424B4 1 tm2026644-22_424b4.htm 424B4 tm2026644-22_424b4 - none - 43.5016704s
 Filed pursuant to Rule 424(b)(4)
 Registration No. 333-250762
 Registration No. 333-251777
PROSPECTUS
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MEDIROM Healthcare Technologies, Inc.
800,000
American Depositary Shares
Representing Common Shares
This is the initial public offering of our common shares, no par value (which we refer to as our “common shares”), in the form of American Depositary Shares (which we refer to as “ADSs”). Each ADS represents one common share. We are offering 800,000 ADSs. The initial public offering price is $15.00 per ADS.
Prior to this offering, there has been no public market for our common shares or ADSs. Our ADSs will trade on The Nasdaq Capital Market under the symbol “MRM.”
We are organized under the laws of Japan and are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, under applicable U.S. federal securities laws, and are eligible for reduced public company reporting requirements. See “Prospectus Summary—Emerging Growth Company Status.”
Kouji Eguchi, our Chief Executive Officer and a director, owns one Class A common share, or “golden share,” with key veto rights, which may limit a shareholder’s ability to influence our business and affairs, including, among others, amendments to our articles of incorporation and the issuance of additional common shares. See “Risk Factors” and “Description of Shares Capital and Articles of Incorporation—Special Voting and Consent Rights—Class A Voting Rights.”
Investing in the ADSs involves a high degree of risk. Before buying any of the ADSs, you should carefully read the discussion of material risks of investing in the ADSs in “Risk Factors” beginning on page 17 of this prospectus.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Total
Per ADS
Per ADS
for Company Contacts
Without
Option
With full
Option
Public offering price
$ 15.00 $ 15.00 $ 12,000,000 $ 13,800,000
Underwriting discounts and commissions(1)
$ 1.05 $ 0.75 $ 675,000 $ 801,000
Proceeds, before expenses, to us
$ 13.95 $ 14.25 $ 11,325,000 $ 12,999,000
(1)
See “Underwriting — Commissions and Discounts” for additional information regarding compensation payable to the underwriters.
We have granted the underwriters an option to purchase up to 120,000 additional ADSs from us at the public offering price, less underwriting discounts and commissions, for 45 days after the date of this prospectus to cover over-allotments, if any.
The underwriters expect to deliver the ADSs to purchasers on or about December 31, 2020.
Maxim Group LLC
The date of this prospectus is December 28, 2020.

 
TABLE OF CONTENTS
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F-1
You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us. Neither we nor the underwriters have authorized anyone to provide you with information that is different, and neither we nor the underwriters take any responsibility for, and provide any assurance as to the reliability of, any information, other than the information in this prospectus and any free writing prospectus prepared by us. We are offering to sell the ADSs, and seeking offers to buy the ADSs, only in jurisdictions where such offers and sales are permitted. This prospectus is not an offer to sell, or a solicitation of an offer to buy, the ADSs in any jurisdictions where, or under any circumstances under which, the offer, sale, or solicitation is not permitted. The information in this prospectus and in any free writing prospectus prepared by us is accurate only as of the date on its respective cover, regardless of the time of delivery of this prospectus or any free writing prospectus or the time of any sale of the ADSs. Our business, results of operations, financial condition, or prospects may have changed since those dates.
 
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Before you invest in the ADSs, you should read the registration statement (including the exhibits thereto and the documents incorporated by reference therein) of which this prospectus forms a part.
For investors outside of the United States:   Neither we nor the underwriters have done anything that would permit this offering, or the possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus.
Notice to prospective investors in Japan:   The ADSs have not been and will not be registered pursuant to Article 4, Paragraph 1 of the Financial Instruments and Exchange Act. Accordingly, none of the ADSs nor any interest therein may be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any “resident” of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to or for the benefit of a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act and any other applicable laws, regulations, and ministerial guidelines of Japan in effect at the relevant time.
 
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ABOUT THIS PROSPECTUS
As used in this prospectus, unless the context otherwise requires or otherwise states, references to “Medirom,” our “Company,” “we,” “us,” “our,” and similar references refer to MEDIROM Healthcare Technologies Inc., a joint stock corporation with limited liability organized under the laws of Japan, and its subsidiaries.
Our functional currency and reporting currency is the Japanese yen (which we refer to as “JPY” or “¥”). The terms “dollar,” “USD,” “US$” or “$” refer to U.S. dollars, the legal currency of the United States. Convenience translations included in this prospectus of Japanese yen into U.S. dollars have been made at the exchange rate of ¥107.770 = US$1.00, which was the foreign exchange rate on June 30, 2020 as reported by the Board of Governors of the Federal Reserve System (which we refer to as the “U.S. Federal Reserve”) in is weekly release on July 6, 2020. Historical and current exchange rate information may be found at www.federalreserve.gov/releases/h10/.
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “U.S. GAAP”). Our fiscal year ends on December 31 of each year as does our reporting year. Therefore, any references to 2019 and 2018 are references to the fiscal and reporting years ended December 31, 2019 and December 31, 2018, respectively. Our most recent fiscal year ended on December 31, 2019. See Note 1 to our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018 included elsewhere in this prospectus, for a discussion of the basis of presentation and translation of financial statements.
We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them.
Non-GAAP Financial Measures
In addition to U.S. GAAP measures, we also use Adjusted EBITDA, Adjusted EBITDA Margin, Financial Expense and Income, and CAPEX, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”, in various places in this prospectus. These financial measures are presented as supplemental disclosure and should not be considered in isolation of, as a substitute for, or superior to, the financial information prepared in accordance with U.S. GAAP, and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus. Adjusted EBITDA, Adjusted EBITDA Margin, Financial Expense and Income, and CAPEX may differ from similarly titled measures presented by other companies.
Please see “Selected Consolidated Financial Information and Operating Data” for a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with U.S. GAAP.
Market and Industry Data
This prospectus contains references to market data and industry forecasts and projections, which were obtained or derived from publicly available information, reports of governmental agencies, market research reports, and industry publications and surveys. These sources generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe such information to be accurate, we have not independently verified the data from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties and risks regarding the other forward-looking statements in this prospectus due to a variety of factors, including those described in the section entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the forecasts and estimates.
 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning our possible or assumed future results of operations, financial condition, business strategies and plans, market opportunity, competitive position, industry environment, and potential growth opportunities. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “believe”, “expect”, “could”, “intend”, “plan”, “anticipate”, “estimate”, “continue”, “predict”, “project”, “potential”, “target,” “goal” or other words that convey the uncertainty of future events or outcomes. You can also identify forward-looking statements by discussions of strategy, plans or intentions. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, because forward-looking statements relate to matters that have not yet occurred, they are inherently subject to significant business, competitive, economic, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including, among others, those discussed in this prospectus under the headings “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business”, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements in this prospectus. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements in this prospectus include:

our ability to attract and retain customers;

our ability to successfully enter new markets and manage our business expansion;

our ability to develop or acquire new products and services, improve our existing products and services and increase the value of our products and services in a timely and cost-effective manner;

our ability to attract advertisers to our Real Media platform and increase the amount that advertisers spend with us;

our ability to compete in the relaxation salon market;

our expectations regarding our customer growth rate and the usage of our services;

our ability to increase our revenues and our revenue growth rate;

our ability to timely and effectively scale and adapt our existing technology and network infrastructure;

our ability to successfully acquire and integrate companies and assets;

our ability to respond to national disasters, such as earthquakes and tsunamis, and to global pandemics, such as COVID-19;

our future business development, results of operations and financial condition; and

the regulatory environment in which we operate.
Given the foregoing risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements in this prospectus. The forward-looking statements contained in this prospectus are not guarantees of future performance and our actual results of operations and financial condition may differ materially from such forward-looking statements. In addition, even if our results of operations and financial condition are consistent with the forward-looking statements in this prospectus, they may not be predictive of results or developments in future periods.
Any forward-looking statement that we make in this prospectus speaks only as of the date of this prospectus. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise, after the date of this prospectus.
 
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PROSPECTUS SUMMARY
This summary highlights selected information presented in greater detail elsewhere in this prospectus. This summary does not include all the information you should consider before investing in the ADSs. You should read this summary together with the more detailed information appearing elsewhere in this prospectus, including our audited and unaudited financial statements and related notes and the sections entitled “Risk Factors” on page 17 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this prospectus. Some of the statements in this summary and elsewhere in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-looking Statements.”
Business Overview
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Medirom Healthcare Technologies Inc., which we refer to in this prospectus as Medirom, is one of the leading holistic health services providers in Japan. Medirom is a franchiser and operator of healthcare salons across Japan and is a preferred platform partner for large consumer brands, healthcare service providers, and government entities to affect positive health outcomes. Through our well-known retail salon brands, including primarily Re.Ra.Ku®, nascent tech platforms, and targeted health consulting and marketing, we have formed a “healthtech” segment. The healthtech segment’s goal is to improve health outcomes and the satisfaction of our customers, as well as offer corporations data-rich, targeted advertising and promotional opportunities.
We operate two synergistic lines of businesses: (1) Relaxation Salon Segment (retail); and (2) Digital Preventative Healthcare Segment (healthtech). By combining brand strength and core retail competencies, including a broad physical footprint in population dense areas across the country, with proprietary
 
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technologies and partnerships, our business provides unique, value-added healthcare services to our customers with scale, customization, and cross-network effects that we believe few other companies in the industry can emulate.
Our core business is the operation and franchising of relaxation salons in Japan. Our salon locations cover major cities throughout Japan, with strong market presence in the Tokyo metropolitan area, which includes Tokyo, Yokohama, and Saitama. Our goal is to improve our customers’ quality of life by providing alternative, non-invasive wellness care. We use therapeutic techniques encompassing finger-pressure style bodywork therapy, stretch therapy, posture and joint alignment, as well as physical therapy elements. Our salons are designed to appeal to individuals seeking to improve their mental and/or physical well-being. Our customers vary from individuals seeking stress and pain relief to other individuals who are just looking to improve their overall mental and physical health. We offer a variety of individual services at our salons, including anti-fatigue therapy, athletic support therapy, slim-down therapy and reflexology. Each therapy is unique and designed to target specific areas of the body.
As of June 30, 2020, the Relaxation Salon Segment has a total of 289 salons for relaxation across Japan (consisting of 138 directly-operated salons and 151 franchised salons), covering major cities, including the Tokyo metropolitan area, which is the largest population region in Japan. Since we introduced our customer management system in 2010, we have served more than 1.57 million customers at our relaxation salons, and in 2019 we served an average 59,000 customers per month. Our customer management system is a cloud-based customer relationship management system which we use to record all customer data and which facilitates reservations, point-of-sale and business intelligence functions. Our salons operate under several brands. Our core brand is Re.Ra.Ku®. There are 177 Re.Ra.Ku® salons across Japan (consisting of 51 directly-operated salons and 126 franchised salons). Our wholly-owned subsidiaries operate under the following names: JOYHANDS WELLNESS Inc. with 62 directly-operated salons, Bell Epoc Wellness Inc. with 45 salons, of which 20 are directly-operated, and Decollte Wellness Corporation with 5 directly-operated salons. Our salons are generally located in metros/subways, shopping malls, plazas and high-traffic streets. On average, our salons measure approximately 670 square feet and contain a reception area and treatment space. A typical salon is staffed by six relaxation therapists. The Relaxation Salon Segment is our core business and accounted for ¥3,865 million (US$35.9 million), or 98.9%, of our total revenue for the year ended December 31, 2019, and ¥1,345 million (US$12.5 million), or 99.1% of our total revenue for the six months ended June 30, 2020.
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The Digital Preventative Healthcare Segment is a growing business line and accounted for less than 2% of our total revenue for the year ended December 31, 2019 and the six months ended June 30, 2020. The Digital Preventative Healthcare Segment consists of the following operations: Sampling business (which includes brand promotion and consumer analysis for third party brands of corporate clients); government-sponsored Specific Health Guidance program, utilizing our internally-developed on-demand health monitoring smartphone application, Lav®; our MOTHER Tracker® for fitness applications; and preventative healthcare services utilizing our digital application and devices.
Competitive Strengths
We believe the following strengths, among others, have contributed to our initial success and will position us for future growth:
Innovative Services.   Our salon services are innovative and differ from traditional shiatsu-style bodywork. For example, we created our unique wing stretch method, which focuses especially on the
 
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shoulder blades. This is important because the shoulder blades are a critical part of the body, as they connect and balance the bones from the neck to the lower back and support the body to ensure the body moves smoothly.
Brand Value.   We believe our trademarks and other intellectual property create a strong competitive advantage in both our Relaxation Salon Segment and Digital Preventative Healthcare Segment. With widespread recognition in the Kanto region and across Japan, our Company benefits from a loyal customer base and brand recognition that allows for smooth scaling of growth businesses.
Employee Satisfaction.   We employ all of our therapists on a salaried basis, rather than a commission-based contractor model normally used in the industry. We have also invested culturally and economically in creating a career progression for therapists, which helps give structure, purpose, and incentives to stay with the Company and improve skills. While this increases our operating leverage, we believe it a core strategic need and advantage as labor is a key gating factor currently in the relaxation sector. We believe that our industry-leading employee satisfaction levels, as evidenced by our award of the 2019 Grand Prix relaxation sector’s top therapist and best store awards in Japan, contributed to employee retention. This is particularly important as high turnover reduces or disrupts available investment in capital because of the costs associated with hiring and training new employees.
Hiring Activities.   We own and run our own job portal website targeting prospective therapist candidates. The job portal website was launched on February 1, 2020 and, as of September 30, 2020, 25% of our new employees during fiscal 2020 have been hired through the site. The SEO-optimized website has surpassed 11,000 pageviews shortly after launch and has already contributed over 179 suitable candidates as of June 30, 2020. This digital solution to recruiting is expected to reduce costs otherwise paid to headhunters and manpower agencies by approximately JPY10,000,000 (US$92,790) in fiscal year 2020. As labor shortages and costly recruiting of therapists remain the primary gating factors for a successful salon operation, we believe our streamlined and cost-efficient recruiting method allows continued operating strength at expanded profit margins. Combined with our brand, this hiring approach at scale puts us in an advantageous position relative to our peers in the industry.
Re.Ra.Ku® College.   We believe we own the largest in scale and best in class education and training facility for relaxation therapists in the Japanese relaxation industry, which enables us to provide continuous training to our franchise owners and salon staff. We believe that regular training ensures that quality service and therapy are consistently provided to our customers throughout all of our salons. The strength of our training and education program is in providing our therapists opportunities to continue improving their service skills after commencing at our salons. We believe we require a higher threshold of training to be met before allowing students to work with our clients in our salons. We find that this rigorous skill grading system better prepares our students and has proven effective for our salons. We provide one of the longest training programs (54 hours) in the industry. Each training module can be taken randomly, rather than in a series, for the trainees’ convenience. In addition, we provide follow-up training courses, which enables us to evaluate and grade the practitioners’ skills. We believe this is a different approach from certain of our competitors, who tend to utilize practitioners on a contract basis. Our training package enables our therapists to improve their treatment skills continuously and, importantly, to maintain high morale.
 
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Sampling Business.   Our Real Media business generates revenue through product placements, advertising, and marketing services on behalf of corporate clients. They provide physical samples, promotional materials, and other branded items which we in turn distribute across our directly-operated and franchised stores as well as through our health and wellness retail partners across Japan. Our Real Media clients benefit from the size and growth of our salon and our health and wellness retail brands’ customer base, which increases scope, advertising precision, and end monetization of their preferred demographics. They further receive valuable, live customer feedback on their products and can inform product and brand marketing decisions at the grassroot level. This is all done using our Real Media platform, which we believe offers these services at significantly reduced costs compared to traditional advertising methods.
Specific Health Guidance Program.   As a leading provider of holistic health services, we support the government-initiated program, Specific Health Guidance Program. As a government (Ministry of Health, Labour and Welfare)-subsidized program, participating companies need to maintain quality controls. Partners and service providers are vetted and must adhere to standards that are established by each of the health insurance providers. By satisfying each standard, Medirom has been engaged in supporting the program by health insurance providers and continues to expand its prospective clients. In addition, we have an on-demand health monitoring application, Lav®, which can provide user-friendly interfaces and experiences. This application, among other digital tools, allows for seamless functionality with our partners and service providers as well as optionality in future monetization of the end user base. As a result, we have successfully managed to acquire several corporate clients, including blue chip companies’ and local governments’ health insurance providers. We believe this B2G/B2B business provides opportunities for multi-year contracts and high margins, particularly given the significant barriers to entry that require a well-recognized health and consumer brand and blue-chip enterprise relationships.
MOTHER Tracker®.   In 2019, we acquired a minority interest in Matrix Industries, Inc. (which we refer to as “Matrix”), a developer of a thermoelectric generator and boost converter. In furtherance of our relationship, we entered into a production and development agreement with Matrix in August 2020 to develop and manufacture a health monitoring wearable device called MOTHER Tracker ®. Our MOTHER Tracker® fitness device is designed to track and collect the health data of the wearer, such as calorie consumption, activity and sleep patterns. We believe it will be the only fitness tracker that requires no electric charging as it will utilize innovative technology such as Gemini TEG (Thermoelectric Generator) and Mercury Boost Converter to enable the user’s body heat to generate electricity. We are not aware of any other wearable devices equipped with NFC currently in the market with equivalent capabilities at this time. MOTHER Tracker® is our registered trademark in Japan. In June 2020, we received a pre-order for the MOTHER Tracker® from Kansai Medical University Hospital (headquartered in Osaka, Japan) for the purpose of health and activities tracking for the patients. We intend to pursue other opportunities in Japan and the United States for large-scale private label contracts for our device.
 
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Our Growth Strategy
Our goal is not only to capture a significant share of the existing market for relaxation salons but also to expand the market for relaxation salons throughout Japan and internationally. We expect to employ a variety of strategic initiatives, including increasing the number of franchises and expanding marketing and advertising efforts throughout strategic locations.
Organic Growth in the Japanese Market.   According to a 2019 industry report by Yano Research Institute Ltd (which we refer to as the “2019 Yano Report”), in terms of the number of salons, we are one of the top three companies, on a consolidated basis, in the Kanto region (Tokyo, Kanagawa, Saitama, Chiba, Gunma, Ibaraki and Tochigi), and in the top four nationwide. The total number of relaxation salons under major brands in Japan as of December 31, 2019 was 2,991, with the largest operator having 633 salons. We believe that the Japanese market has capacity for approximately 1,000 of our salons in the future, based upon our assessment of suitable real estate that fits the underwriting requirements for our business. We aim to achieve this capacity goal through a combination of franchising, direct store ownership, and opportunistic brand partnerships. If we are able to achieve this goal, we believe that we would then have the largest salon network in Japan.
Lead Industry Consolidation via Targeted Acquisitions.   As the domestic Japanese relaxation sector faces structural changes that accelerate consolidation, we believe that we are positioned strategically to harness value, acquire synergies, and maximize our pipeline of suitable bids at bargain prices. Our corporate acquisitions team aims to buy businesses at a small multiple to ours, leveraging our brand, the well-regarded reputation of our founder CEO, and the halo effect of joining Japan’s first relaxation company to go public in the United States. We believe we have a competitive advantage and significant negotiating power to structure accretive deals, integrate both culture and operations of target companies, and grow long-term value.
International Expansion.   We continually consider growth opportunities, including acquisitions and strategic partnerships, in select locations in the United States and other parts of the world, primarily Asia. Our overall approach to retail growth outside of Japan emphasizes a hub-spoke franchising model that requires both low asset intensity and operating drag, relying on local strategic partners who leverage our brand and service competencies to grow.
Acquiring Existing Franchises.   Our management team has developed a strategy for acquiring existing franchised salons and beginning their conversion to directly-operated salons. Our management has developed a template for the acquisition and resale of existing franchised salons that are underperforming relative to our established benchmarks. We monitor the financial performance of our franchised salons on a periodic basis. One of our strategies is to acquire franchised salons that are underperforming, improve their profit margins and then refranchise them. Medirom collects a fee from each salon that is franchised out.
Maximizing Unit Economics.   Our core retail strategy is to improve same store sales and system wide revenue (brand franchise revenue) through marketing, franchisee support, and strategic actions (such as licensing, mergers and acquisitions, and trade deals). We have implemented an internal revenue maximization and cost efficiency strategy that rewards loyal franchisees, increases margins at the store level, and capitalizes on retail flow in our high traffic real estate locations.
Marketing and Advertising Strategy.   We conduct most of our marketing and advertising on our website and through print advertisements in magazines. In addition, our salons are strategically located in areas near train stations and shopping centers that are in and of themselves advertising and marketing drivers.
 
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Continue to Improve Margins and Leverage Infrastructure.   We believe our corporate infrastructure is positioned to support a customer base greater than our existing footprint. As we continue to grow, we expect to drive greater efficiencies across our operations and development and marketing organizations and further leverage our technology and existing support infrastructure. We believe we will be able to reduce corporate costs over time to enhance margins as general and administrative expenses are expected to grow at a slower rate due to efficiencies of scale as we expand our franchises. In addition, we will consider introducing additional complementary products and services that can benefit from our customer base.
Healthtech Strategy. We plan to invest in and grow the higher margin Digital Preventative Healthcare Segment. We intend to increase the number of Lav® users via Specific Health Guidance Program promoted by the Ministry of Health, Labor and Welfare of Japan. We also intend to accelerate the development and production of our MOTHER Tracker®.
Recent Developments
Preliminary Financial Data for the Three and Nine Months Ended September 30, 2020
The preliminary financial results and key operating metrics set forth below are unaudited and preliminary, and do not present all information necessary for an understanding of our operations for the three and nine months ended September 30, 2020. Our estimates are based solely on information available to us as of the date of this prospectus. Actual results for the three and nine months ended September 30, 2020 remain subject to the completion of management’s final reviews and our other financial closing procedures and may differ from these estimated preliminary results due to the completion of our financial closing procedures, final adjustments, and other developments that may arise during the review process. It is unlikely that our actual unaudited consolidated financial statements and related notes as of and for the nine months ending September 30, 2020 will be available prior to the completion of this offering, and consequently may not be available to you prior to your decision whether to invest in this offering.
These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with GAAP. Accordingly, you should not place undue reliance on this preliminary data. This information is presented to assist you in understanding the impact of the COVID-19 pandemic on our business in recent months given the fluidity of the global macroeconomic environment. These estimated preliminary results are not necessarily indicative of any future period and should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.
The preliminary financial data for the three and nine months ended September 30, 2020 included in this prospectus has been prepared by and is the responsibility of our management. Our independent auditor, Baker Tilly US, LLP (formerly Squar Milner LLP), has not audited, reviewed, compiled or performed any procedures with respect to the preliminary financial data. Accordingly, Baker Tilly US, LLP does not express an opinion or any other form of assurance with respect thereto. See “Change in Certifying Accountant.”
For the three months ended September 30, 2020, the Company’s estimated consolidated revenue was JPY895,085 thousand (US$ 8,306 thousand), estimated consolidated cost of revenue was JPY815,526 thousand (US$7,567 thousand), estimated consolidated operating expenses were JPY274,305 thousand (US$2,545 thousand), and estimated consolidated net loss was JPY 119,208 thousand (US$ 1,106 thousand). For the nine months ended September 30, 2020, estimated consolidated revenue was JPY2,251,362 thousand (US$20,890 thousand), estimated consolidated cost of revenue was JPY2,084,746 thousand (US$19,344 thousand), estimated consolidated operating expenses were JPY795,669 thousand (US$7,383 thousand), and estimated consolidated net loss was JPY562,179 thousand (US$ 5,216 thousand). During the three months ended September 30, 2020, our key operating metrics of sales per customer, repeat ratio, and operation ratio were JPY6,296 (US$58.42), 80.08%, and 47.59%, respectively, which are within the range of our historical trends. For definitions of sales per customer, repeat ratio, and operation ratio, please see “Selected Consolidated Financial Information and Operating Data” elsewhere in this prospectus.
As more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations,” the COVID-19 pandemic and the associated
 
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Japanese-government requested closures that have been implemented have had a material adverse impact on the Company’s business and cash flow from operations, similar to many Japanese businesses during 2020. Following the first six months of 2020, which included the Government-requested business halt in April and May 2020, the Company's operations continued to recover from the significant earlier effects of the COVID-19 pandemic. In the three months ended September 30, 2020, the number of treated customers has continued to trend upward, which reflects an increase in demand for services as customers returned to salons. The Company currently believes this trend will continue in the near future and is an encouraging sign for recovery, provided that no additional local government requested closures are in place. During the nine months ended September 30, 2020, estimated cost of revenue as a percentage of estimated consolidated revenue decreased to 92.6% (six months ended June 30, 2020: 93.6%), as the additional revenues in the three months ended September 30, 2020 benefitted from the increase in treated customers, modestly outpacing the incremental cost of revenue, which is largely comprised of fixed costs, including salary costs for the therapists. Similarly, estimated consolidated operating expenses as a percentage of estimated consolidated revenue also showed improvement to 35.3% for the nine months ended September 30, 2020 (six months ended June 30, 2020: 38.4%), as we have been able to gain greater leverage from our administrative fixed costs. The estimated consolidated net loss for the three and nine months ended September 30, 2020 reflects the fact that the Company is still recovering from the overall effects of the COVID-19 pandemic on its operations over the course of the year.
This Recent Developments section includes “forward-looking statements.” All statements contained herein other than statements of historical facts, including, without limitation, statements regarding our expectations regarding our financial and operating results for the three and nine months ended September 30, 2020, and our future financial and business performance, are forward-looking statements. The words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in this prospectus.
Summary Risk Factors
There are a number of risks that you should carefully consider before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk factors” beginning on page 17 of this prospectus. You should read and carefully consider these risks and all of the other information in this prospectus, including the financial statements and the related notes thereto included in this prospectus, before deciding whether to invest in the ADSs. If any of these risks actually occur, our business, financial condition, operating results and cash flows could be materially adversely affected. In such case, the trading price of our ADSs would likely decline, and you may lose all or part of your investment. These risk factors include, but are not limited to:

We may not achieve our development goals, which could adversely affect our operations and financial results.

We are implementing new growth strategy, priorities and initiatives and any inability to execute and evolve our strategy over time could adversely impact our financial condition and results of operations.

We are actively expanding in Japan and overseas markets, and we may be adversely affected if Japanese and global economic conditions and financial markets deteriorate.

We have generated only limited revenue from our Digital Preventative Healthcare Segment, and we may never achieve or sustain profitability.

The failure to enforce and maintain our trademarks and protect our other intellectual property could materially adversely affect our business, including our ability to establish and maintain brand awareness.

Our success depends substantially on the value of our brands.
 
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We are exposed to the risk of natural disasters (such as earthquakes and tsunamis), unusual weather conditions, pandemic outbreaks (such as COVID-19), political events, war, and terrorism (including cyberattacks) that could disrupt business and result in lower sales, increased operating costs, and capital expenditures.

The financial performance of our franchisees can negatively impact our business.

We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.

Our Chief Executive Officer owns a “golden share” with key veto rights, including with respect to the issuance of additional common shares and amendments to our articles of incorporation, which may limit a shareholder’s ability to influence our business and affairs.

We are incorporated in Japan, and it may be more difficult to enforce judgments against us that are obtained in courts outside of Japan.

Substantially all of our revenues are generated in Japan, but an increase of our international presence could expose us to fluctuations in foreign currency exchange rates, or a change in monetary policy may harm our financial results.
Implications of Being an Emerging Growth Company and a Foreign Private Issuer
We are an “emerging growth company”, as defined in Section 2(a) of the Securities Act of 1933, as amended (which we refer to as the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (which we refer to as the “JOBS Act”). As such, we are eligible to take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to reporting companies that make filings with the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). For so long as we remain an emerging growth company, we will not be required to, among other things:

present more than two years of audited financial statements and two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure in our registration statement of which this prospectus forms a part;

have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”);

disclose certain executive compensation related items; and

seek shareholder non-binding advisory votes on certain executive compensation matters and golden parachute arrangements, to the extent applicable to our Company as a foreign private issuer.
The JOBS Act also permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.
We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the last day of the fiscal year during which we have total annual gross revenue of at least $1.07 billion, (iii) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”), which means the market value of our common shares that are held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
In addition, upon the consummation of this offering, we will report in accordance with the rules and regulations applicable to a “foreign private issuer.” As a foreign private issuer, we will take advantage of certain provisions under the rules that allow us to follow the laws of Japan for certain corporate governance
 
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matters. Even when we no longer qualify as an emerging growth company, as long as we continue to qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act;

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, and current reports on Form 8-K upon the occurrence of specified significant events; and

Regulation Fair Disclosure (which we refer to as “Regulation FD”), which regulates selective disclosures of material information by issuers.
As a foreign private issuer, we will have four months after the end of each fiscal year to file our annual report on Form 20-F with the SEC. In addition, our executive officers, directors, and principal shareholders will be exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16 of the Exchange Act.
Foreign private issuers, like emerging growth companies, are exempt from certain more stringent executive compensation disclosure rules. As such, even when we no longer qualify as an emerging growth company, as long as we continue to qualify as a foreign private issuer under the Exchange Act, we will continue to be exempt from the more stringent compensation disclosures required of public companies that are not a foreign private issuer.
We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We are required to determine our status as a foreign private issuer on an annual basis at the end of our second fiscal quarter. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies:
(i)
the majority of our executive officers or directors are U.S. citizens or residents;
(ii)
more than 50% of our assets are located in the United States; or
(iii)
our business is administered principally in the United States.
In this prospectus, we have taken advantage of certain of the reduced reporting requirements as a result of being an emerging growth company and a foreign private issuer. Accordingly, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more volatile.
Corporate Information
Our Company was originally incorporated in Japan on July 13, 2000 under the name “Kabushiki Kaisha Young Leaves.” In January 2017, we changed our name to “MEDIROM Inc.” In April 2018, we established three wholly-owned subsidiaries, Bell Epoc Wellness Inc., JOYHANDS WELLNESS Inc., and Medirom Human Resources Inc. In October 2018, we acquired our fourth wholly-owned subsidiary, Decollte Wellness Corporation. In March 2020, our Company’s English name was changed to “MEDIROM Healthcare Technologies Inc.”
Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168. Our principal executive offices are located in 2-3-1 Daiba, Minato-ku, Tokyo 135-0091, Japan, and our main telephone number is +81(0)3-6721-7364. Our website is https://medirom.co.jp/en/. The information contained in, or that can be accessed through, our website is not incorporated by reference into, and is not a part of, this prospectus. You should not consider any information on our website to be a part of this prospectus or use any such information in your decision on whether to purchase the ADSs. We have included our website address in this prospectus solely for informational purposes.
Trademarks
The names and marks, Re.Ra.Ku®, Lav®, MOTHER Tracker®, appearing in this prospectus are the property of Medirom. CLP CARE LIFE PLANNER® is licensed by the Company from the CEO. The use
 
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of the symbol ® in this prospectus denotes registration of the Company’s names and marks in Japan only, and Lav® denotes a registration of a combined trademark, including both letters and design marks. None of the Company’s names and marks appearing in this prospectus are currently registered in the United States. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend any use or display by us of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
 
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THE OFFERING
Issuer
MEDIROM Healthcare Technologies Inc.
ADSs offered by us
800,000 ADSs.
Offering Price
The initial public offering price is $15.00 per ADS.
Common Shares expected to be Outstanding Immediately After this Offering(1)
4,822,500 common shares (or 4,942,500 common shares if the underwriters exercise in full their option to purchase additional common shares in the form of ADSs).
Option to Purchase Additional ADSs
We have granted to the underwriters an option to purchase up to additional 120,000 ADSs from us at the initial public offering price less the underwriting discounts and commissions, to cover over-allotments, if any, for a period of 45 days from the date of this prospectus.
The ADSs
Each ADS represents one common share. The ADSs are evidenced by American depositary receipts (which we refer to as “ADRs”) issued by The Bank of New York Mellon, as the depositary.
The depositary will be the holder of the common shares underlying the ADSs, and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary, and owners and beneficial owners of ADSs from time to time.
You may surrender your ADSs to the depositary to withdraw the common shares underlying your ADSs. The depositary will charge you a fee for such an exchange.
We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement, as amended, if you continue to hold your ADSs.
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, a form of which is an exhibit to the registration statement to which this prospectus forms a part.
Depositary
The Bank of New York Mellon
Use of Proceeds
The net proceeds to us from this offering will be approximately $7.8 million (or $9.5 million if the underwriters exercise in full their option to purchase additional ADSs), at an initial public offering price of $15.00 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We currently intend to use the net proceeds from this offering for working capital and general corporate purposes, which may include investments, acquisitions, or strategic
 
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collaborations to expand our customer base, as well as the development and marketing of new services. See “Use of Proceeds.”
Lock-ups
We, our directors, executive officers and holders of one percent (1%) or more of our outstanding common shares have entered into agreements with the underwriters pursuant to which they will not offer to sell, sell, pledge, contract to sell, purchase any option to sell, grant any option for the purchase of, lend, or otherwise dispose of, any of our securities for a period of 180 days following the closing of this offering, subject to certain exceptions. See “Underwriting—No Sales of Similar Securities” for more information.
Listing
Our ADSs will trade on The Nasdaq Capital Market (which we refer to as “NASDAQ”) under the symbol “MRM.”
Risk Factors
Investing in the ADSs is highly speculative and involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 17, and all other information contained in this prospectus, before deciding to invest in the ADSs.
(1)
The number of common shares to be outstanding immediately after this offering does not include:
(a)
up to an aggregate of 234,000 common shares issuable upon the exercise of stock options outstanding as of June 30, 2020, and
(b)
up to an aggregate of 450,000 common shares issuable upon the exercise of the eighth and ninth series stock options issued in October 2020. See “Management—Stock Options” for more information.
Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs from us.
 
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following tables set forth our summary consolidated financial information and operating data as of and for the years ended December 31, 2019 and 2018 and the six months ended June 30, 2020 and 2019. You should read the following summary consolidated financial information and operating data in conjunction with, and it is qualified in its entirety by reference to, our audited consolidated financial statements and the related notes thereto, our unaudited condensed consolidated financial statements and the related notes thereto, and the sections entitled “Capitalization”, “Selected Consolidated Financial Information and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, each of which are included elsewhere in this prospectus.
Our summary consolidated statement of income information and operating data for the years ended December 31, 2019 and 2018, and our related summary consolidated balance sheet information as of December 31, 2019 and 2018, have been derived from our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018, prepared in accordance with U.S. GAAP, which are included elsewhere in this prospectus.
Our summary consolidated statement of income information and operating data for the six months ended June 30, 2020 and 2019, and our related summary consolidated balance sheet information as of June 30, 2020 and 2019, have been derived from our unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2020 and 2019, prepared in accordance with U.S. GAAP, which are included elsewhere in this prospectus.
Our historical results for the periods presented below are not necessarily indicative of the results to be expected for any future periods.
(in thousands,
except earnings per share data)
Six months ended June 30,
Year ended December 31,
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
(Unaudited)
Consolidated Statement of Income Information:
Revenues:
Relaxation Salons
$ 12,476 ¥ 1,344,503 ¥ 2,010,506 $ 35,860 ¥ 3,864,656 ¥ 3,348,042
Digital Preventative Healthcare
109 11,774 21,025 405 43,608 85,093
Total revenue
12,585 1,356,277 2,031,531 36,265 3,908,264 3,433,135
Cost of revenues and operating expenses:
Cost of revenues
11,777 1,269,220 1,533,819 27,443 2,957,506 2,476,267
Selling, general and administrative expenses
4,838 521,364 411,717 8,090 871,862 842,822
Impairment loss on long-lived
assets
23,604 413 44,546 40,778
Total cost of revenues and operating expenses
16,615 1,790,584 1,969,140 35,946 3,873,914 3,359,867
Operating income (loss)
$ (4,030) ¥ (434,307) ¥ 62,391 $ 319 ¥ 34,350 ¥ 73,268
Other income (expenses):
Dividend income
2 2 2 2
Interest income
6 674 556 12 1,336 785
Interest expense
(56) (6,076) (7,155) (126) (13,591) (15,485)
Gain from bargain
purchases
15 1,624 4,343 60 6,487 33,218
 
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(in thousands,
except earnings per share data)
Six months ended June 30,
Year ended December 31,
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
(Unaudited)
Other, net
132 14,142 5,057 39 4,153 133
Total other income
(expenses)
97 10,366 2,803 (15) (1,613) 18,653
Income tax expense
177 19,030 11,429 148 15,961 25,252
Equity in earnings (loss) of investment
280 5 559 (359)
Net income (loss)
$ (4,110) ¥ (442,971) ¥ 54,045 $ 161 ¥ 17,335 ¥ 66,310
Net earnings (loss) per share:
Basic
$ (1.02) ¥ (110.12) ¥ 14.72 $ 0.04 ¥ 4.63 ¥ 18.06
Diluted
$ (1.02) ¥ (110.12) ¥ 12.86 $ 0.04 ¥ 4.06 ¥ 14.04
(in thousands, except number of salons,
sales per customer, repeat ratio, and
operation ratio)
Six months ended June 30,
Year ended December 31,
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
Other Operating Data:
Financial expense & income(1)
$ (50) ¥ (5,400) ¥ (6,597) $ (114) ¥ (12,253) ¥ (14,698)
Adjusted EBITDA(2)
(3,472) (374,224) 118,049 1,292 139,301 179,997
CAPEX−paid-out cash basis(3)
1,138 122,688 9,674 210 22,675 110,386
CAPEX−paid-out cash plus future payment obligation basis(3)
1,792 193,138 104,775 695 74,897 222,278
Number of salons
289 270 283 263
Sales per customer(4)
$ 57.85 ¥ 6,234 ¥ 5,968 $ 56.27 ¥ 6,064 ¥ 5,914
Repeat ratio(5)
81.16% 80.63% 81.72% 82.39%
Operation ratio(6)
40.79% 50.42% 50.36% 49.71%
(in thousands, except adjusted EBITDA
margin)
As of June 30,
As of December 31,
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
Reconciliation of non-GAAP measures:
Net income (loss)
$ (4,110) ¥ (442,971) ¥ 54,045 $ 161 ¥ 17,335 ¥ 66,310
Dividend income and interest income
(6) (676) (558) (12) (1,338) (787)
Interest expense
56 6,076 7,155 126 13,591 15,485
Gain from bargain purchases
(15) (1,624) (4,343) (60) (6,487) (33,218)
Other, net
(132) (14,142) (5,057) (39) (4,153) (133)
Income tax expense
177 19,030 11,429 148 15,961 25,252
Equity in earnings (loss) of investment
(280) (5) (559) 359
Operating income
$ (4,030) ¥ (434,307) ¥ 62,391 $ 319 ¥ 34,350 ¥ 73,268
Depreciation and amortization
307 33,105 22,793 428 46,174 44,267
Losses on sales of directly-operated salons to franchises
1 65 8,721 89 9,600 4,057
 
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(in thousands, except adjusted EBITDA
margin)
As of June 30,
As of December 31,
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
Losses on disposal of property and equipment, net and other intangible assets, net
250 26,913 540 43 4,631 17,627
Impairment loss on long-lived assets
23,604 413 44,546 40,778
Adjusted EBITDA
$ (3,472) ¥ (374,224) ¥ 118,049 $ 1,292 ¥ 139,301 ¥ 179,997
Adjusted EBITDA margin(7)
(27.6)% (27.6)% 5.8% 3.6% 3.6% 5.2%
(in thousands)
As of June 30,
As of December 31,
2020($)
2020(¥)
2019($)
2019(¥)
2018(¥)
(Unaudited)
Consolidated Balance Sheet Information:
Total assets
$ 38,025 ¥ 4,097,971 $ 44,144 ¥ 4,757,465 ¥ 4,521,978
Total liabilities
36,567 3,940,884 38,577 4,157,407 4,639,533
Equity (deficit):
Common stock, no par value;
5,521 595,000 5,521 595,000 245,000
Class A common stock, no par value
1 100 1 100 100
Additional paid-in capital
6,618 713,267 6,618 713,267 363,267
Accumulated deficit
(10,654) (1,148,280) (6,545) (705,309) (722,644)
Accumulated other comprehensive income (loss)
(278)
Treasury stock, at cost
(28) (3,000) (28) (3,000) (3,000)
Total equity (deficit)
1,458 157,087 5,567 600,058 (117,555)
Total Liabilities and Equity
$ 38,025 ¥ 4,097,971 $ 44,144 ¥ 4,757,465 ¥ 4,521,978
(1)
We define financial expense and income as dividend income plus interest income less interest expense and use it to measure net financial burden of our borrowings.
(2)
We define Adjusted EBITDA as net income (loss), adjusted to exclude: (i) dividend and interest income, (ii) interest expense, (iii) gain from bargain purchases, (iv) other, net, (v) income tax expense, (vi) equity in earnings (loss) of investment, (vii) depreciation and amortization, (viii) losses on sales of directly-operated salons to franchises, (ix) losses on disposal of property and equipment, and other intangible assets, and (x) impairment loss on long-lived assets. Management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income or other measurements under GAAP. Adjusted EBITDA is not calculated identically by all companies and, therefore, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Non-U.S. GAAP Measures—Adjusted EBITDA.”
(3)
We define CAPEX as the sum of investment amounts on tangible fixed assets and intangible assets during the period. These investment activities consist of acquisitions of property and equipment, acquisitions of businesses, and cost additions to internal use software. CAPEX—paid-out cash basis is the cash amount actually paid during the period to the CAPEX investments defined above, while CAPEX—paid-out cash plus future payment obligation basis is the sum of CAPEX—paid-out cash basis and the unpaid but obliged to pay amounts in the future to the same capital investments which remain on our consolidated balance sheet as accounts payable or accrued expenses.
(4)
We define sales per customer as the ratio of total salon sales to number of treated customers at salons (other than JOYHANDS WELLNESS for which comparative financial and customer data is not available).
(5)
We define repeat ratio for our Re.Ra.Ku® brand as the ratio of repeat customer visits to total customer visits in the applicable month or other stated period.
 
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(6)
We define the operation ratio for our Re.Ra.Ku® brand as the ratio of therapists’ in-service time to total therapists’ working hours (including stand-by time) for the applicable month or other stated period.
(7)
We define Adjusted EBITDA margin as the percentage derived from dividing Adjusted EBITDA for a period by total revenue for the same period.
 
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RISK FACTORS
An investment in the ADSs is highly speculative and involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves numerous risks and uncertainties. You should carefully consider the factors described below, together with all of the other information contained in this prospectus, including the audited and unaudited financial statements and the related notes included in this prospectus, before deciding whether to invest in the ADSs. These risk factors are not presented in the order of importance or probability of occurrence. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the market price of the ADSs could decline, and you could lose part or all of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Company and Our Business
We may not achieve our development goals, which could adversely affect our operations and financial results.
Our number of salons has increased from 263 (of which 116 are directly-operated) in December 2018 to 289 (of which 138 are directly-operated) as of June 30, 2020. We intend to continue our growth either through developing additional directly-operated salons or through new salon development by franchisees, both in existing markets and in new markets, particularly in the United States and Japan. Such rapid development involves substantial risks, including the risk of:

the inability to identify suitable franchisees;

limited availability of financing for our Company and for franchisees at acceptable rates and terms;

development costs exceeding budgeted or contracted amounts;

delays in completion of construction;

the inability to identify, or the unavailability of, suitable sites at acceptable cost and other leasing or purchase terms;

developed properties not achieving desired revenue or cash flow levels once opened;

the negative impact of a new salon upon sales at nearby existing salons;

the challenge of developing in areas where competitors are more established or have greater penetration or access to suitable development sites;

incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion;

impairment charges resulting from underperforming salons or decisions to curtail or cease investment in certain locations or markets;

in new geographic markets where we have limited or no existing locations, the inability to successfully expand or acquire critical market presence for our brands, acquire name recognition, successfully market our products or attract new customers;

operating cost levels that reduce the demand for, or raise the cost of, developing new salons;

the challenge of identifying, recruiting and training qualified salon management;

the inability to obtain all required permits;

changes in laws, regulations and interpretations; and

general economic and business conditions.
Although we manage our growth and development activities to help reduce such risks, we cannot provide assurance that our present or future growth and development activities will perform in accordance with our expectations. Our inability to expand in accordance with our plans or to manage the risks associated with our growth could have a material adverse effect on our results of operations and financial condition.
 
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We are implementing new growth strategy, priorities and initiatives and any inability to execute and evolve our strategy over time could adversely impact our financial condition and results of operations.
We seek to accelerate the growth of our franchise model while at the same time improve the performance of directly-operated salons. Our success depends, in part, on our ability to grow our franchise model, including attracting and retaining qualified franchisees. 76 salons (net) were opened or transferred from franchisees’ operation or from third parties in fiscal year 2018, 20 salons (net) were opened or transferred from franchisees’ operation or third parties in fiscal year 2019, and 6 salons (net) were opened or transferred from franchisees’ operation or from third parties in the six months ended June 30, 2020. In light of the COVID-19 pandemic, we do not plan to open any new directly-operated relaxation salons in fiscal year 2020. Our franchisees closed 3 salon (net) in fiscal year 2018, opened 29 salons (net) in fiscal year 2019, and closed 25 salons (net) in the six months ended June 30, 2020, and plan to open five new directly-operated relaxation salons in the spa facilities by the end of fiscal year 2020. Our ability to open new relaxation salons is dependent upon a number of factors, many of which are beyond our control, including our and our franchisees’ ability to:

identify available and suitable relaxation salon sites;

successfully compete for relaxation salon sites;

reach acceptable agreements regarding the lease or purchase of locations;

obtain or have available the financing required to acquire and operate a relaxation salon, including construction and opening costs, which includes access to build-to-suit leases at favorable interest and capitalization rates;

respond to unforeseen engineering or environmental problems with leased premises;

avoid the impact of inclement weather, natural disasters and other calamities;

hire, train and retain the skilled management and other employees necessary to meet staffing needs;

obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in law and regulations that adversely affect our and our franchisees’ costs or ability to open new relaxation salons; and

control construction cost increases for new relaxation salons.
The growth of our franchise model will take time to execute and may create additional costs, expose us to additional legal and compliance risks, cause disruption to our current business and impact our short-term operating results. Further, in order to enhance services to its franchisees, we may need to invest in certain new capabilities and/or services.
Our success also depends, in part, on our ability to improve sales, as well as both cost of service and product and operating margins at our directly-operated salons. Same-store sales are affected by average ticket and same-store guest visits. A variety of factors affect same-store guest visits, including the guest experience, salon locations, staffing and retention of therapists and salon leaders, price competition, competition, current economic conditions, marketing programs and weather conditions. These factors may cause our same-store sales to differ materially from prior periods and from our expectations.
As part of our longer-term growth strategy, we plan to enter new geographical markets, including the United States and potentially others, where we have little or no prior operating or franchising experience. The challenges of entering new markets include: difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics; consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important in the success of both directly-operated and franchised relaxation salons in our existing markets. Relaxation salons that we open in new markets may take longer to reach expected sales and profit levels and may have higher construction, occupancy and operating costs than existing relaxation salons, thereby negatively affecting our operating results. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new relaxation salons. Expanding our franchise system could require the implementation, expense and management of enhanced business support systems, management
 
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information systems and financial controls as well as additional staffing, franchise support and capital expenditures and working capital.
We are actively expanding in Japan and overseas markets, and we may be adversely affected if Japanese and global economic conditions and financial markets deteriorate.
We seek to proactively expand our business overseas in the future including into new regions for us, particularly the United States and Southeast Asia. We also intend to explore growth opportunities in other markets where we assess primarily on low cost of entry, friendly franchising or partnership relationships and believe there is an economic staying power of our relaxation salon brand locally. We remain opportunistic on strategic mergers and acquisitions, joint ventures, and partnerships in these international markets. As a result, our financial condition and results of operations may be materially affected by general economic conditions and financial markets in Japan and foreign countries, which would be influenced by the changes of various factors. These factors include fiscal and monetary policies, and laws, regulations and policies on financial markets. In the event of an economic downturn in Japan or the United States, consumer spending habits could be adversely affected, and we could experience lower than expected net sales, which could force us to delay or slow our growth strategy and have a material adverse effect on our business, financial condition, profitability and cash flows. In addition, we could be impacted by labor shortages in Japan or other markets. The deterioration of Japanese and global economic conditions, or financial market turmoil, could result in a worsening of our liquidity and capital conditions, an increase in our credit costs, and, as a result, adversely affect our business, financial condition and results of operations.
We have generated only limited revenue from our Digital Preventative Healthcare Segment, and we may never achieve or sustain profitability.
Substantially all of our revenue is generated in Japan from the Relaxation Salon Segment. We have not yet generated material revenue from our Digital Preventative Healthcare Segment. Our Digital Preventative Healthcare Segment has been growing steadily, with our Real Media business now reaching over 6,300 affiliated stores in our retail network in Japan. We believe that other early stage businesses, such as applications supporting the Specific Health Guidance Program and our MOTHER Tracker®, have a good potential to grow rapidly. However, we cannot guarantee that these businesses or any other businesses we develop will gain market acceptance. The degree of market acceptance of our businesses will depend on a number of factors, including the competitive landscape and the adequacy and success of distribution, sales and marketing efforts. Customers, third party payors or advertisers in general may be unwilling to accept, utilize or recommend any of our businesses. As a result, we are unable to predict the extent of future losses or the time required to achieve profitability in that business unit, if at all.
Our system-wide relaxation salon base is geographically concentrated in the Tokyo metropolitan area of Japan, and we could be negatively affected by conditions specific to that region.
Approximately 63% of our directly-operated and franchised relaxation salons are located in the Tokyo metropolitan area of Japan as of June 30, 2020. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions or natural disasters affecting the Kanto region of Japan have had, and may continue to have, material adverse effects on our business. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by these adverse conditions compared to other chain relaxation salons with a greater national footprint.
In addition, our competitors could open additional relaxation salons in Kanto region of Japan, which could result in reduced market share for us and may adversely impact our profitability.
The failure to enforce and maintain our trademarks and protect our other intellectual property could materially adversely affect our business, including our ability to establish and maintain brand awareness.
We regard our trademarks, trade secrets, know-how, and similar intellectual property as critical to our success. We have registered 29 trademarks as of June 30, 2020, and other names and logos used by our Company as trademarks with the Japan Patent Office. Such trademarks are not currently registered in any other jurisdiction. Additionally, we registered the trademark Re.Ra.Ku® in China. Our principal intellectual property rights include copyrights in our website and mobile applications content for Lav®, rights to our
 
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domain name https://medirom.co.jp, and trade secrets and know-how with respect to our training, servicing, sales and marketing and other aspects of our business, and our digital innovations such as the Lav® application. The success of our business strategy depends on our continued ability to use our existing intellectual property in order to increase brand awareness and develop our branded services. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates or infringes on our intellectual property, whether in print, on the Internet or through other media, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands and branded services to achieve and maintain market acceptance. There can be no assurance that all of the steps we have taken to protect our intellectual property in Japan or outside Japan in relevant foreign countries will be adequate. In addition, in light of our intention to expand internationally, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of Japan. If any of our trademarks, trade secrets or other intellectual property are infringed, our business, financial condition and results of operations could be materially adversely affected.
Third party claims with respect to intellectual property assets, if decided against us, may result in competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues.
There can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that our rights in our trademarks, patents and other intellectual property assets are invalid or unenforceable. Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our rights in any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual property which, in turn, could lead to a decline in relaxation salon, Real Media business, and other revenues. If the intellectual property became subject to third party infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated to acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation, or other third party claims.
Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.
We and our franchisees rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our relaxation salons. We use Amazon’s AWS as our cloud service provider. Our and our franchisees’ operations depend upon our and our franchisees’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and other disruptive problems. Any damage or failure of our computer systems, network infrastructure, or AWS cloud servers that cause an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a material network breach in security of these systems as a result of cyber-attack or any other failure to maintain a continuous and secure cyber network could further result in substantial harm, or in delays in customer service and reduce efficiency in our and our franchisees’ operations. This could include the theft of our intellectual property or trade secrets, or the improper use of personal information or other “identify theft.” While we utilize our personnel, as well as a variety of hardware and software, to monitor our systems, controls, firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to prevent damage, breaches or other disruptive problems, there can be no assurance that these security measures will be successful. Any such claim, proceeding or action by a regulatory authority, or any adverse publicity resulting from these allegations, could adversely affect our business and results of operations.
Cybersecurity breaches and other disruptions could compromise our information, result in the unauthorized disclosure of confidential guest, employee, Company and/or business partners’ information, damage our reputation, and expose us to liability, which could negatively impact our business.
In the ordinary course of our business, we collect, process, and store sensitive and confidential data, including our proprietary business information and that of our guests, suppliers and business partners, and
 
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personally identifiable information of our guests and employees, in our data centers and on our networks. For example, our customers are asked to complete a survey, often digitally on iPads, prior to first receiving services at our relaxation salons. The surveys contain questions requesting private health-related information of our relaxation salon patrons. In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card information by way of secure private retail networks.
The secure processing, maintenance, and transmission of this information is critical to our operations. We rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmission, and storage of confidential information. Despite the security measures we have in place and continual vigilance in regard to the protection of sensitive information, our systems and those of our third party service providers may be vulnerable to security breaches, attacks by hackers, acts of vandalism, computer viruses, misplaced or lost data, human errors, or other similar events. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, damage our reputation, and cause a loss of confidence in our business, products, and services, which could adversely affect our business, financial condition, profitability, and cash flows. Although we carry cyber liability insurance to protect against these risks, there can be no assurance that such insurance will provide adequate levels of coverage against all potential claims.
Our success depends substantially on the value of our brands.
Our success is dependent, in large part, upon our ability to maintain and enhance the value of our brands, our customers’ connection to our brands, and a positive relationship with our franchisees. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity, including via social media, or result in litigation. Some of these incidents may relate to the way we manage our relationship with our franchisees, our growth strategies, our development efforts, or the ordinary course of our, or our franchisees’, business. Other incidents may arise from events that are or may be beyond our ability to control and may damage our brands, such as actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare, or otherwise; litigation and claims; security breaches or other fraudulent activities associated with our payment systems; and illegal activity targeted at us or others. Consumer demand for our products and services and our brands’ value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our products or services, which would likely result in lower sales and, ultimately, lower royalty income, which in turn could materially and adversely affect our business and operating results.
We may need to raise additional capital to meet our business requirements in the future, and such capital raising may be costly or difficult to obtain and could dilute current shareholders’ ownership interests.
Our future capital requirements will depend on many factors, including the speed and geographic area of relaxation salon and other business growth, progress and results of our businesses, the number and development requirements of other business that we pursue, and the costs of commercialization activities, including marketing and sales. Because of the numerous risks and uncertainties associated with the development and commercialization of our businesses, we are unable to reasonably estimate the amounts of increased capital outlays and operating expenditures that our business will require. It is likely that we will need to raise additional funds through public or private debt or equity financings to meet various objectives including, but not limited to:

pursuing growth opportunities, including internationally;

acquiring complementary businesses;

making capital improvements to our infrastructure;

hiring qualified management and key employees;

responding to competitive pressures;

complying with regulatory requirements; and

maintaining compliance with applicable laws.
 
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Any additional capital raised through the sale of equity or equity-linked securities may dilute our current shareholders’ ownership in us and could also result in a decrease in the market price of the ADSs. The terms of those securities issued by us in future capital transactions may be more favorable to new investors and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of the ADSs.
Furthermore, any debt or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain required additional capital, we may have to curtail our growth plans or cut back on existing business, and we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition. Thus, holders of the ADSs bear the risk that our future offerings may reduce the market price of the ADSs and dilute their shareholdings in us. See “Description of Capital Stock.”
If we fail to obtain necessary funds for our operations, we will be unable to maintain and improve our services, other businesses, and technology, and we will be unable to develop and commercialize our services, other businesses, and technologies.
Our present and future capital requirements depend on many factors, including:

future revenues and profits generated from the expected launch of new services;

the level of research and development investment required to develop our services, and maintain and improve our technology positions;

our ability and willingness to enter into new agreements with strategic partners and the terms of these agreements;

the costs of recruiting and retaining qualified personnel;

the time and costs involved in obtaining regulatory approvals should such be required; and

the costs of filing, prosecuting, defending, and enforcing trademark, patent claims and other intellectual property rights.
If we are unable to obtain the funds necessary for our operations, we will be unable to develop and commercialize our services and technologies, which would materially and adversely affect our business, liquidity and results of operations.
Our level of indebtedness could materially and adversely affect our business, financial condition and results of operations.
The total debt outstanding under our credit facilities as of June 30, 2020 was JPY737,444,000 (US$6,842,758) on a consolidated basis. Our indebtedness could have significant effects on our business, such as:

limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;
 
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making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;

diluting the economic and voting rights of our existing shareholders or reduce the market price of the ADSs or both upon redemption of the convertible bonds; and

placing us at a competitive disadvantage compared with our competitors that have less debt.
In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
Our outstanding debt agreements may limit our flexibility in operating and expanding our business.
As of June 30, 2020, we had a total of 26 loans with six Japanese financial institutions for an aggregate principal amount of JPY737,444,000 (US$6,842,758) on a consolidated basis. In July 2020, we entered into two additional 10- year loan agreements in the aggregate amount of JPY170,000,000 (US$1,577,433). None of the loan agreements contain any material financial covenants, although certain of the government-sponsored loans set a limit on the total loan amount we may borrow from other government-sponsored lenders. However, 20 of the loan agreements have our Chief Executive Officer as a personal guarantor of such debt obligations of our Company. If we release our Chief Executive Officer from such a guarantor burden, the lenders may request us to provide them with alternative collateral and/or seek additional negative covenants on the existing loan agreements. This could limit our discretion to invest, utilize, and/or dispose of our assets for business.
Furthermore, the potential restrictive covenants to be contained in our existing and future loan agreements may restrict our access to future debt financing, on which our business operations and expansion plans, in part, depend. If our revenues decrease materially or we experience a significant increase in our interest expenses, we may not have enough available cash or be able to raise additional funds on satisfactory terms, if at all, through equity or debt financings to make any required prepayment or repay such indebtedness at the time any such event of default occurs. In such an event, we may be required to delay, limit, reduce or terminate our business development or expansion efforts. Our business, financial condition and results of operations could be materially adversely affected as a result.
We depend on key members of our management and advisory team and will need to add and retain additional leading experts.
We are highly dependent on our executive officers, including our Chief Executive Officer, Mr. Kouji Eguchi, our Chief Financial Officer, Mr. Fumitoshi Fujiwara, and other key management and technical personnel. We do not have employment agreements with either Mr. Kouji Eguchi or Mr. Fumitoshi Fujiwara.
Furthermore, our ability to manage our store expansion will require us to continue to train, motivate, and manage our associates. We will need to attract, motivate, and retain additional qualified executive, managerial, and merchandising personnel and store associates. Competition for this type of personnel is intense, and we may not be successful in attracting, assimilating, and retaining the personnel required to grow and operate our business profitably. We presently maintain a “key person” life insurance policy only for our Chief Executive Officer. There can be no assurance that we will be able to retain our existing personnel, including our Chief Executive Officer, Chief Financial Officer and other key management personnel, or attract additional qualified employees. The loss of key personnel or the inability to hire and retain additional qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operation.
We may suffer losses from liability or other claims if our services cause harm to customers.
Although we screen our customers for major illnesses and injury, our services could potentially cause harm or injury to customers. Unexpected and undesirable side effects caused by our services for which we
 
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have not provided sufficient warnings, which may have been performed negligently, could result in the discontinuance of our relaxation services or prevent us from achieving or maintaining market acceptance of our services. Such side effects or injury incidents could also expose us to liability lawsuits. We currently maintain a comprehensive general liability policy; however, if any general liability lawsuits or claims are successfully brought against us, we could suffer from increased insurance premiums. Moreover, if damages exceed our policy limits, we may incur substantial financial losses. These claims could cause negative publicity regarding our Company, or brand, which could in turn harm our reputation and net revenue, which could have a material adverse effect on our business, financial condition, profitability, and cash flows.
Changes in regulatory requirements, or in application of current regulatory requirements, may have an adverse effect on our business and results of operations.
Relaxation salons such as ours are not currently regulated by the Japanese government. The main law in Japan governing the massage industry is the Act on Practitioners of Massage, Acupressure, Acupuncture and Moxibustion, and etc. (Act No. 217 of 1947) (which we refer to as the “Massage Act”). However, our Company does not market or provide massage, acupressure, acupuncture, moxibustion or other services regulated under the Massage Act, and this information is clearly provided to all customers prior to receiving our services, as well as all franchisees to prevent unauthorized services. Moreover, all of our customers are required to sign a waiver acknowledging this prior to receiving our services. Nevertheless, the Japanese government could later include our industry within the meaning of the Massage Act, or enact a separate law to regulate our industry. If such an occurrence were to happen, our costs associated with licensing and training staff, as well as any additional wages required for hiring licensed staff, as necessary, could add to our expenses and harm our results of operation.
Our prepaid cards are heavily regulated under Japanese law and violations of the relevant law could subject us to sanctions.
We began issuing prepaid cards called “Re.Ra.Ku® Cards” to relaxation salon customers on December 1, 2008. Re.Ra.Ku® Card users can continuously use and also replenish the card at our Company’s relaxation salons. Prepaid cards are generally considered “prepaid payment methods” (which we refer to as “PPMs”) under the Act on Settlement of Funds (Act No. 59 of 2009) (which we refer to as the “Settlement Act”). PPMs are regulated under the Settlement Act so long as there is a possibility the cards could be valid for a period of more than six months. The Re.Ra.Ku® Cards do not have expiration dates and therefore are regulated under the Settlement Act. Moreover, the Re.Ra.Ku® Cards can be used at salons operated by franchisees, and because the franchisees are considered third parties for the purposes of the Settlement Act, we fall under the category of a Public Use PPM Provider.
A Public Use PPM Provider must be registered with the relevant Local Financial Bureau and follow rather detailed deposit procedures to assure that there are adequate funds for the individuals who are effectively loaning their money to the Public Use PPM Provider. If we fail to comply with these procedures, there is some possibility that we will be assessed a monetary fine, and in certain circumstances, a member of our Company could face a criminal penalty of imprisonment. If such results were to occur, it could adversely impact our financial results as well as our brand image.
Matters relating to employment and labor law may adversely affect our business.
Various Japanese labor laws govern our relationships with our employees and affect operating costs. These laws include employment classifications of employee, independent contractor, or contract worker; minimum wage requirements; employer contributions to social security, unemployment insurance, and workers’ accident compensation insurance, and other wage and benefit requirements. Significant additional government regulations and new laws, including mandating increases in minimum wages, changes in employment status requirements, or other labor law changes could materially affect our business, financial condition, operating results or cash flow. Additionally, if our or our franchisees’ employees unionize, it could materially affect our business, financial condition, operating results or cash flow.
We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongful termination, or violation of labor laws. Such claims could also be asserted against us by employees of our franchisees. These claims may divert our financial and
 
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management resources that would otherwise be used to benefit our operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business, brand image, employee recruitment, financial condition, operating results or cash flows.
If we or our franchisees face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.
Labor is a primary component in the cost of operating our directly-operated and franchised relaxation salons. As of June 30, 2020, we had 233 full-time employees, 160 of which were relaxation therapists who provide services to customers directly. If we or our franchisees face labor shortages or increased labor costs because of increased competition for employees, higher employee-turnover rates, or increases in the relevant minimum wage, change in employment status standards, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our and our franchisees’ operating expenses could increase, and our growth could be adversely affected.
If such events occur, we may be unable to increase our prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell franchises. If prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from franchisees.
In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient number of well-qualified relaxation salon operators, management personnel and other employees, including relaxation therapists. Qualified individuals needed to fill these positions can be in short supply in some geographic areas. In addition, relaxation salons have traditionally experienced relatively high employee turnover rates. Our and our franchisees’ ability to recruit and retain such individuals may delay the planned openings of new relaxation salons or result in higher employee turnover in existing relaxation salons, which could increase our and our franchisees’ labor costs and have a material adverse effect on our business, financial condition, results of operations or cash flows. If we or our franchisees are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for these employees could require us or our franchisees to pay higher wages, which would also result in higher labor costs and adversely affect our results of operation.
We are exposed to the risk of natural disasters, unusual weather conditions, pandemic outbreaks such as COVID-19, political events, war and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.
Our headquarters, directly-operated and franchised relaxation salon locations and other businesses, as well as certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods, typhoons, tsunamis, tornadoes, fires or earthquakes, as well as global pandemics such as COVID-19. Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures and even nuclear leaks, as a result of the concentration of our relaxation salons, may disrupt our and our franchisees’ business and may adversely affect our and our franchisees’ ability to sell services. Our business may be harmed if our or our franchisees’ ability to sell services is impacted by any such events, any of which could influence customer trends and purchases and negatively impact our and our franchisees’ revenues, properties or operations.
For example, our relaxation salon business was negatively impacted during the first half of 2020 due to the COVID-19 pandemic, as a result of Japanese government-requested halt in business in order to help combat and contain the outbreak. In April 2020, the Japanese government issued the Declaration of a State of Emergency (which we refer to as the “Declaration”), whereby the Japanese government requested the closing of non-essential activities and businesses across Japan as a preemptive safeguard against the COVID-19 pandemic. This adversely impacted businesses across the nation, particularly in the retail segment in which we operate. The Japanese government-requested halt in business lasted through May 2020. The year on year comparison of Re.Ra.Ku® and other branded salon gross revenue was 74% in June and 86% in July, and improved to 93% in September and 105% in October based on preliminary revenue data, although there can be no guarantee such improvement will continue. We are focusing on the repeat rate improvement while we are under COVID-19 influence. The impact of this Japanese government-requested business halt materially
 
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adversely impacted our revenue for the period. During this time, we implemented mitigation measures to limit the impact on our operations and financial results, including reductions in executive and employee compensation and deferral of nonessential spend. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Assessment of Impact of the COVID-19 to the Company’s Business Operations, Liquidity, and Capital Resources.”
While the COVID-19 pandemic may have led to structural changes in demand in the United States, including a shift in preferences toward digital commerce over traditional retail brick and mortar, we consider the effects to be more muted in Japan. Our Relaxation Salon Segment continues to offer a nearly non-discretionary service, as physical health, joint alignment, therapeutic bodywork impact health wellness of our customers and require physical contact—continuing to buoy our core salon business. However, in order to further strengthen our position and provide financial flexibility during the COVID-19 pandemic, we entered into additional loan agreements for JPY170,000 thousand as of July 28, 2020. We also received JPY 76,419 thousand from a special Japanese government subsidy program for employment adjustment, which incentivizes companies to retain their employees. We believe that the overall impact to our business from the COVID-19 pandemic has been limited in time; however, there can be no guarantee that further closures may not be required in the future if there is an increase in cases of COVID-19 in Japan and other regions where we operate. We believe we and our franchisees have undertaken appropriate protocols, in line with guidance from the Japanese government to protect our employees and our clients.
In addition, if we experience the effects of other events, such as natural or other disasters, we could suffer physical damage to one or more of our or our franchisees’ properties, the temporary closure of some or all of our directly-operated relaxation salons and franchised relaxation salons, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods and supplies to our directly-operated and franchised relaxation salons, disruption of our technology support or information systems, or fuel or electricity shortages or dramatic increases in fuel or electricity prices, all of which would increase the cost of doing business. These events also could have indirect consequences such as increases in the costs of insurance or taxes if they result in significant loss of property or other insurable damage. Any of these factors, or any combination thereof, could adversely affect our operations and our financial results.
As we expand our businesses internationally, we will become subject to foreign laws and regulations and we could be adversely affected by violations of these laws as well as the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws.
As we expand our business in Japan and other parts of the world, including in the United States in the future, we become subject to risks customarily associated with such global operations, including the complexity of laws, regulations, and markets in the countries in which we operate; the uncertainty of enforcement of remedies in certain jurisdictions; the effect of currency exchange rate fluctuations; export control laws; the impact of foreign labor laws and disputes; the ability to attract and retain key personnel; the economic, tax, and regulatory policies of local governments; compliance with applicable anti-money laundering, anti-bribery, and anti-corruption laws, including the Foreign Corrupt Practices Act and other anti-corruption laws that generally prohibit persons and companies and their agents from offering, promising, authorizing, or making improper payments to foreign government officials for the purpose of obtaining or retaining business; and compliance with applicable sanctions regimes regarding dealings with certain persons or countries. Certain of these laws also contain provisions that require accurate recordkeeping and further require companies to devise and maintain an adequate system of internal accounting controls. We cannot assure you that we will be successful in preventing our franchisees or other agents from taking actions in violation of these foreign laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.
There is a risk that we will be a passive foreign investment company (which we refer to as “PFIC”) for the current or any future taxable year, which could result in material adverse U.S. federal income tax consequences if you are a U.S. holder.
A non-U.S. corporation, such as our Company, is classified as a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of its subsidiaries, either:
 
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(i) 50% or more of the value of the corporation’s assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets; or (ii) at least 75% of the corporation’s gross income is passive income. “Passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. In determining the value and composition of our assets, the cash we raise in this offering will generally be considered to be held for the production of passive income and thus will be considered a passive asset.
The determination of whether a corporation is a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules that are subject to differing interpretations. In addition, the determination of whether a corporation will be a PFIC for any taxable year can only be made after the close of such taxable year. Our PFIC status will depend, in part, on the amount of cash that we raise in this offering and how quickly we utilize the cash in our business. Furthermore, because we may value our goodwill based on the market price of the ADSs in this offering, a decrease in the market price of our ADSs may also cause us to be classified as a PFIC for the current or any future taxable year. Based upon the foregoing, it is uncertain whether we will be a PFIC for our current taxable year or any future taxable year
If we are a PFIC for any taxable year during which a U.S. holder (as defined below) owns common shares or ADSs, certain adverse U.S. federal income tax consequences could apply to such U.S. holder. See “Certain Tax Considerations—Certain U.S. Federal Income Tax Considerations for U.S. Holders” for further information. We have not determined, if we were to be classified as a PFIC for a taxable year, whether we will provide information necessary for a U.S. holder to make a “qualified electing fund” election which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs. Accordingly, U.S. holders should assume that they will not be able to make a qualified electing fund election with respect to the common shares or ADSs. The PFIC rules are complex, and each U.S. holder should consult its own tax advisor regarding the PFIC rules, the elections which may be available to it, and how the PFIC rules may affect the U.S. federal income tax consequences relating to the ownership and disposition of our common shares or ADSs.
Risks Related to Our Relationships with Franchisees
The financial performance of our franchisees can negatively impact our business.
Approximately 52% of our relaxation salons were franchised locations as of June 30, 2020. We derive revenues associated with our franchised locations from royalty fees and other fees to franchised locations. Our financial results are therefore dependent in part upon the operational and financial success of our franchisees. As we increase our focus on our franchise business, our dependence on our franchisees grows. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for ensuring the success of our entire system of relaxation salons and for taking a longer-term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to secure adequate financing to continue operating their relaxation salons. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience financial distress or even bankruptcy. If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues, and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. Closure of franchised relaxation salons would reduce our royalty revenues and could negatively impact margins, because we may not be able to reduce fixed costs which we continue to incur.
We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.
Franchisees are independent business operators and are not our employees. Though we have established operational standards and guidelines, they own, operate and oversee the daily operations of their salon locations. We provide training and support to franchisees and set and monitor operational standards, but the quality of franchised relaxation salons may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate relaxation salons in a manner consistent with our
 
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standards and requirements or may not hire and train qualified managers and other relaxation salon personnel, including relaxation therapists. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially, and franchise-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
In addition, our franchisees are subject to the same general economic risks as our Company, and their results are influenced by competition for both guests and therapists, market trends, price competition and disruptions in their markets due to severe weather and other external events. Like us, they rely on external vendors for some critical functions and to protect their company data. They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially since many of them are small businesses with much more limited access to financing than our Company, or by the limited supply of favorable real estate for new salon locations. They may experience financial distress as a result of over-leveraging, which could negatively affect our operating results as a result of delayed payments to us.
We rely on franchise agreements that could be breached and may be difficult to enforce, which could result in franchisees improperly managing relaxation salons.
Although we believe that we take reasonable steps to protect the quality of services provided at our franchised locations, including the use of franchise agreements with detailed and rigorous obligations on the part of franchisees, the agreements can be difficult and costly to enforce. Although we seek to require strict adherence to properly structured franchise agreements, disputes may arise related to revenue, financing, or intellectual property rights associated with our franchise. If a dispute arises, a court may determine that a third party’s rights were infringed. In addition, enforcement of our rights can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality agreements with our franchisees, employees, contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the risks that:

these agreements may be breached;

these agreements may not provide adequate remedies for the applicable type of breach;

our trade secrets or proprietary know-how will otherwise become known; and

our competitors will independently develop similar technology or proprietary information.
We rely in part on the financial health of our franchisees. If we do not screen and monitor them appropriately, it could adversely affect our operations and financial results if they experience financial hardship.
We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. It is possible that some franchisees could file for bankruptcy or become delinquent in their payments to us, which could have a significant adverse impact on our business due to loss or delay in payments of royalties and other fees. Bankruptcies by our franchisees could negatively impact our market share and operating results as we may have fewer well-performing relaxation salons, and adversely impact our ability to attract new franchisees.
Although we have developed criteria to evaluate and screen prospective franchisees, we cannot be certain that the franchisees we select will have the business acumen or financial resources necessary to open and sustainably operate successful franchises in their franchise areas, and Japanese contract laws may limit our ability to terminate or modify these franchise arrangements. Moreover, franchisees may not hire qualified managers or may not successfully operate relaxation salons in a manner consistent with our standards and requirements. The failure of developers and franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition, results of operations and cash flows.
Franchisees may not have access to the financial or management resources that they need to open the relaxation salons contemplated by their agreements with us. Franchisees may not be able to negotiate acceptable lease or purchase terms for relaxation salon sites, obtain the necessary permits and government approvals or meet construction schedules. Any of these problems could slow our growth and reduce our
 
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franchise revenues. Additionally, our franchisees typically depend on financing from banks and other financial institutions, which may not always be available to them, in order to construct and open new relaxation salons. For these reasons, franchisees may not be able to meet the new relaxation salon opening dates required under franchise agreements.
Franchisee turnover could affect our ability to recruit new franchisees.
Although we make great efforts with the aid of our franchise support team to help franchisees who run into difficulties, we may suffer from franchisee retention. As of June 30, 2020, we had a total of 151 franchise operators, with some operating multiple franchise locations. Low franchisee retention could harm our image and deter prospective franchisees. Initial franchise membership revenue earned from new franchisees comprised 4.9% of our overall revenue in 2019 and 1.0% for the first six months of 2020. This revenue was recognized on the opening date of the new franchised salons. If franchisee turnover increases and we begin to struggle to recruit new franchisees to take over relinquished salon locations or establish new ones, such an occurrence could harm our financial results.
Premature termination of franchise agreements can cause losses.
Our franchise agreements may be subject to premature termination in certain circumstances, such as failure of a franchisee to cure a monetary default or abandonment of the franchise. If terminations occur for this or other reasons, we may need to enforce our right to damages for breach of contract and related claims, which may cause us to incur significant legal fees and expenses and/or to take back and operate such salons as directly-operated. Any damages we ultimately collect could be less than the projected future value of the fees and other amounts we would have otherwise collected under the franchise agreement. In addition, with many of our brands, we remain liable under the lease and, therefore, will be obligated to pay rent or enter into a settlement with the landlord, and we may not be made whole by the franchisee. A significant loss of franchise agreements due to premature terminations could hurt our financial performance or our ability to grow our business.
The interests of our franchisees may conflict with ours in the future and we could face liability from our franchisees or related to our relationship with our franchisees.
Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under the respective franchise agreements and the terms and conditions of the franchisee/franchisor relationship. This may lead to disputes with our franchisees, and we expect such disputes to occur from time to time in the future as we continue to offer franchises. Such disputes may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management and our franchisees will be diverted from our relaxation salons and other businesses, which could have a material adverse effect on our business, financial condition, results of operations and cash flows even if we have a successful outcome in the dispute.
We are subject to various Japanese laws that may affect our relationship with our franchisees.
Various Japanese laws govern our relationship with our franchisees and our potential sale of a franchise. A franchisee and/or a government agency may bring legal action against us based on the franchisee/franchisor relationships that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.
The Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Act No. 54 of 1947, as amended) (which we refer to as the “Antimonopoly Act”) prohibits any activities that inappropriately induce or mislead customers to enter into a business relationship by demonstrating seemingly preferable trade terms and conditions that could create a false impression over other competitor franchisors. The Japan Fair Trade Commission (which we refer to as the “JFTC”), which enforces the Antimonopoly Act and other Japanese antitrust laws, set forth “Guidelines Concerning the Franchise System Under the Antimonopoly Act” which suggest that a franchisor adequately disclose and explain material trade terms to a potential franchisee (willing to join the franchise relationship) to prevent any material terms and conditions inappropriately inducing or misleading such potential franchisee. In addition, when a franchisor
 
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markets its franchise, in the event a franchisor provides a prospective franchisee with an estimate of the revenue or profit that might possibly be earned upon becoming a franchisee, such estimated revenue or profit must be based on a reasonable method of calculation and established facts, such as the results of an existing franchise operating in a similar environment. The franchisor is required to present to the prospective franchisee such methods and facts. If the JFTC finds that any of our activities violate the Antimonopoly Act, including any “deceptive customer inducement”, then the JFTC may order us to cease and desist from engaging in such unlawful activities, delete any relevant unlawful clauses from the franchise contract, or carry out any other measures necessary to eliminate such unlawful activities.
In the event the JFTC suspects any violation of the Antimonopoly Act or alleges our Company has misled or wrongly induced based on any particular trade terms, our Company could be exposed to risks including governmental action against our Company.
Risks Related to Our Industry
We are vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results of operations and cash flow.
Relaxation salon businesses depend on discretionary consumer spending and are often affected by changes in consumer tastes, national, regional and local economic conditions, and demographic trends. Factors such as traffic patterns, weather, local demographics, and the type, number and locations of competing salons may adversely affect the performance of individual locations. In addition, economic downturns, rapid inflation, tight labor market conditions and the resulting increase of general wage levels and increases in salon lease expenses could harm the relaxation industry in general and our relaxation salon locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on pricing that could harm our business, financial condition, results of operations and cash flow. There can be no assurance that consumers will continue to regard our brand of relaxation salons favorably or that we will be able to develop new services that appeal to consumer preferences. Our business, financial condition and results of operations depend in part on our ability to anticipate, identify and respond to changing consumer preferences and economic conditions. If we are unable to adapt to changes in consumer preferences and trends, we may lose customers and our revenues may decline.
We may not be able to compete successfully with other relaxation salon businesses, which could materially and adversely affect our results of operations.
We may not be able to compete successfully with other relaxation salon businesses. Intense competition in the relaxation industry could make it more difficult to expand our business and could also have a negative impact on our operating results if customers favor our competitors, or if we are forced to change our pricing and other marketing strategies.
The relaxation industry, particularly in Japan, is intensely competitive. In addition, the Tokyo metropolitan area (consisting of Tokyo, Kanagawa, Saitama, and Chiba) of Japan, the primary market in which we compete, contains what we believe to be the most competitive relaxation services market in Japan. We expect competition in this market to continue to be intense because relaxation salons are comparatively inexpensive to start and operate, and new competitors are regularly entering the market. Competition in our industry is primarily based on price, convenience, quality of service, brand recognition, and location of the relaxation salons. If our directly-operated and franchised relaxation salons cannot compete successfully with other relaxation salon companies in new and existing markets, we could lose customers and our revenues could decline. Our directly-operated and franchised relaxation salons compete with national and regional relaxation salon chains for customers, relaxation salon locations and qualified management and other staff, including licensed relaxation therapists. Some of our competitors may have substantially greater financial and other resources, may have been in business longer, may have greater brand recognition, or may be better established in the markets where our relaxation salons are located or are planned to be located. Any of these competitive factors may materially adversely affect our business, financial condition or results of operations.
 
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We face significant competition and continuous technological change.
In our Digital Preventative Healthcare Segment, if our competitors develop and commercialize services faster than we do or develop and commercialize services that are superior to ours, our commercial opportunities will be reduced or eliminated. The extent to which any of our services achieve market acceptance will depend on competitive factors, many of which are beyond our control. Competition in the relaxation and health technology industries is intense. Our main competitors in the Specific Health Guidance Program, promoted by the Ministry of Health, Labor and Welfare of Japan, include the health and fitness group, Noom Japan.
Negative publicity could reduce sales at some or all of our relaxation salons.
Although we actively screen all personnel and staff members, including relaxation therapists, who interact with customers, we cannot guarantee that our staff or customers will not engage in illegal or inappropriate behavior that could have a negative effect on our brand image, as well as the health and well-being of our customers or staff, as the case may be. In addition, negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held to be responsible. Any such negative impact of adverse publicity relating to one relaxation salon may extend far beyond the relaxation salon involved, especially due to the high geographic concentration of many of our relaxation salons, to affect some or all of our other relaxation salons, including our franchised relaxation salons. The risk of negative publicity is particularly great with respect to our franchised relaxation salons because we are limited in the manner in which we can regulate them, especially on a real-time basis, and negative publicity from our franchised relaxation salons may also significantly impact directly-operated relaxation salons. In addition, the relaxation industry can often be held under legal and legislative scrutiny as a result of some fringe relaxation businesses that engage in illegal or anti-social activities.
Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment, wrongful termination, or similar claims may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. Certain of these types of employee claims, such as tort claims, could be asserted against us by employees of our franchisees. A significant increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, financial condition, results of operations and cash flows.
We are potentially subject to government regulations, and we may experience delays in obtaining required regulatory approvals, if required, to market our proposed businesses.
Various aspects of our operations are or may become subject to Japanese law or the laws of another relevant country or jurisdiction, any of which may change from time to time. Costs arising out of any regulatory developments could be time-consuming, expensive and could divert management resources and attention and, consequently, could adversely affect our business operations and financial performance.
Delays in regulatory clearance, approval, limitations in regulatory approval and withdrawals of regulatory approval, if any are required, may have a negative impact on our results. If we experience significant delays in obtaining any regulatory approvals, our business development costs will increase and or our ability to commercialize future businesses will be adversely affected.
Risks Related to this Offering and Ownership of the ADSs
We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common shares and ADSs may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements in the registration statement for the emerging growth company’s initial public offering of common equity securities, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”), reduced
 
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disclosure about executive compensation arrangements, no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements, and not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements. We have elected to adopt these reduced disclosure requirements.
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement declared effective under the Securities Act, or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.
We would cease to be an “emerging growth company” upon the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year during which our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities, or (iv) as of the end of any fiscal year in which the market value of our common shares held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year (and we have been a public company for at least 12 months and have filed at least one annual report on Form 20-F).
We cannot predict if investors will find the ADSs less attractive as a result of our taking advantage of these exemptions. If some investors find the ADSs less attractive as a result of our choices, there may be a less active trading market for the ADSs and our stock price may be more volatile.
As a “foreign private issuer” we are permitted, and intend, to follow certain home country corporate governance and other practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
Our status as a foreign private issuer exempts us from compliance with certain SEC laws and regulations and certain regulations of NASDAQ, including certain governance requirements such as independent director oversight of the nomination of directors and executive compensation. Further, consistent with corporate governance practices in Japan, we do not have a standalone compensation committee or nomination and corporate governance committee under our board. In addition, we will not be required under the Exchange Act to file current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we will generally be exempt from filing quarterly reports with the SEC. Also, we are not required to provide the same executive compensation disclosures regarding the annual compensation of our five most highly compensated senior executives on an individual basis as are required of U.S. domestic issuers. As a foreign private issuer, we are permitted to disclose executive compensation on an aggregate basis and need not supply a Compensation Discussion & Analysis, as is required for domestic companies. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. These exemptions and accommodations will reduce the frequency and scope of information and protections to which you are entitled as an investor.
Our Chief Executive Officer owns a “golden share” with key veto rights, thereby limiting a shareholder’s ability to influence our business and affairs.
Kouji Eguchi, our Chief Executive Officer and director, is the sole holder of our Class A common share, which we refer to as a “golden share,” entitling him to certain veto rights on key matters presented to our shareholders. Consequently, Mr. Eguchi is able to control key corporate decisions, thus limiting the
 
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ability of the holders of the ADSs to influence matters affecting our Company. As a shareholder, Mr. Eguchi may be able to influence the outcome of matters submitted to shareholders for approval, including amendments of our organizational documents, issuance of additional common shares, approval of any merger, sale of assets, or other major corporate transactions. This may prevent or discourage unsolicited acquisition proposals or offers for our common shares or ADSs that you may feel are in your best interest as one of our shareholders. Circumstances may occur in which the interests of our Chief Executive Officer could be in conflict with your interests or the interests of other shareholders. Accordingly, a shareholder’s ability to fully influence our business and affairs through voting its common shares may be limited.
Certain of our current shareholders have substantial influence over the offering and our Company, and their interests may not be aligned with the interests of our other shareholders.
We entered into certain investment agreements in 2016 with two separate Japanese investment funds, pursuant to which certain approval rights were granted to each such fund in connection with various corporate actions that we may seek to take. See “Description of Share Capital and Articles of Incorporation—Special Voting and Consent Rights—Consent Rights under Investment Agreements.” As a result, these shareholders may exert substantial influence over our business, including significant corporate actions such as filing for bankruptcy, issuance of new shares and the price therefore, and changes to Mr. Eguchi’s role with the Company, among other things.
However, these agreements will terminate in accordance with their terms upon consummation of the IPO.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company following this offering, we will incur legal, accounting, and other expenses that we did not previously incur. We will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, and the listing standards of NASDAQ as applicable to a foreign private issuer, which are different in some material respects from those required for a U.S. public company. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” Further, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors.
Pursuant to Section 404 of the Sarbanes-Oxley Act, once we are no longer an emerging growth company, we may be required to furnish an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of complying with Section 404 of the Sarbanes-Oxley Act will significantly increase, and management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. We may need to hire more employees in the future or engage outside consultants to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, which will further increase our cost and expense. In addition, enhanced legal and regulatory regimes and heightened standards relating to corporate governance and disclosure for public companies result in increased legal and financial compliance costs and make some activities more time-consuming.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors, shareholders or third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.
If we fail to implement and maintain an effective system of internal control to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act (which we refer to as “Section 404”), requires that we include a report from
 
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management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F. In addition, once we cease to be an “emerging growth company” as defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal control or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods.
We cannot assure you that the ADSs will become liquid or that it will be listed on a securities exchange.
Our ADSs representing our common shares will trade on The Nasdaq Capital Market; however, we cannot assure you that we will be able to maintain any such listing. Furthermore, although we anticipate a mechanism allowing common shares to be exchanged at a certain ratio to ADSs in connection with this offering, we may experience procedural or regulatory difficulties, from time to time, in the exchange of common shares for ADSs.
In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling ADSs representing our common shares, which may further affect the liquidity of the ADSs. This would also make it more difficult for us to raise additional capital or attract qualified employees or partners.
Additionally, prior to the completion of this offering, there has been no public market for our common shares or the ADSs. Although our ADSs will be listed on The Nasdaq Capital Market under the symbol “MRM”, an active trading market for the ADSs may never develop or be sustained following this offering. If an active trading market does not develop or is not sustained, you may have difficulty selling your ADSs at an attractive price, or at all. An inactive market may also impair our ability to raise capital by selling our common shares or ADSs, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using our common shares or ADSs as consideration.
Management will have broad discretion as to the use of the proceeds from this offering, and we may not use the proceeds effectively.
Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of the ADSs. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our businesses and cause the price of the ADSs to decline.
 
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The price of the ADSs may fluctuate substantially.
The price for the ADSs in this offering will be determined by us and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. You may not be able to sell your ADSs at or above the initial public offering price or at any other price or at the time that you would like to sell. You should consider an investment in the ADSs to be risky, and you should invest in the ADSs only if you can withstand a total loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of the ADSs to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:

any failure to meet or exceed revenue and financial projections we provide to the public;

actual or anticipated variations in our quarterly financial condition and operating results or those of other companies in our industry;

our failure to meet or exceed the estimates and projections of the investment community;

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

additions or departures of our key management personnel;

issuances by us of debt or equity securities;

litigation involving our Company, including shareholder litigation; investigations or audits by regulators into the operations of our Company; or proceedings initiated by our competitors, franchisees, or customers;

changes in the market valuations of similar companies;

ADS price and volume fluctuations attributable to inconsistent trading volume levels of the ADSs;

significant sales of the ADSs or common shares by our insiders or our shareholders in the future;

the trading volume of the ADSs in the United States; and

general economic and market conditions.
These and other market and industry factors may cause the market price and demand for the ADSs to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their ADSs and may otherwise negatively affect the liquidity of the ADSs. Future market fluctuations may also materially adversely affect the market price of the ADSs.
In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. Any such class action suit or other securities litigation would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, could materially adversely affect our business, financial condition, results of operations and prospects.
If you purchase ADSs in this offering, you will experience immediate dilution.
If you purchase ADSs in this offering, you will experience immediate dilution of $13.53 per ADS in the net tangible book value of your ADSs after giving effect to this offering at the initial public offering price of $15.00 per ADS because the price that you pay will be substantially greater than the net tangible book value per ADS that you acquire. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus titled “Dilution.”
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the price of the ADSs and trading volume could decline.
The trading market for the ADSs depends in part on the research and reports that securities or industry analysts publish about us or our business. If few or no securities or industry analysts cover us, the trading price for the ADSs would be negatively impacted. If one or more of the analysts who covers us downgrades the ADSs, publishes incorrect or unfavorable research about our business, ceases coverage of
 
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our Company, or fails to publish reports on us regularly, demand for the ADSs could decrease, which could cause the price of the ADSs or trading volume to decline.
We do not currently intend to pay dividends on our common shares for the foreseeable future.
We currently do not intend to pay any dividends to holders of our common shares for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Any determination to pay dividends in the future will be at the discretion of our board of directors and subject to limitations under applicable law. Therefore, you are not likely to receive any dividends on your ADSs for the foreseeable future, and the success of an investment in the ADSs will depend upon any future appreciation in its value. Moreover, any ability to pay may be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. Consequently, investors may need to sell all or part of their holdings of our common shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which our shareholders have purchased the ADSs.
Sales of a substantial number of our common shares or ADSs in the public markets by our existing shareholders in the future could cause the price of the ADSs to fall.
Sales of a substantial number of our common shares or ADSs in the public market in the future or the perception that these sales might occur, could depress the market price of the ADSs and could impair our ability to raise capital through the sale of additional equity securities from time to time. We are unable to predict the effect that any such sales may have on the prevailing market price of the ADSs.
The future issuance of additional common shares in connection with our stock option plan, convertible bonds, acquisitions or otherwise may adversely affect the market of the ADSs.
After this offering, we expect to have an aggregate of 679,500 common shares issuable upon exercise of outstanding stock options, at a weighted average exercise price of JPY905 (US$8.40) per share. If and when these options are exercised for our common shares, the number of common shares outstanding will increase. Such an increase in our outstanding securities, and any sales of such shares, could have a material adverse effect on the market for the ADSs, and the market price of the ADSs.
We provide a stock option plan for our Company’s directors, internal corporate auditors, employees and external consultants. We currently plan to continue granting stock options and other incentives so that we can continue to secure talented personnel in the future. We may issue all of these common shares without any further action or approval by our shareholders, subject to certain exceptions. Any common shares, issued in connection with our stock option plan, the exercise of outstanding stock options, or otherwise, would dilute the percentage ownership held by the investors who purchase ADSs in this offering.
The right of holders of ADSs to participate in any future rights offerings may be limited, which may cause dilution to their holdings and holders of ADSs may not receive cash dividends if it is impractical to make them available to them.
We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to the ADS holders in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to ADS holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act.
The depositary has agreed to pay ADS holders the cash dividends or other distributions it or the custodian receives on our common shares or other deposited securities after deducting its fees and expenses. However, because of these deductions, ADS holders may receive less, on a per share basis with respect to their ADSs than they would if they owned the number of shares or other deposited securities directly. ADSs
 
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holders will receive these distributions in proportion to the number of common shares the ADSs represent. In addition, the depositary may, at its discretion, decide that it is not lawful or practical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and ADS holders will not receive such distribution.
Holders of ADSs may be subject to limitations on transfer of their ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or withdrawing the underlying common shares.
We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or prejudices a material right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or withdrawing the underlying common shares. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances.
Holders of ADSs may not receive distributions on our common shares or any value for them if it is illegal or impractical to make them available to such holders.
The depositary of ADSs has agreed to pay holders of ADSs the cash dividends or other distributions it or the custodian for the ADSs receives on common shares or other deposited securities after deducting its fees and expenses. Holders of ADSs will receive these distributions in proportion to the number of our common shares that such ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit distributions on our common shares to holders of ADSs. This means that holders of ADSs may not receive the distributions we make on our common shares if it is illegal or impractical to make them available to such holders. These restrictions may materially reduce the value of the ADSs.
ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our common shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our common shares, the ADSs or the deposit agreement, which may include any claim under the U.S. federal securities laws.
If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated
 
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by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action. Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs (including purchasers of our ADSs in the secondary market) or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
Risks Related to Japan
We are incorporated in Japan, and it may be more difficult to enforce judgments against us that are obtained in courts outside of Japan.
We are incorporated in Japan as a joint stock corporation (kabushiki kaisha) with limited liability. All of our directors are non-U.S. residents, and a substantial portion of our assets and the personal assets of our directors are located outside the United States. As a result, when compared to a U.S. company, it may be more difficult for investors to effect service of process upon us in the United States, or to enforce against us, or our directors or executive officers, judgments obtained in U.S. courts predicated upon civil liability provisions of U.S. federal or state securities laws or similar judgments obtained in other courts outside of Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon U.S. federal and state securities laws.
Substantially all of our revenues are generated in Japan, but an increase of our international presence could expose us to fluctuations in foreign currency exchange rates, or a change in monetary policy may harm our financial results.
Our functional currency and reporting currency is the Japanese yen. Substantially all of our revenues are generated in Japan, but an increase in our international presence could expose us to fluctuations in foreign currency exchange rates. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies which, among other factors, may be influenced by governmental policies and domestic and international economic and political developments. If our non-Japanese revenues increase substantially in the future, any significant change in the value of the currencies of the countries in which we do business against the Japanese yen could adversely affect our financial condition and results of operations due to translational and transactional differences in exchange rates.
We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the amount of our revenues that will be generated in other countries, the variability of currency exposures, and the potential volatility of currency exchange rates. We do not take actions to manage our foreign currency exposure, such as entering into hedging transactions.
 
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Rights of shareholders under Japanese law may be different from rights of shareholders in other jurisdictions.
Our articles of incorporation and the Companies Act of Japan (which we refer to as the “Companies Act”) govern our corporate affairs. Legal principles relating to matters such as the validity of corporate procedures, directors’ fiduciary duties and obligations, and shareholders’ rights under Japanese law may be different from, or less clearly defined than, those that would apply to a company incorporated in any other jurisdiction. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of other countries. For example, under the Companies Act, only holders of 3% or more of our total voting rights or our outstanding shares are entitled to examine our accounting books and records. Furthermore, there is a degree of uncertainty as to what duties the directors of a Japanese joint stock corporation may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced than that in other jurisdictions.
Holders of ADSs have fewer rights than shareholders under Japanese law, and their voting rights are limited by the terms of the deposit agreement.
The rights of shareholders under Japanese law to take actions, including with respect to voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records, and exercising appraisal rights, are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of our common shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. ADS holders will not be able to bring a derivative action, examine our accounting books and records, or exercise appraisal rights through the depositary.
Holders of ADSs may exercise their voting rights only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from the ADS holders in the manner set forth in the deposit agreement, the depositary will make efforts to vote the common shares underlying the ADSs in accordance with the instructions of the ADS holders. The depositary and its agents may not be able to send voting instructions to ADS holders or carry out their voting instructions in a timely manner. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote.
Direct acquisition of our common shares, in lieu of ADSs, is subject to a prior filing requirement under recent amendments to the Japanese Foreign Exchange and Foreign Trade Act and related regulations.
Under recent amendments in 2019 to the Japanese Foreign Exchange and Foreign Trade Act and related regulations (which we refer to as “FEFTA”), direct acquisition of our common shares, in lieu of ADSs, by a Foreign Investor (as defined herein under “Description of Share Capital and Articles of Incorporation—Exchange Controls”) could be subject to the prior filing requirement under FEFTA. A Foreign Investor wishing to acquire direct ownership of our common shares, rather than ADSs, will be required to make a prior filing with the relevant governmental authorities through the Bank of Japan and wait until clearance for the acquisition is granted by the applicable governmental authorities, which approval may take up to 30 days and could be subject to further extension. The requisite approval relating to this offering was received on December 4, 2020. Without such clearance, the Foreign Investor will not be permitted to acquire our common shares directly. As such, prior to accepting our common shares for deposit, the depositary must obtain such pre-clearance from the applicable Japanese governmental authority. In addition, any Foreign Investor expecting to receive delivery of our common shares upon surrender of ADSs must also obtain pre-clearance from the applicable Japanese governmental authority prior to accepting delivery, which approval may take up to 30 days and could be subject to further extension. Although such prior filing requirement is not triggered for trading our ADSs once the depositary receives clearance for the deposit of the underlying common shares, we cannot assure you that there will not be delays for additional Foreign Investors who wish to acquire our common shares or for holders of the ADSs who are Foreign Investors and who wish to surrender their ADSs and acquire the underlying common shares. In addition, we cannot assure you that the applicable Japanese governmental authorities will grant such clearance in a timely manner or at all. See “Description of Share Capital and Articles of Incorporation—Exchange Controls” and “Description of American Depositary Shares—Deposit, Withdrawal and Cancellation.”
 
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Dividend payments and the amount you may realize upon a sale of ADSs that you hold will be affected by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen.
Cash dividends, if any, in respect of our common shares represented by the ADSs will be paid to the depositary in Japanese yen and then converted by the depositary into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect, among other things, the amounts a holder of ADSs will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that a holder of ADSs would receive upon sale in Japan of our common shares obtained upon surrender of ADSs, and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar value of dividends and sales proceeds received by holders of common shares.
 
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USE OF PROCEEDS
We will receive approximately $7.8 million in net proceeds from the sale of 800,000 ADSs offered by us in this offering (or approximately $9.5 million if the underwriters exercise in full their option to purchase up to 120,000 additional ADSs from us), based on the initial public offering price of $15.00 per ADS, after deducting estimated underwriting discounts and commissions and offering expenses of approximately $4.2 million payable by us.
We intend to use the net proceeds from this offering for working capital and general corporate purposes, which may include investments, acquisitions, or strategic collaborations to expand our customer base, as well as the development and marketing of new services.
We have no agreements or commitments for particular uses of the net proceeds from this offering, and our management will have discretion in allocating the net proceeds. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our expansion and development efforts, whether or not we enter into strategic transactions, our general operating costs and expenditures, and the changing needs of our businesses.
We believe that our funds and the net proceeds from this offering will be sufficient to continue our businesses and operations as currently conducted through 2021; however, changing circumstances may cause us to consume capital significantly faster than we currently anticipate.
 
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DIVIDEND POLICY
We currently intend to retain any future earnings to finance the development and expansion of our businesses and, therefore, do not intend to pay any cash dividends in the foreseeable future. Since our inception, we have not declared or paid any cash dividends on our common shares. Any decision to pay dividends in the future will be subject to a number of factors, including our financial condition, results of operations, the level of our retained earnings, capital demands, general business conditions, and other factors our board of directors may deem relevant. Accordingly, we cannot give any assurance that any dividends may be declared and paid in the future.
If declared, holders of outstanding common shares on a dividend record date will be entitled to the full dividend declared without regard to the date of issuance of the common shares or any transfer of the common shares subsequent to the dividend payment date. Payment of declared annual dividends in respect of a particular year, if any, will be made in the following year after approval by our shareholders at the annual general meeting of shareholders, subject to certain provisions of our articles of incorporation. See “Description of Share Capital and Articles of Incorporation—Dividend Rights.” Any dividend we declare will be paid by the depositary bank to the holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our common shares, to the extent permitted by applicable law and regulations, less the fees and expenses payable under the deposit agreement. See “Description of American Depositary Shares—Dividends and Other Distributions.”
 
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CAPITALIZATION
The following table sets forth our cash and cash equivalents, debt and capitalization as of June 30, 2020:

on an actual basis; and

on a pro forma basis to give effect to the above and the issuance of 800,000 ADSs in this offering at an initial public offering price of $15.00 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as set forth in this prospectus.
You should read the following table in conjunction with the sections entitled “Use of Proceeds”, “Selected Consolidated Financial Information and Operating Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Management—Stock Options”, and our financial statements and the related notes thereto included elsewhere in this prospectus.
As of June 30, 2020
(in thousands, except share amounts)
Actual
Pro Forma(1)
Cash and cash equivalents(2)
$ 2,088 $ 10,859
Debt
$ 6,842 $ 6,842
Shareholders’ equity:
Common Shares, no par value−9,999,999 shares authorized; 4,115,000 shares issued and 4,022,500 shares outstanding (excluding 92,500 shares of treasury stocks), actual; 9,999,999 shares authorized, 4,915,000 shares issued and 4,822,500 shares outstanding (excluding 92,500 shares of treasury stock), pro forma
5,521 9,436
Class A Shares, no par value−1 share authorized, 1 share issued and
outstanding, actual; 1 share authorized; 1 share issued and outstanding, pro
forma
1 1
Additional paid-in capital
6,618 10,532
Accumulated deficit
(10,654) (10,654)
Accumulated other comprehensive loss, net of taxes
 — 
Treasury stock, at cost
(28) (28)
Total shareholders’ equity
1,458 9,287
Total capitalization
$ 8,300 $ 16,129
(1)
The number of common shares to be outstanding immediately after this offering is based on the issuance of 800,000 ADSs in this offering and does not include (i) up to 120,000 ADSs issuable upon the exercise in full by the underwriters of their option to purchase additional ADSs from us based upon an offer and sale of 800,000 ADSs at an offering price of $15.00 per ADS; (ii) up to an aggregate of 234,000 common shares issuable upon the exercise of stock options outstanding as of June 30, 2020. The outstanding stock options have a weighted average exercise price of $11.10 per share and expire on December 21, 2026; and (iii) up to an aggregate of 450,000 common shares issuable upon the exercise of the eighth and ninth series stock options issued in October 2020. The outstanding stock options have a weighted average exercise price of JPY752 (US$6.98) per share and expire on September 30, 2026. See “Management—Stock Options” for more information.
(2)
The pro forma cash and cash equivalents is net of offering expenses not paid as of June 30, 2020, not total estimated offering expenses, which are used to calculate net proceeds in “Use of Proceeds.”
 
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DILUTION
Purchasers of ADSs in this offering will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per ADS paid by the purchasers of the ADSs in this offering and the pro forma, as adjusted net tangible book value per ADS immediately after, and giving effect to, this offering. Dilution results from the fact that the initial public offering price per ADS in this offering is substantially in excess of the net tangible book value per ADS attributable to our existing shareholders for our presently outstanding common shares.
Our historical net tangible book value per common share is determined by dividing our net tangible book value, which is the book value of our total assets less the book value of our goodwill, intangible assets, deferred initial public offering costs and total liabilities, by the number of outstanding common shares. As of June 30, 2020, the historical net tangible book value (deficit) of our common shares was $(1,921) thousand, or $(0.48) per common share, net of treasury stocks and including one Class A share.
After giving effect to the (i) sale by us of 800,000 ADSs in this offering at an initial public offering price of $15.00 per ADS, and (ii) receipt by us of the net proceeds of this offering, after deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2020 would have been $7,073 thousand, or $1.47 per common share. The pro forma net tangible book value per common share immediately after the offering is calculated by dividing the pro forma net tangible book value of $7,073 thousand by 4,822,500 common shares (which is the pro forma common shares outstanding as of June 30, 2020). The difference between the initial public offering price per ADS and the pro forma net tangible book value per ADS represents an immediate increase in net tangible book value of $1.95 per ADS to our existing shareholders, and an immediate dilution in net tangible book value of $13.53 per ADS to purchasers of ADSs in this offering.
The following table illustrates this dilution to purchasers in this offering on a per ADS basis (in thousands, except per ADS data):
Initial public offering price per ADS
$ 15.00
Net tangible book value per common share before this offering (as of June 30, 2020)
$ (0.48)
Increase in net tangible book value per ADS attributable to purchasers in this offering
$ 1.95
Pro forma net tangible book value per ADS immediately after this offering
$ 1.47
Dilution in pro forma net tangible book value per ADS to purchasers in this offering
$ 13.53
The table and information above assume no exercise by the underwriters of their option to purchase additional ADSs in this offering. If the underwriters exercise in full their option to purchase up to 120,000 additional ADSs from us based upon an offer and sale of 800,000 ADSs at an offering price of $15.00 per ADS, the pro forma net tangible book value per ADS immediately after this offering would be $1.77 per ADS, and the dilution in pro forma net tangible book value per ADS to purchasers in this offering would be $13.23 per ADS, in each case the initial public offering price of $15.00 per ADS, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
The following table summarizes, as of June 30, 2020, on the pro forma basis described above, the differences between the number of common shares underlying the ADSs purchased from us, the total consideration paid to us in cash, and the weighted average price per common share underlying the ADSs that our existing shareholders and the new purchasers in this offering paid. The total consideration below is based on an initial public offering price of $15.00 per ADS, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Common Shares
Total Consideration
Number
Percent
Amount
Percent
Weighted
Average Price
Per Share
Existing shareholders
4,022,500 83% $ 12,693,700 51% $ 3.16
Purchasers in this offering
800,000 17% $ 12,000,000 49% $ 15.00
Total 4,822,500 100% $ 24,693,700 100% $ 5.12
 
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The table and information above assume no exercise by the underwriters of their option to purchase additional ADSs in this offering. Based upon an offer and sale of 800,000 ADSs at an offering price of $15.00 per ADS, if the underwriters exercise in full their option to purchase up to 120,000 additional ADSs from us, the number of common shares underlying the ADSs held by purchasers in this offering would be increased to 920,000 common shares, or 19% of the total number of common shares outstanding immediately after this offering, and the percentage of common shares held by our existing shareholders would be reduced to 81% of the total number of common shares outstanding immediately after this offering.
The foregoing tables and calculations are based on the number of common shares that will be outstanding immediately following the offering, and exclude (i) up to 120,000 ADSs issuable upon the exercise in full by the underwriters of their option to purchase additional ADSs from us; (ii) up to an aggregate of 234,000 common shares issuable upon the exercise of stock options outstanding as of June 30, 2020. The outstanding stock options have a weighted average exercise price of $11.10 per share and expire on December 21, 2026; and (iii) up to an aggregate of 450,000 common shares issuable upon the exercise of the eighth and ninth series stock options issued in October 2020. The outstanding stock options have a weighted average exercise price of JPY752 (US$6.98) per share and expire on September 30, 2026. See “Management—Stock Options” for more information.
 
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following tables set forth our selected consolidated financial information and operating data as of and for the years ended December 31, 2019 and 2018 and the six months ended June 30, 2020 and 2019. You should read the following selected consolidated financial information and operating data in conjunction with, and it is qualified in its entirety by reference to, our audited consolidated financial statements and the related notes thereto, our unaudited condensed consolidated financial statements and the related notes thereto, and the sections entitled “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which are included elsewhere in this prospectus.
Our selected consolidated statement of income information and operating data for the years ended December 31, 2019 and 2018, and our related selected consolidated balance sheet information as of December 31, 2019 and 2018, have been derived from our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018, prepared in accordance with U.S. GAAP, which are included elsewhere in this prospectus.
Our selected consolidated statement of income information and operating data for the six months ended June 30, 2020 and 2019, and our related selected consolidated balance sheet information as of June 30, 2020 and 2019, have been derived from our unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2020 and 2019, prepared in accordance with U.S. GAAP, which are included elsewhere in this prospectus.
Our historical results for the periods presented below are not necessarily indicative of the results to be expected for any future periods.
Six months ended June 30,
Year ended December 31,
(in thousands, except earnings per share data)
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
(Unaudited)
Consolidated Statement of Income Information:
Revenues:
Relaxation Salons
$ 12,476 ¥ 1,344,503 ¥ 2,010,506 $ 35,860 ¥ 3,864,656 ¥ 3,348,042
Digital Preventative Healthcare
109 11,774 21,025 405 43,608 85,093
Total revenue
12,585 1,356,277 2,031,531 36,265 3,908,264 3,433,135
Cost of revenues and operating expenses:
Cost of revenues
11,777 1,269,220 1,533,819 27,443 2,957,506 2,476,267
Selling, general and administrative expenses
4,838 521,364 411,717 8,090 871,862 842,822
Impairment loss on long-lived assets
23,604 413 44,546 40,778
Total cost of revenues and operating
expenses
16,615 1,790,584 1,969,140 35,946 3,873,914 3,359,867
Operating income (loss)
$ 4,030 ¥ (434,307) ¥ 62,391 $ 319 ¥ 34,350 ¥ 73,268
Other income (expenses):
Dividend income
2 2 2 2
Interest income
6 674 556 12 1,336 785
Interest expense
(56) (6,076) (7,155) (126) (13,591) (15,485)
Gain from bargain purchases
15 1,624 4,343 60 6,487 33,218
Other, net
132 14,142 5,057 39 4,153 133
Total other income (expenses)
97 10,366 2,803 (15) (1,613) 18,653
Income tax expense
177 19,030 11,429 148 15,961 25,252
Equity in earnings (loss) of investment
280 5 559 (359)
Net income (loss)
$ (4,110) ¥ (442,971) ¥ 54,045 $ 161 ¥ 17,335 ¥ 66,310
Net earnings (loss) per share:
Basic
$ (1.02) ¥ (110.12) ¥ 14.72 $ 0.04 ¥ 4.63 ¥ 18.06
Diluted
$ (1.02) ¥ (110.12) ¥ 12.86 $ 0.04 ¥ 4.06 ¥ 14.04
 
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Six months ended June 30,
Year ended December 31,
(in thousands, except number of salons, sales per
customer, repeat ratio, and operation ratio)
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
Other Operating Data:
Financial expense & income(1)
$ (50) ¥ (5,400) ¥ (6,597) $ (114) ¥ (12,253) ¥ (14,698)
Adjusted EBITDA(2)
(3,472) (374,224) 118,049 1,292 139,301 179,997
CAPEX−paid-out cash basis(3)
1,138 122,688 9,674 210 22,675 110,386
CAPEX−paid-out cash plus future payment obligation basis(3)
1,792 193,138 104,775 695 74,897 222,278
Number of salons
289 270 283 263
Sales per customer(4)
$ 57.85 ¥ 6,234 ¥ 5,968 $ 56.27 ¥ 6,064 ¥ 5,914
Repeat ratio(5)
81.16% 80.63% 81.72% 82.39%
Operation ratio(6)
40.79% 50.42% 50.36% 49.71%
As of June 30,
As of December 31,
(in thousands, except adjusted EBITDA
margin)
2020($)
2020(¥)
2019(¥)
2019($)
2019(¥)
2018(¥)
Reconciliation of non-GAAP measures:
Net income (loss)
$ (4,110) ¥ (442,971) ¥ 54,045 $ 161 ¥ 17,335 ¥ 66,310
Dividend income and interest income
(6) (676) (558) (12) (1,338) (787)
Interest expense
56 6,076 7,155 126 13,591 15,485
Gain from bargain purchases
(15) (1,624) (4,343) (60) (6,487) (33,218)
Other, net
(132) (14,142) (5,057) (39) (4,153) (133)
Income tax expense
177 19,030 11,429 148 15,961 25,252
Equity in earnings (loss) of investment
(280) (5) (559) 359
Operating income (loss)
$ (4,030) ¥ (434,307) ¥ 62,391 $ 319 ¥ 34,350 ¥ 73,268
Depreciation and
amortization
307 33,105 22,793 428 46,174 44,267
Losses on sales of directly-operated salons to
franchises
1 65 8,721 89 9,600 4,057
Losses on disposal of property and equipment, net and other intangible assets, net
250 26,913 540 43 4,631 17,627
Impairment loss on long-lived assets
23,604 413 44,546 40,778
Adjusted EBITDA
$ (3,472) ¥ (374,224) ¥ 118,049 $ 1,292 ¥ 139,301 ¥ 179,997
Adjusted EBITDA margin(7)
(27.6)% (27.6)% 5.8% 3.6% 3.6% 5.2%
 
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As of June 30,
As of December 31,
(in thousands)
2020($)
2020(¥)
2019($)
2019(¥)
2018(¥)
(Unaudited)
Consolidated Balance Sheet Information:
Total assets
$ 38,025 ¥ 4,097,971 $ 44,144 ¥ 4,757,465 ¥ 4,521,978
Total liabilities
36,567 3,940,884 38,577 4,157,407 4,639,533
Equity (deficit):
Common stock, no par value;
5,521 595,000 5,521 595,000 245,000
Class A common stock, no par value;
1 100 1 100 100
Additional paid-in capital
6,618 713,267 6,618 713,267 363,267
Accumulated deficit
(10,654) (1,148,280) (6,545) (705,309) (722,644)
Accumulated other comprehensive income (loss)
(278)
Treasury stock, at cost
(28) (3,000) (28) (3,000) (3,000)
Total equity (deficit)
1,458 157,087 5,567 600,058 (117,555)
Total Liabilities and Equity
$ 38,025
¥
4,097,971
$ 44,144 ¥ 4,757,465 ¥ 4,521,978
(1)
We define financial expense and income as dividend income plus interest income less interest expense and use it to measure net financial burden of our borrowings.
(2)
We define Adjusted EBITDA as net income (loss), adjusted to exclude: (i) dividend and interest income, (ii) interest expense, (iii) gain from bargain purchases, (iv) other, net, (v) income tax expense, (vi) equity in earnings (loss) of investment, (vii) depreciation and amortization, (viii) losses on sales of directly-operated salons to franchises, (ix) losses on disposal of property and equipment, and other intangible assets, and (x) impairment loss on long-lived assets. Management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income or other measurements under GAAP. Adjusted EBITDA is not calculated identically by all companies and, therefore, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Non-U.S. GAAP Measures—Adjusted EBITDA.”
(3)
We define CAPEX as the sum of investment amounts on tangible fixed assets and intangible assets during the period. These investment activities consist of acquisitions of property and equipment, acquisitions of businesses, and cost additions to internal use software. CAPEX—paid-out cash basis is the cash amount actually paid during the period to the CAPEX investments defined above, while CAPEX—paid-out cash plus future payment obligation basis is the sum of CAPEX—paid-out cash basis and the unpaid but obliged to pay amounts in the future to the same capital investments which remain on our consolidated balance sheet as accounts payable or accrued expenses.
(4)
We define sales per customer as the ratio of total salon sales to number of treated customers at salons (other than JOYHANDS WELLNESS for which comparative financial and customer data is not available).
(5)
We define repeat ratio for our Re.Ra.Ku® brand as the ratio of repeat customer visits to total customer visits in the applicable month or other stated period.
(6)
We define the operation ratio for our Re.Ra.Ku® brand as the ratio of therapists’ in-service time to total therapists’ working hours (including stand-by time) for the applicable month or other stated period.
(7)
We define Adjusted EBITDA margin as the percentage derived from dividing Adjusted EBITDA for a period by total revenue for the same period.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections of this prospectus entitled “Selected Consolidated Financial Information and Operating Data” and “Business”, and our consolidated financial statements and related notes thereto, included elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our current plans, expectations, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
Overview
Our principal business is to own, develop, operate, manage, and support relaxation salons through the franchising and through direct ownership of such salons throughout Japan. We seek to be the leading provider of relaxation and bodywork services in the markets we serve and to become the most recognized brand in our industry through the steady and focused expansion of relaxation salons in key markets throughout Japan and potentially abroad.
As of June 30, 2020, we and our franchisees operated 289 salons, of which 138 were operated as Company-operated salons, and 151 were operated by our franchisees. Of the 138 directly-operated salons, 26 were developed by us or acquired from franchisees.
Our current strategy is to grow our business through development of additional franchises, and to continue to expand the number of our directly-operated salons in a deliberate and measured manner. In addition, we believe that we can continue the development of, and revenue generation from, Company-operated salons through further selective acquisition of existing franchised salons and the opening of greenfield units. We will seek to acquire existing franchised salons that meet our criteria for demographics, site attractiveness, proximity to other salons, and other suitability factors.
Key Financial Definitions
Revenue.   Revenue consists of the following items: revenue from directly-operated salons, franchise revenue, and other revenues.
Cost of Revenue.   The total cost of delivering services to customers consists of the following items: cost of goods sold, subcontract expenses, cost of franchise royalty and affiliation revenue, salon operating cost, salaries for therapists, legal and welfare expenses, provision for paid annual leave, travelling expenses, salon rent, depreciation and amortization, gain/loss from asset retirement obligation, interest expenses for asset retirement obligation, business consignment expenses, and others.
Selling, General and Administrative Expenses.   Selling, general and administrative expenses, or SG&A, includes the costs to sell and deliver services and the costs to manage the company as follows: directors’ compensations, salaries and allowances, bonuses, legal welfare expenses, provision for paid annual leave, recruiting expenses, travel expenses, advertising expenses, rent, taxes and duties, commission fees, compensations, depreciation and amortization, provision for doubtful accounts, and others.
Non-U.S. GAAP Measures
Financial Expense and Income.   We define financial expense and income as dividend income plus interest income less interest expense and use it to measure net financial burden of our borrowings.
 
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Adjusted EBITDA.    We define Adjusted EBITDA as net income (loss), adjusted to exclude: (i) dividend and interest income, (ii) interest expense, (iii) gain from bargain purchases, (iv) other, net, (v) income tax expense, (vi) equity in earnings (loss) of investment, (vii) depreciation and amortization, (viii) losses on sales of directly-operated salons to franchises, (ix) losses on disposal of property and equipment, and other intangible assets, and (x) impairment loss on long-lived assets. Management considers Adjusted EBITDA to be a measurement of performance which provides useful information to both management and investors. Adjusted EBITDA should not be considered an alternative to net income or other measurements under GAAP. Adjusted EBITDA is not calculated identically by all companies and, therefore, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
We use Adjusted EBITDA to enhance our understanding of our operating performance, which represents our views concerning our performance in the ordinary, ongoing and customary course of our operations. We historically have found it helpful, and believe that investors have found it helpful, to consider an operating measure that excludes certain expenses relating to transactions not reflective of our core operations.
The information about our operating performance provided by this financial measure is used by our management for a variety of purposes. We regularly communicate Adjusted EBITDA results to our board of directors and we discuss with the board our interpretation of such results. We also compare our Adjusted EBITDA performance against internal targets as a key factor in evaluating our periodic operating performance at each salon level, segment level, and consolidated level, largely because we believe that this measure is indicative of how the fundamental business is performing and is being managed.
Adjusted EBITDA Margin.   Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by total revenue for the same period.
CAPEX.   Capital expenditure, or CAPEX, is the sum of investment amounts on tangible fixed assets and intangible assets during the period. These investment activities consist of acquisitions of property and equipment, acquisitions of businesses, and cost additions to internal use software. CAPEX—paid-out cash basis is the cash amount actually paid during the period to the CAPEX investments defined above, while CAPEX—paid-out cash plus future payment obligation basis is the sum of CAPEX—paid-out cash basis and the unpaid but obliged to pay amounts in the future to the same capital investments which remain on our consolidated balance sheet as accounts payable or accrued expenses.
Key Performance Indicators
In assessing the performance of our business, we consider several key performance indicators used by management. We receive monthly performance reports from our system and our salons which include key performance indicators per salon including sales, number of newly-acquired customers, number of repeat customers, sales per customer, and operation ratio. We believe these indicators provide us with useful data with which to measure our performance and to measure the performance of our own and our franchisees’ salons.
These key indicators include:

Number of Salons.   Directly-operated salons, and franchisees’ salons.

Sales Per Customer.    The ratio of total salon sales to number of treated customers at salons (other than JOYHANDS WELLNESS for which comparative financial and customer data is not available).

Repeat Ratio.    The ratio of repeat customer visits to total customer visits in the applicable month or other stated period.

Operation Ratio.   The ratio of therapists’ in-service time to total therapists’ working hours (including stand-by time) for the applicable month or other stated period.
 
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The following table sets forth the above key performance indicators for the periods presented:
Six months ended June 30,
Year ended December 31,
2020
2019
2019
2018
Number of Salons
289 270 283 &#