MRM - Zerospo Readies Plans For $17 Million U.S. IPO

2023-05-26 12:41:10 ET

Summary

• Zerospo has filed proposed terms for a $17 million U.S. IPO.
• The company operates a network of medical and relaxation salons in Japan.
• Zerospo operates in a low margin business, has a significant debt load and management's proposed valuation at IPO is excessive.
• I'll pass on the Zerospo IPO.

A Quick Take On Zerospo

Zerospo (ZRSP) has filed to raise $16.875 million in an IPO of its ordinary shares, according to an F-1/A registration statement .

The firm provides medical wellness and relaxation services to consumers in Japan.

The company has substantial debt, thin operating margins, and management has excessive valuation assumptions at IPO.

I'll pass on the Zerospo IPO.

Zerospo Overview

Tokyo, Japan-based Zerospo was founded to own, operate and franchise medical and relaxation salons in Tokyo, Japan. The firm has since expanded outside of the Tokyo region.

Management is headed by founder, Chairman and CEO Mr. Yoshio Ukaji, who has been with the firm since its inception and was previously a certified national Judo therapist.

The company's primary offerings include the following:

• Skeletal adjustment

• Electrical muscle stimulation

• Postpartum pelvic correction

• Acupuncture

• Relaxation spa services.

The firm has 36 corporate-owned Zerospo medical salons and five franchised locations in Japan. It has nine Begins relaxation salons (eight corporate-owned and one franchised).

The medical salon business accounted for 75% of the company's revenue in the most recent fiscal year.

As of October 31, 2022, Zerospo has booked fair market value investment of $38,000 from founder Mr. Yoshio Ukaji

Zerospo - Customer Acquisition

The majority of its customers are employed females seeking improved health and wellness.

The company markets its services via an omnichannel approach, utilizing digital marketing, print and affiliate referrals.

Payroll expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

(Source - SEC.)

The Payroll efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Payroll expense, was 0.2x in the most recent reporting period. (Source - SEC.)

The annual average number of visits per repeat customer is 14.4 times.

Zerospo's Market & Competition

According to a 2021 market research report by Grand View Research, the global personalized retail nutrition and wellness market (as a proxy for the general wellness market) was an estimated $1.8 billion in 2020 and is expected to reach $3.3 billion by 2028.

This represents a forecast CAGR (Compound Annual Growth Rate) of 7.9% from 2021 to 2028.

The main drivers for this expected growth are the increasing scalability of targeted direct-to-consumer programs and a rising desire by consumers for improved wellness, especially in time-pressed urban areas.

Also, the chart below shows the historical and projected future growth of the Japanese personalized retail nutrition and wellness market, from 2018 to 2028:

Major competitive or other industry participants include the following:

• Medirom Healthcare Technologies

• Genki-Dou

• HoneGori

• K's Group

• Small independent operators.

Zerospo Financial Performance

The company's recent financial results can be summarized as follows:

• Growing topline revenue

• Increased gross profit but decreased gross margin

• Reduced operating profit

• A swing to cash used in operations.

Below are relevant financial results derived from the firm's registration statement:

(Source - SEC.)

As of October 31, 2022, Zerospo had $1.5 million in cash and $20.7 million in total liabilities.

Free cash flow during the twelve months ending October 31, 2022, was negative ($1.9 million).

Zerospo IPO Details

Zerospo intends to raise $16.875 million in gross proceeds from an IPO of its ordinary shares, offering 3.75 million shares at a proposed midpoint price of $4.50.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

Immediately after the IPO, the company will be controlled founder, Chairman and CEO Mr. Ukaji.

Assuming a successful IPO, the company's enterprise value at IPO would approximate $52.4 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 27.27%. A figure under 10% is generally considered a 'low float' stock which can be subject to significant price volatility.

As a foreign private issuer, the company can choose to take advantage of reduced, delayed or exempted financial and senior officer disclosure requirements versus those that domestic U.S. firms are required to follow.

The firm is an "emerging growth company" as defined by the 2012 JOBS Act and has elected to take advantage of reduced public company reporting requirements; prospective shareholders will receive less information for the IPO and in the future as a publicly-held company within the requirements of the Act.

Management says it will use the net proceeds from the IPO as follows:

20% for capital expenditures to open new salons;

25% for acquisitions of existing salons or assets for expansion;

20% for training expenditures (consisting of training facilities, building up training teams, and recruiting teams);

5% for recruiting expenditures; and

30% for working capital and general corporate purposes including repayment of the Note.

(Source - SEC.)

Management's presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is not currently a party to any material legal proceedings.

The sole listed bookrunner of the IPO is Boustead Securities.

Valuation Metrics For Zerospo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - SEC.)

As a reference, a potential public comparable to Zerospo would be Medirom Healthcare Technologies Inc. ( MRM ); below is a comparison of their primary valuation metrics:

(Source - SEC and Seeking Alpha.)

Commentary About Zerospo's IPO

Zerospo is seeking U.S. public capital market investment to fund its general expansion efforts.

The firm's financials have generated increasing topline revenue, growing gross profit but reduced gross margin, lowered operating profit and a shift to cash used in operations.

Free cash flow for the twelve months ending October 31, 2022, was negative ($1.9 million).

Payroll expenses as a percentage of total revenue dropped slightly as revenue increased; its Payroll efficiency multiple was 0.2x in the most recent fiscal year.

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the firm's growth and working capital requirements.

Zerospo's recent capital spending history indicates it has spent heavily on capital expenditures despite negative operating cash flow.

The market opportunity for health and wellness services in Japan is substantial and is expected to grow at a moderate rate of growth in the coming years.

Boustead Securities is the lead underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of negative (63.6%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

As for valuation expectations, management is asking investors to pay an Enterprise Value/Revenue multiple of approximately 3.85x, which is 3.8 times higher than publicly-held comparable Medirom.

Zerospo has substantial debt, thin operating margins, and management has excessive valuation assumptions at IPO.

I'll pass on the Zerospo IPO.

Expected IPO Pricing Date: To be announced.

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