F-1/A: Center Holdings Inc. Files Amended IPO Prospectus, Revealing Dual Offering and Strategic Expansion into New Ventures

Center Holdings Inc., a Japanese mobile connectivity and staffing services provider, has filed an amended F-1 registration statement with the SEC for its initial public offering, detailing plans to raise up to $14.8 million to fund expansion into water dispenser and smartphone businesses, despite recent declines in net income and customer numbers in core segments.

Summary

• Center Holdings Inc. is a Cayman Islands-incorporated holding company operating primarily through its Japanese subsidiaries, Center Mobile Japan and Pay Storage.
• The company provides mobile connectivity and wireless communication services (SIM Card Business) as a Mobile Virtual Network Operator (MVNO) using NTT Docomo's infrastructure, offering competitive prices and an innovative business model where customers can lower fees by watching ads via the PLAIO app.
• Other business segments include Internet Business (mobile router, home wireless, home internet services), Outsourcing Business (staffing agency), and Travel Business (portal for travel plans).
• The company is offering 3,750,000 Ordinary Shares in a firm commitment initial public offering, with an expected price range of $4.00 to $6.00 per share.
• Concurrently, selling shareholders are registering 3,970,014 Ordinary Shares for resale, from which the company will not receive any proceeds.
• Net proceeds from the company's offering are estimated to be approximately $12.8 million (or $14.8 million if the over-allotment option is fully exercised), based on a $4.00 per share IPO price.
• The company plans to allocate 40% of net proceeds to the water dispenser business, 40% to the original smartphone business, and 20% to expanding existing businesses, including the SIM Card Business.
• Total revenue for the six months ended November 30, 2024, increased by 36.1% to JPY1,039,866 thousand ($6,914 thousand) compared to the same period in 2023.
• However, net income for the six months ended November 30, 2024, decreased by 13.4% to JPY29,081 thousand ($193 thousand) from JPY33,595 thousand ($224 thousand) in the prior year period.
• For the fiscal year ended May 31, 2024, total revenue decreased by 10.1% to JPY1,583,214 thousand ($10,526 thousand) from JPY1,760,423 thousand ($11,704 thousand) in 2023.
• Net income for the fiscal year ended May 31, 2024, significantly decreased by 86.2% to JPY40,278 thousand ($268 thousand) from JPY291,724 thousand ($1,940 thousand) in 2023.
• The SIM Card Business revenue decreased by 2.3% for the six months ended Nov 30, 2024, and by 19.2% for the fiscal year ended May 31, 2024, primarily due to a decrease in users through distributors.
• The Outsourcing Business revenue saw substantial growth, increasing by 352.0% for the six months ended Nov 30, 2024, and by 260.9% for the fiscal year ended May 31, 2024, driven by an increase in corporate client contracts.
• The Travel Business revenue decreased by 23.0% for the six months ended Nov 30, 2024, and by 38.1% for the fiscal year ended May 31, 2024, due to a decrease in distributors and subscribers.
• The number of SIM card users decreased from 31,398 as of November 30, 2023, to 28,212 as of November 30, 2024, and from 32,845 as of May 31, 2023, to 30,031 as of May 31, 2024.
• Travel business subscribers decreased from 6,286 as of November 30, 2023, to 4,769 as of November 30, 2024, and from 8,205 as of May 31, 2023, to 5,314 as of May 31, 2024.
• The company was subject to administrative sanctions from the Japan Consumer Affairs Agency on March 29, 2023, for violating regulations on multilevel marketing transactions.
• Mr. Tatsuya Nakagoshi, the founder and director, will hold approximately 71.63% of the aggregate voting power post-IPO, making the company a 'controlled company' under Nasdaq rules, though it intends to follow home country practice as a foreign private issuer.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to significant declines in net income and revenue in core segments, coupled with a limited operating history and high dependence on third-party agreements. While the IPO and new business ventures offer future potential, the current financial performance and inherent risks weigh heavily on the outlook.

Positives

• The company operates an innovative business model allowing customers to lower mobile fees by watching advertisements through its PLAIO app, creating a dual revenue stream.
• The Outsourcing Business has shown significant revenue growth, increasing by 352.0% for the six months ended November 30, 2024, and 260.9% for the fiscal year ended May 31, 2024.
• The company benefits from not owning physical network infrastructure, reducing capital expenditures and allowing focus on competitive pricing.
• Management team possesses extensive multidisciplinary experience in sales, system engineering, web design, and e-commerce.
• Established nationwide retail channels in Japan, including directly-operated stores, franchise stores, distributors, and OEM Partners, provide a flexible expansion model.
• The company is actively pursuing new growth strategies by expanding into water dispenser and original smartphone businesses, aiming to diversify revenue and enhance big data collection.
• The company has obtained two patents in Japan related to big data technologies and is pursuing international patent applications.
• The company's gross profit increased by 64.8% for the six months ended November 30, 2024, primarily driven by the Outsourcing Business.
• The gross profit margin for the Outsourcing Business significantly increased from 6% to 59% for the six months ended November 30, 2024, indicating improved profitability in this segment.

Negatives

• Net income significantly decreased by 13.4% for the six months ended November 30, 2024, and by 86.2% for the fiscal year ended May 31, 2024.
• Total revenue decreased by 10.1% for the fiscal year ended May 31, 2024.
• The SIM Card Business, which historically accounted for the largest portion of revenue, experienced a decline in revenue and a decrease in the number of users.
• The Travel Business revenue also decreased significantly, by 23.0% for the six months ended November 30, 2024, and 38.1% for the fiscal year ended May 31, 2024, with a notable drop in subscribers.
• Advertising revenue decreased by 6.3% for the six months ended November 30, 2024, and 5.3% for the fiscal year ended May 31, 2024, linked to fewer users watching advertisements.
• The company has a limited operating history since its inception in 2020, making it difficult for potential investors to evaluate its business.
• The company is highly dependent on MVNEs (FreeBit, Network Consulting) and MNOs (NTT Docomo, UQ Communications Inc., NTT East/West Corporations) for its core SIM Card and Internet businesses, with no long-term agreements in some cases.
• Significant reliance on FourM for advertising revenue through the PLAIO app, with a short three-month automatic renewal term for their outsourcing agreement.
• The company's physical stores and operations are concentrated in Japan, exposing it to macroeconomic risks specific to the region.
• The company has no commercial insurance coverage beyond government-mandated social/health insurance and comprehensive tenant insurance, increasing exposure to business disruptions or litigation.
• The company experienced a substantial increase in selling, general, and administrative expenses, rising by 90.6% for the six months ended November 30, 2024, and 6.3% for the fiscal year ended May 31, 2024.
• The gross profit margin for the mobile network service decreased from 48% to 44% for the six months ended November 30, 2024, and from 58% to 47% for the fiscal year ended May 31, 2024, due to fixed costs despite decreased revenue.
• The company incurred a gross loss from advertising for the fiscal year ended May 31, 2024, at -7% margin.
• The company's cash flow from operating activities shifted from an inflow of JPY362,322 thousand in FY2023 to an outflow of JPY75,691 thousand in FY2024.
• Cash used in financing activities significantly increased for the six months ended November 30, 2024, primarily due to IPO-related expenses.

Risks

• Substantial dependence on the success of franchise stores and OEM Partners for customer acquisition in the SIM Card Business and Internet Business.
• Reliance on MVNEs (FreeBit, Network Consulting) and MNOs (NTT Docomo, UQ Communications Inc., NTT East/West Corporations) and other third-party service providers, with risks of contract termination or unfavorable terms.
• Dependence on FourM for displaying advertisements through the PLAIO application and generating advertising revenue, with a short three-month contract term.
• Limited operating history since 2020, making business evaluation difficult for potential investors.
• Operating in highly competitive industries across all business segments (SIM Card, Internet, Outsourcing, Travel) against competitors with greater resources and brand recognition.
• Failure to maintain and enhance brand recognition or respond to customer requirements could harm business and results of operations.
• Inability to keep SIM card service prices competitive and attractive, or provide high-quality internet services, could impact profitability.
• Loss of key personnel, including senior management and technical staff, could materially adversely affect the business.
• Failure to maintain and increase retail channels (directly-operated stores, franchise stores, distributors, OEM Partners) could adversely affect customer acquisition and revenue.
• Business and future growth are concentrated in Japan, exposing the company to specific macroeconomic risks and potential decline in customer engagement in the region.
• Privacy concerns and evolving privacy laws/regulations (e.g., Personal Information Protection Act of Japan) may reduce the effectiveness of products/services and lead to fines or liabilities.
• Risk of lawsuits, server management expenses, or reputation damage if customer personal data is not properly kept, managed, or used, including from cyber-attacks or employee misconduct.
• Inability to attract, train, or retain qualified management and sales personnel in physical stores could negatively impact performance.
• Investments in new water dispenser and original smartphone businesses may not produce expected returns, potentially failing to cover development, manufacturing, and marketing costs.
• Inability to successfully implement business and operating strategies, including expanding customer base, increasing brand awareness, and developing new products.
• Failure to keep up with rapid technological development changes in the industry could lead to services becoming obsolete and customer loss.
• Requirement for significant cash to fund business expansion, with uncertainty in obtaining additional capital on satisfactory terms.
• Regulatory matters and new legislation (Telecommunications Business Act, Mobile Phone Misuse Prevention Act, Youth Internet Access Law, Provider Liability Limitation Act, Radio Act, Act against Unjustifiable Premiums and Misleading Representations, Worker Dispatching Businesses Act, Employment Security Act, Secondhand Goods Business Act, Consumer Contracts Act, Labor Laws) could negatively impact business operations and result in penalties or license revocation.
• Exposure to various cyber-security risks, including data breaches, system degradation, and malware, which could lead to business losses and reputational damage.
• Reliance on relationships with business partners for water dispenser and original smartphone development and manufacturing; impairment of these relationships could hinder new business expansion.
• Success of SIM Card Business expansion and innovative business model relies on ongoing and future patent applications for big data technologies, which if unsuccessful or delayed, could adversely affect the business.
• Credit risk with respect to customers' ability to pay for services, potentially leading to uncollectible amounts.
• Inability to conduct marketing activities cost-effectively could reduce market share and profitability.
• Failure to effectively implement hiring policies in the Outsourcing Business could impact the ability to attract and retain workers and meet corporate client needs.
• Dependence of Outsourcing Business revenue on dispatch fees from PayPay Corporation; impairment of this relationship could materially affect the business.
• Public health epidemics or outbreaks (e.g., COVID-19) and natural disasters could adversely impact business operations.
• Compliance and risk management programs might not be effective, leading to adverse outcomes for reputation, financial condition, and results of operations.
• General economic, political, and market conditions, including geopolitical instability, may adversely impact operating performance.
• Exposure to litigation or administrative proceedings, which if adversely determined, could cause substantial losses and reputational damage (e.g., past administrative sanctions from Japan Consumer Affairs Agency).
• Potential difficulties in identifying opportunities or integrating acquired businesses if pursuing acquisitions, investments, or strategic alliances.
• An active trading market for Ordinary Shares may not develop or be sustained after the IPO.
• New investors will experience immediate and substantial dilution in the net tangible book value of Ordinary Shares purchased.
• Future issuances of Ordinary Shares or convertible securities could cause the market price to decline and dilute holdings.
• Sale or availability for sale of substantial amounts of Ordinary Shares by existing shareholders could adversely affect market price.
• If securities or industry analysts do not publish research or publish negative reports, stock price and trading volume could decline.
• Market price of Ordinary Shares may be volatile or decline regardless of operating performance, and shares may not be resold at or above IPO price.
• Failure to implement and maintain effective internal control could lead to reporting failures, fraud, and loss of investor confidence.
• Substantially increased costs as a public company due to compliance requirements.
• Limited experience operating as a public company, potentially leading to operational, administrative, and strategic difficulties.
• As a foreign private issuer, the company intends to follow home country practice (Cayman Islands law) for corporate governance, which provides less protection than U.S. domestic issuers.
• If the company cannot satisfy Nasdaq listing requirements, shares may not be listed or may be delisted, negatively impacting price and liquidity.
• As an emerging growth company, taking advantage of certain exemptions may make performance comparison with other public companies difficult.
• Classification as a passive foreign investment company (PFIC) could have adverse U.S. federal income tax consequences for U.S. taxpayers.
• Management has broad discretion over the use of IPO proceeds, which may not enhance results or share price.
• Difficulty enforcing judgments against the company due to incorporation in Cayman Islands and operations/assets in Japan.

Future Outlook

Center Holdings Inc. intends to expand into the water dispenser business and develop original smartphones, aiming to diversify revenue streams and enhance big data collection for targeted advertising. The company plans to start reselling water dispensers in spring/summer 2025 and original smartphones by late 2025 or early 2026. The long-term goal for the SIM Card Business is to mainly rely on advertising revenue to provide mobile connectivity services for free, similar to YouTube and Facebook, as the customer base grows to at least 100,000 users. The company expects its revenue from the outsourcing business to continue to increase.

Management Comments

• "We believe the following competitive strengths are essential for our success and differentiate us from our competitors: competitive price and an innovative business model; high quality and stability of our mobile connectivity and wireless communications services; experienced management team with strong technical and operational expertise; we have developed nationwide retail channels and a flexible expansion model."
• "Our goal and policy are to provide a more stable working environment and conditions for job seekers."
• "We expect our revenue from outsourcing business to continue to increase in the future as we secure more contracts with corporate clients."
• "Ultimately, our goal is to mainly rely on the advertising revenue from advertisers and long-term advertising sponsors to provide our mobile connectivity and wireless communications services for free to our customers, with advertisements delivered and watched on a regular basis, just like YouTube and Facebook, making using our mobile connectivity and wireless communications services is free become a new common sense among the consumers in Japan."

Industry Context

Center Holdings Inc. operates in the highly competitive Japanese MVNO market, which has seen an increase in contracts (15.2% market share as of Dec 2023, up from 13.8% in Dec 2022). While consumer prices for cell phone services have declined since 2019, they have been on an upward trend since 2021. The company's innovative advertising-based model for mobile services is a differentiator in this market. In the staffing agency market, the company faces over 40,000 licensed agencies nationwide, with over 3,000 in Osaka alone, but aims to differentiate by hiring full-time employees and providing training. The expansion into IoT-enabled water dispensers and original smartphones aligns with broader trends in smart home technology and data monetization.

Comparison to Industry Standards

• The company's MVNO model, leveraging NTT Docomo's infrastructure, allows it to avoid significant capital expenditures, similar to other MVNOs globally that focus on service delivery rather than network ownership.
• The innovative PLAIO app, which allows customers to reduce mobile fees by watching ads, is a unique approach compared to traditional MVNOs and MNOs, which typically rely solely on subscription fees. This model attempts to emulate the 'free' content model of platforms like YouTube and Facebook, but applied to mobile connectivity.
• In the staffing industry, the company's policy of hiring job seekers as full-time employees and providing training differentiates it from many Japanese staffing agencies that primarily act as intermediaries without extensive employee development, potentially offering a more stable environment for workers compared to industry norms.
• The company's churn rate for SIM card users was 3.1% for the six months ended Nov 30, 2024, and 2.4% for the fiscal year ended May 31, 2024. Retention rates were 96.9% and 97.6% respectively. These figures would need to be benchmarked against average churn rates for MVNOs in Japan and other developed markets to assess performance relative to industry standards, but specific comparable company data is not provided in the filing.

Management Changes

Corporate Governance

Legal Proceedings

• On March 29, 2023, the company received administrative sanctions from the Japan Consumer Affairs Agency for violating regulations on multilevel marketing transactions under the Specified Commercial Transactions Act, due to providing services to business partners improperly engaged in such transactions.
• Mr. Tatsuya Nakagoshi (founder, former representative director/CEO) and Mr. Kazuo Iseji (director, CFO) also received administrative sanctions for cooperating with these business partners.
• The sanctions prohibited the company and the named individuals from involvement in solicitation, offer acceptance, or contracting related to multilevel marketing transactions from March 30, 2023, to December 29, 2023.
• Although marketing activities were not impacted as involvement ceased before sanctions, these proceedings negatively impacted the company's reputation.
• The company has adopted policies to prevent recurrence, including not conducting multilevel marketing transactions and not providing services to partners engaging in them.

Related Party Transactions

• On June 10, 2022, the company extended a JPY20 million loan to Mr. Shota Matsuyama (founder of Pay Storage) at 0.90% annual interest, maturing June 2025. This loan was used for Pay Storage's establishment, and the company assessed Mr. Matsuyama as a nominee shareholder, effectively wholly owning Pay Storage through him.
• On June 30, 2024, the company acquired 400 shares of Pay Storage from Mr. Shota Matsuyama for JPY20 million, with the transfer price offset against the outstanding loan amount.
• The company lent Mr. Tatsuya Nakagoshi (founder and director) JPY8,562 thousand on May 31, 2022, JPY29,090 thousand on May 31, 2023, and JPY3,324 thousand on May 31, 2024, for personal expenses, with interest rates of 1.25% and 0.9% per annum. Mr. Nakagoshi repaid all outstanding loans in October 2024, with no outstanding balance as of November 30, 2024.
• The company had accrued expenses due to Center Porter Co., Ltd. (a company controlled by Tatsuya Nakagoshi) for cosmetics sales commission: JPY204 thousand as of November 30, 2024, and JPY308 thousand as of May 31, 2024.
• Sales commission expenses paid to Center Porter Co., Ltd. were JPY1,304 thousand for the six months ended November 30, 2024, and JPY2,273 thousand for the fiscal year ended May 31, 2024.

Stakeholder Impact

• **Shareholders**: New investors will experience immediate and substantial dilution. Mr. Tatsuya Nakagoshi will retain significant control (71.63% voting power) post-IPO, potentially limiting influence of other shareholders. Foreign private issuer status and home country governance practices may offer less protection compared to U.S. domestic issuers. The volatility of the stock price and potential for future share issuances could impact investment value.
• **Employees**: The Outsourcing Business aims to provide a more stable working environment and competitive employment conditions for job seekers, benefiting employees. However, the company's limited number of full-time employees (69 as of May 31, 2024, increasing to 119 as of Nov 30, 2024) and reliance on key personnel pose risks if they are lost. The company's expansion into new businesses may create new job opportunities.
• **Customers**: The innovative PLAIO app offers customers the benefit of lower mobile fees. However, dependence on third-party service providers (MVNEs, MNOs) and potential issues with network stability could impact service quality. Decreases in SIM card users and travel subscribers indicate challenges in customer retention in these segments.
• **Suppliers**: The company's reliance on key suppliers like FreeBit and FourM means that any termination or unfavorable changes in contractual terms could disrupt services and impact the company's ability to serve customers.
• **Creditors**: The company's ability to meet obligations depends on cash flows from its operating subsidiaries. The decrease in net income and shift to negative operating cash flow for FY2024 could be a concern, though the IPO proceeds are expected to improve liquidity.

Next Steps

• Finalize product design for original smartphones and move into mass production.
• Develop an upgraded version of the water dispenser with additional features and obtain relevant patents.
• Start reselling water dispensers in spring or summer of 2025.
• Start reselling original smartphones by the end of 2025 or beginning of 2026.
• Continue to grow the SIM Card Business and expand customer base to potentially become an MVNE.
• Increase visibility and brand awareness through advertising and social media platforms.
• Develop and maintain good supplier relationships for internet services, SIM cards, and routers.
• Expand retail channels, including franchise stores and OEM Partners.
• Maximize customer satisfaction.
• Train and retain skilled sales personnel through the Outsourcing Business.
• Complete the transfer of equity interests in Center Mobile Japan to Center Mobile Cayman as part of the corporate reorganization.
• Obtain Nasdaq approval for listing Ordinary Shares under the symbol CTMB.

Key Dates

Recommendation

Keywords

Mobile Virtual Network Operator, MVNO, Japan, Telecommunications, Staffing Agency, Outsourcing, Travel Business, IPO, SEC Filing, F-1/A, PLAIO App, Advertising Revenue, Big Data, Smartphones, Water Dispenser, NTT Docomo, FreeBit, Nasdaq Listing, Controlled Company, Foreign Private Issuer, Corporate Governance, Risk Factors, Financial Performance, Japan Consumer Affairs Agency, PayPay Corporation