エドガーで原本を確認する
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-41181
Yoshitsu Boueki Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)
Yoshitsu Co., Ltd
(Translation of Registrant’s name into English)
Japan
(Jurisdiction of incorporation or organization)
Harumi Building, 2-5-9 Kotobashi,
Sumida-Ku, Tokyo, 130-0022
Japan
+81356250668
(Address of principal executive offices)
Mei Kanayama, Representative Director
Telephone: +81356250668
Email: ky@ystbek.co.jp
At the address of the Company set forth above
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| American depositary shares, each representing one ordinary share | TKLF | The Nasdaq Stock Market LLC | ||
| Ordinary shares* | The Nasdaq Stock Market LLC |
| * | Not for trading, but only in connection with the listing of the American depositary shares on The NASDAQ Stock Market LLC. Each American depositary share represents one ordinary share. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 42,220,206 ordinary shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Emerging growth company | ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
| * | If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐ |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ In this annual report on Form 20-F, unless the context otherwise requires, references to:
TABLE OF CONTENTS
INTRODUCTION
| ● | “ADRs” are to the American Depositary Receipts that may evidence the ADSs (defined below); | |
| ● | “ADSs” are to the American Depositary Shares, each of which represents one Ordinary Share (defined below); | |
| ● | “Japanese yen” or “¥” are to the legal currency of Japan; | |
| ● | “Kaika International” are to Kaika International Co., Ltd., formerly known as Tokyo Lifestyle Co., Ltd., a stock company incorporated pursuant to the laws of Japan, which is wholly owned by Yoshitsu (defined below); |
| ● | “Ordinary Shares” are to the ordinary shares of Yoshitsu; |
| ● | “repeat customer” for a specified period are to any customer who (1) is an active customer during such period and (2) had purchased products from us at least twice during the period from our inception to the end of such period. Orders placed by a repeat customer during a specified period include all orders placed by the customers during such period even if the customer made the first purchase from us in the same period. We determine that a customer has purchased products from us (a) in our directly-operated physical stores or franchise stores if the customer uses our rewards card when making payments or (b) in our online stores if a customer with the same phone number has made purchases in our online stores before; | |
| ● | “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States; |
| ● | “we,” “us,” “our,” “our Company,” or the “Company” are to Yoshitsu and its subsidiary, as the case may be; and | |
| ● | “Yoshitsu” are to Yoshitsu Co., Ltd, a stock company incorporated pursuant to the laws of Japan. |
This annual report on Form 20-F includes our audited consolidated financial statements for the fiscal years ended March 31, 2024, 2023, and 2022. In this annual report, we refer to assets, obligations, commitments, and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of ¥ to United States dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations and the value of our assets.
This annual report contains translations of certain ¥ amounts into U.S. dollars at specified rates. Unless otherwise stated, the following exchange rates are used in this annual report:
| March 31, | ||||||||||||
| US$ Exchange Rate | 2024 | 2023 | 2022 | |||||||||
| At the end of the year - ¥ | ¥1=$0.006613 | ¥1=$0.007519 | ¥1=$0.008208 | |||||||||
| Average rate for the year - ¥ | ¥1=$0.006920 | ¥1=$0.007402 | ¥1=$0.008908 | |||||||||
Part I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3. KEY INFORMATION
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Business
We operate in a highly competitive market and our failure to compete effectively could adversely affect our results of operations.
The beauty and health products markets in Japan, China, Canada, the U.K., and the U.S. are fragmented and highly competitive. We primarily compete against other offline and online retailers and wholesalers of beauty and health products, but also increasingly face competition from retail pharmacies, discount stores, convenience stores, and supermarkets as we increase our offerings of sundry products and other products. See “Item 4. Information on the Company—B. Business Overview—Competition.” Our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities, or greater financial, technical, or marketing resources than we do. Competitors may leverage their brand recognition, experience, and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products. Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies, and devote substantially more resources to their store and website development than us. In addition, new and enhanced technologies may increase the competition in the online retail market. Increased competition may reduce our profitability, market share, customer base, and brand recognition. There can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive pressures could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to timely gauge beauty trends and react to changing consumer preferences in a timely manner, our sales will decrease.
We believe our success depends in substantial part on our ability to:
| ● | recognize and define product and beauty trends; | |
| ● | anticipate, gauge, and react to changing consumer demand in a timely manner; |
| ● | translate market trends into appropriate, saleable product offerings in our stores in advance of our competitors; | |
| ● | develop and maintain supplier relationships that provide us access to the newest merchandise on reasonable terms; and | |
| ● | distribute merchandise to our stores in an efficient and effective manner and maintain appropriate in-stock levels. |
If we are unable to anticipate and fulfill the merchandise needs of the regions in which our products are sold, our net sales may decrease and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition, and results of operations.
We may be subject to product liability claims if our customers are harmed by the products sold through our distribution channels.
We sell products manufactured by third parties, some of which may be defectively designed or manufactured, of inferior quality, or counterfeit. For example, beauty products in general, regardless of their authenticity or quality, may cause allergic reactions or other illness that may be severe for certain customers. Sales and distributions of products in our directly-operated physical stores, online stores, and franchise stores, or to our wholesale customers could expose us to product liability claims relating to personal injury and may require product recalls or other actions. Third parties that suffered such injury may bring claims or legal proceedings against us as the retailer of the products. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations regarding Product Quality and Customer Protection.” Although we would have legal recourse against the manufacturers or suppliers of such products under Japanese law, attempting to enforce our rights against the manufacturers or suppliers may be expensive, time-consuming, and ultimately futile. Defective, inferior, or counterfeit products or negative publicity as to personal injury caused by products we sell may adversely affect consumer perceptions of our Company or our products, which could harm our reputation and brand image. In addition, we do not currently maintain any third-party liability insurance or product liability insurance with respect to the products we sell. As a result, any material product liability claim or litigation could have a material adverse effect on our business, financial condition, and results of operations. Even unsuccessful claims could result in the expenditure of funds and management time and effort in defending them and could have a negative impact on our reputation and results of operations.
We rely substantially on short-term borrowings to fund our operations, and the failure to renew these short-term borrowings or the failure to continue to obtain financing on favorable terms, if at all, may adversely affect our ability to operate our business.
Our liquidity relies significantly on short-term borrowings. As of March 31, 2024, we had approximately $53.2 million in short-term borrowings outstanding. As of March 31, 2023, we had approximately $60.6 million in short-term borrowings outstanding. As of March 31, 2022, we had approximately $40.3 million in short-term borrowings outstanding. As of the date of this annual report, we extended the outstanding short-term borrowings for an additional six months with a maturity date of December 30, 2024 and repaid $8.7 million of the outstanding short-term borrowing as of March 31, 2023. We repaid all of our outstanding $40.4 million short-term borrowings as of March 31, 2022, upon their maturity. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experience and outstanding credit history. However, we cannot assure you that we will be able to renew these loans in the future as they mature. If we are unable to renew these bank loans in the future, our liquidity position would be adversely affected, and we may be required to seek more expensive sources of short-term or long-term funding to finance our operations.
Further financing may also not be available to us on favorable terms, if at all. If we are unable to obtain short-term financing in an amount sufficient to support our operations, it may be necessary, to suspend or curtail our operations, which would have a material adverse effect on our business and financial condition. In that event, current shareholders would likely experience a loss of most or all of their investment.
Our substantial indebtedness could materially and adversely affect our business, financial condition, results of operations, and cash flows.
As of March 31, 2024, we had approximately $53.2 million in short-term borrowings and $7.4 million in long-term borrowings outstanding.
The amount of our debt could have significant consequences on our operations, including:
| ● | reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, and other general corporate purposes as a result of our debt service obligations; | |
| ● | limiting our ability to obtain additional financing; | |
| ● | limiting our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate, and the general economy; | |
| ● | increasing the cost of any additional financing; and | |
| ● | limiting the ability of our subsidiary to pay dividends to us for working capital or return on our investment. |
Any of these factors and other consequences that may result from our substantial indebtedness could have a material adverse effect on our business, financial condition, results of operations, and cash flows impacting our ability to meet our payment obligations under our debts. Our ability to meet our payment obligations under our outstanding indebtedness depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, and regulatory factors as well as other factors that are beyond our control.
The business operations and results of operations of our directly-operated physical stores and wholesale operations in Japan are susceptible to adverse impact caused by pandemics, such as the COVID-19 pandemic.
The COVID-19 pandemic has spread throughout the world and resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.
The COVID-19 pandemic materially and adversely affected our business operations and operating results during the fiscal years ended March 31, 2023 and 2022. Our total revenue decreased by $65,028,234, or 27.7%, from $234,752,580 for the fiscal year ended March 31, 2022 to $169,724,346 for the fiscal year ended March 31, 2023 due to the impact of the COVID-19 pandemic. Partially offset by the decrease in our operating expenses, our net income decreased from $3,924,148 during the fiscal year ended March 31, 2022 to a net loss of $8,048,822 during the fiscal year ended March 31, 2023, representing a decrease of 305.1%. During the fiscal year ended March 31, 2024, the COVID-19 pandemic did not have a material impact on our financial position and operating results. For additional information, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information—COVID-19 Affecting Our Results of Operations.”
As of the date of this annual report, the daily life of Japanese residents is largely back to its normal state. However, there is no assurance that a disease outbreak, such as the COVID-19 pandemic, and any similar natural disasters will not occur in the future. The extent to which such natural diseases may impact our operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted, including the duration, severity, and recurrence of any such disease outbreak, the effectiveness of mitigation strategies, and third-party actions taken to contain its spread and mitigate its public health effects. Any of these factors may materially and adversely affect our business, financial condition, and results of operations.
Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets.
One of the key means of achieving our growth strategies will be through opening and operating new stores on a profitable basis for the foreseeable future. During the fiscal year ended March 31, 2022, we opened three new directly-operated physical stores in Hong Kong, opened two new overseas online stores and two new domestic online stores, added two franchise stores, and added 16 new wholesale customers. During the period from April 1, 2023 to the date of this annual report, we opened four new directly-operated physical stores in the U.S., one new directly-operated physical store in Canada, and one new directly-operated physical store in Hong Kong. We also added five franchise stores and added 75 new wholesale customers. However, during the same fiscal year, we closed one directly-operated physical store in Japan and two directly-operated physical stores in Hong Kong, converted four directly-operated physical stores in Japan into franchise stores, converted three franchise stores in the U.S. into wholesale customers, and converted four franchise stores in Canada into wholesale customers. We identify target markets, taking into account numerous factors, such as the locations of our current stores, demographics, traffic patterns, information gathered from various sources, and, recently, whether known consumer patterns will remain at the same level as prior to the COVID-19 pandemic and if we need to modify the layout of our new stores to minimize contact with customers. We may not be able to open our planned new stores within budget or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect our business, financial condition, and results of operations. As we operate more stores, our rate of expansion relative to the size of our store base will eventually decline.
The number and timing of new stores opened during any given period may be negatively impacted by a number of factors, including:
| ● | our ability to increase brand awareness and beauty and health product consumption in areas where we open stores; | |
| ● | the identification and availability of sites for store locations with the appropriate size, traffic patterns, local retail and business attractions, and infrastructure that will drive high levels of customer traffic and sales per unit; | |
| ● | competition in existing and new markets, including competition for store sites; | |
| ● | the negotiation of acceptable lease terms; | |
| ● | our ability to obtain all required governmental permits on a timely basis; | |
| ● | our ability to control construction and development costs of new stores; | |
| ● | the maintenance of adequate distribution capacity, information systems, and other operational system capabilities; | |
| ● | integrating new stores into our existing procurement, manufacturing, distribution, and other support operations; | |
| ● | the hiring, training, and retention of store management and other qualified personnel; | |
| ● | assimilating new store employees into our corporate culture; | |
| ● | the effective management of inventory to meet the needs of our stores and wholesale customers on a timely basis; and | |
| ● | the availability of sufficient levels of cash flow and financing to support our expansion activities. |
Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital constraints, difficulties in staffing and operating new store locations, or lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.
Additionally, customer trends, preferences, and demand may vary significantly by region, and our experience in the markets in which our products are currently sold may not be applicable in other regions or countries. As a result, we may not be able to leverage our experience to expand into other parts of Japan and overseas. When we enter new markets, we may face intense competition from companies with greater experience or an established presence in the targeted geographical areas or from other companies with similar expansion targets. In addition, our business model may not be successful in new and untested markets and markets with a different business environment. We may not be able to grow our revenue in the new cities we enter, but we will incur substantial costs in connection with any such expansion. Consequently, we cannot assure you that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will be profitable, which could have a material adverse effect on our results of operations.
We lease a substantial amount of space and are required to make substantial lease payments under our operating leases. Any failure to make these lease payments when due would likely harm our business, financial condition, and results of operations.
We lease the premises of all our physical store locations. Many of our lease agreements have escalating rent provisions over the initial term and any extensions. As our stores mature and as we expand our store base, our lease expenses, and our cash outlays for rent under our lease agreements will increase. Our substantial operating lease obligations could have significant negative consequences, including:
| ● | requiring that an increased portion of our cash from operations and available cash be applied to pay our lease obligations, thus reducing liquidity available for other purposes; | |
| ● | increasing our vulnerability to adverse general economic and industry conditions; | |
| ● | limiting our flexibility to plan for or react to changes in our business or in the industry in which we compete; and | |
| ● | limiting our ability to obtain additional financing. |
If an existing or future store is not profitable, and we decide to close it, we may nonetheless remain obligated to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease.
We depend on our cash flow from operations to pay our lease obligations, finance our growth capital strategy, and fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, we may not be able to achieve our growth plans, fund our other liquidity and capital needs, or ultimately service our lease obligations, which would materially and adversely affect our business.
Unexpected termination of our leases, failure to renew our leases, or failure to renew our leases at acceptable terms could materially and adversely affect our business.
We lease the premises of all of our directly-operated physical stores. As a result, we may be subject to compulsory acquisition, closure, or demolition of any of the properties on which our stores are situated. Although we may receive liquidated damages or compensation if our leases are terminated unexpectedly, we may be forced to suspend operations of the relevant store and divert management attention, time, and costs to find a new site and relocate our store, which will negatively affect our business and results of operations.
We enter into leases of approximately one to 15 years with an option to renew for our directly-operated physical stores. Rent for our leases is typically a fixed amount and subject to annual or biennially incremental increase as stipulated in the lease agreements. We cannot assure you that we would be able to renew the relevant lease agreements without substantial additional cost or increase in the rental cost payable by us. If a lease agreement is renewed at a rent substantially higher than the current rate, or currently existing favorable terms granted by the lessor are not extended, our business and results of operations may be materially and adversely affected. If we are unable to renew the leases for our store sites, we will have to close or relocate the store, which could subject us to additional costs, expenses, and risks, and loss of existing customers, and could have a material adverse effect on our business and results of operations. In addition, the relocated store may not perform as well as the existing store.
Our earnings and business growth strategy depend in part on the success of our franchisees, and we may be harmed by actions taken by our franchisees, or employees of our franchisees, that are outside of our control.
A significant portion of our revenue is generated by sales to our franchise stores. As of the date of this annual report, we have one franchisee operating two franchise stores in the U.S., two franchisees operating two franchise stores in the U.K., and three franchisees operating three franchise stores in Japan. Franchisees are independent operators, and their employees are not our employees.
We enter into trademark license agreements with overseas franchisees, pursuant to which, we license certain trademarks, such as “東京生活館” and “REIWATAKIYA,” and sell our products to the franchisees. We enter into franchise agreements with domestic franchisees, pursuant to which, we grant the franchisees the right to operate the stores under the names “TOKYO LIFESTYLE” and “REIWATAKIYA” and provide management support to the franchisee, including joint procurement and ordering, while the franchisee takes charge of daily operation under our guidance. The quality of franchise store operations, and its effect on our brand, may be diminished by any number of factors beyond our control. Additionally, franchisees may not operate their stores in a manner consistent with our standards and requirements or they or their employees may take other actions that adversely affect the value of our brand. In such event, our business and reputation may suffer, and as a result our revenue could decline.
While we try to ensure that franchisees maintain the quality of our brand and comply with their trademark license agreements, franchisees may take actions that adversely affect the value of our intellectual property or reputation or that are inconsistent with their contractual obligations. Although our trademark license agreements permit us to terminate the agreement under certain circumstances, including violation of the agreement by a franchisee and deterioration of financial conditions of a franchisee, there can be no assurance that such remedy will be available or sufficient to prevent or undo harm to our brand and protect our intellectual property.
Our franchisees may not operate their franchises successfully. Since we currently have only six franchisees operating our franchise stores, if one of them were to become insolvent, choose to not renew their trademark license agreement with us, or otherwise were unable or unwilling to pay us amounts due to us pursuant to the terms of their agreements, our business and results of operations would be materially and adversely affected.
The operation of our franchise stores relies significantly on three franchisees and if any of them terminate their trademark license agreements or franchise agreements with us and if we are unable to find suitable replacements, our business could be materially and adversely affected.
A significant portion of our revenue is generated by sales to our franchise stores, the operation of which relies on our three existing franchisees. As of the date of this annual report, we have one franchisee operating two franchise stores in the U.S., two franchisees operating two franchise stores in the U.K., and three franchisees operating three franchise stores in Japan. Our trademark license agreements and franchise agreements with the franchisees have a term of one to three years and automatically renew for successive one-year terms, unless either party notifies the other of its intention to the contrary in writing no later than two months before the expiration of the current term. Our franchisees may determine to terminate their agreements with us for a number of reasons, including low sales volumes or high costs, or their failure to secure lease renewals. If any of our three franchisees terminate their trademark license agreements or franchise agreements with us or request more favorable terms than the ones we currently have to continue such agreements, our business and results of operations would be materially and adversely affected.
Any decrease in customer traffic in the shopping malls or street locations in which our stores are located could cause our sales to be less than expected.
Our stores are typically located in shopping malls or street locations near busy commercial districts or popular tourism attractions. Sales at these stores are derived, to a significant degree, from the volume of customer traffic in those locations and surrounding areas. Our stores benefit from the current popularity of shopping malls and street locations near busy commercial districts or popular tourism attractions as shopping destinations and their ability to generate customer traffic in the vicinity of our stores. Our sales volume and customer traffic may be adversely affected by, among other things:
| ● | economic downturns in Japan; | |
| ● | high fuel prices; | |
| ● | changes in customer demographics; | |
| ● | a decrease in popularity of shopping malls or street locations in which a significant number of our stores are located; | |
| ● | epidemics or pandemics, such as the COVID-19 pandemic, and measures imposed by governments or shopping malls in response to such epidemics, including limiting the number of customers in shopping malls; | |
| ● | the closing of the “anchor” store of a shopping mall or the stores of other key tenants; or | |
| ● | a deterioration in the financial condition of shopping mall operators or developers which could, for example, limit their ability to maintain and improve their facilities. |
A reduction in customer traffic as a result of these or any other factors could have a material adverse effect on our financial condition and results of operations.
In addition, severe weather conditions and other catastrophic occurrences in areas in which we have stores may have a material adverse effect on our results of operations. Such conditions may result in physical damage to our stores, loss of inventory, decreases in customer traffic, and closure of one or more of our stores. Any of these factors may disrupt our business and have a material adverse effect on our financial condition and results of operations.
The ongoing need for renovations and other capital improvements at our stores could have a material adverse effect on us, including our financial condition, liquidity, and results of operations.
To improve the in-store experience of our customers, our physical stores have an ongoing need for maintenance and renovations and other capital improvements, including replacement, from time to time, of furniture, fixtures, and equipment. These capital improvements may give rise to the following risks:
| ● | possible environmental liabilities; | |
| ● | construction cost overruns and delays; | |
| ● | a decline in revenue while stores are out of service due to capital improvement projects; | |
| ● | a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on favorable terms, or at all; | |
| ● | uncertainties as to market demand or a loss of market demand after capital improvements have begun; and | |
| ● | bankruptcy or insolvency of a contracted party during a capital improvement project or other situation that renders them unable to complete their work. |
The costs of all these capital improvements or any of the above noted factors could have a material adverse effect on us, including our financial condition, liquidity, and results of operations.
We rely on our relationships with suppliers to purchase high-quality beauty and health products on reasonable terms. If these relationships were to be impaired, or if certain suppliers were unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in beauty products or health products, either of which could have a material adverse effect on our competitive position, our business, and financial performance.
We have no long-term supply agreements or exclusive arrangements with our suppliers and, therefore, our success depends on maintaining good relationships with our suppliers. Our business depends to a significant extent on the willingness and ability of our suppliers to supply us with a sufficient selection and volume of products to stock our stores. Some of our suppliers that have many other customers may not have the capacity to supply us with sufficient merchandise to keep pace with our growth plans. We have also entered into supply agreements with certain well-known Japanese brands, such as Shiseido, Sato, Kao, and Kosé, which have allowed us to benefit from the growing popularity of such brands. During the fiscal years ended March 31, 2024, 2023, and 2022, our product sales attributable to these brands accounted for approximately 5.7%, 19.87%, and 22.89% of our total product sales, respectively. Any of our suppliers could in the future decide to scale back or end its relationship with us and strengthen its relationship with our competitors, which could negatively impact the revenue we earn from the sale of products from such supplier. If we fail to maintain strong relationships with our existing suppliers or fail to continue acquiring and strengthening relationships with additional suppliers of beauty and health products, our ability to obtain a sufficient amount and variety of merchandise on reasonable terms may be limited, which could have a negative impact on our competitive position.
During the fiscal year ended March 31, 2024, three suppliers accounted for approximately 22.5%, 21.2%, and 5.9% of our total purchases, respectively. During the fiscal year ended March 31, 2023, three suppliers accounted for approximately 18.2%, 16.3%, and 12.0% of our total purchases, respectively. During the fiscal year ended March 31, 2022, three suppliers accounted for approximately 30.1%, 19.7%, and 17.9% of our total purchases, respectively. The loss of or a reduction in the amount of merchandise made available to us by any one of these key suppliers, or by any of our other suppliers, could have an adverse effect on our business.
The capacity of our distribution and order fulfillment infrastructure may not be adequate to support our recent growth and expected future growth plans, which could prevent the successful implementation of these plans or cause us to incur costs to expand this infrastructure, which could have a material adverse effect on our business, financial condition, and results of operations.
We currently operate two distribution centers, which house the distribution operations for our physical stores together with the order fulfillment operations of our franchise stores. We plan to open a new distribution center in Malaysia in 2024 to support and replenish inventory at our physical stores and franchise stores in Malaysia. If we are unable to successfully implement the expansion of our distribution infrastructure or upgrade of our information systems, the efficient flow of our merchandise could be disrupted. In order to support our recent and expected future growth and to maintain the efficient operation of our business, additional distribution centers may need to be added in the future. Our failure to expand our distribution capacity on a timely basis to keep pace with our anticipated growth in stores could have a material adverse effect on our business, financial condition, and results of operations.
Any significant interruption in the operations of our distribution centers could disrupt our ability to deliver merchandise to our stores and customers in a timely manner, which could have a material adverse effect on our business, financial condition, and results of operations.
Our directly-operated physical stores, online stores, and sales to our franchise stores and wholesale customers are supported by two distribution centers. This dependence on two distribution centers, combined with the fact that we are a retailer and wholesaler carrying approximately 40,700 stock keeping units (“SKUs”) of beauty products that change on a regular basis in response to beauty trends, makes the success of our operations particularly vulnerable to disruptions in our distribution system. Any significant interruption in the operation of our distribution infrastructure, including events beyond our control, such as disruptions in our information systems, disruptions in operations due to fire or other catastrophic events, labor disagreements, or shipping problems, could drastically reduce our ability to receive and process orders and provide products to our stores and customers. This could result in lost sales and a loss of customer loyalty, which could have a material adverse effect on our business, financial condition, and results of operations.
Increased distribution costs or disruption of product transportation could adversely affect our business and financial results.
Distribution costs have historically fluctuated significantly over time, particularly in connection with oil prices, and increases in such costs could result in reduced profits. In addition, certain factors affecting distribution costs are controlled by third-party carriers. To the extent that the market price for fuel or freight or the number or availability of carriers fluctuates, our distribution costs could be affected. In addition, temporary or long-term disruption of product transportation due to weather-related problems, strikes, lockouts, or other events could impair our ability to supply products affordably and in a timely manner or at all. Any increases in the cost of transportation, and any disruption in transportation, could have a material adverse effect on our business, financial condition, and results of operations.
Any material disruption of our information systems could materially and adversely affect our business operations and negatively impact our financial results.
We are increasingly dependent on a variety of information systems to effectively manage the operations of our growing store base and fulfill customer orders from our online stores. In addition, we have identified the need to expand and upgrade our information systems to support recent and expected future growth, including the opening of our new distribution center in October 2022. As part of this expansion of our information systems, we have modified our warehouse management system to support our distribution centers. The failure of our information systems to perform as designed, including the failure of our warehouse management system to operate as expected during the holiday season or to support our distribution centers, could have a material adverse effect on our business and results of our operations. Any material disruption of our information systems could disrupt our ability to track, record, and analyze the merchandise that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and credit card transactions, and our ability to receive and process online orders or engage in normal business activities. Moreover, security breaches or leaks of proprietary information, including leaks of customers’ private data, could result in liability, decrease customer confidence in our company, and weaken our ability to compete in the marketplace, which could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to conduct our marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.
We have incurred expenses on a variety of marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our marketing and promotional activities may not be well received by customers and may not result in the increased levels of product sales that we anticipate. We incurred $752,425, $1,367,485, and $3,154,574 in promotion and advertising expenses during the fiscal years ended March 31, 2024, 2023, and 2022, respectively. Marketing approaches and tools in the beauty and health products markets in Japan, China, Canada, the U.K., and the U.S. are evolving. This further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and customer preferences, which may not be as cost-effective as our marketing activities in the past and may lead to significantly higher marketing expenses in the future. We cannot assure you that we can produce, or benefit from, unique and effective marketing campaigns in the future. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could reduce our market share, cause our net revenue to decline, and negatively impact our profitability.
If we fail to effectively manage our inventory, our results of operations, financial condition, and liquidity could be materially and adversely affected.
Our business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory. Demand for products, however, can change significantly between the time inventory is ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer preferences with respect to our products, and other factors, and our customers may not order products in the quantities that we expect. It may be difficult to accurately forecast demand, and determine appropriate amounts of inventory for our products. In addition, in order to secure more favorable commercial terms, we may need to continue to enter into supply arrangements without unconditional return clauses or with more restrictive return policies.
If we fail to effectively manage our inventory or obtain favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory value, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory levels or to pay higher prices to our suppliers in order to secure the right to return products to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results of operations, financial condition, and liquidity.
Sales to the China market represented approximately 61.2%, 51.1%, and 84.2% of our revenue for the fiscal years ended March 31, 2024, 2023, and 2022, respectively, and we expect such sales to continue to represent a significant part of our revenue and any negative impact to our ability to sell our products to customers based in China could materially and adversely affect our results of operations and financial condition.
To date we have generated a significant portion of our revenue from sales to the China market. During the fiscal years ended March 31, 2024, 2023, and 2022, sales to the China market accounted for approximately 61.2%, 51.1%, and 84.2% of our revenue, respectively. We expect such sales to continue to comprise a significant part of our revenue going forward. As a result, any unforeseen events or circumstances that negatively impact our ability to sell our products to customers based in China would materially and adversely affect our results of operations and financial condition. These negative events and circumstances include, but may not be limited to, the following:
| ● | an economic downturn in China; | |
| ● | political instability that could adversely affect our ability to deliver our products to consumers in a timely fashion; | |
| ● | changes in laws and regulations, in particular those with little advance notice; | |
| ● | deterioration of relations or disruption of trade with Japan, such as anti-Japan campaigns and the boycott of Japanese products; | |
| ● | failures by third-party e-commerce marketplace operators operating our online stores on online platforms in China to comply with laws and regulations; | |
| ● | tariffs and other trade barriers which could make it more expensive for us to deliver our products to consumers; and | |
| ● | increases in shipping costs for our products or other service issues with our third-party shippers, such as global availability of shipping containers, and related labor and fuel costs. |
Our business is geographically concentrated, which subjects us to greater risks from changes in local or regional conditions.
In addition to our operations in Japan and our sales to consumers in China, we sell our products to consumers in the U.S., Canada, and the U.K. Due to this geographic concentration, our results of operations and financial conditions are subject to greater risks from changes in general economic and other conditions in these countries, than the operations of more geographically diversified competitors. These risks include:
| ● | changes in economic conditions and unemployment rates; | |
| ● | changes in laws and regulations; | |
| ● | a decline in the number of visitors to our stores; | |
| ● | changes in competitive environment; and | |
| ● | adverse weather conditions and natural disasters (including weather or road conditions that limit access to our stores). |
As a result of the geographic concentration of our business, we face a greater risk of a negative impact on our business, financial condition, results of operations, and prospects in the event that any of the countries to which we sell our products is more severely impacted by any such adverse condition, as compared to other countries.
A downturn in the economy of the markets in which our products are sold may affect consumer purchases of discretionary items, such as beauty and health products, which could delay our growth strategy and have a material adverse effect on our business, financial condition, profitability, and cash flows.
We appeal to a wide demographic consumer profile and offer a broad selection of Japanese beauty and health products. A downturn in the economy of the markets in which our products are sold could adversely impact consumer purchases of discretionary items, such as beauty and health products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit, and consumer confidence in future economic conditions. In the event of an economic downturn, 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 recent years, the economic indicators in Japan have also shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide Suga and Prime Minister Shinzo Abe have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. This policy was terminated in April 2024. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of the U.K.’s exit from the European Union (“Brexit”) on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, the occurrence of pandemics, such as the COVID-19 pandemic, the occurrence of large-scale natural disasters, such as earthquakes and typhoons, as well as an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.
If the relevant PRC regulatory agencies were to determine that we are subject to the cybersecurity review or other regulations and policies that have been issued by the Cyberspace Administration of China, our business, financial conditions, and results of operations could be materially and adversely affected.
On April 27, 2020, the Cyberspace Administration of China (the “CAC”), along with 11 other authorities, promulgated the Measures for Cybersecurity Review, effective on June 1, 2020, which are applicable to “critical information infrastructure operators” (“CIIO”) who purchase network products and services in China. On July 10, 2021, the CAC released a revised draft for comments of the Cybersecurity Review Measures, which expanded the scope of review to include data processors who engage in data processing activities that affect or may affect the national security of China. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) was promulgated and took effect on February 15, 2022.
On August 20, 2021, the Standing Committee of the National People’s Congress of China adopted and promulgated the Personal Information Protection Law of the PRC (the “PIPL”), which became effective on November 1, 2021. The PIPL applies to the activities of processing the personal information of individuals inside China that are carried out outside China “for the purpose of providing products or services to individuals inside China,” or those constituting “analysis or evaluation of the behaviors of individuals inside China.” The “processing of personal information” includes, but is not limited to, the collection, storage, use, processing, transmission, provision, disclosure, and deletion of personal information.
The regulations and policies that have been issued by the CAC to date do not apply to us for the following reasons: for online sales in China, we have entrusted the operations of all of our online stores on Tmall Global, JD Worldwide, Pinduoduo, and other online platforms in China to third-party Chinese e-commerce marketplace operators (the “Entrusted Third Parties”) pursuant to cooperation agreements between us and the Entrusted Third Parties. Consumer purchase data and personal information generated by these online stores are collected, used, managed, and stored in China by the Entrusted Third Parties, and we only receive necessary information, such as the numbers and types of products ordered from the Entrusted Third Parties in order to complete orders for these online stores. We have no right to obtain any personal information of Chinese consumers from the Entrusted Third Parties. In addition, our PRC legal counsel, Finance & Commerce Law Firm of China, has advised us that our PRC subsidiary, Qingzhiliangpin, is not a CIIO and does not collect or process personal information of individuals inside China in its business. As a result of the foregoing, (i) we are not subject to the cybersecurity review as required by the Measures for Cybersecurity Review (2021 version) and (ii) we are not subject to the PIPL since we have not engaged in activities of processing personal information of individuals inside China or those constituting analysis or evaluation of the behaviors of individuals inside China.
There remains uncertainty, however, inherent in relying on an opinion of counsel in connection with whether aspects of our business could be subject to Chinese laws and regulations. The PRC regulatory agencies, including the CAC, may not reach the same conclusion as our PRC counsel has and they may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Measures for Cybersecurity Review (2021 version) or the PIPL. In light of the significance of online sales in China to our business, if the CAC or other relevant PRC regulatory agencies were to determine that we are subject to the cybersecurity review as required by Measures for Cybersecurity Review (2021 version) or the PIPL, we may be required to suspend part of our operations or experience other disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations.
Our management has a limited history managing rapid expansion. If we cannot effectively and efficiently manage our growth strategy, our results of operations or profitability could be materially and adversely affected.
We have been growing rapidly in recent years, and we intend to continue to expand our business by opening new physical and online stores. Since this rapid expansion is a new strategy for us and our management has a limited history managing such an expansion, we may not be able to adapt quickly to such major business change, compete successfully in new markets, build our brand in new countries or areas, or generate sufficient net income from our new stores. As a result, it is difficult for us to predict our results of operations with respect to our newly opened stores and you should not rely on our historical results of operations as an indication of our future financial performance.
This growth strategy has placed, and will continue to place, substantial demands on our managerial, operational, technological, and other resources. Our growth strategy will also place significant demands on us to maintain the quality of our product and customer services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our product and customer services. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures, and controls, including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train, manage, and motivate our workforce and manage our relationships with customers, suppliers, and other service providers. As we selectively increase our product offerings, we will need to work with different groups of new suppliers efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers. All of these endeavors involve risks and will require substantial management effort and significant additional expenditures. We cannot assure you that we will be able to effectively manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our results of operations and profitability.
We may be unsuccessful in expanding and operating our business internationally, which could adversely affect our results of operations.
We plan to add an aggregate of 15 new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore ,Thailand ,Malaysia, and Taiwan during the next three years. The entry and operation of our business in these markets could cause us to be subject to unexpected, uncontrollable, and rapidly changing events and circumstances outside Japan. As we grow our international operations, we may need to recruit and hire new product development, sales, marketing, and support personnel in the countries in which we have or will establish new stores or otherwise have a significant presence. Entry into new international markets typically requires the establishment of new marketing and distribution channels. In addition, the opening of a new store typically results in initial recruiting and training expenses and reduced labor efficiencies. Our ability to continue to expand into international markets involves various risks, including the possibility that our expectations regarding the level of returns we will achieve on such expansion will not be achieved in the near future, or ever, and that competing in markets with which we are unfamiliar may be more difficult than anticipated. If we are less successful than we expect in a new market, we may not be able to realize an adequate return on our initial investment and our operating results could suffer.
Our international operations may also fail due to other risks inherent in foreign operations, including:
| ● | varied, unfamiliar, unclear, and changing legal and regulatory restrictions, including different legal and regulatory standards applicable to beauty and health products; | |
| ● | failure to properly comply with Japanese laws and regulations relating to the export of our products; | |
| ● | compliance with multiple and potentially conflicting regulations in Europe, Asia, Oceania, and North America, including export requirements, tariffs, import duties, and other trade barriers, as well as health and safety requirements; | |
| ● | difficulties in staffing and managing foreign operations; | |
| ● | longer collection cycles; | |
| ● | the economic burden and uncertainty placed on our customers by the imposition and threatened imposition of tariffs by the U.S., China, and other countries; | |
| ● | seasonal reductions in business activities, particularly throughout Europe; | |
| ● | differing intellectual property laws that may not provide sufficient protections for our intellectual property; | |
| ● | proper compliance with local tax laws, which can be complex and may result in unintended adverse tax consequences; | |
| ● | localized spread of infection resulting from the COVID-19 pandemic, including any economic downturns and other adverse impacts; | |
| ● | difficulties in enforcing agreements through foreign legal systems; | |
| ● | impact of different real estate trends in different regions; | |
| ● | fluctuations in currency exchange rates that may affect product demand and may adversely affect the profitability in Japanese yen of products provided by us in foreign markets where payment for our products is made in the local currency, including any fluctuations caused by uncertainties relating to Brexit; | |
| ● | impact of Brexit on the U.K.’s access to the European Union Single Market, the related regulatory environment, the global economy, and the resulting impact on our business; | |
| ● | changes in general economic, health, and political conditions in countries where our products are sold; |
| ● | potential labor strike, lockouts, work slowdowns, and work stoppages; | |
| ● | restrictions on downsizing operations in Europe and expenses and delays associated with any such activities; and | |
| ● | different consumer preferences and requirements in specific international markets. |
Our current and any future international expansion plans will require management attention and resources and may be unsuccessful. We may find it impossible or prohibitively expensive to continue expanding internationally or we may be unsuccessful in our attempt to do so, and our results of operations could be adversely impacted.
If we are unable to provide a high-quality customer experience, our business, reputation, financial condition, and results of operations may be materially and adversely affected.
The success of our business largely depends on our ability to provide a high-quality customer experience, which in turn depends on a variety of factors. These factors include our ability to continue to offer authentic products at competitive prices, source products to respond to customer demand and preferences, maintain the quality of our products, provide clean and attractive physical stores and reliable and user-friendly website interfaces for our customers to visit and purchase products, and provide timely and reliable delivery for products in our online stores and high-quality after-sales service. If our customers are not satisfied with our products or customer service experience, or the prices at which we offer the products, or our internet platform for online stores is severely interrupted or otherwise fail to meet our customers’ expectations, our reputation and customer loyalty could be adversely affected.
We rely on contracted third-party delivery service providers to deliver our products sold through our online stores. Interruptions to or failures in the delivery services could prevent the timely or successful delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as inclement weather, natural disasters, or labor unrest. If our products are not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in our services. Furthermore, the delivery personnel of contracted third-party delivery service providers act on our behalf and interact with our customers directly. Any failure to provide high-quality delivery services to our customers may negatively impact the shopping experience of our customers, damage our reputation, and cause us to lose customers.
In addition, we hired third-party e-commerce marketplace operators to operate our overseas online stores and depended on online customer service representatives from these third-party e-commerce marketplace operators to provide live assistance to our overseas online customers 24 hours a day, seven days a week. As of August 2022, we used approximately 12 customer service representatives from third-party e-commerce marketplace operators. In August 2022, to reduce our operating expenses and credit risk, we outsourced the entire operations of our overseas online stores to the third-party e-commerce marketplace operators and transited from selling products to individual overseas online customers to selling products to the third-party e-commerce marketplace operators, who therefore became our e-commerce wholesale customers (the “EC Wholesale Customers”) and were authorized to continue operating the overseas online stores on our behalf, including using their online customer service representatives to provide live assistance to the overseas online customers.
For more detailed discussion of the overseas online stores and our EC Wholesale Customers, please refer to “Item 4. Information on the Company—B. Business Overview—Our Distribution Channels—Online Stores.” If our EC Wholesale Customers and their customer service representatives fail to provide satisfactory service, or if wait times are too long due to the high volume of requests from customers at peak times, our brand and customer loyalty may be adversely affected. In addition, any negative publicity or poor feedback regarding the customer service may harm our brand and reputation and in turn cause us to lose customers and market share.
As a result, if we or any of our EC Wholesale Customers are unable to continue to provide, or maintain, a high-quality customer service, we may not be able to retain existing customers or attract new customers, which could have a material adverse effect on our business, reputation, financial condition, and results of operations.
Failure to maintain or enhance our brands or image could have a material adverse effect on our business and results of operations.
We believe our “晴の良品,” “東京生活館,” and other brands are well-recognized among our customers and other Japanese beauty and health product industry players, such as other Japanese beauty and health product retailers in the local markets our products are sold in. Our brands are integral to our sales and marketing efforts. Our continued success in maintaining and enhancing our brands and image depends to a large extent on our ability to satisfy consumer needs by further developing and maintaining the quality of our products, as well as our ability to respond to competitive pressures. If we are unable to satisfy consumer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers may decline, which could in turn adversely affect our results of operations.
Failure to obtain and maintain required licenses and permits or to comply with liquor, pharmaceutical, medical device, and other regulations could lead to the loss of our liquor, pharmaceutical, and other licenses and, thereby, harm our business, financial condition, or results of operations.
The sale of beauty and health products are subject to various government regulations in the markets in which our products are sold, including those relating to the sale of pharmaceuticals, and medical devices. In addition, we also sell liquor in certain of our stores, which is also subject to government regulation. Such regulations are subject to change from time to time. See “Item 4. Information on the Company—B. Business Overview—Regulations.” The failure to obtain and maintain licenses, permits, and approvals relating to such regulations could adversely affect our business, financial condition, or results of operations. Licenses may be revoked, suspended, or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits, and approvals could adversely affect us or cause a delay or result in our decision to cancel the opening of new stores, either of which could adversely affect our business, financial condition, or results of operations.
Data security breaches and attempts thereof could negatively affect our reputation, credibility, and business.
The third-party e-commerce marketplace operators for our online stores collect and store personal information relating to our customers, including their personally identifiable information, and rely on third parties for the various social media tools and websites we use as part of our marketing strategy. Our directly-operated physical stores in Hong Kong also collect and store personally identifiable information during membership registering for Customers. Customers are increasingly concerned over the security of personal information transmitted over the Internet (or through other mechanisms), consumer identity theft, and user privacy. Any perceived, attempted, or actual unauthorized disclosure of personally identifiable information regarding our employees, customers, or website visitors could harm our reputation and credibility, reduce our online sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers, and could result in litigation against us or the imposition of significant fines or penalties. We cannot assure you that any of our third-party service providers with access to such personally identifiable information will maintain policies and practices regarding data privacy and security in compliance with all applicable laws, or that they will not experience data security breaches or attempts thereof which could have a corresponding adverse effect on our business.
Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new foreign, national, provincial or state, and local laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased compliance costs.
A breach of security of confidential customer information related to our electronic processing of credit and debit card transactions, or a breach of security of our employee information, could substantially affect our reputation, business, financial condition, and results of operations.
A significant portion of the sales in our stores are by credit or debit cards. Other retailers have experienced security breaches in which credit and debit card information has been stolen. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. We may ultimately be held liable for the unauthorized use of a cardholder’s credit card information in an illegal activity and be required by card issuers to pay charge-back fees. In addition, many of the jurisdictions in which our products are sold, including Japan, Nevada, and New York, have enacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding could cause us to incur significant expenses, which could have an adverse impact on our business, financial condition, or results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on our Company and could substantially affect our reputation, business, financial condition, or results of operations.
If we are unable to attract, train, assimilate, and retain employees that embody our culture, including store personnel, store managers, and senior managers, we may not be able to grow or successfully operate our business.
Our success depends in part upon our ability to attract, train, assimilate, and retain a sufficient number of employees, including store personnel and store managers, who understand and appreciate our culture, are able to represent our brand effectively and establish credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers, and knowledge of the products we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected, and our brand image may be negatively impacted. Our growth strategy will require us to attract, train, and assimilate even more personnel. Any failure to meet our staffing needs or any material increases in team member turnover rates could have a material adverse effect on our business or results of operations.
We place substantial reliance on the retail and wholesale industry experience and knowledge of our senior management team as well as their relationships with other industry participants. Mr. Mei Kanayama, our representative director, is particularly important to our future success due to his substantial experience and reputation in the retail and wholesale markets. We do not carry, and do not intend to procure, key person insurance on any of our senior management team. The loss of the services of one or more members of our senior management team due to their departure, or otherwise, could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for our current senior management could be difficult, and competition for such personnel of similar experience is intense. If we fail to retain our senior management, our business and results of operations could be materially and adversely affected.
Our private label products may not appeal to our customers, and may compete with our brand partners.
We recently started to cooperate with suppliers to develop our own private label products. However, there is no assurance that our private label product offerings will generate customer interest and meet consumer needs or expectations. If we are unable to generate sufficient sales of our private label products, we may fail to cover our development, manufacturing, and marketing costs and expenses with respect to these products, and our business, results of operations, and financial condition may be adversely affected.
Moreover, as we sell both branded products sourced from our suppliers and our private label products through our distribution channels, we are likely to face competition from our suppliers. Branded products may have an advantage over our private label products primarily due to name recognition, even though private label products are typically more competitively priced compared to branded products. In addition, selling private label products may harm our relationship with our suppliers. If we lose our suppliers or if our relationships with our suppliers deteriorate, our business may be adversely affected. See “—We rely on our relationships with suppliers to purchase high-quality beauty and health products on reasonable terms. If these relationships were to be impaired, or if certain suppliers were unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in beauty products or health products, either of which could have a material adverse effect on our competitive position, our business, and financial performance.”
Fluctuation of the value of the Japanese yen against certain foreign currencies may have a material adverse effect on the results of our operations.
Some of our foreign operations’ functional currencies are not the Japanese yen, and the financial statements of such foreign operations prepared initially using their functional currencies are translated into Japanese yen. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. During the fiscal years ended March 31, 2024, 2023, and 2022, 70.7%, 57.5%, and 90.6%, respectively, of our revenue was derived from markets outside of Japan. We expect that an increasing portion of our revenue and expenses in the future will be denominated in currencies other than the Japanese yen. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies in which we conduct our business. In recent years, the value of the Japanese yen against our functional currencies or the U.S. dollar has fluctuated widely, and may continue to fluctuate and is affected by, among other things, changes in governmental policies and domestic and international economic and political developments. For example, in 2022 and 2023, the Japanese yen depreciated approximately 5.6% and 16.9%, respectively, against the U.S. dollar. It is difficult to predict how market forces or government policies may impact such exchange rates between the Japanese yen and the U.S. dollar or our functional currencies in the future. Moreover, we do not take actions to manage our foreign currency exposure, such as entering into hedging transactions. 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 revenue that will be generated in other countries, the variability of currency exposures, and the potential volatility of currency exchange rates.
Future acquisitions may have a material adverse effect on our ability to manage our business and our results of operations and financial condition.
We may acquire businesses, technologies, services, or products which are complementary to our core Japanese beauty and health product retail and wholesale business. Future acquisitions may expose us to potential risks, including risks associated with the integration of new operations, services, and personnel, unforeseen or hidden liabilities, the diversion of resources and management attention from our existing business and technology, our potential inability to generate sufficient revenue to offset new costs, the costs and expenses incurred in connection with such acquisitions, or the potential loss of or harm to relationships with suppliers, employees, and customers resulting from our integration of new businesses.
Any of the potential risks listed above could have a material adverse effect on our ability to manage our business or our results of operations and financial condition. In addition, we may need to fund any such acquisitions through the incurrence of additional debt or the sale of additional debt or equity securities, which would result in increased debt service obligations, including additional operating and financing covenants, or liens on our assets, that would restrict our operations, or dilution to our shareholders.
Risks Relating to Our Ordinary Shares and the Trading Market
The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.
Sales of substantial amounts of the ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. As of the date of this annual report, 42,220,206 of our Ordinary Shares are issued and outstanding. Among these shares, 21,428,666 are in the form of ADSs. All our ADSs are freely tradable without restriction or additional registration under the Securities Act. The remaining Ordinary Shares outstanding are available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs.
If securities or industry analysts do not publish research or reports about our business, or if they publish a negative report regarding the ADSs, the price of the ADSs and trading volume could decline.
Any trading market for the ADSs may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of the ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of the ADSs and the trading volume to decline.
The market price of the ADSs may be volatile or may decline regardless of our operating performance.
From the closing of our initial public offering on January 13, 2022 to July 16, 2024, the closing price of the ADSs has ranged from $0.20 to $29.52 per ADS. The trading price of the ADSs is likely to continue to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in Japan that have listed their securities in the United States.
In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:
| ● | actual or anticipated fluctuations in our revenue and other operating results; | |
| ● | the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections; | |
| ● | actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors; | |
| ● | announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
| ● | price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; | |
| ● | the trading volume of the ADSs on the Nasdaq Capital Market (“Nasdaq”); | |
| ● | sales of the ADSs or Ordinary Shares by us, members of our senior management and directors or our shareholders or the anticipation that such sales may occur in the future; | |
| ● | lawsuits threatened or filed against us; and | |
| ● | other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
If we fail to implement and maintain an effective system of internal controls or fail to remediate the material weaknesses in our internal control over financial reporting that have been identified, we may fail to meet our reporting obligations or be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.
We used to be a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in preparing our consolidated financial statements as of and for the fiscal year ended March 31, 2024, we have identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board (United States) and other control deficiencies. The material weaknesses identified were (i) a lack of internal accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements and (ii) a lack of proper control over logical access security of IT systems, IT operations and service organization management. Following the identification of the material weaknesses and control deficiencies, we plan to take remedial measures including: (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; and (iii) improving our IT environment and daily management. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. Our failure to correct the material weaknesses or our failure to discover and address any other material weaknesses or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations, and prospects, as well as the trading price of the ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.
In addition, once we cease to be an “emerging growth company,” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” in April 2027, 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 controls 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 complete our evaluation testing and any required remediation in a timely manner.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal, accounting, and financial compliance costs and investor relations and public relations 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.” The Exchange Act requires, among other things, that we file annual reports and reports of foreign private issuer with respect to our business and operating results as well as proxy statements.
As a result of disclosure of information in the Form 20-F and in filings required of a public company, our business and financial condition are more visible, which we believe may result in threatened or actual litigation, including by competitors and other 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 adversely affect our business, brand and reputation, and results of operations.
Being a public company and these new rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and senior management.
As a foreign private issuer, we have followed home country practice even though we are considered a “controlled company” under Nasdaq corporate governance rules, which could adversely affect our public shareholders.
Our largest shareholder, Mr. Mei Kanayama, owns more than a majority of the voting power of our outstanding Ordinary Shares. Under the Nasdaq corporate governance rules, a company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain Nasdaq corporate governance standards, including the requirements that:
| ● | a majority of its board of directors consist of independent directors; | |
| ● | its director nominations be made, or recommended to the full board of directors, by its independent directors or by a nominations committee that is comprised entirely of independent directors and that it adopts a written charter or board resolution addressing the nominations process; and |
| ● | it has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. |
As a foreign private issuer, however, Nasdaq corporate governance rules allow us to follow corporate governance practice in our home country, Japan, with respect to appointments to our board of directors and committees. We have followed home country practice as permitted by Nasdaq rather than relying on the “controlled company” exception to the corporate governance rules. See “—Because we are a foreign private issuer and have taken advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.” Accordingly, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the operation, development, and growth of our business and, as a result, we do not expect to declare or pay any dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
Rights of shareholders under Japanese law may be different from rights of shareholders in other jurisdictions.
Our articles of incorporation, as amended (the “Articles of Incorporation”) and the Companies Act of Japan (the “Companies Act”) govern our corporate affairs. Legal principles relating to matters such as the validity of corporate procedures, directors’ and executive officers’ 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 law 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 stock company may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced than that in other jurisdictions.
As holders of ADSs, you may have fewer rights than holders of our Ordinary Shares and must act through the depositary to exercise those rights.
The rights of shareholders under Japanese law to take actions, including 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. ADS holders are not shareholders of record. The depositary, through its custodian agents, is the record holder of our Ordinary Shares underlying the ADSs. 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. If we instruct the depositary to ask for your voting instructions, 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 Ordinary 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.
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 Ordinary Shares provides that, to the fullest extent permitted by applicable law, owners and holders of ADSs irrevocably waive the right to a jury trial for any claim that they may have against us or the depositary arising from or relating to our Ordinary Shares, the ADSs, or the deposit agreement, including any claim under the U.S. federal securities laws.
However, ADS holders will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder. In fact, ADS holders cannot waive our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder. If we or the depositary opposed a demand for jury trial relying on jury trial waiver mentioned above, it is up to the court to determine whether such waiver was enforceable considering the facts and circumstances of that case in accordance with the applicable state and federal law.
If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court or by the United States Supreme Court. Nonetheless, we believe that a jury trial waiver provision is generally enforceable 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. In determining whether to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable in the case of the deposit agreement or the ADSs. If you or any other owners or holders of ADSs bring a claim against us or the depositary relating to the matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other owner or holder may not have the right to a jury trial regarding such claims, which may limit and discourage 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 have different outcomes compared to that of a jury trial, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if the jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any owner or holder of ADSs or by us or the depositary of compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder.
Holders of ADSs may not receive distributions on our Ordinary Shares or any value for them if it is illegal or impractical to make them available to such holders.
Subject to the terms of the deposit agreement, the depositary has agreed to pay holders of ADSs the cash dividends or other distributions it or the custodian for the ADSs receives on the Ordinary Shares or other deposited securities after deducting its fees and expenses and any taxes or other government charges. Holders of ADSs will receive these distributions in proportion to the number of our Ordinary 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 Ordinary Shares to holders of ADSs. This means that holders of ADSs may not receive the distributions we make on our Ordinary Shares if it is illegal or impractical to make them available to such holders. These restrictions may materially reduce the value of the ADSs.
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 cancelling and withdrawing the underlying our Ordinary 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 substantial existing 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 cancelling and withdrawing the underlying our Ordinary Shares. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances.
We are incorporated in Japan, and it may be more difficult to enforce judgments obtained in courts outside Japan.
We are incorporated in Japan as a stock company 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 and senior management 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 in the United States upon us or to enforce against us, our directors or senior management, judgments obtained in U.S. courts predicated upon civil liability provisions of the federal or state securities laws of the U.S. or similar judgments obtained in other courts outside 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 the federal and state securities laws of the United States.
Dividend payments and the amount you may realize upon a sale of our Ordinary Shares or the 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 Ordinary Shares represented by the ADSs will be paid to the depositary in Japanese yen and then converted by the depositary or its agents into U.S. dollars, subject to certain conditions and the terms of the deposit agreement. 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 Ordinary Shares obtained upon cancellation and 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 our Ordinary Shares.
If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers, and we would incur significant additional legal, accounting, and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our senior management, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information that United States domestic issuers are required to disclose. We may cease to qualify as a foreign private issuer in the future, in which case we would incur significant additional expenses that could have a material adverse effect on our results of operations.
Because we are a foreign private issuer and have taken advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.
Nasdaq listing rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to, and we have followed home country practice in lieu of the above requirements. The corporate governance practice in our home country, Japan, does not require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests of the company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, Nasdaq listing rules also require U.S. domestic issuers to have an audit committee, a compensation committee, and a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. Consistent with corporate governance practices in Japan, we have a three-member board of corporate auditors instead of an audit committee and we do not have a standalone compensation committee or nomination and corporate governance committee of our board. Moreover, Nasdaq listing rules require a listed company to obtain shareholder approval for certain dilutive events listed in Listing Rule 5635. However, consistent with corporate governance practices in Japan, we are not required to obtain shareholder approval for such dilutive events, unless they constitute a favorable issue of shares or stock acquisition rights or an acquisition of the entire business requiring a special resolution of shareholders’ meeting. See “Item 16G. Corporate Governance.” As a result of these exemptions, investors would have less protection than they would have if we were a domestic issuer. Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq listing rules in determining whether shareholder approval is required on such matters.
If we cannot continue to satisfy the continued listing requirements and other rules of Nasdaq, the ADSs may be delisted, which could negatively impact the price of the ADSs and your ability to sell them.
In order to maintain our listing on Nasdaq, we are required to comply with certain rules of Nasdaq, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of publicly held shares, and various additional requirements. On December 20, 2023, we received a letter from the Listing Qualifications Department of Nasdaq notifying us that we are not in compliance with the minimum bid price requirement as set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given a period of 180 calendar days, or until June 17, 2024, to regain compliance with Nasdaq Listing Rule 5550(a)(2). On June 18, 2024, we were given an additional period of 180 calendar days, or until December 16, 2024, to regain compliance. To regain compliance, the ADSs must have a closing bid price of at least US$1.00 for a minimum of 10 consecutive business days. In the event we do not regain compliance by December 16, 2024, we may face delisting.
If Nasdaq subsequently delists the ADSs from trading, we could face significant consequences, including:
| ● | a limited availability for market quotations for the ADSs; | |
| ● | reduced liquidity with respect to the ADSs; | |
| ● | a determination that the ADS is a “penny stock,” which will require brokers trading in the ADSs to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for the ADSs; |
| ● | limited amount of news and analyst coverage; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
We are an “emerging growth company” within the meaning of the Securities Act, and we have taken advantage of certain exemptions from disclosure requirements available to emerging growth companies, which will make it more difficult to compare our performance with other public companies.
We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. 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 Securities Act registration statement declared effective 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. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This will make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Because we are an “emerging growth company”, we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and the ADSs.
For as long as we remain an “emerging growth company,” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of other public companies. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the ADS price may be more volatile.
If we are classified as a passive foreign investment company, United States taxpayers who own the ADSs or our Ordinary Shares may have adverse United States federal income tax consequences.
A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either:
| ● | At least 75% of our gross income for the year is passive income; or | |
| ● | The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. |
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds the ADSs or our Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Based on our operations and the composition of our assets, it is possible that, for our 2025 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC, which could have adverse U.S. federal income tax consequences for U.S. taxpayers who are shareholders. We will make this determination following the end of any particular tax year.
The classification of certain of our income as active or passive, and certain of our assets as producing active or passive income, and hence whether we are or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations as well as certain IRS guidance relating to the classification of assets as producing active or passive income. Such regulations and guidance are potentially subject to different interpretations. If due to different interpretations of such regulations and guidance the percentage of our passive income or the percentage of our assets treated as producing passive income increases, we may be a PFIC in one or more taxable years.
For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were or are determined to be a PFIC, see “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—PFIC.”
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES, THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE COMPANY IS A PFIC.
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Corporate History and Structure
We began our operations through Yoshitsu, a stock company incorporated on December 28, 2006 pursuant to the laws of Japan. On October 24, 2019, Yoshitsu incorporated a wholly owned subsidiary, Tokyo Lifestyle Co., Ltd., pursuant to the laws of Japan. On August 25, 2022, Tokyo Lifestyle Co., Ltd. changed its name to Kaika International Co., Ltd.
On December 25, 2020, we established a new company in Japan, Palpito Co., Ltd. (“Palpito”), owned 40% by Yoshitsu and 60% by two unrelated third parties. Palpito is a retailer and wholesaler of art toys, which are toys and collectibles created by artists and designers that are either self-produced or made by small, independent toy companies, typically in very limited editions.
On January 13, 2022, we closed our initial public offering (“IPO”) of 6,250,000 ADSs at a public offering price of $4.00 per ADS, which included 250,000 ADSs issued pursuant to the partial exercise of the underwriters’ over-allotment option. Each ADS represents one ordinary share of the Company. The closing for the sale of the over-allotment shares took place on February 21, 2022. Gross proceeds of our IPO, including the proceeds from the sale of the over-allotment shares, totaled $25.0 million, before deducting underwriting discounts and other related expenses. Net proceeds of our IPO, including over-allotment shares, were approximately $21.4 million. In connection with the IPO, the ADSs began trading on Nasdaq under the symbol “TKLF” on January 18, 2022.
On July 20, 2022, we entered into a definitive agreement (the “Agreement”) with All Seas Global Limited (the “Seller”). Mr. Mei Kanayama, the representative director of our Company, holds 100% of the equity interests in the Seller, and hence, the Seller and us are related parties under common control. Tokyo Lifestyle Limited is a company principally engaged in the import and retail of Japanese beauty and cosmetic products in Hong Kong and engaged in the live e-commerce business through its wholly-owned subsidiary, Shenzhen Qingzhiliangpin Network Technology Co., Ltd. (“Qingzhiliangpin”). Pursuant to the Agreement, we agreed to acquire 100% of the equity interests in Tokyo Lifestyle Limited in consideration of the sum of ¥392,000,000 in cash (approximately US$2,842,173), subject to certain terms. The transaction contemplated by the Agreement was approved by our board of directors at a meeting on June 27, 2022, and closed on July 27, 2022. This acquisition is a critical initiative of our business strategy to boost our business expansion in the Southeast Asia market and advance the digital transformation of live streaming e-commerce in our retail business.
On October 26, 2022, the board of directors of Tokyo Lifestyle Limited approved the acquisition of REIWATAKIYA (MYS) SDN. BHD. (“Reiwatakiya”) from the Seller, who held 60% equity interests in Reiwatakiya. Reiwatakiya is an entity incorporated on June 14, 2022 and is not in operation as of the date of this annual report. It is expected to principally engage in the import and retail of Japanese beauty and cosmetic products in Malaysia. The 60% equity interests in Reiwatakiya were transferred to Tokyo Lifestyle Limited on October 26, 2022 with no consideration. As Tokyo Lifestyle Limited and Reiwatakiya previously were controlled by the same ultimate controlling shareholder before this acquisition of a business between entities under common control, and therefore, the related acquired assets and liabilities were transferred at Reiwatakiya’s historical carrying value. On January 4, 2023, Tokyo Lifestyle Limited acquired the remaining 40% of the equity interests in Reiwatakiya from a third-party shareholder with no consideration and Reiwatakiya became the wholly owned subsidiary of Tokyo Lifestyle Limited.
On June 30, 2023, we entered into two share transfer agreements with Seihinkokusai Co., Ltd. (“Seihinkokusai”), an entity of which Mr. Mei Kanayama’s wife is a director and the representative director, to sell our 100% equity interests in Kaika International and 40% equity interests in Palpito to Seihinkokusai, for cash consideration of ¥5,000,000 (approximately $37,595) and ¥40,000,000 (approximately $300,760), respectively. The transactions were negotiated at arm’s length and were approved by our board on June 30, 2023. The cash consideration was fully received, and the transactions were completed on July 1, 2023.
On September 6, 2023, Tokyo Lifestyle Limited incorporated a wholly-owned subsidiary, RAKKISTAR HOLDING INC., in the Province of Ontario, Canada. On October 17, 2023, Tokyo Lifestyle Limited incorporated a wholly-owned subsidiary, Tokyo Lifestyle Holding Inc. (“TSL Holding”), in the State of Delaware. On October 26, 2023, TSL Holding organized a wholly-owned subsidiary, REIWATAKIYA BOS LLC, a limited liability company in the Commonwealth of Massachusetts. On November 8, 2023, TSL Holding organized a wholly-owned subsidiary, REIWATAKIYA NYC LLC, a limited liability company in the State of New York. These entities are currently not engaging in any active business operations.
The following chart illustrates our corporate structure as of the date of this annual report.
Notes: All percentages reflect the equity interests held by each of our shareholders, excluding the shares issuable under the outstanding warrants.
| (1) | Represents 12,975,050 Ordinary Shares held by Tokushin G. K., which is owned by Mr. Kanayama and his family, as of the date of this annual report. |
| (2) | Represents 2,672,754 ADSs held by Yingjia Yang, each representing one Ordinary Share, as of the date of this annual report, according to a Schedule 13G filed by Yingjia Yang on December 31, 2021 with the SEC. |
| (3) | Represents 2,672,460 ADSs held by Grand Elec-Tech Limited, which is 100% owned by Zhiyong Chen, as of the date of this annual report, according to a Schedule 13G filed by Grand Elec-Tech Limited on December 31, 2021 with the SEC. |
| (4) | Represents 4,463,354 Ordinary Shares beneficially owned by three shareholders of Yoshitsu, each of whom beneficially owns less than 5% of our Ordinary Shares, as of the date of this annual report. |
For details of our principal shareholders’ ownership, please refer to the beneficial ownership table in “Principal Shareholders.”
Corporate Information
Our headquarters are located at Harumi Building, 2-5-9 Kotobashi, Sumida-ku, Tokyo, 130-0022, Japan, and our phone number is +81356250668. Our English website address is www.ystbek.co.jp/en/. The information contained in, or accessible from, our website or any other website does not constitute a part of this annual report. 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.
The SEC maintains a website at www.sec.gov that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC using its EDGAR system.
For information regarding our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”
B. Business Overview
Overview
Headquartered in Tokyo, we are a retailer and wholesaler of Japanese beauty and health products, as well as sundry products and other products. We currently offer approximately 40,700 SKUs of beauty products, including cosmetics, skin care, fragrance, and body care, among others, 15,200 SKUs of health products, including over-the-counter (“OTC”) drugs, nutritional supplements, and medical supplies and devices, 44,200 SKUs of sundry products, including home goods, 150 SKUs of electronic products, including entertainment gaming products such as Nintendo Switch and Xbox Series, 850 SKUs of luxury products, including branded watches, perfume, handbags, clothes and jewelry, and 50,600SKUs of other products, including food and alcoholic beverages.
We currently sell our products through directly-operated physical stores, through online stores, and to franchise stores and wholesale customers. Leveraging our deep understanding of consumer needs and preferences, we have rapidly expanded our operations. Specifically, we opened three new directly-operated physical stores in Hong Kong, opened two new overseas online stores and two new domestic online stores, added two franchise stores, and added 16 new wholesale customers during the fiscal year ended March 31, 2022; and during the period from April 1, 2023 to the date of this report, we opened four new directly-operated physical stores in the U.S., one new directly-operated physical store in Canada and one new directly-operated physical store in Hong Kong; we also added five franchise stores and added 75 new wholesale customers. We believe our distribution channels are a trusted destination for consumers to discover and purchase branded Japanese beauty and health products, sundry products, and other products.
Since our inception, we have built a large base of customers, which has been essential for our rapid growth. During the fiscal years ended March 31, 2024, 2023, and 2022, our physical stores served approximately 473,369, 542,276, and 431,484 customers, respectively, and orders placed by our repeat customers accounted for approximately 42%, 40%, and 47% of total orders in our physical stores, respectively. During the same fiscal years, our online stores served approximately 307,785, 615,571, and 2,091,231 customers, respectively, and orders placed by our repeat customers accounted for approximately 52%, 54%, and 39% of total orders in our online stores, respectively. During the same fiscal years, our franchise stores served approximately 402,734, 154,344, and 259,746 customers, and orders placed by our repeat customers accounted for approximately 60%, 54%, and 51% of total orders in our franchise stores, respectively.
Since our inception, we have established long-term relationships with over 173 suppliers, consisting primarily of cosmetics and pharmaceutical companies and distributors, including many well-known Japanese brands, such as Shiseido, Sato, Kao, and Kosé.
Since our inception, we have achieved growth and profitability. Our revenue increased from $224,758,556 during the fiscal year ended March 31, 2021 to $234,752,580 during the fiscal year ended March 31, 2022, representing a slight increase of 4.4%. However, due to the negative impact of the resurgence of COVID-19 in 2022 on our revenue and an increase in our operating expenses, our revenue decreased to $169,724,346 during the fiscal year ended March 31, 2023, representing a decrease of 27.7%. Our revenue increased from $169,724,346 during the fiscal year ended March 31, 2023 to $195,681,315 during the fiscal year ended March 31, 2024, representing an increase of 15.3%. Our net income decreased from $4,952,327 during the fiscal year ended March 31, 2021 to $3,924,148 during the fiscal year ended March 31, 2022, representing a decrease of 20.8%. During the fiscal year ended March 31, 2023, our net income decreased to a net loss of $8,048,822, representing a decrease of 305.1%. During the fiscal year ended March 31, 2024, our net income increased to $6,435,622, representing an increase of 180.0%.
Since our inception, we have financed our operations primarily through bank loans. As of the date of this annual report, we have approximately $53.2 million in short-term borrowings outstanding, with a maturity date in December 2024, and approximately $7.4 million in long-term borrowings outstanding, with maturity dates ranging from June 2024 to August 2026. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We rely substantially on short-term borrowings to fund our operations, and the failure to renew these short-term borrowings or the failure to continue to obtain financing on favorable terms, if at all, may adversely affect our ability to operate our business” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our substantial indebtedness could materially and adversely affect our business, financial condition, results of operations, and cash flows.”
Sales to the China market represent a significant part of our revenue. During the fiscal years ended March 31, 2024, 2023, and 2022, sales to the China market accounted for approximately 61.2%, 51.1%, and 84.2% of our revenue, respectively, mainly due to the increased online sales in China. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Sales to the China market represented approximately61.2%, 51.1%, and 84.2% of our revenue for the fiscal years ended March 31, 2024, 2023, and 2022, respectively, and we expect such sales to continue to represent a significant part of our revenue and any negative impact to our ability to sell our products to customers based in China could materially and adversely affect our results of operations.” As we plan to expand into new markets by opening new stores, including adding additional directly-operated physical stores in Japan, Hong Kong, the U.S., and Canada, and add new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore, Thailand, Malaysia and Taiwan during the next three years, we expect the percentage of sales to the China market to decrease in the future. See “—Our Growth Strategies—Expanding into New Markets by Opening New Stores.”
Our Competitive Strengths
We believe that the following competitive strengths have contributed to our success and differentiated us from our competitors:
Diverse and High-Quality Product Offerings
We have developed a diverse merchandise portfolio, including approximately 40,700 SKUs of beauty products,15,200 SKUs of health products, 44,200 SKUs of sundry products, 150 SKUs of electronic products, 850 SKUs of luxury products, and 50,600 SKUs of other products. In particular, we have rigorously analyzed a large quantity of beauty and health products available for sale in Japan and developed an insightful knowledge and understanding of our customers’ needs and preferences by analyzing historical sales data, seasonality impact, customer feedback, and beauty and fashion trends. We believe our strong product selection and recommendation expertise deliver value, quality, and convenience for our customers and enhance our brand image. In addition, we have also entered into supply agreements with many well-known Japanese brands, including Shiseido, Sato, Kao, and Kosé.
A Multi-Channel Distribution Network
We have built a multi-channel distribution network that consists of (i) directly-operated physical stores, (ii) online stores, and (iii) franchise stores and wholesale customers. Our directly-operated physical stores, online stores, and franchise stores and wholesale customers contributed 7.6%, 5.5%, and 86.9% of our total revenue for the fiscal year ended March 31, 2024, respectively, 7%, 12%, and 81% of our total revenue for the fiscal year ended March 31, 2023, respectively, and 6%, 52%, and 42% of our total revenue for the fiscal year ended March 31, 2022, respectively.
We operate our five physical stores in Japan, six physical stores in Hong Kong, four physical stores in the U.S., and one physical store in Canada directly, staffed by our employees rather than franchisees, which we believe is critical in building a strong brand name and offering a consistent customer experience across our store network. We have developed uniform standards among various aspects of physical store operations and are able to provide a consistently high-quality level of services in all of our physical stores. Direct operation also enables us to select store locations that meet the consumer traffic requirements, target new neighborhoods, and leverage our existing distribution centers. In addition, the directly-operated physical stores allow us to address local demand for specific products more accurately, to control our corporate overhead expenses, and to provide uniform and high-quality training for our employees.
We extend the reach of our distribution network by operating online stores in Japan, China, and Korea and selling to franchise stores in the U.S., Canada, Hong Kong, and the U.K. and wholesale customers in Japan and overseas. Such geographic diversification helps us explore additional revenue generating opportunities and maintain the stability of our revenue, especially during times when customer volume in our physical stores decreases, such as during the COVID-19 pandemic.
Proven Ability to Expand Rapidly While Maintaining Profitability
We have expanded our distribution channels at a rapid pace in recent years, while maintaining our gross margin. In particular, the number of our directly-operated physical stores increased from seven as of March 31, 2019 to 16 as of the date of this annual report, the number of our franchise stores only decreased slightly from 11 as of March 31, 2019 to seven as of the date of this annual report, and the number of our wholesale customers increased from 28 as of March 31, 2019 to 171 as of the date of this annual report. However, due to the negative impact of the resurgence of COVID-19 in 2022 on our revenue and the increase in our operating expenses, our overall gross margin decreased slightly by 2 percentage points from 19% for the fiscal year ended March 31, 2022 to 17% for the fiscal year ended March 31, 2023. Our overall gross margin decreased by 20.6 percentage points from 17.3% for the fiscal year ended March 31, 2023 to 11.9% for the fiscal year ended March 31, 2024. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results.” Our rapid expansion is supported by our two distribution centers. We believe our distribution centers enable us to provide effective support to our physical stores and online stores, cope with distinct regional factors, such as local regulatory requirements and demographics, and reduce the incremental cost of opening additional distribution centers in cities close to our existing distribution centers. These attributes have allowed us to effectively shorten the amount of time required for us to open new stores and for new stores to become profitable.
An Experienced Management Team
Our management team is comprised of highly-skilled and dedicated professionals who have worked with us for many years or otherwise have wide ranging experience in retail, services, management, business development, and marketing. Our representative director, Mr. Mei Kanayama, has 12 years of experience in retail and wholesale of Japanese beauty and health products.
We have cultivated an experienced and skilled work force, emphasizing collaboration, individual accountability, flexibility, and willingness to deliver high-quality customer service. Our senior management team is able to leverage the capabilities of this broader work force to facilitate our ongoing and long-term relationships that are key to our retail and wholesale businesses. Our combined team offers substantial industry experience and in-depth knowledge of the beauty and health products markets in Japan and China.
Our Strategy
We intend to develop our business and strengthen brand loyalty by implementing the following strategies:
Expanding into New Markets by Opening New Stores
We plan to explore new markets while enhancing our current presence in Japan, China, the U.S., the U.K., and Canada by analyzing features of customer trends in different regions, continuously focusing on improving customer in-store experience, further expanding our distribution network, and exploring new partnership opportunities. In particular, during the next three years, we intend to open 10 additional directly-operated physical stores in Hong Kong, and expect the expenses related to opening these stores to be approximately HKD15 million to HKD20 million ($1.9 million to $2.5 million); and, as our overall strategy is to focus more on the development of overseas franchise and wholesale sales, we also intend to add an aggregate of 15 new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore ,Malaysia, Thailand and Taiwan. We expect the expenses related to adding these franchise stores to be borne by franchisees in each geographic area. We also plan to establish a new distribution center in Malaysia See “—Enhancing Our Technology Platform and Infrastructure” below.
We face financial and logistical challenges associated with our plans for accelerated and geographically expansive growth. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets,” “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—The capacity of our distribution and order fulfillment infrastructure may not be adequate to support our recent growth and expected future growth plans, which could prevent the successful implementation of these plans or cause us to incur costs to expand this infrastructure, which could have a material adverse effect on our business, financial condition, and results of operations,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our management has a limited history managing rapid expansion. If we cannot effectively and efficiently manage our growth strategy, our results of operations or profitability could be materially and adversely affected.”
Expansion into different countries subject us to risks associated with entry and operations in those countries. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be unsuccessful in expanding and operating our business internationally, which could adversely affect our results of operations.”
Developing Our Own Private Label Products
We have been extending our product offerings by collaborating with beauty and other product suppliers to develop our own private label products. The private label products we currently sell include reusable shopping bags, toning lotion, milk lotion, purified water, sneakers, thermosteel flasks, and face masks. We have been exploring the possibility of adding facial masks, facial essences, T-shirts, and other footwear, among others. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our private label products may not appeal to our customers and may compete with our brand partners.”
Improving Customer Experience and Enhance Customer Loyalty
We are dedicated to improving customer experience and enhancing customer loyalty. In our physical stores, we strive to provide high-quality customer service and showcase our high product quality and professional knowledge in beauty and health products, which we believe will foster trust and loyalty among our new and existing customers. In addition, we intend to increase our fulfillment speed, improve the packaging of our products, and offer more customized services, including enhanced product recommendations, to our online store customers. We also intend to continue using social media platforms to engage with our customers and to receive real-time feedback on our product and services. We plan to refine our online store shopping experience by further integrating our online stores with social media platforms, such as Facebook and Instagram, and adopting new marketing methods, including livestreaming e-commerce, which is broadcasting of live video in real time via the internet to promote and sell goods, and influencer marketing, which is a form of social media marketing involving endorsements and product placement from influencers. See “—Marketing” for the timing and estimated cost for such plan.
Enhancing Our Technology Platform and Infrastructure
We intend to continue to invest in IT and equipment to enhance operational efficiency and reliability, improve customer experience, and reduce costs. Our initiatives include wider use of warehouse management systems and increased use of packaging automation in our distribution centers. We also upgraded and improved the integration of our existing operation and financial systems. In addition, we opened a new distribution center in Hong Kong in 2022 to support and replenish inventory at our physical stores and wholesale customers in Hong Kong. The cost for opening the new distribution center was approximately $0.3 million.
Product Offerings
Product Categories
We offer high-quality and affordable beauty products. We currently have approximately 40,700 SKUs of beauty products available through our distribution channels. The following table illustrates the categories of beauty products we sell:
| Product Category | Product Description | |
| Cosmetics | Foundation, powder, concealer, makeup remover, eye liner, eye shadow, brow powder, brow pencil, mascara, lip gloss, lipstick, and nail polish | |
| Skin care | Facial cleanser, whitening products, sun block, moisturizer, facial mask, eye mask, eye gel, and exfoliating | |
| Cosmetic applicators | Brush, puff, curler, hair iron, and shaver | |
| Fragrance | Perfume and cologne for women and men | |
| Body care | Shampoo, conditioner, and body wash | |
| For men | Facial wash, firming lotion, astringent, and moisturizer | |
| For baby and children | Lip balm, lotion, shampoo, soap, and essence oil |
We supplement our beauty products with health products and we currently have approximately 15,200 SKUs of health products available through our distribution channels. The following table illustrates the categories of health products we sell:
| Product Category | Product Description | |
| OTC drugs | OTC drugs for the treatment of common ailments, such as colds, headaches, stomach pain, cough, and eye strain, among others | |
| Nutritional supplements | Vitamins, minerals, fiber supplements, nutritional yeast, dietary products, and other nutritional supplements | |
| Medical supplies and devices | A variety of general-purpose medical supplies and devices, such as bandages, masks, thermometers, disinfectant sprays, eye masks, contact lens, and contact lens cleaners and solutions |
We also currently have approximately 44,200 SKUs of sundry products available through our distribution channels. The following table illustrates the categories of sundry products we sell:
| Product Category | Product Description | |
| Home goods | Bedding and bath products, home décor, dining and tabletop items, storage containers, car supplies, cleaning agents, and laundry supplies | |
| Miscellaneous | Spa supplies, clothing, formula milk, and diapers |
We also currently have approximately 850 SKUs of luxury products available through our distribution channels. The following table illustrates the categories of luxury products we sell:
| Product Category | Product Description | |
| Branded watches | Branded watches such as Richard Mille and PATEK PHILIPPE | |
| Miscellaneous | Perfume, handbags, clothes and jewelry |
We also currently have approximately 150 SKUs of electronic products available through our distribution channels. The following table illustrates the categories of electronic products we sell:
| Product Category | Product Description | |
| entertainment gaming products | Nintendo Switch and Xbox Series |
We also currently have approximately 50,600 SKUs of other products available through our distribution channels. The following table illustrates the categories of other products we sell:
| Product Category | Product Description | |
| Food | Soft drinks, packaged snacks, tea and coffee, fruit juice, and mineral water | |
| Alcoholic beverages | Whisky, beer, and sake | |
| Miscellaneous | Cigarettes and pet food |
The following tables illustrate our revenue for the fiscal years ended March 31, 2024, 2023, and 2022 by product categories:
| Fiscal Year Ended March 31, 2024 |
Fiscal Year Ended March 31, 2023 |
Fiscal Year Ended March 31, 2022 |
||||||||||||||||||||||
| Product Category | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Beauty products | $ | 50,114,893 | 25.6 | % | $ | 128,781,665 | 75.9 | % | $ | 154,741,555 | 65.9 | % | ||||||||||||
| Health products | 4,931,671 | 2.5 | % | 18,701,204 | 11.0 | % | 19,374,420 | 8.3 | % | |||||||||||||||
| Sundry products | 6,083,770 | 3.1 | % | 11,033,924 | 6.5 | % | 50,513,824 | 21.5 | % | |||||||||||||||
| Luxury products | 90,189,723 | 46.1 | % | |||||||||||||||||||||
| Electronic products | 34,901,681 | 17.9 | % | |||||||||||||||||||||
| Other products | 9,459,577 | 4.8 | % | 11,207,553 | 6.6 | % | 10,122,781 | 4.3 | % | |||||||||||||||
| Total | $ | 195,681,315 | 100.0 | % | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | ||||||||||||
Pricing and Payment of Products
We offer competitive pricing to attract and retain customers. Prices are set either by our suppliers or by us with reference to major online and offline competitors, taking into account our overall pricing strategy for different categories. We constantly monitor the prices of products offered by our competitors. We also occasionally offer significant discounts on certain products for a limited time in flash sales or other promotional activities. We typically evaluate the profitability of our products every three months and make continuous efforts to maintain and improve an efficient cost structure and create incentives for our suppliers to provide us with competitive prices.
We provide customers with flexible payment options, including in-person settlement in physical stores with cash, credit cards and debit cards, and Japanese transportation IC cards, bank transfers, online payments with credit cards and debit cards, and payment through third-party mobile payment platforms, such as PayPay, WeChat Payment, and Alipay.
Our Distribution Channels
Our distribution channels consist of (i) our directly-operated physical stores in Japan, Hong Kong, U.S. and Canada, (ii) online stores through our websites and various e-commerce marketplaces in Japan, China, and Korea, (iii) franchise stores in the U.S. and the U.K., and wholesale customers in Japan and other countries including China, the U.S., and Canada. We sell our products in similar manners to our franchise stores and wholesale customers, and we also license certain trademarks, such as “東京生活館” and “REIWATAKIYA,” to be used by these franchise stores.
The following tables illustrate our revenue for the fiscal years ended March 31, 2024, 2023, and 2022 by geographic areas and distribution channels.
| Fiscal Year Ended March 31, 2024 |
Fiscal Year Ended March 31, 2023 |
Fiscal Year Ended March 31, 2022 |
||||||||||||||||||||||
| Geographic Area | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Japan domestic market | $ | 57,381,922 | 29.3 | % | $ | 72,190,276 | 42.5 | % | $ | 22,022,276 | 9.4 | % | ||||||||||||
| China market | 119,818,459 | 61.2 | % | 86,702,023 | 51.1 | % | 197,596,778 | 84.2 | % | |||||||||||||||
| Other overseas markets | 18,480,934 | 9.5 | % | 10,832,047 | 6.4 | % | 15,133,526 | 6.4 | % | |||||||||||||||
| Total | $ | 195,681,315 | 100.0 | % | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | ||||||||||||
| Fiscal Year Ended March 31, 2024 |
Fiscal Year Ended March 31, 2023 |
Fiscal Year Ended March 31, 2022 |
||||||||||||||||||||||
| Distribution Channel | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Directly-operated physical stores | $ | 14,951,952 | 7.6 | % | $ | 11,606,180 | 6.8 | % | $ | 12,965,904 | 5.5 | % | ||||||||||||
| Online stores | 10,705,449 | 5.5 | % | 20,700,011 | 12.2 | % | 122,150,105 | 52.0 | % | |||||||||||||||
| Franchise stores and wholesale customers | 170,023,914 | 86.9 | % | 137,418,155 | 81.0 | % | 99,636,571 | 42.5 | % | |||||||||||||||
| Total | $ | 195,681,315 | 100.0 | % | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | ||||||||||||
Physical Stores
We currently directly operate five physical stores in four cities in Japan, six physical stores in Hong Kong, four physical stores in the U.S., and one physical store in Canada under the names “Tokyo Lifestyle,” “東京生活館,” and “REIWATAKIYA.” We choose to directly operate these physical stores because it allows us to exercise greater control over product quality, front-end sales, customer service quality, and overall shopping environment. This model also makes it easier to initiate transparent communication between our central management team and employees at our stores and to more efficiently manage our entire business operation.
The following table summarizes the information on our directly-operated physical stores as of the date of this annual report:
| Store Name | City | Size (Square Feet) | Opened | |||||
| 1 | Quiz Gate Urawa Store | Saitama | 4,702 | August 31, 2018 | ||||
| 2 | Koshigaya Ryutsu Danchi Store | Koshigaya | 1732 | October 1, 2021 | ||||
| 3 | Yokohama Chinatown Store | Yokohama | 2,085 | November 11, 2015 | ||||
| 4 | Shinbashi Store | Tokyo | 3,756 | June 28, 2019 | ||||
| 5 | Nishi Kawaguchi Store | Koshigaya | 4,226 | January 18, 2023 | ||||
| 6 | Lohas Park Store | Hong Kong | 815 | September 30, 2021 | ||||
| 7 | Telford Plaza Store | Hong Kong | 909 | November 10, 2021 | ||||
| 8 | Nina Mall Store | Hong Kong | 1163 | August 30, 2022 | ||||
| 9 | Citylink Plaza Store | Hong Kong | 688 | October 20, 2022 | ||||
| 10 | Facesss Store | Hong Kong | 809 | January 19, 2023 | ||||
| 11 | The Wai Store | Hong Kong | 2081 | July 22, 2023 | ||||
| 12 | Toronto 1 Store | Ontario | 636 | December 1, 2023 | ||||
| 13 | REIWATAKIYA BOS 2 Store | Massachusetts | 2000 | December 9, 2023 | ||||
| 14 | REIWATAKIYA LV 1 Store | Las Vegas | 2113 | September 1, 2023 | ||||
| 15 | REIWATAKIYA NYC1 Store | New York | 3000 | April 24, 2024 | ||||
| 16 | REIWATAKIYA BOS 1 Store | Massachusetts | 2185 | April 24, 2024 |
We employ a rigorous analytical process to identify new store locations, whereby we usually look for retail space on the first floor of street locations near busy commercial districts or popular tourist attractions, and evaluate locations based on market characteristics, demographic characteristics, including income and education levels, the presence of key anchor stores and co-tenants, population density, convenience for parking and other means of transportation, and the overall surrounding environment, among other factors. Before entering into a lease agreement, our management team conducts comprehensive research on rents paid near the selected location and identifies factors that may influence the rent amount. We also actively monitor and manage the performance of our stores and seek to incorporate information learned through the monitoring process into our future site selection decisions.
Each physical store is typically staffed with a general manager, who usually oversees multiple stores, two full-time employees, and eight independent contractors. The general manager oversees all store activities, including inventory management, merchandising, cash management, scheduling, hiring, and customer services. The full-time employees assist the general manager with store activities and the independent contractors are responsible for daily activities of the store, such as greeting customers, answering questions, offering assistance, suggesting items, lending opinions, providing product information, and cleaning. General managers and full-time employees receive bonuses depending on their position and performance. Each general manager reports to our director of store management, who in turn reports to our corporate officer who reports to our representative director, Mr. Mei Kanayama.
Our physical stores are typically open for eight to 14 hours a day, seven days a week. Some of our stores have extended hours during the New Year season.
Online Stores
We sell our products through 11 domestic online stores on our websites and on various e-commerce marketplaces, including Rakuten, Yahoo! Japan, Amazon Japan, and Wowma! in Japan.
The domestic online stores are directly operated by our employees and independent contractors. For the overseas online stores, from April 2022 to August 2022, we hired third-party e-commerce marketplace operators to operate the overseas online stores and improve our online interaction with overseas customers and the efficiency of our overseas customers’ online ordering process, and paid these third-party e-commerce marketplace operators transaction commissions ranging from 1.8% to 3% based on our sales amount. In August 2022, to reduce our operating expenses and credit risk, we outsourced the entire operations of our overseas online stores to third-party e-commerce marketplace operators and transited from selling products to individual overseas online customers to selling products to the third-party e-commerce marketplace operators, who therefore became our EC Wholesale Customers and were authorized to continue operating the overseas online stores on our behalf. We have since then ceased paying the transaction commissions, and entered into customary master sales and purchase agreements with the EC Wholesale Customers. For a more detailed discussion of the customary master sales and purchase agreements with our wholesale customers, please refer to “—Franchise Stores and Wholesale Customers—Relationships with Wholesale Customers.” We classify the income generated from the sales to the EC Wholesale Customers as our wholesale customers income, and transfer the payments of individual online customers we received from overseas e-commerce marketplaces to the EC Wholesale Customers.
Integrating convenience, aesthetics, and functionality, our online stores aim to actively drive consumer spending by strategically featuring a carefully selected catalog of popular items. We focus on creating a high-quality online shopping experience for our customers whereby they are aided by detailed product descriptions, thoughtful peer reviews, and multiple angel picture illustrations in making purchase decisions. Our online store interface is fully integrated with our warehouse management system, enabling us to track order and delivery status on a real-time basis.
Our online store design offers several user-friendly features that enhance customer experience and convenience, including:
| ● | Browsing. Home page of our online stores arranges our product offerings into segments, such as best-selling products, cosmetics, skin care, cosmetic applicators, and body care. We provide customers with detailed product information, including product specifications, user guides, photographs, peer reviews, and ratings. |
| ● | Sales Functionalities. We create an enjoyable shopping experience for our customers by allowing them to view the popularity of each product and the number of products left in stock. Our customers can conveniently share their shopping experiences with us on various social media and networking websites through links prominently set out on our webpages. |
| ● | Product Reviews. To help customers make informed purchasing decisions, we devote a large part of our online stores to display recent purchase records for each product to highlight the item’s popularity and encourage previous purchasers to share their feedback. We have established a large and active online review community. As of the date of this annual report, there were an aggregate of approximately 30,200 product reviews or short customer comments on our online stores. We only allow customers who have made purchases to post reviews on the relevant products, and we incentivize customers by offering them rewards, such as rebates and free samples, for posting reviews. We believe these product reviews and functions provide valuable information to our potential and existing customers, create positive customer experience, and as a result, promote repeat visits and purchases. |
| ● | Personalized Services. We offer personalized services to our customers via account management systems of third-party e-commerce marketplace operators by allowing customers to customize their payment and delivery preferences. Customers can link their accounts on our online stores with other popular social networks and payment platforms in Japan, China, and Korea. To facilitate the ease of the checkout process for our repeat customers, the database of third-party e-commerce marketplace operators keeps track of these customers’ preferred delivery address, shipping method, and payment option based on information they previously provided. We allow users to subscribe to future curated sales notices via emails, text messages, and mobile push notifications. We believe all these features improve the shopping experience of our customers and deepen their loyalty. |
We deliver orders placed on our online stores or by our EC Wholesale Customers to all areas in Japan, China, and Korea from our distribution centers or third-party warehouses through reputable third-party delivery companies with nationwide coverage, such as Nippon Express, FedEx, UPS, and EMS China, and regional delivery companies. We leverage our large-scale operations and reputation to obtain favorable contractual terms from third-party delivery companies. To reduce the risk of reliance on any single delivery company and optimize the delivery process, we typically contract with two or more regional delivery companies in each major city. We regularly monitor and review the delivery companies’ performance and their compliance with our contractual terms. Our logistics agreements with third-party delivery companies typically have a term of one year and are automatically renewed for successive one-year terms, unless earlier terminated.
Franchise Stores and Wholesale Customers
As of the date of this annual report, we have two franchise stores in the U.S., two franchise stores in the U.K., and three franchise stores in Japan. The following table summarizes the information on our franchise stores:
| City | Number
of Franchise Stores |
Total
Size (Square Feet) |
Opened | |||
| Houston | 1 | 1,884 | July 2018 | |||
| Seattle | 1 | 1,200 | December 2017 | |||
| London | 2 | 2,044 | May 2021 and October 2023 | |||
| Tokyo | 3 | 5,925 | July 2023,August 2023, and October 2023 |
In addition, as of the date of this annual report, we have approximately 171 wholesale customers in Japan and other countries, including China, the U.S., and Canada.
Franchise Profile and Trademark License Agreements
As of the date of this annual report, we have one franchisee operating two U.S. franchise stores, two franchisees operating two U.K. franchise stores, and three franchisees operating three Japan franchise stores. Our franchise formula enables franchisees to benefit from our brand recognition with a relatively low initial capital investment.
We enter into trademark license agreements with overseas franchisees, under which the overseas franchisee is granted a revocable license and non-exclusive right to use certain of our trademarks, such as “東京生活館” and “REIWATAKIYA,” solely for the purposes of selling, promoting sales of, and performing post-sale and other support relating to the products we sell to the overseas franchisee. In exchange, the overseas franchisee is required to pay a monthly royalty fee of ¥60,000 (approximately $568) per franchise store and to purchase at least 75% of the products sold in their stores (except heavy products, such as purified water) from us. Regarding the remaining 25% of the products sold in their stores, we do not limit the kinds of products that our overseas franchisees may purchase from third parties or the sources of such products. The trademark license agreements have a term of one year and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of the then current term. We also have the right, subject to applicable laws in Japan, to terminate a trademark license agreement for a variety of reasons, including a franchisee’s violation or threatened violation of the agreement, discontinuation of business, or a material change in the shareholding structure of the franchisee, among others.
We do not require our overseas franchisees to pay an initial fee to purchase the franchise, and we do not charge them additional fees for new franchise locations, other than increased royalty fees, which are billed monthly on a per franchise store basis. Our overseas franchise stores are not subject to mandatory requirements contracts and we do not earn commission on sales of products sold by the overseas franchise store. Instead, we enter into customary master sales and purchase agreements, similar to those with our wholesale customers as discussed below, with each of the overseas franchise stores operated by the overseas franchisees. We do not provide financing to our overseas franchisees.
We enter into franchise agreements with domestic franchisees, under which the domestic franchisee is granted a non-exclusive right to use our trademarks, logos, and related symbols, service marks, design signs, and other business-related indications and operate the domestic franchise store at the location specified in the agreement. The domestic franchisee also receives management support from us, including joint procurement and ordering of products. In particular, the domestic franchisee is required to procure products from us, or from the vendors designated by us with our prior approval. In exchange, the domestic franchisee is required to pay a franchisee fee of ¥3,000,000 (approximately $21,582), and a monthly royalty fee equals to 5% of the monthly sales proceeds plus the monthly cost of rent, security cameras, POS register system, and office management services. The franchise agreements have a term of three years and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of the then current term. We also have the right, subject to the terms of the franchise agreements and applicable laws in Japan, to terminate the franchise agreement for a variety of reasons, including a franchisee’s violation or threatened violation of the agreement, discontinuation of business, or a material change in the shareholding structure of the franchisee, among others.
Relationships with Wholesale Customers
We enter into customary master sales and purchase agreements with our wholesale customers with respect to the products we sell to them providing for the terms of our relationship, such as delivery and purchase of goods, terms and conditions of payment, acceptance inspection, complaint handling, and disputes with third parties, among other things. These agreements typically have a term of one year and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of such agreement. During the term of the master sales and purchase agreement, we send purchase orders to the wholesale customer for each sale and purchase to specify the terms of each order, such as product names, unit prices, quantities, and delivery dates, among other things.
Key Opinion Leaders Advertising Services
Since June 2021, our wholly-owned subsidiary, Qingzhiliangpin, has provided online advertising solutions endorsing products or services in China for merchants (“Merchant Customers”) through a platform partner (the “Platform Partner”), Wuhan Juliangxingtu Technology Limited, and a key opinion leader (“KOL”) employee, who is a prominent social media influencer. Qingzhiliangpin enters into a platform service agreement (the “Platform Service Agreement”) with the Platform Partner to obtain an account (the “Account”) and access to the advertisement order platform operated by the Platform Partner (the “Platform”). The Platform Service Agreement has no specified end date and will continue to be valid unless and until the Platform Partner terminates the Platform Service Agreement by giving Qingzhiliangpin a written notice 15 days in advance. Through the Platform, Qingzhiliangpin receives advertisement orders from Merchant Customers with details of their advertising needs and requirements. Qingzhiliangpin determines with the Merchant Customers customary commission fees on an order-by-order basis prior to accepting the orders. After the orders are accepted, the KOL employee produces and posts online short video advertisements on Chinese short video platforms, such as TikTok and Kuaishou, according to the requirements of the Merchant Customers. After reviewing the work products and confirming acceptance with the Platform Partner, the Merchant Customers issue the commission fees to the Platform Partner, who settles the Account with Qingzhiliangpin every month and issues the commission fees to the bank account designated by Qingzhiliangpin after deducting certain service fees at a ratio that is determined in the Platform Service Agreement and is subject to updates through notices by the Platform Partner. As of the date of this annual report, Qingzhiliangpin has served 28 Merchant Customers and employed one KOL. The revenue generated from the KOL advertising services was $2,039,346, $1,889,367, and $985,758, representing 1.0%, 1.1%, and 0.4% of our total revenue during the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
Customers and Customer Service
Since our directly-operated physical stores in Japan are mostly located in commercial districts and tourist areas which foreigners who live in Japan and tourists often visit, the majority of the customers of our physical stores in Japan are foreigners who live in Japan and tourists who visit Japan and are between the ages of 30 to 50 years old. Our directly-operated physical stores in Hong Kong are mostly located in commercial districts and tourist areas and the majority of the customers of our physical stores in Hong Kong are residents and tourists and are between the ages of 30 to 50 years old. The majority of the customers of our online stores are between the ages of 18 to 45 years old. We periodically conduct qualitative customer surveys, helping us build a stronger understanding of our market position and our customers’ purchasing habits. For details about our wholesale customers, see “—Our Distribution Channels—Franchise Stores and Wholesale Customers—Relationships with Wholesale Customers.”
We believe our emphasis on customer service enhances our brand image and customer loyalty. As of March 31, 2024, our directly-operated physical stores had approximately 35 full-time employees and independent contractors, who also serve as customer service representatives and are required to complete mandatory training conducted by experienced managers on product knowledge, complaint handling, and communication skills before they are allowed to begin working at our stores. As of August 2022, the third-party e-commerce marketplace operators of our overseas online stores used approximately 12 customer service representatives. After outsourcing our overseas online stores operations in August 2022, the third-party e-commerce marketplace operators, who became our EC Wholesale Customers, continued to use customer service representatives for our overseas online stores. For details about outsourcing operations of our overseas online stores, see “—Our Distribution Channels—Online Stores.” Customers can access these online representatives 24 hours a day, seven days a week. The third-party e-commerce marketplace operators train these customer service representatives to answer customer inquiries and proactively educate potential customers about our products and promptly resolve customer complaints.
We generally offer a seven-day product return policy, as long as the products are undamaged, in their original condition, and can be resold. Products sold in our physical stores may be returned in store with receipt. For products sold in our online stores, customers must submit a return application request online, and the customer service representatives then review and process the return request or contact the customer by e-mail or by phone if there are questions relating to the request before it can be processed. Upon receipt of the returned product, the customer’s payment account will be credited with the purchase price. We believe our hassle-free return policies help build customer trust and increase customer loyalty.
Marketing
Our marketing and promotion strategy is to build brand recognition, attract new customers, increase customer traffic to our physical and online stores, build strong customer loyalty, maximize repeat customer visits, and develop incremental revenue opportunities.
Our marketing department designs the marketing efforts for our directly-operated physical stores, third-party e-commerce marketplace operators design promotions for our online stores, and our franchise stores design regional promotions based on local demographics and market conditions. Our store managers and staff are also encouraged to propose their own advertising and promotion plans, including holiday promotions, posters, and billboards. In addition, we offer special discounts and gift promotions for selected merchandise periodically in conjunction with our suppliers’ marketing programs.
Many of our promotion programs are designed to encourage cosmetics and pharmaceutical companies to invest resources to market their brands within our stores. For instance, some cosmetics and pharmaceutical companies provide point-of-purchase displays, which are marketing materials to be placed on top of or alongside the promoted merchandise in our physical stores to promote their products, and free product samples during promotional events. We believe that these promotions improve our customers’ shopping experience because cosmetics and pharmaceutical companies provide purchasing incentives and information to help customers make informed purchase decisions. We work to maintain strong inventory positions for merchandise featured in our promotions, as we believe this increases the effectiveness of our spending on promotion activities.
As part of our marketing campaign, customers in our directly-operated physical stores in Japan and Hong Kong and our franchise stores in the U.S. can enroll in our rewards program, which is primarily a spend-based loyalty program, and get a rewards card. In Japan, members of our rewards program earn one membership point for each ¥100 spent in our directly-operated physical stores and subsequently each membership point can be used as ¥1 at our directly-operated physical stores when making payments; in Hong Kong, members of our rewards program earn one membership point for each HKD spent in our directly-operated physical stores and subsequently each 250 membership points can be used as HKD1 at our directly-operated physical stores when making payments; the membership points are valid for one year starting from the last use of the rewards card. In the U.S., members of our rewards program earn one membership point for each one U.S. dollar spent in our franchise stores, and subsequently these membership points can be redeemed for different products at our franchise stores; the membership points do not expire. Certain discount pricing is only available to members of our rewards program. After a customer enrolls in our rewards program, we communicate via the customer’s preferred method: e-mail, traditional mail, or text messages. As of March 31, 2024, 2023, and 2022, approximately 523,628, 477,844, and 387,700 customers had enrolled in our rewards program, respectively. We intend to further extend this program to enhance customer acquisition and retention.
Our physical stores periodically hand out flyers and leaflets and use direct mail advertising to promote our brand and the products carried in our stores. Our online stores on third-party websites participate in shopping events on those websites, such as Rakuten Super Sale and Singles’ Day and Double 12 on Tmall Global. In addition, we enhance publicity of our products and the effectiveness of our other marketing strategies by advertising on outdoor billboards in busy commercial districts, popular tourist attractions, and airports, newspapers, magazines, and social media platforms, such as Instagram, Twitter, TikTok, and WeChat.
We are developing a mobile shopping app named “TOKYOLIFESTYLE” (the “App”) on the App Store and Google Play. As of the date of this annual report, the APP is in the process of internal testing. Featuring wide product availability, customized product recommendations, and convenient shopping experiences, the App is designed to become one of the leading global retail e-commerce platforms, by offering users a distinctive Japanese shopping experience. We plan to expand our business overseas by providing both online live sales promotions and physical store shopping experiences. We estimate the cost associated with developing the App and related logistics facilities to be approximately $8 million to $10 million.
Suppliers
We have an extensive network of suppliers, consisting primarily of cosmetics and pharmaceutical companies and distributors. During the fiscal year ended March 31, 2024, we directly sourced from 113 cosmetics companies and distributors and 11 pharmaceutical companies and distributors. During the fiscal year ended March 31, 2023, we directly sourced from 83 cosmetics companies and distributors and nine pharmaceutical companies and distributors. During the fiscal year ended March 31, 2022, we directly sourced from 83 cosmetics companies and distributors and eight pharmaceutical companies and distributors. For the fiscal year ended March 31, 2024, three suppliers accounted for approximately 22.5%, 21.2%, and 5.9% of our purchases in terms of monetary value, respectively. For the fiscal year ended March 31, 2023, three suppliers accounted for approximately 18.2%, 16.3%, and 12.0% of our purchases in terms of monetary value, respectively. For the fiscal year ended March 31, 2022, three suppliers accounted for approximately 30.1%, 19.7%, and 17.9% of our purchases in terms of monetary value, respectively.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We rely on our relationships with suppliers to purchase high-quality beauty and health products on reasonable terms. If these relationships were to be impaired, or if certain suppliers were unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in beauty products or health products, either of which could have a material adverse effect on our competitive position, our business, and financial performance.”
Supplier and Product Selection
When choosing suppliers, we take into consideration, among other things, whether their products complement our overall product offering, the quality and prices of their products, market reputation, production and/or distribution capacity, the market potential of their products, and the availability of supplier rebates. Before we engage with any new supplier, we also examine their qualifications and licenses to verify that they operate their businesses in compliance with applicable laws, rules, and regulations.
Our merchandising team members possess insightful knowledge and understanding of existing and potential customers’ needs and preferences. Before selecting each product, we consider and analyze historical sales data, beauty and fashion trends, seasonality, and customer feedback to project how many items of a particular product we should offer in our physical stores and online stores.
Our Relationship with Cosmetics and Pharmaceutical Companies and Key Suppliers
We work closely with our top suppliers, especially cosmetics and pharmaceutical companies, to strengthen our relationships with them. We constantly communicate with our suppliers to keep them informed of any changes to the inventory levels of their products in order for them to timely respond to our sales demands. Before hosting a major sales event, we provide advance notice to our suppliers so that they can prepare ample stock to meet potential surge in demand and increased purchases.
For the same product, the price from a cosmetics or pharmaceutical company is generally 5% to 8% lower than that from a distributor. Cosmetics and pharmaceutical companies in Japan typically do not limit the number of distributors that may directly source from them or impose requirements, such as those for volume or geographic areas, on these distributors. As a result, we aim to directly source from major cosmetics and pharmaceutical companies so as to get lower prices. We also seek to cooperate with other distributors who directly source from cosmetics and pharmaceutical companies that do not have an established relationship with us. We believe our cooperation with these distributors allows us to expand our product offerings and procure products manufactured by cosmetics and pharmaceutical companies without an established relationship with us.
We generally enter into supply agreements with suppliers which lay out the general terms of our relationship, such as order of goods, delivery and acceptance, processing of returns, terms and conditions of payments, and handling of confidential information, among other things. These supply agreements typically have a term of one year and automatically renew for successive one-year terms unless either party sends written notice of non-renewal no later than two or three months prior to the expiration of the then-current term of such agreement.
Distribution
Our directly-operated physical stores, online stores, and sales to our franchise stores and wholesale customers are supported by our two distribution centers. The following table summarizes the information on our distribution centers as of the date of this annual report:
| City | Total
Size (Square Feet) |
Opened | ||
| Tokyo | 26,900 | September 2021 | ||
| Hong Kong | 2,790 | October 2022 |
Our suppliers deliver merchandise either directly to our physical stores or to our distribution centers, depending on demand from each distribution center or physical store, before we deliver them to our physical stores, customers of our online stores, and wholesale customers using our own vehicles and third-party logistics companies. At each distribution center, we maintain a small fleet of trucks to deliver to our physical stores and we typically replenish merchandise for each of our physical stores once every five days. For details about distribution for our online stores, see “—Our Distribution Channels—Online Stores.”
Our franchise stores have access to substantially the same types of merchandise as offered in our directly-operated physical stores in Japan, and each franchise store places its orders to us based on factors it determines, such as demand of consumers, popularity of merchandise, and seasonal trends. We typically wait until we have a sufficient amount of such orders to fill a shipping container before shipping merchandise from our distribution centers to our franchise stores through third-party logistics companies. In the event that a franchise store has an urgent need to replenish certain merchandise, we can also ship merchandise from our distribution centers to the franchise store through express delivery services provided by third-party logistics companies.
Warehouse Management System and Inventory Control
The operations of our Tokyo and Hong Kong distribution centers, including inventory management and deliveries, are integrated and coordinated using the warehouse management systems of Logizard ZERO, a cloud-based warehouse management system service providers in Japan, and of Eastop ERP, a cloud-based warehouse management system service providers in Hong Kong. The systems enable us to closely monitor each step of the fulfillment process of our online stores from the time a purchase order is confirmed and the product stocked in our distribution centers, up to when the product is packaged and picked up for delivery by third-party logistics companies for delivery to a customer. At each distribution center, inventory is bar-coded and tracked through our warehouse management system, allowing real-time monitoring of inventory level and item tracking in our distribution center. When preparing items for shipping, we repackage different types of products ordered by the same customer to our standardized boxes for optimized storage and sourcing in our distribution centers.
We manage our inventory carefully in order to minimize inventory holding costs, ensure timely delivery of merchandise, and maintain the variety of merchandise available in our stores. We hire a third-party inventory services provider to perform quarterly inventory counts in our directly-operated physical stores and distribution centers, and randomly pick 10 products to double-check the count results. We require our store and distribution center managers to follow up on any inventory discrepancies discovered during each inventory count and report the results to the management.
Cash Control
Approximately 30% of the sales in our physical stores in Japan are made in cash, and we have adopted strict cash control procedures in all of our stores in Japan. In particular, the details of each sales event are recorded in our integrated information management system, and the cash generated at our stores in Japan is collected and deposited every two to three days in designated bank accounts, which are controlled by our headquarters. After the cash is deposited, our financial department also carries out a reconciliation of sales data collected on our information management system with cash receipts as confirmed by the banks. The cash needs of each physical store are dispatched centrally two to three times a month based on budgeted amounts. Approximately 15% to 25% of the sales in our physical stores in Hong Kong are made in cash. We check and make an inventory of the cash generated at our stores in Hong Kong daily before we seal and date the cash. The cash generated at our Hong Kong stores is collected and deposited every two weeks in designated bank accounts controlled by our Hong Kong subsidiary. Approximately 20% to 25% of the sales in our physical stores in the U.S. and Canada are made in cash. We check and make an inventory of the cash generated at our stores in the U.S. and Canada daily before we seal and date the cash. The cash generated at the U.S. and Canada stores is collected and deposited every week in designated bank accounts controlled by the local subsidiaries.
Quality Control
We place strong emphasis on quality control for both merchandise sourcing and in-store services. Our quality control starts with procurement. In particular, we have screened cosmetics and pharmaceutical companies in Japan and selected a core set of companies as our suppliers after reviewing product selection and quality, manufacturing, packaging, transportation, storage capabilities, and cost competitiveness.
We conduct random quality inspections of each batch of products we procure. We replace our suppliers if they consistently fail to pass our quality inspections. Since there is a significant manufacturing capability surplus within the Japanese beauty and health products industry, it is possible for us to change suppliers without a material interruption to our business. We regularly dispatch quality inspectors to our stores to monitor the service quality of our staff. We consider the feedback received during these inspections when determining the bonus portion of our store employee’s salaries.
Competition
The beauty and health products markets in Japan, China, Canada, the U.K., and the U.S. are fragmented and highly competitive. We primarily compete against other offline and online retailers and wholesalers of beauty and health products, but also increasingly face competition from retail pharmacies, discount stores, convenience stores, and supermarkets as we increase our offering of sundry products and other products. We believe we are well-positioned to effectively compete on the basis of price, quality of products, in-store presence, customer service, and e-commerce initiatives. However, some of our current or future competitors may have longer operating histories, greater brand recognition, or greater financial, technical, or marketing resources than we do. For a discussion of risks relating to competition, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We operate in a highly-competitive market and our failure to compete effectively could adversely affect our results of operations.”
Employees
We had 140, 135, and 124 full-time employees as of March 31, 2024, 2023, and 2022, respectively. The following table sets forth the number of our full-time employees categorized by areas of operations as of March 31, 2024:
| Function: | Number | |||
| Management | 52 | |||
| Store | 35 | |||
| Sales | 49 | |||
| Total | 134 | |||
We enter into employment agreements with our full-time employees. The employment agreements have an indefinite term and may be terminated by the employee with a 30-day advance notice. Dismissal of the employee by us is required to meet the following requirements: (i) the dismissal is objectively reasonable and socially acceptable; (ii) the dismissal is based on the grounds set forth in the labor regulations; (iii) the dismissal does not fall under any of the prohibited grounds stipulated by law; and (iv) a 30-day advance notice is given, or a dismissal allowance is paid in lieu of such notice. In addition, we enter into confidentiality and non-compete agreements with our key employees before they leave our Company.
In addition to our full-time employees, we had 99, 112, and 102 independent contractors as of March 31, 2024, 2023, and 2022, respectively. These independent contractors are primarily responsible for customer services and assisting our full-time employees.
We believe that we maintain a good working relationship with our employees and independent contractors, and we have not experienced material labor disputes in the past. None of our employees are represented by labor unions.
Facilities
We own our headquarters location in Tokyo and we lease an aggregate of approximately 13,778 square feet of physical store, franchise stores, office, and residence space in Tokyo. We also own premises in Koshigaya on which we are operating a distribution center of approximately 26,900 square feet, lease an aggregate of approximately 12,000 square feet of physical and franchise store space in Koshigaya, Saitama, Yokohama, and three parking lots in Koshigaya, Saitama, and Tokyo, lease an aggregate of approximately 9255 square feet of physical store and warehouse space in Hong Kong, lease an aggregate of approximately 636 square feet of the physical store in Canada, and lease an aggregate of approximately 7113 square feet of physical stores in the U.S.. A summary of our leased properties as of the date of this annual report is shown below:
| Location | Space (in square feet, excluding parking lots) |
Use | Lease Term (years) |
|||||||
| Tokyo | 13778 | One physical store, three franchise stores, offices, residence, and one parking lot | 1 to 15 | |||||||
| Koshigaya | 5213 | Two Physical stores and one parking lot | 3 | |||||||
| Saitama | 4,702 | Physical store and parking lot | 5 | |||||||
| Yokohama | 2,085 | Physical store | 10 | |||||||
| Hong Kong | 9,255 | Six physical stores and warehouse | 1 to 3 | |||||||
| Ontario | 636 | Physical store | 5 | |||||||
| Massachusetts | 2000 | Physical store | 5 | |||||||
| Las Vegas | 2113 | Physical store | 3 | |||||||
| New York | 3000 | Physical store | 5 | |||||||
We lease these premises from independent third parties, except as discussed below, under operating lease agreements, which are typically renewable every one to three years.
We have been leasing approximately 2,696 square feet of office space and a parking lot in Tokyo pursuant to a lease agreement we entered into on June 25, 2021 with Seihinkokusai Co., Ltd. (“Seihinkokusai”), an entity of which Mr. Kanayama’s wife is a director and the representative director. The monthly rent is ¥0 for the first eight months and ¥1,422,000 (approximately $13,415) afterwards, and we also paid ¥14 million (approximately $126,476) as a rental security deposit. The lease period is from August 1, 2021 to July 31, 2024 and may be renewed unless Seihinkokusai notifies us in writing of the termination of the lease for legitimate reasons between six months and one year prior to the expiration of the lease. The lease agreement was terminated in February 2024.
We have been leasing approximately 7,062 square feet of franchise store space in Hakuba pursuant to a lease agreement we entered into on March 22, 2021 with Seihinkokusai. The monthly rent is ¥0 for the first three months and ¥1,000,000 (approximately $9,434) afterwards, and we also paid ¥10 million (approximately $75,190) as a rental security deposit. The lease period is from April 1, 2021 to April 30, 2024. The lease terminated upon expiration of the lease period.
We believe that our existing facilities are sufficient for our near-term needs.
Intellectual Property
We regard our trademarks, service marks, domain names, trade secrets, and similar intellectual property as critical to our success. We rely on a combination of copyright and trademark law, and confidentiality agreements with employees to protect our intellectual property rights. We also regularly monitor any infringement or misappropriation of our intellectual property rights.
As March 31, 2024, we owned 19 trademarks in Japan:
| No. | Trademark | Type
of Mark |
List
of Goods and Services |
Registration Number |
Registration
Date |
Expiration Date |
||||||
| 1 | 晴の良品 | Word | Class 5, 10, 20, 24, 25, and 28 | 5804614 | November 6, 2015 | November 6, 2025 | ||||||
| 2 |  |
Logo | Class 5, 10, 20, 24, 25, and 28 | 5804613 | November 6, 2015 | November 6, 2025 | ||||||
| 3 | 東京生活館 | Word | Class 3, 5, and 44 | 5855378 | June 3, 2016 | June 3, 2026 | ||||||
| 4 |  |
Logo | Class 3, 5, and 44 | 5855379 | June 3, 2016 | June 3, 2026 | ||||||
| 5 | 東京生活館 | Word | Class 35 | 5865658 | July 8, 2016 | July 8, 2026 | ||||||
| 6 |  |
Logo | Class 35 | 5868655 | July 22, 2016 | July 22, 2026 | ||||||
| 7 |  |
Logo | Class 3, 10, 21, and 35 | 5880029 | September 9, 2016 | September 9, 2026 | ||||||
| 8 |  |
Logo | Class 3, 10, 21, and 35 | 5880030 | September 9, 2016 | September 9, 2026 | ||||||
| 9 |  |
Logo | Class 3, 10, 21, and 35 | 5880058 | September 9, 2016 | September 9, 2026 |
| No. | Trademark | Type
of Mark |
List
of Goods and Services |
Registration Number |
Registration
Date |
Expiration Date |
||||||
| 10 |  |
Logo | Class 35 and 44 | 6044473 | May 18, 2018 | May 18, 2028 | ||||||
| 11 |  |
Logo | Class 3 and 35 | 6068378 | August 3, 2018 | August 3, 2028 | ||||||
| 12 |  |
Logo | Class 3 and 35 | 6099304 | November 16, 2018 | November 16, 2028 | ||||||
| 13 | TOKYO PLUS | Word | Class 35 | 6183713 | September 27, 2019 | September 27, 2029 | ||||||
| 14 | JLENSES | Word | Class 35 | 6183714 | September 27, 2019 | September 27, 2029 | ||||||
| 15 | 令和多喜屋 | Word | Class 3, 5, 35, and 44 | 6325574 | December 7, 2020 | December 7, 2030 | ||||||
| 16 | Tokyo beauty house | Word | Class 3, 5, 35, and 44 | 6247380 | April 22, 2020 | April 22, 2030 | ||||||
| 17 | Tokyo life house | Word | Class 3, 5, 35, and 44 | 6247381 | April 22, 2020 | April 22, 2030 | ||||||
| 18 |  |
Word | Class 3, 5, 35, and 44 | 6264856 | July 1, 2020 | July 1, 2030 | ||||||
| 19 |  |
Word | Class 3, 5, 35, and 44 | 6270405 | July 16, 2020 | July 16, 2030 |
In addition, as of March 31, 2024, we had registered four domain names relating to our business, namely ystbek.co.jp, qingzhiliangpin.com, tokyoplus.jp, and jlenses.com, in Japan.
As of March 31, 2024, we also had 12 pending trademark registration; we also owned the following 19 trademarks in other countries and regions:
| No. | Trademark | Country/Region | Type
of Mark |
List
of Goods and Services |
Registration Number |
Registration Date |
Expiration Date |
|||||||
| 1 |  |
China | Word | Class 35 | 41941705 | July 28, 2020 | July 27, 2030 | |||||||
| 2 |  |
Hong Kong | Logo | Class 35 | 304969081 | Jun 21, 2019 | June 20, 2029 | |||||||
| 3 |  |
Hong Kong | Word | Class 35 | 305097844 | October 30, 2019 | October 29, 2029 | |||||||
| 4 |  |
Hong Kong | Word | Class 3 | 302845495 | December 20, 2013 | December 19, 2033 | |||||||
| 5 |  |
Hong Kong | Word | Class 3, 5, 35, and 44 | 304300073 | April 24, 2018 | October 11, 2027 | |||||||
| 6 |  |
Hong Kong | Logo | Class 35 and 44 | 304300064 | March 19, 2018 | October 11, 2027 |
| 7 |  |
Hong Kong | Logo | Class 35 | 304483044 | April 4, 2018 | April 3, 2028 | |||||||
| 8 |  |
Hong Kong | Logo | Class 35 | 304715703 | October 29, 2018 | October 28, 2028 | |||||||
| 9 |  |
Hong Kong | Logo | Class 35 | 304719060 | October 31, 2018 | October 30, 2028 | |||||||
| 10 |  |
Macao | Word | Class 35 | N/161717 | April 27, 2020 | April 27, 2027 | |||||||
| 11 |  |
Macao | Word | Class 5 | N/135119 | September 10, 2018 | September 10, 2025 | |||||||
| 12 |  |
Macao | Word | Class 44 | N/135121 | September 10, 2018 | September 10, 2025 | |||||||
| 13 |  |
U.S. | Word | Class 35 | 87713467 | March 12, 2019 | March 11, 2029 | |||||||
| 14 |  |
U.S. | Logo | Class 35 | 87713490 | September 10, 2019 | September 9, 2029 | |||||||
| 15 |  |
U.S. | Word | Class 35 | 88675151 | December 29, 2020 | December 28, 2030 | |||||||
| 16 |  |
Canada | Logo | Class 35 and 44 | TMA1070977 | January 18, 2020 | January 18, 2030 | |||||||
| 17 |  |
Canada | Word | Class 35 and 44 | TMA1087885 | January 28, 2020 | January 28, 2030 | |||||||
| 18 |  |
Australia | Word | Class 35 | 2047385 | June 10, 2020 | October 30, 2029 | |||||||
| 19 |  |
United Kingdom | Word | Class 35 | UK00003441105 | January 24, 2020 | November 1, 2029 |
Insurance
We maintain directors and officers liability insurance for our directors and senior management and group comprehensive life insurance for our directors, senior management, and full-time employees. We do not maintain other property insurance, business interruption insurance, or general third-party liability insurance. We believe the insurance coverage we maintain is in line with the industry. For risk factors relating to our insurance policies, please see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We may be subject to product liability claims if our customers are harmed by the products sold through our distribution channels.”
Seasonality
We experience seasonality in our business, mainly reflecting the impact of online promotional events held by e-commerce companies. For instances, Rakuten holds special promotional events in March, June, and September each year and e-commerce companies in China hold special promotional campaigns on June 18, November 11, and December 12 each year, which tend to increase revenue in the respective quarter relative to other quarters.
Legal Proceedings
From time to time, we may become a party to various legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to intellectual property infringement, violation of third-party licenses or other rights, breach of contract, and labor and employment claims. We are currently not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the opinion of our management, are likely to have any material and adverse effect on our business, financial condition, cash flow, or results of operations.
Regulations
We are subject to a number of Japanese laws and regulations that affect retailers, wholesalers, or online sellers of beauty and health products in Japan. These may involve product quality and customer protection, maintenance of websites and e-commerce, labor laws, shipping of goods, environment, food and beverage product sales, advertising, lease agreements, protection of personal information, securing of safety of pharmaceuticals and medical devices, liquor tax, secondhand dealers, and consumption tax. Because we also sell our products to individual and wholesale customers in other countries, including China, the U.S., the U.K., and Canada, certain jurisdictions may claim that we are required to comply with their laws, including even jurisdictions where we have no local entity, employees, or infrastructure.
Regulations regarding Product Quality and Customer Protection
We are subject to laws and regulations, as well as pending legislative and regulatory proposals, regarding product quality and customer protection, which could affect us in jurisdictions in which we sell our products.
In Japan, the Product Liability Act (Act No.85 of July 1, 1994, as amended) and Consumer Contract Act (Act No. 61 of May 12, 2000, as amended) mainly regulate the product quality and customer protection. The Product Liability Act sets forth the liabilities of a manufacturer, processor, or importer for damages caused by defects in a product. A seller who was not involved in the manufacturing, processing, or import of a product could still be liable under this act if its name, trade name, or trademark, etc. was indicated on the product as the manufacturer, processor, or importer, such indications on the product might mislead others into believing that the seller was the manufacturer, processor, or importer, or such indications on the product might be recognized by others as those of the substantial manufacturer, processor, or importer. Liability under this act can be imposed even if the manufacturer, processor, or importer (and the said seller) was not negligent. The Consumer Contract Act invalidates certain provisions in contracts with consumers, such as exemption of compensation for damages to consumers and restrictions of termination by consumers due to the seller’s breach of contract. We comply with these regulations.
In the U.S., we are subject to regulation by the Consumer Product Safety Commission (the “CPSC”) under the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008. These statutes and the related regulations ban from the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The CPSC has the authority to require the recall, repair, replacement, or refund of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances.
In Hong Kong, we are subject to the Sale of Goods Ordinance (Cap. 26), the Consumer Goods Safety Ordinance (Cap. 456), and the Import and Export Ordinance (Cap. 60). These statutes regulate the import and sale of consumer goods in Hong Kong, including the quality, safety, and suitability of products sold under a contract of sale. We comply with these regulations.
Regulations regarding Maintenance of Websites and E-commerce
The Act on Special Provisions to the Civil Code Concerning Electronic Consumer Contracts and Electronic Acceptance Notice (Act No. 95 of June 29, 2001, as amended) and the Act on Specified Commercial Transactions (Act No. 57 of June 4, 1976, as amended) regulate sales of goods through e-commerce within Japan. For example, under these acts, we as a seller must explicitly show prices of products, timing and method of payment, timing of delivery, conditions for return of goods, our name and contact information, and name of representative person, among others. We comply with these regulations.
Labor Laws
There are various labor-related laws in Japan, including the Labor Standards Act (Act No. 49 of April 7, 1947, as amended), the Industrial Safety and Health Act (Act No. 57 of June 8, 1972, as amended), and the Labor Contracts Act (Act No. 128 of December 5, 2007). The Labor Standards Act regulates, among others, minimum standards for working conditions such as working hours, leave period, and leave days. The Industrial Safety and Health Act requires, among others, the implementation of measures to secure employee safety and protect the health of workers in the workplace. The Labor Contracts Act regulates, among others, the change of terms of employment contracts and working rules, and dismissal and disciplinary action. We comply with these regulations.
In Hong Kong, we are subject to labor-related laws such as the Employment Ordinance (Cap. 57), the Employees’ Compensation Ordinance (Cap. 282), the Mandatory Provident Schemes Ordinance (Cap. 485), and the Occupational Safety and Health Ordinance (Cap. 509). These statutes regulate the terms of employment in Hong Kong and set certain workplace health and safety requirements. These statutes also make it compulsory for an employer to purchase insurance coverage for its employees, as well as to participate in and make contributions to its employees’ pension schemes. We comply with these regulations.
Regulations regarding Shipping of Goods
Under the Civil Code (Act No. 89 of April 27, 1896, as amended), our shipping of goods is generally subject to the terms and conditions as agreed with our customers. In addition, as disclosed above, we must specify timing of delivery of goods in accordance with the Act on Specified Commercial Transactions regarding our sales through e-commerce. We comply with these regulations.
Environmental Regulations
There are various environmental-related laws in Japan, including the Air Pollution Control Act (Act No. 97 of June 10, 1968, as amended), Water Pollution Prevention Act (Act No. 138 of December 25, 1970, as amended), Soil Contamination Countermeasures Act (Act No. 53 of May 29, 2002, as amended), and Noise Regulation Act (Act No. 98 of June 10, 1968, as amended). Our business and operation do not include any type of business which are specifically subject to these environmental regulations.
Regulations regarding the Food and Beverage Product Sales
The sale business of food and beverage is subject to the Food Sanitation Act (Act No. 233 of December 24, 1947, as amended). We do not sell or deal with any food or beverage which are subject to the Food Sanitation Act.
Regulations on Advertising
The Premiums and Representations Act (Act No. 134 of May 15, 1962) stipulates the restricted methods and means of various advertisements, representations, and sales promotions, in a broad sense. When we advertise our products, we must provide appropriate information under this act, so as not to mislead our customers. We comply with these regulations.
In Hong Kong, the Trade Description Ordinance (Cap. 362) prohibits the use of false trade descriptions, information, marks, and statements in respect of goods sold during the course of trade. We comply with these regulations.
Regulations on Lease Agreements
Our lease agreements are generally subject to the Civil Code (Act No. 89 of April 27, 1896, as amended) and Act on Land and Building Leases (Act No. 90 of October 4, 1991, as amended). The terms and conditions of our lease agreements are consistent with these laws and are valid and enforceable as provided for in these agreements.
Regulations regarding Protection of Personal Information
We are subject to laws and regulations regarding protection of personal information that we may obtain in the course of retailing or other businesses in Japan and Hong Kong.
In Japan, the Act on the Protection of Personal Information (Act No. 57 of May 30, 2003, as amended) and its related guidelines impose various requirements on businesses, including us, that use databases containing personal information. Under this act, we are required to lawfully use personal information we have obtained within the purposes of use we have specified and take appropriate measures to maintain security of such information. We are also restricted from providing personal information to third parties without obtaining prior consent of the corresponding individual, except for (i) cases based on laws and regulations, (ii) cases in which there is a need to protect a human life, body or fortune, and when it is difficult to obtain a principal’s consent, (iii) cases in which there is a special need to enhance public hygiene or promote fostering healthy children, and when it is difficult to obtain a principal’s consent, or (iv) cases in which there is a need to cooperate in regard to a central government organization or a local government, or a person entrusted by them performing affairs prescribed by laws and regulations, and when there is a possibility that obtaining a principal’s consent would interfere with the performance of the said affairs. Certain types of personal information, such as race, creed, social status, medical history, criminal record, and fact of having suffered damage by a crime, are classified as “special care-required personal information.” We must not obtain such special care-required personal information without the prior consent of the principals, except for any of (i) through (iv) above, or (v) cases in which the special care-required personal information has been disclosed by the principals, a central government organization, or a local government, among others, or (vi) other cases specified by cabinet order as being equivalent to (i) through (v) above. We comply with these regulations.
In Hong Kong, the Personal Data (Privacy) Ordinance (Cap. 486) requires data users who control the collection, retention, or use of personal data to comply with certain data protection principles in respect of the collection, retention, use, and security of such data. The statute also gives data subjects certain rights, such as the right to be informed of whether any data user holds their personal data, the right to be supplied with such data, and the right to request correction of any data they consider to be inaccurate. We comply with these regulations.
Regulations for Securing Safety of Pharmaceuticals and Medical Devices
We are subject to laws and regulations for securing safety of pharmaceuticals and medical devices in Japan and Hong Kong.
In Japan, the Act on Securing Quality, Efficacy, and Safety of Products Including Pharmaceuticals and Medical Devices (Act No. 145 of August 10, 1960, as amended) (the “APMD”) has been enacted to secure the quality, efficacy, and safety of pharmaceuticals and medical devices, to provide the control required for preventing the occurrence or spread of hazards to public health and hygiene caused by the use of such pharmaceuticals and medical devices, to take measures against designated substances, and to improve public health and hygiene by taking necessary measures for the promotion of research and development of pharmaceuticals and medical devices which are especially important for medical practice.
As provided in Article 2 of the APMD, the term “pharmaceuticals” as used in the APMD refers to:
| (i) | items listed in the Japanese pharmacopoeia; | |
| (ii) | items (other than quasi-drugs and regenerative medicine products) intended for use in the diagnosis, treatment, or prevention of disease in humans or animals, excluding medical appliances or instruments, etc.; and | |
| (iii) | items (other than quasi-drugs, cosmetics, and regenerative medicine products) intended to affect the structure and functions of a human or animal body and which are not medical appliances or instruments, etc. |
Article 24 of the APMD stipulates that no person other than one who has obtained license for establishing a pharmacy or selling pharmaceuticals shall be engaged in the business of selling, providing, or storing or exhibiting pharmaceuticals for the purpose of the sale or provision thereof. The license for selling pharmaceuticals shall be renewed every six years or otherwise expires. We have duly obtained and maintained such licenses for each of our directly-operated physical stores which sell pharmaceuticals in Japan.
In Hong Kong, the Pharmacy and Poisons Ordinance (Cap. 138) requires the retail sale of pharmaceuticals to be conducted by authorized sellers of poisons at licensed premises under the supervision of registered pharmacists. We have duly obtained and maintained the relevant authorizations and licenses for each of our directly-operated physical stores which sell pharmaceuticals in Hong Kong. We are also subject to the Food and Drugs (Composition and Labelling) Regulations (Cap. 132W) and Undesirable Medical Advertisements Ordinance (Cap. 231), which regulate the composition, advertising, and labelling of pre-packaged food and drugs sold by us. We comply with these regulations.
Regulations regarding Dealers of Secondhand Articles
The Secondhand Articles Dealer Act (Act No. 108 of May 28, 1949, as amended) regulates the dealing of secondhand articles in Japan, aiming to prevent theft and other crimes and to immediately recover damage caused by theft, etc. The act regulates secondhand article business, as defined in Article 2.2, such as purchase, sale, or exchange of secondhand articles, excluding any businesses which only conduct selling of secondhand articles or repurchasing of goods from the buyer.
According to Article 3 of this act, secondhand article dealers are required to obtain permission from the relevant authority of each region where place(s) of business is/are located. The permission remains in effect until it is revoked by or surrendered to the relevant authority. This permission must be obtained for each store, but permissions for two or more stores can be applied by one application. We do not deal with secondhand articles and it is not necessary for us to obtain and maintain this permission; but we have nevertheless obtained and maintained such permission.
Regulations for Liquor Retailing
Our shops sell liquor in Japan and Hong Kong, and we are subject to laws and regulations for liquor retailing.
In Japan, the Liquor Tax Act (Act No.6 of February 28, 1953, as amended) imposes tax on liquor and stipulates tax thresholds and tax rates according to types of liquor, etc. In order to operate business of selling liquor, the operator shall, pursuant to Article 9 of this act, obtain license for selling liquor. The license remains in effect until it is revoked by the relevant governmental authority. We have duly obtained and maintain such licenses for each of our directly-operated physical stores which sell liquor in Japan. We are prohibited from selling liquor to minors (under 20 years old) under Minor Drinking Prohibition Act (Act No. 20 of March 30, 1922, as amended), and must check the ID of customers if they appear to be under 20 years old.
In Hong Kong, we do not require a license for the retail sale of liquor for off-premises consumption. However, the Dutiable Commodities (Liquor) Regulations (Cap. 109B) prohibits the supply or sale of beverages containing more than 1.2% ethyl alcohol by volume to a minor in the course of business, and requires premises supplying or selling such liquor to display appropriate signage at a prominent location. We comply with these regulations.
Regulations for Operating Tax-free Shops
We are subject to laws and regulations regarding the operation of tax-free shops in Japan.
The Consumption Tax Act (Act No.108 of December 30, 1988, as amended) provides for a multi-step, broad-based tax imposed on most transactions in goods and services in Japan. Consumption tax is assessed at each stage of the manufacturing, importing, wholesale, and retail process. The current consumption tax rate is generally 10%, with an 8% rate applying to a limited number of exceptions.
Under the Consumption Tax Act, each shop may sell goods to non-residents who intend to export such goods, if such shop obtains a permission from the relevant tax authority. Each of our directly-operated physical stores in Japan has duly obtained and maintained such permission.
Regulations for Cross-Border E-Commerce in China
We are subject to laws and regulations regarding cross-border e-commerce in China. According to the E-Commerce Law of the PRC, the Notice on Improving the Relevant Work on the Administration of Cross-border E-commerce Retail Imports, the Announcement on Regulatory Matters Relating to Cross-border E-commerce Retail Imports and Exports, and other relevant PRC laws and regulations, we are deemed a cross-border e-commerce enterprise. As a result, we are required to assume the responsibilities regarding product quality and safety, and responsibilities relating to the protection of consumer rights, including but not limited to product information disclosure, product return services, a recall system for substandard or defective products, and compensation for infringement of consumer rights for product liability. These regulations further require us to entrust a Chinese enterprise with the relevant registration with the PRC customs and timely and truthful customs declarations, which Chinese enterprise is required to accept supervision by relevant authorities and bear joint and several civil liability with us. We have entrusted such Chinese enterprise and, to our knowledge, as of the date of this annual report, we and such Chinese enterprise have complied with such requirements.
C. Organizational Structure
See “—A. History and Development of the Company.”
D. Property, Plants and Equipment
See “—B. Business Overview—Facilities.”
Item 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report. This report contains forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
Key Financial Performance Indicators
We consider a variety of financial and operating measures in assessing the performance of our business. The key financial performance measures we use are revenue, gross profit and gross margin, operating expenses, and operating income.
Revenue
Our net revenue is derived primarily from retail and wholesale of Japanese beauty and health products, luxury and electronic products, as well as sundry and other products. Luxury products include primarily branded watches, perfume, handbags, clothes and jewelry, etc. Electronic products include primarily entertainment gaming products, such as Nintendo Switch, Xbox Series, etc. Sundry products include primarily home goods, such as bedding and bath products, home décor, dining and tabletop items, storage containers, car supplies, cleaning agents, and laundry supplies. It also includes spa supplies, clothing, formula milk, and diapers. Other products and services include primarily food, such as soft drinks, packaged snacks, tea and coffee, fruit juice, mineral water, and alcoholic beverages, cigarettes, and pet food. It also includes revenue from advertising services through key opinion leaders (“KOLs”). We have experienced growth since our inception, which we believe is a result of our focus on maintaining the quality of our products and customer services. Growth of our revenue is primarily driven by expanding our distribution network, both in Japan and overseas, as well as extending our product offerings. Revenue is impacted by competition, current economic conditions, pricing, inflation, product mix and availability, promotional and competitive activities, and the spending habits of our customers. Our product offerings across diverse product categories support growth in revenue by attracting new customers and encouraging repeat visits from our existing customers to our physical and online stores.
Gross Profit and Gross Margin
Gross profit is the difference between revenue and cost of revenue. Our cost of revenue consists primarily of the costs of merchandise products. Supplies and prices of our merchandise products can be affected by a variety of factors, including seasonal fluctuations, demand, politics, and economic conditions. We may not be able to increase prices to cover increased costs due to an increase in the prices of merchandise products from our suppliers, which would have an adverse effect on our operating results and profitability. In order to negotiate more favorable prices on merchandise products, we work closely with our top suppliers, especially cosmetics and pharmaceutical companies, to strengthen our relationships with them. For the same product, the price from a cosmetics or pharmaceutical company is generally 5% to 8% lower than that from a distributor. Cosmetics and pharmaceutical companies in Japan typically do not limit the number of distributors that may directly source from them or impose requirements, such as those for volume or geographic areas, on these distributors. As a result, we aim to directly source products from major cosmetics and pharmaceutical companies so as to get lower prices. We also seek to cooperate with other distributors who directly source products from cosmetics and pharmaceutical companies, as well as luxury and electronic providers who do not have an established relationship with us. We believe our cooperation with these distributors allows us to expand our product offerings and procure products manufactured by cosmetics and pharmaceutical companies without an established relationship with us.
Gross margin is gross profit divided by revenue. Gross margin is a measure used by management to indicate whether we are selling our products at an appropriate gross profit. Our gross margin is impacted by the prices of our products, product mix, availability, and discounts offered, as some products generally provide higher gross margins, and by our merchandise costs, which may vary. We offer competitive pricing to attract and retain customers. Prices are set either by our suppliers or by us with reference to major online and offline competitors, taking into account our overall pricing strategy for different categories. We typically evaluate the profitability of our products every three months.
Operating Expenses
Our operating expenses consist of selling and marketing expenses and general and administrative expenses, which primarily include payroll and employee benefit expenses and bonus expenses, shipping expenses, promotion and advertising expenses, and other facility-related costs, such as store rent, utilities, and depreciation.
Operating expenses generally increase as we grow our store base and invest in corporate infrastructure. We have made investments in talent acquisition and infrastructure over the past six years which have resulted in higher operating expenses. Despite the decreased operating expenses during the fiscal year ended March 31, 2024 as compared to the same period last year, as discussed in detail below, our operating expenses are expected to continue increasing in the future as we invest to open new stores both in Japan and overseas, expand our distribution and logistics capacity, drive greater brand awareness, attract new customers, and increase our market penetration. To support our growth, we will continue to increase headcount, particularly in the sales and logistics related positions. This increase in headcount will drive higher payroll and employee-related expenses. Overall, we expect our operating expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company.
Operating Income
Operating income is the difference between gross profit and operating expenses. Operating income excludes other income (expense), and income tax expenses. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
A. Operating Results
Comparison of Results of Operations for the Fiscal Years Ended March 31, 2024 and 2023
The following table summarizes the results of our operations during the fiscal years ended March 31, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such fiscal years.
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||
| 2024 | 2023 | Amount | % | |||||||||||||
| REVENUE | $ | 195,681,315 | $ | 169,724,346 | $ | 25,956,969 | 15.3 | % | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Merchandise costs | 172,306,308 | 140,293,419 | 32,012,889 | 22.8 | % | |||||||||||
| Selling, general and administrative expenses | 17,597,125 | 28,607,088 | (11,009,963 | ) | (38.5 | )% | ||||||||||
| Total operating expenses | 189,903,433 | 168,900,507 | 21,002,926 | 12.4 | % | |||||||||||
| INCOME FROM OPERATIONS | 5,777,882 | 823,839 | 4,954,043 | 601.3 | % | |||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Interest expense, net | (1,611,141 | ) | (2,422,079 | ) | 810,938 | (33.5 | )% | |||||||||
| Additional and delinquent tax due to consumption tax correction | (628,876 | ) | (6,622,486 | ) | 5,993,610 | (90.5 | )% | |||||||||
| Gain from disposal of equity method investment | 190,571 | - | 190,571 | 100.0 | % | |||||||||||
| Gain from disposal of a subsidiary | 341,139 | - | 341,139 | 100.0 | % | |||||||||||
| Other income, net | 760,435 | 13,145 | 747,290 | 5,685.0 | % | |||||||||||
| Gain from foreign currency exchange | 3,065,971 | 718,990 | 2,346,981 | 326.4 | % | |||||||||||
| Change in fair value of representative’s warrants liability | 109,173 | 139,615 | (30,442 | ) | (21.8 | )% | ||||||||||
| Income (loss) from equity method investment | (69,444 | ) | 14,554 | (83,998 | ) | (577.1 | )% | |||||||||
| Total other income (expenses), net | 2,157,828 | (8,158,261 | ) | 10,316,089 | (126.4 | )% | ||||||||||
| INCOME (LOSS) BEFORE INCOME TAX PROVISION | 7,935,710 | (7,334,422 | ) | 15,270,132 | (208.2 | )% | ||||||||||
| PROVISION FOR INCOME TAXES | 456,774 | 714,400 | (257,626 | ) | (36.1 | )% | ||||||||||
| NET INCOME (LOSS) | $ | 7,478,936 | $ | (8,048,822 | ) | $ | 15,527,758 | (192.9 | )% | |||||||
Revenue
We generated revenue primarily from: (i) directly-operated physical stores in Japan, Hong Kong and others, (ii) online stores through our websites and various e-commerce marketplaces in Japan, China, and Korea, as well as services income from advertising business through key opinion leaders (“KOLs”), and (iii) franchise stores in Japan, the U.S., Canada, and the U.K., and wholesale customers in Japan and other countries, including China, the U.S., and Canada.
Our total revenue increased by $25,956,969, or 15.3%, from $169,724,346 for the fiscal year ended March 31, 2023 to $195,681,315 for the fiscal year ended March 31, 2024. The increase in our revenue consists of increased revenue from directly-operated physical stores and franchise stores and wholesale customers, which was partially offset by the decreased revenue from online stores and services. Revenue generated from companies located in Japan accounted for 77.8% and 88.2% of our total revenue for the fiscal years ended March 31, 2024 and 2023, respectively. Revenue generated from companies located in Hong Kong and others accounted for 22.2% and 11.8% of our total revenue for the fiscal years ended March 31, 2024 and 2023, respectively.
The following table sets forth the breakdown of our revenue for the fiscal years ended March 31, 2024 and 2023, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2024 | % | 2023 | % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 14,951,952 | 7.6 | % | $ | 11,606,180 | 6.8 | % | $ | 3,345,772 | 28.8 | % | ||||||||||||
| Online stores and services | 10,705,449 | 5.5 | % | 20,700,012 | 12.2 | % | (9,994,563 | ) | (48.3 | )% | ||||||||||||||
| Franchise stores and wholesale customers | 170,023,914 | 86.9 | % | 137,418,154 | 81.0 | % | 32,605,760 | 23.7 | % | |||||||||||||||
| Total Revenue | $ | 195,681,315 | 100.0 | % | $ | 169,724,346 | 100.0 | % | $ | 25,956,969 | 15.3 | % | ||||||||||||
Revenue from directly-operated physical stores increased by $3,345,772, or 28.8%, to $14,951,952 for the fiscal year ended March 31, 2024, from $11,606,180 for the fiscal year ended March 31, 2023. During the fiscal year ended March 31, 2024, the Company started to offer luxury products, which contributed a significant portion of increased directly-operated physical store sales in the fiscal year ended March 31, 2024. The increase in directly-operated physical stores sales was also due to revenue contributed from our newly-opened physical stores in the United States and Canada, which was partially offset by the decreased revenue as a result of the transformation of four physical stores in Japan during the fiscal year ended March 31, 2024. The transformation of the physical stores in Japan was due to the fact that these stores had underperformed and we transformed these stores into franchise stores to improve our cash flow and working capital. After the change, these physical stores purchased products from us like other franchise stores, and hence this portion of revenue was recorded under franchise stores and wholesale customers.
Revenue from online stores and services decreased by $9,994,563, or 48.3%, to $10,705,449 for the fiscal year ended March 31, 2024, from $20,700,012 for the fiscal year ended March 31, 2023. Revenue from online stores and services for the fiscal year ended March 31, 2024 consists of revenue from online stores in Japan as well as KOLs services income. The decrease was mainly due to the significant decrease in revenue from online stores and services revenue generated by our online stores in China during the fiscal year ended March 31, 2024 as compared to the same period last year resulted from a shift in our business strategy since August 2022. Instead of operating the online stores by ourselves, we entrusted the entire operations of all our online stores in China to third-party companies to minimize the operating risk. After the change, these third-party companies purchased products from us like other wholesale customers, and hence this portion of revenue was recorded under franchise stores and wholesale customers.
Revenue from franchise stores and wholesale customers increased by $32,605,760, or 23.7%, from $137,418,154 for the fiscal year ended March 31, 2023 to $170,023,914 for the fiscal year ended March 31, 2024. The increase was mainly due to expansion of products offering as we started to offer luxury products and electronic products that have higher unit selling prices. In addition, the increase was also due to the increased revenue generated from franchise stores which previously was recognized under physical stores as mentioned above, as well as the increased revenue from the new wholesale customers with whom we entered into business relationships during the fiscal year ended March 31, 2024. The increase was partially offset by the decreased sales of beauty products to wholesales customers as the demand for Japanese beauty products declined in China market.
Cost of Revenue
The following table sets forth the breakdown of our cost of revenue for the fiscal years ended March 31, 2024 and 2023, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2024 | % | 2023 | % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 11,916,702 | 6.9 | % | $ | 8,882,991 | 6.3 | % | $ | 3,033,711 | 34.2 | % | ||||||||||||
| Online stores and services | 7,920,348 | 4.6 | % | 16,221,524 | 11.6 | % | (8,301,176 | ) | (51.2 | )% | ||||||||||||||
| Franchise stores and wholesale customers | 152,469,258 | 88.5 | % | 115,188,904 | 82.1 | % | 37,280,354 | 32.4 | % | |||||||||||||||
| Total Cost of Revenue | $ | 172,306,308 | 100.0 | % | $ | 140,293,419 | 100.0 | % | $ | 32,012,889 | 22.8 | % | ||||||||||||
Cost of revenue from directly-operated physical stores increased by $3,033,711, or 34.2%, from $8,882,991 for the fiscal year ended March 31, 2023 to $11,916,702 for the fiscal year ended March 31, 2024. The percentage increase in cost of revenue was more than the percentage increase in revenue, as discussed in greater detail below.
Cost of revenue from online stores and services decreased by $8,301,176, or 51.2%, from $16,221,524 for the fiscal year ended March 31, 2023 to $7,920,348 for the fiscal year ended March 31, 2024. The percentage decrease in cost of revenue was more than the percentage decrease in revenue, as discussed in greater detail below.
Cost of revenue from franchise stores and wholesale customers increased by $37,280,354, or 32.4%, from $115,188,904 for the fiscal year ended March 31, 2023 to $152,469,258 for the fiscal year ended March 31, 2024. The percentage increase in cost of revenue was more than the percentage increase in revenue, as discussed in greater detail below.
Gross Profit and Gross Margin
The following table sets forth the breakdown of our gross profit for the fiscal years ended March 31, 2024 and 2023, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2024 | Margin % | 2023 | Margin % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 3,035,250 | 20.3 | % | $ | 2,723,189 | 23.5 | % | $ | 312,061 | 11.5 | % | ||||||||||||
| Online stores and services | 2,785,101 | 26.0 | % | 4,478,488 | 21.6 | % | (1,693,387 | ) | (37.8 | )% | ||||||||||||||
| Franchise stores and wholesale customers | 17,554,656 | 10.3 | % | 22,229,250 | 16.2 | % | (4,674,594 | ) | (21.0 | )% | ||||||||||||||
| Total Gross Margin and Margin % | $ | 23,375,007 | 11.9 | % | $ | 29,430,927 | 17.3 | % | $ | (6,055,920 | ) | (20.6 | )% | |||||||||||
The gross profit of directly-operated physical stores increased by $312,061, or 11.5%, from $2,723,189 for the fiscal year ended March 31, 2023 to $3,035,250 for the fiscal year ended March 31, 2024, which was mainly due to the increase in revenue. The gross margin from directly-operated physical stores decreased by 3.2 percentage points from 23.5% for the fiscal year ended March 31, 2023 to 20.3% for the fiscal year ended March 31, 2024. The decrease in gross margin was mainly due to the increased sales of luxury products which have relatively lower gross margins, as well as increased promotion activities and price discounts given to our customers so that we could attract more customers to visit our physical stores during the fiscal year ended March 31, 2024.
The gross profit of online stores and services decreased by $1,693,387, or 37.8%, from $4,478,488 for the fiscal year ended March 31, 2023 to $2,785,101 for the fiscal year ended March 31, 2024, which was in line with the decrease in revenue from online stores and services. The gross margin from online stores and services increased by 4.4 percentage points from 21.6% for the fiscal year ended March 31, 2023 to 26.0% for the fiscal year ended March 31, 2024. The increase was mainly due to price adjustments we made as we raised the selling prices of products sold in our online stores in Japan.
The gross profit of franchise stores and from wholesale customers decreased by $4,674,594, or 21.0%, from $22,229,250 for the fiscal year ended March 31, 2023 to $17,554,656 for the fiscal year ended March 31, 2024, mainly due to the increased cost of revenue from franchise stores and wholesale customers. The gross margin from franchise stores and wholesale customers decreased by 5.9 percentage points from 16.2% for the fiscal year ended March 31, 2023 to 10.3% for the fiscal year ended March 31, 2024. The decrease in gross margin was mainly due to the increased sales of luxury products and electronic products which have relatively lower gross margins during the fiscal year ended March 31, 2024.
Operating Expenses
Our operating expenses consist of selling and marketing expenses and general and administrative expenses, which primarily include payroll, employee benefit expenses and bonus expenses, shipping expenses, promotion and advertising expenses, and other facility-related costs, such as store rent, utilities, and depreciation. Our operating expenses accounted for 9.0% and 16.9% of our revenue for the fiscal years ended March 31, 2024 and 2023, respectively.
| For the Fiscal Years Ended March 31, | ||||||||||||||||||||||||
| 2024 | 2023 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Allowance for (net recovery of) credit losses | $ | (2,043,939 | ) | (11.6 | )% | $ | 3,471,953 | 12.1 | % | $ | (5,515,892 | ) | (158.9 | )% | ||||||||||
| Shipping expenses | 1,793,286 | 10.2 | % | 5,863,482 | 20.5 | % | (4,070,196 | ) | (69.4 | )% | ||||||||||||||
| Promotion and advertising expenses | 752,425 | 4.3 | % | 1,367,485 | 4.8 | % | (615,060 | ) | (45.0 | )% | ||||||||||||||
| Payroll, employee benefit expenses and bonus expenses | 5,682,429 | 32.3 | % | 6,247,246 | 21.8 | % | (564,817 | ) | (9.0 | )% | ||||||||||||||
| Transaction commission | 1,921,577 | 10.9 | % | 2,248,804 | 7.9 | % | (327,227 | ) | (14.6 | )% | ||||||||||||||
| Professional service fees | 3,548,374 | 20.2 | % | 3,193,815 | 11.2 | % | 354,559 | 11.1 | % | |||||||||||||||
| Other expenses | 5,942,973 | 33.7 | % | 6,214,303 | 21.7 | % | (271,330 | ) | (4.4 | )% | ||||||||||||||
| Total operating expenses | $ | 17,597,125 | 100.0 | % | $ | 28,607,088 | 100.0 | % | $ | (11,009,963 | ) | (38.5 | )% | |||||||||||
Operating expenses decreased by $11,009,963, or 38.5%, from $28,607,088 for the fiscal year ended March 31, 2023 to $17,597,125 for the fiscal year ended March 31, 2024. The decrease in operating expenses was primarily attributable to the following factors:
| (1) | a decrease in allowance for credit losses by $5,515,892, or 158.9%, from $3,471,953 for the fiscal year ended March 31, 2023 to $(2,043,939) for the fiscal year ended March 31, 2024. The decrease in allowance for credit losses was mainly due to the collection of long-term receivables and accounts receivable, causing a net recovery of credit losses during the fiscal year ended March 31, 2024; |
| (2) | a decrease in shipping expenses by $4,070,196, or 69.4%, from $5,863,482 for the fiscal year ended March 31, 2023 to $1,793,286 for the fiscal year ended March 31, 2024. Our shipping expenses incurred mainly for sales from online stores and sales to franchise stores and wholesale customers which both decreased during the fiscal year ended March 31, 2024. Previously, we incurred shipping expenses when we shipped our products to our overseas bonded warehouses in China before we sold products to our online customers and some overseas wholesale customers, but we terminated the warehouse and logistics services in China in October 2022. During the fiscal year ended March 31, 2024, we did not have sales from online stores in China because since August 2022, instead of operating the online stores in China by ourselves, we entrusted the entire operation of all our online stores in China to third-party companies to minimize the operating risk. After this transition, these third-party companies purchased products from us like other wholesale customers, and hence this portion of revenue was recorded under franchise stores and wholesale customers. Currently, the majority of our overseas franchise and wholesale customers now pick up the products from our warehouse in Japan, hence, shipping expense incurred for sales from online stores and sales to franchise stores and wholesale customers both decreased during the fiscal year ended March 31, 2024; |
| (3) | a decrease in promotion and advertising expenses by $615,060, or 45.0%, from $1,367,485 for the fiscal year ended March 31, 2023 to $752,425 for the fiscal year ended March 31, 2024. The decrease was mainly due to our effort in cost control as well as decreased advertising expenses for our online stores, as we spent less on advertising activities for our overseas online stores after we entrusted the entire operations of all our online stores in China to third-party companies as mentioned above; |
| (4) | a decrease in payroll, employee benefit expenses, and bonus expenses by $564,817, or 9.0%, from $6,247,246 for the fiscal year ended March 31, 2023 to $5,682,429 for the fiscal year ended March 31, 2024. The decrease was mainly due to the decreased payroll, employee benefit expenses, and bonus expenses of $1,305,723 in Japan, which was attributable to the decreased headcount resulting from implementation of cost control as well as the transformation of four physical stores in Japan. The decrease was partially offset by the increased payroll, employee benefit expenses, and bonus expenses of $740,906 in Hong Kong, the United States and Canada, which was due to the increased headcount caused by the expansion of our business operation in these regions during the fiscal year ended March 31, 2024; |
| (5) | a decrease in transaction commission paid to third-party e-commerce marketplace operators by $327,227, or 14.6%, from $2,248,804 for the fiscal year ended March 31, 2023 to $1,921,577 for the fiscal year ended March 31, 2024. We paid third-party e-commerce marketplace operators transaction commission ranging from 1.8% to 3.0% based on our sales amount. The decrease in transaction commission was due to the decrease in our online sales in China; and |
| (6) | an increase in professional service fees by $354,559, or 11.1%, from $3,193,815 for the fiscal year ended March 31, 2023 to $3,548,374 for the fiscal year ended March 31, 2024. The increase was mainly due to the increased professional fees paid to our lawyers for services incurred for the consumption tax examination. |
Interest Expenses, net
Our interest expenses, net included interest expenses calculated at interest rate per loan agreements and loan service costs, which were directly incremental to the loan agreements and amortized over the loan periods. Due to our strategic debt management and favorable loan conditions, interest expenses, net decreased by $810,938, or 33.5%, from $2,422,079 for the fiscal year ended March 31, 2023 to $1,611,141 for the fiscal year ended March 31, 2024. The decrease mainly consisted of a decrease in amortized loan service costs in relation to our syndicated loans by $454,980, as well as a decrease in interest expenses at interest rate by $355,542, which was mainly due to the decreased weighted average loan balances and interest rate for the fiscal year ended March 31, 2024 as compared to the same period last year.
Additional and Delinquent Tax Due to Consumption Tax Correction
Since January 2022, the Tokyo Regional Taxation Bureau had conducted a tax examination into the Company’s consumption tax filing for the period from July 2018 to December 2021. As a result of the examination, we were required to return consumption tax refund for export transactions that were determined not to meet the tax exemption requirements due to incomplete submission of relevant export documents. As the failure in submission of relevant export documents was caused by our suppliers and customers, we entered into agreements with relevant suppliers and customers to claim compensation for damages from the additional consumption tax payment. Due to this consumption tax correction, apart from the amount of $6,622,486 we were required to pay during the fiscal year ended March 31, 2023, we were required to pay the additional tax for understatement and delinquent tax of $628,876 based on the final assessment by the Tokyo Regional Taxation Bureau, which we recorded during the fiscal year ended March 31, 2024.
Gain from Disposal of Equity Method Investment
On December 25, 2020, we and an individual investor established Palpito, a stock company incorporated in Japan pursuant to the laws of Japan. We owned 40% of the equity interests of Palpito and the registered capital was fully injected on December 31, 2020. On June 30, 2023, we entered into a share transfer agreement with Seihinkokusai Co., Ltd. (“Seihinkokusai”), a related party of the company to sell our 40% equity interests in Palpito to Seihinkokusai, for a cash consideration of ¥40,000,000 ($300,760). The cash consideration was fully received, and the transactions were completed on July 1, 2023, and we recorded a gain from disposal of equity method investment of $190,571 for the fiscal year ended March 31, 2024.
Gain from Disposal of a Subsidiary
On June 30, 2023, we entered into a share transfer agreement with Seihinkokusai, a related party of the Company to sell our 100% equity interest in Kaika International to Seihinkokusai, for a cash consideration of ¥5,000,000 ($37,595). The cash consideration was fully received and the transactions were completed on July 1, 2023, and we recorded a gain from disposal of Kaika International of $341,139 for the fiscal year ended March 31, 2024.
Other Income, net
Our other income, net primarily includes tax refund, disposal gain or loss from property and equipment, government subsidy, and other immaterial income and expense items. Other income, net increased by $747,290, or 5,685.0%, from net other income of $13,145 for the fiscal year ended March 31, 2023 to net other income of $760,435 for the fiscal year ended March 31, 2024. The increase was mainly due to the increased gain from disposal of property and equipment, which was partially offset by decreased government subsidy received during the fiscal year ended March 31, 2024 as compared to the same period of last year.
Gain from Foreign Currency Exchange
Gain from foreign currency exchange was $3,065,971 for the fiscal year ended March 31, 2024 as compared to a gain from foreign currency exchange of $718,990 for the fiscal year ended March 31, 2023. The gain from foreign currency exchange was mainly due to the significant fluctuations of foreign exchange rates on our accounts receivable that denominated in foreign currencies such as U.S. dollar during the fiscal year ended March 31, 2024. The increase was also due to the increased gain from foreign currency exchange by our Hong Kong subsidiaries, which was mainly due to the significant fluctuations of foreign exchange rate on its payables that were denominated in Japanese Yen during the fiscal year ended March 31, 2024.
Change in Fair Value of Warrants Liabilities
In connection with our IPO, we agreed to issue warrants to the representative of the underwriters for the IPO on January 13, 2022. On January 26, 2024, we entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell 5,970,152 of its ADSs, at a purchase price of $0.67 per ADS. In the concurrent private placement, the Company also issued to the same investors 5,970,152 ADS purchase warrants. These warrants were classified as liability at fair value, and are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our consolidated statements of operations and comprehensive income (loss). Change in fair value of the warrants liabilities amounted to $109,173 and $139,615 during the fiscal years ended March 31, 2024 and 2023, respectively.
Income (Loss) from Equity Method Investment
As mentioned above, we owned 40% of the equity interests in Palpito before we sold it to Seihinkokusai on June 30, 2023. Our loss from equity method investment was $69,444 for the fiscal year ended March 31, 2024 as compared to an income from equity method investment of $14,554 for the fiscal year ended March 31, 2023.
Provision for Income Taxes
Our provision for income taxes was $456,774 and $714,400 for the fiscal years ended March 31, 2024 and 2023, respectively. Our provision for income taxes decreased by $257,626, or 36.1%. The decrease in provision for income taxes was mainly due to the decreased deferred income tax expenses in relation to the reversal of deferred tax liabilities resulting from the collection of compensation receivable for consumption tax during the fiscal year ended March 31, 2024, which was partially offset by the increased current income tax expenses resulted from the increased taxable income for the fiscal year ended March 31, 2024.
Net Income (Loss)
As a result of the foregoing, we reported a net income of $7,478,936 for the fiscal year ended March 31, 2024 as compared to a net loss of $8,048,822 for the fiscal year ended March 31, 2023.
Comparison of Results of Operations for the Fiscal Years Ended March 31, 2023 and 2022
The following table summarizes the results of our operations during the fiscal years ended March 31, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such fiscal years.
| For the fiscal years
ended March 31, |
Variance | |||||||||||||||
| 2023 | 2022(1) | Amount | % | |||||||||||||
| REVENUE | $ | 169,724,346 | $ | 234,752,580 | $ | (65,028,234 | ) | (27.7 | )% | |||||||
| OPERATING EXPENSES | ||||||||||||||||
| Merchandise costs | 140,293,419 | 191,040,547 | (50,747,128 | ) | (26.6 | )% | ||||||||||
| Selling, general and administrative expenses | 28,607,088 | 36,422,772 | (7,815,684 | ) | (21.5 | )% | ||||||||||
| Total operating expenses | 168,900,507 | 227,463,319 | (58,562,812 | ) | (25.7 | )% | ||||||||||
| INCOME FROM OPERATIONS | 823,839 | 7,289,261 | (6,465,422 | ) | (88.7 | )% | ||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Interest expense, net | (2,422,079 | ) | (2,785,766 | ) | 363,687 | (13.1 | )% | |||||||||
| Additional and delinquent tax due to consumption tax correction | (6,622,486 | ) | - | (6,622,486 | ) | 100.0 | % | |||||||||
| Other income, net | 13,145 | 598,206 | (585,061 | ) | (97.8 | )% | ||||||||||
| Gain from foreign currency exchange | 718,990 | 833,547 | (114,557 | ) | (13.7 | )% | ||||||||||
| Change in fair value of representative’s warrants liability | 139,615 | 369,404 | (229,789 | ) | (62.2 | )% | ||||||||||
| Income (loss) from equity method investment | 14,554 | (145,828 | ) | 160,382 | (110.0 | )% | ||||||||||
| Total other expenses, net | (8,158,261 | ) | (1,130,437 | ) | (7,027,824 | ) | 621.7 | % | ||||||||
| INCOME (LOSS) BEFORE INCOME TAX PROVISION | (7,334,422 | ) | 6,158,824 | (13,493,246 | ) | (219.1 | )% | |||||||||
| INCOME TAX PROVISION | 714,400 | 2,234,676 | (1,520,276 | ) | (68.0 | )% | ||||||||||
| NET INCOME (LOSS) | $ | (8,048,822 | ) | $ | 3,924,148 | $ | (11,972,970 | ) | (305.1 | )% | ||||||
| (1) | The financial information presented has been retrospectively adjusted for the acquisition of Tokyo Lifestyle Limited. |
Revenue
We generated revenue primarily from: (i) directly-operated physical stores in Japan and in Hong Kong, (ii) online stores through our websites and various e-commerce marketplaces in Japan, China, and Korea, as well as services from advertising business through key opinion leaders (“KOLs”), and (iii) franchise stores in the U.S., Canada, and the U.K., and wholesale customers in Japan and other countries, including China, the U.S., and Canada.
Our total revenue decreased by $65,028,234, or 27.7%, from $234,752,580 for the fiscal year ended March 31, 2022 to $169,724,346 for the fiscal year ended March 31, 2023. The decrease in our revenue was primarily due to decreased revenue from online stores and services and directly-operated physical stores, which was partially offset by the increased revenue from franchise stores and wholesale customers. Revenue generated from companies located in Japan accounted for 88.2% and 87.9% of our total revenue for the fiscal years ended March 31, 2023 and 2022, respectively. Revenue generated from companies located in Hong Kong and other accounted for 11.8% and 12.1% of our total revenue for the fiscal years ended March 31, 2023 and 2022, respectively.
The following table sets forth the breakdown of our revenue for the fiscal years ended March 31, 2023 and 2022, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 11,606,180 | 6.8 | % | $ | 12,965,904 | 5.6 | % | $ | (1,359,724 | ) | (10.5 | )% | |||||||||||
| Online stores and services | 20,700,012 | 12.2 | % | 122,150,105 | 52.0 | % | (101,450,093 | ) | (83.1 | )% | ||||||||||||||
| Franchise stores and wholesale customers | 137,418,154 | 81.0 | % | 99,636,571 | 42.4 | % | 37,781,583 | 37.9 | % | |||||||||||||||
| Total Revenue | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | $ | (65,028,234 | ) | (27.7 | )% | |||||||||||
Our directly-operated physical stores sales accounted for 6.8% and 5.6% of our total revenue for the fiscal years ended March 31, 2023 and 2022, respectively. Revenue from directly-operated physical stores decreased by $1,359,724, or 10.5%, to $11,606,180 for the fiscal year ended March 31, 2023, from $12,965,904 for the fiscal year ended March 31, 2022. The decrease was mainly due to the decrease in revenue generated from directly-operated physical stores in Japan by $2,237,706, or 20.7%, to $8,598,523 for the fiscal year ended March 31, 2023, from $10,836,229 for the fiscal year ended March 31, 2022. The decrease was mainly due to the depreciation of the Japanese yen against U.S. dollars. The average translation rate for the fiscal years ended March 31, 2023 and 2022 was at ¥1=US$0.007402 and ¥1=US$0.008908, respectively, resulting in a decrease of 16.9%. Our revenue generated from our directly-operated physical stores in Japan (excluding the impact of foreign currency translation) remained relatively stable with a slight decrease by 4.5% for the fiscal year ended March 31, 2023 as compared to the same period last year, mainly due to the relocation of one of our popular directly-operated physical stores as a result of municipal construction project conducted by the local government, which was partially offset by the increased revenue generated from other directly-operated physical stores as our business gradually recovered from the impact of COVID-19. However, due to the depreciation of the Japanese yen against U.S. dollars, revenue generated from our directly-operated physical stores in Japan decreased for the fiscal year ended March 31, 2023 as compared to the same period last year. The decrease was partially offset by the increase in revenue generated from our directly-operated physical stores in Hong Kong by $877,982, or 41.2%, from $2,129,675 for the fiscal year ended March 31, 2022 to $3,007,657 for the fiscal year ended March 31, 2023. The increase in revenue from directly-operated physical stores in Hong Kong was mainly due to the newly opened physical stores during the fiscal year ended March 31, 2023.
Our online stores and services accounted for 12.2% and 52.0% of our total revenue for the fiscal years ended March 31, 2023 and 2022, respectively. Revenue from online stores and services decreased by $101,450,093, or 83.1%, to $20,700,012 for the fiscal year ended March 31, 2023, from $122,150,105 for the fiscal year ended March 31, 2022. The decrease was mainly due to the significant decrease in revenue generated by our online stores during the fiscal year ended March 31, 2023 by $102,561,175, or 84.6%, to $18,603,172 for the fiscal year ended March 31, 2023, from $121,164,347 for the fiscal year ended March 31, 2022. The decrease was mainly due to a shift in our business strategy since August 2022, instead of operating the online stores by ourselves, we entrusted the entire operations of all our online stores in China to third-party companies to minimize the operating risk. After the change, these third-party companies purchased products from us like other wholesale customers, and hence this portion of revenue was recorded under franchise stores and wholesale customers. The decrease was also due to due to a resurgence of the COVID-19 pandemic in late March 2022 in China, which resulted in shipping container shortages and stricter border control protocols, shipments and customs clearance for overseas imports were delayed. Our online sales in China were significantly constrained, due to the inability to deliver the products to our customers as a consequence of mobility restrictions and lockdowns imposed in certain provinces across China. Although the situation has eased since June 2022, due to the continuous impact from the COVID-19 pandemic, our online sales volume in China did not return to its normal level as compared to the same period of last year. The decrease was also exacerbated by the significant depreciation of the Japanese yen against U.S. dollars, as mentioned above. The decrease was partially offset by the increased revenue from services revenue generated by companies in Hong Kong and other by $1,111,082, or 112.7%, from $985,758 for the fiscal year ended March 31, 2022 to $2,096,840 for the fiscal year ended March 31, 2023. The increase was mainly due to increased revenue from advertising services through KOLs. As the total followers of our KOLs on various social media platforms increased significantly during the fiscal year ended March 31, 2023, the number of advertisements requests from our customers and the price per piece of advertisement increased, which led to a significant increase in revenue from KOLs services for the fiscal year ended March 31, 2023.
Our franchise stores and wholesale customers sales accounted for 81.0% and 42.4% of our total revenue for the fiscal years ended March 31, 2023 and 2022, respectively. Revenue from franchise stores and wholesale customers increased by $37,781,583, or 37.9%, to $137,418,154 for the fiscal year ended March 31, 2023, from $99,636,571 for the fiscal year ended March 31, 2022. The increase was mainly due to the increase in revenue generated from domestic franchise stores and wholesale customers by companies in Japan during the fiscal year ended March 31, 2023 by $48,025,396, or 64.6%, to $122,414,361 for the fiscal year ended March 31, 2023, from $74,388,965 for the fiscal year ended March 31, 2022. Our revenue generated from domestic franchise stores and wholesale customers (excluding the impact of foreign currency translation) increased significantly by 10,977.1% for the fiscal year ended March 31, 2023 as compared to last year. The increase was due to a shift in our business strategy when our overseas sales were adversely affected by the COVID-19 resurgence. With the high demand for our products, we managed to modify our business strategy by developing and selling our products in domestic market. Our revenue generated by companies in Japan from overseas franchise stores and wholesale customers (excluding the impact of foreign currency translation) also increased by 27.1% for the fiscal year ended March 31, 2023 as compared to last year. The increase was mainly due to the increased revenue previously recognized under online stores due to the shift in our business strategy as mentioned above. However, the increase in revenue from overseas franchise stores and wholesale customers by companies in Japan was partially offset by the COVID-19 resurgence in China, as our overseas shipments were delayed or limited due to the shipping container shortages caused by the COVID-19 pandemic and increased shipping charges, as well as fewer orders received from our overseas franchise stores and wholesale customers when their business was impacted by the COVID-19 pandemic. Overall, our revenue from franchise stores and wholesale customers generated by companies in Japan increased despite the impact from significant depreciation of the Japanese yen against U.S. dollars, as mentioned above. The increase was partially offset by the decreased revenue from franchise stores and wholesale customers generated by companies in Hong Kong and other by $10,243,813, or 40.6%, from $25,247,606 for the fiscal year ended March 31, 2022 to $15,003,793 for the fiscal year ended March 31, 2023. The decrease was due to the impact of COVID-19 resurgence as mentioned above.
Cost of Revenue
Our overall cost of revenue decreased by $50,747,128, or 26.6%, from $191,040,547 for the fiscal year ended March 31, 2022 to $140,293,419 for the fiscal year ended March 31, 2023. The decrease in our cost of revenue was primarily due to decreased cost of revenue from directly-operated physical stores and online stores and services, which was partially offset by the increased cost of revenue from franchise stores and wholesale customers.
The following table sets forth the breakdown of our cost of revenue for the fiscal years ended March 31, 2023 and 2022, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 8,882,991 | 6.3 | % | $ | 11,261,970 | 5.9 | % | $ | (2,378,979 | ) | (21.1 | )% | |||||||||||
| Online stores and services | 16,221,524 | 11.6 | % | 98,589,103 | 51.6 | % | (82,367,579 | ) | (83.5 | )% | ||||||||||||||
| Franchise stores and wholesale customers | 115,188,904 | 82.1 | % | 81,189,474 | 42.5 | % | 33,999,430 | 41.9 | % | |||||||||||||||
| Total Cost of Revenue | $ | 140,293,419 | 100.0 | % | $ | 191,040,547 | 100.0 | % | $ | (50,747,128 | ) | (26.6 | )% | |||||||||||
Cost of revenue from directly-operated physical stores decreased by $2,378,979, or 21.1%, from $11,261,970 for the fiscal year ended March 31, 2022 to $8,882,991 for the fiscal year ended March 31, 2023. The percentage decrease in cost of revenue was more than the percentage decrease in revenue, as discussed in greater details below.
Cost of revenue from online stores and services decreased by $82,367,579, or 83.5%, from $98,589,103 for the fiscal year ended March 31, 2022 to $16,221,524 for the fiscal year ended March 31, 2023. The percentage decrease in cost of revenue was largely in line with the percentage decrease in revenue.
Cost of revenue from franchise stores and wholesale customers increased by $33,999,430, or 41.9%, from $81,189,474 for the fiscal year ended March 31, 2022 to $115,188,904 for the fiscal year ended March 31, 2023. The percentage increase in cost of revenue was largely in line with the percentage increase in revenue.
Gross Profit and Gross Margin
Our gross profit decreased by $14,281,106, or 32.7%, from $43,712,033 for the fiscal year ended March 31, 2022 to $29,430,927 for the fiscal year ended March 31, 2023. The decrease was mainly attributable to the decreased gross profit from online stores and services, which was partially offset by the increased gross profit from franchise stores and wholesale customers and directly-operated physical stores. Our overall gross margin remained relatively stable with a slight decrease by 1.3 percentage points from 18.6% for the fiscal year ended March 31, 2022 to 17.3% for the fiscal year ended March 31, 2023. The decrease was mainly attributable to the decreased gross profit margin from franchise stores and wholesale customers.
The following table sets forth the breakdown of our gross profit for the fiscal years ended March 31, 2023 and 2022, respectively:
| For the fiscal years ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | Margin % | 2022 | Margin % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 2,723,189 | 23.5 | % | $ | 1,703,934 | 13.1 | % | $ | 1,019,255 | 59.8 | % | ||||||||||||
| Online stores and services | 4,478,488 | 21.6 | % | 23,561,002 | 19.3 | % | (19,082,514 | ) | (81.0 | )% | ||||||||||||||
| Franchise stores and wholesale customers | 22,229,250 | 16.2 | % | 18,447,097 | 18.5 | % | 3,782,153 | 20.5 | % | |||||||||||||||
| Total Gross Margin and Margin % | $ | 29,430,927 | 17.3 | % | $ | 43,712,033 | 18.6 | % | $ | (14,281,106 | ) | (32.7 | )% | |||||||||||
The gross profit of directly-operated physical stores increased by $1,019,255, or 59.8%, from $1,703,934 for the fiscal year ended March 31, 2022 to $2,723,189 for the fiscal year ended March 31, 2023, which was mainly due to the increase in gross margin generated by directly-operated physical stores in Hong Kong. The gross margin from directly-operated physical stores increased by 10.4 percentage points from 13.1% for the fiscal year ended March 31, 2022 to 23.5% for the fiscal year ended March 31, 2023. The increase was mainly due to 1) increased gross profit margin generated by directly-operated physical stores in Hong Kong, while the exchange rate of Hong Kong dollar against U.S. dollars remained relatively stable, there was a significant depreciation of the Japanese yen that caused the decrease in the prices of merchandise products we purchased from our Japanese suppliers, the decrease of prices was partially offset by an increase in the prices of merchandise products dominated in Japanese Yen, as the volume of the merchandise products we purchased from our suppliers decreased due to the declined sales, we received less volume discount from our suppliers during the fiscal year ended March 31, 2023; 2) increased gross profit margin generated by new stores opened at prime and central locations in Hong Kong during the fiscal year ended March 31, 2023, where we can sell our products at higher prices; and 3) less promotion activities and price discounts given to our customers by directly-operated physical stores in Japan during the fiscal year ended March 31, 2023, as we had more promotion activities and price discounts given to our customers during the fiscal year ended March 31, 2022, so that we could attract more customers to visit our physical stores when the number of customer visits was adversely affected by the COVID-19 pandemic.
The gross profit of online stores and services decreased by $19,082,514, or 81.0%, from $23,561,002 for the fiscal year ended March 31, 2022 to $4,478,488 for the fiscal year ended March 31, 2023, which was in line with the decrease in revenue from online stores and services. The gross margin from online stores and services remained relatively stable with a slight increased by 2.3 percentage points from 19.3% for the fiscal year ended March 31, 2022 to 21.6% for the fiscal year ended March 31, 2023. The increase was mainly due to increased revenue generated from KOLs service that has higher gross margin. Our revenue generated from KOLs service accounted for 10.1% of our total online stores and services for the fiscal year ended March 31, 2023 and it only accounted for 1% of our total online stores and services for the fiscal year ended March 31, 2022.
The gross profit of franchise stores and from wholesale customers increased by $3,782,153, or 20.5%, from $18,447,097 for the fiscal year ended March 31, 2022 to $22,229,250 for the fiscal year ended March 31, 2023, which was in line with the increase in revenue from franchise stores and wholesale customers. The gross margin from franchise stores and wholesale customers decreased slightly by 2.3 percentage points from 18.5% for the fiscal year ended March 31, 2022 to 16.2% for the fiscal year ended March 31, 2023. As a majority of our sale transactions to franchise stores and wholesale customers were denominated in Japanese yen, the depreciation of the Japanese yen did not cause a significant fluctuation of our gross profit margin. The decrease in gross profit margin was mainly attributable to an increase in the prices of merchandise products we purchased from our suppliers dominated in Japanese Yen as mentioned above. Meanwhile, to expand our overseas market and develop more franchise stores and wholesale customers, we gave some price discounts to our new customers in order to build a strong long-term business relationship with them. Therefore, our gross margin from franchise stores and wholesale customers decreased during the fiscal year ended March 31, 2023 as compared the same period last year.
Operating Expenses
Our operating expenses consist of selling and marketing expenses and general and administrative expenses, which primarily include payroll, employee benefit expenses and bonus expenses, shipping expenses, promotion and advertising expenses, and other facility related costs, such as store rent, utilities, and depreciation. Our operating expenses accounted for 16.0% and 15.5% of our revenue for the fiscal years ended March 31, 2023 and 2022, respectively.
| For the fiscal years ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Shipping expenses | $ | 5,863,482 | 20.5 | % | $ | 13,609,683 | 37.3 | % | $ | (7,746,201 | ) | (56.9 | )% | |||||||||||
| Promotion and advertising expenses | 1,367,485 | 4.8 | % | 3,154,574 | 8.7 | % | (1,787,089 | ) | (56.7 | )% | ||||||||||||||
| Transaction commission | 2,248,804 | 7.9 | % | 6,077,241 | 16.7 | % | (3,828,437 | ) | (63.0 | )% | ||||||||||||||
| Professional service fees | 3,193,815 | 11.2 | % | 1,439,811 | 4.0 | % | 1,754,004 | 121.8 | % | |||||||||||||||
| Payroll, employee benefit expenses and bonus expenses | 6,247,246 | 21.8 | % | 6,022,056 | 16.5 | % | 225,190 | 3.7 | % | |||||||||||||||
| Bad debt expenses | 3,471,953 | 12.1 | % | (219,047 | ) | (0.6 | )% | 3,691,000 | 1685.0 | % | ||||||||||||||
| Other expenses | 6,214,303 | 21.7 | % | 6,338,454 | 17.4 | % | (124,151 | ) | (2.0 | )% | ||||||||||||||
| Total operating expenses | $ | 28,607,088 | 100.0 | % | $ | 36,422,772 | 100.0 | % | $ | (7,815,684 | ) | (21.5 | )% | |||||||||||
Operating expenses decreased by $7,815,684, or 21.5%, from $36,422,772 for the fiscal year ended March 31, 2022 to $28,607,088 for the fiscal year ended March 31, 2023. The decrease in operating expenses was primarily attributable to the following factors:
| (1) | a decrease in shipping expenses by $7,746,201, or 56.9%, from $13,609,683 for the fiscal year ended March 31, 2022 to $5,863,482 for the fiscal year ended March 31, 2023. The decrease was mainly due to a significant decrease in overseas sales from online stores, and franchise stores and wholesale customers. Although there was an increase in domestic franchise stores and wholesale customers sales, the shipping rate for domestic sales is much lower than overseas sales; therefore, shipping expenses decreased significantly in fiscal year ended March 31, 2023; |
| (2) | a decrease in promotion and advertising expenses by $1,787,089, or 56.7%, from $3,154,574 for the fiscal year ended March 31, 2022 to $1,367,485 for the fiscal year ended March 31, 2023. The decrease was mainly due to decreased advertising expenses by $2,172,851 in Japan, as we spent less on advertising activities for our online stores and directly-operated physical stores. During the fiscal year ended March 31, 2023, we did not open new online stores and we spent less on existing online stores in China. Meanwhile, as we entrusted the entire operations of some of our online stores to third-party companies, we stopped to advertise these online stores. We also spent less on advertising activities for directly-operated physical stores due to the impact of COVID-19 when less tourists traveled from overseas. The decrease was partially offset by the increased promotion and advertising expenses in Hong Kong by $385,762, as we spent more on advertising activities to enhance our brand awareness and attract more customers when we tried to expand our business in Hong Kong during the fiscal year ended March 31, 2023. We advertised on outdoor billboards in busy commercial districts, popular tourist attractions, airports, newspapers, brochures, leaflets, magazines, and social media platforms, such as WeChat, Facebook, Instagram, and TikTok to promote both our physical stores and online stores; |
| (3) | a decrease in transaction commission paid to third-party e-commerce marketplace operators by $3,828,437, or 63.0%, from $6,077,241 for the fiscal year ended March 31, 2022 to $2,248,804 for the fiscal year ended March 31, 2023. We paid third-party e-commerce marketplace operators transaction commission ranging from 1.8% to 3.0% based on our sales amount. The decrease in transaction commission was in line with the decrease in our online sales; |
| (4) | an increase in consulting and professional service fees by $1,754,004, or 121.8%, from $1,439,811 for the fiscal year ended March 31, 2022 to $3,193,815 for the fiscal year ended March 31, 2023. The increase was mainly due to increased professional services required after we became a public company, mainly including increased legal services of approximately $0.5 million, investor relationship services of approximately $0.4 million and consulting services of approximately $0.4 million and other professional services. The increase was also due to increased professional fees in Hong Kong, which was due to the expansion of our business operation and more professional services were required during the fiscal year ended March 31, 2023; |
| (5) | an increase in payroll, employee benefit expenses, and bonus expenses by $225,190, or 3.7%, from $6,022,056 for the fiscal year ended March 31, 2022 to $6,247,246 for the fiscal year ended March 31, 2023. While the payroll, employee benefit expenses, and bonus expenses in Japan remained relatively stable, the increase was mainly due to the increased payroll, employee benefit expenses, and bonus expenses in Hong Kong, which was due to the increased headcount causing by the expansion of our business operation in Hong Kong during the fiscal year ended March 31, 2023; and |
| (6) | an increase in bad debt expenses by $3,691,000, or 1,685.0%, from $(219,047) for the fiscal year ended March 31, 2022 to $3,471,953 for the fiscal year ended March 31, 2023. The increase in bad debt expenses was mainly due to an increase in account receivable, as our collection of account receivables was slowed down because of delayed shipments and longer payment processing procedures as affected by the COVID-19 pandemic. Although we believe that they are unlikely to default because of our long-term business relationships with them as well as our evaluation of their current financial healthiness based on information available to us, considering the increased credit risk due to slower collection of our account receivable, we applied a higher bad debt percentage on different aging groups of our account receivables balance according to our accounting policy based on our best estimates. We have been monitoring and making great efforts to maintain the provision at a lower risk level. |
Interest Expenses, net
Our interest expenses, net included interest expenses calculated at interest rate per loan agreements and loan service costs, which were directly incremental to the loan agreements and amortized over the loan periods. Interest expenses, net decreased by $363,687, or 13.1%, from $2,785,766 for the fiscal year ended March 31, 2022 to $2,422,079 for the fiscal year ended March 31, 2023. The decrease was mainly due to a decrease in interest expenses at interest rate by $139,467 and decrease in amortized loan service costs in relation to our syndicated loans and other borrowings by $223,641. Although the weighted average loan balance (excluding the impact of foreign currency translation) increased during the fiscal year ended March 31, 2023, interest expenses, net decreased due to the significant depreciation of the Japanese yen against U.S. dollars, as mentioned above.
Additional and Delinquent Tax Due to Consumption Tax Correction
The Tokyo Regional Taxation Bureau had conducted a tax examination into the Company’s consumption tax filing for the period from July 2018 to December 2021. As a result of the examination, we were required to return consumption tax refund for export transactions that were determined not to meet the tax exemption requirements due to incomplete submission of relevant export documents. As the failure in submission of relevant export documents was caused by our suppliers and customers, we entered into agreements with relevant suppliers and customers to claim compensation for damages from the additional consumption tax payment. As a result, the consumption tax to be returned was fully covered by the compensation we claimed from these suppliers and customers. However, due to this consumption tax correction, we were required to pay the additional tax for understatement and delinquent tax of $6,622,486 which we recorded during the fiscal year ended March 31, 2023.
Other Income, net
Our other income, net primarily includes tax refund, disposal gain or loss from property and equipment, government subsidy, and other immaterial income and expense items. Other income, net decreased by $585,061, or 97.8%, from $598,206 for the fiscal year ended March 31, 2022 to $13,145 for the fiscal year ended March 31, 2023. The decrease was mainly due to decreased receipt of government subsidies as the financial support during the COVID-19 pandemic, as well as an increased loss from disposal of property and equipment during the fiscal year ended March 31, 2023.
Gain from Foreign Currency Exchange
Gain from foreign currency exchange was $718,990 for the fiscal year ended March 31, 2023 as compared to a gain from foreign currency exchange of $833,547 for the fiscal year ended March 31, 2022. The gain from foreign currency exchange was mainly due to the significant fluctuations of foreign exchange rate on our accounts receivables that denominated in foreign currencies such as U.S. dollars and Chinese Yuan during the fiscal year ended March 31, 2023.
Change in Fair Value of Representative’s Warrants Liability
In connection with our IPO, we agreed to issue warrants to a representative of several underwriters on January 13, 2022, which was classified as liability at its fair value and adjust the warrant to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our consolidated statements of operations and comprehensive income (loss). Change in fair value of representative’s warrants liability was amounted to $139,615 and $369,404 during the fiscal years ended March 31, 2023 and 2022, respectively.
Income (Loss) from Equity Method Investment
On December 25, 2020, we and an individual investor established Palpito, a stock company incorporated in Japan pursuant to the laws of Japan. We own 40% of Palpito and the registered capital was fully injected on December 31, 2020. Our income from equity method investment was $14,554 for the fiscal year ended March 31, 2023 as compared to a loss from equity method investment of $145,828 for the fiscal year ended March 31, 2022. The increase in income from equity method investment was due to net income generated by Palpito during the fiscal year ended March 31, 2023.
Provision for Income Taxes
Our provision for income taxes was $714,400 and $2,234,676 for the fiscal years ended March 31, 2023 and 2022, respectively. Our provision for income taxes decreased by $1,520,276, or 68.0%. The decrease in provision for income taxes was mainly due to the decreased current income tax expenses resulted from the decreased taxable income for the fiscal year ended March 31, 2023, which was partially offset by increased deferred income tax expenses resulted from compensation receivable in relation to an examination on consumption tax by the tax authority (see Note 14 of our accompanying consolidated financial statements).
Net Loss (Income)
As a result of the foregoing, we reported a net loss of $8,048,822 for the fiscal year ended March 31, 2023 as compared to a net income of $3,924,148 for the fiscal year ended March 31, 2022.
B. Liquidity and Capital Resources
As reflected in the consolidated financial statements, we had a net income of $7.5 million and cash provided by operating activities of $1.9 million for the fiscal year ended March 31, 2024. Our working capital increased by $20.2 million from $8.6 million as of March 31, 2023 to $28.8 million as of March 31, 2024.
As of March 31, 2024, we had $2,475,538 in cash as compared to $1,766,441 as of March 31, 2023. As of March 31, 2024·, we also had approximately $105.4 million of accounts receivable balance due from third parties. Approximately 35.4% of the March 31, 2024 balance has subsequently been collected, and the majority of the remaining balance is expected to be collected by December 31, 2024. The collection of such receivables made cash available for use in our operations as working capital, if necessary.
As of March 31, 2024, our merchandise inventories balance amounted to approximately $4.4 million, which we believe can be sold quickly based on the analysis of the current trends in demand for our products. As of March 31, 2024, we also had approximately $53.2 million in short-term borrowings and $7.4 million in long-term borrowings outstanding. We successfully extended the syndicated loans and another two loans with maturity dates until December 2024. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experience and outstanding credit history.
As of March 31, 2024, we had consumption tax payable of approximately $5.5 million due to tax examination. The Company will make payments of the consumption tax payable by a monthly instalment and the amount will also offset by our future consumption tax receivable from the tax authorities for excess input consumption tax. Meanwhile, as of March 31, 2024, we had approximately $9.9 million of compensation receivable for consumption tax. We expect there will be no material impact on our cash flow in coming years.
Short-term borrowings consisted of the following:
| Maturity | Interest Rate | March 31, 2024 |
March 31, 2023 |
|||||||||||
| Syndicated Loans (1) | December, 2024 | TIBOR^(3M)+0.70% - TIBOR (1M)+1.20% | $ | 51,912,050 | $ | 60,636,412 | ||||||||
| Resona Bank (2) | December, 2024 | 3.4% | $ | 1,322,600 | - | |||||||||
| Total short-term borrowings | $ | 53,234,650 | $ | 60,636,412 | ||||||||||
The terms of the various loan agreements related to short-term borrowings contain certain restrictive covenants which, among other things, require the Company to maintain specified ratios of debt to tangible net assets and debt service coverage, and positive net income. The terms also prohibit the Company from entering into transactions that may have a significant adverse impact on the Company’s ability to fulfil its loan obligations, including but not limited to, reorganization of the Company or its subsidiaries, transferring part or all of the Company’s business or assets to third parties, or receiving part or all of business or assets from other third-party companies. Although the Company incurred a net loss in the fiscal year ended March 31, 2023, the Company did not receive any notices from banks, such as notices of terminating its ability to borrow under the relevant agreements and notices of accelerating its obligations to repay outstanding borrowings. The financial performance of the Company has improved during the fiscal year ended March 31, 2024, and the Company was in compliance with such covenants as of the March 31, 2024.
| ^ | TIBOR is an acronym for the Tokyo Interbank Offered Rate, which is the daily reference rate derived from the interest rate that banks charge to lend funds to other banks in the Japanese interbank market. |
| (1) | On September 27, 2022, the Company entered into a one-year syndicated loan agreement, which was effective from September 30, 2022, with a consortium of banks, with an aggregate credit line of ¥8.15 billion (approximately $61.3 million), and the interest rate was adjusted to TIBOR (3M)+0.70%. As of March 31, 2023, the Company borrowed an aggregated of ¥8.15 billion (approximately $61.3 million) under the agreement, and the net outstanding balance of this loan was approximately ¥8.1 billion (approximately $60.6 million), net off the unamortized loan service cost of ¥85.6 million ($643,438). On September 22, 2023, the Company extended the loan on a three-month basis for an additional six months with a maturity date on March 29, 2024, and the interest rate was adjusted to TIBOR (1M)+1.20%. In March 2024, the Company repaid ¥300.0 million, and the Company extended the loan for additional three months with a maturity date on June 28, 2024, subsequently, extended the loan for additional six months with a maturity date on December 30, 2024, and the interest rate remained at TIBOR (1M)+1.20%. As of March 31, 2024, the total outstanding balance of this loan was approximately ¥7.85 billion (approximately $51.9 million). The syndicated loan is guaranteed by Mr. Kanayama. |
| (2) | The loan is guaranteed by Mr. Kanayama. The Company extended the loan for additional six months with a maturity date on December 30, 2024. |
Long-term borrowings consisted of the following:
| Maturity | Interest Rate | March
31, 2024 |
March
31, 2023 |
|||||||||
| Toei Shinkin Bank (1) | December 2053 | 1.10% | $ | - | $ | 1,981,520 | ||||||
| Japan Finance Corporation (2) | December 2024 - April 2025 | 0.71% - 4.25% | 1,247,735 | 1,665,007 | ||||||||
| BOT Lease Co., Ltd. (3) | March 2028 | TIBOR (3M) + 6.0% | 1,322,600 | 1,503,800 | ||||||||
| MUFG Bank (4) | August 2026 | TIBOR (3M) + 0.8% | 4,166,190 | 5,210,667 | ||||||||
| Tokyo Higashi Shinkin Bank | July 2026 | 2.0% | - | 100,153 | ||||||||
| The Hongkong and Shanghai Banking Corporation Limited (5) | June 2023 – February 2033 | 2.750% - 3.625% | 424,126 | 619,032 | ||||||||
| DFL-Shutoken Leasing (Hong Kong) Company Limited | March 2024 – October 2025 | 2.990% | 207,105 | 518,731 | ||||||||
| Resona Merchant Bank Asia Limited (6) | No maturity date | 1.2% | - | 1,510,934 | ||||||||
| Total long-term borrowings | $ | 7,367,756 | $ | 13,109,844 | ||||||||
| Current portion of long-term borrowings | $ | 1,730,796 | $ | 2,783,445 | ||||||||
| Non-current portion of long-term borrowings | $ | 5,636,960 | $ | 10,326,399 | ||||||||
| (1) | Guaranteed by Mr. Kanayama. The loan was fully repaid during the fiscal year ended March 31, 2024 before maturity. |
| (2) | The Company extended the loan for additional six months with a maturity date on December 31, 2024. |
| (3) | The loan bears an interest rate of TIBOR (3M)+6.0% (in the case EBITDA exceeds ¥0) or TIBOR (3M)+0.7% (in the case EBITDA is ¥0 or less). |
| (4) | In connection with the Company’s bank borrowings from MUFG Bank, the Company pledged a piece of land of 16,165 square feet with a carrying value of ¥340.1 million (approximately $2.2 million) as of March 31, 2024 as collateral to safeguard the loan. |
| (5) | Guaranteed by Mr. Kanayama. |
| (6) | On September 27, 2022, TLS entered into a revolving credit facility agreement with Resona Merchant Bank Asia Limited for an aggregated credit line of ¥200 million, with no specific maturity date. The loan was fully repaid during the fiscal year ended March 31, 2024. |
As of March 31, 2024, our working capital balance was approximately $28.8 million. In assessing our liquidity, our management monitors and analyzes our cash on hand, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments. We believe our cash on hand, our operating cash flows and the available bank facilities will be sufficient to meet our working capital needs over the next 12 months. However, if we were to experience an adverse operating environment or incur unanticipated capital expenditures, or if we decide to accelerate our growth, then additional financing may be required. Our capital expenditures, including development costs related to the opening additional physical stores and facilities, maintenance and remodel expenditures, and other capital needs such as other infrastructure to support ongoing operational initiatives have been and will continue to be significant. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debts or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
We have implemented various measures to control our operating costs. Currently, in order to improve our cash flow and working capital, we have transformed four of our underperformed directly-operated physical stores into franchise stores during the fiscal year ended March 31, 2024, so that we could improve our profitability by saving on our operating expenditure, especially personnel cost, such as payroll, employee benefit expenses and bonus expenses etc. Meanwhile, we have closely monitored the collection of long-term receivable and account receivables, and strengthened our inventory management to minimize inventory backlog, our accounts receivables and inventory turnover rate has improved which collectively contributed to the improvement of our financial performance. As part of our long-term strategy, we will continue investing in IT and equipment to enhance operational efficiency and reduce costs, and we plan to continue exploring new markets while enhancing our current presence in Japan, China, the U.S., the U.K., and Canada by analyzing features of customer trends in different regions, continuously focusing on improving customer in-store experience, further expanding our distribution network, and exploring new partnership opportunities. During the fiscal year ended March 31, 2024, we opened two directly-operated physical stores in the United States and one directly-operated physical store in Canada. In the next three years, we intend to open 10 additional directly-operated physical stores in Hong Kong, and expect the expenses related to opening these stores to be approximately HKD15 million to HKD20 million ($1.9 million to $2.5 million); and we also intend to add an aggregate of 15 new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore, Malaysia, Thailand and Taiwan. We plan to extend our product offerings by cooperating with beauty product and other product suppliers to develop our own private label products. We believe this will help us attract additional customers, enhance the shopping experience of our existing customer base, encourage repeat purchases, and increase customer engagement and loyalty. Even though we still expect to invest a significant amount of resources on our current expansion plans in the next few years, we are confident that we would be able to generate sufficient net income and cash flow from the operating activities of our planned new stores in the long run to support our future operations.
The following table sets forth summaries of our cash flows for the periods indicated:
| For the Fiscal Years ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Net cash provided by (used in) operating activities | $ | 1,911,955 | $ | (25,738,414 | ) | $ | (7,005,764 | ) | ||||
| Net cash provided by (used in) investing activities | 2,713,914 | (743,271 | ) | (3,105,239 | ) | |||||||
| Net cash provided by (used in) financing activities | (1,781,306 | ) | 12,745,818 | 13,763,803 | ||||||||
| Effect of exchange rate change on cash | (2,135,466 | ) | (2,763,692 | ) | (2,230,388 | ) | ||||||
| Net increase (decrease) in cash | 709,097 | (16,499,559 | ) | 1,422,412 | ||||||||
| Cash at beginning of year | 1,766,441 | 18,266,000 | 16,843,588 | |||||||||
| Cash at end of year | $ | 2,475,538 | $ | 1,766,441 | $ | 18,266,000 | ||||||
Operating Activities
Net cash provided by operating activities was $1,911,955 for the fiscal year ended March 31, 2024, mainly derived from a net income of $7,478,936 for the year, and net changes in our operating assets and liabilities, which mainly included a decrease in compensation receivable for consumption tax of $11,284,665 as we have received payments from the debtors according to the collection plan, and an increase in accounts payable of $13,816,414 as we negotiated longer payment terms with our suppliers. Our merchandise inventories decreased by $2,355,034 due to our strengthening inventory management to minimize inventory backlog and improve inventory turnover rate. Meanwhile, accounts receivable due from third parties increased by $24,747,655 as a result of our increased sales, and taxes payable decreased by $6,977,961 as we have made payments to tax authority for the additional consumption tax as a result of the consumption tax examination as mentioned above during the fiscal year ended March 31, 2024.
Net cash used in operating activities was $25,738,414 for the fiscal year ended March 31, 2023, mainly derived from a net loss of $8,048,822 for the year, reconciled by provision for doubtful accounts of $3,471,953 and deferred tax provision of $4,849,771, and net changes in our operating assets and liabilities, which mainly included an increased in accounts receivable due from third parties of $53,824,026 which was due to the delayed shipments and longer payment processing procedures as affected by the COVID-19 pandemic. Compensation receivable for consumption tax increased by $23,212,327 which was due to the compensation receivable due from our suppliers and customers in relation to the consumption tax examination as mentioned above. Meanwhile, merchandise inventories decreased by $21,285,866 as we reduced the stockpile of inventories in our bonded warehouse in China as we terminated the warehousing services with a third-party service provider since October 2022. Taxes payable increased by $17,268,372 as we are required to additional consumption tax to tax authority as a result of the consumption tax examination as mentioned above. Prepaid expenses and other assets decreased by $7,780,889 was mainly due to the decreased consumption tax and the increase of receivable and account payable by $5,280,797 during the fiscal year ended March 31, 2023.
Net cash used in operating activities was $7,005,764 for the fiscal year ended March 31, 2022, mainly derived from a net income of $3,924,148 for the year and net changes in our operating assets and liabilities, which mainly included an increase in merchandise inventories of $6,054,509 as we increased the stockpile of inventories in anticipation of increased sales in the coming months. Prepaid expenses and other current assets increased by $7,028,529 primarily due to the increased consumption tax receivable, which was due the impact of the COVID-19 pandemic in Japan, causing the delay in refund of the consumption tax by the Japanese tax bureau. Long-term prepaid expenses and other non-current assets increased by $4,762,929, as we made prepayment for warehouse and logistics services over the period from March 1, 2022, to February 28, 2025. Meanwhile, accounts receivable due from third parties decreased by $7,841,569 which was due to the decreased revenue in the last quarter of the fiscal year ended March 31, 2022.
Investing Activities
Net cash provided by investing activities amounted to $2,713,914 for the fiscal year ended March 31, 2024, mainly due to proceeds from disposal of property and equipment of $3,104,387 and proceeds from disposal of equity method investment of $276,800, partially offset by purchases of property and equipment in the aggregate amount of $929,308 and disposal of a subsidiary of $171,788.
Net cash used in investing activities amounted to $743,271 for the fiscal year ended March 31, 2023, mainly due to purchases of property and equipment in the aggregate amount of $934,960, partially offset by the repayments from related parties of $188,728.
Net cash used in investing activities amounted to $3,105,239 for the fiscal year ended March 31, 2022, mainly due to purchases of property and equipment in the aggregate amount of $3,037,813.
Financing Activities
Net cash used in financing activities was $1,781,306 for the fiscal year ended March 31, 2024, which primarily consisted of repayments of long-term borrowings of $4,186,712 and repayments of short-term borrowings of $2,076,000, partially offset by proceeds from issuance of ordinary shares, net of issuance costs of $3,747,282 and proceeds from short-term borrowings of $1,384,000.
Net cash provided by financing activities was $12,745,818 for the fiscal year ended March 31, 2023, which primarily consisted of proceeds from short-term borrowings of $78,831,300, partially offset by repayments of short-term borrowings of $55,515,000 and repayments of long-term borrowings of $9,798,554.
Net cash provided by financing activities was $13,763,803 for the fiscal year ended March 31, 2022, which primarily consisted of net proceeds from our IPO of $22,102,984, proceeds from short-term borrowings of $282,176,915, and proceeds from long-term borrowings of $17,057,036, partially offset by repayments of short-term borrowings of $303,096,477.
Contractual Obligations
As of March 31, 2024, our contractual obligations were as follows:
| Contractual obligations | Total | Less than 1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | Thereafter | |||||||||||||||||||||
| Short-term borrowings (1) | $ | 53,234,650 | $ | 53,234,650 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| Long-term borrowings (2) | 7,835,529 | 1,873,955 | 796,984 | 3,468,886 | 1,452,163 | 49,449 | 194,092 | |||||||||||||||||||||
| Operating lease payments (3) | 4,523,459 | 1,679,607 | 1,163,010 | 467,286 | 404,128 | 249,647 | 559,781 | |||||||||||||||||||||
| Finance lease payments (4) | 485,937 | 202,516 | 161,194 | 100,635 | 20,652 | 940 | - | |||||||||||||||||||||
| Total | $ | 66,079,575 | $ | 56,990,728 | $ | 2,121,188 | $ | 4,036,807 | $ | 1,876,943 | $ | 300,036 | $ | 753,873 | ||||||||||||||
| (1) | Represents the outstanding principal balance of short-term loans from banks and financial institutions. |
| (2) | Represents the outstanding principal balance and interest payable of long-term loans from banks and financial institutions. |
| (3) | We lease retail store facilities and distribution centers, which are classified as operating leases in accordance with Topic 842. As of March 31, 2024, our future lease payments totaled $4,523,459. |
| (4) | We lease software, equipment, and furniture, which are classified as finance leases in accordance with Topic 842. As of March 31, 2024, our future lease payments totaled $485,937. |
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2024 and 2023.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
D. Trend Information
Other than as disclosed below and elsewhere in this annual report on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments, or events for the period from April 1, 2023 to March 31, 2024 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity, or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
Factors and Trends Affecting Our Results of Operations
We believe the following key factors may affect our financial condition and results of operations:
Changes in Consumer Preferences and Discretionary Spending
Our success depends in substantial part on our ability to recognize and define product and beauty trends; anticipate, gauge, and react to changing consumer demand in a timely manner; translate market trends into appropriate, saleable product offerings in our stores in advance of our competitors; develop and maintain supplier relationships that provide us access to the newest merchandise on reasonable terms; and distribute merchandise to our stores in an efficient and effective manner and maintain appropriate in-stock levels. If we are unable to anticipate and fulfill the merchandise needs of the regions in which our products are sold, it could result in decreased demand for our products or require us to change our pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial results, and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. We appeal to a wide demographic consumer profile and offer a broad selection of Japanese beauty and health products. A downturn in the economy could adversely impact consumer purchases of discretionary items such as beauty and health products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit, and consumer confidence in future economic conditions. In the event of an economic downturn, 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.
Our Ability to Increase Awareness of Our Brand and Develop Customer Loyalty
We believe our “晴の良品,” “東京生活館,” and other brands are well-recognized among our customers and other Japanese beauty and health product industry players such as other Japanese beauty and health product retailers in the local markets our products are sold in. Our brands are integral to our sales and marketing efforts. We believe that maintaining and enhancing our brand name recognition in a cost-effective manner is critical to satisfying consumer needs by further developing and maintaining the quality of our products, as well as our ability to respond to competitive pressures. We have incurred expenses on a variety of different marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our marketing and promotional activities may not be well received by customers and may not result in the levels of product sales that we anticipate. Therefore, brand promotion activities may not necessarily yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in marketing activities. If we are unable to satisfy consumer needs or if our public image or reputation were otherwise diminished, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or retain our existing customers, in which case our business transactions with our customers may decline, and our operating results and financial condition, would be materially adversely affected.
Our Ability to Maintain Good Relationship with Existing Suppliers and Develop New Suppliers
We have no long-term supply agreements or exclusive arrangements with our suppliers and, therefore, our success depends on maintaining good relationships with our suppliers. Our business depends to a significant extent on the willingness and ability of our suppliers to supply us with a sufficient selection and volume of products to stock our stores. Some of our suppliers that have many other customers may not have the capacity to supply us with sufficient merchandise to keep pace with our growth plans. We have also entered into supply agreements with certain well-known Japanese brands, such as Shiseido, Sato, Kao, and Kosé, which have allowed us to benefit from the growing popularity of such brands. Any of these brands could in the future decide to scale back or end its partnership with us and strengthen its relationship with our competitors, which could negatively impact the revenue we earn from the sale of such products. As we selectively increase our product offerings, we will need to work with different groups of new suppliers efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers. If we fail to maintain strong relationships with our existing suppliers, or fail to continue acquiring and strengthening relationships with additional suppliers of beauty and health products, our ability to obtain a sufficient amount and variety of merchandise on reasonable terms may be limited, which could have a negative impact on our competitive position.
Our Ability to Compete Successfully
The beauty and health products markets in Japan, China, Canada, the U.K., and the U.S. are fragmented and highly-competitive. We primarily compete against other offline and online retailers and wholesalers of beauty and health products, but also increasingly face competition from retail pharmacies, discount stores, convenience stores, and supermarkets as we increase our offering of sundry products and other products. Our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities, or greater financial, technical, or marketing resources than we do. Competitors may leverage their brand recognition, experience, and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products. Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies, and devote substantially more resources to their store and website development than us. In addition, new and enhanced technologies may increase the competition in the online retail market. Increased competition may reduce our profitability, market share, customer base, and brand recognition. There can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive pressures may have a material adverse effect on our business, financial condition, and results of operations.
A Downturn in Economy
In recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The global economy faced a sharp rise in energy prices triggered by the conflict in Ukraine. This led to a rise in inflation globally, followed by considerable monetary tightening in major markets, particularly in the United States and Europe, which put downward pressure on the global economies. However, economic activities continued to normalize as the effects of COVID-19 on people’s daily lives lessened, and, on the whole, the global economy was beginning to recover gradually. The current global economy has managed to avoid a significant slowdown and is maintaining a modest but stable growth trajectory, and it is expected that the global economy will continue to show robust growth from 2024 to 2025. The U.S. economy is forecasted to sustain around 2% growth rate, supported by a strong capital investment driven by a high pace of immigration and industrial policies, despite the demand restraint from previous monetary tightening becoming apparent. In Europe, although a tightening financial environment persists as the banks continue to tighten credit standards, a recovery to around 1% growth is expected in 2025 due to a resurgence in consumption following an increase in real wages. While the Chinese economy is anticipated to achieve government-targeted growth rates in 2024, it will continue to be affected by the drag of prolonged real estate adjustments with increased fiscal spending.
Japan’s economy generally followed the global economic trends, showing a mixture of negative and positive trends. Although the general economy of Japan is gradually recovering after the negative impact of the COVID-19, there are still concerns about the rising prices, depreciation of Japanese Yen and slowdown in the overseas economy. In terms of domestic demand, personal consumption is picking up due to the improvements in the employment rate and personal wages, as well as the supportive government policies. In terms of external demand, there is an increase in number of overseas visitors since Japan resumed visa-free travel, and the exports which had declined due to the slowdown in the overseas economy, are gradually increasing. However, there are still many negative factors that could significantly slow down the pace of economic recovery. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.
COVID-19 Affecting Our Results of Operations
The COVID-19 pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.
Due to a resurgence of the COVID-19 pandemic in late March 2022 in China, which resulted in shipping container shortages and stricter border control protocols, shipments and customs clearance for overseas imports were delayed. Our sales from online stores and franchise stores and wholesale customers in China were significantly constrained, due to the inability to deliver the products to our customers as a consequence of mobility restrictions and lockdowns imposed in certain provinces across China. The daily life of the Japanese residents is largely back to its normal state. The Japanese government reopened its borders to holders of visitors, and visitor numbers have risen steadily since Japan resumed visa-free travel for many countries in October 2022. It halted pre-arrival COVID-19 tests for travelers from China on April 2023 and is set to scrap all remaining infection controls from May 2023. Meanwhile. in early December 2022, China announced a nationwide loosening of its zero-COVID policy, and most of the travel restrictions and quarantine requirements were lifted in December 2022. Although there were significant surges of COVID-19 cases in many cities in China during the period from December 2022 to January 2023, the spread of the COVID-19 has been slowed down and it is successfully under control currently in China. However, the impact of COVID-19 pandemic still depends on the future developments that cannot be accurately predicted at this time. We may experience customer losses, including due to bankruptcy or customers cutting budget or ceasing operations, which may also result in delays in collections or an inability to collect accounts receivable from these customers. Although COVID-19’s impact on our overall business operations appeared to be temporary, the extent to which COVID-19 may continue to impact our financial condition, results of operations, or liquidity continues to remain uncertain.
E. Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. Our critical accounting policies and practices include the following: (i) revenue recognition; (ii) income taxes; and (iii) credit losses. See “Note 2—Summary of Significant Accounting Policies” to our consolidated financial statements for the disclosure of these accounting policies. We believe the following accounting estimates involve the most significant judgments used in the preparation of our financial statements.
Impairment of long-lived assets
We evaluate our long-lived assets, including property and equipment, operating lease right-of-use assets and long-term prepaid expenses and non-current assets for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, we evaluate the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we recognize an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, we did not recognize any impairment loss on long-lived assets for the fiscal years ended March 31, 2024, 2023, and 2022.
Credit Losses
On April 1, 2023, we adopted Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements.
Our account receivables, compensation receivable for consumption tax and other receivable included in current and non-current prepaid expenses and other assets, are within the scope of ASC Topic 326. We make estimates of expected credit and collectability trends for the allowance for credit losses based upon assessment of various factors, including historical experience, the age of the accounts receivable, compensation receivable for consumption tax and other receivable, credit-worthiness of the customers and other debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and other debtors. We also provide specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. As of March 31, 2024 and 2023, allowance for credit losses for accounts receivable amounted to $1,244,662 and $3,219,772, respectively, allowance for credit losses for other receivables amounted to $728,554 and $904,598, respectively, and allowance for credit losses for compensation receivable for consumption tax amounted to $99,526 and $436,145, respectively.
Merchandise inventories
Merchandise inventories are stated at the lower of cost or net realizable value, on a weighted average basis. Costs include mainly the cost of merchandise inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to sell products. Write-down is recorded when future estimated net realizable value is less than cost, which is recorded in merchandise costs in the consolidated statements of operations and comprehensive income (loss). The Company periodically evaluates merchandise inventories for their net realizable value adjustments, and reduces the carrying value of those merchandise inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging and expiration dates, as applicable, taking into consideration historical and expected future product sales. As of March 31, 2024 and 2023, merchandise inventories write-down was $69,700 and $152,759, respectively.
Income taxes
We are required to make estimates and apply our judgements in determining the provision for income tax expenses for financial reporting purpose based on tax laws in various jurisdictions in which we operate. In calculating the effective income tax rate, we make estimates and judgements, including the calculation of tax credits and the timing differences of recognition of income and expenses between financial reporting and tax reporting. These estimates and judgements may result in adjustments of pre-tax income amount filed with local tax authorities in accordance with relevant local tax rules and regulations in various tax jurisdictions. Although we believe that our estimates and judgments are reasonable, actual results may be materially different from the estimated amounts. Changes in these estimates and judgements may result in material increase or decrease in our provision for income tax expenses.
Deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. When we determine and quantify the valuation allowances, we consider such factors as projected future taxable income, the availability of tax planning strategies, the historical taxable income/losses in prior years, and future reversals of existing taxable temporary differences. The assumptions used in determining projected future taxable income require significant judgment. Actual operating results in future years could differ from our current assumptions, judgments and estimates. Changes in these estimates and assumptions may materially affect the tax position measurement and financial statement recognition. If, in the future, we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would decrease our earnings in the period in which such a determination is made. As of March 31, 2024 and 2023, we recorded deferred tax assets of $950,213 and $4,930,891, net of valuation allowance of $79,062 and $597,777, respectively.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our board of directors, our senior management, and corporate auditors as of the date of this annual report.
| Name | Age | Position(s) | ||
| Mei Kanayama | 44 | Representative Director and Director (Principal Executive Officer) | ||
| Youichiro Haga | 58 | Director and Corporate Officer (Principal Accounting and Financial Officer) | ||
| Keiichi Kimura* | 58 | Corporate Auditor | ||
| Tadao Iwamatsu* | 49 | Corporate Auditor | ||
| Junji Sato* | 64 | Corporate Auditor | ||
| Yoji Takenaka | 60 | Independent Director | ||
| Tetsuya Sato | 53 | Independent Director |
| * | Corporate auditors are not members of our board of directors. |
Mr. Mei Kanayama has served as our representative director since June 2009 and a director since January 2008, and the representative director and director of Kaika International since October 2019. Mr. Kanayama served as the president of Hirona Co., Ltd., a telecommunications company, between May 2008 and March 2012, and as a sales manager at Yonechiku Co., Ltd., a wholesaler and retailer of frozen marine products, dried foods, and livestock products, between July 2000 and September 2007.
Mr. Youichiro Haga has served as a director since June 2021 and a corporate officer since September 2020. Prior to joining Yoshitsu, Mr. Haga worked at MUFG Bank, Ltd. from April 1991 to August 2020, in various roles, including deputy branch manager, senior investigator, and investigator, among others. Mr. Haga received his law degree from Hitotsubashi University in 1991.
Mr. Keiichi Kimura has served as our corporate auditor since March 2020 and as a residential land and building trader of Tengo Rengan Co., Ltd since March 2019. Mr. Kimura served as a residential land and building trader of at Takuetsu Kokusai Co., Ltd. between February 2014 and February 2019 and as director of Lakelands Golf Club between December 2006 and August 2013. Mr. Kimura received his bachelor’s degree in Economics from Osaka Gakuin University in 1989 and his bachelor’s degree in Business Marketing from University of Southern Queensland in 1992.
Mr. Tadao Iwamatsu has served as our corporate auditor since June 2022. Mr. Iwamatsu served as a general manager of our Company between February 2017 and June 2022 and a store manager at Universal Drug Store Co. between February 2007 and January 2017. Mr. Iwamatsu received his bachelor’s degree in Economics from Teikyo University in 1999.
Mr. Junji Sato has served as our corporate auditor since October 2021. Mr. Sato has been an instructor in system safety management at Nagaoka University of Technology since April 2017, and lectured on product safety measures at the Ministry of Economy, Trade, and Industry of Japan, universities, and other organizations between September 2015 and March 2017. Mr. Sato served as a product development manager at Chiyoda Co., Ltd (TYO: 8185), an operator of specialty store chains, between July 2004 and August 2015 and worked at Midori International Corp., a service provider in the field of intellectual property, between April 1990 and January 2004, where he was responsible for the design and development of new products and cooperation with foreign enterprises. Mr. Sato has served as an independent director of Seihinkokusai Co., Ltd. since June 2018. Mr. Sato received his bachelor’s degree in Fine Arts from Tokyo Zokei University in 1982.
Mr. Yoji Takenaka has severed as our independent director since June 2021. Mr. Takenaka has been a lawyer at Takenaka Law Office, which he founded, since April 2005. Mr. Takenaka worked as a lawyer at Yamamoto Takayuki Law Office from April 1993 to March 2005. Mr. Takenaka received his bachelor’s degree in Politics from Waseda University in 1986.
Mr. Tetsuya Sato has severed as our independent director since June 2021. Mr. Sato has served as the CFO of RSK Co., Ltd since July 2019, and served as president of WDM Co., Ltd between June 2017 and June 2019. Mr. Sato was in charge of business related to Nippon Telegraph and Telephone at Terrada Logicom Co., Ltd in Mitsubishi Corporation between January 2005 and May 2016. Mr. Sato also worked part-time at various Japanese companies, including MGB Co., Ltd where he has served as a corporate officer since April 2020, Japan Enmei Co., Ltd where he served as CFO between June 2018 and June 2019, as vice president and M&A division director between April 2018 and May 2018, and as M&A division director between September 2006 and May 2016, DDZ Co., Ltd where he served as president between July 2017 and March 2018, and Soken Beverage Co., Ltd where he served as auditor between June 2016 and May 2017. Mr. Sato received his Doctor of Business Administration degree from Josai International University in 2020.
Board Diversity
The table below provides certain information regarding the diversity of our board of directors as of the date of this annual report.
| Board Diversity Matrix | ||
| Country of Principal Executive Offices: | Japan | |
| Foreign Private Issuer | Yes | |
| Disclosure Prohibited under Home Country Law | No | |
| Total Number of Directors | 4 |
| Female | Male | Non- Binary |
Did Not Disclose Gender |
|||||||||||||
| Part I: Gender Identity | ||||||||||||||||
| Directors | 0 | 4 | 0 | 0 | ||||||||||||
| Part II: Demographic Background | ||||||||||||||||
| Underrepresented Individual in Home Country Jurisdiction | 0 | |||||||||||||||
| LGBTQ+ | 0 | |||||||||||||||
| Did Not Disclose Demographic Background | 0 | |||||||||||||||
Family Relationships
None of our directors or executive officers has a family relationship as defined in Item 401 of Regulation S-K.
Controlled Company
Mr. Mei Kanayama, our representative director, beneficially owns approximately 55.58% of the aggregate voting power of our outstanding Ordinary Shares. As a result, we are a “controlled company” within the meaning of the Nasdaq listing rules. As a controlled company, we are permitted to elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements, including the requirements that:
| ● | a majority of our board of directors consist of independent directors; | |
| ● | our director nominees be selected or recommended solely by independent directors; and | |
| ● | we have a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees. |
As a foreign private issuer, however, Nasdaq corporate governance rules allow us to follow corporate governance practice in our home country, Japan, with respect to appointments to our board of directors and committees. We follow home country practice as permitted by Nasdaq rather than rely on the “controlled company” exception to the corporate governance rules. See “Item 3. Key Information—D. Risk Factors— Risks Relating to Our Ordinary Shares and the Trading Market—Because we are a foreign private issuer and intend to take advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.” Accordingly, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
B. Compensation
In accordance with the Companies Act, compensation for our directors and senior management, including bonuses, retirement allowances, and incentive stock options, must be approved at our general meeting of shareholders, unless otherwise specified in our Articles of Incorporation in the future. The shareholders’ approval may specify the upper limit of the aggregate amount of compensation or calculation methods, but if compensation includes benefits in kind, the shareholders’ approval must include the description of such benefits. Compensation for a director or senior management is fixed by our board of directors or by consultation among our corporate auditors in accordance with our internal regulations and practice and, in the case of retirement allowances, generally reflects the position of the director or corporate auditor at the time of retirement, length of service as a director or senior management and contribution to our performance.
For the fiscal year ended March 31, 2024, we paid an aggregate of approximately $421,428 as compensation to our directors and senior management. We have not set aside or accrued any amount to provide pension, retirement, or other similar benefits to our directors and senior management.
C. Board Practices
Our board of directors has the ultimate responsibility for the administration of our affairs. Under the Companies Act and our Articles of Incorporation, we are required to have no fewer than three but not more than 10 directors. Directors are elected at general meetings of shareholders. The normal term of office of any director expires at the close of the ordinary general meeting of shareholders held with respect to the last fiscal year ended within two years after such director’s election to office. Our directors may, however, serve any number of consecutive terms.
The board of directors appoints from among its members one or more representative directors, who have the authority individually to represent us in the conduct of our affairs. The board of directors may appoint from among its members a president, or one or more senior managing directors, and managing directors.
Board of Directors
Our board of directors consists of four directors. Our board of directors has determined that our directors, Yoji Takenaka, and Tetsuya Sato satisfy the “independence” requirements of the Nasdaq corporate governance rules and the rules and regulations of the SEC.
Corporate Auditors
We currently have three corporate auditors. As permitted under the Companies Act, we have elected to structure our corporate governance system as a company with a separate board of corporate auditors instead of board committees. Under the Companies Act and our Articles of Incorporation, we are required to have at least three but no more than 10 corporate auditors. Corporate auditors are elected at general meetings of shareholders. The normal term of office of any corporate auditor expires at the close of the annual general meeting of shareholders held with respect to the last fiscal year ended within four years after such corporate auditor’s election to office. Our corporate auditors may, however, serve any number of consecutive terms. Corporate auditors may be removed by a special resolution of a general meeting of shareholders.
Our corporate auditors are not required to be certified public accountants. Our corporate auditors may not at the same time be directors, employees, or accounting advisors (kaikei sanyo) of us or our subsidiary.
The function of corporate auditors is similar to that of independent directors, including those who are members of the audit committee, of a U.S. company. Each corporate auditor has a statutory duty to supervise the administration by the directors of our affairs, to examine the financial statements and business reports to be submitted by a representative director at the general meetings of shareholders and to prepare an audit report. They are obligated to participate in meetings of the board of directors and, if necessary, to express their opinion at such meetings, but are not entitled to vote. Our corporate auditors must inspect the proposals, documents, and any other materials to be submitted by our board of directors to the shareholders at the shareholders’ meeting. If a corporate auditor finds a violation of statutory regulations or our Articles of Incorporation, or another significant improper matter, such auditor must report those findings to the shareholders at the shareholders’ meeting.
Furthermore, if a corporate auditor believes that a director has engaged in, or is likely to engage in, misconduct or acts that are significantly improper, or that there has been a violation of statutory regulations or our Articles of Incorporation, the corporate auditor: (i) must report that fact to our board of directors; (ii) can demand that a director convene a meeting of our board of directors; and (iii) if no such meeting is convened in response to the demand, can convene the meeting under the corporate auditor’s own authority. If a director engages in, or is likely to engage in, an activity outside the scope of the objectives of our Company or otherwise in violation of laws or regulations or our Articles of Incorporation, and such act is likely to cause significant damage to our Company, then a corporate auditor can demand that the director cease such activity.
Our board of corporate auditors has a statutory duty to prepare an audit report based on the audit reports issued by the individual corporate auditors and submit such audit reports to a relevant director and, in the case of audit reports related to financial statements, the independent auditors of our Company each year. A corporate auditor may note an opinion in an audit report issued by our board of corporate auditors, if the opinion expressed in such corporate auditor’s individual audit report is different from the opinion expressed in the audit report issued by our board of corporate auditors. Our board of corporate auditors is empowered to establish the audit principles, the method of examination by our corporate auditors of our affairs and financial position, and any other matters relating to the performance of our corporate auditors’ duties.
Additionally, our corporate auditors must represent our Company in: (i) any litigation between our Company and a director; (ii) dealing with shareholders’ demands seeking a director’s liability to our Company; and (iii) dealing with notices of litigation and settlement in a derivative suit seeking a director’s liability to our Company. A corporate auditor can file court actions relating to our Company within the authority of our corporate auditors, such as an action to nullify the incorporation of our Company, the issuance of shares, or a merger, or to cancel a resolution at a shareholders’ meeting.
In addition to our corporate auditors, we must, on or prior to listing of the ADSs, appoint accounting auditors (kaikei kansa-nin) from independent certified public accountants in Japan. The accounting auditors have the statutory duties of examining the financial statements to be submitted by directors at the general meetings of shareholders and reporting their opinion thereon to the relevant directors and corporate auditors. The accounting auditors also audit the financial statements to be included in the securities reports that, if required, will be filed with the relevant local finance bureau of the Ministry of Finance. We have appointed ShineWing Japan LLC as our accounting auditor.
Limitation of Liability of Directors and Corporate Auditors
Under the Companies Act and our Articles of Incorporation we may exempt, by resolution of the board of directors, our directors and corporate auditors from liabilities to us arising in connection with their failure to execute their duties in good faith and without gross negligence, within the limits stipulated by applicable laws and regulations. In addition, our Articles of Incorporation provide that we may enter into agreements with our directors (excluding executive directors) and corporate auditors to limit their respective liabilities to us arising in connection with a failure to execute their duties in good faith and without gross negligence to the higher of either a predetermined amount which shall be no less than ¥1 million or an amount stipulated in laws and regulations. We maintain directors and officers liability insurance for our directors and senior management.
D. Employees
See “Item 4. Information on the Company—B. Business Overview—Employees.”
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our Ordinary Shares as of the date of this annual report for:
| ● | each of our directors and senior management; | |
| ● | all directors and senior management as a group; and | |
| ● | each person known to us to own beneficially more than 5% of our Ordinary Shares. |
Beneficial ownership includes voting or investment power with respect to the Ordinary Shares. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all Ordinary Shares shown as beneficially owned by them. Percentage of beneficial ownership of each listed person is based on 42,220,206 Ordinary Shares outstanding as of the date of this annual report, excluding the shares issuable under the outstanding warrants.
Information with respect to beneficial ownership has been furnished by each director, senior management, or beneficial owner of 5% or more of our Ordinary Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of Ordinary Shares beneficially owned by a person listed below and the percentage ownership of such person, Ordinary Shares underlying options, warrants, or convertible securities held by each such person that are exercisable or convertible within 60 days of the date of this annual report are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.
| Ordinary Shares | ||||||||
| Beneficially Owned | ||||||||
| Number | Percent | |||||||
| Directors and Senior Management(1) : | ||||||||
| Mei Kanayama(2) | 23,464,000 | 55.58 | % | |||||
| Youichiro Haga | — | — | ||||||
| Keiichi Kimura | — | — | ||||||
| Tadao Iwamatsu | — | — | ||||||
| Junji Sato | — | — | ||||||
| Yoji Takenaka | — | — | ||||||
| Tetsuya Sato | — | — | ||||||
| All directors and senior management as a group (seven individuals): | 23,464,000 | 55.58 | % | |||||
| 5% Shareholders: | ||||||||
| Tokushin G.K.(3) | 12,975,050 | 30.73 | % | |||||
| Grand Elec-Tech Limited(4) | 2,672,460 | 6.33 | % | |||||
| Yingjia Yang(5) | 2,672,754 | 6.33 | % | |||||
| (1) | Unless otherwise indicated, the business address of each of the individuals is Harumi Building, 2-5-9 Kotobashi, Sumida-ku, Tokyo, 130-0022, Japan. |
| (2) | Represents (i) 7,216,436 Ordinary Shares held personally, (ii) 12,975,050 Ordinary Shares held through Tokushin G. K., a limited liability company formed under the laws of Japan owned by Mr. Kanayama and his family, for which Mr. Kanayama is the managing member, and accordingly, Mr. Kanayama has voting and dispositive control, (iii) 2,672,460 Ordinary Shares beneficially owned by Grand Elec-Tech Limited, and (iv) 600,054 Ordinary Shares held by a minority shareholder. Grand Elec-Tech Limited and the minority shareholder have delegated to Mr. Kanayama all authority to exercise the voting rights of the Ordinary Shares they beneficially owned. |
| (3) | The number of Ordinary Shares beneficially owned prior to this annual report represents 12,975,050 Ordinary Shares held by Tokushin G. K. The registered address of Tokushin G. K. is #4810, 2-3-30 Harumi, Chuo-ku, Tokyo, Japan. |
| (4) | The number of Ordinary Shares beneficially owned prior to this annual report represents 2,672,460 Ordinary Shares held by Grand Elec-Tech Limited, a British Virgin Islands company, which is 100% owned by Zhiyong Chen. The registered address of Grand Elec-Tech Limited is Wickhams Cay 1I, Road Town, Tortola, British Virgin Islands according to the Schedule 13G filed by Grand Elec-Tech Limited on December 31, 2021 with the SEC. |
| (5) | The number of Ordinary Shares beneficially owned prior to this annual report represents 2,672,754 Ordinary Shares held by Yingjia Yang, an individual residing at Harumi 2-3-30-4705, Chuo-Ku, Tokyo, 1040053, Japan according to the Schedule 13G filed by Yingjia Yang on December 31, 2021 with the SEC. |
To our knowledge, the Company is not directly or indirectly owned or controlled by another corporation(s), by any foreign government, or by any other natural or legal person(s) severally or jointly.
As of the date of this annual report, approximately 50.75% of our issued and outstanding Ordinary Shares are held in the United States by one record holder (The Bank of New York Mellon).
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our Company.
F. Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation
Not applicable.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Material Transactions with Related Parties
During the period from the beginning of our preceding three fiscal years up to the date of this annual report, we have engaged in the following transactions with our directors, senior management, or holders of more than 5% of our outstanding share capital and their affiliates, which we refer to as our related parties:
| Name of Related Party | Relationship to Us | |
| Mr. Mei Kanayama | Our representative director and director | |
| Seihinkokusai Co., Ltd. (“Seihinkokusai”) | An entity of which Mr. Kanayama’s wife is a director and the representative director | |
| Takuetsu Kokusai Co., Ltd. | The entity’s representative director is Mr. Kanayama’s wife. | |
| Shintai Co., Ltd. | The entity’s representative director is Mr. Kanayama’s wife before April 30, 2023. | |
| Palpito | An equity investment entity of the Company, which was sold to Seihinkokusai on June 30, 2023. | |
| Tokushin G.K. | A shareholder of the Company | |
| YST (HK) Limited | An entity controlled by Mr. Kanayama, which was subsequently dissolved on January 14, 2022 |
Accounts Receivable, net - Related Parties
| a. | Accounts receivable, net - related parties |
Accounts receivable, net - related parties consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Name | ||||||||
| Seihinkokusai | $ | 25,704 | $ | 266,523 | ||||
| Palpito | - | 35,106 | ||||||
| Tokushin G.K. | - | 2,118 | ||||||
| Shintai Co., Ltd. | - | 24,060 | ||||||
| Subtotal | 25,704 |
327,807 | ||||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Total accounts receivable, net - related parties | $ | 25,704 | $ | 327,807 | ||||
We typically grant our related parties a credit term of 90 days. Due to the COVID-19 pandemic, we extended the credit term to no more than six months, which is the same with credit terms given to our other customers. 100% of the accounts receivable due from related parties outstanding as of March 31, 2023 balance has been subsequently collected.
| b. | Due from related parties |
Due from related parties consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Name | ||||||||
| Palpito | $ | - | $ | - | ||||
| Seihinkokusai(1) | 9,762 |
443,664 | ||||||
| All Seas Global Limited | - | - | ||||||
| Shintai Co., Ltd. | - | 903 | ||||||
| Total due from related parties | $ | 9,762 |
$ | 444,567 | ||||
| (1) | The Company rents a storefront from Seihinkokusai. Pursuant to the rent agreement, the Company paid ¥50 million ($375,950) as a rental security deposit to this related party. During the fiscal year ended March 31, 2023, Seihinkokusai refunded ¥40 million ($300,760) to the Company for its working capital needs. The Company also rents an office space from Seihinkokusai. Pursuant to the rent agreement, the Company paid ¥14 million ($105,266) as a rental security deposit to this related party. In addition, the Company obtained the operating rights of Seihinkokusai’s online stores on domestic e-commerce marketplaces and use them as the Company’s own online stores to sell its products. Pursuant to an EC Site Operation Business Assignment Agreement dated January 31, 2020, the Company paid ¥20 million ($150,380) as an operating security deposit to Seihinkokusai; the Company also needs to pay transaction commission of 1% based on its sales amount and the transaction commission was immaterial during the fiscal years ended March 31, 2024, 2023, and 2022. The agreement is valid for one year, and is automatically renewed yearly unless the parties indicate otherwise in writing. The amount due from Seihinkokusai will be collected back when the agreement expires or is terminated. The compensation receivable for consumption tax amounted to $109,144. |
We recorded these amounts as due from related parties in our consolidated financial statements. Such advances are non-interest bearing and due upon demand.
| c. | Accounts payable - related parties |
Related parties consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Name | ||||||||
| Seihinkokusai | $ | 299,541 | $ | - | ||||
| Palpito | - | - | ||||||
| Total accounts payable - related parties | $ | 299,541 | $ | - | ||||
These accounts payable to related parties were related to products we purchased from these related parties. See “—Purchase from Related Parties” for more information.
| d. | Due to related parties |
Due to related parties consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Name | ||||||||
| Mr. Mei Kanayama(1) | $ | 29,716 | $ | 63,916 | ||||
| Seihinkokusai | 13,227 | 233,643 | ||||||
| Total due to related parties(4) | $ | 42,943 | $ | 297,559 | ||||
| (1) | Our due to Mr. Kanayama was for the reimbursement of his business travel and entertainment. As of May 31, 2024, the amount due to Mr. Kanayama had been fully repaid. |
| (2) | As mentioned above, we obtained the operating rights of Seihinkokusai’s online stores and rent a storefront and an office space from Seihinkokusai. Our due to Seihinkokusai was for the 1% transaction commission payable based on our sales amount on Seihinkokusai’s online stores, as well as other payable, such as parking fees, utilities, cleaning fees, and others miscellaneous expenses in relation to the office space rented from Seihinkokusai. Our due to Seihinkokusai also includes accommodation expenses payable when our employees stay in the hotel owned by Seihinkokusai. As of May 31, 2024, the amount due to Seihinkokusai had been fully repaid. |
| e. | Sales to related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Seihinkokusai(1) | $ | 5,992,219 | $ | 22,092 | $ | 22,092 | ||||||
| Shintai Co., Ltd. | - | 1,347 | 1,347 | |||||||||
| Palpito(2) | 14,774 | 83,290 | 83,290 | |||||||||
| Tokushin G.K. | - | - | - | |||||||||
| Takuetsu Kokusai Co., Ltd.(3) | - | 6,507 | 6,507 | |||||||||
| YST (HK) Limited | - | 130,523 | 130,523 | |||||||||
| Total revenue from related parties | $ | 6,006,993 | $ | 243,759 | $ | 243,759 | ||||||
| (1) | Seihinkokusai and Shintai Co., Ltd. are engaged in restaurant and dining businesses. We sell sundry products, such as masks, handwash, and detergent, to these companies and all transactions were on the same terms as those to our other customers. |
| (2) | Palpito is a retailer of art toys and focuses on selling artworks made by Japanese artists. We sell artworks products and toys to Palpito and all transactions were on the same terms as those to our other customers. |
| (3) | Takuetsu Kokusai Co., Ltd. is engaged in real estate businesses. We sell liquor products and sundry products, such as masks and bottled water, to the company and all transactions were on the same terms as those to our other customers. |
| f. | Purchase from related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Seihinkokusai | $ | 445,980 | $ | 125,496 | $ | 401,341 | ||||||
| Palpito | - | 77,020 | 122,520 | |||||||||
| YST (HK) Limited | - | - | 13,885 | |||||||||
| Total purchase from related parties | $ | 445,980 | $ | 202,516 | $ | 537,746 | ||||||
| (1) | Seihinkokusai is engaged in restaurant and dining businesses. In Japan, a company may only purchase a limited number of liquor products from manufacturers due to their hunger marketing strategy. Therefore, we purchase certain liquor products from Seihinkokusai when it has excess stock and all transactions were on the same terms as those with our other suppliers. |
| (2) | Palpito is a retailer of art toys and focuses on selling artworks made by Japanese artists. We purchase artworks products from Palpito and all transactions were on the same terms as those with our other suppliers. |
We expect to continue purchasing products from these related parties in the future through transactions that are on the same terms as those with our other suppliers.
Other Related Party Transactions
Mr. Kanayama provided guarantees in connection with certain loans we borrowed during the fiscal year ended March 31, 2024. See “Note 9—Borrowings” of our consolidated financial statements.
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report. See “Item 18. Financial Statements.”
Legal Proceedings
See “Item 4. Information on the Company—B. Business Overview—Legal Proceedings.”
Dividend Policy
Since our inception, we have not declared or paid cash dividends on our Ordinary 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. We currently intend to retain most, if not all, of our available funds and any future earnings after the initial public offering to fund the operation, development, and growth of our business, and, as a result, we do not expect to pay any dividends in the foreseeable future. Consequently, we cannot give any assurance that any dividends may be declared and paid in the future.
If declared, holders of our outstanding shares on a dividend record date will be entitled to the full dividend declared without regard to the date of issuance of the shares or any subsequent transfer of the shares. 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 and the Companies Act. See “—Distribution of Surplus” And “—Restriction on Distribution of Surplus” below.
Subject to the terms of the deposit agreement for the ADSs, investors in the ADSs will be entitled to receive dividends on our Ordinary Shares represented by ADSs to the same extent as the holders of our Ordinary Shares, less the fees and expenses payable under the deposit agreement in respect of, and any Japanese tax applicable to, such dividends. See “Item 10. Additional Information—E. Taxation—Japanese Taxation” and “Item 12. Description of Securities Other Than Equity Securities—D. American Depositary Shares.” The depositary will generally convert the Japanese yen it receives into U.S. dollars and distribute the U.S. dollar amounts to holders of ADSs. Cash dividends on our Ordinary Shares, if any, will be paid in Japanese yen.
Distribution of Surplus
Under the Companies Act, the distribution of dividends takes the form of distribution of surplus, and a distribution of surplus may be made in cash and/or in kind, with no restrictions on the timing and frequency of such distributions. The Companies Act generally requires a stock company to make distributions of surplus authorized by a resolution of a general meeting of shareholders. Distributions of surplus are, however, permitted pursuant to a resolution of the board of directors if:
| (a) | the company’s articles of incorporation so provide; | |
| (b) | the normal term of office of directors expires on or before the day of the conclusion of the annual shareholders meeting for the last business year ending within one year from the time of their election (our Articles of Incorporation do not have provisions to this effect); | |
| (c) | the company has accounting auditor(s) and board of corporate auditors, audit and supervisory committee, or nominating committee, etc.; and | |
| (d) | the company’s non-consolidated annual financial statements and certain documents for the latest fiscal year fairly present its assets and profit or loss, as required by the ordinances of the Ministry of Justice. |
In an exception to the above rule, even if the requirements described in (a) through (d) are not met, the company may be permitted to make distributions of surplus in cash to its shareholders by resolution of the board of directors once per fiscal year if its Articles of Incorporation so provide. Our Articles of Incorporation do not have provisions to that effect.
A resolution of a general meeting of shareholders authorizing a distribution of surplus must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of surplus is to be made in kind, we may, pursuant to a resolution of a general meeting of shareholders, grant a right to the shareholders to require us to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of surplus must be approved by a special resolution of a general meeting of shareholders. Our Articles of Incorporation provide that we are relieved of our obligation to pay any distributions in cash that go unclaimed for three years after the date they first become payable.
Restriction on Distribution of Surplus
Under the Companies Act, we may distribute surplus up to the excess of the aggregate of (a) and (b) below, less the aggregate of (c) through (f) below, as of the effective date of such distribution, if our net assets are not less than ¥3,000,000:
| (a) | the amount of surplus, as described below; | |
| (b) | in the event that extraordinary financial statements as of, or for a period from the beginning of the fiscal year to, the specified date are approved, the aggregate amount of (i) the aggregate amount as provided for by an ordinance of the Ministry of Justice as the net income for such period described in the statement of income constituting the extraordinary financial statements, and (ii) the amount of consideration that we received for the treasury shares that we disposed of during such period; | |
| (c) | the book value of our treasury shares; | |
| (d) | in the event that we disposed of treasury shares after the end of the previous fiscal year, the amount of consideration that we received for such treasury shares; | |
| (e) | in the event described in (b) in this paragraph, the aggregate amount as provided for by an ordinance of the Ministry of Justice as the net loss for such period described in the statement of income constituting the extraordinary financial statements; and | |
| (f) | certain other amounts set forth in the ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of share capital, additional paid-in capital and legal earnings reserve, each such amount as it appears on the balance sheet as of the end of the previous fiscal year) all or a certain part of such excess amount as calculated in accordance with the ordinances of the Ministry of Justice. |
For the purposes of this section, the amount of “surplus” is the excess of the aggregate of (I) through (IV) below, less the aggregate of (V) through (VII) below:
| (I) | the aggregate of other capital surplus and other retained earnings at the end of the previous fiscal year; |
| (II) | in the event that we disposed of treasury shares after the end of the previous fiscal year, the difference between the book value of such treasury shares and the consideration that we received for such treasury shares; |
| (III) | in the event that we reduced our share capital after the end of the previous fiscal year, the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital and/or legal earnings reserve (if any); |
| (IV) | in the event that we reduced additional paid-in capital and/or legal earnings reserve after the end of the previous fiscal year, the amount of such reduction less the portion thereof that has been transferred to share capital (if any); |
| (V) | in the event that we cancelled treasury shares after the end of the previous fiscal year, the book value of such treasury shares; |
| (VI) | in the event that we distributed surplus after the end of the previous fiscal year, the aggregate of the following amounts: |
| (1) | the aggregate amount of the book value of the distributed assets, excluding the book value of such assets that would be distributed to shareholders but for their exercise of the right to receive dividends in cash instead of dividends in kind; | |
| (2) | the aggregate amount of cash distributed to shareholders who exercised the right to receive dividends in cash instead of dividends in kind; and |
| (3) | the aggregate amount of cash paid to shareholders holding fewer shares than the shares that were required in order to receive dividends in kind; |
| (VII) | the aggregate amounts of (1) through (4) below, less (5) and (6) below: |
| (1) | in the event that the amount of surplus was reduced and transferred to additional paid-in capital, legal earnings reserve and/or share capital after the end of the previous fiscal year, the amount so transferred; |
| (2) | in the event that we distributed surplus after the end of the previous fiscal year, the amount set aside in additional paid-in capital and/or legal earnings reserve; |
| (3) | in the event that we disposed of treasury shares in the process of (x) a merger in which we acquired all rights and obligations of a company, (y) a corporate split in which we acquired all or a part of the rights and obligations of a split company, or (z) a share exchange (kabushiki kokan) in which we acquired all shares of a company after the end of the previous fiscal year, the difference between the book value of such treasury shares and the consideration that we received for such treasury shares; |
| (4) | in the event that the amount of surplus was reduced in the process of a corporate split in which we transferred all or a part of our rights and obligations after the end of the previous fiscal year, the amount so reduced; |
| (5) | in the event of (x) a merger in which we acquired all rights and obligations of a company, (y) a corporate split in which we acquired all or a part of the rights and obligations of a split company, or (z) a share exchange in which we acquired all shares of a company after the end of the previous fiscal year, the aggregate amount of (i) the amount of the other capital surplus after such merger, corporate split or share exchange, less the amount of other capital surplus before such merger, corporate split or share exchange, and (ii) the amount of the other retained earnings after such merger, corporate split or share exchange, less the amount of other retained earnings before such merger, corporate split or share exchange; and |
| (6) | in the event that an obligation to cover a deficiency, such as the obligation of a person who subscribed newly issued shares with an unfair amount to be paid in, was fulfilled after the end of the previous fiscal year, the amount of other capital surplus increased by such payment. |
In Japan, the “ex-dividend” date and the record date for any distribution of surplus come before the date a company determines the amount of distribution of surplus to be paid.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offer and Listing Details.
The ADSs have been listed on Nasdaq since January 18, 2022 under the symbol “TKLF.”
B. Plan of Distribution
Not applicable.
C. Markets
The ADSs have been listed on Nasdaq since January 18, 2022 under the symbol “TKLF.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our articles of association, Exhibit 3.2, and the description of differences in corporate laws contained in our registration statement on Form F-1 (File No. 333-259129), as amended, initially filed with the SEC on August 27, 2021.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report.
D. Exchange Controls
Foreign Exchange Regulations
The Foreign Exchange and Foreign Trade Act of Japan (Gaikoku Kawase oyobi Gaikoku Boueki Hou) (the “FEFTA”) and related cabinet orders and ministerial ordinances, which we refer to collectively as the Foreign Exchange Regulations, govern certain aspects relating to the acquisition and holding of shares by “exchange non-residents” and by “foreign investors” (as these terms are defined below). It also applies in some cases to the acquisition and holding of the ADSs representing our Ordinary Shares acquired and held by non-residents of Japan and by foreign investors. In general, the Foreign Exchange Regulations currently in effect do not affect transactions between exchange non-residents to purchase or sell Ordinary Shares or ADSs outside Japan using currencies other than Japanese yen.
Exchange residents are defined in the Foreign Exchange Regulations as:
| (i) | individuals who reside within Japan; or | |
| (ii) | corporations whose principal offices are located within Japan. |
Exchange non-residents are defined in the Foreign Exchange Regulations as:
| (i) | individuals who do not reside in Japan; or | |
| (ii) | corporations whose principal offices are located outside Japan. |
Generally, branches and other offices of non-resident corporations located within Japan are regarded as exchange residents. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.
Foreign investors are defined in the Foreign Exchange Regulations as:
| (i) | individuals who are exchange non-residents; | |
| (ii) | corporations or other entities organized under the laws of foreign countries or whose principal offices are located outside Japan; | |
| (iii) | corporations of which 50% or more of the total voting rights are held, directly or indirectly, by individuals and/or corporations falling within (i) and/or (ii) above; | |
| (iv) | investment partnerships and limited liability partnerships for investment, etc. (including foreign partnerships) in which the ratio of capital contribution from exchange non-residents is 50% or more of the total amount of capital contribution by all partners, or in which a majority of the managing partners are exchange non-residents; or | |
| (v) | corporations or other entities having a majority of either (A) directors or other persons equivalent thereto or (B) directors or other persons equivalent thereto having the power of representation who are non-resident individuals. |
Acquisition of Shares
Acquisition by a foreign investor of shares of a Japanese corporation from a non-foreign investor requires pre or post facto reporting by the foreign investor through an exchange resident to the Minister of Finance of Japan through the Bank of Japan. No such reporting requirement is imposed, however, if:
(i) shares are acquired due to the occurrence of an event of inheritance, bequest, gratis allotment of shares, or acquisition of shares with a call provision; or
(ii) both the investment ratio and the voting right ratio (total of closely related parties) of all shares held after the share acquisition are less than 10% (provided that the nationality of the foreign investor is that of the listed country or Japan, and the business purpose of the issuing company under its articles of incorporation falls under the category of post facto reporting industry); or
(iii) the acquisition falls under any other case prescribed in Article 55-5 of the FEFTA, Article 3.1 of the Cabinet Order on Inward Direct Investment, etc., and Articles 3.2 and 3.3 of the Order on Inward Direct Investment, etc.
Dividends and Proceeds of Sale
Under the Foreign Exchange Regulations, dividends paid on, and the proceeds from sales in Japan of, shares held by exchange non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.
E. Taxation
Japanese Taxation
The following is a general summary of the principal Japanese tax consequences (limited to national tax) to owners of our Ordinary Shares, in the form of Ordinary Shares or ADSs, who are non-resident individuals of Japan or who are non-Japanese corporations without a permanent establishment in Japan, collectively referred to in this section as non-resident holders. The statements below regarding Japanese tax laws are based on the laws and treaties in force and as interpreted by the Japanese tax authorities as of the date of this annual report, and are subject to changes in applicable Japanese laws, tax treaties, conventions, or agreements, or in the interpretation of them, occurring after that date. This summary is not exhaustive of all possible tax considerations that may apply to a particular investor, and potential investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership, and disposition of our Ordinary Shares, including, specifically, the tax consequences under Japanese law, under the laws of the jurisdiction of which they are resident and under any tax treaty, convention, or agreement between Japan and their country of residence, by consulting their own tax advisors.
For the purpose of Japanese tax law and the tax treaty between the United States and Japan, a U.S. holder of ADSs will generally be treated as the owner of the Ordinary Shares underlying the ADSs evidenced by the ADRs.
Generally, a non-resident holder of Ordinary Shares or ADSs will be subject to Japanese income tax collected by way of withholding on dividends (meaning in this section distributions made from our retained earnings for the Companies Act purposes) we pay with respect to our Ordinary Shares and such tax will be withheld prior to payment of dividends. Share splits generally are not subject to Japanese income or corporation taxes.
In the absence of any applicable tax treaty, convention, or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of the Japanese withholding tax applicable to dividends paid by Japanese corporations on their Ordinary Shares to non-resident holders is generally 20.42% (or 20% for dividends due and payable on or after January 1, 2038) under Japanese tax law. However, with respect to dividends paid on listed shares issued by a Japanese corporation (such as Ordinary Shares or ADSs) to non-resident holders, other than any individual shareholder who holds 3% or more of the total number of shares issued by the relevant Japanese corporation (to whom the aforementioned withholding tax rate will still apply), the aforementioned withholding tax rate is reduced to (i) 15.315% for dividends due and payable up to and including December 31, 2037 and (ii) 15% for dividends due and payable on or after January 1, 2038. The withholding tax rates described above include the special reconstruction surtax (2.1% multiplied by the original applicable withholding tax rate, i.e., 15% or 20%, as the case may be), which is imposed during the period from and including January 1, 2013 to and including December 31, 2037, to fund the reconstruction from the Great East Japan Earthquake.
If distributions were made from our capital surplus, rather than retained earnings, for the Companies Act purposes, the portion of such distributions in excess of the amount corresponding to a pro rata portion of return of capital as determined under Japanese tax laws would be deemed dividends for Japanese tax purposes, while the rest would be treated as return of capital for Japanese tax purposes. The deemed dividend portion, if any, would generally be subject to the same tax treatment as dividends as described above, and the return of capital portion would generally be treated as proceeds derived from the sale of Ordinary Shares and subject to the same tax treatment as sale of our Ordinary Shares as described below. Distributions made in consideration of repurchase by us of our own shares or in connection with certain reorganization transactions will be treated substantially in the same manner.
Japan has income tax treaties whereby the withholding tax rate (including the special reconstruction surtax) may be reduced, generally to 15%, for portfolio investors, with, among others, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, New Zealand, Norway, Singapore, and Spain, while the income tax treaties with, among others, Australia, France, Hong Kong, the Netherlands, Portugal, Sweden, Switzerland, the United Arab Emirates, the United Kingdom, and the United States generally reduce the withholding tax rate to 10% for portfolio investors. In addition, under the income tax treaty between Japan and the United States, dividends paid to pension funds which are qualified U.S. residents eligible to enjoy treaty benefits are exempt from Japanese income taxation by way of withholding or otherwise unless the dividends are derived from the carrying on of a business, directly or indirectly, by the pension funds. Similar treatment is applicable to dividends paid to pension funds under the income tax treaties between Japan and the United Kingdom, the Netherlands, and Switzerland. Under Japanese tax law, any reduced maximum rate applicable under a tax treaty shall be available when such maximum rate is below the rate otherwise applicable under the Japanese tax law referred to in the second preceding paragraph with respect to the dividends to be paid by us on our Ordinary Shares or the ADSs.
Non-resident holders of our Ordinary Shares who are entitled under an applicable tax treaty to a reduced rate of, or exemption from, Japanese withholding tax on any dividends on our Ordinary Shares, in general, are required to submit, through the withholding agent to the relevant tax authority prior to the payment of dividends, an Application Form for Income Tax Convention regarding Relief from Japanese Income Tax and Special Income Tax for Reconstruction on Dividends together with any required forms and documents. A standing proxy for a non-resident holder of our Ordinary Shares or the ADSs may be used in order to submit the application on a non-resident holder’s behalf. In this regard, a certain simplified special filing procedure is available for non-resident holders to claim treaty benefits of reduction of or exemption from Japanese withholding tax, by submitting a Special Application Form for Income Tax Convention regarding Relief from Japanese Income Tax and Special Income Tax for Reconstruction on Dividends of Listed Stock, together with any required forms or documents. If the depositary needs investigation to identify whether any non-resident holders of ADSs are entitled to claim treaty benefits of exemption from or reduction of Japanese withholding tax the depositary or its agent submits an application form before payment of dividends so that the withholding cannot be made in connection with such holders for eight months after the record date concerning such payment of dividends. If it is proved that such holders are entitled to claim treaty benefits of exemption from or reduction of Japanese withholding tax within the foregoing eight-month period, the depositary or its agent submits another application form together with certain other documents so that such holder can be subject to exemption from or reduction of Japanese withholding tax. To claim this reduced rate or exemption, such non-resident holder of ADSs will be required to file a proof of taxpayer status, residence, and beneficial ownership, as applicable, and to provide other information or documents as may be required by the depositary. Non-resident holders who are entitled, under any applicable tax treaty, to a reduced rate of Japanese withholding tax below the rate otherwise applicable under Japanese tax law, or exemption therefrom, as the case may be, but fail to submit the required application in advance may nevertheless be entitled to claim a refund from the relevant Japanese tax authority of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident holders are entitled to a reduced treaty rate under the applicable tax treaty) or the full amount of tax withheld (if such non-resident holders are entitled to an exemption under the applicable tax treaty), as the case may be, by complying with a certain subsequent filing procedure. We do not assume any responsibility to ensure withholding at the reduced treaty rate, or exemption therefrom, for shareholders who would be eligible under an applicable tax treaty but who do not follow the required procedures as stated above.
Gains derived from the sale of our Ordinary Shares or the ADSs outside Japan by a non-resident holder that is a portfolio investor will generally not be subject to Japanese income or corporation taxes. Japanese inheritance and gift taxes, at progressive rates, may be payable by an individual who has acquired from another individual our Ordinary Shares or the ADSs as a legatee, heir, or donee, even if none of the acquiring individual, the decedent, or the donor is a Japanese resident.
United States Federal Income Taxation
WE URGE POTENTIAL PURCHASERS OF THE ADSS OR OUR ORDINARY SHARES TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL, AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING, AND DISPOSING OF THE ADSS OR OUR ORDINARY SHARES.
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
| ● | banks; | |
| ● | financial institutions; | |
| ● | insurance companies; | |
| ● | regulated investment companies; | |
| ● | real estate investment trusts; | |
| ● | broker-dealers; | |
| ● | persons that elect to mark their securities to market; | |
| ● | U.S. expatriates or former long-term residents of the U.S.; | |
| ● | governments or agencies or instrumentalities thereof; | |
| ● | tax-exempt entities; | |
| ● | persons liable for alternative minimum tax; |
| ● | persons holding our Ordinary Shares or the ADSs as part of a straddle, hedging, conversion or integrated transaction; | |
| ● | persons that actually or constructively own 10% or more of our voting power or value (including by reason of owning our Ordinary Shares or the ADSs); | |
| ● | persons who acquired our Ordinary Shares or the ADSs pursuant to the exercise of any employee share option or otherwise as compensation; | |
| ● | persons holding our Ordinary Shares or the ADSs through partnerships or other pass-through entities; | |
| ● | beneficiaries of a Trust holding our Ordinary Shares or the ADSs; or | |
| ● | persons holding our Ordinary Shares or the ADSs through a trust. |
The discussion set forth below is addressed only to U.S. Holders that purchase Ordinary Shares or ADSs. Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Ordinary Shares or the ADSs.
Material Tax Consequences Applicable to U.S. Holders of the ADSs or Ordinary Shares
The following sets forth the material U.S. federal income tax consequences related to the ownership and disposition of the ADSs or our Ordinary Shares. This description does not deal with all possible tax consequences relating to ownership and disposition of the ADSs or our Ordinary Shares or U.S. tax laws, other than the U.S. federal income tax laws, such as the tax consequences under non-U.S. tax laws, state, local, and other tax laws.
The following brief description applies only to U.S. Holders (defined below) that hold ADSs or Ordinary Shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the federal income tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date, and the income tax treaty between the United States and Japan (the “Tax Convention”). All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of ADSs or Ordinary Shares and you are, for U.S. federal income tax purposes,
| ● | an individual who is a citizen or resident of the United States; | |
| ● | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; | |
| ● | an estate whose income is subject to U.S. federal income taxation regardless of its source; or | |
| ● | a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a partnership (or other entities treated as a partnership for United States federal income tax purposes) is a beneficial owner of the ADSs or our Ordinary Shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners of a partnership holding the ADSs or our Ordinary Shares are urged to consult their tax advisors regarding an investment in the ADSs or our Ordinary Shares.
An individual is considered a resident of the U.S. for federal income tax purposes if he or she meets either the “Green Card Test” or the “Substantial Presence Test” described as follows:
The Green Card Test: You are a lawful permanent resident of the United States, at any time, if you have been given the privilege, according to the immigration laws of the United States, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services issued you an alien registration card, Form I-551, also known as a “green card.”
The Substantial Presence Test: If an alien is present in the United States on at least 31 days of the current calendar year, he or she will (absent an applicable exception) be classified as a resident alien if the sum of the following equals 183 days or more (See §7701(b)(3)(A) of the Internal Revenue Code and related Treasury Regulations):
| 1. | The actual days in the United States in the current year; plus |
| 2. | One-third of his or her days in the United States in the immediately preceding year; plus |
| 3. | One-sixth of his or her days in the United States in the second preceding year. |
This summary is based, in part, upon the representations made by the depositary to us and assumes that the deposit agreement for the ADSs, and all other related agreements, will be performed in accordance with their terms.
Treatment of the ADSs
U.S. Holders of ADSs generally will be treated for U.S. federal income tax purposes as holding our Ordinary Shares represented by the ADSs. No gain or loss will be recognized on an exchange of our Ordinary Shares for ADSs or an exchange of ADSs for our Ordinary Shares if the depositary has not taken any action inconsistent with the material terms of the deposit agreement for the ADSs or the U.S. Holder’s ownership of the underlying Ordinary Shares. A U.S. Holder’s tax basis in the Ordinary Shares received in exchange for ADSs will be the same as its tax basis in the ADSs, and the holding period in the shares will include the holding period in the ADSs.
Taxation of Dividends and Other Distributions on the ADSs or Our Ordinary Shares
Subject to the application of the PFIC rules discussed below, a U.S. Holder generally will recognize ordinary dividend income in an amount equal to the amount of any cash and the value of any property we distribute as a distribution with respect to the U.S. Holder’s Ordinary Shares (or ADSs), to the extent that the distribution is paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, when the distribution is received (or when received by the depositary in the case of ADSs). We do not intend to maintain calculations of earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that distributions paid with respect to our Ordinary Shares or the ADSs generally will be treated as dividends. Dividends will not be eligible for the dividends received deduction generally allowable to U.S. corporations. Dividends paid on our Ordinary Shares or the ADSs will be treated as “qualified dividends” taxable at preferential rates, if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules, (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC, and (iii) the U.S. Holder satisfies certain holding period and other requirements. The Tax Convention has been approved for the purposes of the qualified dividend rules and we believe we will be eligible for the benefits of the Tax Convention.
Dividend income will include any amounts withheld in respect of Japanese taxes and will be treated as foreign-source income for foreign tax credit purposes. Subject to applicable limitations, some of which vary depending upon the U.S. Holder’s circumstances, Japanese taxes withheld from dividends on our Ordinary Shares or the ADSs generally will be creditable against the U.S. Holder’s U.S. federal income tax liability to the extent such taxes do not exceed any reduced withholding rate available under the Tax Convention. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming a foreign tax credit, a U.S. Holder may, at its election, deduct creditable foreign taxes, including Japanese taxes, in computing its taxable income, subject to applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued by the U.S. Holder in the taxable year.
Dividends paid in a currency other than U.S. dollars will be includable in income in a U.S. dollar amount based on the exchange rate in effect on the date of receipt (or the date of the depositary’s receipt in the case of ADSs), whether or not the payment is converted into U.S. dollars at that time. A U.S. Holder should not recognize any foreign currency gain or loss in respect of the distribution if the foreign currency is converted into U.S. dollars on the date the distribution is received. If the foreign currency is not converted into U.S. dollars on the date of receipt, however, gain or loss may be recognized upon a subsequent sale or other disposition of the foreign currency. The foreign currency gain or loss (if any) generally will be treated as ordinary income or loss to the U.S. Holder and generally will be treated as U.S.-source income or loss, which may be relevant in calculating the U.S. Holder’s foreign tax credit limitation.
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary Shares or ADSs, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain.
Taxation of Dispositions of ADSs or Ordinary Shares
Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the ADSs or Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ADSs or Ordinary Shares for more than one year, you will generally be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes which will generally limit the availability of foreign tax credits.
PFIC
A non-U.S. corporation is considered a PFIC, as defined in Section 1297(a) of the US Internal Revenue Code, for any taxable year if either:
| ● | at least 75% of its gross income for such taxable year is passive income; or | |
| ● | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash we raise in the initial public offering will generally be considered to be held for the production of passive income and (2) the value of our assets must be determined based on the market value of the ADSs or our Ordinary Shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value of all of our assets (including the cash raised in the initial public offering) on any particular quarterly testing date for purposes of the asset test.
Based on our operations and the composition of our assets, we do not expect to be treated as a PFIC under the current PFIC rules. We must make a separate determination each year as to whether we are a PFIC, however, and there can be no assurance with respect to our status as a PFIC for our current taxable year or any future taxable year. Depending on the amount of cash we raise in the initial public offering, together with any other assets held for the production of passive income, it is possible that, for our current taxable year or for any subsequent taxable year, more than 50% of our assets may be assets held for the production of passive income. We will make this determination following the end of any particular tax year. In addition, because the value of our assets for purposes of the asset test will generally be determined based on the market price of the ADSs or our Ordinary Shares and because cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on the market price of the ADSs or our Ordinary Shares and the amount of cash we raise in the initial public offering. Accordingly, fluctuations in the market price of the ADSs or Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in the initial public offering. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the value of our assets will depend upon material facts (including the market price of the ADSs or our Ordinary Shares from time to time and the amount of cash we raise in the initial public offering) that may not be within our control. If we are a PFIC for any year during which you hold ADSs or Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold ADSs or Ordinary Shares. If we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described below, however, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the ADSs or Ordinary Shares.
If we are a PFIC for your taxable year(s) during which you hold ADSs or Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ADSs or Ordinary Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or Ordinary Shares will be treated as an excess distribution. Under these special tax rules:
| ● | the excess distribution or gain will be allocated ratably over your holding period for the ADSs or Ordinary Shares; | |
| ● | the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and | |
| ● | the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or Ordinary Shares cannot be treated as capital, even if you hold the ADSs or Ordinary Shares as capital assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election under Section 1296 of the US Internal Revenue Code for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) ADSs or Ordinary Shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair market value of the ADSs or Ordinary Shares as of the close of such taxable year over your adjusted basis in such ADSs or Ordinary Shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the ADSs or Ordinary Shares over their fair market value as of the close of the taxable year. Such ordinary loss, however, is allowable only to the extent of any net mark-to-market gains on the ADSs or Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale or disposition of the ADSs or Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or Ordinary Shares. Your basis in the ADSs or Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “—Taxation of Dividends and Other Distributions on the ADSs or our Ordinary Shares” generally would not apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including Nasdaq. If the ADSs or Ordinary Shares are regularly traded on Nasdaq and if you are a holder of ADSs or Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election under Section 1295(b) of the US Internal Revenue Code with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. The qualified electing fund election, however, is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold ADSs or Ordinary Shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year and provide certain annual information regarding such ADSs or Ordinary Shares, including regarding distributions received on the ADSs or Ordinary Shares and any gain realized on the disposition of the ADSs or Ordinary Shares.
If you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold the ADSs or our Ordinary Shares, then such ADSs or Ordinary Shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of such ADSs or Ordinary Shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis (equal to the fair market value of the ADSs or Ordinary Shares on the last day of the last year in which we are treated as a PFIC) and holding period (which new holding period will begin the day after such last day) in your ADSs or Ordinary Shares for tax purposes.
IRC Section 1014(a) provides for a step-up in basis to the fair market value for the ADSs or our Ordinary Shares when inherited from a decedent that was previously a holder of the ADSs or our Ordinary Shares. However, if we are determined to be a PFIC and a decedent that was a U.S. Holder did not make either a timely qualified electing fund election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) the ADSs or our Ordinary Shares, or a mark-to-market election and ownership of those ADSs or Ordinary Shares are inherited, a special provision in IRC Section 1291(e) provides that the new U.S. Holder’s basis should be reduced by an amount equal to the Section 1014 basis minus the decedent’s adjusted basis just before death. As such if we are determined to be a PFIC at any time prior to a decedent’s passing, the PFIC rules will cause any new U.S. Holder that inherits the ADSs or our Ordinary Shares from a U.S. Holder to not get a step-up in basis under Section 1014 and instead will receive a carryover basis in those ADSs or Ordinary Shares.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in the ADSs or our Ordinary Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to the ADSs or our Ordinary Shares and proceeds from the sale, exchange or redemption of the ADSs or our Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding under Section 3406 of the US Internal Revenue Code with at a current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders. Transactions effected through certain brokers or other intermediaries, however, may be subject to withholding taxes (including backup withholding), and such brokers or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to the ADSs or our Ordinary Shares, subject to certain exceptions (including an exception for ADSs or Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold ADSs or Ordinary Shares. Failure to report such information could result in substantial penalties. You should consult your own tax advisor regarding your obligation to file a Form 8938.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the SEC our registration statement on Form F-1 (File No. 333-259129), as amended, and our registration statement on Form F-3 (File No. 333-274076), as amended.
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing, among other things, the furnishing and content of proxy statements to shareholders, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
I. Subsidiary Information
For information about our subsidiary, see “Item 4. Information on the Company—A. History and Development of the Company.”
J. Annual Report to Security Holders
If we are required to provide an annual report to security holders in response to the requirements of Form 6-K, we will submit the annual report to security holders in electronic format in accordance with the EDGAR Filer Manual.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our business is mainly conducted in Japan, and our books and records are maintained in ¥. The financial statements that we file with the SEC and provide to our shareholders are presented in U.S. dollars. Changes in the exchange rates between the ¥ and U.S. dollar affect the value of our assets and results of operations, when presented in U.S. dollars. For the fiscal years ended March 31, 2024 and 2023, we had an unrealized foreign currency translation loss of $3,923,683 and $4,266,206, respectively.
The value of the ¥ against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the Japanese political and economic conditions and perceived changes in the economy of Japan and the United States. Any significant revaluation of the ¥ may materially and adversely affect our cash flows, revenue, and financial condition. Further, the ADSs offered in the U.S. are offered in U.S. dollars, we need to convert the net proceeds we receive into ¥ in order to use the funds for our business. Changes in the conversion rate among the U.S. dollar and the ¥ will affect the amount of proceeds we will have available for our business.
To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into more hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash. As of March 31, 2024, 2023, and 2022, $1,814,329, $1,015,905, and $17,568,176 of our cash was on deposit at financial institutions in Japan, respectively, which were insured by the Deposit Insurance Corporation of Japan subject to certain limitations. The Company has not experienced any losses in such accounts. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by our assessment of our customers’ creditworthiness and our ongoing monitoring of outstanding balances.
Interest Rate Risk
We have not used derivative financial instruments to hedge interest risk. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed to material risks due to changes in market interest rates. Our future interest income, however, may fall short of expectations due to changes in market interest rates.
Inflation Risk
In recent years, inflation has not had a material impact on our results of operations. According to the Statistics Bureau of Japan, the inflation rate in Japan was approximately 3.2%, 2.3%, and (0.2)% in 2023, 2022, and 2021, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in Japan. If inflation rises, it may materially and adversely affect our business.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
The Bank of New York Mellon, as depositary, registers and delivers ADSs. Each ADS represents one Ordinary Share (or a right to receive one Ordinary Share) deposited with MUFG Bank Ltd., as custodian for the depositary in Japan. Each ADS also represents any other securities, cash, or other property that may be held by the depositary. The deposited shares together with any other securities, cash, or other property held by the depositary are referred to as the deposited securities. The depositary’s office at which the ADSs will be administered and its principal executive office are located at 240 Greenwich Street, New York, New York 10286.
The form of deposit agreement for the ADSs and the form of ADRs that represents an ADS have been incorporated by reference as exhibits to this annual report.
Fees and Expenses
| Persons depositing or withdrawing shares or ADS holders must pay: | For: | |
| $5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
|
| $0.05 (or less) per ADS | Any cash distribution to ADS holders | |
| A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders | |
| $0.05 (or less) per ADS per calendar year | Depositary services | |
| Registration or transfer fees | Transfer and registration of our Ordinary Shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares | |
| Expenses of the depositary |
Cable (including SWIFT) and facsimile transmissions (when expressly provided in the deposit agreement)
Converting foreign currency to U.S. dollars |
|
| Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes | As necessary | |
| Any charges incurred by the depositary or its agents for servicing the deposited securities | As necessary |
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary, or share revenue from the fees collected from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers, or other service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads, or commissions.
The depositary may convert currency itself or through any of its affiliates, or the custodian or we may convert currency and pay U.S. dollars to the depositary. Where the depositary converts currency itself or through any of its affiliates, the depositary acts as principal for its own account and not as agent, advisor, broker, or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account. The depositary makes no representation that the exchange rate used or obtained by it or its affiliate in any currency conversion under the deposit agreement will be the most favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s obligation to act without negligence or bad faith. The methodology used to determine exchange rates used in currency conversions made by the depositary is available upon request. Where the custodian converts currency, the custodian has no obligation to obtain the most favorable rate that could be obtained at the time or to ensure that the method by which that rate will be determined will be the most favorable to ADS holders, and the depositary makes no representation that the rate is the most favorable rate and will not be liable for any direct or indirect losses associated with the rate. In certain instances, the depositary may receive dividends or other distributions from us in U.S. dollars that represent the proceeds of a conversion of foreign currency or translation from foreign currency at a rate that was obtained or determined by us and, in such cases, the depositary will not engage in, or be responsible for, any foreign currency transactions and neither it nor we make any representation that the rate obtained or determined by us is the most favorable rate and neither it nor we will be liable for any direct or indirect losses associated with the rate.
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until those taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
Part II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
Registration Statement on Form F-1, as amended (File Number 333-259129)
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-259129) for our initial public offering, which was declared effective by the SEC on December 23, 2021. In January 2022, we completed our initial public offering in which we issued and sold an aggregate of 6,250,000 ADS, at a price of $4.00 per ADS for $25 million. Univest Securities, LLC was the representative of the underwriters of our initial public offering.
We incurred approximately $3.6 million in expenses in connection with our initial public offering, which included approximately $2 million in underwriting discounts, approximately $150,000 in expenses paid to or for underwriters, and approximately $1.45 million in other expenses. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities, or our affiliates. None of the net proceeds we received from the initial public offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
The net proceeds raised from the initial public offering were $21.4 million after deducting underwriting discounts and the offering expenses payable by us. As of July 10, 2024, we had used $10.7 million, $5.4 million, $3.2 million, and $2.1 million from the net proceeds for (i) opening new directly-operated physical stores and adding franchise stores, (ii) brand marketing, (iii) improving our distribution centers and logistics systems, and (iv) talent acquisition and retention, respectively. We intend to use the remaining proceeds from our initial public offering in the manner disclosed in our registration statement on Form F-1, as amended (File Number 333-259129).
Registration Statement on Form F-3, as amended (File Number 333-274076)
The following “Use of Proceeds” information relates to the registration statement on Form F-3 (File Number 333-274076), utilizing a shelf registration process, which was declared effective by the SEC on September 8, 2023.
In January 2024, we completed a registered direct offering pursuant to the above effective Form F-3, in which we issued and sold 5,970,152 of our ADSs, at a purchase price of $0.67 per ADS to certain institutional investors. In a concurrent private placement, we also agreed to sell to the same investors warrants to purchase up to 5,970,152 ADSs at a purchase price of $0.67 per ADS. We engaged Maxim Group LLC as the exclusive placement agent in connection with the offering. We agreed to pay Maxim Group LLC a placement agent fee equal to 7.5% of the gross proceeds raised in the registered direct offering and reimburse it up to $50,000 for the reasonable and accounted fees and expenses of legal counsel. We incurred approximately $288,000 in expenses in connection with this offering. None of the transaction expenses included payments to directors or officers of our Company or their associates, persons owning more than 10% or more of our equity securities, or our affiliates. None of the net proceeds we received from the registered direct offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities, or our affiliates.
The net proceeds raised from the registered direct offering were $3,412,000 after deducting the placement agent fees and offering expenses payable by us. As of the date of this annual report, we have used $3,412,000 from the net proceeds to expand overseas markets and for daily operations.
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of March 31, 2024.
Based on that evaluation, our management has concluded that, as of March 31, 2024, our disclosure controls and procedures were not effective due to the following material weaknesses: (i) we do not have sufficient in-house personnel in our accounting department with sufficient knowledge of the U.S. GAAP and SEC reporting rules and (ii) we do not have proper control of IT system logical access security, IT Operations and Service Organization Management.
Our management is currently in the process of evaluating the steps necessary to remediate the ineffectiveness, such as (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, and (iii) improving our IT environment and daily management.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2024. The assessment was based on criteria established in the framework Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was not effective as of March 31, 2024. Our management identified the material weaknesses in our internal control over financial reporting as (i) insufficient in-house personnel in our accounting department with sufficient knowledge of the U.S. GAAP and SEC reporting rules and (ii) a lack of proper control over logical access security of IT systems, IT operations and service organization management.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC where domestic and foreign registrants that are non-accelerated filers, which we are, and “emerging growth companies,” which we also are, are not required to provide the auditor attestation report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [RESERVED]
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Under the Companies Act, we have elected to structure our corporate governance system as a company with a separate board of corporate auditors and therefore do not have an audit committee. The function of our board of corporate auditors and each corporate auditor is similar to that of independent directors, including those who are members of the audit committee of a U.S. public company. Our board of corporate auditors is comprised of three corporate auditors, each of which satisfies the requirements of Rule 10A-3 under the Exchange Act.
Item 16B. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics, which is applicable to all of our directors, senior management, and employees. Our code of business conduct and ethics is publicly available on our website.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered and billed by Marcum Asia CPAs LLP, our independent registered public accounting firm since December 12, 2022, and Friedman LLP, our independent registered public accounting firm before December 12, 2022, for the periods indicated.
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Audit fees(1) | $ | 627,249 | $ | 599,150 | $ | 420,000 | ||||||
| Audit-Related fees | - | |||||||||||
| Tax fees | - | |||||||||||
| All other fees(2) | 40,000 | |||||||||||
| Total | $ | 627,249 | $ | 599,150 | $ | 460,000 | ||||||
| (1) | Audit fees include the aggregate fees billed for each of the fiscal years for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements or for the audits of our financial statements and review of the interim financial statements. |
| (2) | All other fees include the aggregate fees billed in each of the fiscal years for products and services provided by our independent registered public accounting firm, other than the services reported under audit fees, audit-related fees, and tax fees. |
The policy of our audit committee is to pre-approve all audit and non-audit services provided by our independent registered public accounting firm, including audit services, audit-related services, tax services, and other services as described above.
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Please refer to “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Ordinary Shares and the Trading Market—As a foreign private issuer, we have followed home country practice even though we are considered a ‘controlled company’ under Nasdaq corporate governance rules, which could adversely affect our public shareholders.”
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
There has been no change in independent accountants for our Company during the two most recent fiscal years or any subsequent interim period except as previously reported in our Report of Foreign Private Issuer on Form 6-K (File No. 001-41181), filed with the SEC on December 15, 2022. There have been no disagreements of the type required to be disclosed by Item 16F(b).
Item 16G. CORPORATE GOVERNANCE
We are a “foreign private issuer” as defined under the federal securities laws of the U.S. and the Nasdaq listing standards. Under the federal securities laws of the U.S., foreign private issuers are subject to different disclosure requirements than U.S.-domiciled public companies. We intend to take all actions necessary for us to maintain our status as a foreign private issuer under the applicable corporate governance requirements of the Sarbanes-Oxley Act of 2002, the Exchange Act, and other applicable rules adopted by the SEC, and the Nasdaq listing standards. Under the SEC rules and the Nasdaq listing standards, a foreign private issuer is subject to less stringent corporate governance requirements. Subject to certain exceptions, the SEC and the Nasdaq permit a foreign private issuer to follow its home country practices in lieu of their respective rules and listing standards. In general, our Articles of Incorporation and the Companies Act govern our corporate affairs.
As a foreign private issuer, we follow Japanese law and corporate practices in lieu of the corporate governance provisions set out under Nasdaq Rule 5600. The following rules under Nasdaq Rule 5600 differ from Japanese law requirements:
| ● | Nasdaq Rule 5605(b)(1) requires that at least a majority of a listed company’s board of directors be independent directors, and Nasdaq Rule 5605(b)(2) requires that independent directors regularly meet in executive session, where only independent directors are present. Under our current corporate structure, the Companies Act does not require independent directors. Our board of directors, however, is currently comprised of four directors, two of which are considered “independent,” as determined in accordance with the applicable Nasdaq rules. We expect our independent directors to regularly meet in executive sessions, where only the independent directors are present; |
| ● | Nasdaq Rule 5605(c)(2)(A) requires a listed company to have an audit committee composed entirely of not less than three directors, each of whom must be independent. Under Japanese law, a company may have a statutory auditor or a board of auditors. We currently have a three-member board of corporate auditors. See “—Corporate Auditors” below for additional information; | |
| ● | Nasdaq Rule 5605(d) requires, among other things, that a listed company’s compensation committee be comprised of at least two members, each of whom is an independent director as defined under such rule. Our board of directors collectively participate in the discussions and determination of compensation for our senior management and directors, and other compensation related matters; | |
| ● | Nasdaq Rule 5605(e) requires that a listed company’s nomination and corporate governance committee be comprised solely of independent directors. Our board of directors does not have a standalone nomination and corporate governance committee. Our board of directors collectively participate in the nomination process of potential directors and corporate auditors and oversee our corporate governance practices; and | |
| ● | Nasdaq Rule 5620(c) sets out a quorum requirement of 33% applicable to meetings of shareholders. In accordance with Japanese law and generally accepted business practices, our Articles of Incorporation provide that there is no quorum requirement for a general resolution of our shareholders. Under the Companies Act and our Articles of Incorporation, however, a quorum of not less than one-third of the total number of voting rights is required in connection with the election of directors and statutory auditors and certain other matters. | |
| ● |
Nasdaq Listing Rule 5635 requires a listed company to obtain shareholder approval for certain dilutive events, including: a. certain acquisitions in connection with the acquisition of the stock or assets of another company; b. an issuance that will result in a change of control of the company; c. the establishment or amendment of certain equity-based compensation plans and arrangements; and d. certain transactions other than a public offering involving issuances of a 20% or greater interest in the company. Under the Companies Act and our Articles of Incorporation, however, unless it constitutes a favorable issue of shares or stock acquisition rights or an acquisition of the entire business requiring a special resolution of shareholders’ meeting, we are not required to obtain shareholder approval for the dilutive events listed in Listing Rule 5635. |
Item 16H. MINE SAFETY DISCLOSURE
Not applicable.
Item 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
Item 16J. INSIDER TRADING POLICIES
Our board of directors has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of our securities by directors, senior management, and employees that are reasonably designed to promote compliance with applicable insider trading laws, rules, and regulations, and any listing standards applicable to us.
Item 16K. CYBERSECURITY
Risk Management and Strategy
We recognize the importance of safeguarding the security of our computer systems, software, networks, and other technology assets. We have implemented cybersecurity measures and protocols for assessing, identifying, and managing material risks from cybersecurity threats, which are integrated into our overall risk management framework. We aim to ensure a comprehensive and proactive approach to safeguarding our assets and operations.
The Company’s board of directors is collectively responsible for oversight of risks from cybersecurity threats. The Company’s executive officers oversee the overall processes to safeguard data and comply with relevant regulations and will report material cybersecurity incidents to the board. The Company’s executive officers have limited experience in the area of cybersecurity, but where necessary in the view of the Company’s executive officers, the Company will consult with external advisers to manage and remediate any cybersecurity incidents. For material cybersecurity incidents, the Company’s executive officers will promptly inform, update, and seek the instructions of the board.
In the year ended March 31, 2024, we did not detect any cybersecurity incidents that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition.
Governance
Our board of directors has general oversight power over cybersecurity issues and delegates the primary responsibility for day-to-day assessment and management of cybersecurity risks to our information technology personnel. When cybersecurity incidents occur, our information technology personnel will collect the relevant information, prepare solutions to mitigate the incidents, and report the incidents to our board of directors to take appropriate and timely measures in response to the incidents.
Part III
Item 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
Item 18. FINANCIAL STATEMENTS
The consolidated financial statements of Yoshitsu are included at the end of this annual report.
Item 19. EXHIBITS
EXHIBIT INDEX
| * | Filed with this annual report on Form 20-F |
| ** | Furnished with this annual report on Form 20-F |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Yoshitsu Co., Ltd | ||
| By: | /s/ Mei Kanayama | |
| Mei Kanayama | ||
| Representative Director and Director | ||
| (Principal Executive Officer) | ||
| Date: July 16, 2024 | ||
YOSHITSU CO., LTD
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Yoshitsu Co., Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Yoshitsu Co., Ltd. and its subsidiaries (collectively, the “Company”) as of March 31, 2024 and 2023, the related consolidated statements of comprehensive income (loss), change in stockholders’ equity and cash flows for each of the two years in the period ended March 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also audited the retrospective adjustments to the 2022 consolidated financial statements related to the business combination under common control as described in Note 1 and 10. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2022 consolidated financial statements of the Company other than with respect to the retrospective adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2022 consolidated financial statements taken as a whole.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum Asia CPAs LLP
Marcum Asia CPAs LLP
We have served as the Company’s auditor since 2020. (Such date takes into account the acquisition of certain assets of Friedman LLP by Marcum Asia CPAs LLP effective September 1, 2022)
New York, New York
July 16, 2024
F-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Yoshitsu Co., Ltd.
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the retrospective adjustments related to the business combination under common control as described in Note 1 and 10, the accompanying consolidated balance sheet of Yoshitsu Co., Ltd. and its subsidiaries (collectively, the “Company”) as of March 31, 2022, and the related consolidated statements of operations and comprehensive income changes in shareholders’ equity, and cash flows for the year ended March 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”) (the 2022 financial statements before the effects of the retrospective adjustments related to the business combination under common control as described in Note 1 and 10 are not presented herein). In our opinion, before the effects of the retrospective adjustments related to the business combination under common control as described in Note 1 and 10, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for the year ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review or apply any procedures to the retrospective adjustments related to the business combination under common control as described in Note 1 and 10, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor from 2020 through 2022.
New York, New York
August 15, 2022
F-
YOSHITSU CO., LTD
CONSOLIDATED BALANCE SHEETS
| March 31, | March 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,475,538 | $ | 1,766,441 | ||||
| Accounts receivable, net | 105,359,841 | 89,447,155 | ||||||
| Accounts receivable - related parties, net | 25,704 | 327,807 | ||||||
| Merchandise inventories, net | 4,413,880 | 7,187,800 | ||||||
| Due from related parties | 9,762 | 444,567 | ||||||
| Compensation receivable for consumption tax, current | 7,133,470 | 3,912,719 | ||||||
| Prepaid expenses and other current assets, net | 2,748,682 | 3,542,864 | ||||||
| TOTAL CURRENT ASSETS | 122,166,877 | 106,629,353 | ||||||
| Property and equipment, net | 9,013,827 | 12,938,598 | ||||||
| Operating lease right-of-use assets | 3,979,727 | 2,709,954 | ||||||
| Long term investment | 169,148 | |||||||
| Compensation receivable for consumption tax, non-current, net | 2,721,034 | 19,230,370 | ||||||
| Long-term prepaid expenses and other non-current assets, net | 4,115,694 | 4,997,857 | ||||||
| TOTAL ASSETS | $ | 141,997,159 | $ | 146,675,280 | ||||
| CURRENT LIABILITIES: | ||||||||
| Short-term borrowings | $ | 53,234,650 | $ | 60,636,412 | ||||
| Current portion of long-term borrowings | 1,730,796 | 2,783,445 | ||||||
| Accounts payable | 24,392,029 | 12,719,160 | ||||||
| Accounts payable - a related party | 299,541 | |||||||
| Due to related parties | 42,943 | 297,559 | ||||||
| Deferred revenue | 55,093 | 146,024 | ||||||
| Taxes payable | 9,357,482 | 18,219,803 | ||||||
| Operating lease liabilities, current | 1,523,222 | 1,323,900 | ||||||
| Finance lease liabilities, current | 170,553 | 369,786 | ||||||
| Warrants liabilities | 441,104 | 24,663 | ||||||
| Other payables and other current liabilities | 2,167,320 | 1,520,756 | ||||||
| TOTAL CURRENT LIABILITIES | 93,414,733 | 98,041,508 | ||||||
| Operating lease liabilities, non-current | 2,488,823 | 1,416,508 | ||||||
| Finance lease liabilities, non-current | 263,571 | 622,922 | ||||||
| Long-term borrowings | 5,636,960 | 10,326,399 | ||||||
| Other non-current liabilities | 1,934,927 | 2,535,123 | ||||||
| Deferred tax liabilities, net | 2,215,361 | 4,451,077 | ||||||
| TOTAL LIABILITIES | $ | 105,954,375 | $ | 117,393,537 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, no par value,100,000,000 shares authorized; 42,220,206 shares and 36,250,054 shares issued and outstanding as of March 31, 2024 and 2023, respectively | 16,716,839 | 14,694,327 | ||||||
| Capital reserve | 10,262,191 | 9,078,915 | ||||||
| Retained earnings | 21,056,780 | 13,577,844 | ||||||
| Accumulated other comprehensive loss | (11,993,026 | ) | (8,069,343 | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | 36,042,784 | 29,281,743 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 141,997,159 | $ | 146,675,280 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-
YOSHITSU CO., LTD
CONSOLIDATED STATEMENTS OF OPERTAIONS AND COMPREHENSIVE INCOME (LOSS)
| For the Years Ended March 31 | ||||||||||||
| 2024 | 2023 | 2022 (1) | ||||||||||
| REVENUE | ||||||||||||
| Revenue - third parties | $ | 189,674,322 | $ | 168,876,360 | $ | 234,508,821 | ||||||
| Revenue - related parties | 6,006,993 | 847,986 | 243,759 | |||||||||
| Total revenue | 195,681,315 | 169,724,346 | 234,752,580 | |||||||||
| COSTS AND OPERATING EXPENSES | ||||||||||||
| Merchandise costs | 172,306,308 | 140,293,419 | 191,040,547 | |||||||||
| Selling, general and administrative expenses | 17,597,125 | 28,607,088 | 36,422,772 | |||||||||
| Total operating expenses | 189,903,433 | 168,900,507 | 227,463,319 | |||||||||
| INCOME FROM OPERATIONS | 5,777,882 | 823,839 | 7,289,261 | |||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Interest expense, net | (1,611,141 | ) | (2,422,079 | ) | (2,785,766 | ) | ||||||
| Additional and delinquent tax due to consumption tax correction | (628,876 | ) | (6,622,486 | ) | ||||||||
| Gain from disposal of equity method investment | 190,571 | |||||||||||
| Gain from disposal of a subsidiary | 341,139 | |||||||||||
| Other income, net | 760,435 | 13,145 | 598,206 | |||||||||
| Gain from foreign currency exchange | 3,065,971 | 718,990 | 833,547 | |||||||||
| Change in fair value of warrants liabilities | 109,173 | 139,615 | 369,404 | |||||||||
| Income (loss) from equity method investment | (69,444 | ) | 14,554 | (145,828 | ) | |||||||
| Total other income (expenses), net | 2,157,828 | (8,158,261 | ) | (1,130,437 | ) | |||||||
| INCOME (LOSS) BEFORE INCOME TAX PROVISION | 7,935,710 | (7,334,422 | ) | 6,158,824 | ||||||||
| PROVISION FOR INCOME TAXES | 456,774 | 714,400 | 2,234,676 | |||||||||
| NET INCOME (LOSS) | 7,478,936 | (8,048,822 | ) | 3,924,148 | ||||||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||
| Foreign currency translation loss | (3,923,683 | ) | (4,279,325 | ) | (3,466,261 | ) | ||||||
| TOTAL COMPREHENSIVE INCOME (LOSS) | $ | 3,555,253 | $ | (12,328,147 | ) | $ | 457,887 | |||||
| $ | 0.20 | $ | (0.22 | ) | $ | 0.12 | ||||||
| 37,264,162 | 36,250,054 | 32,678,625 | ||||||||||
| * | Retrospectively restated for effect of a 294-for-1 forward split on August 18, 2021. |
| (1) | The financial information presented in this report has been retrospectively adjusted for the acquisition of Tokyo Lifestyle Limited. |
The accompanying notes are an integral part of these consolidated financial statements.
F-
YOSHITSU CO., LTD
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Ordinary Shares | Capital | Retained | Accumulated Other Comprehensive | Total Shareholders’ | ||||||||||||||||||||
| Shares* | Amount | Reserve | Earnings | Income (Loss) | Equity (1) | |||||||||||||||||||
| Balance, March 31, 2021 | 27,327,594 | $ | 2,416,635 | $ | 501,053 | $ | 17,702,518 | $ | (323,757 | ) | $ | 20,296,449 | ||||||||||||
| - | ||||||||||||||||||||||||
| Capital contribution from Grand Elec-Tech Limited | 2,672,460 | 920,192 | 902,224 | 1,822,416 | ||||||||||||||||||||
| Issuance of ordinary shares and additional shares under overallotment option in initial public offerings, net of issuance costs | 6,250,000 | 11,357,500 | 10,060,011 | 21,417,511 | ||||||||||||||||||||
| Capital contribution in the form of debt exemption | - | 1,111,608 | 1,111,608 | |||||||||||||||||||||
| Issuance of representative’s warrants | - | (653,831 | ) | (653,831 | ) | |||||||||||||||||||
| Net income for the year | - | 3,924,148 | 3,924,148 | |||||||||||||||||||||
| Foreign currency translation loss | - | (3,466,261 | ) | (3,466,261 | ) | |||||||||||||||||||
| Balance, March 31, 2022 | 36,250,054 | $ | 14,694,327 | $ | 11,921,065 | $ | 21,626,666 | $ | (3,790,018 | ) | $ | 44,452,040 | ||||||||||||
| Business combinations under common control | - | (2,842,173 | ) | (2,842,173 | ) | |||||||||||||||||||
| Capital contribution received by Malaysia subsidiary | - | 23 | 23 | |||||||||||||||||||||
| Capital contribution in the form of debt exemption | - | |||||||||||||||||||||||
| Issuance of representative’s warrants | - | |||||||||||||||||||||||
| Net loss for the year | - | (8,048,822 | ) | (8,048,822 | ) | |||||||||||||||||||
| Foreign currency translation loss | - | (4,279,325 | ) | (4,279,325 | ) | |||||||||||||||||||
| Balance, March 31, 2023 | 36,250,054 | $ | 14,694,327 | $ | 9,078,915 | $ | 13,577,844 | $ | (8,069,343 | ) | $ | 29,281,743 | ||||||||||||
| Issuance of ordinary shares | 5,970,152 | 2,022,512 | 1,724,770 | 3,747,282 | ||||||||||||||||||||
| Issuance of investors’ warrants | - | (541,494 | ) | - | - | (541,494 | ) | |||||||||||||||||
| Net income for the year | - | 7,478,936 | 7,478,936 | |||||||||||||||||||||
| Foreign currency translation loss | - | (3,923,683 | ) | (3,923,683 | ) | |||||||||||||||||||
| Balance, March 31, 2024 | 42,220,206 | $ | 16,716,839 | $ | 10,262,191 | $ | 21,056,780 | $ | (11,993,026 | ) | $ | 36,042,784 | ||||||||||||
| * | Retrospectively restated for effect of share issuances on October 22, 2020 and a 294-for-1 forward split on August 18, 2021. |
| (1) | The financial information presented in this report has been retrospectively adjusted for the acquisition of Tokyo Lifestyle Limited. |
The accompanying notes are an integral part of these consolidated financial statements.
F-
YOSHITSU CO., LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended March 31 | ||||||||||||
| 2024 | 2023 | 2022 (1) | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net Income (loss) | $ | 7,478,936 | $ | (8,048,822 | ) | $ | 3,924,148 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | 1,232,611 | 1,226,496 | 1,217,455 | |||||||||
| Loss (gain) from disposal of property and equipment | (712,685 | ) | 329,580 | 35,803 | ||||||||
| Loss (gain) from unrealized foreign currency translation | (412,728 | ) | 282,131 | (662,345 | ) | |||||||
| Provision for (reversal of) credit losses | (2,043,939 | ) | 3,471,953 | (278,642 | ) | |||||||
| Addition (reversal) of merchandise inventories written down | (68,361 | ) | 150,382 | |||||||||
| Amortization of operating lease right-of-use assets | 1,711,978 | 1,784,754 | 2,385,992 | |||||||||
| Deferred tax provision (benefit) | (1,778,277 | ) | 4,849,771 | (67,268 | ) | |||||||
| Change in fair value of warrants liabilities | (109,173 | ) | (139,615 | ) | (369,404 | ) | ||||||
| Investment loss (income) from equity method investment | 69,444 | (14,554 | ) | 145,828 | ||||||||
| Gain from disposal of equity method investment | (190,571 | ) | ||||||||||
| Accrued interest expense | 38,666 | |||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (24,747,655 | ) | (53,824,026 | ) | 7,841,569 | |||||||
| Accounts receivable - related parties | 277,005 | (323,212 | ) | |||||||||
| Merchandise inventories | 2,355,034 | 21,285,866 | (6,054,509 | ) | ||||||||
| Compensation receivable for consumption tax | 11,284,665 | (23,212,327 | ) | |||||||||
| Prepaid expenses and other current assets | 949,043 | 5,597,781 | (7,028,529 | ) | ||||||||
| Long term prepaid expenses and other non-current assets | 315,809 | 2,183,108 | (4,762,929 | ) | ||||||||
| Accounts payable | 13,816,414 | 5,280,797 | (2,803,950 | ) | ||||||||
| Accounts payable - related parties | 299,591 | (119,081 | ) | 25,813 | ||||||||
| Deferred revenue | 35,027 | 49,715 | (69,862 | ) | ||||||||
| Taxes payable | (6,977,961 | ) | 17,268,372 | (1,365,092 | ) | |||||||
| Other payables and other current liabilities | 1,078,396 | (1,590,907 | ) | 1,932,901 | ||||||||
| Operating lease liabilities | (1,711,398 | ) | (1,807,376 | ) | (2,270,868 | ) | ||||||
| Other non-current liabilities | (239,250 | ) | (419,200 | ) | 1,179,459 | |||||||
| Net cash provided by (used in) operating activities | 1,911,955 | (25,738,414 | ) | (7,005,764 | ) | |||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of property and equipment | (929,308 | ) | (934,960 | ) | (3,037,813 | ) | ||||||
| Proceeds from disposal of property and equipment | 3,104,387 | 2,961 | 61,109 | |||||||||
| Proceeds from disposal of equity method investment | 276,800 | |||||||||||
| Proceeds from disposal of a subsidiary | 34,600 | |||||||||||
| Disposal of a subsidiary, net of cash | (171,788 | ) | ||||||||||
| Collection of amount due from (advances made to) related parties | 399,223 | 188,728 | (128,535 | ) | ||||||||
| Net cash provided by (used in) investing activities | 2,713,914 | (743,271 | ) | (3,105,239 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Capital contribution | 23 | 1,822,416 | ||||||||||
| Proceeds from initial public offerings, net of issuance costs | 22,102,984 | |||||||||||
| Proceeds from issuance of ordinary shares, net of issuance costs | 3,747,282 | |||||||||||
| Cash consideration paid for business combination under common control | (2,842,173 | ) | ||||||||||
| Proceeds from short-term borrowings | 1,384,000 | 78,831,300 | 282,176,915 | |||||||||
| Repayments of short-term borrowings | (2,076,000 | ) | (55,515,000 | ) | (303,096,477 | ) | ||||||
| Proceeds from long-term borrowings | 2,160,161 | 17,057,036 | ||||||||||
| Repayments of long-term borrowings | (4,186,712 | ) | (9,798,554 | ) | (1,608,276 | ) | ||||||
| Advances received from (payments made to) related parties | (228,966 | ) | 104,482 | (4,282,303 | ) | |||||||
| Repayment of obligations under finance leases | (420,910 | ) | (194,421 | ) | (408,492 | ) | ||||||
| Net cash provided by (used in) financing activities | (1,781,306 | ) | 12,745,818 | 13,763,803 | ||||||||
| Effect of exchange rate fluctuation on cash | (2,135,466 | ) | (2,763,692 | ) | (2,230,388 | ) | ||||||
| Net increase (decrease) in cash | 709,097 | (16,499,559 | ) | 1,422,412 | ||||||||
| Cash at beginning of year | 1,766,441 | 18,266,000 | 16,843,588 | |||||||||
| Cash at end of year | $ | 2,475,538 | $ | 1,766,441 | $ | 18,266,000 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for income taxes | $ | 880,308 | $ | 433,899 | $ | 3,718,637 | ||||||
| Cash paid for interest | $ | 798,353 | $ | 1,108,863 | $ | 873,147 | ||||||
| Supplemental non-cash operating activities | ||||||||||||
| Purchase of property and financed under long-term payment | $ | $ | 831,746 | $ | 22,719 | |||||||
| Purchase of property and equipment financed under finance leases | $ | $ | 210,666 | $ | 901,561 | |||||||
| Right of use assets obtained in exchange for operating lease liabilities | $ | 3,118,676 | $ | 542,231 | $ | 2,856,470 | ||||||
| Capital contribution in the form of debt exemption | $ | $ | $ | 1,111,608 | ||||||||
| Deduction of right of use assets and operating lease liabilities in relation to lease concession | $ | $ | $ | 84,368 | ||||||||
| Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement | $ | $ | $ | 27,262 | ||||||||
| Deferred IPO cost offset with capital reserve | $ | $ | $ | 685,473 | ||||||||
| (1) | The financial information presented in this report has been retrospectively adjusted for the acquisition of Tokyo Lifestyle Limited. |
The accompanying notes are an integral part of these consolidated financial statements.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION
Yoshitsu Co., Ltd (the “Company”) is a stock company incorporated in Japan pursuant to the laws of Japan on December 28, 2006.
Prior to July 1, 2023, the Company owned 100% of the equity interests of Kaika International Co., Ltd, formerly known as Tokyo Lifestyle Co., Ltd. (“Kaika International”), a stock company incorporated pursuant to the laws of Japan on October 24, 2019. On June 30, 2023, the Company entered into a share transfer agreement with Seihinkokusai Co., Ltd. (“Seihinkokusai”), a related party of the Company, to sell its 100% equity interests in Kaika International to Seihinkokusai, and the transaction was completed on July 1, 2023.
On July 27, 2022, the Company acquired 100% equity interests in Tokyo Lifestyle Limited (“TLS”), a company incorporated pursuant to the laws of Hong Kong on May 10, 2019 and principally engaged in the import and retail of Japanese beauty and cosmetic products in Hong Kong and engaged in the live e-commerce business through its wholly-owned subsidiary, Shenzhen Qingzhiliangpin Network Technology Co., Ltd. (“Qingzhiliangpin”), a company incorporated on April 16, 2020 in the People’s Republic of China (the “PRC”). October 26, 2022, TLS acquired 60% equity interests in REIWATAKIYA (MYS) SDN. BHD. (“Reiwatakiya”) and the remaining 40% equity interests on January 4, 2023. Reiwatakiya is a private limited company incorporated in Malaysia on June 14, 2022, and principally engaged in the import and retail of Japanese beauty and cosmetic products in Malaysia, and is currently not engaging in any active business operations. These transactions were accounted for as acquisitions under common control (see details in “Acquisition Under Common Control”).
On September 6, 2023, TLS incorporated a wholly-owned subsidiary, RAKKISTAR HOLDING INC., in the State of Ontario, Canada. On October 17, 2023, TLS incorporated a wholly-owned subsidiary, Tokyo Lifestyle Holding Inc. (“TLS Holding”), in the State of Delaware. TLS Holding incorporated three wholly-owned subsidiaries, REIWATAKIYA LV LLC, a limited liability company on August 3, 2023, in the State of Nevada; REIWATAKIYA BOS LLC, a limited liability company on October 26, 2023, in the Commonwealth of Massachusetts; and REIWATAKIYA NYC LLC, a limited liability company on November 8, 2023, in the State of New York. TLS Holding and REIWATAKIYA NYC LLC are currently not engaging in any active business operations.
The Company and its subsidiaries (collectively, “Yoshitsu”) are a retailer and wholesaler of Japanese beauty and health products, as well as luxury and electronic products, sundry products, and other products and services. The Company offers approximately 47,700 stock keeping units (“SKUs”) of beauty products, including cosmetics, skin care, fragrance, and body care, among others; 15,200 SKUs of health products, including over-the-counter (“OTC”) drugs, nutritional supplements, and medical supplies and devices; 44,200 SKUs of sundry products, including home goods, 150 SKUs of electronic products, including entertainment gaming products, such as Nintendo Switch and Xbox Series, 850 SKUs of luxury products, including branded watches, perfume, handbags, clothes, and jewelry, and 50,600 SKUs of other products, including food, alcoholic beverages The Company also provides advertising services by key opinion leaders (“KOLs”).
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION (continued)
Acquisition Under Common Control
On July 20, 2022, the Company entered into a definitive agreement (the “Agreement”) with All Seas Global Limited to acquire its 100% equity interests in TLS. Pursuant to the Agreement, the Company agreed to acquire 100% of the equity interests in TLS in total consideration of Japanese yen 392,673,800 in cash ($2,842,173), subject to certain terms. The transaction contemplated by the Agreement was approved by the Company’s board of directors at a special board meeting on June 27, 2022. The 100% of the equity interests in TLS were transferred to the Company on July 20, 2022, and cash consideration was paid in full and the transaction was closed on July 27, 2022. As the Company and TLS previously were controlled by the same ultimate controlling shareholder before this acquisition, this transaction was accounted for as an acquisition of a business under common control, and accordingly, the Company’s comparative financial information prior to the acquisition date of July 20, 2022 was retrospectively adjusted to include the financial results of TLS. See “Note 10—Acquisitions.”
On October 26, 2022, the board of directors of TLS approved the acquisition of Reiwatakiya from All Seas Global Limited, who held a 60% interest in Reiwatakiya, and subsequently, approved the acquisition of the remaining 40% interest in Reiwatakiya from a third-party shareholder on January 4, 2023. The 60% and 40% of the equity interests in Reiwatakiya were transferred to the TLS on October 26, 2022 and January 4, 2023, respectively, with no consideration. As TLS and Reiwatakiya previously were controlled by the same ultimate controlling shareholder before this acquisition, this transaction was accounted for as an acquisition of a business under common control, accordingly, the Company’s comparative financial information prior to the acquisition date of October 26, 2022 was retrospectively adjusted to include the financial results of Reiwatakiya. See “Note 10—Acquisitions.”
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities Exchange Commission (the “SEC”). The accompanying consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany balances and transactions are eliminated upon consolidation.
Use of estimates
In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, assessment of expected credit losses for accounts receivable, compensation receivable for consumption tax, current and non-current prepaid expenses and other assets, valuation of inventories, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, inputs used in the calculation of the asset retirement obligation, and implicit interest rate of operating leases and financing leases. Actual results could differ from those estimates.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash
Cash includes currency on hand and deposits held by banks that can be added or withdrawn without limitation. The Company maintains its bank accounts in Japan, Hong Kong, China, Malaysia, the United States and Canada. The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. As of March 31, 2024 and 2023, the Company did not have any cash equivalents.
Receivables and credit losses
On April 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments – Credit Losses (“Topic 326”), Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss impairment methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The expected credit loss impairment model requires the entity to recognize its estimate of expected credit losses for affected financial assets using an allowance for credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements.
The Company’s account receivables, compensation receivable for consumption tax and other receivable included in current and non-current prepaid expenses and other assets are within the scope of Topic 326. The Company makes estimates of expected credit and collectability trends for the allowance for credit losses based upon assessment of various factors, including historical experience, the age of the receivables, credit-worthiness of the customers and other debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and other debtors. The Company also provides specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.
Expected credit losses are included in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income (loss). After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Account receivables, compensation receivable for consumption tax and other receivable is recognized and carried at original amount less an allowance for credit losses, as necessary. As of March 31, 2024 and 2023, allowance for credit losses for accounts receivable amounted to $1,244,662 and $3,219,772, respectively, allowance for credit losses for other receivables amounted to $728,554 and $904,598, respectively, and allowance for credit losses for compensation receivable for consumption tax amounted to $99,526 and $436,145, respectively.
Leases
The Company accounts for lease in accordance with ASC 842. The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company leases retail store facilities and distribution centers, which are classified as operating leases and leases certain software and equipment and furniture as finance lease in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current, and operating lease liabilities, non-current, and finance leases are included in property and equipment, finance lease liabilities, current, and finance lease liabilities, non-current in the consolidated balance sheet.
At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The operating lease right-of-use asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All operating lease right-of-use assets are reviewed for impairment annually. There was no impairment for operating lease right-of-use lease assets during the fiscal years ended March 31, 2024, 2023, and 2022.
The Company has elected the short-term lease exception, and therefore operating lease right-of-use assets and liabilities do not include leases with a lease term of twelve months or less.
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in Topic 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in Topic 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
Based on the nature of the agreements reached with many of its landlords, the Company has accounted for rent concessions as if they were part of the enforceable rights and obligations of the existing lease contracts and did not account for the concessions as lease modifications. The Company has received a total of lease concessions amounting to $253,206, and among which, $nil, $72,401 and $127,303 was received during the fiscal years ended March 31, 2024, 2023, and 2022, respectively. The Company remeasured the lease payments using the same discount rate, and has continued to recognize lease expenses on a straight-line basis for its leases over the related lease terms.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity investment
An investment in which the Company has the ability to exercise significant influence, but does not have a controlling interest, is accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the board of directors, voting rights, and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. The Company did not record impairment losses on its equity method investment during the fiscal years ended March 31, 2024, 2023, and 2022. When the equity investment is sold, any gain or loss resulted from difference between the transaction price and carry value of the equity investment is recognized in the consolidated statements of operations and comprehensive income (loss).
Common control transactions
In business combinations under common control, the assets and liabilities acquired are measured at the historical amounts of the acquirees in the consolidated financial statements of acquirer on the acquisition date. The difference between the carrying amounts of the net assets acquired and the consideration paid is adjusted to the equity account of the acquirer. The operating results for all periods presented are retrospectively restated as if the current structure and operations resulting from the acquisition had been in existence since the beginning of the earliest year presented, with financial data of previously separate entities consolidated. The subsequent adjustment of contingent consideration after the acquisition date is also accounted for as an equity transaction.
Compensation receivable for consumption tax
Compensation receivable for consumption tax pertains to damages the Company claimed from certain suppliers as well as customers. Compensation receivable for consumption tax is recognized and carried at original amount in the agreements less an allowance for credit losses. As of March 31, 2024 and 2023, allowance for credit losses for compensation receivable for consumption tax amounted to $99,526 and $436,145, respectively.
Merchandise inventories
Merchandise inventories are stated at the lower of cost or net realizable value, on a weighted average basis. Costs include mainly the cost of merchandise inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to sell products. Write-down is recorded when future estimated net realizable value is less than cost, which is recorded in merchandise costs in the consolidated statements of operations and comprehensive income (loss). The Company periodically evaluates merchandise inventories for their net realizable value adjustments, and reduces the carrying value of those merchandise inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging and expiration dates, as applicable, taking into consideration historical and expected future product sales. As of March 31, 2024 and 2023, merchandise inventories write-down was $69,700 and $152,759, respectively.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Except for assets that are not subject to depreciation, such as land and construction in progress, depreciation and amortization of property and equipment are mainly provided using the straight-line method or declining balance method, which allocates an asset’s cost over the periods during which the Company benefits from the use of the asset. The expected economic useful lives of the Company’s assets are as follows:
| Useful life | ||
| Property and buildings | 35-50 years | |
| Land | Infinite | |
| Leasehold improvements | Lesser of useful life and lease term | |
| Equipment and furniture | 2-18 years | |
| Automobiles | 4-6 years | |
| Software | 5 years |
Land has infinite useful life and is not subjected to amortization. Management reviews for impairment accordance with the accounting policy stated under impairment of long-lived assets.
Expenditures for maintenance and repair, which do not materially extend the useful lives of the assets, are charged to expenses as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of operations and comprehensive income (loss) in other income or expenses.
Asset retirement obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the long-lived assets. The Company’s asset retirement obligations are primarily related to leasehold improvement of its retail stores leases, that, at the end of the leases, are required to be returned to the landlords in their original condition. As of March 31, 2024 and 2023, the balance of asset retirement obligations included in other non-current liabilities was $773,802 and $1,004,838, respectively, and will be subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the leasehold improvements and are depreciated over the shorter of the estimated useful life of the asset or the term of the lease subsequent to the initial measurement. Due to the time over which these obligations could be settled and the judgment used to determine the liability, the ultimate obligation may differ from the estimate. Upon settlement, any difference between actual cost and the estimate is recognized as a gain or loss in that period.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment, operating lease right-of-use assets and long-term prepaid expenses and non-current assets for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Company evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, the Company did not recognize any impairment loss on long-lived assets for the fiscal years ended March 31, 2024, 2023, and 2022.
Revenue recognition
The Company accounts for revenue in accordance with ASC 606. ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance (ASC Topic 605, Revenue Recognition) did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in the scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
Under ASC 606, revenue is recognized when control of promised goods is transferred or service is rendered to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from the specified goods and services.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
The Company currently generates its revenue through retail and wholesale of Japanese beauty and health products, luxury and electronic products, as well as sundry and other products and services, through a multi-channel distribution network. Currently, the Company sells its products and renders its services through: (i) directly-operated physical stores, (ii) online stores and services, and (iii) franchise stores and wholesale customers. For domestic sales in Japan, Hong Kong, the United States and Canada, revenue is recognized at the point of sales or delivery of the related products and control is transferred. For international sales, the Company sells goods under Cost Insurance and Freight (“CIF”) shipping point term, and revenue is recognized when product is loaded on the ships and control is deemed as transferred. The Company’s service revenue primarily consists advertising services of KOLs for its customers. The Company produces short videos with the online celebrities to promote the brands of its customers on social media platforms, such as TikTok and Kuaishou. Revenue from these services is recognized at a point in time when the service is rendered by the Company.
For online stores, the Company generally offers a seven-day product return policy for products sold in the Company’s online store in China, and an eight-day product return policy for products sold in the Company’s online store in Japan, as long as the products are undamaged, in their original condition, and can be resold. For products sold in the Company’s physical stores, the Company offers a seven-day product return policy for products sold in the Company’s physical stores in Japan and Hong Kong; a fifteen-day and thirty-day product return policy for products sold in the Company’s physical stores in the United States and Canada, as long as the products are undamaged, in their original condition, and can be resold. Historically, the customer returns were immaterial. Therefore, the Company did not provide any sales return allowances for the fiscal years ended March 31, 2024, 2023, and 2022.
The Company enters into franchise agreements with franchisees in Japan under which the franchisee is granted a revocable license and non-exclusive right to use the Company’s trademarks and stores. The Company requires an entire non-refundable initial franchise fee of ¥3.0 million (approximately $20,000) to be paid upon execution of a franchise agreement, which typically has an initial term of three years and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of the then current term. Initial franchise fees are recognized on a straight-line basis over the term of the franchise agreement. In addition, the Company is also entitled to continuing franchise fees (royalties), equal to 5% of the monthly gross sales of the franchise store, and royalties are recognized as revenue based on the monthly royalty earned. Franchise fees from the franchisees were included in revenue from franchise stores and wholesale customers, and were immaterial for the fiscal years ended March 31, 2024, 2023, and 2022.
The Company is the principal for its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise before it is transferred to customers, which generally is established when the Company is primarily responsible for merchandising decisions, maintains the relationship with customer, including assurance of member service and satisfaction, and has pricing discretion.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
In directly-operated physical stores, customers can enroll in the Company’s rewards program, which is primarily a spending-based rewards program, and get a rewards card. Members of the rewards program usually earn three membership points for each ¥100 spent, and one membership point for each HK$1, US$1 and CAD1 spent in the Company’s directly-operated physical stores in Japan, Hong Kong, the United States and Canada, respectively. Subsequently, one membership point can be used as ¥1 at the Company’s directly-operated physical stores in Japan when making payment, and 250 membership points can be used as HK$1 at the Company’s directly-operated physical stores in Hong Kong when making payment; membership point can be used to redeem products at the Company’s directly-operated physical stores in the United States and Canada. The membership points are valid for one year and ten years starting from the last use of the rewards card in directly-operated physical stores in Japan and Hong Kong, respectively. There is no expiration date for membership points earned at directly-operated physical stores in the United States and Canada, respectively. The Company initially accounts for these membership points as a reduction in sales based on the estimated monetary value of the membership points with the corresponding liability classified as deferred revenue in the consolidated balance sheets. When a customer redeems earned membership points at its stores, the Company recognizes revenue and reduces the deferred revenue. Unused membership points are recognized as breakage, which is recorded as revenue in the consolidated statements of operations and comprehensive income (loss). Membership point breakage was immaterial for the fiscal years ended March 31, 2024, 2023, and 2022.
Contract balances and remaining performance obligations
Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs. The Company did not have contract assets as of March 31, 2024 and 2023. The Company’s contract liabilities, which are reflected in its consolidated balance sheets as deferred revenue of $55,093 and $146,024 as of March 31, 2024 and 2023, respectively, consist primarily of revenue for amount received in advance from the Company’s wholesale customers and unredeemed membership points. These amounts represent the Company’s unsatisfied performance obligations as of the balance sheet dates. The amount of revenue recognized in the fiscal years ended March 31, 2024, 2023, and 2022 that was included in the opening deferred revenue was $82,017, $94,386 and $182,871, respectively. As of March 31, 2024, the amount received in advance from wholesale customers and unredeemed membership points was $55,093. The Company expects to recognize revenue when products are delivered to the wholesale customers or when customers redeem their membership points, which is expected to occur within one year.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Disaggregation of revenue
The Company disaggregates its revenue by geographic areas, product categories, and distribution channels, which the Company believes best depicts how the nature, amount, timing, and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenue for the fiscal years ended March 31, 2024, 2023, and 2022 is as following:
Revenue by geographic areas
The summary of the Company’s total revenue by geographic areas for the fiscal years ended March 31, 2024, 2023, and 2022 was as follows
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Japan domestic market | $ | 57,381,922 | $ | 72,190,276 | $ | 22,022,276 | ||||||
| China market | 119,818,459 | 86,702,023 | 197,596,778 | |||||||||
| Other overseas markets | 18,480,934 | 10,832,047 | 15,133,526 | |||||||||
| Total revenue | $ | 195,681,315 | $ | 169,724,346 | $ | 234,752,580 | ||||||
Revenue by product categories
The summary of the Company’s total revenue by product categories for the fiscal years ended March 31, 2024, 2023, and 2022 was as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Beauty products | $ | 50,114,893 | $ | 128,781,665 | $ | 154,741,555 | ||||||
| Health products | 4,931,671 | 18,701,204 | 19,374,420 | |||||||||
| Sundry products | 6,083,770 | 11,033,924 | 50,513,824 | |||||||||
| Luxury products | 90,189,723 | - | - | |||||||||
| Electronic products | 34,901,681 | - | - | |||||||||
| Other products and services (1) | 9,459,577 | 11,207,553 | 10,122,781 | |||||||||
| Total revenue | $ | 195,681,315 | $ | 169,724,346 | $ | 234,752,580 | ||||||
| (1) | Other products and services include primarily food, such as soft drinks, packaged snacks, tea and coffee, fruit juice, and mineral water, and alcoholic beverages, cigarettes, and pet food. It also includes revenue from advertising services through KOLs. |
Revenue by distribution channels
The summary of the Company’s total revenue by distribution channels for the fiscal years ended March 31, 2024, 2023, and 2022 was as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Directly-operated physical stores | $ | 14,951,952 | $ | 11,606,180 | $ | 12,965,904 | ||||||
| Online stores and services | 10,705,449 | 20,700,011 | 122,150,105 | |||||||||
| Franchise stores and wholesale customers | 170,023,914 | 137,418,155 | 99,636,571 | |||||||||
| Total revenue | $ | 195,681,315 | $ | 169,724,346 | $ | 234,752,580 | ||||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, due from related parties, current portion of compensation receivable for consumption tax, prepaid expenses and other current assets, short-term borrowings, current portion of long-term borrowings, accounts payable, due to related parties, deferred revenue, taxes payable, and other payables and other current liabilities, approximate the fair value of the respective assets and liabilities as of March 31, 2024 and 2023 based upon the short-term nature of the assets and liabilities.
Foreign currency translation
The Company maintains its books and records in its local currency, Japanese yen (“YEN” or “¥”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. The Company’s subsidiaries in Hong Kong, the PRC, Malaysia, the United States and Canada use their respective currencies Hong Kong Dollar (“HK$”), Chinese Yuan (“RMB”), Malaysia Ringgit (“MYR”), United States Dollars (“USD”) and Canadian dollar (“CAD”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations and comprehensive income (loss).
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The reporting currency of the Company is the United States Dollars (“US$” or “$”) and the accompanying consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statement,” assets and liabilities of the Company are translated into US$, using the exchange rate on the balance sheet date. Revenue and expenses are translated at the average rates prevailing during the period. Shareholders’ equity is translated at the historical exchange rate at the time of transaction. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.
The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
| March 31, 2024 | March 31, 2023 | March 31, 2022 | ||||||||||
| Year-end spot rate |
Average rate |
Year-end spot rate |
Average rate |
Year-end spot rate |
Average rate |
|||||||
| US$ against YEN | ¥1=US$0.00661 | ¥1=US$0.00692 | ¥1=US$0.00752 | ¥1=US$0.00740 | ¥1=US$0.00821 | ¥1=US$0.00891 | ||||||
| US$ against HK$ | HK$1=US$0.12778 | HK$1=US$0.12780 | HK$1=US$0.12739 | HK$1=US$0.12757 | HK$1=US$0.12771 | HK$1=US$ 0.12846 | ||||||
| US$ against RMB | RMB1=US$0.13850 | RMB1=US$0.13953 | RMB1=US$0.14560 | RMB1=US$0.14607 | RMB1=US$0.15765 | RMB1=US$0.15582 | ||||||
| US$ against MYR | MYR1=US$0.21175 | MYR1=US$0.21548 | MYR1=US$0.22659 | MYR1=US$0.22499 | - | - | ||||||
| US$ against CAD | CAD1=US$0.73855 | CAD1=US$0.74162 | - | - | - | - | ||||||
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expenses in the period incurred. No significant penalties or interest relating to income taxes were incurred during the fiscal years ended March 31, 2024, 2023, and 2022, and there was no uncertain tax provision as of March 31, 2024 and 2023.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company’s operating entities in Japan are subject to the income tax laws of Japan. As of March 31, 2024, the tax years ended March 31, 2022 through March 31, 2024 for the Company’s operating entities in Japan remain open for statutory examination by the Japanese tax authorities. The Company’s subsidiary in Hong Kong is subject to the profit taxes in Hong Kong. As of March 31, 2024, the tax years ended since the year of incorporation through March 31, 2024 for the Company’s subsidiary in Hong Kong remain open for statutory examination by the Hong Kong taxing jurisdictions. The Company’s subsidiary in China is subject to the income tax laws of the PRC. As of March 31, 2024, the tax years ended since the year of incorporation through December 31, 2023 for the Company’s PRC subsidiary remain open for statutory examination by PRC tax authorities. The Company’s subsidiary in Malaysia is subject to the income tax laws of Malaysia. As of March 31, 2024, all of the tax returns of the Company’s Malaysian subsidiary remain open for statutory examination by relevant tax authorities. The Company’s subsidiaries in the United States are subject to the tax law of the United States. As of March 31, 2024, the tax years ended since the year of incorporation through December 31, 2023 for the Company’s subsidiaries in United States remain open for statutory examination by the United States tax authorities. The Company’s subsidiary in Canada is subject to the tax law of Canada. As of March 31, 2024, the tax years ended since the year of incorporation through December 31, 2023 for the Company’s subsidiary in Canada remain open for statutory examination by Canada tax authorities.
Sales and leaseback
The Company enters into sale and leaseback transactions, pursuant to which the Company sells the property to a third party and agrees to lease the property back for a certain period of time. To determine whether the transfer of the property should be accounted for as a sale, the Company evaluates whether it has transferred control to the third party in accordance with the revenue recognition guidance set forth in ASC 606. If the transfer of the asset is deemed to be a sale at market terms, the Company recognizes the transaction price for the sale based on the cash proceeds received, derecognizes the carrying amount of the underlying asset and recognizes a gain or loss in the consolidated statements of operations and comprehensive income (loss) in other income or expenses for any difference between the carrying value of the asset and the transaction price. The Company then accounts for the leaseback in accordance with its lease accounting policy.
Earnings (loss) per share
The Company computes earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average ordinary shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential ordinary shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were no dilutive shares for the fiscal years ended March 31, 2024, 2023, and 2022.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping and handling cost
All shipping and handling costs are expensed as incurred and included in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income (loss). Total shipping and handling expenses were $1,793,286, $5,863,482 and $13,609,683 for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
Advertising expenses
Advertising costs are expensed as incurred and included in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income (loss). Advertising expenses amounted to $301,681, $748,363 and $2,847,383 for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive loss. The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in YEN, HK$, RMB, MYR and CAD to US$ is reported in other comprehensive loss in the consolidated statements of operations and comprehensive income (loss).
Related parties and transactions
The Company identifies related parties, and accounts for, discloses related party transactions in accordance with ASC 850, “Related Party Disclosures,” and other relevant ASC standards.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence. Transactions between related parties commonly occurring in the normal course of business are considered to be related party transactions.
Segment reporting
The Company uses the management approach in determining its operating segments. The management approach considers the internal reporting used by the Company’s chief operating decision maker (“CODM”). The Company’s CODM has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the Company. Management has determined that the Company has three operating segments, which are (i) directly-operated physical stores, (ii) online stores and services, and (iii) franchise stores and wholesale customers.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and uncertainties
Political and economic risk
The directly-operated physical stores of the Company are located in Japan, Hong Kong, the United States and Canada, and the online stores and franchise stores and wholesale partners of the Company are mainly located in Japan, mainland China and Hong Kong. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in Japan, Hong Kong, mainland China, the United States and Canada, as well as by the general state of their economy. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in Japan, Hong Kong, mainland China, the United States and Canada. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, including its organization and structure disclosed in Note 1, such experience may not be indicative of future results.
Credit risk
As of March 31, 2024 and 2023, $1,964,529 and $1,001,582 of the Company’s cash was on deposit at financial institutions in Japan, respectively, which were insured by the Deposit Insurance Corporation of Japan subject to certain limitations. The Company has not experienced any losses in such accounts.
As of March 31, 2024 and 2023, $93,919 and $590,116 of the Company’s cash was on deposit at financial institutions in Hong Kong, respectively, which were insured by the Hong Kong Deposit Protection Board for compensation up to a limit of HK$500,000 (approximately $64,000) if the bank with which an individual/a company hold its eligible deposit fails.
As of March 31, 2024 and 2023, $139,167 and $69,537 of the Company’s cash was on deposit at financial institutions in mainland China, respectively, where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure. The Company has not experienced any losses in such accounts.
As of March 31, 2024 and 2023, $13,137 and $27,137 of the Company’s cash was on deposit at financial institutions in Malaysia, respectively, which were subject to certain protections under the requirement of the deposit insurance system up to a limit of MYR250,000 (approximately $53,000) if the bank with which an individual/a company hold its eligible deposit fails.
As of March 31, 2024 and 2023, $111,301 and $nil of the Company’s cash was on deposit at financial institutions in the United States which were insured by the Federal Deposit Insurance Corporation for compensation up to a limit of $250,000 if the bank with which an individual/a company hold its eligible deposit fails.
As of March 31, 2024 and 2023, $29,090 and $nil of the Company’s cash was on deposit at financial institutions in Canada, respectively, which were insured by the Canada Deposit Insurance Corporation for compensation up to a limit of CAD100,000 (approximately $74,000) if the bank with which an individual/a company hold its eligible deposit fails.
Accounts receivable are typically unsecured and derived from revenue earned from customers, compensation receivables are typically unsecured and derived from damages the Company claimed from certain suppliers as well as customers, thereby exposed to credit risks. The risk is mitigated by the Company’s assessment of its customers and suppliers’ creditworthiness and its ongoing monitoring of outstanding balances.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations
For the fiscal years ended March 31, 2024, 2023, and 2022, majority of the Company’s assets were located in Japan and Hong Kong.
The Company’s revenue was generated by the Company and its subsidiaries, which are located in Japan, Hong Kong, mainland China, the United States and Canada. Revenue generated from companies in Japan accounted for 77.8%, 88.2% and 87.9% of our total revenue for the fiscal years ended March 31, 2024, 2023, and 2022, respectively. Revenue generated from companies in Hong Kong and others accounted for 22.2%, 11.8% and 12.1% of our total revenue for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
For the fiscal year ended March 31, 2024, one customer accounted for 18.8% of the Company’s total revenue. For the fiscal year ended March 31, 2023, one customer accounted for 10.6% of the Company’s total revenue. For the fiscal year ended March 31, 2022, no single customer accounted for more than 10% of the Company’s total revenue.
As of March 31, 2024, three wholesale customers accounted for 26.5%, 10.6% and 10.2% of the total accounts receivable balance, respectively. As of March 31, 2023, four wholesale customers accounted for 15.7%, 15.2%, 14.8% and 13.0% of the total accounts receivable balance, respectively.
For the fiscal year ended March 31, 2024, two suppliers accounted for approximately 22.5% and 21.2% of the Company’s total purchases, respectively. For the fiscal year ended March 31, 2023, three suppliers accounted for approximately 18.2%, 16.3%, and 12.0% of the Company’s total purchases, respectively. For the fiscal year ended March 31, 2022, three suppliers accounted for approximately 30.1%, 19.7%, and 17.9% of the Company’s total purchases, respectively.
Recent accounting pronouncements
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures.” This ASU expands required public entities’ segment disclosures, including disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company plans to adopt this guidance effective April 1, 2025 and the adoption of this ASU is not expected to have a material impact on its financial statements.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. This ASU requires additional quantitative and qualitative income tax disclosures to enable financial statements users better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company plans to adopt this guidance effective April 1, 2025 and the adoption of this ASU is not expected to have a material impact on its financial statements.
Except for the above-mentioned pronouncement, there are no new recently issued accounting standards that will have material impact on the Company’s consolidated financial position, statements of operations, and cash flows.
NOTE 3 – LIQUIDITY
The financial performance of the Company has improved during the fiscal year ended March 31, 2024. As reflected in the consolidated financial statements, the Company had a net income of $7.5 million, an increase of $15.5 million from a net loss of $8.0 million for the fiscal year ended March 31, 2023, and the Company had cash provided by operating activities of $1.9 million for the fiscal year ended March 31, 2024 as compared to cash used in operating activities was $25.7 million for the fiscal year ended March 31, 2023. Total cash increased by $0.7 million from $1.8 million as of March 31, 2023 to $2.5 million as of March 31, 2024, and working capital increased by $20.2 million from $8.6 million as of March 31, 2023 to $28.8 million as of March 31, 2024.
In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources, the turnover of its accounts receivable, its ability to obtain additional financial support in the future, and its operating and capital expenditure commitments.
Currently, the Company continues implementing various measures to boost revenue and controlling the cost and expenses, and modifying its business strategies so that the Company could concentrate its management resources on core businesses and improving operation efficiency and profitability. And the Company is also working to improve its liquidity and capital sources primarily through cash flows from operation and debt financing. In order to fully implement its business plan and sustain continued growth, the Company may also seek equity financing from outside investors when necessary. Based on the current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital requirement for at least 12 months from the date the consolidated financial statements are issued.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Accounts receivable | $ | 106,604,503 | $ | 92,666,927 | ||||
| Less: allowance for credit losses | (1,244,662 | ) | (3,219,772 | ) | ||||
| Accounts receivable, net | $ | 105,359,841 | $ | 89,447,155 | ||||
The Company’s accounts receivable primarily include balance due from customers when the Company’s products have been sold and delivered to customers, which has not been collected as of the balance sheet dates.
Movement of allowance for credit losses was as follows:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Beginning balance | $ | 3,219,772 | $ | 237,037 | ||||
| Additions (reduction) | (1,676,528 | ) | 2,951,045 | |||||
| Foreign currency translation adjustments | (298,582 | ) | 31,690 | |||||
| Ending balance | $ | 1,244,662 | $ | 3,219,772 | ||||
NOTE 5 – MERCHANDISE INVENTORIES, NET
Merchandise inventories, net consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Beauty products | $ | 2,349,158 | $ | 3,866,209 | ||||
| Health products | 400,473 | 714,601 | ||||||
| Luxury products | 353,057 | |||||||
| Other products | 1,311,192 | 2,606,990 | ||||||
| Merchandise inventories, net | $ | 4,413,880 | $ | 7,187,800 | ||||
As of March 31, 2024 and 2023, merchandise inventories write-down was $69,700 and $152,759, respectively.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – COMPENSATION RECEIVABLE FOR CONSUMPTION TAX, NET
Compensation receivable for consumption tax, net consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Compensation receivable for consumption tax | $ | 9,954,030 | $ | 23,579,234 | ||||
| Less: allowance for credit losses | (99,526 | ) | (436,145 | ) | ||||
| Subtotal | 9,854,504 | 23,143,089 | ||||||
| Less: compensation receivable for consumption tax, current | (7,133,470 | ) | (3,912,719 | ) | ||||
| Long-term compensation receivable for consumption tax, net | $ | 2,721,034 | $ | 19,230,370 | ||||
The Tokyo Regional Taxation Bureau had conducted a tax examination into the Company’s consumption tax filing for the period from July 2018 to December 2021. As a result of the examination, the Company was required to return consumption tax refund for export transactions that were determined not to meet the tax exemption requirements due to failure in submission of relevant export documents (see Note 13) by the Company’s certain suppliers and customers. In June 2023, the Company entered into agreements with relevant suppliers and customers to claim compensation for damages from the additional consumption tax payment. These suppliers and customers agreed to compensate the Company and the compensation receivable for consumption tax will be paid over two years from the date of the agreements. As of March 31, 2023, the net total of approximately $23.2 million (approximately ¥3.1 billion), including approximately $23.1 million due from third parties and approximately $0.1 million due from a related party (see Note 12). During the fiscal year ended March 31, 2024, the Company received a total of approximately $13.6 million (approximately ¥1.6 billion), and the net total of approximately $9.9 million (approximately ¥1.5 billion) of compensation receivable for consumption tax was all due from third parties as of March 31, 2024.
NOTE 7 – PREPAID EXPENSES AND OTHER ASSETS, NET
Prepaid expenses and other assets, net consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Deposits (1) | $ | 1,470,367 | $ | 1,927,362 | ||||
| Consumption tax receivable | 20,993 | |||||||
| Other receivables (2) | 3,309,998 | 4,590,901 | ||||||
| Advance to suppliers | 97,635 | 262,598 | ||||||
| Prepaid expenses and others (3) | 2,714,930 | 2,643,465 | ||||||
| Allowance for credit losses | (728,554 | ) | (904,598 | ) | ||||
| Subtotal | 6,864,376 | 8,540,721 | ||||||
| Less: prepaid expenses and other current assets, net | (2,748,682 | ) | (3,542,864 | ) | ||||
| Long-term prepaid expenses and other non-current assets, net | $ | 4,115,694 | $ | 4,997,857 | ||||
| (1) | Deposits primarily include security deposits paid to landlords for the Company’s retail stores and distribution centers as well as security deposits paid to the Company’s suppliers and to third-party platform operators for the operations of online stores. |
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – PREPAID EXPENSES AND OTHER ASSETS, NET (continued)
| (2) |
Other receivables as of March 31, 2024 and 2023 included $710,236 and $807,541 due from a construction company, which is a refund of the design and construction service fee the Company prepaid for the construction of its new distribution center. Since the construction company failed to obtain relevant construction permits and delayed the construction, the service agreement was terminated and the Company requested a refund of prepaid contract amount. In November 2020, the Company filed a legal case against the construction company claiming the refund of the contract prepayment, and as of the date of this report, the legal case is still in process. Although the Company is confident in winning the legal case based on management’s evaluation of the collectability on a combination of various factors, the Company fully provided an allowance for credit loss for the receivable from this construction company as of March 31, 2024 and 2023, respectively.
Other receivables as of March 31, 2024 and 2023 included approximately $1.8 million and $2.9 million due from a third-party warehouse and logistics service provider (the “Service Provider”). The Company engaged the Service Provider for warehouse and logistics services previously; however, due to the tax examination mentioned in Note 6, the Service Provider failed to provide relevant export documents for consumption tax examination, which caused the additional consumption tax to be paid to the tax authority by the Company. As a result, the Company terminated its warehouse and logistics services in October 2022, and entered into an agreement with the Service Provider, pursuant to which, the unutilized service fees will be repaid by the Service Provider over two years from the date of the agreement. As of March 31, 2024 and 2023, the Company provided an allowance for credit loss of $17,723 and $96,155 for the receivable from the Service Provider according to our accounting policy based on our best estimates. |
| (3) | Prepaid expenses and others as of March 31, 2024 and 2023, included prepaid expenses amounting to approximately $1.8 million (approximately ¥279.3 million) and $2.1 million (approximately ¥279.3 million), which is related to the development of a mobile application where customers could purchase products from the Company’s online shops. |
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Property and buildings | $ | 3,122,152 | $ | 4,469,370 | ||||
| Leasehold improvements | 3,674,485 | 4,262,580 | ||||||
| Land | 2,249,401 | 3,489,621 | ||||||
| Equipment and furniture | 2,355,674 | 2,723,113 | ||||||
| Automobiles | 158,925 | 364,916 | ||||||
| Software | 606,559 | 687,888 | ||||||
| Subtotal | 12,167,196 | 15,997,488 | ||||||
| Less: accumulated depreciation | (3,153,369 | ) | (3,058,890 | ) | ||||
| Property and equipment, net | $ | 9,013,827 | $ | 12,938,598 | ||||
Depreciation expense was $1,232,611, $1,226,496 and $1,217,455 for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
As of March 31, 2024 and 2023, the Company pledged a piece of land of 16,165 square feet with a carrying value of ¥340.1 million (approximately $2.2 million) as collateral to safeguard the Company’s bank borrowings from MUFG Bank (see Note 11).
NOTE 9 – LEASES
The Company leases retail store facilities and distribution centers under non-cancellable operating leases, with terms ranging from one to 15 years, as well as finance leases for software, equipment, and furniture with a term of five years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of right-of-use assets and lease liabilities.
Operating lease expenses for lease payment are recognized on a straight-line basis over the lease term. Finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased assets, and interest expenses, which are recognized following an effective interest rate method. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Operating Leases
The table below presents the operating lease related assets and liabilities recorded on the balance sheets.
| March 31, 2024 |
March 31, 2023 |
|||||||
| Operating lease right-of-use lease assets | $ | 3,979,727 | $ | 2,709,954 | ||||
| Operating lease liabilities – current | $ | 1,523,222 | $ | 1,323,900 | ||||
| Operating lease liabilities – non-current | 2,488,823 | 1,416,508 | ||||||
| Total operating lease liabilities | $ | 4,012,045 | $ | 2,740,408 | ||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LEASES (continued)
Other supplemental information for all of operating leases were as follows as of March 31, 2024 and 2023:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | 4.25 | 4.65 | ||||||
| Weighted average discount rate (1) | 4.77 | % | 5.33 | % | ||||
| Gains on sales and leaseback transactions (2) | $ | 731,638 | ||||||
| (1) | The Company used an incremental borrowing rate of 6.68% for its lease contracts entered prior to fiscal year 2024 and 2.03% for its lease contracts entered during fiscal year 2024 in Japan. The Company used an incremental borrowing rate of 2.83%, 5.25% and 8.50% for its lease contracts in Hong Kong, Canada and the United States, respectively. |
| (2) | On December 14, 2023, the Company entered into a Real Estate Sales Agreement (“Sales Agreement”) with a third-party buyer (the “Buyer”). Pursuant to the agreement, the Company sold its head office in Japan including the building and land to the Buyer for a total consideration of ¥430.0 million. On February 28, 2024, the Company entered into a Rental Agreement with the Buyer, pursuant to the agreement, the Company leased the same building for its head office for two years from February 28, 2024 to February 27, 2026, with a monthly rental of ¥1.75 million. The Company determined that these transactions should be accounted as sales and leaseback transaction as the control of the head office was transferred to the Buyer, and recognized a gain of $731,638 on disposal of the building and land on February 29, 2024. |
During the fiscal years ended March 31, 2024, 2023, and 2022, the Company incurred total operating lease expenses of $1,978,211, $2,126,918 and $2,602,514, respectively.
Finance Leases
The components of finance lease expenses were as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Finance leases cost: | ||||||||||||
| Amortization of right-of-use assets | $ | 351,626 | $ | 237,802 | $ | 199,796 | ||||||
| Interest on lease liabilities | 80,738 | 72,678 | 204,774 | |||||||||
| Total finance leases cost | $ | 432,364 | $ | 310,480 | $ | 404,570 | ||||||
Supplemental cash flow information related to finance leases was as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flows from finance leases | $ | 80,738 | $ | 72,678 | $ | 204,774 | ||||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LEASES (continued)
Supplemental balance sheet information related to leases was as follows:
| March 31, 2024 | March 31, 2023 |
|||||||
| Finance leases cost: | ||||||||
| Software | $ | 496,438 | $ | 355,756 | ||||
| Equipment and furniture | 1,082,560 | 1,012,001 | ||||||
| Subtotal | 1,578,998 | 1,367,757 | ||||||
| Less: accumulated depreciation | (1,324,770 | ) | (710,153 | ) | ||||
| Property and equipment, net | $ | 254,228 | $ | 657,604 | ||||
The weighted average remaining lease terms and discount rates for all of finance leases as of March 31, 2024 and 2023 were as follows:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | 2.67 | 3.70 | ||||||
| Weighted average discount rate | 8.07 | % | 8.07 | % | ||||
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2024:
| 12 months ending March 31, | Operating Leases |
Finance Leases |
||||||
| 2025 | $ | 1,679,607 | $ | 202,516 | ||||
| 2026 | 1,163,010 | 161,194 | ||||||
| 2027 | 467,286 | 100,635 | ||||||
| 2028 | 404,128 | 20,652 | ||||||
| 2029 | 249,647 | 940 | ||||||
| Thereafter | 559,781 | |||||||
| Total lease payments | 4,523,459 | 485,937 | ||||||
| Less: imputed interest | (511,414 | ) | (51,813 | ) | ||||
| Present value of lease liabilities | $ | 4,012,045 | $ | 434,124 | ||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – ACQUISITIONS
TLS Acquisition
On July 20, 2022, the Company entered into an Agreement with All Seas Global Limited to acquire 100% equity interests in TLS. The 100% of the equity interests in TLS were transferred to the Company on July 20, 2022, and cash consideration was paid in full and the transaction was closed on July 27, 2022. As the TLS and the Company were controlled by the same ultimate controlling shareholder before this acquisition, the transaction was accounted for as an acquisition of a business between entities under common control, and therefore, the related acquired assets and liabilities were transferred at TLS’s historical carrying value. The Company recognized $3.6 million of consideration in excess of the book value of net liabilities acquired, with $2.84 million recorded in capital reserve and $0.74 million recorded in retained earnings at the acquisition date.
The carrying amounts of the assets and liabilities of TLS as of the transaction date were as follows:
| July 20, 2022 |
||||
| Assets | $ | 7,293,021 | ||
| Liabilities | 8,030,370 | |||
| Net liabilities | $ | (737,349 | ) | |
| Consideration in excess of net liabilities acquired | $ | 3,579,522 | ||
| Total purchase consideration | $ | 2,842,173 | ||
Reiwatakiya Acquisition
On October 26, 2022, the board of directors of TLS approved the acquisition of Reiwatakiya from All Seas Global Limited who held 60% interests in Reiwatakiya. The 60% the equity interests in Reiwatakiya were transferred to the TLS on October 26, 2022 with no consideration. As the TLS and Reiwatakiya were controlled by the same ultimate controlling shareholder before this acquisition, the transaction was accounted for as an acquisition of a business between entities under common control, and therefore, the related acquired assets and liabilities were transferred at Reiwatakiya’s historical carrying value. On January 4, 2023, TLS acquired the remaining 40% of the equity interests in Reiwatakiya from a third-party shareholder with no consideration and Reiwatakiya became the wholly owned subsidiary of TLS. The Company recognized $2,502 of consideration in excess of the book value of net liabilities acquired, which is reflected in retained earnings at the acquisition date.
The carrying amounts of the assets and liabilities of Reiwatakiya as of the transaction date were as follows:
| October 26, 2022 |
||||
| Assets | $ | 32,838 | ||
| Liabilities | 37,008 | |||
| Net liabilities | $ | (4,170 | ) | |
| Non-controlling interests | 1,668 | |||
| Consideration in excess of net liabilities acquired | $ | 2,502 | ||
| Total purchase consideration | $ | |||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – BORROWINGS
Short-term borrowings consisted of the following:
| Maturity | Interest Rate | March 31, 2024 | March 31, 2023 | |||||||||
| Syndicated Loans (1) | December, 2024 | TIBOR^(3M)+0.70% - TIBOR (1M)+1.20% | $ | 51,912,050 | $ | 60,636,412 | ||||||
| Resona Bank (2) | December, 2024 | 1.725% | 1,322,600 | - | ||||||||
| Total short-term borrowings | $ | 53,234,650 | $ | 60,636,412 | ||||||||
The terms of the various loan agreements related to short-term borrowings contain certain restrictive covenants which, among other things, require the Company to maintain specified ratios of debt to tangible net assets and debt service coverage, and positive net income. The terms also prohibit the Company from entering into transactions that may have a significant adverse impact on the Company’s ability to fulfil its loan obligations, including but not limited to, reorganization of the Company or its subsidiaries, transferring part or all of the Company’s business or assets to third parties, or receiving part or all of business or assets from other third-party companies. Although the Company incurred a net loss in the fiscal year ended March 31, 2023, the Company did not receive any notices from banks, such as notices of terminating its ability to borrow under the relevant agreements and notices of accelerating its obligations to repay outstanding borrowings. The financial performance of the Company has improved during the fiscal year ended March 31, 2024, and the Company was in compliance with such covenants as of the March 31, 2024.
| ^ | TIBOR is an acronym for the Tokyo Interbank Offered Rate, which is the daily reference rate derived from the interest rate that banks charge to lend funds to other banks in the Japanese interbank market. |
| (1) | On September 27, 2022, the Company entered into a one-year syndicated loan agreement, which was effective from September 30, 2022, with a consortium of banks, with an aggregate credit line of ¥8.15 billion (approximately $61.3 million), and the interest rate was adjusted to TIBOR (3M)+0.70%. As of March 31, 2023, the Company borrowed an aggregated of ¥8.15 billion (approximately $61.3 million) under the agreement, and the net outstanding balance of this loan was approximately ¥8.1 billion (approximately $60.6 million), net off the unamortized loan service cost of ¥85.6 million ($643,438). On September 22, 2023, the Company extended the loan on a three-month basis for an additional six months with a maturity date on March 29, 2024, and the interest rate was adjusted to TIBOR (1M)+1.20%. In March 2024, the Company repaid ¥300.0 million, and the Company extended the loan for additional three months with a maturity date on June 28, 2024, subsequently, extended the loan for additional six months with a maturity date on December 30, 2024, and the interest rate remained at TIBOR (1M)+1.20%. As of March 31, 2024, the total outstanding balance of this loan was approximately ¥7.85 billion (approximately $51.9 million). The syndicated loan is guaranteed by Mr. Kanayama. |
| (2) | The loan is guaranteed by Mr. Kanayama. The Company extended the loan for additional six months with a maturity date on December 30, 2024. |
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – BORROWINGS (continued)
Long-term borrowings consisted of the following:
| Maturity | Interest Rate | March 31, 2024 |
March 31, 2023 |
|||||||||||
| Toei Shinkin Bank (1) | December 2053 | 1.10% | $ | $ | 1,981,520 | |||||||||
| Japan Finance Corporation (2) | December 2024 - April 2025 | 0.71% - 4.25% | 1,247,735 | 1,665,007 | ||||||||||
| BOT Lease Co., Ltd. (3) | March 2028 | TIBOR (3M) + 6.0% | 1,322,600 | 1,503,800 | ||||||||||
| MUFG Bank (4) | August 2026 | TIBOR (3M) + 0.8% | 4,166,190 | 5,210,667 | ||||||||||
| Tokyo Higashi Shinkin Bank | July 2026 | 2.0% | 100,153 | |||||||||||
| The Hongkong and Shanghai Banking Corporation Limited (5) | June 2023 – February 2033 | 2.750% - 3.625% | 424,126 | 619,032 | ||||||||||
| DFL-Shutoken Leasing (Hong Kong) Company Limited | March 2024 – October 2025 | 2.990% | 207,105 | 518,731 | ||||||||||
| Resona Merchant Bank Asia Limited (6) | No maturity date | 1.2% | 1,510,934 | |||||||||||
| Total long-term borrowings | $ | 7,367,756 | $ | 13,109,844 | ||||||||||
| Current portion of long-term borrowings | $ | 1,730,796 | $ | 2,783,445 | ||||||||||
| Non-current portion of long-term borrowings | $ | 5,636,960 | $ | 10,326,399 | ||||||||||
| (1) | Guaranteed by Mr. Kanayama. The loan was fully repaid during the fiscal year ended March 31, 2024 before maturity. |
| (2) | The Company extended the loan for additional six months with a maturity date on December 31, 2024. |
| (3) | The loan bears an interest rate of TIBOR (3M)+6.0% (in the case EBITDA exceeds ¥0) or TIBOR (3M)+0.7% (in the case EBITDA is ¥0 or less). |
| (4) | In connection with the Company’s bank borrowings from MUFG Bank, the Company pledged a piece of land of 16,165 square feet with a carrying value of ¥340.1 million (approximately $2.2 million) as of March 31, 2024 as collateral to safeguard the loan. |
| (5) | Guaranteed by Mr. Kanayama. |
| (6) | On September 27, 2022, TLS entered into a revolving credit facility agreement with Resona Merchant Bank Asia Limited for an aggregated credit line of ¥200 million, with no specific maturity date. The loan was fully repaid during the fiscal year ended March 31, 2024. |
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – BORROWINGS (continued)
The future maturities of long-term borrowings as of March 31, 2024 were as follows:
| 12 months ending March 31, | ||||
| 2025 | $ | 1,730,796 | ||
| 2026 | 676,336 | |||
| 2027 | 3,372,731 | |||
| 2028 | 1,363,742 | |||
| 2029 | 42,552 | |||
| Thereafter | 181,599 | |||
| Total long-term borrowings | $ | 7,367,756 | ||
For the above-mentioned short-term and long-term loans, the Company recorded interest expenses of $1,588,395, $2,388,870 and $2,951,406 for the fiscal years ended March 31, 2024, 2023, and 2022, respectively. The annual weighted average interest rates were 1.19%, 1.49% and 1.59% for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company’s relationships with related parties who had transactions with the Company are summarized as follows:
| Name of Related Party | Relationship to the Company | |
| Mr. Mei Kanayama | Representative director, director, and controlling shareholder | |
| Seihinkokusai Co., Ltd. (“Seihinkokusai”) | An entity of which Mr. Kanayama’s wife is a director and the representative director | |
| Shintai Co., Ltd. | The entity’s representative director is Mr. Kanayama’s wife before April 30, 2023. | |
| Palpito | An equity investment entity of the Company, which was sold to Seihinkokusai on June 30, 2023. | |
| Tokushin G.K. | A shareholder of the Company. | |
| Takuetsu Kokusai Co., Ltd. | The entity’s representative director is Mr. Kanayama’s wife. | |
| YST (HK) Limited | An entity controlled by Mr. Kanayama, which was subsequently dissolved on January 14, 2022 |
| a. | Accounts receivable, net - related parties |
| Accounts receivable, net - related parties consisted of the following: | |
| Name | March 31, 2024 |
March 31, 2023 |
||||||
| Seihinkokusai | $ | 25,704 | $ | 266,523 | ||||
| Palpito | - | 35,106 | ||||||
| Tokushin G.K. | - | 2,118 | ||||||
| Shintai Co., Ltd. | - | 24,060 | ||||||
| Subtotal | 25,704 | 327,807 | ||||||
| Less: allowance for credit losses | - | |||||||
| Total accounts receivable, net - related parties | $ | 25,704 | $ | 327,807 | ||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
| b. | Due from related parties |
| Due from related parties consisted of the following: | |
| Name | March
31, 2024 |
March
31, 2023 |
||||||
| Seihinkokusai (1) | $ | 9,762 | $ | 443,664 | ||||
| Shintai Co., Ltd. | - | 903 | ||||||
| Total due from related parties | $ | 9,762 | $ | 444,567 | ||||
| (1) | The amount due from Seihinkokusai mainly includes: 1) The Company rents a storefront from Seihinkokusai. Pursuant to the rent agreement, the Company paid ¥50 million ($330,650) as a rental security deposit to this related party. Seihinkokusai refunded ¥40 million ($264,520) to the Company during the fiscal year ended March 31, 2023, and refunded the remaining ¥10 million ($66,130) during the fiscal year ended March 31, 2024 for its working capital needs; 2) The Company also rents an office space from Seihinkokusai. Pursuant to the rent agreement, the Company paid ¥14 million ($92,582) as a rental security deposit to this related party which was fully refunded to the Company during the fiscal year ended March 31, 2024 for its working capital needs; 3) In addition, the Company obtained the operating rights of Seihinkokusai’s online stores on domestic e-commerce marketplaces and use them as the Company’s own online stores to sell its products. Pursuant to an EC Site Operation Business Assignment Agreement dated January 31, 2020, the Company paid ¥20 million ($132,260) as an operating security deposit to Seihinkokusai which was fully refunded to the Company during the fiscal year ended March 31, 2024 for its working capital needs; the Company also needs to pay transaction commission of 1% based on its sales amount and the transaction commission was immaterial during the fiscal years ended March 31, 2024, 2023, and 2022. The agreement is valid for one year, and is automatically renewed yearly unless the parties indicate otherwise in writing; and 4) compensation receivable for consumption tax amounted to $109,144 as of March 31, 2023, which was fully received during the fiscal year ended March 31, 2024 (See Note 6). |
| c. | Accounts payable – a related party |
Accounts payable – a related party consisted of the following:
| Name | March 31, 2024 |
March 31, 2023 |
||||||
| Seihinkokusai | $ | 299,541 | $ | |||||
| Total accounts payable – a related party | $ | 299,541 | $ | |||||
| d. | Due to related parties |
Due to related parties consisted of the following:
| Name | March 31, 2024 | March 31, 2023 |
||||||
| Mr. Mei Kanayama | $ | 29,716 | $ | 63,916 | ||||
| Seihinkokusai | 13,227 | 233,643 | ||||||
| Total due to related parties | $ | 42,943 | $ | 297,559 | ||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
| e. | Sales to related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| Name | 2024 | 2023 | 2022 | |||||||||
| Seihinkokusai | $ | 5,992,219 | $ | 642,018 | $ | 22,092 | ||||||
| Shintai Co., Ltd. | 113,559 | 1,347 | ||||||||||
| Palpito | 14,774 | 87,200 | 83,290 | |||||||||
| Tokushin G.K. | 4,950 | |||||||||||
| Takuetsu Kokusai Co., Ltd. | 259 | 6,507 | ||||||||||
| YST (HK) Limited | 130,523 | |||||||||||
| Total revenue from related parties | $ | 6,006,993 | $ | 847,986 | $ | 243,759 | ||||||
| f. | Purchase from related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| Name | 2024 | 2023 | 2022 | |||||||||
| Seihinkokusai | $ | 445,980 | $ | 125,496 | $ | 401,341 | ||||||
| Palpito | 77,020 | 122,520 | ||||||||||
| YST (HK) Limited | 13,885 | |||||||||||
| Total purchase from related parties | $ | 445,980 | $ | 202,516 | $ | 537,746 | ||||||
| g. | Sales of a subsidiary and an equity investment to a related party |
On June 30, 2023, the Company entered into share transfer agreements with Seihinkokusai to sell its 100% equity interest in Kaika International and 40% equity interests in Palpito to Seihinkokusai, for cash consideration of ¥5,000,000 ($37,595) and ¥40,000,000 ($300,760), respectively. The cash consideration was fully received and the transactions were completed on July 1, 2023. The Company recorded a gain from disposal of Kaika International of ¥49,297,548 ($341,139) and a gain from disposal of equity method investment of ¥27,539,183 ($190,571) for the fiscal year ended March 31, 2024, respectively.
| h. | Other related party transactions |
Mr. Kanayama provided guarantees in connection with certain loans the Company borrowed (see Note 11).
NOTE 13 – TAXES
| (a) | Corporate Income Taxes |
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Japan
The Company and its subsidiary in Japan are mainly subject to Japanese national and local income taxes, inhabitant tax, and enterprise tax, which, in the aggregate, represent a statutory income tax rate of approximately 30.6%, 30.6% and 34.0% for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
Hong Kong
TLS is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a rate of 8.25% on assessable profits up to HK$2,000,000, and 16.5% on any part of assessable profits over HK$2,000,000 for the fiscal years ended March 31, 2024, 2023, and 2022.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
PRC
Qingzhiliangpin is incorporated in the PRC and is subject to the PRC Enterprise Income Tax. Under the Enterprise Income Tax Law of PRC, domestic enterprises and Foreign Investment Enterprises are subject to a unified 25% enterprise income tax rate. Qingzhiliangpin is recognized as small low-profit enterprises. According to the relevant PRC tax policies, once an enterprise meets certain requirements and is identified as a small-scale minimal profit enterprise, the portion of its taxable income not more than RMB1 million is subject to a reduced effective rate of 2.5% and the portion between RMB1 million and RMB3 million is subject to a reduced effective rate of 5% for the period from January 1, 2021 to December 31, 2022. During the period from January 1, 2023 to December 31, 2027, the taxable income not more than RMB3 million is subject to a reduced effective rate of 5%.
Malaysia
Reiwatakiya is incorporated in Malaysia, and is governed by the income tax laws of Malaysia. The income tax provision in respect of operations in Malaysia is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations, and practices. Under the Income Tax Act of Malaysia, enterprises incorporated in Malaysia are usually subject to a unified 24% enterprise income tax rate while preferential tax rates, tax holidays, and tax exemptions may be granted on a case-by-case basis. The tax rate for small and medium sized companies (generally companies incorporated in Malaysia with paid-in capital of MYR2,500,000 or less) is 17% for the first MYR600,000 taxable income, with the remaining balance being taxed at the 24% rate.
United States
The Company’s subsidiaries in the United States are subject to the United States federal corporate income tax rate of 21%. The Company is also subject to state jurisdictions that have corporate tax rates ranging from 0% to 8.45% for the fiscal year ended March 31, 2024.
Canada
The Company’s subsidiary in Canada is subject to the Canadian federal corporate income tax rate of 15% and provincial or territorial rates of 11.5%, which, in the aggregate, represent a statutory income tax rate of 26.5% for the fiscal year ended March 31, 2024.
The income (loss) before tax were as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Japan | $ | 5,104,640 | $ | (7,503,560 | ) | $ | 5,749,422 | |||||
| Hong Kong | 3,011,218 | (59,307 | ) | 359,534 | ||||||||
| PRC | (86,706 | ) | 239,733 | 49,868 | ||||||||
| Malaysia | (12,515 | ) | (11,288 | ) | ||||||||
| United States | (19,559 | ) | ||||||||||
| Canada | (61,368 | ) | ||||||||||
| Income (loss) before tax | 7,935,710 | (7,334,422 | ) | 6,158,824 | ||||||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
The components of the income tax provision (benefit) were as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Current tax provision (benefit) | ||||||||||||
| Japan | $ | 2,229,231 | $ | (4,277,929 | ) | $ | 2,301,944 | |||||
| Hong Kong | ||||||||||||
| PRC | 5,820 | 142,558 | ||||||||||
| Malaysia | ||||||||||||
| United States | ||||||||||||
| Canada | ||||||||||||
| 2,235,051 | (4,135,371 | ) | 2,301,944 | |||||||||
| Deferred tax provision (benefit) | ||||||||||||
| Japan | $ | (1,778,320 | ) | $ | 4,849,771 | $ | (122,276 | ) | ||||
| Hong Kong | 55,008 | |||||||||||
| PRC | ||||||||||||
| Malaysia | 43 | |||||||||||
| United States | ||||||||||||
| Canada | ||||||||||||
| (1,778,277 | ) | 4,849,771 | (67,268 | ) | ||||||||
| Income tax provisions | $ | 456,774 | $ | 714,400 | $ | 2,234,676 | ||||||
The following table reconciles the Japan statutory rate to the Company’s effective tax rates for the fiscal years ended March 31, 2024, 2023, and 2022:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Japanese statutory income tax rate | 30.6 | % | 30.6 | % | 34.0 | % | ||||||
| Non-deductible expenses | 2.0 | % | (1.2 | )% | 1.7 | % | ||||||
| Non-taxable income | (1.8 | )% | (2.2 | )% | ||||||||
| Tax rate difference in non-Japan subsidiaries and different prefectures in Japan | 2.6 | % | (1.6 | )% | 0.1 | % | ||||||
| Change in valuation allowance | (5.4 | )% | (5.9 | )% | 0.5 | % | ||||||
| Effects of consumption tax examination (1) | (22.2 | )% | (30.8 | )% | ||||||||
| Others | (0.8 | )% | (1.2 | )% | ||||||||
| Subtotal | 5.8 | % | (9.7 | )% | 32.9 | % | ||||||
| Undistributed retained earnings tax (2) | 3.4 | % | ||||||||||
| Effective tax rate | 5.8 | % | (9.7 | )% | 36.3 | % | ||||||
| (1) | This pertains to the tax effect resulted from the additional consumption tax of approximately $0.6 million charged as well as inhabitant tax refund of approximately $2.0 million based on final assessment due to the consumption tax examination (See note (c) - tax payable). |
| (2) | The Company is a Specified Family Company, as one shareholder and its related persons hold more than 50% of its total outstanding shares. Hence, in addition to the normal corporate income taxes, the Company is also subjected to a special tax on its undistributed retained earnings (“URE”) for each fiscal year, after the Company’s share capital exceeds ¥100 million. URE tax is imposed on the Company’s URE, which is defined as the Company’s taxable income for the year minus the sum of the dividends paid, the adjusted corporate income tax, and the URE credit (which usually is 40% of the taxable income). The portion of its URE not more than ¥30 million is subject to a rate of 10%, the portion between ¥30 million and ¥100 million is subject to a rate of 15%, and the portion over ¥100 million is subject to a rate of 20%. |
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
The Company’s deferred tax liabilities, net comprised of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Deferred tax assets: | ||||||||
| Allowance for credit losses | $ | 619,675 | $ | 1,434,120 | ||||
| Accrued member rewards | 15,511 | 39,019 | ||||||
| Accrued employee bonus | 18,146 | 46,564 | ||||||
| Accrued asset retirement obligation | 185,941 | 123,626 | ||||||
| Accrued employee retirement pension | 72,378 | 59,358 | ||||||
| Investment loss from equity method investment | 40,300 | |||||||
| Net operating loss carry-forwards | 38,562 | 3,187,904 | ||||||
| Total deferred tax assets | 950,213 | 4,930,891 | ||||||
| Valuation allowance | (79,062 | ) | (597,777 | ) | ||||
| Total deferred tax assets | 871,151 | 4,333,114 | ||||||
| Deferred tax liabilities: | ||||||||
| Change in fair value of warrant liabilities | (38,588 | ) | (7,552 | ) | ||||
| Accrued interest income on consumption tax receivable | (19,894 | ) | ||||||
| Compensation receivable for consumption tax | (3,047,924 | ) | (8,756,745 | ) | ||||
| Total deferred tax liabilities | (3,086,512 | ) | (8,784,191 | ) | ||||
| Deferred tax liabilities, net | $ | (2,215,361 | ) | $ | (4,451,077 | ) | ||
The Company’s movement of the valuation allowance were as follows:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Beginning balance | $ | 597,777 | $ | 386,436 | ||||
| Additions (reduction) | (430,385 | ) | 214,389 | |||||
| Disposal of a subsidiary | (82,732 | ) | ||||||
| Foreign currency translation adjustments | (5,598 | ) | (3,048 | ) | ||||
| Ending balance | $ | 79,062 | $ | 597,777 | ||||
As of March 31, 2023, the Company had net operating loss carried forward from the entities in Japan of $8,780,785, and the Company utilized all the net operating loss during the year ended March 31, 2024.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
As of March 31, 2023, the Company had net operating loss carried forward from the entities in Hong Kong of $3,025,621. The Company utilized net operating loss of $2,964,163 during the year ended March 31, 2024. As of March 31, 2024, the Company had net operating loss carried forward from the entities in Hong Kong of $61,458, which can be offset against future taxable profit indefinitely.
As of March 31, 2024, the Company had net operating loss carried forward of $58,218 and $61,114 from the entities in the United States and Canada, respectively, which can be offset against future taxable profit indefinitely.
| (b) | Consumption tax |
In Japan, consumption tax collected and remitted to tax authorities is excluded from revenue, cost of sales, and expenses in the consolidated statements of operations and comprehensive income (loss). Before October 1, 2019, the applicable consumption tax rate was 8%, and since October 1, 2019, the Company has been subject to the applicable consumption tax rate of 10%, with an 8% rate applicable to a limited number of exceptions based on the new Japanese tax law. For overseas sales, the Company is exempted from paying consumption tax. The Company can deduct all its qualified input consumption tax paid when purchasing from suppliers, against the output consumption tax derived from domestic sales. The Company is eligible for consumption tax refund from the tax authorities for excess input consumption tax, which is recorded as additional consumption tax payable due to tax examination in taxes payable on the balance sheets (See note (c) - tax payable).
| (c) | Taxes payable |
Taxes payable consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Income tax payable | $ | 3,829,368 | $ | 663,503 | ||||
| Additional consumption tax payable due to tax examination (1) | 5,475,313 | 16,597,264 | ||||||
| Consumption tax payable and others | 52,801 | 959,036 | ||||||
| Total taxes payable | $ | 9,357,482 | $ | 18,219,803 | ||||
| (1) | Since January 2022, the Tokyo Regional Taxation Bureau had conducted a tax examination into the Company’s consumption tax filing for the period from July 2018 to December 2021, and the examination was completed in May 2023. As a result of the examination, the Company was required to return consumption tax refund amounting to approximately $28.3 million (approximately ¥3.8 billion) for export transactions that were determined not to meet the tax exemption requirements due to incomplete submission of relevant export documents. In addition, the additional tax for understatement and delinquent tax computed by the Company’s tax consultant amounted to approximately $6.1 million (approximately ¥0.8 billion). Therefore, as of March 31, 2023, the Company recorded a net consumption tax payable amounted to approximately $16.6 million (approximately ¥2.2 billion), after the deduction of refundable consumption tax amounted to approximately $12.9 million (approximately ¥1.7 billion) that was withheld by the Tokyo Regional Taxation Bureau due to this examination, as well as refundable income tax that arose from the payments of additional consumption tax amounted to approximately $4.9 million (approximately ¥0.7 billion). During the fiscal year ended March 31, 2024, the Company recorded additional consumption tax payable approximately $0.6 million (approximately ¥90.9 million) based on the final assessment by the Tokyo Regional Taxation Bureau. The Company made payments of the consumption tax payable by a monthly instalment of approximately $0.2 million (¥30.0 million), and the amount was also offset by the consumption tax receivable from the tax authorities for excess input consumption tax. The consumption tax payable was $5,475,313 as of March 31, 2024. |
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 –WARRANTS LIABILITIES
Representative’s warrants liability
In connection with the Company’s IPO, the Company agreed to issue warrants to a representative of several underwriters, for a nominal consideration of $0.01 to purchase 300,000 ADSs of the Company (equal to 5% of the total number of ADSs sold in the IPO, but not including any over-allotment ADSs sold in the over-allotment option) (the “Representative’s Warrants”). The Representative’s Warrants have an exercise price of $4.8 per ADS (equal to 120% of the Company’s IPO offering price of $4.00 per ADS). The Representative’s Warrants will be exercisable beginning from six months after the date of commencement of sales in the Company’s IPO and for a period of five years after the date of commencement of sales in the Company’s IPO.
Because the strike price of the Representative’s Warrants is denominated in United States Dollars, a currency other than the Company’s functional currency, Japanese yen, the Representative’s Warrants were not considered indexed to the Company’s own stock. As such, the Representative’s Warrants were classified as a derivative liability under ASC 815-10, and recorded initially and subsequently at fair value with all future changes in the fair value recognized currently in earnings until such time as the warrants are exercised or expired. As of March 31, 2024, these Representative’s Warrants were issued and outstanding but none of the warrants had been exercised. For the fiscal years ended March 31, 2024, 2023, and 2022, these Representative Warrants were antidilutive and accordingly were not included in the diluted EPS calculation based on treasury stock method.
On January 13, 2022, the Company recorded a fair value of $522,116 for the Representative’s Warrants liability at issuance resulting in a decrease in additional paid-in capital of $522,116, as the Company determined these warrants issued to the representative of underwriters were part of its incremental cost directly attributable to the Company’s IPO. The Company recognized a gain of $22,574, $139,615 and $369,404 from the change in fair value of the Representative’s Warrants liability subsequently for the fiscal years ended March 31, 2024, 2023, and 2022, respectively.
These warrants do not trade in an active securities market, and as such, the Company estimates its fair value using the Black-Scholes Option Pricing Model (the “Black-Scholes Model”) on the date that these warrants were originally issued and as of March 31, 2024 and 2023 using the following assumptions:
| March 31, 2024 |
March 31, 2023 |
January 13, 2022 |
||||||||||
| Representative’s Warrants liability | ||||||||||||
| Stock price | $ | 0.25 | $ | 0.98 | $ | 4.00 | ||||||
| Exercise price | $ | 4.80 | $ | 4.80 | $ | 4.80 | ||||||
| Expected term (years) | 2.79 | 3.79 | 5.00 | |||||||||
| Risk-free interest rate | 4.21 | % | 3.60 | % | 1.47 | % | ||||||
| Expected volatility | 57.63 | % | 55.57 | % | 55.39 | % | ||||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – REPRESENTATIVE’S WARRANTS LIABILITY (continued)
Investors’ warrants liability
On January 26, 2024, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell 5,970,152 of its ADSs, at a purchase price of $0.67 per ADS. In the concurrent private placement, the Company also issued to the same investors 5,970,152 ADS purchase warrants (the “Investors’ Warrants”). The warrants have an exercise price of $0.67 per ADS, are exercisable immediately, and will expire 5.5 years following the date of issuance.
Because the strike price of the Investors’ Warrants is denominated in United States Dollars, a currency other than the Company’s functional currency, Japanese yen, the Investors’ Warrants were not considered indexed to the Company’s own stock. As such, the Investors’ Warrants were classified as a derivative liability under ASC 815-10, and recorded initially and subsequently at fair value with all future changes in the fair value recognized currently in earnings until such time as the warrants are exercised or expired. As of March 31, 2024, these Investors’ Warrants were issued and outstanding but none of the warrants had been exercised. For the fiscal years ended March 31, 2024, these Investors’ Warrants were antidilutive and accordingly were not included in the diluted EPS calculation based on treasury stock method.
On January 26, 2024, the Company recorded a fair value of $541,494 for the Investors’ Warrants liability at issuance. The Company recognized a gain of $86,599 from the change in fair value of the Investors’ Warrants liability subsequently for the fiscal years ended March 31, 2024.
These warrants do not trade in an active securities market, and as such, the Company estimates its fair value using the Black-Scholes Option Pricing Model (the “Black-Scholes Model”) on the date that these warrants were originally issued and as of March 31, 2024 using the following assumptions:
| March 31, 2024 |
January 26, 2024 |
|||||||
| Investors’ Warrants liability | ||||||||
| Stock price | $ | 0.25 | $ | 0.27 | ||||
| Exercise price | $ | 0.67 | $ | 0.67 | ||||
| Expected term (years) | 5.33 | 5.50 | ||||||
| Risk-free interest rate | 4.21 | % | 4.00 | % | ||||
| Expected volatility | 56.91 | % | 56.96 | % | ||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SHAREHOLDERS’ EQUITY
Ordinary shares
The Company is a stock company incorporated in Japan pursuant to the laws of Japan on December 28, 2006.
At the incorporation, the number of authorized ordinary shares was 1,000 and 1,000 ordinary shares were issued to the original shareholder of the Company for cash of ¥10,000,000 ($85,060). The issued ordinary shares were subsequently transferred to Mr. Mei Kanayama, the controlling shareholder of the Company.
On April 25, 2011, the number of authorized ordinary shares was increased to 10,000. 2,000 new ordinary shares were issued to Mr. Mei Kanayama for cash of ¥20,000,000 ($248,640), the controlling shareholder of the Company.
On October 15, 2014, 500 shares were transferred from Mr. Mei Kanayama to Mr. Yingjia Yang, the minority shareholder of the Company.
On July 30, 2016, 2,000 new ordinary shares were issued to Mr. Mei Kanayama for cash of ¥20,000,000 ($195,960).
On March 30, 2017, 4,410 new ordinary shares were issued to Mr. Mei Kanayama for cash of ¥44,100,000 ($396,327), and 490 new ordinary shares were issued to Mr. Yingjia Yang for cash of ¥4,900,000 ($44,036).
On October 22, 2020, the Company’s shareholders approved an increase in the number of the Company’s authorized ordinary shares from 10,000 to 300,000, and 72,909 new ordinary shares were issued to Mr. Mei Kanayama and 8,101 new ordinary shares were issued to Mr. Yingjia Yang, which share issuances were equivalent to a forward split of the Company’s outstanding ordinary shares at an approximate or rounded ratio of 9.1828-for-1 share. The Company has retroactively restated the shares and per share data for all the periods presented. As a result, the Company had 300,000 authorized ordinary shares and 90,910 ordinary shares were issued and outstanding as of March 31, 2020.
On November 10, 2020, 9,090 ordinary shares were issued to Grand Elec-Tech Limited, which the Company subsequently repurchased and cancelled on January 20, 2021. On December 25, 2020, 2,041 new ordinary shares were issued to SHUR Co., Ltd. for cash of ¥150,001,254 ($1,446,012).
On February 5 and 12, 2021, an issuance of 9,090 ordinary shares to Grand Elec-Tech Limited was authorized by the Company’s board of directors and a general meeting of shareholders, respectively. Grand Elec-Tech Limited was obliged to contribute the price of such issuance amounting to ¥200,007,270 (approximately $1.9 million) by August 12, 2021. Grand Elec-Tech Limited started to make payments in April 2021 and contributed the fully amount by June 22, 2021. On June 22, 2021, the Company’s shareholders and board of directors passed a resolution to amend the original date of payment from August 12, 2021 to June 22, 2021, and on the same day, the Company issued the 9,090 shares to Grand Elec-Tech Limited.
On August 18, 2021, shareholders of the Company approved an increase in the number of the Company’s authorized Ordinary Shares from 300,000 to 100,000,000 and the Company’s board of directors approved a forward split of the Company’s outstanding Ordinary Shares at a ratio of 294-for-1 share, which became effective on the same day.
On January 26, 2024, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell 5,970,152 of its ADSs, at a purchase price of $0.67 per ADS for gross proceeds of approximately $4.0 million. The Company has received gross proceeds in full from the investors, and all of the ADSs were issued on January 30, 2024.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SHAREHOLDERS’ EQUITY (continued)
Initial public offering
On January 13, 2022, the Company closed its IPO of 6,250,000 ADSs at a public offering price of $4.00 per ADS, which included 250,000 ADSs issued pursuant to the partial exercise of the underwriters’ over-allotment option. Each ADS represents one ordinary share of the Company. The closing for the sale of the over-allotment shares took place on February 21, 2022. Gross proceeds of the Company’s IPO, including the proceeds from the sale of the over-allotment ADSs, totaled $25.0 million, before deducting underwriting discounts and other related expenses. Net proceeds of the Company’s IPO, including the over-allotment, were approximately $21.4 million. In connection with the IPO, the Company’s ADSs began trading on the Nasdaq Capital Market under the symbol “TKLF” on January 18, 2022.
Restricted net assets
The Company is restricted in its ability to transfer a portion of its net assets, equivalent to its share capital to its shareholders in the form of loans, advances, or cash dividends. The payment of dividends by the Company organized in Japan is subject to limitations, procedures, and formalities. Regulations in Japan currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in Japan. As of March 31, 2024 and 2023, the total restricted net assets of the Company amounted to $26,979,030 and $23,773,242, respectively.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Contingencies
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of March 31, 2024 and 2023, there were no legal claims and litigation against the Company.
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT REPORTING
Segments
The Company is engaged in the operation of retail and wholesale of Japanese beauty and health products, as well as sundry products and other products and services. The Company’s operations are conducted in three reported segments: (i) directly-operated physical stores, (ii) online stores and services, and (iii) franchise stores and wholesale customers. The Company defines its segments as those operations whose results the CODM regularly reviews to analyze performance and allocate resources. The Company sells similar individual products and services in each of its segments. It is impractical to segregate and identify revenue for each of these individual products and services.
Directly-operated physical stores segment includes physical stores in Japan, Hong Kong, the United States and Canada. Online stores and services segment includes sales through the Company’s websites and various e-commerce marketplaces in Japan, China, and Korea, as well as services from advertising business through KOLs. Franchise stores and wholesale customers segments include franchise stores in Japan, the United States and the United Kingdom, and wholesale customers in Japan and other countries including China, the United States and Canada.
The Company measures the results of its segments using, among other measures, each segment’s revenue, merchandise costs, interest expenses, net, provision for income tax, net income (loss), depreciation and amortization, capital expenditures, total assets as well as total liabilities, which includes certain corporate overhead allocations. From time to time, the Company revises the measurement of each segment’s revenue and other measures, including any corporate overhead allocations, as determined by the information regularly reviewed by its CODM. When the measurement of a segment significantly changes, previous period amounts and balances are reclassified to be comparable to the current period’s presentation.
The following table presents the segment information for the fiscal years ended March 31, 2024, 2023, and 2022, respectively:
| For the Fiscal Year ended March 31, 2024 | ||||||||||||||||
| Directly- Operated Physical Stores |
Online Stores and Services |
Franchise Stores and Wholesale Customers |
Total | |||||||||||||
| Revenue | $ | 14,951,952 | $ | 10,705,449 | $ | 170,023,914 | $ | 195,681,315 | ||||||||
| Merchandise costs | $ | 11,916,702 | $ | 7,920,348 | $ | 152,469,258 | $ | 172,306,308 | ||||||||
| Interest expenses, net | $ | (123,107 | ) | $ | (88,143 | ) | $ | (1,399,891 | ) | $ | (1,611,141 | ) | ||||
| Provision for income tax | $ | 34,902 | $ | 24,989 | $ | 396,883 | $ | 456,774 | ||||||||
| Net income | $ | 571,463 | $ | 409,162 | $ | 6,498,311 | $ | 7,478,936 | ||||||||
| Depreciation and amortization | $ | 94,184 | $ | 67,434 | $ | 1,070,993 | $ | 1,232,611 | ||||||||
| Capital expenditures | $ | 917,396 | $ | 9,766 | $ | 2,146 | $ | 929,308 | ||||||||
F-
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT REPORTING (continued)
| For the Fiscal Year Ended March 31, 2023 | ||||||||||||||||
| Directly- Operated Physical Stores |
Online Stores and Services | Franchise Stores and Wholesale Customers |
Total | |||||||||||||
| Revenue | $ | 11,606,180 | $ | 20,700,011 | $ | 137,418,155 | $ | 169,724,346 | ||||||||
| Merchandise costs | $ | 8,882,991 | $ | 16,221,524 | $ | 115,188,904 | $ | 140,293,419 | ||||||||
| Interest expenses, net | $ | (165,628 | ) | $ | (295,403 | ) | $ | (1,961,048 | ) | $ | (2,422,079 | ) | ||||
| Provision for income tax | $ | 48,853 | $ | 87,130 | $ | 578,417 | $ | 714,400 | ||||||||
| Net loss | $ | (550,399 | ) | $ | (981,655 | ) | $ | (6,516,768 | ) | $ | (8,048,822 | ) | ||||
| Depreciation and amortization | $ | 83,870 | $ | 149,587 | $ | 993,039 | $ | 1,226,496 | ||||||||
| Capital expenditures | $ | 459,856 | $ | 366,440 | $ | 108,664 | $ | 934,960 | ||||||||
| For the Fiscal Year Ended March 31, 2022 | ||||||||||||||||
| Directly- Operated Physical Stores |
Online Stores and Services |
Franchise Stores and Wholesale Customers |
Total | |||||||||||||
| Revenue | $ | 12,965,904 | $ | 122,150,105 | $ | 99,636,571 | $ | 234,752,580 | ||||||||
| Merchandise costs | $ | 11,261,970 | $ | 98,589,103 | $ | 81,189,474 | $ | 191,040,547 | ||||||||
| Interest expenses, net | $ | (153,864 | ) | $ | (1,449,533 | ) | $ | (1,182,369 | ) | $ | (2,785,766 | ) | ||||
| Provision for income tax | $ | 123,426 | $ | 1,162,781 | $ | 948,469 | $ | 2,234,676 | ||||||||
| Net income | $ | 216,739 | $ | 2,041,874 | $ | 1,665,535 | $ | 3,924,148 | ||||||||
| Depreciation and amortization | $ | 67,243 | $ | 633,485 | $ | 516,727 | $ | 1,217,455 | ||||||||
| Capital expenditures | $ | 928,319 | $ | 1,174,609 | $ | 934,885 | $ | 3,037,813 | ||||||||
| March 31, 2024 |
March 31, 2023 |
|||||||
| Total assets: | ||||||||
| Directly-Operated Physical Stores | $ | 10,732,784 | $ | 8,815,957 | ||||
| Online Stores and Services | 4,323,971 | 20,070,215 | ||||||
| Franchise Stores and Wholesale Customers | 126,940,404 | 117,789,108 | ||||||
| Total assets | $ | 141,997,159 | $ | 146,675,280 | ||||
| Total liabilities: | ||||||||
| Directly-Operated Physical Stores | $ | 12,841,698 | $ | 9,728,199 | ||||
| Online Stores and Services | 5,853,185 | 11,812,654 | ||||||
| Franchise Stores and Wholesale Customers | 87,259,492 | 95,852,684 | ||||||
| Total liabilities | $ | 105,954,375 | $ | 117,393,537 | ||||
Disaggregated Revenues
The Company disaggregates its revenue by geographic areas, product categories, and distribution channels, which the Company believes best depicts how the nature, amount, timing, and uncertainty of the revenue and cash flows are affected by economic factors. See Note 2 for the Company’s disaggregation of revenue for the fiscal years ended March 31, 2024, 2023, and 2022.
NOTE 18 – SUBSEQUENT EVENTS
The Company decided to reduce the amount of capital stock by ¥1,856,786,684 ($12,278,930) to ¥99,000,000 ($654,687). All of the ¥1,856,786,684 ($12,278,930) of capital to be reduced was designated as additional paid-in capital reserve. The reduction of capital stock was approved by the Shareholders of the Company at the annual general meeting held on June 27, 2024 and became effective on July 15, 2024. The reduction of capital stock is aimed to help the Company reduce its operating expenses as well as tax expenses. According to Company Law of Japan, after the Company reduced its capital stock below ¥100 million, it is no longer required to establish the Board of Supervisors that constitutes three Supervisors, it is only required to maintain one Supervisor. Meanwhile, the Company will not be required to conduct domestic audit in Japan, and the Company will be qualified as a small-scale minimal profit enterprise and subjected to a lower tax rate under Japanese tax law.
These consolidated financial statements were approved by management and available for issuance on July 16, 2024, and the Company has evaluated subsequent events through this date. The Company did not identify any subsequent events except those disclosed above that would have required adjustment or disclosure in the financial statements.
F-46
Exhibit 4.22
Conformed Copy
Revolving Credit Facility Agreement Second Amendment
With respect to the amendment of the Revolving Credit Facility Agreement dated September 27, 2022 (including subsequent changes, hereinafter referred to as the “Original Agreement”) entered into by and among the borrowers (Hereinafter referred to as the “Borrower”), guarantors, Mei Kanayama (hereinafter referred to as “Guarantor”), MUFG Bank, Ltd., Mizuho Bank, Ltd., Resona Bank, Limited, Sumitomo Mitsui Banking Corporation, The Iyo Bank, Ltd., The Chiba Bank, Limited, The Tokyo Star Bank, Limited, Sumitomo Mitsui Trust Bank, Limited, The Ashikaga Bank, Limited, The Suruga Bank, Limited, The Kochi Bank, Ltd., The Tokushima Taisho Bank, Ltd., The Towa Bank, Ltd., The Kansai Mirai Bank, Ltd., The 82 Bank, Ltd., The Kita Bank of Japan, Ltd. and The Toei Shinkin Bank, Ltd. (Hereinafter referred to as “Lender”.) and MUFG Bank, Ltd. (Hereinafter referred to as “Agent”.) in capacity of Agent, this Agreement for Amendment to the Revolving Credit Facility Agreement Second Amendment (Hereinafter referred to as the “Agreement”.) is executed as follows. Unless otherwise defined in this Agreement, any term used in this Agreement shall have the meaning defined in the Original Agreement.
Article 1 Amendments to the Original Agreement
| 1. | Notwithstanding the provisions of the Original Agreement, all parties hereto hereby amend the following terms and conditions of the Loan made under the Original Agreement (Hereinafter referred to as the “Modified Loans”.) as follows: |
Notice
(Loan to be Amended)
| Effective Date | August 31, 2023 | ||
| Amount of the Loan | 8,150,000,000 yen | ||
| Basic Loan Term | 1 month | ||
| Maturity date | December 29,2023 |
(Conditions)
| Before change | After change | ||
|
Maturity date (Article 1 of the Original Agreement 55) |
December 29, 2023 (hereinafter referred to as the “Pre-change Maturity Date”)
|
March 29, 2024 (hereinafter referred to as the “changed maturity date”.). | |
|
Base interest rate (Article 1 of the Original Agreement 17) |
0.04818% per annum |
For each Interest Calculation Period, such interest two business days prior to the commencement date of the Accounting Period at 11:00 AM or 11:00 AM on the date on or after 11:00 AM, which is close to the target date. In addition, the JBA TIBOR Administration Japanese Yen TIBOR representing (page 17097 of Telerate or its successor page) means the interest rate for 1 month. Succession Page) of which one month’s interest is the interest rate. In the event that such interest rate is not disclosed for any reason, such interest rate shall be two business days of the first day of the Interest Calculation Period. At or prior to 11:00 AM Tokyo Interbank at the time of the most recent One-month yen loan in the market As the offered rate for transactions |
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
| The interest rate reasonably determined by the Agent (expressed at an annual rate.). Provided, however, that if the rate of interest so determined is less than 0% per annum, the rate shall be 0% per annum. | |||
|
Liquidation (Article 1 of the Original Agreement 36) |
① In the case where principal is repaid or set-off prior to the repayment date of the individual loan (including cases where the guarantee obligation of the guarantor pertaining to the principal of the relevant Individual Loan has been performed or set-off. Hereinafter, the same shall apply in this issue.), (2) the borrower cancels the loan contract for the individual loan after the loan application and before the individual loan is disbursed pursuant to the first sentence of Article 587 of the Civil Code (ii) Cancelled in accordance with the first sentence of paragraph (2) (3) If the individual loan was not disbursed due to the failure to satisfy all or part of the conditions under Article 5, or (4) If the borrower has lost the benefit of the maturity date of the individual loan and the reinvestment rate falls below the applicable interest rate, the amount calculated by multiplying the amount of principal subject to settlement money by the difference between the reinvestment rate and the applicable interest rate and the actual number of days of the remaining term. However, such amount shall not be in violation of laws and regulations, etc. In the case of (1) of this item, the “commencement date of settlement” refers to the date on which the payment or set-off was made, in the case of (2) and (3) of this item, the desired disbursement date of the individual loan, and in the case of (4) of this item, the date reasonably determined by the lender among the date on which the benefit of time has been lost or later dates, the “principal amount subject to settlement” refers to the principal amount of the payment or set-off in the case of (1) of this item, the disbursement amount of the individual loan in the case of (2) and (3) of this item, and the principal amount of the individual loan in the case of (4) of this item as of the date on which the benefit of time has been lost, the “remaining period” refers to the period from the commencement date of settlement (Including the same day.) to the repayment date (Including the same day.), and the “reinvestment rate” refers to the Amount of Principal Subject to Liquidation Payments |
① If the principal is repaid or set-off on a date other than the interest payment date (including cases where the guarantee obligation of the guarantor pertaining to the principal of the relevant Individual Loan has been performed or set-off. Hereinafter, the same shall apply in this issue.), (2) the Borrower may, after making an application for a loan and before disbursing the Individual Loan, establish a loan contract for the Individual Loan in accordance with Article 587 -2 of the Civil Code. The first sentence of paragraph 2 of this Article, ③ If the Individual Loan is not disbursed due to failure to satisfy all or part of the conditions stipulated in Article 5 of this Article, or (4) the Borrower has lost the benefit of the term of the Individual Loan and the reinvestment interest rate falls below the applicable interest rate, the amount calculated by multiplying the Amount of Principal Subject to Liquidation Payments by the difference between the reinvestment interest rate and the applicable interest rate and the actual number of days of the remaining term. However, such amount shall not be in violation of laws and regulations. In the case of (1) of this Article, the “Calculation Commencement Date of Liquidation Payments” refers to the date on which the payment or set-off was made, in the case of (2) and (3) of this Article, the expected disbursement date for the Individual Loan, and in the case of (4) of this Article, the date on which the benefit of the term was lost or any subsequent date reasonably determined by the Lender. ④ The “Remaining Period” refers to the period from the commencement date of settlement calculation (Including the same day.) to the next interest payment date (Including the same day.). The” Reinvestment Rate” refers to the rate reasonably determined by the Lender assuming that the principal amount subject to settlement money is reinvested in the Tokyo Interbank Market over the remaining period. In addition, such settlement shall be calculated using deferred payment. |
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
|
refers to the interest rate reasonably determined by the lender on the assumption that the money will be reinvested in the Tokyo Interbank Market for a period of time. The settlement amount shall be calculated using deferred payment. The amount shall be calculated on a per diem basis with a year of 365 days, the division shall be made at the end, and amounts less than 1 yen shall be rounded down. Mitsu is discarded. |
The amount shall be calculated on a per diem basis with a year of 365 days, the division shall be made at the end, and amounts less than 1 yen shall be rounded down. | ||
| Interest Calculation Period | None defined |
With respect to interest to be paid on the interest payment date on the last day of January 2024 and on any subsequent interest payment dates, the first is the period from the original maturity date to the second interest payment date and, from the second to the next interest payment date, each period from the previous interest payment date to the next interest payment date. |
|
| Interest payment date | No definition |
The date of payment of interest in 2023 12 months 29, the last day of January 2024, 2024 the last day of February of the year and the changed maturity date (provided, however, that if the interest payment date falls on a day other than a business day, the interest payment date shall be the following business day, and if the following business day falls in the following month, the interest payment date shall be the preceding business day. The interest payment date shall be the business day.) means. |
| 2. | Revolving Credit Facility dated September 26, 2023 executed between the parties hereto. |
Article 1, Paragraph 2 of the First Amendment Agreement (Change of Maturity Date) shall be deleted.
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
| 3. | Notwithstanding the provisions of Article 12.1 through 12.3 of the Original Agreement, the Borrower will prepay 100 million yen of the principal of the Loan Subject to Modification (of such amount for each lender, the amount shown as the Repayment Amount on December 29, 2023 below). |
(The amount of 100 million yen of the principal of the Loan Subject to Modification shall be repaid in advance of the maturity date of the Loan.) (Of the principal amount of the Loan Subject to Modification, 200 million yen in cash (of which the amount stated in the repayment amount on January 31, 2024 below will be prepaid for each lender) and interest will be prepaid on the maturity date prior to the modification. The total amount of 200 million yen of the principal of the Loan Subject to Modification (of such amount, the amount stated in the Repayment Amount on January 31, 2024 below shall be prepaid for each lender) and interest shall be paid on January 31, 2024.
| Lender |
December 29, 2023 |
January 31, 2024 |
| MUFG Bank, Ltd. | 0 yen | 0 yen |
| Mizuho Bank, Ltd. | 0 yen | 0 yen |
| Resona Bank, Ltd. | 18,867,900 yen | 37,735,800 yen |
| Sumitomo Mitsui Banking Corporation | 16,981,100 yen | 33,962,200 yen |
| Iyo Bank, Ltd. | 9,434,000 yen | 18,868,000 yen |
| Chiba Bank, Ltd. | 7,547,200 yen | 15,094,400 yen |
| Tokyo Star Bank, Ltd. | 7,547,200 yen | 15,094,400 yen |
| Sumitomo Mitsui Trust Bank, Limited | 7,547,200 yen | 15,094,400 yen |
| Ashikaga Bank, Ltd. | 5,660,400 yen | 11,320,800 yen |
| Suruga Bank, Ltd. | 5,660,400 yen | 11,320,800 yen |
| Kochi Bank, Ltd. | 5,660,400 yen | 11,320,800 yen |
| Tokushima Taisho Bank, Ltd. | 5,660,400 yen | 11,320,800 yen |
| Towa Bank, Ltd. | 3,773,600 yen | 7,547,200 yen |
| Kansai Mirai Bank, Ltd. | 1,886,800 yen | 3,773,600 yen |
| 82 Bank, Ltd. | 1,886,800 yen | 3,773,600 yen |
| Kita Bank of Japan, Ltd. | 943,300 yen | 1,886,600 yen |
| Toei Shinkin Bank | 943,300 yen | 1,886,600 yen |
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
| 4. | Article 1, Item 42 of the Original Contract |
(Before change)
| 42 | Multiple Lenders |
refers to a single lender or multiple lenders whose total participation ratio (However, after the termination of the loan obligation of all Lenders, during the period when all obligations under this Agreement pertaining to the Loan have not been fully satisfied, the ratio shall be the total principal amount of each Lender’s individual unpaid loans to the total outstanding balance of the Loan as of the Time of Collective Intent.) as of the time of the collective intention is 66.7% or more. However, in the case of the collective intention to determine whether or not to give notice to forfeit the benefit of time in accordance with Article 22, Paragraph 2, it refers to a single lender or multiple lenders whose total ratio of the total principal amount of unpaid individual loans of each lender to the total outstanding balance as of the time of the collective intention is 66.7% or more. In cases where the Lender determines that there is a reason that requires instructions from multiple lenders, the “base time for collective intention” refers to the time at which the Agent receives the notice prescribed in Article 27, Paragraph 1, Item 1. refers to the time of issuance. |
(After change)
| 42 | Multiple Lenders |
refers to a single lender or multiple lenders whose total participation ratio (However, after the termination of the loan obligation of all Lenders, during the period when all obligations under this Agreement pertaining to the Loan have not been fully satisfied, the ratio shall be the total principal amount of each Lender’s individual unpaid loans to the total outstanding balance of the Loan as of the Time of Collective Intent.) as of the base time of mobilization exceeds 50%. However, in the case of mobilization to determine whether to issue a notice to forfeit the benefit of time in accordance with Article 22, Paragraph 2, it refers to a single lender or multiple lenders whose total ratio of the total principal amount of unpaid individual loans of each lender to the total outstanding balance as of the base time of mobilization exceeds 50%. The “base time of mobilization” refers to the time at which the Agent received the notice stipulated in Article 27, Paragraph 1, Item 1 if the Lender determines that an event requiring instruction from multiple lenders has occurred, or the time at which the Agent issued the notice stipulated in Article 27, Paragraph 2 if the Agent determines that it is necessary to mobilize the will of multiple lenders. means. |
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
| 5. | Article 11, Paragraph 1 of the Original Agreement |
(Before amendment)
The Borrower shall pay on the maturity date the total amount of interest calculated by multiplying the principal amount of each individual loan for each lender by the applicable interest rate and the actual number of days in the loan period.
(after change)
The Borrower shall pay on the interest payment date, which is the end date of each interest calculation period, the total amount of interest calculated by multiplying the outstanding principal amount of each individual loan for each interest calculation period for each lender by the applicable interest rate and the actual number of days in the interest calculation period.
| 6. | The following provisions shall be added to Article 21, Paragraph 1, Item 1 (m) of the Original Agreement as (n) to (q) of the said Item. |
| (n) | Funds Schedule |
The Borrower shall prepare a funds schedule with the first reference date of December 2023 and the last day of each month as the reference date, and shall submit the said funds schedule to all Lenders and Agents by the 15th day of the month following the month to which the said reference date belongs (if the relevant day falls on a day other than a business day, the following business day;).
| (o) | New Borrowings |
When the Borrower makes a new loan (Including, but not limited to, borrowings from financial institutions, parent companies, subsidiaries and affiliates.), the Borrower shall report to all Lenders and Agents to that effect and the details thereof in advance.
| (p) | Measures to Prevent Recurrence of Cases of Incomplete Consumption Tax Refund Procedures |
The Borrower’s agent shall formulate measures to prevent the recurrence of the inadequacy of the consumption tax refund procedure described in the “Consumption Tax Investigation” dated June 2, 2023 (This includes, but is not limited to, the development of internal systems and measures to alert exporters.) and shall report such measures to all Lenders and Agents by March 29, 2024 (if the relevant day falls on a day other than a business day, the following business day;).
| (q) | Number of Consumption Tax Refund Transactions, etc. |
Report to all lenders and agents by the end of January 2024 (if the relevant day falls on a day other than a business day, the following business day;) on (i) the total number of consumption tax refund transactions and (ii) the number of deficiencies identified in (i) and the status of responses between October 1, 2023 and the end of December.
| 7. | Article 21, Paragraph 1, Item 1 (i) Trial Balance |
(Before Change)
Prepare unconsolidated trial balances for the borrower with the first record date set at the end of September 2022 and the last day of the interim period of each fiscal year of the borrower as the record date, and submit the unconsolidated trial balances to all lenders and agents promptly after the disclosure of financial statements, etc. (Provided, however, that in the case of preparation of reports, etc., reports, etc.) pertaining to the interim period.
(After Change)
Prepare unconsolidated trial balances for the borrower with the first record date set at the end of December 2023 and the last day of each month as the record date, and submit the unconsolidated trial balances to all lenders and agents by the 15th day of the month after the month in which the record date falls (where the date falls on a non-business day The trial balance shall be submitted to all lenders and agents by the following business day.
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
| 8. | The following provisions shall be added as Item 6 of Paragraph 1 of Article 21 of the Original Contract after Item 5 of the same Paragraph. |
⑥ Maintenance of cash and deposits
The Borrower commits to maintain the cash and deposits balance at the end of each month with the first date of the end of January 2024 at 200 million yen or more. The cash and deposits balance under this Item shall be calculated based on the amount indicated in the fund schedule submitted pursuant to Paragraph 1, Item 1 (n) of this Article.
| 9. | The following provisions shall be added as Item 4 of Article 21, Paragraph 2, Item 3 of the Original Agreement. |
④ Maintenance of Cash and Deposits Balance
The Guarantor undertakes not to lower the cash and deposits balance to be maintained by the Borrower pursuant to Article 21, Paragraph 1, Item 6 (Including, but not limited to, provision of funds to borrowers through loans, etc.).
| 10. | Article 22, Paragraph 2, Item 10 of the Original Agreement |
(Before change)
⑩ When the total of all voting rights held directly or indirectly by the Guarantor and the Guarantor’s spouse, children, and father to the Borrower is less than half of the total voting rights based on the total number of outstanding shares of the Borrower
(After change)
| ⑩ | (Intentionally Deleted) |
| 11. | Article 23, Paragraph 1 of the Original Agreement |
(Before change)
If the Borrower or Guarantor must perform its obligations to any of the Lenders or Agents due to the expiration of the due date, loss of benefit of the due date, or any other reason 18, the Lender or Agent may (1) set off its claims under this Agreement against the Borrower or Guarantor against the deposit obligations, obligations under insurance contracts, and other obligations of the Lender or Agent against the Borrower or Guarantor, regardless of the due date of the obligations, and (2) obtain a refund of the various deposits on behalf of the Borrower or Guarantor and appropriate them to satisfy the obligations, without prior notice and without the prescribed procedures. With respect to the calculation of interest, settlement money, delinquency charges, etc. on the claims and obligations in the case of offsetting or appropriating the payment, the relevant claims and obligations shall be calculated on the assumption that they will be extinguished on the date of calculation, the interest rate or rate shall be in accordance with the provisions of the contract pertaining to such interest rate or rate, and the foreign exchange rate at the time of calculation reasonably determined by the relevant lender or agent shall be applied.
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
(After Change)
In cases where the Borrower or Guarantor is required to perform its obligations to any of the Lenders or Agents due to the expiration of the due date, loss of benefit of the due date, or for any other reason, the relevant Lender or Agent Notwithstanding the provisions of Article 18, Paragraph 2, (1) may set off any claim under this Agreement against such Borrower or Guarantor against any deposit obligation, insurance contract obligation or other obligation of such Lender or Agent against such Borrower or Guarantor, regardless of the due date of such obligation, and (2) may receive a refund of deposits on behalf of such Borrower or Guarantor and appropriate such refund for the repayment of such obligation without prior notice and without prescribed procedures. In the case of such set-off or application for repayment, the calculation of interest, settlement money, delinquency charges, etc. shall be made on the assumption that such claim or obligation will be extinguished on the date of calculation, the interest rate or rate shall be determined in accordance with the provisions of the contract pertaining to such interest rate or rate, and the foreign exchange rate reasonably determined by such Lender or Agent at the time of calculation shall be applied. The method of allocation in this case shall be in accordance with the provisions of Article 18, Paragraphs 3 and 4 and Article 19.
| 12. | Article 23, Paragraph 2 of the Original Contract |
(Before Change)
Notwithstanding the provisions of Article 18, Paragraph 2, the Borrower or Guarantor may set off the deposit claims, insurance claims, and other claims held by the Borrower or Guarantor against any lender or agent that have become due only when it is necessary to preserve the claims against the lender or agent. In such a case, the Borrower or Guarantor shall notify the lender or agent of the set-off and promptly submit to the lender or agent the certificates of the deposit claims, insurance claims, and other claims that have been set off and the passbook with the seal affixed thereto. In the case of such set-off, the calculation of interest and delinquency charges on the claims and debts shall be made on the assumption that the claims and debts will be extinguished on the date of arrival of the notice of set-off, the interest rate or rate shall be in accordance with the provisions of the contract pertaining to such interest rate or rate, and the foreign exchange rate at the time of calculation reasonably determined by the lender or agent shall be applied.
(After Change)
Notwithstanding Article 18, Paragraph (2), the Borrower or Guarantor may set off the deposit claims, insurance claims, and other claims held by the Borrower or Guarantor against any of the lenders or agents that have become due, but only if it is necessary for the purpose of preserving the claims. In this case, the Borrower or Guarantor shall give the notice of set-off to the lender or agent and promptly submit to the lender or agent the certificates of the deposit claims, insurance claims, and other claims that have been set-off and the passbook with the registered seal affixed thereto. In the case of set-off, the interest on the claims and obligations, delinquency charges, etc. shall be calculated on the assumption that the claims and obligations will be extinguished on the date of arrival of the notice of set-off, the interest rate or rate shall be in accordance with the provisions of the contract pertaining to the interest rate or rate, and the foreign exchange rate reasonably determined by the lender or agent at the time of calculation shall be applied. Article 18, Paragraph (3) and Paragraph 4 and Article 19.
| 13. | Sentence 1, Paragraph 1, Article 24 of the Original Agreement |
(Before Change)
In the event that the obligations of the borrower or guarantor under this agreement to any lender are extinguished without complying with the provisions of Articles 18 and 19 (except where set-off or repayment allocation is carried out pursuant to the provisions of Paragraph 1 or Paragraph 2 of the preceding article) (such lender hereinafter referred to as the “Obligation-Extinguished Lender” in this paragraph), unless otherwise stipulated in this agreement, all lenders and the agent shall make adjustments among the lenders and the agent by taking the following measures such as assignment or transfer of claims or other appropriate measures, so that the result will be the same as if the repayment had been made in accordance with the provisions of Articles 18 and 19 and the obligations to the lenders and the agent had been extinguished. If the agreement of all lenders and the agent on such assignment or transfer of claims or other appropriate measures cannot be obtained, all lenders shall follow the measures determined by the agent at its discretion. However, if the adjustment between the lenders and the agent stipulated in this paragraph is to include the assignment of claims (including but not limited to the case stipulated in Item 2 of this paragraph), the lender who is to become the assignor of such claims may refuse such assignment. Even if such assignment is refused, it shall be deemed that such assignment has been made for the purpose of calculating the unused lending limit.
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
(After Change)
If any obligation of the Borrower or Guarantor under this Agreement to any Lender is satisfied pursuant to the provisions of Articles 18 and 19,
In the event of default (However, set-off or appropriation of repayment pursuant to the provisions of Paragraph 1 or 2 of the preceding article is included.) (Such lender shall hereinafter be referred to as the “Extinguished Lender” in this paragraph.), except as otherwise provided in this Agreement, all Lenders and Agents shall make arrangements between the Lenders and Agents by assigning or accepting their claims in accordance with the following provisions, or by taking other appropriate action, so that payments will be made in accordance with the provisions of Articles 18 and 19 and the obligations to the Lenders and Agents will have the same effect as if they had been extinguished: If all Lenders and Agents fail to agree on such assignment, acceptance of claims, or other appropriate action, all Lenders shall take such action as determined by the Agents in their discretion. However, if a claim is expected to be assigned as part of the arrangement between the Lenders and Agents set forth in this Paragraph (Including, but not limited to, the case specified in item (ii) of this paragraph.), the Lender who is to assign the claim may refuse such assignment. Even if such assignment is refused, the assignment shall be deemed to have been made for the purpose of calculating the maximum unused loan amount.
| 14. | Article 24, Paragraph 2, Item 3 of the Original Contract |
(Before Change)
③ When the obligations of the Borrower or Guarantor under this Agreement have been extinguished as a result of set-off or appropriation of repayment in accordance with Paragraph 1 or 2 of the preceding Article
(After Change)
③ (Intentionally Deleted)
| 15. | Article 30, Paragraph 5 of the Original Agreement |
(Before change)
Notwithstanding the provisions of Article 23, Paragraph 1, the Unauthorized Transferee shall not set off or appropriate the payment for the Unauthorized Transferee. The Unauthorized Transferee and the Unauthorized Transferee shall handle disputes arising from the Unauthorized Transfers at their own cost and responsibility, and in the event that the Borrower, Guarantor, other Lender or Agent has suffered any damage, etc. as a result of the Unauthorized Transfers, the Unauthorized Transferee shall compensate the relevant Borrower, Guarantor, other Lender or Agent for such damage, etc.
(After change)
Notwithstanding the provisions of Article 23, Paragraph 1 and Paragraph 2, the Unauthorized Transferee and the Borrower shall not set off or appropriate the payment for the Unauthorized Transfers. The Unauthorized Transferee and the Unauthorized Transferee shall handle disputes arising from the Unauthorized Transfers at their own cost and responsibility, and in the event that the Borrower, Guarantor, other Lender or Agent has suffered any damage, etc. as a result of the Unauthorized Transfers, the Unauthorized Transferee shall compensate the relevant Borrower, Guarantor, other Lender or Agent for such damage, etc.
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
| 16. | The parties hereto confirm that the change of the Maturity Date under this Article does not constitute an extension of the commitment period set forth in the Original Agreement, and that the Guarantor shall continue to be bound by the guarantee obligation for the Individual Loans Subject to the Modification, even though the Principal Fixation Date set forth in the Original Agreement remains unchanged. |
Article 2 Effect of Other Provisions of the Original Agreement
All provisions of the Original Agreement other than those stipulated in Article 1 hereof shall remain in force and effect.
Article 3 Effective Date of the Agreement
This Agreement shall be effective from the date hereof. However, the base interest rate and the settlement amount changed in accordance with the provisions of Article 1 and Article 1, Paragraph 5 hereof shall apply on and after December 29, 2023.
Article 4 Guidelines for Managers’ Guarantees
In the event that the Guarantor requests any of the Lenders or Agents to liquidate its guarantee obligations under the Original Agreement as amended by this Agreement in accordance with the Guidelines for Managers’ Guarantees published by the Guidelines for Managers’ Guarantees Study Group (Secretariat of the Japanese Bankers Association and the Japan Chamber of Commerce and Industry) on December 5, 2013 (Includes revised content after publication.), all Lenders and Agents shall endeavor to respond to the liquidation in good faith based on the said Guidelines.
[Less than or equal to margin]
Revolving Credit Facility Agreement for Yoshitoshi Trading Co., Ltd. dated December 27, 2023
Second Amendment Agreement
(Original Agreement: Revolving Credit Facility Agreement dated September 27, 2022)
-
As evidence of execution of this Agreement, all parties hereto have executed one original copy of this Agreement, signed or stamped with their names and seals, and the Agent shall retain said original copy.
Each of the other parties hereto shall receive a copy from the Agent.
December 27, 2023
| Borrower (address, name and seal)： | |
| 130-0022 | |
| 2-5-9, Koto-bashi, Sumida-ku, Tokyo | |
| Yoshitsu Co, Ltd. | |
| Representative Director: Mei Kanayama |
| Guarantor (address, name and seal): | |
| Mei Kanayama |
| Lender and agent (address, name and seal): | |
| The Bank of Mitsubishi UFJ, Ltd. | |
| Representative Director Junichi Hanzawa |
| Lender (address, name and seal): | |
| Mizuho Bank, Ltd. Kameido | |
| Corporate Banking Division | |
| Kengo Yamamoto, General Manager | |
| Mizuho Bank, Ltd. |
| Lender (address, name and seal): | |
| Resona Bank, Limited Kinshicho Branch | |
| Branch Manager Toshihide Fujita | |
| Resona Bank, Ltd |
| Lender (address, name and seal): | |
| Sumitomo Mitsui Banking Corporation Kinshicho Corporate Banking Division | |
| Department Manager Yuji Kawamura |
| Lender (address, name and seal): | |
| The Iyo Bank, Ltd. Shinjuku Branch | |
| Branch Manager Sei Onojo | |
| The Iyo Bank |
| Lender (address, name and seal): | |
| Asahi Seimei Shinkoiwa Building 2F | |
| The Chiba Bank, Ltd. Koiwa Branch | |
| Branch Manager Yoshitaka Tanaka | |
| The Chiba Bank, Ltd. |
| Lender (address, name and seal): | |
| Tokyo Star Bank, Ltd. | |
| Sales Department 3 | |
| General Manager Kaoru Katayama |
| Lender (address, name and seal): | |
| Sumitomo Mitsui Trust Bank, Ltd | |
| Takahiro Ayano, Manager |
| Lender (address, name and seal): | |
| The Ashikaga Bank, Ltd. | |
| Representative Director Kazuyuki Shimizu | |
| The Ashikaga Bank, Ltd. |
| Lender (address, name and seal): | |
| The Suruga Bank, Ltd, Tokyo Branch | |
| Branch Manager Toshimitsu Sato | |
| The Suruga Bank, Ltd |
| Lender (address, name and seal): | |
| The Kochi Bank, Ltd. Tokyo Branch | |
| Branch Manager Yasuhiro Miyazaki | |
| The Kochi Bank, Ltd. |
| Lender (address, name and seal): | |
| Tachibana Kameido Building 7F | |
| The Tokushima Taisho Bank, Ltd. Kameido Branch | |
| Branch Manager Yuichi Honchi | |
| The Tokushima Taisho Bank, Ltd. |
| Lender (address, name and seal): | |
| The Towa Bank, Ltd, Tokyo Branch | |
| Branch Manager Takeshi Kishi | |
| The Towa Bank, Ltd, |
| Lender (address, name and seal): | |
| Kansai Mirai Bank, Ltd. Tokyo Branch | |
| Branch Manager Takahiro Okada | |
| Kansai Mirai Bank, Ltd. |
| Lender (address, name and seal): | |
| Hachijuni Bank, Ltd. Ikebukuro Branch | |
| Branch Manager Atsuya Matsunaga | |
| Hachijuni Bank, Ltd |
| Lender (address, name and seal): | |
| The Kitanihon Bank, Ltd. Tokyo Branch | |
| Director, Branch Manager Yuta Kodera | |
| The Kitanihon Bank, Ltd. |
| Lender (address, name and seal): | |
| Toei Shinkin Bank | |
| Mitsuhiko Tamura, General Manager, Loan Department | |
| Toei Shinkin Bank |
Exhibit 4.23
Loan Agreement
(Automatic change, fixed interest rate shared)
Resona Bank, Ltd.
Debtor Yoshitsu Co, Ltd.
co-signer Mei Kanayama
The Borrower, having approved this Agreement in addition to each of the provisions of the Banking Agreement separately executed, has borrowed money from you on the Borrowing Date and received the same as set forth in the following terms and conditions.
Article 1 (Borrowing Guidelines)
Amount ¥ 200,000,000 yen
Use of funds Ordinary working capital
Final repayment date: March 29, 2024 A.D.
Interest rate 3.400% per annum (prorated 365 days per year)
Repayment Method Lump-sum repayment on the repayment date
Interest Payment Method
Interest will be paid on the drawdown date through February 29, 2024 A.D., and one month in advance on the 31st day of every month thereafter.
However, on the final interest payment date, interest will be paid in advance up to the final repayment date.
Treatment of Holidays
If the principal and interest repayment date falls on a holiday, the next business day shall be the repayment date.
Down payment account for repayment Resona Bank, Limited, Kameido Branch Account No.-
Special Terms and Conditions
(1) The borrower agrees that the interest rate may be changed during the term of the loan in accordance with the following criteria.
The interest rate will be based on the interest rate specified below (hereinafter referred to as the “Base Rate”). (i) The interest rate shall be based on the interest rate specified below (hereinafter referred to as the “Base Interest Rate”).
(i) The interest rate shall be based on the interest rate specified below (hereinafter referred to as the “Base Rate”) and shall be increased or decreased in the same range as the Base Rate as a result of future changes in the Base Rate.
The base interest rate as of today is as follows. We hereby confirm that the base interest rate as of today is as follows
Base interest rate Short-term prime rate 1.725％
② The Obligor or you may request consultations with respect to changing the Base Rate or the agreed upon time and method of interest payment to a level generally considered reasonable in the event of a change in financial conditions or other similar reasonable cause.
③ The change in the Rate of Interest shall apply from the day following the first Interest Payment Date that falls after the Reference Rate Change Date.
This Agreement shall come into effect when you actually deliver the money to the borrower, and you shall not be obligated to lend to the borrower under this Agreement.
You are not obligated to lend to the borrower under this Agreement.
Article 2 (Prepayment)
In the event that a borrower elects to prepay all or a portion of the Loan prior to the Final Repayment Date, the borrower shall pay an administrative fee as prescribed by the Company for prepayment. However, if there is any change in such administrative fee, the borrower shall pay the revised administrative fee thereafter. The same shall apply in the event of any change in consumption tax, etc. due to amendment of laws and regulations.
Article 3 (Concomitant Payment of Bills)
In order to secure the repayment of the borrowings under Article 1, the borrower shall draw a promissory note in the amount and due date specified by you and present it to you for payment,
The Debtor shall, in order to secure repayment of the borrowings under Article 1, draw and deliver to you a promissory note in the amount and due date specified by you and continue to redeem it in the same manner until the final repayment date.
The borrower may, with your consent, omit the presentation of the promissory note as provided in the preceding paragraph. However, in this case
In this case, however, upon your request at a later date, the promissory note shall be immediately inserted in accordance with the preceding paragraph.
Article 4 (Automatic Payment of Principal and Interest Repayment, etc.)
Payment of principal, interest, and late charges hereunder shall be made by depositing an amount equal to or more than the prescribed payment amount into the Repayment Deposit Account designated in Article 1 hereof on or before each payment date.
(1) The payment of principal, interest, late payment charges, etc. hereunder shall be made by deposit of an amount equal to or more than the prescribed payment amount into the Repayment Deposit Account designated in Article 1 by each payment date, and you shall make payment by check or ordinary deposit on the payment due date.
Notwithstanding the provisions of the Checking Account Rules or the Savings Account Rules, etc., you shall make a withdrawal from the Repayment Deposit Account and apply it to each Payment Date without using a check, your ordinary or general account passbook, or a request for withdrawal form for the same purpose.
2. In the event that the balance in the deposit account as set forth in the preceding paragraph is less than the amount of each payment, no partial payment shall be made and the prescribed delinquency measures shall be taken without objection.
3. If the balance in the Deposit Account under the preceding paragraph reaches the amount to be paid at a later date, you may at any time make the same payment, including any late payment charges, as in Paragraph 1.
Article 5 (Withdrawal of Incidental Expenses)
The Credit Guarantee Association guarantee fee, other guarantee fees, fixed date fees, registration fees, and any other expenses related to this Agreement that are required to secure your claims under this Agreement shall also be debited from the borrower’s bank account and applied in accordance with Article 4.
Article 6 (Late Payment)
In the event of failure to perform any obligation to you under this Agreement, the Obligor shall pay to you a late payment penalty at the rate of 14% per annum (prorated for 365 days per year) on the amount owed.
Article 7 (Preparation of Notarial Deed)
The obligor and the joint guarantors shall, at your request, immediately take the necessary procedures to prepare a notarial deed with an acknowledgment of compulsory execution with a clause of forfeiture of the benefit of time with respect to the obligations under this agreement. The costs incurred for this purpose shall be borne by the obligor and the cosigner.
Article 8 (Review of Terms and Conditions)
1. You may request consultations with the Debtor regarding a review of the interest rate and interest rate range for the borrowings under this Agreement if any of the following events occur The Debtor shall respond to such request for consultation by you.
| (1) | 2 consecutive fiscal years of net loss |
A deficit for two consecutive fiscal years means a deficit in net income on the income statement (or its equivalent) for the last fiscal year and the fiscal year preceding the last fiscal year.
| (2) | Insolvency |
Insolvency is defined as liabilities exceeding assets on the balance sheet at the last fiscal year-end.
| (3) | When any other objective reason arises that your company deems it necessary to review the terms and conditions of the transaction. |
2. Even if a borrower falls under any of the events set forth in the preceding paragraph, the application of the forfeiture of the benefit of time provision in the banking agreement between the borrower and you shall not be precluded.
Article 9 (Assignment of Claims)
You may assign all or a portion of your Loan Receivables under this Agreement to another financial institution (including a trust as defined in this Article) in the future. The debtor confirms that the terms and conditions of the banking agreement between the debtor and you and the terms and conditions of this Agreement shall continue to apply even after the assignment of receivables. 2.
The Debtor agrees that, with respect to the Receivables transferred by you as set forth in the preceding paragraph, you shall, during the period of your delegation of authority with the transferee (including the beneficiaries of the Trust in this Article), administer and collect the Receivables under this Agreement as agent of the transferee.
3. If the receivables under this Agreement are guaranteed by a credit guarantee association, your company shall obtain the approval of the credit guarantee association in advance when your company assigns the receivables pursuant to Paragraph 1.
Article 10 (Guarantee)
1. The joint and several guarantors shall jointly and severally guarantee all debts owed by the borrower to you as a result of the transactions contemplated by this Agreement, on behalf of the borrower, and their performance shall be subject to the terms and conditions of the Banking Agreement separately executed by the borrower as well as this Agreement.
2. The joint guarantor will not set off against any deposit or other claim of the debtor against your company.
3. The co-signer does not claim exemption even if your company changes or releases the collateral or other guarantees for its own convenience.
4. If the joint guarantor fulfills the guarantee obligation, the rights acquired from you by subrogation shall not be exercised without your consent during the continuation of the transaction between the debtor and your company. If your company so requests, we will assign the right or rank to your company without compensation.
5. If the joint guarantor has any other guarantees for the debtor’s dealings with you, such guarantees shall not be modified by this Guaranty Agreement, and if the joint guarantor has any other guarantees with a specified limit, the amount of such guarantees shall be added to the limit of such guarantees. The same shall apply in the event that a cosigner guarantees any other future transactions between the borrower and your company.
6. If you make a claim for performance against any of the joint guarantors, the persons who have assumed their obligations and their successors-in-interest, such claim for performance shall be effective against the obligor and the other joint guarantors.
The Obligor agrees that upon request to you by the Guarantor (including a Guarantor who is not entrusted by the Obligor), you will provide the Guarantor with the information specified in Article 458-2 of the Civil Code (whether or not the principal of the principal obligation and any interest, penalties, damages or any other default in connection with the principal obligation and all other obligations incidental thereto are in default, as well as the amount of the balance thereof and the amount of any such default and the amount thereof that has become due). and interest, penalties, damages and all other amounts due and owing in connection with the Principal Obligations) to Guarantor.
8. The Joint Guarantor shall immediately notify you in writing of any change in its seal, name, trade name, representative, address or any other matters notified to you.
9. If any notice given or any document sent by you is delayed or fails to arrive due to any cause attributable to the cosigner, such as failure to notify us in accordance with the preceding paragraph or failure to receive any notice from you, it shall be deemed to have arrived at the time when it would normally have arrived.
【Covenants Quasi Provisions in the Event of Performance of Guaranteed Obligations】
In the event that the joint guarantor petitions for the settlement of guarantee obligations based on this contract in accordance with the “Guidelines on Personal Guarantees Provided by Business Owners” announced on December 5, 2013, by the Study Group on Guidelines for Personal Guarantees Provided by Business Owners (with the National Bankers Association and the Japan Chamber of Commerce and Industry as the secretariat), including revisions made after the announcement (hereinafter referred to as the “Guidelines”), the bank shall make efforts to respond in good faith to such settlement in accordance with the Guidelines.
Article 11 (Confirmation of Provision of Information)
1. The Debtor has provided the Guarantor with the same information that it provided to the Creditor with respect to the following statements
(i) the status of the debtor’s property and income and expenditure
(2) Existence or non-existence of debts owed by the obligor other than the Obligations, as well as the amount of such debts and the status of performance of the Obligations
(iii) If the obligor has provided or intends to provide anything else as security for the Obligations, a statement to that effect and the details thereof
2. The guarantor has received information from the obligor concerning the following items
(i) the status of the debtor’s assets and income and expenditure
(2) Existence or non-existence of debts owed by the obligor other than the Obligations, as well as the amount of such debts and the status of performance of such debts
(iii) If the obligor has provided or intends to provide any other security for the Obligations, a description of such security and its contents
Article 12 (Agreed Jurisdiction)
In the event that a lawsuit becomes necessary in connection with transactions under this Agreement, the parties agree to submit to the jurisdiction of the Osaka and Tokyo District Courts or the court having jurisdiction over the location of the Branch.
The parties agree that any litigation arising out of or in connection with this Agreement shall be subject to the jurisdiction of the Osaka or Tokyo District Court or the court having jurisdiction over the location of the Branch.
the end
6
Exhibit 4.24
Revolving Credit Facility Agreement Third Amendment Agreement
This Agreement for Amendment (Hereinafter referred to as the “Agreement”) to Third Amendment to Repolping Credit Facility Agreement (Hereinafter referred to as “appellant”) is entered into by and between Yoshitu, Ltd., Kanayama Mei as Guarantor (Hereinafter referred to as “guarantor”.), MUFG Bank, Ltd., Mizuho Bank, Ltd., Resona Bank, Ltd., Sumitomo Mitsui Banking Corporation, The Iyo Bank, Ltd., The Chiba Bank, Ltd., The Tokyo Star Bank, Ltd., Sumitomo Mitsui Trust Bank, Limited, The Ashikaga Bank, Ltd., The Suruga Bank, Limited, The Kochi Bank, Ltd., The Tokushima Taisho Bank, Ltd., The Towa Bank, Ltd., The Kansai Mirai Bank, Ltd., The 82 Bank, Ltd., The Kita Bank of Japan, Ltd. and The Toei Shinkin Bank, Ltd. (Hereinafter referred to as’ lender ’.) and MUFG Bank, Ltd. (Hereinafter referred to as “Agent”.) as Agent, with respect to the amendment to the Repolping Credit Facility Agreement dated September 27, 2022 (including subsequent changes, hereinafter referred to as the “Original Agreement”.) entered into among the Borrower, Guarantor, All Lenders and Agent. Unless otherwise specified in this Agreement, all terms used in this Agreement shall have the meaning set forth in the Original Agreement.
Article 1 Changes to the Original Agreement
| 1. | Notwithstanding the provisions of the Original Agreement, all moderators hereto shall modify the following terms and conditions of the Loan executed under the Original Agreement (Hereinafter referred to as “Modified Loan J”.) as follows: |
Notice
(Loan Subject to Modification)
|
Effective Date Amount of the Loan Base Loan Period Maturity Date |
August 31, 2023 7.85 billion yen 1 month March 29, 2024 |
(Conditions)
| Before change | After change | ||
|
Maturity date (Article 1 of the Original Agreement 55) |
March 29, 2024 (Hereinafter referred to as “Maturity Date before change”.) | June 28, 2024 (Hereinafter referred to as the “changed maturity term”.) | |
| Interest note period | With respect to interest payable on the interest payment date ending January 31, 2024 and subsequent interest payment dates, the initial period is the period from the pre-modification maturity date to the second interest payment date, and the second and subsequent periods are the respective periods from the immediately preceding interest payment date to the next interest payment date. | With respect to interest payable on the last interest payment date of January 2024 and subsequent interest payment dates, the first interest payment date is the period from December 29, 2023 to the second interest payment date, and the second and subsequent interest payment dates are each period from the immediately preceding interest payment date to the next interest payment date. | |
| Interest payment date | The Interest Payment Dates, which shall be December 29, 2023, the last day of January 2024, the last day of February 2024 and the Modified Maturity Date (provided, however, that if such Interest Date falls on a non-business day, such Interest Date shall be the next business day following such interest payment date, or if such next business day falls in the next month, the preceding business day). (iii) “Interest Date” shall mean the following Business Day. | Interest Payment Date, the last day of each month after December 29, 2023 and the last day of January 2024 until the last day of the month immediately preceding the month in which the Maturity Date after Modification falls, and the Maturity Date after Modification (provided, however, that if such Interest Payment Date falls on a non-business day, such Interest Payment Date shall be the next business day following such business day and if such next business day falls in the next month If such next business day falls into the following month, the interest payment date shall be the preceding business day). (ii) “Interest Payment Date” shall mean the following business day. |
| 2. | Article 21 (1) (i) of the Original Agreement |
(Before change)
(1) Commitment of the Borrower
① Report
The Borrower shall ensure that the following (a) through (m) are carried out at its own expense.
(After Change)
(1) Commitment of the Borrower
① Reporting
The Borrower shall ensure that the following (a) through (m) are carried out at its own expense .
| 3. | Article 21, Paragraph 1, Item 1 (p) of the Original Agreement |
(before change)
(p) Preventive Measures against Recurrence of Incomplete Consumption Tax Refund Procedures
Measures to prevent recurrence of the deficiency in consumption tax refund procedures described in the “Consumption Tax Investigation” dated June 2, 2023 prepared by the attorney representing the Borrower (including, but not limited to, measures to improve internal systems and reminders to exporters). (ii) To formulate a plan for the prevention of recurrence of the deficiency in consumption tax refund procedures (including, but not limited to, measures to improve internal systems and alert exporters) and to report such plan to all lenders and agents by March 29, 2024 (or the next business day if such date falls on a non-business day).
(after change)
(p) Preventive Measures against Recurrence of Incomplete Consumption Tax Refund Procedures
Measures to prevent recurrence of the deficiency in consumption tax refund procedures described in the “Consumption Tax Investigation” dated June 2, 2023 prepared by the attorney representing the Borrower (including, but not limited to, measures to improve internal systems and alerting exporters). (including, but not limited to, measures to improve internal systems and alert exporters) by March 29, 2024 (or the following business day if the said date falls on a non-business day), and report such preventive measures to all lenders and agents by March 29, 2024 (or the following business day if the said date falls on a non-business day), and also report the measures to all lenders and agents by March 29, 2024. (or, if such date falls on a non-business day, the following business day), and prepare a document confirming the status of performance with respect to such preventive measures on the last day of each month thereafter (or, if such date falls on a non-business day, the following business day). (ii) prepare a document that confirms the status of implementation of the relevant preventive measures and submit it to all lenders and the Agent by the last day of the month following the month in which the record date falls (or, if such date falls on a day other than a business day, the following business day).
| 4. | Article 21, Paragraph 1, Item 1 (q) of the Original Agreement |
(Before Change)
(q) Number of Incidence of Consumption Tax Refund Transactions, etc.
Report to all lenders and agents by the end of January 2024 (or the following business day if such day falls on a non-business day) the (i) total number of consumption tax refund transactions that occurred from October 1 to December 31, 2023, and (ii) the number of deficiencies in (i) above and the status of their response
(After Change)
(q) Number of Incidence of Consumption Tax Refund Transactions, etc
Report to all lenders and agents by the end of April 2024 (or the following business day if such day falls on a non-business day) the (i) total number of consumption tax refund transactions that occurred from January 1 to March 31, 2024, and (ii) the number of deficiencies in (i) above and the status of their response
| 5. | The parties hereto each confirm that the change in the Maturity Date pursuant to this Article does not constitute an extension of the Committed Institution as set forth in the Original Agreement, and that the Principal Fixed Date of this Root Guarantee as set forth in the Original Agreement also remains unchanged, but that the Guarantor remains liable to guarantee the Individual Loan Subject to Change. |
Article 2 Effect of Other Provisions of the Original Agreement
Each provision of the Original Agreement other than those stipulated in Article 1 hereof shall continue to be effective.
Article 3. Effective Date of this Agreement
This Agreement shall be effective from the execution date of this Agreement.
Article 4. Guidelines for Manager Guarantees
The Guarantor shall provide to either Lender or Agent for the arrangement of the Guaranteed Obligations under the Original Agreement as modified by this Agreement, the Guidelines for Management Guarantees published on December 5, 2013 by the Study Group on Guidelines for Management Guarantees (with the Japanese Bankers Association and the Japan Chamber of Commerce and Industry as secretariat) ( including revisions made after publication). ), all lenders and agents shall endeavor to respond in good faith to such arrangement in accordance with such guidelines.
[Margins below]
IN WITNESS WHEREOF, all Parties hereto have executed one (1) original copy of this Agreement, and each other Party hereto shall receive a copy thereof from Agent, under their names or names and seals.
| Borrower (address, name and seal): | |
| 〒130-0022 | |
| 2-5-9, Koto-bashi, Sumida-ku, Tokyo | |
| Yoshitsu Co, Ltd. | |
| Representative Director: Mei Kanayama | |
| (Yoshitsu Co., Ltd.) |
| Guarantor (address, name and seal): | |
| Mei Kanayama | |
| (Mei Kanayama) |
| Lender and agent (address, name and seal): | |
| The Bank of Mitsubishi UFJ, Ltd. | |
| Representative Director | |
| (MUFG Bank, Ltd.) “) | |
| ,... Kura | |
| Lender (address, name and seal): | |
| Mizuho Bank, Ltd. Kameido Corporate Banking Division | |
| Kengo Yamamoto, General Manager | |
| Mizuho Bank, Ltd. |
| Lender (address, name and seal): | |
| Resona Bank, Limited Kinshicho Branch | |
| Branch Manager Toshihide Fujita | |
| (Resona Bank, Ltd.) |
| Lender (address, name and seal): | |
| Sumitomo Mitsui Banking Corporation Kinshicho Corporate Banking Division | |
| Department Manager Yuji Kawamura |
| Lender (address, name and seal): | |
| The Iyo Bank, Ltd. Shinjuku Branch | |
| Branch Manager Sei Onojo | |
| (Iyo Bank, Ltd.) |
| Lender (address, name and seal): | |
| Asahi Seimei Shinkoiwa Building 2F | |
| The Chiba Bank, Ltd. Koiwa Branch | |
| Branch Manager Yoshitaka Tanaka | |
| (The Chiba Bank, Ltd.) |
| Lender (address, name and seal): | |
| Tokyo Star Bank, Ltd. | |
| Sales Department 4 | |
| General Manager Kenichi Adachi | |
| (Tokyo Star Bank, Ltd.) |
| Lender (address, name and seal): | |
| Sumitomo Mitsui Trust Bank, Ltd | |
| Takahiro Ayano, Manager | |
| (Sumitomo Mitsui Trust Bank, Ltd) |
| Lender (address, name and seal): | |
| The Ashikaga Bank, Ltd. | |
| Representative Director Kazuyuki Shimizu | |
| (Ashikaga Bank, Ltd.) |
| Lender (address, name and seal): | |
| The Suruga Bank, Ltd, Tokyo Branch | |
| Branch Manager Toshimitsu Sato | |
| (Suruga Bank, Ltd.) |
| Lender (address, name and seal): | |
| The Kochi Bank, Ltd. Tokyo Branch | |
| Branch Manager Yasuhiro Miyazaki | |
| (The Kochi Bank, Ltd) |
| Lender (address, name and seal): | |
| The Tokushima Taisho Bank, Ltd. Kameido Branch | |
| Branch Manager Yuichi Honchi | |
| (The Tokushima Taisho Bank, Ltd ) |
| Lender (address, name and seal): | |
| The Towa Bank, Ltd, Tokyo Branch | |
| Branch Manager Takeshi Kishi | |
| (The Towa Bank, Ltd,) |
| Lender (address, name and seal): | |
| Kansai Mirai Bank, Ltd. Tokyo Branch | |
| Branch Manager Takahiro Okada | |
| (Kansai Mirai Bank, Ltd.) |
| Lender (address, name and seal): | |
| The Hachijuni Bank, Ltd. Tokyo Sales Department | |
| Sales Department 2 General Manager Junji Yokosawa | |
| (Hachijuni Bank, Ltd.) |
| Lender (address, name and seal): | |
| The Kitanihon Bank, Ltd. Tokyo Branch | |
| Director, Branch Manager Yuta Kodera | |
| (Kita Bank of Japan, Ltd.) |
| Lender (address, name and seal): | |
| Toei Shinkin Bank | |
| Mitsuhiko Tamura, General Manager, Loan Department | |
| (Toei Shinkin Bank) |
21
Exhibit 4.25
Modification Agreement Certificate
To Resona Bank, Ltd.
| Address | ||
| Borrower | To Yoshitu Co,Ltd | |
| Address | ||
| Borrower | To Mei Kanayama | |
| Address | ||
| Borrower |
| Article 1 | The Debtor has agreed to change the repayment date and method of repayment of the loan amount of 200,000,000 yen (original loan amount: 200,000,000 yen) owed to you under the loan agreement (the “Original Agreement”) dated February 26, 2024 as follows. |
| Article 2 | This Agreement is a Modification Agreement only with respect to the following matters, and all other related terms and conditions shall be governed by the respective terms and conditions of the Original Agreement (including the Modification Agreement, hereinafter the same). |
| Article 3 | The co-signers and guarantors acknowledge this Modification Agreement and accept their responsibilities in accordance with the terms of the Original Agreement and this Agreement. |
| Before the amendment | Due date | March 29, 2024 |
| Repayment Method | Repayment of 200 million yen on the due date. | |
| After the change | Repayment Date | June 28, 2024 |
| Repayment Method | Repayment of 200 million yen on the due date. |
The end
Exhibit 8.1
Subsidiaries of the Registrant
| Subsidiary | Jurisdiction of Organization | |
| Tokyo Lifestyle Limited | Hong Kong | |
| REIWATAKIYA (MYS) SDN. BHD. | Malaysia | |
| Shenzhen Qingzhiliangpin Network Technology Co., Ltd. | People’s Republic of China | |
| RAKKISTAR HOLDING INC. | Ontario, Canada | |
| Tokyo Lifestyle Holding Inc. | Delaware, USA | |
| REIWATAKIYA BOS LLC | Massachusetts, USA | |
| REIWATAKIYA NYC LLC | New York, USA |
Exhibit 11.2
Insider Trading Compliance Manual
Yoshitsu Co., Ltd
Adopted June 28, 2024
In order to take on an active role in the prevention of insider trading violations by its officers, directors, employees, consultants, advisors, and other related individuals, the Board of Directors (the “Board”) of Yoshitsu Co., Ltd, a stock company incorporated pursuant to the laws of Japan (the “Company”), has adopted the policies and procedures described in this Insider Trading Compliance Manual.
| I. | Adoption of Insider Trading Policy. |
Effective as of the date written above, the Company has adopted the Insider Trading Policy (the “Policy”), which prohibits trading based on material, non-public information regarding the Company and its subsidiaries (“Inside Information”). The Policy covers all officers and directors of the Company and its subsidiaries, all other employees of the Company and its subsidiaries, all secretaries and assistants supporting such officers, directors, or employees and consultants or advisors to the Company or its subsidiaries who have or may have access to Inside Information and members of the immediate family or household of any such person. The Policy (and/or a summary thereof) is to be delivered to all new officers, directors, employees, consultants, advisors and related individuals who are within the categories of covered persons upon the commencement of their relationships with the Company, and is to be circulated to all covered personnel at least annually.
| II. | Designation of Certain Persons. |
A. Insiders Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), prohibits “short-swing” profits by all directors and executive officers of the Company, and any direct or indirect beneficial owner of 10% or more of any of the Company’s equity security of any class (collectively, the “Insiders”) and such Insiders, in addition to any beneficial owners of 5% or more of the Company’s registered securities of any class, are subject to the reporting and liability provisions of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the “Section 13(d) Individuals”). Rule 3a12-3 under the Exchange Act exempts securities registered by a Foreign Private Issuer, or FPI from Section 16 of the Exchange Act. Accordingly, Section 13(d) Individuals of an FPI are not subject to the short-swing profit limits set forth in Section 16(b), nor are they required to comply with the Section 16(a) reporting requirements.
Under Sections 13(d) and 13(g) of the Exchange Act, and the U.S. Securities and Exchange Commission (“SEC”) related rules, subject to certain exemptions, any person who after acquiring, directly or indirectly the beneficial ownership of a certain class of equity securities, becomes, either directly or indirectly, the beneficial owner of more than 5% of such class must deliver a statement to the issuer of the security and to each exchange where the security is traded. Delivery to each exchange can be satisfied by making a filing on EDGAR (as defined below). In addition, Section 13(d) Individuals must file with the SEC a statement containing certain information, as well as any additional information that the SEC may deem necessary or appropriate in the public interest or for the protection of investors. Attached hereto as Exhibit A is a separate memorandum which discusses the relevant terms of Section 13.
B. Other Persons Subject to Policy. In addition, certain employees, consultants, and advisors of the Company as described in Section I above have, or are likely to have, from time to time access to Inside Information and together with the Insiders, are subject to the Policy.
| III. | Appointment of Chief Compliance Officer. |
The Company has appointed Youichiro Haga as the Company’s Chief Compliance Officer (the “Compliance Officer”).
| IV. | Duties of the Compliance Officer. |
The Compliance Officer has been designated by the Board to handle any and all matters relating to the Company’s Insider Trading Compliance Program. Certain duties may be delegated to outside counsel with special expertise in securities issues and relevant law. The duties of the Compliance Officer shall include the following:
A. Pre-clearing all transactions involving the Company’s securities by the Insiders and those individuals having regular access to Inside Information, defined for these purposes to include all officers, directors, and employees of the Company and its subsidiaries and members of the immediate family or household of any such person, in order to determine compliance with the Policy, insider trading laws, Section 13 and Section 16 of the Exchange Act and Rule 144 promulgated under the Securities Act of 1933, as amended. Attached hereto as Exhibit C is a Pre-Clearance Checklist to assist the Compliance Officer in the performance of his or her duties hereunder.
B. Assisting in the preparation and filing of Section 13(d) reports for all Section 13(d) Individuals although the filings are their individual obligations.
C. Serving as the designated recipient at the Company of copies of reports filed with the SEC by Section 13(d) Individuals under Section 13(d) of the Exchange Act.
D. Performing periodic reviews of available materials, which may include Schedule 13D, Schedule 13G, Form 144, officers’ and directors’ questionnaires, as applicable, and reports received from the Company’s stock administrator and transfer agent, to determine trading activity by officers, directors and others who have, or may have, access to Inside Information.
E. Circulating the Policy (and/or a summary thereof) to all covered employees, including the Insiders, on an annual basis, and providing the Policy and other appropriate materials to new officers, directors and others who have, or may have, access to Inside Information.
F. Assisting the Board in implementing the Policy and Sections I and II of this memorandum.
G. Coordinating with Company counsel regarding all securities compliance matters.
H. Retaining copies of all appropriate securities reports, and maintaining records of his or her activities as Compliance Officer.
YOSHITSU CO., LTD
INSIDER TRADING POLICY
and Guidelines with Respect to Certain Transactions in the Company’s Securities
SECTION I
APPLICABILITYOF POLICY
This Policy applies to all transactions in the Company’s securities, including ordinary shares, options and warrants to purchase ordinary shares, and any other securities the Company may issue from time to time, such as preferred shares, and convertible debentures, as well as derivative securities relating to the Company’s shares, whether issued by the Company, such as exchange-traded options. It applies to all officers and directors of the Company, all other employees of the Company and its subsidiaries, all secretaries and assistants supporting such directors, officers, and employees, and consultants or advisors to the Company or its subsidiaries who have or may have access to Material Non-public Information (as defined below) regarding the Company and members of the immediate family or household of any such person. This group of people is sometimes referred to in this Policy as “Insiders.” This Policy also applies to any person who receives Material Non-public Information from any Insider.
Any person who possesses Material Non-public Information regarding the Company is an Insider for so long as such information is not publicly known.
SECTION II
DEFINITION OF MATERIAL NON-PUBLIC INFORMATION
It is not possible to define all categories of material information. However, information should be regarded as “material” if there is a reasonable likelihood that it would be considered important to an investor in making an investment decision regarding the purchase or sale of the Company’s securities. Material information may be positive or negative. “Non-public Information” is information that has not been previously disclosed to the general public and is otherwise not available to the general public.
While it may be difficult to determine whether any particular information is material, there are various categories of information that are particularly sensitive and, as a general rule, should always be considered material. Examples of such information may include:
| ● | Financial results; |
| ● | Entry into a material agreement or discussions regarding entry into a material agreement; |
| ● | Projections of future earnings or losses; |
| ● | Major contract awards, cancellations or write-offs; |
| ● | Joint ventures or commercial ventures with third parties; |
| ● | News of a pending or proposed merger or acquisition; |
| ● | News of the disposition of material assets; |
| ● | Impending bankruptcy or financial liquidity problems; |
| ● | Gain or loss of a significant line of credit; |
| ● | Significant breach of a material agreement; |
| ● | New business or services announcements of a significant nature; |
| ● | Share splits; |
| ● | New equity or debt offerings; |
| ● | Significant litigation exposure due to actual or threatened litigation; |
| ● | Changes in senior management or the Board; |
| ● | Capital investment plans; and |
| ● | Changes in dividend policy. |
All of the foregoing categories of information and any similar information should be considered “Material Non-public Information” for purposes of this Policy. If there are any questions regarding whether a particular item of information is Material Non-public Information, please consult the Compliance Officer or the Company’s legal counsel before taking any action with respect to such information.
SECTION III
CERTAIN EXCEPTIONS
For purposes of this Policy, the Company considers that the exercise of stock options under the Company’s stock option plan (but not the sale of any such shares) is exempt from this Policy, since the other party to the transaction involving only the Company itself and the price does not vary with the market but is fixed by the terms of the option agreement or the plan.
SECTION IV
STATEMENT OF POLICY
General Policy
It is the policy of the Company to prohibit the unauthorized disclosure of any non-public information acquired in the workplace and the misuse of Material Non-public Information in securities trading.
Specific Policies
1. Trading on Material Non-public Information. With certain exceptions, no officer or director of the Company, no employee of the Company or its subsidiaries and no consultant or advisor to the Company or any of its subsidiaries and no members of the immediate family or household of any such person, shall engage in any transaction involving a purchase or sale of the Company’s securities, including any offer to purchase or offer to sell, during any period commencing with the date that he or she possesses Material Non-public Information concerning the Company, and ending at the close of business on the second Trading Day (as defined below) following the date of public disclosure of that information, or at such time as such non-public information is no longer material. However, see “Permitted Trading Period” below for a full discussion of trading pursuant to a pre-established plan or by delegation.
As used herein, the term “Trading Day” shall mean a day on which national stock exchanges are open for trading.
2. Tipping. No Insider shall disclose (“tip”) Material Non-public Information to any other person (including family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates, nor shall such Insider or related person make recommendations or express opinions on the basis of Material Non-public Information as to trading in the Company’s securities.
Regulation FD (Fair Disclosure) (“Disclosure Regulation”) is an issuer disclosure rule implemented by the SEC that addresses selective disclosure. The Disclosure Regulation provides that when the Company, or person acting on its behalf, discloses Material Non-public Information to certain enumerated persons (in general, securities market professionals and holders of the Company’s securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or unintentional; for an intentional selective disclosure, the Company must make public disclosures simultaneously; for a non-intentional disclosure, the Company must make public disclosure promptly. Under the Disclosure Regulation, the required public disclosure may be made by filing or furnishing a Form 6-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
It is the Company’s policy that all communications with the press be handled through our Chief Executive Officer (CEO) or investor/public relations firm. Please refer all press, analyst or similar requests for information to the Company’s CEO and do not respond to any inquiries without prior authorization from the Company’s CEO. If the Company’s CEO is unavailable, the Company’s Chief Financial Officer will fill this role.
3. Confidentiality of Non-public Information. Non-public information relating to the Company is the property of the Company and the unauthorized disclosure of such information (including, without limitation, via email or by posting on Internet message boards or blogs, anonymously or otherwise) is strictly forbidden.
4. Duty to Report Inappropriate and Irregular Conduct. All employees, and particularly executives, managers and/or supervisors, have a responsibility for maintaining financial integrity within the Company, and being consistent with generally accepted accounting principles and both federal and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or irregularities, whether by witnessing the incident or being told of it, must report it to their immediate supervisor and to the chairman of the Company’s Audit Committee of the Board (or to the Chairman of the Board, if an Audit Committee has not been established). For a more complete understanding of this issue, employees should consult their employee manual and or seek the advice of the Company’s general counsel or outside counsel. Our outside securities counsel is Hunter Taubman Fischer & Li LLC, attention: Ying Li, Esq. at (212) 530-2206, email yli@htflawyers.com.
SECTION V
POTENTIAL CRIMINAL AND CIVIL LIABILITY
AND/OR DISCIPLINARY ACTION
1. Liability for Insider Trading. Insiders may be subject to penalties of up to $1,000,000 and up to twenty (20) years in jail for engaging in transactions in the Company’s securities at a time when they possess Material Non-public Information regarding the Company, regardless of whether such transactions were profitable. In addition, the SEC has the authority to seek a civil monetary penalty of up to three times the amount of profit gained or loss avoided by illegal insider trading. “Profit gained” or “loss avoided” generally means the difference between the purchase or sale price of the Company’s shares and its value as measured by the trading price of the shares a reasonable period after public dissemination of the non-public information.
2. Liability for Tipping. Insiders may also be liable for improper transactions by any person (commonly referred to as a “tippee”) to whom they have disclosed Material Non-public Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities. The SEC has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the Financial Industry Regulatory Authority, Inc. use sophisticated electronic surveillance techniques to monitor all trades and uncover insider trading.
3. Possible Disciplinary Actions. Individuals subject to the Policy who violate this Policy shall also be subject to disciplinary action by the Company, which may include suspension, forfeiture of perquisites and ineligibility for future participation in the Company’s equity incentive plans and/or termination of employment.
SECTION VI
PERMITTED TRADING PERIOD
1. Black-Out Period and Trading Window.
To ensure compliance with this Policy and applicable federal and state securities laws, the Company requires that all officers, directors, employees, and all members of the immediate family or household of any such person refrain from conducting any transactions involving the purchase or sale of the Company’s securities, other than during the period in any half year commencing at the close of business on the second Trading Day following the date of public disclosure of the financial results for the prior interim period or fiscal year and ending on the twenty-fifth day of the sixth month of the half year (the “Trading Window”). Notwithstanding the foregoing, persons subject to this Policy may submit a request to the Company to purchase or sell the Company’s securities outside the Trading Window on the basis that they do not possess any Material Non-public Information. The Compliance Officer shall review all such requests and may grant such requests on a case-by-case basis if he or she determines that the person making such request does not possess any Material Non-public Information at that time.
If such public disclosure occurs on a Trading Day before the markets close, then such date of disclosure shall be considered the first Trading Day following such public disclosure. For example, if such public disclosure occurs at 1:00 p.m. EST on June 10, then June 10 shall be considered the first Trading Day following such disclosure.
Please be advised that these guidelines are merely estimates. The actual trading window may be different because the Company’s interim report or annual report may be filed earlier or later. The filing date of an interim report or annual report may fall on a weekend or the Company may delay filing an annual report due to an extension. Please check with the Compliance Officer to confirm whether the trading window is open.
The safest period for trading in the Company’s securities, assuming the absence of Material Non-public Information, is generally the first ten Trading Days of the Trading Window. It is the Company’s policy that the period when the Trading Window is “closed” is a particularly sensitive period of time for transactions in the Company’s securities from the perspective of compliance with applicable securities laws. This is because the officers, directors and certain other employees are, as any half-year period progresses, increasingly likely to possess Material Non-public Information about the expected financial results for the period. The purpose of the Trading Window is to avoid any unlawful or improper transactions or even the appearance of any such transactions.
It should be noted that even during the Trading Window any person possessing Material Non-public Information concerning the Company shall not engage in any transactions involving the Company’s securities until such information has been known publicly for at least two Trading Days. The Company has adopted the policy of delaying trading for “at least two Trading Days” because the securities laws require that the public be informed effectively of previously undisclosed material information before Insiders trade in the Company’s shares. Public disclosure may occur through a widely disseminated press release or through filings, such as Form 6-K, with the SEC. Furthermore, in order for the public to be effectively informed, the public must be given time to evaluate the information disclosed by the Company. Although the amount of time necessary for the public to evaluate the information may vary depending on the complexity of the information, generally two Trading Days is sufficient.
From time to time, the Company may also require that directors, officers, selected employees, and others suspend trading because of developments known to the Company and not yet disclosed to the public. In such event, such persons may not engage in any transaction involving the purchase or sale of the Company’s securities during such period and may not disclose to others the fact of such suspension of trading.
Although the Company may from time to time require during a Trading Window that directors, officers, selected employees, and others suspend trading because of developments known to the Company and not yet disclosed to the public, each person is individually responsible at all times for compliance with the prohibitions against insider trading. Trading in the Company’s securities during the Trading Window should not be considered a “safe harbor,” and all directors, officers and other persons should use good judgment at all times.
Notwithstanding these general rules, Insiders may trade outside of the Trading Window provided that such trades are made pursuant to a pre-established plan or by delegation. These alternatives are discussed in the next section.
| 2. | Trading According to a Pre-established Plan or by Delegation. |
Trading which is not “on the basis of” Material Non-public Information may not give rise to insider trading liability. The SEC has adopted Rule 10b5-1 under which insider trading liability can be avoided if Insiders follow very specific procedures. In general, such procedures involve trading according to pre-established instructions (a “Pre-established Trade”).
Pre-established Trades must:
(a) Be documented by a contract, written plan, or formal instruction which provides that the trade take place in the future. For example, an Insider can contract to sell his or her shares on a specific date, or simply delegate such decisions to an investment manager, 401(k) plan administrator or a similar third party. This documentation must be provided to the Compliance Officer;
(b) Include in its documentation the specific amount, price and timing of the trade, or the formula for determining the amount, price and timing. For example, the Insider can buy or sell shares in a specific amount and on a specific date each month, or according to a pre-established percentage (of the Insider’s salary, for example) each time that the share price falls or rises to pre-established levels. In the case where trading decisions have been delegated, the specific amount, price and timing need not be provided; (c) Include additional representation in its documentation for Directors and Officers.
If the person who entered into the pre-established contract, written plan, or formal instruction (discussed in Section VI.2(a) above) is a director or officer of the Company, such director or officer shall include a representation certifying that, on the date of adoption of the pre-established contract, plan, or instruction, (i) he or she is not aware of any material nonpublic information about the Company or its securities, and (ii) he or she is adopting the pre-established contract, plan, or instruction in good faith and not as part of a plan or scheme to evade prohibitions on inside trading;
(d) Be implemented at a time when the Insider does not possess Material Non-public Information and Upon the Expiration of a Cooling-Off Period. As a practical matter, this means that the Insider may set up Pre-established Trades, or delegate trading discretion, only during a “Trading Window” (discussed in Section VI.1 above); provided that (i) any director or officer of the Company may not conduct a Pre-established Trade until the expiration of a cooling-off period, consisting of the later of (A) 90 days after the adoption or modification of the pre-established contract, plan, or instruction, and (B) two business days following the disclosure of the Company’s financial results in a Form 20-F or Form 6-K (but, in any event, this required cooling period is subject to a maximum of 120 days after adoption of the pre-established contract, plan, or instruction), and (ii) any other persons, who are covered by the Policy (as discussed in Section I above) and are not directors or officers, may not conduct a Pre-established Trade until the expiration of a cooling-off period that is 30 days after the adoption of the pre-established contract, plan, or instruction; and,
(e) Remain beyond the scope of the Insider’s influence after implementation. In general, the Insider must allow the Pre-established Trade to be executed without changes to the accompanying instructions, and the Insider cannot later execute a hedge transaction that modifies the effect of the Pre-established Trade. An Insider wishing to change the amount, price or timing of a Pre-established Trade, or terminate a Pre-established Trade, can do so only during a “Trading Window” (discussed in Section 1, above). If the Insider has delegated decision-making authority to a third party, the Insider cannot subsequently influence the third party in any way and such third party must not possess material non-public information at the time of any of the trades.
Prior to implementing a pre-established plan for trading, all officers and directors must receive the approval for such plan from the Compliance Officer. In addition, Insiders are generally prohibited from having more than one pre-established contract, plan, or instruction covering the same time period for open market purchase of sales of the Company’s securities, unless one of the exceptions under 17 C.F.R 240.10b5-1(c)(1)(ii)(D) is met. Furthermore, Issuers are prohibited from entering into more than one pre-established contract, plan, or instruction, which is designed to effect open-market purchase or sale of the Company’s securities as a single transaction, for any given 12-month period.
3. Pre-Clearance of Trades.
Even during a Trading Window, all officers, directors, employees, as well as members of the immediate family or household of such individuals, must comply with the Company’s “pre-clearance” process prior to trading in the Company’s securities, implementing a pre-established plan for trading, or delegating decision-making authority over the Insider’s trades. To do so, each officer and director must contact the Compliance Officer prior to initiating any of these actions. Trades executed pursuant to a properly implemented Pre-Established Trade approved by the Compliance Officer do not need to be pre-cleared. The Company may also find it necessary, from time to time, to require compliance with the pre-clearance process from certain individuals other than those mentioned above.
4. Individual Responsibility.
As Insiders, every person subject to this Policy has the individual responsibility to comply with this Policy against insider trading, regardless of whether the Company has established a Trading Window applicable to that Insider or any other Insiders of the Company. Each individual, and not necessarily the Company, is responsible for his or her own actions and will be individually responsible for the consequences of their actions. Therefore, appropriate judgment, diligence and caution should be exercised in connection with any trade in the Company’s securities. An Insider may, from time to time, have to forego a proposed transaction in the Company’s securities even if he or she planned to make the transaction before learning of the Material Non-public Information and even though the Insider believes he or she may suffer an economic loss or forego anticipated profit by waiting.
5. Exceptions to the Policy.
Any exceptions to this Policy may only be made by advance written approval of each of: (i) the CEO, (ii) the Compliance Officer and (iii) the Chairman of the Audit Committee of the Board (or the Chairman of the Board if an Audit Committee has not been established). Any such exceptions shall be immediately reported to the remaining members of the Board.
SECTION VII
APPLICABILITY OF POLICY TO INSIDE INFORMATION
REGARDING OTHER COMPANIES
This Policy and the guidelines described herein also apply to Material Non-public Information relating to other companies, including the Company’s customers, vendors or suppliers or potential acquisition targets (“business partners”), when that information is obtained in the course of employment or performance of other services on behalf of the Company. Civil and criminal penalties, as well as the termination of employment, may result from trading on inside information regarding the Company’s business partners. All employees should treat Material Non-public Information about the Company’s business partners with the same care as is required with respect to the information relating directly to the Company.
SECTION VIII
PROHIBITION AGAINST BUYING AND SELLING
COMPANY ORDINARY SHARES WITHIN A SIX-MONTH PERIOD
Insiders
Generally, purchases and sales (or sales and purchases) of Company ordinary shares occurring within any six-month period in which a mathematical profit is realized result in illegal “short-swing profits”. The prohibition against short-swing profits is found in Section 16 of the Exchange Act. Section 16 was drafted as a rather arbitrary prohibition against profitable “insider trading” in a company’s securities within any six-month period regardless of the presence or absence of Material Non-public Information that may affect the market price of those securities. Each executive officer, director and 10% or greater shareholder of the Company is subject to the prohibition against short-swing profits under Section 16. The measure of damages is the profit computed from any purchase and sale or any sale and purchase within the short-swing (i.e., six-month) period, without regard to any setoffs for losses, any first-in or first-out rules, or the identity of the ordinary shares. This approach sometimes has been called the “lowest price in, highest price out” rule and can result in a realization of “profits” for Section 16 purposes even when the Insider has suffered a net loss on his or her trades. Rule 3a12-3 under the Exchange Act exempts securities registered by an FPI from Section 16 of the Exchange Act. Accordingly, Section 13(d) Individuals of an FPI are not subject to the short-swing profit limits set forth in Section 16(b), nor are they required to comply with the Section 16(a) reporting requirements.
SECTION IX
INQUIRIES
Please direct your questions as to any of the matters discussed in this Policy to the Compliance Officer.
Exhibit A
Section 13 Memorandum
| To: | All Officers, Directors and 5% or greater Shareholders (“Insider”) |
| Re: | Overview of Section 13 Under the Exchange Act of 1934, as amended |
A. Introduction.
This Memorandum provides an overview of Section 13 of the Exchange Act of 1934, as amended (the “Exchange Act”), and the related rules promulgated by the SEC.
Each executive officer, director and 5% or greater shareholder (commonly called an “Insider”) of Yoshitsu Co., Ltd (the “Company”) is personally responsible for complying with the provisions of Section 13, and failure by an Insider to comply strictly with his or her reporting requirements will result in an obligation by the Company to publicly disclose such failure. Moreover, Congress has granted the SEC authority to seek monetary court-imposed fines on Insiders who fail to timely comply with their reporting obligations.
Under Section 13 of the Exchange Act, reports made to the SEC are filed on Schedule 13D, Schedule 13G, Form 13F, and Form 13H. A securities firm (and, in some cases, its parent company or other control persons) generally will have a Section 13 reporting obligation if the firm directly or indirectly:
| ● | beneficially owns, in the aggregate, more than 5% of a class of the voting, equity securities (the “Section 13(d) Securities”): |
| ● | registered under Section 12 of the Exchange Act, |
| ● | issued by any closed-end investment company registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), or |
| ● | issued by any insurance company that would have been required to register its securities under Section 12 of the Exchange Act but for the exemption under Section 12(g)(2)(G) thereof (see Schedules 13D and 13G: Reporting Significant Acquisition and Ownership Positions below); |
| ● | manages discretionary accounts that, in the aggregate, hold equity securities trading on a national securities exchange with an aggregate fair market value of $100 million or more; or |
| ● | manages discretionary accounts that, in the aggregate, purchase or sell any NMS securities (generally exchange-listed equity securities and standardized options) in an aggregate amount equal to or greater than (i) 2 million shares or shares with a fair market value of over $20 million during a day, or (ii) 20 million shares or shares with a fair market value of over $200 million during a calendar month. |
B. Reporting Requirements Under Section 13(d) and 13(g).
1. General. Sections 13(d) and 13(g) of the Exchange Act require any person or group of persons1 who directly or indirectly acquires or has beneficial ownership2 of more than 5% of a class of an issuer’s Section 13(d) Securities (the “5% threshold”) to report such beneficial ownership on Schedule 13D or Schedule 13G, as appropriate. Both Schedule 13D and Schedule 13G require background information about the reporting persons and the Section 13(d) Securities listed on the schedule, including the name, address, and citizenship or place of organization of each reporting person, the amount of the securities beneficially owned and aggregate beneficial ownership percentage, and whether voting and investment power is held solely by the reporting persons or shared with others. Reporting persons that must report on Schedule 13D are also required to disclose a significant amount of additional information, including certain disciplinary events, the source and amount of funds or other consideration used to purchase the Section 13(d) Securities, the purpose of the acquisition, any plans to change or influence the control of the issuer, and a list of any transactions in the securities effected in the last 60 days. A reporting person may use the less burdensome Schedule 13G if it meets certain criteria described below.
| 1 | A “group” is defined in Rule 13d-5 as “two or more persons [that] agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer.” See, for example, the persons described above in Reporting Obligations of “Control Persons”. An agreement to act together does not need to be in writing and may be inferred by the SEC or a court from the concerted actions or common objective of the group members. |
| 2 | Under Rule 13d-3, “beneficial ownership” of a security exists if a person, directly or indirectly, through any contract, arrangement, understanding, or relationship or otherwise, has or shares voting power and/or investment power over a security. “Voting power” means the power to vote or direct the voting of a security. “Investment power” means the power to dispose of or direct the disposition of a security. Under current SEC rules, a person holding securities-based swaps or other derivative contracts may be deemed to beneficially own the underlying securities if the swap or derivative contract provides the holder with voting or investment power over the underlying securities. Please contact us if you would like guidance regarding the application of Section 13 to securities-based swaps or other derivative contracts. |
In general, Schedule 13G is available to any reporting person that falls within one of the following three categories:
| ● | Exempt Investors. A reporting person is an “Exempt Investor” if the reporting person beneficially owns more than 5% of a class of an issuer’s Section 13(d) Securities at the end of a calendar year, but its acquisition of the securities is exempt under Section 13(d)(6) of the Exchange Act. For example, a person that acquired all of its Section 13(d) Securities prior to the issuer’s registration of such securities (or class of securities) under the Exchange Act, or acquired no more than 2% of the Section 13(d) Securities within a 12-month period, is considered to be an Exempt Investor and would be eligible to file reports on Schedule 13G. |
| ● | Qualified Institutions. Along with certain other institutions listed under the Exchange Act3, a reporting person that is a registered investment adviser or broker-dealer may file a Schedule 13G as a “Qualified Institution” if it (a) acquired its position in a class of an issuer’s Section 13(d) Securities in the ordinary course of its business, (b) did not acquire such securities with the purpose or effect of changing or influencing control of the issuer, nor in connection with any transaction with such purpose or effect (such purpose or effect, an “activist intent”), and (c) promptly notifies any discretionary account owner on whose behalf the firm holds more than 5% of the Section 13(d) Securities of such account owner’s potential reporting obligation. |
| ● | Passive Investors. A reporting person is a “Passive Investor” if it beneficially owns more than 5% but less than 20% of a class of an issuer’s Section 13(d) Securities and (a) the securities were not acquired or held with an activist intent, and (b) the securities were not acquired in connection with any transaction having an activist intent. There is no requirement that a Passive Investor limit its acquisition of Section 13(d) Securities to purchases made in the ordinary course of its business. In addition, a Passive Investor does not have an obligation to notify discretionary account owners on whose behalf the firm holds more than 5% of such Section 13(d) Securities of such account owner’s potential reporting obligation. |
2. Method of Filing.
(a) An Insider must file Section 13 schedules in electronic format via the Commission’s Electronic Data Gathering Analysis and Retrieval System (“EDGAR”) in accordance with EDGAR rules set forth in Regulation S-T.
| 3 | Under Rule 13d-1, a reporting person also qualifies as a Qualified Institution if it is a bank as defined in Section 3(a)(6) of the Exchange Act, an insurance company as defined in Section 3(a)(19) of the Exchange Act, an investment company registered under the Investment Company Act, or an employee benefit plan, savings association, or church plan. The term “Qualified Institution” also includes a non-U.S. institution that is the functional equivalent of any of the foregoing entities and the control persons and parent holding companies of an entity that qualifies as a Qualified Institution. |
A-
(b) Filing Date. Schedules are deemed filed with the SEC or the applicable exchange on the date recognized by EDGAR. For Section 13 purposes, filings may be made up to 10 p.m. EST. In the event that a due date falls on a weekend or SEC holiday, the filing will be deemed timely filed if it is filed on EDGAR by the next business day after such weekend or holiday. An Insider must first obtain several different identification codes from the SEC before the filings can be submitted. In order to receive such filing codes, the Insider first submits a Form ID to the SEC. The Form ID must be signed, notarized, and submitted electronically through the SEC’s Filer Management website, which can be accessed at https://www.filermanagement.edgarfiling.sec.gov. The Insider is required to retain a manually signed hard copy of all EDGAR filings (and related documents like powers of attorney) in its records available for SEC inspection for a period of five years after the date of filing.
(c) Company. In addition, the rules under Section 13 require that a copy of the applicable filing be sent to the issuer of the security at its principal executive office by registered or certified mail. A copy of Schedules filed pursuant to §§ 240.13d-1(a) and 240.13d-2(a) shall also be sent to each national securities exchange where the security is traded.
(d) Securities to be Reported. A person who is subject to Section 13 must only report as beneficially owned those securities in which he or she has a pecuniary interest. See the discussion of “beneficial ownership” below at Section D.
3. Initial Report of Ownership – Schedule 13D or 13G. Under Section 13, Insiders are required to make an initial report on Schedule 13D or Schedule 13G to the SEC of their holdings of all equity securities of the corporation (whether or not such equity securities are registered under the Exchange Act). This would include all traditional types of securities, such as ordinary shares, preferred shares and junior shares, as well as all types of derivative securities, such as warrants to purchase shares, options to purchase shares, puts and calls. Even Insiders who do not beneficially own any equity securities of the Company must file a report to that effect.
(a) Initial Filing Deadline. An Insider who is not eligible to use Schedule 13G must file a Schedule 13D within 10 days of such reporting person’s direct or indirect acquisition of beneficial ownership of more than 5% of a class of an issuer’s Section 13(d) Securities.
| ● | A reporting person that is an Exempt Investor is required to file its initial Schedule 13G within 45 days of the end of the calendar year in which the person exceeds the 5% threshold. |
| ● | A reporting person that is a Qualified Institution also is required to file its initial Schedule 13G within 45 days of the end of the calendar year in which the person exceeds the 5% threshold. Since the 5% threshold for a Qualified Institution is calculated as of the end of a calendar year, a Qualified Institution that acquires directly or indirectly more than 5% of a class of an issuer’s Section 13(d) Securities during a calendar year, but as of December 31 has reduced its interest below the 5% threshold, will not be required to file an initial Schedule 13G. However, a Qualified Institution that acquires direct or indirect beneficial ownership of more than 10% of a class of an issuer’s Section 13(d) Securities prior to the end of a calendar year must file an initial Schedule 13G within 10 days after the first month in which the person exceeds the 10% threshold. |
| ● | A reporting person that is a Passive Investor must file its initial Schedule 13G within 10 days of the date on which it exceeds the 5% threshold. |
(b) Switching from Schedule 13G to Schedule 13D. If an Insider that previously filed a Schedule 13G no longer satisfies the conditions to be an Exempt Investor, Qualified Institution, or Passive Investor, the person must switch to reporting its beneficial ownership of a class of an issuer’s Section 13(d) Securities on a Schedule 13D (assuming that the person continues to exceed the 5% threshold). This could occur in the case of (1) an Insider that changes from acquiring or holding Section 13(d) Securities for passive investment to acquiring or holding such securities with an activist intent, (2) an Insider that is a Qualified Institution that deregisters as an investment adviser pursuant to an exemption under the Investment Advisers Act of 1940, as amended, or applicable state law, or (3) an Insider that is a Passive Investor that acquires 20% or more of a class of an issuer’s Section 13(d) Securities. In each case, the Insider must file a Schedule 13D within 10 days of the event that caused it to no longer satisfy the necessary conditions (except that, if a former Qualified Institution is able to qualify as a Passive Investor, such person may simply amend its Schedule 13G within 10 days to switch its status).
A-
An Insider who is required to switch to reporting on a Schedule 13D will be subject to a “cooling off” period from the date of the event giving rise to a Schedule 13D obligation (such as the change to an activist intent or acquiring 20% of a class of an issuer’s Section 13(d) Securities) until 10 calendar days after the filing of Schedule 13D. During the “cooling off” period, the reporting person may not vote or direct the voting of the Section 13(d) Securities or acquire additional beneficial ownership of such securities. Consequently, a person should file a Schedule 13D as soon as possible once he is obligated to switch from a Schedule 13G to reduce the duration of the “cooling off” period.
The Insider will thereafter be subject to the Schedule 13D reporting requirements with respect to the Section 13(d) Securities until such time as the former Schedule 13G reporting person once again qualifies as a Qualified Institution or Passive Investor with respect to the Section 13(d) Securities or has reduced its beneficial ownership interest below the 5% threshold. However, only a reporting person that was originally eligible to file a Schedule 13G and was later required to file a Schedule 13D may switch to reporting on Schedule 13G.4
4. Changes in Ownership – Amendments to Schedule 13D or 13G.
Amendments to Schedule 13D. If there has been any material change to the information in a Schedule 13D previously filed by an Insider5, the person must promptly file an amendment to such Schedule 13D. A material change includes, without limitation, a reporting person’s acquisition or disposition of 1% or more of a class of the issuer’s Section 13(d) Securities, including as a result of an issuer’s repurchase of its securities. An acquisition or disposition of less than 1% may be considered a material change depending on the circumstances. A disposition that reduces a reporting person’s beneficial ownership interest below the 5% threshold, but is less than a 1% reduction, is not necessarily a material change that triggers an amendment to Schedule 13D. However, an amendment in such a circumstance is recommended to eliminate the reporting person’s filing obligations if the reporting person does not in the near term again expect to increase its ownership above 5%. “Promptly” is generally considered to be within 2 to 5 calendar days of the material change, depending on the facts and circumstances.
Amendments to Schedule 13G.
| ● | Annual. If a reporting person previously filed a Schedule 13G and there has been any change to the information reported in such Schedule 13G as of the end of a calendar year, then an amendment to such Schedule 13G must be filed within 45 days of the calendar year end. A reporting person is not required to make an annual amendment to Schedule 13G if there has been no change since the previously filed Schedule 13G or if the only change results from a change in the person’s ownership percentage as a result of a change in the aggregate number of Section 13(d) Securities outstanding (e.g., due to an issuer’s repurchase of its securities). |
| ● | Other than Annual (Qualified Institutions). A reporting person that previously filed a Schedule 13G as a Qualified Institution reporting beneficial ownership of less than 10% of a class of an issuer’s Section 13(d) Securities, must file an amendment to its Schedule 13G within 10 days of the end of the first month such Qualified Institution is the direct or indirect beneficial owner of more than 10% of a class of the issuer’s Section 13(d) Securities. Thereafter, within 10 days after the end of any month in which the person’s direct or indirect beneficial ownership of such securities increases or decreases by more than 5% of the class of securities (computed as of the end of the month), the person must file an amendment to Schedule 13G. |
| 4 | See Question 103.07 (September 14, 2009), Regulation 13D-G C&DIs. |
| 5 | This includes a change in the previously reported ownership percentage of a reporting person even if such change results solely from an increase or decrease in the aggregate number of outstanding securities of the issuer. |
A-
| ● | Other than Annual (Passive Investors). A reporting person that previously filed a Schedule 13G as a Passive Investor must promptly file an amendment any time it directly or indirectly acquires more than 10% of a class of an issuer’s Section 13(d) Securities. Thereafter, the reporting person must file an amendment to Schedule 13G promptly after its direct or indirect beneficial ownership of such securities increases or decreases by more than 5%. |
5. Reporting Identifying Information for Large Traders - Form 13H. Rule 13h-1 of the Exchange Act requires a Form 13H to be filed with the SEC by any individual or entity (each, a “Large Trader”) that, directly or indirectly, exercises investment discretion over one or more accounts and effects transactions in NMS Securities (as defined below) for those accounts through one or more registered broker-dealers that, in the aggregate, equal or exceed (a) 2 million shares or $20 million in fair market value during any calendar day, or (b) 20 million shares or $200 million in fair market value during any calendar month (each, an “identifying activity level”). Under Regulation NMS, an “NMS Security” is defined to include any U.S. exchange-listed equity securities and any standardized options, but does not include any exchange-listed debt securities, securities futures, or shares of open-end mutual funds that are not currently reported pursuant to an effective transaction reporting plan under the Exchange Act. A Large Trader must file an initial Form 13H promptly after effecting aggregate transactions equal to or greater than one of the identifying activity levels. The SEC has indicated that filing within 10 days will be deemed a prompt filing. Amendments to Form 13H must be filed within 45 days after the end of each full calendar year and then promptly following the end of a calendar quarter if any of the information on Form 13H becomes inaccurate.
Form 13H requires that a Large Trader, reporting for itself and for any affiliate that exercises investment discretion over NMS securities, list the broker-dealers at which the Large Trader and its affiliates have accounts and designate each broker-dealer as a “prime broker,” an “executing broker,” and/or a “clearing broker.” Form 13H filings with the SEC are confidential and exempt from disclosure under the United States Freedom of Information Act. The information is, however, subject to disclosure to Congress and other federal agencies and when ordered by a court. If a securities firm has multiple affiliates in its organization that qualify as Large Traders, Rule 13h-1 permits the Large Traders to delegate their reporting obligation to a control person that would file a consolidated Form 13H for all of the Large Traders it controls. Otherwise, each Large Trader in the organization will be required to file a separate Form 13H.
6. Reporting Obligations of Control Persons and Clients.
The Firm’s Obligations. As discussed above, a securities firm is deemed to be the beneficial owner of Section 13(d) Securities in all accounts over which it exercises voting and/or investment power. Therefore, a firm will be a reporting person if it directly or indirectly acquires or has beneficial ownership of more than 5% of a class of an issuer’s Section 13(d) Securities. Unless a securities firm has an activist intent with respect to the issuer of the Section 13(d) Securities, the firm generally will be able to report on Schedule 13G as either a Qualified Institution or as a Passive Investor.
Obligations of a Firm’s Control Persons. Any control person (as defined below) of a securities firm, by virtue of its ability to direct the voting and/or investment power exercised by the firm, may be considered an indirect beneficial owner of the Section 13(d) Securities. Consequently, the direct or indirect control persons of a securities firm may also be reporting persons with respect to a class of an issuer’s Section 13(d) Securities. The following persons are likely to be considered “control persons” of a firm:
| ● | any general partner, managing member, trustee, or controlling shareholder of the firm; and |
| ● | the direct or indirect parent company of the firm and any other person that indirectly controls the firm (e.g., a general partner, managing member, trustee, or controlling shareholder of the direct or indirect parent company). |
A-
If a securities firm (or parent company) is directly or indirectly owned by two partners, members, trustees, or shareholders, generally each such partner, member, trustee, or shareholder is deemed to be a control person. For example, if a private fund that beneficially owns more than 5% of a class of an issuer’s Section 13(d) Securities is managed by a securities firm that is a limited partnership, the general partner of which is a limited liability company that in turn is owned in roughly equal proportions by two managing members, then each of the private fund, the securities firm, the firm’s general partner, and the two managing members of the general partner likely will have an independent Section 13 reporting obligation.
Availability of Filing on Schedule 13G by Control Persons. Any direct and indirect control person of a securities firm may file a Schedule 13G as an Exempt Investor, a Qualified Institution or as a Passive Investor to the same extent as any other reporting person as described above. In order for a control person to file a Schedule 13G as a Qualified Institution, however, no more than 1% of a class of an issuer’s Section 13(d) Securities may be held (i) directly by the control person or (ii) directly or indirectly by any of its subsidiaries or affiliates that are not Qualified Institutions. For example, a direct or indirect control person of a securities firm will not qualify as a Qualified Institution if more than 1% of a class of an issuer’s Section 13(d) Securities is held by a private fund managed by the firm or other affiliate because a private fund is not among the institutions listed as a Qualified Institution under the Exchange Act.
A securities firm that has one of its control persons serving on an issuer’s board of directors may not be eligible to qualify as a Passive Investor with respect to such issuer. Even though the securities firm may not otherwise have an activist intent, the staff of the SEC has stated “the fact that officers and directors have the ability to directly or indirectly influence the management and policies of an issuer will generally render officers and directors unable to certify to the requirements” necessary to file as a Passive Investor.6
Obligations of a Firm’s Clients. If a client of a securities firm (including a private or registered fund or a separate account client) by itself beneficially owns more than 5% of a class of an issuer’s Section 13(d) Securities, the client has its own independent Section 13 reporting obligation.
Availability of Joint Filings by Reporting Persons. As discussed above, each reporting person has an independent reporting obligation under Section 13 of the Exchange Act. The direct and indirect beneficial owners of the same Section 13(d) Securities may satisfy their reporting obligations by making a joint Schedule 13D or Schedule 13G filing, provided that:
| ● | each reporting person is eligible to file on the Schedule used to make the Section 13 report (e.g., each person filing on a Schedule 13G is a Qualified Institution, Exempt Investor, or Passive Investor); |
| ● | each reporting person is responsible for the timely filing of the Schedule 13D or Schedule 13G and for the completeness and accuracy of its information in such filing7; and |
| ● | the Schedule 13D or Schedule 13G filed with the SEC (i) contains all of the required information with respect to each reporting person; (ii) is signed by each reporting person in his, her, or its individual capacity (including through a power of attorney); and (iii) has a joint filing agreement attached. |
| 6 | See Question 103.04 (September 14, 2009), Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting Compliance and Disclosure Interpretations of the Division of Corporation Finance of the SEC (the “Regulation 13D-G C&DIs”). |
| 7 | If the reporting persons are eligible to file jointly on Schedule 13G under separate categories (e.g., a private fund as a Passive Investor and its control persons as Qualified Institutions), then the reporting persons must comply with the earliest filing deadlines applicable to the group in filing any joint Schedule 13G. In the example above, the reporting persons would be required to file a Schedule 13G initially within 10 days of exceeding the 5% threshold and thereafter promptly upon any transaction triggering an amendment (i.e., the filing deadlines applicable to a Passive Investor) and not the later deadlines applicable to a Qualified Institution. |
A-
C. Determining Beneficial Ownership.
In determining whether a securities firm has crossed the 5% threshold with respect to a class of an issuer’s Section 13(d) Securities8, it must include the positions held in any proprietary accounts and the positions held in all discretionary client accounts that it manages (including any private or registered funds, accounts managed by or for principals and employees, and accounts managed for no compensation), and positions held in any accounts managed by the firm’s control persons (which may include certain officers and directors) for themselves, their spouses, and dependent children (including IRA and most trust accounts).
1. Determining Who is a Five Percent Holder. Beneficial ownership in the Section 13 context is determined by reference to Rule 13d-3, which provides that a person is the beneficial owner of securities if that person has or shares voting or disposition power with respect to such securities, or can acquire such power within 60 days through the exercise or conversion of derivative securities.
2. Determining Beneficial Ownership for Reporting and Short-Swing Profit Liability. For all Section 13 purposes other than determining who is a five percent holder, beneficial ownership means a direct or indirect pecuniary interest in the subject securities through any contract, arrangement, understanding, relationship or otherwise. “Pecuniary interest” means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities. Discussed below are several of the situations that may give rise to an indirect pecuniary interest.
(a) Family Holdings. An Insider is deemed to have an indirect pecuniary interest in securities held by members of the Insider’s immediate family sharing the same household. Immediate family includes grandparents, parents (and step-parents), spouses, siblings, children (and step-children) and grandchildren, as well as parents-in-laws, siblings-in-laws, children-in-law and all adoptive relationships. An Insider may disclaim beneficial ownership of shares held by members of his or her immediate family, but the burden of proof will be on the Insider to uphold the lack of a pecuniary interest.
(b) Partnership Holdings. Beneficial ownership of a partnership’s securities is attributed to the general partner of a limited partnership in proportion of such person’s partnership interest. Such interest is measured by the greater of the general partner’s share of partnership profits or of the general partner’s capital account (including any limited partnership interest held by the general partner).
(c) Corporate Holdings. Beneficial ownership of securities held by a corporation will not be attributed to its shareholders who are not controlling shareholders and who do not have or share investment control over the corporation’s portfolio securities.
(d) Derivative Securities. Ownership of derivative securities (warrants, share appreciation rights, convertible securities, options and the like) is treated as indirect ownership of the underlying equity securities. Acquisition of derivative securities must be reported. If the derivative securities are acquired pursuant to an employee plan, the timing of such reporting depends upon the Rule 16b-3 status of the employee plan under which the grant was made.
| 8 | In calculating the 5% test, a person is permitted to rely upon the issuer’s most recent interim or annual report for purposes of determining the amount of outstanding voting securities of the issuer, unless the person knows or has reason to believe that such information is inaccurate. |
A-
D. Delinquent Filings.
1. Correcting Late Filings. In the case of an Insider that has failed to make required amendments to its Schedule 13D or Schedule 13G in a timely manner (i.e., any material changes), the Insider must immediately amend its schedule to disclose the required information. The SEC Staff has explained that, “[r]egardless of the approach taken, the security holder must ensure that the filings contain the information that it should have disclosed in each required amendment, including the dates and details of each event that necessitated a required amendment.” However, the SEC Staff has also affirmed that, irrespective of whether a security holder takes any of these actions, a security holder may still face liability under the federal securities laws for failing to promptly file a required amendment to a Schedule 13D or Schedule 13G.
2. Potential Liability. The SEC may bring an enforcement action, in the context of a Schedule 13D or Schedule 13G filing, for violations of Section 13(d), Section 13(g), Rule 10b-5 and Section 10(b), provided that the SEC specifically shows: (1) a material misrepresentation or omission made by the defendant; (2) scienter on the part of the defendant; and (3) a connection between a misrepresentation or omission and purchase or sale of a security regarding the Rule 10b-5 claim it brings. The SEC may seek civil remedies in the form of injunctive relief, a cease-and-desist order, monetary penalties, and other forms of equitable relief (e.g., disgorgement of profits). Under Section 32 of the Exchange Act, criminal sanctions may also extend to the willful violation of Section 13(d) and Section 13(g). The U.S. Department of Justice, which prosecutes criminal offenses under the Exchange Act, may seek numerous penalties against any person that violates the Exchange Act and any rules thereunder, including a monetary fine of up to $5,000,000, imprisonment for up to 20 years and/or disgorgement.
A-
Exhibit B
Yoshitsu Co., Ltd
Insider Trading Compliance Program - Pre-Clearance Checklist
Individual Proposing to Trade:_________________________
Number of Shares covered by Proposed Trade:_________________________
Date:_________________________
| ☐ | Trading Window. Confirm that the trade will be made during the Company’s “trading window.” |
| ☐ | Section 13 Compliance. Confirm, if the individual is subject to Section 13, that the proposed trade will not give rise to any potential liability under Section 13 as a result of matched past (or intended future) transactions. Also, ensure that an amendment to Schedule 13D or 13G has been or will be completed and will be timely filed. |
| ☐ | Prohibited Trades. Confirm, if the individual is subject to Section 13, that the proposed transaction is not a “short sale,” put, call or other prohibited or strongly discouraged transaction. |
| ☐ | Rule 144 Compliance. Confirm that: |
| ☐ | Current public information requirement has been met; |
| ☐ | Shares are not restricted or, if restricted, the six-month holding period has been met; |
| ☐ | Volume limitations are not exceeded (confirm that the individual is not part of an aggregated group); |
| ☐ | The manner of sale requirements has been met; and |
| ☐ | The Notice of Form 144 Sale has been completed and filed. |
| ☐ | Rule 10b-5 Concerns. Confirm that (i) the individual has been reminded that trading is prohibited when in possession of any material information regarding the Company that has not been adequately disclosed to the public, and (ii) the Compliance Officer has discussed with the individual any information known to the individual or the Compliance Officer which might be considered material, so that the individual has made an informed judgment as to the presence of inside information. |
| Signature of Compliance Officer |
Transactions Report
| Officer or Director: |
| I. | TRANSACTIONS: |
| ☐ | No transactions. | ☐ | The transactions described below. |
| Owner of Record | Transaction Date (1) |
Transaction Code (2) |
Security (Common, Preferred) |
Number of Securities Acquired |
Number of Securities Disposed of |
Purchase/ Sale Unit Price |
|||||||
| (1) | (a) | Brokerage transactions - trade date | (d) |
Acquisitions under stock bonus plan - date of grant |
|
| (b) | Other purchases and sales - date firm commitment is made | (e) | Conversion - date of surrender of convertible security | ||
| (c) | Option and SAR exercises - date of exercise | (f) | Gifts - date on which gift is made |
| (2) | Transaction Codes: | ||||
| (P) | Pre-established Purchase or Sale | (Q) | Transfer pursuant to marital settlement | ||
| (N) | Purchase or Sale (not “Pre-established”) | (U) | Tender of shares | ||
| (G) | Gift | (W) | Acquisition or disposition of will | ||
| (M) | Option exercise (in-the-money option) | (J) | Other acquisition or disposition (specify) | ||
| II. | SECURITIES OWNERSHIP FOLLOWING TRANSACTION |
A. Company Securities Directly or Indirectly Owned (other than stock options noted below):
| Title of Security (e.g., Preferred, Common, etc.) |
Number
of Shares/Units |
Record
Holder (if not Reporting Person) |
Relationship
to Reporting Person |
|||
B. Stock Option Ownership:
| Date of Grant |
Number of Shares | Exercise Price |
Vesting Dates |
Expiration Date |
Exercises to Date (Date, No. of Shares) |
|||||
B-
Exhibit C
Yoshitsu Co., Ltd
Transaction Reminder
| TO: | [Name of Officer or Director] |
FROM:
DATED:
| RE: | Amendment to Schedule 13D filing |
This is to remind you that if there is a change in your beneficial ownership of ordinary shares or other securities of Yoshitsu Co., Ltd (the “Company”), you must file an amendment to Schedule 13D with the Securities and Exchange Commission (the “SEC”) within 2-5 business days following the transaction.
Our records indicate that on __________ (specify date) you had the transactions in the Company’s securities indicated on the attached exhibit.
1. Please advise us whether the information on the attached exhibit is correct:
| ☐ | The information is complete and correct. |
| ☐ | This information is not complete and correct. I have marked the correct information on the attached exhibit. |
| 2. | Please advise us if we should assist you by preparing the amendment to Schedule 13D for your signature and filing it for you with the SEC based upon the information you provided to us, or if you will prepare and file the amendment to Schedule 13D yourself. (Please note that we have prepared and attached for your convenience an amendment to Schedule 13D reflecting the information we have, which (if it is complete and correct), you may sign and return in the envelope enclosed.) |
| ☐ | The Company should prepare and file the amendment to Schedule 13D on my behalf after receiving my signature on the form. |
| ☐ | I shall prepare and file the amendment to Schedule 13D myself. |
| Signed | |
| Dated |
If you have any questions, contact Youichiro Haga, the Company’s Compliance Officer.
I understand that my amendment to Schedule 13D must be filed as follows: (i) on EDGAR (the SEC Electronic Data-Gathering, Analysis and Retrieval system) and (ii) one copy with the Company’s Compliance Officer.
Exhibit 12.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Mei Kanayama, certify that:
1. I have reviewed this annual report on Form 20-F of Yoshitsu Co., Ltd (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: July 16, 2024
| By: | /s/ Mei Kanayama | ||
| Name: | Mei Kanayama | ||
| Title: | Representative Director and Director (Principal Executive Officer) | ||
Exhibit 12.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Youichiro Haga, certify that:
1. I have reviewed this annual report on Form 20-F of Yoshitsu Co., Ltd (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: July 16, 2024
| By: | /s/ Youichiro Haga | ||
| Name: | Youichiro Haga | ||
| Title: | Director and Corporate Officer (Principal Accounting and Financial Officer) | ||
Exhibit 13.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Yoshitsu Co., Ltd (the “Company”) on Form 20-F for the year ended March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mei Kanayama, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 16, 2024
| By: | /s/ Mei Kanayama | ||
| Name: | Mei Kanayama | ||
| Title: | Representative Director and Director (Principal Executive Officer) | ||
Exhibit 13.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Yoshitsu Co., Ltd (the “Company”) on Form 20-F for the year ended March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Youichiro Haga, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 16, 2024
| By: | /s/ Youichiro Haga | ||
| Name: | Youichiro Haga | ||
| Title: | Director and Corporate Officer (Principal Accounting and Financial Officer) | ||
Exhibit 15.1
July 16, 2024
Yoshitsu Co., Ltd
Harumi Building, 2-5-9 Kotobashi,
Sumida-Ku, Tokyo, 130-0022
Japan
| RE: | Consent of the People’s Republic of China Counsel |
Dear Sirs/Madams,
We consent to the references to our name under the captions “Item 3. Key Information—D. Risk Factors” in the annual report of Yoshitsu Co., Ltd on Form 20-F for the year ended March 31, 2024 (the “Annual Report”), which is filed with the U.S. Securities and Exchange Commission (the “SEC”) on the date hereof. We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we fall within the category of the person whose consent is required under Section 7 of the U.S. Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours faithfully,
| /s/ Finance & Commerce Law Firm of China | |
| Finance & Commerce Law Firm of China |
Exhibit 15.2
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of Yoshitsu Co., Ltd. on Form F-3 [FILE NO. 333-274076] of our report dated July 16, 2024, with respect to our audits of the consolidated financial statements of Yoshitsu Co., Ltd. as of March 31, 2024 and 2023, and for each of the two years in the period ended March 31, 2024, which reports are included in this Annual Report on Form 20-F of Yoshitsu Co., Ltd. for the year ended March 31, 2024.
We also consent to the reference to our Firm under the caption “Experts” appearing in such Registration Statements.
/s/ Marcum Asia CPAs LLP
Marcum Asia CPAs LLP
New York, New York
July 16, 2024
Exhibit 15.3
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of Yoshitsu Co., Ltd. on Form F-3 [FILE NO. 333-274076] of our report dated August 15, 2022 with respect to our audit, before the effects of the retrospective adjustments related to the business combination under common control, as described in Note 1 and Note 10 are not presented herein, of the consolidated financial statements of Yoshitsu Co., Ltd. for the year ended March 31, 2022, which report is included in this Annual Report on Form 20-F of Yoshitsu Co., Ltd. for the year ended March 31, 2024.
We also consent to the reference to our Firm under the caption “Experts” appearing in such Registration Statements.
/s/ Friedman LLP
Friedman LLP
New York, New York
July 16, 2024
Exhibit 97.1
YOSHITSU CO., LTD.
COMPENSATION RECOVERY POLICY
Effective November 21, 2023
In accordance with Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Exchange Act Rule 10D-1, and the listing standards of the national securities exchange (the “Exchange”) on which the securities of Yoshitsu Co., Ltd. (the “Company”) are listed, the Company’s Board of Directors (the “Board”) has adopted this Compensation Recovery Policy (the “Policy”).
Capitalized terms used in the Policy are defined in Section I below. The application of the Policy to Executive Officers is not discretionary, except to the limited extent provided in Section G below, and applies without regard to whether an Executive Officer was at fault.
| A. | Persons Covered by the Policy |
The Policy is binding and enforceable against all Executive Officers. Each Executive Officer will be required to sign and return to the Company an acknowledgement that such Executive Officer will be bound by the terms and comply with the Policy. The failure to obtain such acknowledgement will have no impact on the applicability or enforceability of the Policy.
| B. | Administration of the Policy |
The Compensation Committee of the Board (the “Committee”) has full-delegated authority to administer the Policy. The Committee is authorized to interpret and construe the Policy and to make all determinations necessary, appropriate, or advisable for the administration of the Policy. In addition, if determined in the discretion of the Board, the Policy may be administered by the independent members of the Board or another committee of the Board made up of independent members of the Board, in which case all references to the Committee will be deemed to refer to such independent members of the Board or such other Board committee. All determinations of the Committee will be final and binding and will be given the maximum deference permitted by law.
| C. | Accounting Restatements Requiring Application of the Policy |
If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (an “Accounting Restatement”), then the Committee must determine the excess compensation, if any, that must be recovered (the “Excess Compensation”). The Company’s obligation to recover Excess Compensation is not dependent on if or when the restated financial statements are filed.
| D. | Compensation Covered by the Policy |
The Policy applies to all Incentive-Based Compensation Received by an Executive Officer:
| (a) | after beginning service as an Executive Officer; |
| (b) | who served as an Executive Officer at any time during the performance period for that Incentive-Based Compensation; |
| (c) | while the Company has a class of securities listed on the Exchange; |
| (d) | during the three completed fiscal years immediately preceding the Accounting Restatement Determination Date. In addition to these last three completed fiscal years, the Policy must apply to any transition period (that results from a change in the Company’s fiscal year) within or immediately following those three completed fiscal years. However, a transition period between the last day of the Company’s previous fiscal year end and the first day of the Company’s new fiscal year that comprises a period of nine to 12 months would be deemed a completed fiscal year; and |
| (e) | on or after October 2, 2023. |
| E. | Excess Compensation Subject to Recovery of the Policy |
Excess Compensation is the amount of Incentive-Based Compensation Received that exceeds the amount of Incentive-Based Compensation that otherwise would have been Received had such Incentive-Based Compensation been determined based on the restated amounts (this is referred to in the listings standards as “erroneously awarded incentive-based compensation”) and must be computed without regard to any taxes paid.
To determine the amount of Excess Compensation for Incentive-Based Compensation based on stock price or total shareholder return, where it is not subject to mathematical recalculation directly from the information in an Accounting Restatement, the amount must be based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was Received and the Company must maintain documentation of the determination of that reasonable estimate and provide the documentation to the Exchange.
| F. | Repayment of Excess Compensation |
The Company must recover Excess Compensation reasonably promptly and Executive Officers are required to repay Excess Compensation to the Company. Subject to applicable law, the Company may recover Excess Compensation by requiring the Executive Officer to repay such amount to the Company by direct payment to the Company or such other means or combination of means as the Committee determines to be appropriate (these determinations do not need to be identical as to each Executive Officer). These means may include:
| (a) | requiring reimbursement of cash Incentive-Based Compensation previously paid; |
| (b) | seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; |
| (c) | offsetting the amount to be recovered from any unpaid or future compensation to be paid by the Company or any affiliate of the Company to the Executive Officer; |
| (d) | cancelling outstanding vested or unvested equity awards; and/or |
| (e) | taking any other remedial and recovery action permitted by law, as determined by the Committee. |
The repayment of Excess Compensation must be made by an Executive Officer notwithstanding any Executive Officer’s belief (whether or not legitimate) that the Excess Compensation had been previously earned under applicable law and therefore is not subject to recovery.
In addition to its rights to recovery under the Policy, the Company or any affiliate of the Company may take any legal actions it determines appropriate to enforce an Executive Officer’s obligations to the Company or its affiliate or to discipline an Executive Officer, including (without limitation) termination of employment, institution of civil proceedings, reporting of misconduct to appropriate governmental authorities, reduction of future compensation opportunities, or change in role. The decision to take any actions described in the preceding sentence will not be subject to the approval of the Committee and can be made by the Board, any committee of the Board, or any duly authorized officer of the Company or of any applicable affiliate of the Company.
| G. | Limited Exceptions to the Policy |
The Company must recover Excess Compensation in accordance with the Policy except to the limited extent that any of the conditions set forth below are met, and the Committee determines that recovery of the Excess Compensation would be impracticable:
| (a) | The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. Before reaching this conclusion, the Company must make a reasonable attempt to recover the Excess Compensation, document the reasonable attempt(s) taken to so recover, and provide that documentation to the Exchange; |
| (b) | Recovery would violate home country law where that law was adopted prior to November 28, 2022. Before reaching this conclusion, the Company must obtain an opinion of home country counsel, acceptable to the Exchange, that recovery would result in such a violation, and must provide such opinion to the Exchange; or |
| (c) | Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the legal requirements as such; |
| H. | Other Important Information in the Policy |
Notwithstanding the terms of any of the Company’s organizational documents (including, but not limited to, the Company’s bylaws), any corporate policy or any contract (including, but not limited to, any indemnification agreement), neither the Company nor any affiliate of the Company will indemnify or provide advancement for any Executive Officer against any loss of Excess Compensation, or any claims relating to the Company’s enforcement of its rights under the Policy. Neither the Company nor any affiliate of the Company will pay for or reimburse insurance premiums for an insurance policy that covers potential recovery obligations. In the event that pursuant to the Policy the Company is required to recover Excess Compensation from an Executive Officer who is no longer an employee, the Company will be entitled to seek recovery in order to comply with applicable law, regardless of the terms of any release of claims or separation agreement such individual may have signed. Neither the Company nor any affiliate of the Company will enter into any agreement that exempts any Incentive-Based Compensation that is granted, paid, or awarded to an Executive Officer from the application of the Policy or that waives the Company’s right to recovery of any Excess Compensation, and the Policy shall supersede any such agreement (whether entered into before, on, or after the adoption of the Policy).
The Committee or Board may review and modify the Policy from time to time.
If any provision of the Policy or the application of any such provision to any Executive Officer is adjudicated to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability will not affect any other provisions of the Policy or the application of such provision to another Executive Officer, and the invalid, illegal or unenforceable provisions will be deemed amended to the minimum extent necessary to render any such provision or application enforceable.
The Policy will terminate and no longer be enforceable when the Company ceases to be a listed issuer within the meaning of Section 10D of the Exchange Act.
| I. | Definitions |
“Accounting Restatement Determination Date” means the earlier to occur of: (a) the date the Board, a committee of the Board, or one or more of the officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement; and (b) the date a court, regulator, or other legally authorized body directs the Company to prepare an Accounting Restatement.
“Executive Officer” means each individual who is or was ever designated as an “officer” by the Board in accordance with Exchange Act Rule 16a-1(f).
“Financial Reporting Measures” means measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are also Financial Reporting Measures. A Financial Reporting Measure need not be presented within the financial statements or included in a filing with the Securities and Exchange Commission.
“Incentive-Based Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure (for the avoidance of doubt, no compensation that is potentially subject to recovery under the Policy will be earned until the Company’s right to recover under the Policy has lapsed) and excludes the following: salaries, bonuses paid solely at the discretion of the Committee or Board that are not paid from a bonus pool that is determined by satisfying a Financial Reporting Measure, bonuses paid solely upon satisfying one or more subjective standards and/or completion of a specified employment period, non-equity incentive plan awards earned solely upon satisfying one or more strategic measures or operational measures, and equity awards for which the grant is not contingent upon achieving any Financial Reporting Measure performance goal and vesting is contingent solely upon completion of a specified employment period (e.g., time-based vesting equity awards) and/or attaining one or more non-Financial Reporting Measures.
“Received” means, with respect to any Incentive-based Compensation, actual or deemed receipt, and Incentive-Based Compensation is “Received” under the Policy in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive-Based Compensation award is attained, even if the payment or grant of the Incentive-Based Compensation occurs after the end of that period. For the avoidance of doubt, the Policy does not apply to Incentive-Based Compensation for which the Financial Reporting Measure is attained prior to October 2, 2023.
ACKNOWLEDGEMENT
I acknowledge that I have received and read the Compensation Recovery Policy (the “Policy”) of Yoshitsu Co., Ltd. (the “Company”).
I understand and acknowledge that the Policy applies to me, and all of my beneficiaries, heirs, executors, administrators, or other legal representatives and that the Company’s right to recovery in order to comply with applicable law will apply, regardless of the terms of any release of claims or separation agreement I have signed or will sign in the future.
I agree to be bound by and to comply with the Policy and understand that determinations of the Committee (as such term is used in the Policy) will be final and binding and will be given the maximum deference permitted by law.
I understand and agree that my current indemnification rights, whether in an individual agreement or the Company’s organizational documents, exclude the right to be indemnified for amounts required to be recovered under the Policy.
I understand that my failure to comply in all respects with the Policy is a basis for termination of my employment with the Company and any affiliate of the Company, as well as any other appropriate discipline.
I understand that neither the Policy, nor the application of the Policy to me, gives rise to a resignation for good reason (or similar concept) by me under any applicable employment agreement or arrangement.
I acknowledge that if I have questions concerning the meaning or application of the Policy, it is my responsibility to seek guidance from the Company’s legal department or my own personal advisers.
I acknowledge that neither this Acknowledgement nor the Policy is meant to constitute an employment contract.
Please review, sign, and return this form to the Company.
| [*] | |
| (print name and title) | |
| (signature) |
5