Medirom Healthcare Technologies Inc. — FY2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022; this is an annual report, not a standalone 2022 Q4 report. Financial statements are prepared under U.S. GAAP and reported in Japanese yen. U.S. dollar figures are filing convenience translations.
Business context
Medirom operates and franchises relaxation salons in Japan, alongside a luxury hair-salon business and digital preventative-healthcare products and services. At year-end it had 312 relaxation salons: 168 company-owned, 113 franchised, and 31 investor-owned salons operated by Medirom. More than 85% of revenue was generated in Japan; the relaxation salon business remained the largest segment.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | ¥6.954 billion | ¥5.410 billion |
| Operating income (loss) | ¥96.967 million | ¥(470.587) million |
| Net income (loss) | ¥148.965 million | ¥(990.731) million |
| Adjusted EBITDA (non-GAAP) | ¥293.931 million; 4.2% margin | ¥(77.974) million; (1.4)% margin |
| Net cash used in operating activities | ¥685.697 million | ¥557.231 million |
- Revenue increased 28.5%. Relaxation salon revenue was ¥5.973 billion, up 14.9%; luxury beauty revenue was ¥594.761 million, up 251.3%, primarily reflecting a full year of ZACC consolidation; and digital preventative-healthcare revenue was ¥386.383 million, up 778.8% from a smaller base.
- Salon sales to investors generated ¥1.123 billion of revenue, versus ¥559 million in 2021. Medirom sold 19 salons in 2022 and managed 31 investor-owned salons at year-end.
- Cost of revenue was ¥5.052 billion, or 72.6% of revenue, compared with 73.8% in 2021. SG&A was ¥1.805 billion, or 26.0% of revenue, versus 33.7%. No impairment loss was recorded in 2022, compared with ¥63.211 million in 2021.
- Cash and cash equivalents were ¥605.454 million at year-end, up from ¥370.617 million. Investing activities provided ¥580.437 million, largely reflecting salon-sale proceeds; financing activities provided ¥340.097 million, including convertible-bond proceeds.
- Current assets were ¥2.363 billion and current liabilities ¥3.642 billion. Total liabilities were ¥6.807 billion against total assets of ¥6.747 billion; shareholders’ deficit was ¥59.378 million.
- Bank-loan principal outstanding was ¥751.318 million. The company also issued ¥500 million of unsecured convertible bonds in December 2022, bearing 5% interest, maturing in 2027, and subject to holder conversion and put rights after six months. Operating lease obligations totaled ¥2.052 billion in undiscounted future payments.
- The relaxation salon segment reported ¥1.272 billion of operating income; digital preventative healthcare reported a ¥60.190 million operating loss and luxury beauty a ¥23.735 million operating loss. Corporate and elimination costs were ¥1.091 billion.
Changes, outlook, risks and unusual items
- Management attributed improved results to business recovery after COVID-19 disruptions, higher average spend per customer, full-year contributions from acquired businesses, growth in digital-healthcare activity, and reduced SG&A. Salon customers served increased to 826,231 from 781,438; average sales per customer rose to ¥6,627 from ¥6,445.
- The company reported no specific numerical earnings or revenue guidance. Management planned to test and roll out higher Re.Ra.Ku service prices in the first half of 2023, after trials at six salons, and to pursue a longer-term goal of 1,000 salons in Japan. U.S. and Southeast Asian expansion remained exploratory.
- Management stated that year-end cash was not expected to cover operating expenses, capital spending and debt service for the 12 months following the audit opinion, and that additional capital would be required. The auditor’s report highlighted substantial doubt about the company’s ability to continue as a going concern. Management cited further salon sales, possible financing and refinancing plans, but said financing was not assured.
- Operating cash flow remained negative despite the return to net income. The company also disclosed negative working capital and a consolidated shareholders’ deficit, underscoring liquidity and funding risk.
- Standalone net assets were below the ¥100 million Japanese-law threshold for its prepaid-card issuer registration. Medirom was consulting with the regulator; failure to present an acceptable remediation plan could lead to revocation and refunds of unused card balances. The filing also reports a late prepaid-card safeguarding deposit, a matter the regulator closed after the company’s response.
- Nasdaq had issued a delisting determination after Medirom failed the $35 million market-value requirement. A hearing panel granted extensions through May 30, 2023 to demonstrate compliance with a net-income standard; the company also received a notice concerning late periodic filings. The company said it expected to regain compliance, but the filing does not establish the ultimate outcome.
- Management identified material weaknesses in financial reporting controls, including delayed accounting-policy updates, insufficient segregation of duties and documented reviews, and inadequate controls over newer business processes. Remediation was underway; management nevertheless concluded the audited statements fairly presented the periods shown.
- Other material risks include dependence on Japan and the Tokyo region, labor and lease costs, franchisee performance, competition, execution of the salon-sale strategy, digital-healthcare profitability and third-party device manufacturing. The company does not intend to pay dividends for the foreseeable future.
Important facts for investors to verify
- Current liquidity, cash burn, financing availability and progress on the going-concern plans, including the economics and pace of further salon sales.
- Current Nasdaq listing status and compliance with both listing and periodic-filing requirements after the disclosed May 2023 extensions.
- Regulatory resolution of the prepaid-card net-asset shortfall, registration status, required deposits and any potential customer refunds.
- Whether operating cash flow improves and whether profitability persists without reliance on salon-sale revenue and other non-recurring or timing-sensitive items.
- Remediation and independent validation of the disclosed material weaknesses, and the company’s ability to produce timely, reliable filings.
- Convertible-bond conversion or put activity, resulting cash obligations or dilution, and the maturity profile of borrowings and leases.