Medirom Healthcare Technologies Inc. — FY2021 Form 20-F
Reporting period: Fiscal year ended December 31, 2021; this is an annual report, not a quarterly filing. Financial statements are prepared under U.S. GAAP and presented primarily in Japanese yen (JPY). The filing was signed November 14, 2022.
Business context
Medirom operates and franchises relaxation salons in Japan and has smaller digital preventative healthcare and luxury beauty businesses. At year-end it reported 312 salons: 184 company-operated, 124 franchised and four investor-owned but managed by the company. The Relaxation Salon segment remained the principal business. During 2021, Medirom acquired SAWAN, including its Ruam Ruam salons, and obtained a controlling interest in hair-salon operator ZACC; it acquired ZACC’s remaining interest in January 2022.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | JPY 5.410 billion | JPY 3.342 billion |
| Operating loss | JPY 470.6 million | JPY 746.1 million |
| Net loss | JPY 990.7 million | JPY 539.2 million |
| Adjusted EBITDA (non-GAAP) | Loss of JPY 78.0 million | Loss of JPY 543.5 million |
| Operating cash flow | Use of JPY 557.2 million | Use of JPY 366.4 million |
| Cash and cash equivalents at year-end | JPY 370.6 million | JPY 1.440 billion |
Revenue rose 61.9%. Relaxation Salon revenue was JPY 5.197 billion, up 56.7%; Luxury Beauty contributed JPY 169.3 million after the ZACC acquisition, and Digital Preventative Healthcare revenue was JPY 44.0 million, up 71.3% but still less than 1% of total revenue. Revenue growth reflected customer recovery from COVID-19 restrictions, acquisitions and new salons. Medirom also recognized JPY 559 million of revenue from selling 12 salons to investors while retaining management responsibilities.
Cost of revenue was JPY 3.994 billion, or 73.8% of revenue, versus 87.2% in 2020. This implies gross margin of approximately 26.2%, compared with 12.8% in 2020. SG&A increased 70.6% to JPY 1.823 billion, rising to 33.7% of revenue from 32.0%. Operating loss narrowed, but net loss increased: income tax expense of JPY 576.3 million included a full valuation allowance against deferred tax assets, following cumulative losses and management’s assessment that the assets may not be realized. Adjusted EBITDA improved substantially but remained negative; it is a non-GAAP measure defined by the company.
At December 31, 2021, total assets were JPY 5.753 billion and total liabilities JPY 5.961 billion, leaving a shareholders’ deficit of JPY 208.3 million. Current assets of JPY 1.382 billion were below current liabilities of JPY 3.196 billion. Principal outstanding under credit facilities was JPY 913.5 million; the weighted-average interest rate was 0.66%, with maturities through 2035. Operating lease liabilities totaled JPY 1.884 billion. Management stated that year-end cash was not expected to cover operating costs, capital needs and debt service for the following 12 months and that additional capital was required.
Changes, outlook and material risks
- Operating recovery, but continued losses and cash consumption: Customers served increased to 781,438 from 650,050; average sales per customer rose to JPY 6,445 from JPY 6,286; and average therapist operation ratio improved to 47.6% from 43.5%. Average repeat ratio was broadly stable at 81.9% versus 81.8%.
- Growth strategy: Management aims to expand the salon network, use acquisitions and investor-funded salon sales with management agreements, improve salon margins and grow Lav and the MOTHER Bracelet digital-health businesses. It cited a mid-term goal of 1,000 salons and interest in the United States and Southeast Asia. The filing provides no formal financial guidance or quantified forecast.
- COVID-19 and geographic concentration: Emergency declarations shortened hours or temporarily closed salons during 2021. About 64.4% of salons were in the Tokyo metropolitan area, exposing the business to local disruption and economic conditions. Management reported gradual customer recovery but said the pandemic’s duration and effects remained uncertain.
- Prepaid-card regulatory issue: Medirom disclosed that standalone net assets under Japanese GAAP were below the JPY 100 million minimum applicable to its prepaid-card issuer license. It had informed the Kanto Local Financial Bureau and was consulting with the regulator. Failure to present a satisfactory remediation plan could lead to license revocation and refunds of unused card balances. Customer prepaid balances were approximately JPY 509 million.
- Going-concern and financing risk: The company relies on salon sales, potential equity or debt financing, or refinancing to address funding needs; management cautioned that financing may not be available on acceptable terms or at all. It had sold 12 salons in 2021 and reported additional salon-sale agreements after year-end.
- Controls and reporting: Management concluded disclosure controls were ineffective and identified material weaknesses involving business-combination accounting, integration of acquired entities, accounting-system integration and deferred-tax-asset valuation. Remediation efforts included ERP implementation, accounting hires and new review processes. The auditor’s opinion on the financial statements was unqualified; the auditor was not engaged to opine on internal-control effectiveness.
- Other items: The filing reported Nasdaq market-value noncompliance notices after year-end: Medirom regained compliance in April 2022, then received another notice in June 2022 with a December 27, 2022 deadline. It also disclosed short-term corporate bonds issued in 2022, including a JPY 40 million bond due December 31, 2022. These are subsequent events, not year-end 2021 balances.
Most important facts for investors to verify
- Current cash runway, financing availability and progress on salon sales, against management’s disclosed 12-month funding shortfall.
- Regulatory resolution of the prepaid-card net-asset deficiency, license status and any required customer refunds.
- Progress remediating the material weaknesses, ERP implementation and reliability of acquisition accounting and tax estimates.
- Whether operating recovery converts into positive operating cash flow and sustained profitability, including the cost and returns of acquisitions and salon-sale arrangements.
- Current Nasdaq listing compliance and subsequent-event debt obligations; the filing’s notices describe conditions through 2022, not current status.