected average contract life of 7-10 years, as there is a material right related to renewals504 - The company assesses impairment of long-lived assets at the individual salon level; in 2024, an impairment loss of ¥22.9 million was recognized on long-lived assets517520 - For acquisitions, the company applies a screen test to determine if a transaction is a business combination or an asset acquisition, which requires significant judgment523 Directors, Senior Management and Employees This section details the company's leadership, including executive officers, directors, and corporate auditors, their compensation, stock option plans, and the workforce composition as of December 31, 2024 FY2024 Compensation of Directors and Corporate Auditors | Category | Number of Persons | Total Remuneration (in thousands JPY) | | :--- | :--- | :--- | | Executive directors | 2 | 48,998 | | Outside directors | 2 | 4,200 | | Full-time corporate auditor | 1 | 3,300 | | Outside corporate auditors | 2 | 2,100 | - As of December 31, 2024, the company had 436,000 outstanding stock options with a weighted average exercise price of JPY 1,193 per share174552 - The company has a Board of Corporate Auditors, as permitted by Japanese law for corporate governance, instead of an audit committee; this board has a statutory duty to supervise the administration of the company's affairs by the directors557560 - As of December 31, 2024, the company employed 334 full-time, 621 part-time, and 96 fixed-term employees568 Major Shareholders and Related Party Transactions This section details the company's ownership structure, highlighting CEO Kouji Eguchi's significant stake and 'golden share' veto rights, along with various related party transactions including loan guarantees and consulting fees - As of December 31, 2024, CEO Kouji Eguchi beneficially owned 22.71% of the company's common shares and holds a Class A 'golden share' with special veto rights573 - CEO Kouji Eguchi is a personal guarantor for five of the company's bank loans, with an outstanding amount of ¥204.1 million as of December 31, 2024578 - In 2023, COZY LLC, a company controlled by the CEO, conducted a stock repurchase plan, acquiring 22,543 ADSs for approximately ¥19.0 million581582 - Consulting fees were paid to entities owned by independent directors Tomoya Ogawa and Akira Nojima, and corporate auditor Osamu Sato, through March 2023, after which they began receiving standard director/auditor remuneration586587588 Financial Information This section refers to the consolidated financial statements in Item 18, confirms no material legal proceedings, and states the company's policy to retain earnings for business development rather than paying cash dividends - The company is not currently a party to any material legal proceedings594 - The company does not intend to pay any cash dividends in the foreseeable future, planning to retain earnings to finance business development and expansion595 Additional Information This section covers supplementary details including the MOTHER Bracelet® development agreement, Japan's FEFTA regulations on foreign investment, and U.S. federal income tax considerations, notably the risk of Passive Foreign Investment Company (PFIC) classification - The company has a development and production agreement with Matrix Industries, Inc. for its MOTHER Bracelet®, which grants exclusivity in the Asia territory; the agreement was extended to December 31, 2024, and is under negotiation for further extension606 - Under Japan's Foreign Exchange and Foreign Trade Act (FEFTA), direct acquisition of the company's common shares by a 'Foreign Investor' is subject to a prior filing requirement due to the company's data processing activities in its Digital Preventative Healthcare Segment611 - For U.S. holders, there is a significant risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which could lead to adverse U.S. federal income tax consequences; the company's risk of becoming a PFIC has increased due to declines in its ADS market price632 Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate risk on variable debt, foreign currency exchange risk from JPY fluctuations, and credit risk from trade receivables, along with mitigation strategies - As of December 31, 2024, the company's bank borrowings totaled ¥1.04 billion, with ¥295.7 million being variable rate loans; a 100 basis point increase in interest rates on these variable loans would increase annual interest expense by ¥719 thousand673 - The company is exposed to foreign currency risk; a hypothetical 10% depreciation in the value of the Japanese yen against the U.S. dollar would have resulted in a ¥23.7 million decrease in net income before tax for the year ended December 31, 2024677 - Credit risk is managed through policies and procedures; the company believes the concentration of risk is low as no single customer accounted for 10% or more of total revenue in FY2022, 2023, or 2024685 PART II Controls and Procedures This section addresses the ineffectiveness of the company's disclosure controls and internal control over financial reporting due to identified material weaknesses, outlining a remediation plan involving system improvements and enhanced financial team capacity - Management concluded that the company's disclosure controls and procedures were not effective as of the end of the period covered by the report708 - Several material weaknesses in internal control over financial reporting were identified710 - Identified material weaknesses include: * Insufficiency of effective processes for review and approval of journal entries * Insufficient management review controls over key financial information * Ineffective user access controls, resulting in insufficient segregation of duties * Ineffective internal controls over complex or non-routine accounting transactions due to limited personnel and technical expertise711 - A remediation plan is underway to address these weaknesses, involving system improvements, process streamlining, and enhancing the financial team's capacity with internal and external support714 Miscellaneous This section covers governance and compliance, including the company's Board of Corporate Auditors structure, auditor fees, a change in certifying accountant, adherence to Japanese corporate governance as a foreign private issuer, and cybersecurity risk management Principal Accountant Fees (in thousands JPY) | Fee Category | 2024 | 2023 | | :--- | :--- | :--- | | Audit Fees | 101,779 | 93,742 | | Audit-Related Fees | 18,135 | — | | Tax Fees | — | — | | All Other Fees | — | — | - The company, as a foreign private issuer, follows Japanese law in lieu of certain NASDAQ corporate governance rules, including those related to board independence, audit committee composition, and compensation/nomination committees725727 - The company reported a change in its certifying accountant in December 2024 but states there were no disagreements of the type required to be disclosed723 - The company has processes to manage cybersecurity risks and did not identify any incidents in FY2024 that materially affected its business, operations, or financial condition730731 PART III Financial Statements This section presents the company's audited consolidated financial statements for FY2022-2024, prepared under U.S. GAAP, highlighting the independent auditor's 'Going Concern' issue due to working capital deficiency and the need for additional funding - The independent auditor's report includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern due to a significant working capital deficiency and the need to raise additional funds743750 Consolidated Balance Sheet Highlights (As of Dec 31) | (in thousands JPY) | 2024 | 2023 | | :--- | :--- | :--- | | Total Current Assets | 2,706,062 | 1,758,704 | | Total Assets | 8,090,671 | 6,849,189 | | Total Current Liabilities | 4,181,481 | 3,560,593 | | Total Liabilities | 6,902,613 | 6,633,228 | | Total Equity | 987,898 | 215,961 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in thousands JPY) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenues | 8,299,134 | 6,827,943 | 6,954,057 | | Operating Income (Loss) | (18,102) | (391,579) | 96,967 | | Net Income | 138,191 | 115,049 | 148,965 | - In 2024, the company changed its accounting estimate for the useful life of store operating rights from three to seven years, which reduced amortization expense by ¥150.7 million and increased net income by ¥103.6 million810