MEDIROM Healthcare Technologies : Financial Results for the Year Ending 2020

May 17, 2021

MEDIROM Healthcare Technologies Inc. Reports

Financial Results for the Year Ending 2020 and Provides Corporate Update

Conference Call to be held Monday May 17, 2021 at 4:30 p.m. ET

New York - May 17, 2021 - MEDIROM Healthcare Technologies Inc. (NasdaqCM: MRM, "MEDIROM"), a leading holistic health services provider in Japan, today announced MEDIROM's financial results for the year ended December 31, 2020.

FY 2020 Financial Highlights

• Total revenue decreased by 14.5% to $32.4 million, due to the COVID-19lock-down in April and May 2020.
• Cost of revenues stayed relatively flat as a result of an increase in the total number of salons from 283 to 290, offset by cost reduction efforts to mitigate the impact of COVID-19.
• SG&A increased by 22.6% due to the office relocation and IPO expenses/costs.
• Impairment loss increased 139.1% as certain salons with relatively long contract terms of leases and large amounts of asset retirement costs were impaired.
• Net loss of $5 million recorded due to the COVID-19 halt and temporarily increased SG&A.
• Adjusted EBITDA and Adjusted EBITDA margin were negative $5.3 million and minus 16.3%, respectively.
• Cashflow from Operating Activities was negative $3.5 million, mainly due to the decrease in net income.
• Cashflow from Investing Activities was negative $1.3 million, primarily due to salons acquisitions from franchisees.
• Cashflow from Financing Activities was positive $13.8 million, due to $11.3 million in proceeds from the IPO and the special long-term bank loans for the COVID-19 pandemic.
• Net cash increased by $8.9 million in FY2020.

Corporate Highlights FY 2020

• The revenue decrease in System-WideSales was observed only from March to May due to the first COVID-19Declaration of Emergency in operation in Tokyo metropolis and several prefectures.

• KPIs recovered after the first COVID-19 Declaration.
• Our mobile application Lav Ⓡ is being upgraded for general consumers use on top of the engagement by Specific Guidance Program.
• Currently developing a self-charging smart bracelet, MOTHER TrackerⓇ, with a silicon valley start-up, Matrix Industries. Its major features are chargeless generator, boost converter, and Software Development Kit open policy.
• Preparing for the integration of the hashed health data collected at our salons, via mobile application and smart tracker.

Outlook and perspective FY 2021

• We are currently experiencing the third Declaration of Emergency for COVID-19in major prefectures and cities.
• After observing the KPIs transition in FY2020 and ongoing FY2021, we concluded that our industry is regarded as a necessary service for people's daily life. We believe that relaxation salon business segment will continue to stay stable, and that we can generate reasonable profit by controlling the cost and expenses.
• Acquired a medium sized salon in May 2021. We will actively continue to grow our salon business through M&A transactions.
• Intend for the MOTHER TrackerⓇ to be launched before the end of the year.

Financial Results for the Year Ended December 31, 2020 Compared to 2019

Revenues

Revenues derived from our Relaxation Salon Segment were JPY3,864,656 thousand (US$37,452 thousand) in the year ended December 31, 2019, and JPY3,315,947 thousand (US$32,134 thousand) in the year ended December 31, 2020.

The revenue from our Relaxation Salon Segment consists of revenue from directly-operated salons and revenue from franchising. In the year ended December 31, 2019, our revenue from directly-operated salons and from franchising was JPY2,031,155 thousand (US$19,684 thousand) and JPY1,833,501 thousand (US$17,768 thousand), respectively. In the year ended December 31, 2020, our revenue from directly- operated salons and from franchising decreased to JPY2,026,806 thousand (US$19,641 thousand) and JPY1,289,141 thousand (US$12,493 thousand), respectively.

The primary factor for the decrease in revenues from directly-operated salons between year end 2019 and 2020 was the decrease in the number of customers due to the COVID-19 pandemic. In the year ended

December 31, 2019, our salons had customer visits of 857 thousand, while in the same period of 2020, the figure was 650 thousand excluding visitors to our JOYHANDS WELLNESS salons located in spa facilities (for which data is not available).

The primary reason for the decrease in revenues from franchising was also the decrease in the number of customers due to the COVID-19 pandemic. In the year ended December 31, 2019, our franchised salons had served 302.9 thousand customers, while in the same period of 2020, franchised salons served 187.5 thousand customers. Although this decrease in revenue by our franchisees resulted in less royalty income for the Company, our expenses for providing supporting services to our franchisees decreased accordingly.

We recognize revenue from initial franchise membership on the opening date of the new franchised salons. In addition, our revenue from franchise royalties includes revenues from recurring royalty income, rental income from subleased salon properties, construction of franchised salons, uniforms and training sales.

The revenue from our Preventative Healthcare Segment decreased 41.1% for the year ended December 31, 2020 compared to the same period in 2019, as a result of a slower increase in the number of participants in the Health Guidance Program during the COVID-19 pandemic. Our MOTHER Tracker®is still at the development stage and as such generates no revenue.

Cost of Revenues

For the year ended December 31, 2019 and 2020, the cost of revenues was JPY 2,957,506 thousand (US$28,661 thousand) and JPY2,912,667 thousand (US$28,226 thousand), respectively. Total cost of revenues stayed relatively flat for the year ended December 31, 2020 compared to the prior year as a result of an increase in the total number of salons from 283 to 290, offset by cost reduction efforts to mitigate the impact of COVID-19. These cost reductions included furlough of our relaxation therapists and employees, as well as temporary rent reductions negotiated with the landlords. The cost to revenue ratios were 75.7% during the year ended December 31, 2019 and 87.2% during the comparable period in 2020. Total cost of revenues as a percentage of revenue increased from the prior year as a result of lower revenue levels due to COVID-19, which outpaced the decreases in cost of revenues.

The cost of revenue from directly-operated salon increased by JPY236,950 thousand (US$2,296 thousand) from JPY1,912,893 thousand (US$18,538 thousand) in the year ended December 31, 2019 to JPY2,149,843 thousand (US$20,833 thousand) in the year ended December 31, 2020. The cost of revenue from franchising activities decreased by JPY274,854 thousand (US$2,664 thousand) from JPY1,019,956 thousand (US$9,884 thousand) in the year ended December 31, 2019 to JPY745,102 thousand (US$7,221 thousand) in the year ended December 31, 2020. The increase in cost of revenues from directly-operated

salons and the corresponding decrease in cost of revenues from franchised salons was due to the acquisition of franchised salons and conversion into directly-operated salons.

Selling, General, and Administration Expenses

For the year ended December 31, 2019 and 2020, the selling, general, and administration expenses were JPY871,862 thousand (US$8,449 thousand) and JPY1,068,537 thousand (US$10,355 thousand), respectively. The percentage of revenue of selling, general, and administration expenses in the year ended December 31, 2019 and 2020 was 22.3% and 32.0%, respectively. The increase in 2020 was a result of an increase in the number of new college graduate employees, moving expenses incurred in connection with the relocation of our headquarters, and professional fees incurred in connection with our initial public offering.

Impairment Loss on Long-lived Assets

MD, BEW and DW recorded impairment losses of JPY30,224 thousand (US$293 thousand), JPY9,420 thousand (US$91 thousand) and JPY4,902 thousand (US$48 thousand), respectively, for 2019 while MD and DW recorded impairment losses of JPY93,589 thousand (US$907 thousand) and JPY12,912 thousand (US$125 thousand), respectively, for 2020. The impairment losses increased as certain salons with relatively long contract terms of leases and large amounts of asset retirement costs were impaired.

Interest Expense

Interest expense was relatively flat in 2020 compared with that of 2019.

Gain from Bargain Purchase

Gain from bargain purchases through acquisitions of relaxation salons decreased by JPY6,487 thousand (US$63 thousand) from the prior year because we entered into no bargain purchase transaction.

Other Income-Net

Other income increased in 2020 by JPY127,146 thousand (US$1,232 thousand) to JPY131,299 thousand (US$1,272 thousand), a 3,061.5% increase from 2019. The increase in other income was due to the receipt of government subsidies of JPY111,581thousand (US$1,081 thousand) in relation to COVID-19.

Income Tax Expense

Income tax benefit for 2020 was JPY87,519 thousand (US$848 thousand), an improvement of JPY103,480 thousand (US$1,003 thousand), from income tax expense of JPY15,961 thousand (US$155 thousand). This was mainly due to deferred tax benefit of JPY 107,264 thousand (US$1,039 thousand) recorded for 2020 whereas deferred tax expense of JPY5,739 thousand (US$56 thousand) incurred for 2019, which was

partially offset by an increase in current tax expense by JPY9,523 thousand (US$92 thousand). The fluctuation in deferred tax expense was driven primarily by fluctuations in deferred tax assets related to operating loss carryforwards. The increase in current tax expense was mainly due to an increase in inhabitant tax per capita, which is calculated based on capital and the number of employees.

Net Income and Adjusted EBITDA

Our consolidated net income in the year ended December 31, 2019 was JPY17,335 thousand (US$168 thousand), or 0.4% of consolidated revenue, while our consolidated net loss for the comparable period in 2020 was JPY539,170 thousand (US$5,225 thousand), or -16.1% of consolidated revenue, as a result of the key factors described above. Our Adjusted EBITDA decreased from JPY139,301 thousand (US$1,350 thousand) in the year ended December 31, 2019 to a loss of JPY(543,456) thousand

(US$5,267 thousand) for the comparable period in 2020, resulting in an Adjusted EBITDA margins of 3.6%, and (16.3)% for the year ended December 31, 2019 and 2020, respectively. The key factors behind this decrease, other than changes in revenues, cost of revenues, and selling, general and administrative expenses, were the increase of impairment loss on long-lived assets by JPY61,955 thousand (US$600 thousand) and increase of subsidies by JPY111,581 thousand (US$1,081 thousand).

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated.

		Year ended December 31,
		2020($)			2020(¥)			2019(¥)
Net (loss) income attributable to shareholders	$	(5,225)		¥	(539,170)		¥	17,335
Net cash provided by operating activities		(3,551)			(366,420)		7,870
Net cash used in investing activities		(1,353)			(139,599)			(37,931)
Net cash provided by financing activities		13,879			1,432,131		331,994
Net increase of cash and cash equivalents during the period		8,975			926,112			301,933
Cash and cash equivalents at beginning of period	$	4,977		¥	513,621	¥	211,688
Cash and cash equivalents at end of period	$	13,952		¥	1,439,733		¥	513,621

Operating Activities

Net cash flows provided by operating activities decreased from JPY7,870 thousand (US$76 thousand) in the year ended December 31,2019 to negative JPY366,420 thousand (US$3,551 thousand) in the year ended December 31, 2020, primarily due to decrease in net income attributable to shareholders, decrease in contract liabilities, decrease in deposits received, while partially offset by decrease in accounts receivable, increase in accrued expenses, increase in lease and guarantee deposits, and add-back of impairment loss on