Tokyo Lifestyle Co., Ltd 20-F for FY2023
Tokyo Lifestyle Co., Ltd. (TKLF)
About this 20-F
Tokyo Lifestyle Co., Ltd filed this 20-F on July 31, 2023, covering the fiscal year ended March 31, 2023 (FY2023).
Headline figures
Fiscal year ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $169.72M
- down 27.7% from $234.75M a year earlier
- Net loss
- $8.05M
- compared with net income of $3.92M a year earlier
- Diluted EPS
- -$0.22
- compared with $0.12 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the fiscal year ended
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number:
Yoshitsu Boueki Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
+81356250668
(Address of principal executive offices)
Telephone: 81356250668
Email:
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 | ||
each representing one ordinary share | The | |||
| The |
| * | 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:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
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 ☐
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.
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).
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 | ☐ | |
| ☒ | 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:
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
TABLE OF CONTENTS
i
INTRODUCTION
In this annual report on Form 20-F, unless the context otherwise requires, references to:
| ● | “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, 2023, 2022, and 2021. 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 | 2023 | 2022 | 2021 | |||||||||
| At the end of the year - ¥ | ¥1=$0.007519 | ¥1=$0.008208 | ¥1=$0.009034 | |||||||||
| Average rate for the year - ¥ | ¥1=$0.007402 | ¥1=$0.008908 | ¥1=$0.009434 | |||||||||
ii
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; |
1
| ● | 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, 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 repaid all of our outstanding $40.3 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 of or all of their investment.
2
Our substantial indebtedness could materially and adversely affect our business, financial condition, results of operations, and cash flows.
As of March 31, 2023, we had approximately $60.6 million in short-term borrowings and $13.1 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 has materially and adversely affected our business operations and operating results. 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%. 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, with the Japanese government allowing travel in and out of the country, subject to customary vaccination records and basic health precautionary measures. There is continuing significant uncertainty regarding the extent to which and how long the COVID-19 pandemic and related government directives, actions, and economic relief efforts will disrupt the Japanese economy. The extent to which the COVID-19 pandemic impacts our operational and financial performance in fiscal year 2023 will depend on future developments, including the duration of the COVID-19 pandemic, the acceptance and effectiveness of vaccines, and the impact of COVID-19 and related containment and mitigation measures on our customers and employees, all of which are highly uncertain, unpredictable, and outside our control.
3
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, 2021, we added a franchise store in Canada, but we did not open any new directly-operated physical store and closed a franchise store in the U.S. and a franchise store in Hong Kong due to the impact of the COVID-19 pandemic. 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 developed 16 new wholesale customers. During the period from April 1, 2022 to the date of this annual report, we opened two new directly-operated physical stores in Japan and six new directly-operated physical stores in Hong Kong, opened two new overseas online stores and two new domestic online stores, added one franchise store, and developed 66 new wholesale customers; however, during the same period, we closed three directly-operated physical stores in Japan and four directly-operated physical stores in Hong Kong, transited four directly-operated physical stores in Japan into franchise stores, and transited 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:
| ● | epidemics or pandemics, such as the COVID-19 pandemic; | |
| ● | 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.
4
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.
5
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 eight franchise stores in the U.S., one franchisee operating one franchise store in the U.K., and one franchisee operating one franchise store 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 three 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 eight franchise stores in the U.S., one franchisee operating one franchise store in the U.K., and one franchisee operating one franchise store 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.
6
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.
7
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, 2023, 2022, and 2021, our product sales attributable to these brands accounted for approximately 19.87%, 22.89%, and 65.35% 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, 2023, three suppliers accounted for approximately 18.2%, 16.3%, and 12.0% of our total purchases. During the fiscal year ended March 31, 2022, three suppliers accounted for approximately 30.1%, 19.7%, and 17.9% of our total purchases. During the fiscal year ended March 31, 2021, two suppliers accounted for approximately 34.9% and 28.2% 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 2023 to support and replenish inventory at our physical stores and franchise stores in Malaysia. See “Item 4. Information on the Company—B. Business Overview—Our Growth Strategies—Enhancing Our Technology Platform and Infrastructure.” 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 37,700 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.
8
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 $1,367,485, $3,154,574, and $4,080,568 in promotion and advertising expenses during the fiscal years ended March 31, 2023, 2022, and 2021, 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.
9
Sales to the China market represented approximately 51.1%, 84.2%, and 77.4% of our revenue for the fiscal years ended March 31, 2023, 2022, and 2021, 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, 2023, 2022, and 2021, sales to the China market accounted for approximately 51.1%, 84.2%, and 77.4% 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. 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.
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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.
11
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., 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.
12
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.
13
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.
14
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.”
15
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, 2023, 2022, and 2021, 57.5%, 90.6%, and 81.0%, 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.
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, 36,250,054 of our Ordinary Shares are issued and outstanding. Among these shares, 11,595,214 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 31, 2023, the closing price of the ADSs has ranged from $0.94 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.
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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 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, 2023, 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) deficiencies in our information technology (“IT”) general controls regarding access and password management, IT operations, and cybersecurity of our financial system and key operation systems. 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.
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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 |
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| ● | 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.
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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.
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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.
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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. 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.
The ADSs are listed on the Nasdaq Capital Market. We cannot assure you that the ADSs will continue to be listed on Nasdaq. In order to maintain our listing on Nasdaq, we will be 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. We may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy Nasdaq criteria for maintaining our listing, the ADSs could be subject to 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.
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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 2024 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.”
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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 the Nasdaq Capital Market 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 June 30, 2023, we entered into two share transfer agreements (the “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 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.
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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.
| (1) | Represents 14,775,050 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 2,063,300 Ordinary Shares held by Prometheus Capital Fund I, L.P., whose sole general partner is Prometheus Capital GP Limited, as of the date of this annual report. |
| (5) | Represents 600,054 Ordinary Shares held by a shareholder of Yoshitsu, which holds 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 37,700 SKUs of beauty products, including cosmetics, skin care, fragrance, and body care, among others, 24,500 SKUs of health products, including over-the-counter (“OTC”) drugs, nutritional supplements, and medical supplies and devices, 36,800 SKUs of sundry products, including home goods, and 29,500 SKUs of other products, including food and alcoholic beverages.
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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 and opened five new online stores, added a franchise store in Canada, and developed 30 new wholesale customers during the fiscal year ended March 31, 2021; 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 developed 16 new wholesale customers during the fiscal year ended March 31, 2022; and during the period from April 1, 2022 to the date of this report, we opened two new directly-operated physical store in Japan and six new directly-operated physical stores in Hong Kong, opened two new overseas online stores and two new domestic online stores, added one franchise stores, and developed 66 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, 2023, 2022, and 2021, our physical stores served approximately 542,276, 431,484, and 537,537 customers, respectively, and orders placed by our repeat customers accounted for approximately 40%, 47%, and 48% of total orders in our physical stores, respectively. During the same fiscal years, our online stores served approximately 615,571, 2,091,231, and 2,203,000 customers, respectively, and orders placed by our repeat customers accounted for approximately 54%, 39%, and 26% of total orders in our online stores, respectively. During the same fiscal years, our franchise stores served approximately 154,344, 259,746, and 204,500 customers, and orders placed by our repeat customers accounted for approximately 54%, 51%, and 45% of total orders in our franchise stores, respectively.
Since our inception, we have established long-term relationships with over 119 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 recent resurgence of the COVID-19 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 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%.
Since our inception, we have financed our operations primarily through bank loans. As of the date of this annual report, we have approximately $60.6 million in short-term borrowings outstanding, with a maturity date in September 2023, and approximately $13.1 million in long-term borrowings outstanding, with maturity dates ranging from June 2023 to December 2053. 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, 2023, 2022, and 2021, sales to the China market accounted for approximately 51.1%, 84.2%, and 77.4% 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 approximately 51.1%, 84.2%, and 77.4% of our revenue for the fiscal years ended March 31, 2023, 2022, and 2021, 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 and Hong Kong, and adding new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., 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.”
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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 37,700 SKUs of beauty products, 24,500 SKUs of health products, 36,800 SKUs of sundry products, and 29,500 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 feedbacks, 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%, 12%, and 81% of our total revenue for the fiscal year ended March 31, 2023, respectively,6%, 52%, and 42% of our total revenue for the fiscal year ended March 31, 2022, respectively, 14%, 50%, and 37% of our total revenue for the fiscal year ended March 31, 2021, respectively.
We operate our seven physical stores in Japan and six physical stores in Hong Kong 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 13 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 10 as of the date of this annual report, and the number of our wholesale customers increased from 28 as of March 31, 2019 to 128 as of the date of this annual report. However, due to the negative impact of the recent resurgence of the COVID-19 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. 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.
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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 11 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 Japan, with a focus on suburban areas around Tokyo, and expect the expenses related to opening these stores to be approximately ¥350 million to ¥500 million ($2.9 million to $4.1 million); 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., Malaysia, 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.”
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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 anticipate upgrading and improving 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 37,700 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 24,500 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 |
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We also currently have approximately 36,800 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 29,500 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, 2023, 2022, and 2021 by product categories:
| Fiscal Year Ended March 31, 2023 | Fiscal Year Ended March 31, 2022 | Fiscal Year Ended March 31, 2021 | ||||||||||||||||||||||
| Product Category | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Beauty products | $ | 128,781,665 | 75.9 | % | $ | 154,741,555 | 65.9 | % | $ | 141,921,837 | 63.1 | % | ||||||||||||
| Health products | 18,701,204 | 11.0 | % | 19,374,420 | 8.3 | % | 39,818,777 | 17.7 | % | |||||||||||||||
| Sundry products | 11,033,924 | 6.5 | % | 50,513,824 | 21.5 | % | 32,920,998 | 14.6 | % | |||||||||||||||
| Other products | 11,207,553 | 6.6 | % | 10,122,781 | 4.3 | % | 10,096,944 | 4.5 | % | |||||||||||||||
| Total | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | $ | 224,758,556 | 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 effort to maintain and improve an efficient cost structure and create incentives for our suppliers to provide us with competitive prices.
We provide customers 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 and Hong Kong, (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.
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The following tables illustrate our revenue for the fiscal years ended March 31, 2023, 2022, and 2021 by geographic areas and distribution channels.
| Fiscal Year Ended March 31, 2023 | Fiscal Year Ended March 31, 2022 | Fiscal Year Ended March 31, 2021 | ||||||||||||||||||||||
| Geographic Area | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Japan domestic market | $ | 72,190,276 | 42.5 | % | $ | 22,022,276 | 9.4 | % | $ | 42,728,171 | 19.0 | % | ||||||||||||
| China market | 86,702,023 | 51.1 | % | 197,596,778 | 84.2 | % | 173,918,701 | 77.4 | % | |||||||||||||||
| Other overseas markets | 10,832,047 | 6.4 | % | 15,133,526 | 6.4 | % | 8,111,684 | 3.6 | % | |||||||||||||||
| Total | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | $ | 224,758,556 | 100.0 | % | ||||||||||||
| Fiscal Year Ended March 31, 2023 | Fiscal Year Ended March 31, 2022 | Fiscal Year Ended March 31, 2021 | ||||||||||||||||||||||
| Distribution Channel | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Directly-operated physical stores | $ | 11,606,180 | 6.8 | % | $ | 12,965,904 | 5.5 | % | $ | 30,645,214 | 13.6 | % | ||||||||||||
| Online stores | 20,700,011 | 12.2 | % | 122,150,105 | 52.0 | % | 111,435,341 | 49.6 | % | |||||||||||||||
| Franchise stores and wholesale customers | 137,418,155 | 81.0 | % | 99,636,571 | 42.5 | % | 82,678,001 | 36.8 | % | |||||||||||||||
| Total | $ | 169,724,346 | 100.0 | % | $ | 234,752,580 | 100.0 | % | $ | 224,758,556 | 100.0 | % | ||||||||||||
Physical Stores
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We currently directly operate seven physical stores in five cities in Japan and six physical stores in Hong Kong under the names “Tokyo Lifestyle” and “東京生活館.” 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 of 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 | Kameido Store | Tokyo | 1,600 | August 1, 2015 | |||
| 3 | Koshigaya Ryutsu Danchi Store | Koshigaya | 1732 | October 1, 2021 | |||
| 4 | Yokohama Chinatown Store | Yokohama | 2,085 | November 11, 2015 | |||
| 5 | Shinbashi Store | Tokyo | 3,756 | June 28, 2019 | |||
| 6 | Nishi Kasai Store | Tokyo | 3,087 | June 6, 2022 | |||
| 7 | Nishi Kawaguchi Store | Koshigaya | 4,226 | January 18,2023 | |||
| 8 | Lohas Park Store | Hong Kong | 815 | September 30, 2021 | |||
| 9 | Telford Plaza Store | Hong Kong | 909 | November 10, 2021 | |||
| 10 | Nina Mall Store | Hong Kong | 1163 | August 30, 2022 | |||
| 11 | Citylink Plaza Store | Hong Kong | 688 | October 20, 2022 | |||
| 12 | Facesss Store | Hong Kong | 809 | January 19,2023 | |||
| 13 | The Wai Store | Hong Kong | 2081 | July 22, 2023 |
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, Mr. Uehara. Mr. Uehara reports to our representative director, Mr. Mei Kanayama.
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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. Due to the COVID-19 pandemic, almost all of our physical stores were temporarily closed between late April 2021 and the end of May 2021. After resuming their business in June 2021, most of our physical stores are open for eight to 11 hours, six days a week.
Online Stores
We sell our products through 17 domestic online stores on our websites and on various e-commerce marketplaces, including Rakuten, Yahoo! Japan, Amazon Japan, and Wowma! in Japan, and nine overseas online stores on e-commerce marketplaces, including Tmall Global, JD Worldwide, and Pinduoduo in China, and Coupang in Korea.
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 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 75,600 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. |
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| ● | 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 eight franchise stores in the U.S., one franchise store in the U.K., and one franchise store in Japan. The following table summarizes the information of our franchise stores:
| City | Number
of Franchise Stores |
Total
Size (Square Feet) |
Opened | |||
| Los Angeles | 3 | 4,800 | August 2016, April 2017, and August 2017 | |||
| Las Vegas | 1 | 3,000 | July 2019 | |||
| Houston | 1 | 1,884 | July 2018 | |||
| Seattle | 1 | 1,200 | December 2017 | |||
| New York | 1 | 3,000 | February 2019 | |||
| Boston | 1 | 2,185 | February 2020 | |||
| London | 1 | 495 | May 2021 | |||
| Tokyo | 1 | 1,219 | July 29, 2023 |
In addition, as of the date of this annual report, we have approximately 128 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 eight U.S. franchise stores, one franchisee operating one U.K. franchise store, and one franchisee operating one Japan franchise store. 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.
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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 Tik Tok 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 51 Merchant Customers and employed one KOL. The revenue generated from the KOL advertising services was $1,889,367 and $985,758, representing 1.1% and 0.4% of our total revenue during the fiscal years ended March 31, 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, 2023, our directly-operated physical stores had approximately 44 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.
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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, 2023, 2022, and 2021, approximately 477,844, 387,700, and 237,000 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.
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We are developing a mobile shopping app named “TOKYOLIFESTYLE” (the “App”) on the App Store and Google Play. 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 experience. 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, 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. During the fiscal year ended March 31, 2021, we directly sourced from 52 cosmetics companies and distributors and eight pharmaceutical companies and distributors. 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. For the fiscal year ended March 31, 2021, two suppliers accounted for approximately 34.9% and 28.2% 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 license 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 feedbacks 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.
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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 of 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.
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Cash Control
Approximately 60% 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 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 20% to 25% of the sales in our physical stores in Hong Kong are made in cash. We check and make 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.
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 135, 124, and 76 full-time employees as of March 31, 2023, 2022, and 2021, respectively. The following table sets forth the number of our full-time employees categorized by areas of operations as of March 31, 2023:
| Function: | Number | |||
| Management | 48 | |||
| Store | 44 | |||
| Sales | 43 | |||
| Total | 135 | |||
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.
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In addition to our full-time employees, we had 112, 102, and 73 independent contractors as of March 31, 2023, 2022, and 2021, 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 22,504 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 19,807square feet of physical and franchise store space in Koshigaya, Saitama, Yokohama, and Hakuba, and six parking lots in Koshigaya, Saitama, and Tokyo, and lease an aggregate of approximately 9,255 square feet of physical store and warehouse space in Hong Kong. A summary of our leased properties as of the date of this annual report is shown below:
| Location | Space |
Use | Lease Term (years) |
|||||||
| Tokyo | 22,504 | Three physical stores, one franchise store, offices, residence, and three parking lots | 1 to 15 | |||||||
| Koshigaya | 5,958 | Two Physical stores and two parking lots | 3 | |||||||
| Saitama | 4,702 | Physical store and parking lot | 5 | |||||||
| Yokohama | 2,085 | Physical store | 10 | |||||||
| Hakuba | 7,062 | Franchise store | 3 | |||||||
| Hong Kong | 9,255 | Six physical stores and warehouse | 1 to 3 | |||||||
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 lease 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. Regardless of the above, we may terminate the lease at any time by providing Seihinkokusai with three-month prior notice or payment of three-month rent.
We also lease 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 December 31, 2023. The lease will terminate upon expiration of the lease period if Seihinkokusai notifies us in writing of the termination of the lease between six months and one year prior to the expiration of the lease (the “Notice Period”). If Seihinkokusai notifies us of the termination of the lease after the Notice Period has expired, the lease will be terminated after six months from the date of the notice. Regardless of the above, we may terminate the lease at any time by providing Seihinkokusai with three-month prior notice or payment of three-month rent.
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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, 2023, we owned 15 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 |
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| 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 |
In addition, as of March 31, 2023, 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, 2023, we also had three pending trademark registration and owned 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, 2023 | |||||||
| 5 |  |
Hong Kong | Word | Class 3, 5, 35, and 44 | 304300073 | April 24, 2018 | October 11, 2027 |
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| No. | Trademark | Country/Region | Type of Mark |
List
of Goods and Services |
Registration
Number |
Registration Date |
Expiration Date | |||||||
| 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 |
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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.
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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.
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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.
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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.
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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.”
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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, as well as sundry products and other products. We have experienced growth since our inception, resulting from 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. Revenue is impacted by competition, current economic conditions, pricing, inflation, product mix and availability, promotional and competitive activities, and 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 of 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 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.
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 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 of our overall pricing strategy for different categories. We typically evaluate the profitability of our products every three months.
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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 years which have resulted in higher operating expenses. Our operating expenses are expected to continue increasing in the future as we invest to open new stores both in Japan and overseas, expend 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. Our professional fees for legal, audit, and advisory services have increased since we became a public company upon the completion of our IPO. 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 financial expenses, interest expenses, other income, 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, 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. |
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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 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 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.
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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.
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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.
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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 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 | )% | |||||||||||
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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.
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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.
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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.
Comparison of Results of Operations for the Fiscal Years Ended March 31, 2022 and 2021
The following table summarizes the results of our operations during the fiscal years ended March 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such fiscal years.
| For the fiscal years ended March 31, | Variance | |||||||||||||||
| 2022(1) | 2021(1) | Amount | % | |||||||||||||
| REVENUE | $ | 234,752,580 | $ | 224,758,556 | $ | 9,994,024 | 4.4 | % | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Merchandise costs | 191,040,547 | 181,501,073 | 9,539,474 | 5.3 | % | |||||||||||
| Selling, general and administrative expenses | 36,422,772 | 32,540,922 | 3,881,850 | 11.9 | % | |||||||||||
| Total operating expenses | 227,463,319 | 214,041,995 | 13,421,324 | 6.3 | % | |||||||||||
| INCOME FROM OPERATIONS | 7,289,261 | 10,716,561 | (3,427,300 | ) | (32.0 | )% | ||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Interest expense, net | (2,785,766 | ) | (2,187,400 | ) | (598,366 | ) | 27.4 | % | ||||||||
| Other income, net | 598,206 | 341,880 | 256,326 | 75.0 | % | |||||||||||
| Gain (loss) from foreign currency exchange | 833,547 | (582,424 | ) | 1,415,971 | (243.1 | )% | ||||||||||
| Change in fair value of representative's warrants liability | 369,404 | - | 369,404 | 100.0 | % | |||||||||||
| Loss from equity method investment | (145,828 | ) | (29,242 | ) | (116,586 | ) | 398.7 | % | ||||||||
| Total other expenses, net | (1,130,437 | ) | (2,457,186 | ) | 1,326,749 | (54.0 | )% | |||||||||
| INCOME BEFORE INCOME TAX PROVISION | 6,158,824 | 8,259,375 | (2,100,551 | ) | (25.4 | )% | ||||||||||
| INCOME TAX PROVISION | 2,234,676 | 3,307,048 | (1,072,372 | ) | (32.4 | )% | ||||||||||
| NET INCOME | $ | 3,924,148 | $ | 4,952,327 | $ | (1,028,179 | ) | (20.8 | )% | |||||||
| (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 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 increased by $9,994,024, or 4.4%, from $224,758,556 for the fiscal year ended March 31, 2021 to $234,752,580 for the fiscal year ended March 31, 2022. The increase in our revenue was primarily due to increased revenue from franchise stores and wholesale customers and online stores and services, which was partially offset by the decreased revenue from directly-operated physical stores. Revenue generated from companies in Japan accounted for 87.9% and 88.4% of our total revenue for the fiscal years ended March 31, 2022 and 2021, respectively. Revenue generated from companies in Hong Kong and other accounted for 12.1% and 11.6% of our total revenue for the fiscal years ended March 31, 2022 and 2021, respectively.
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The following table sets forth the breakdown of our revenue for the fiscal years ended March 31, 2022 and 2021, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2022 | % | 2021 | % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 12,965,904 | 5.6 | % | $ | 30,645,215 | 13.6 | % | $ | (17,679,311 | ) | (57.7 | )% | |||||||||||
| Online stores and services | 122,150,105 | 52.0 | % | 111,435,341 | 49.6 | % | 10,714,764 | 9.6 | % | |||||||||||||||
| Franchise stores and wholesale customers | 99,636,571 | 42.4 | % | 82,678,000 | 36.8 | % | 16,958,571 | 20.5 | % | |||||||||||||||
| Total Revenue | $ | 234,752,580 | 100.0 | % | $ | 224,758,556 | 100.0 | % | $ | 9,994,024 | 4.4 | % | ||||||||||||
Our directly-operated physical stores sales accounted for 5.6% and 13.6% of our total revenue for the fiscal years ended March 31, 2022 and 2021, respectively. Revenue from directly-operated physical stores decreased by $17,679,311, or 57.7%, to $12,965,904 for the fiscal year ended March 31, 2022, from $30,645,215 for the fiscal year ended March 31, 2021. The decrease was mainly due to the decreased revenue generated from directly-operated physical stores in Japan by $18,666,100, or 63.3%, from $29,502,329 for the fiscal year ended March 31, 2021 to $10,836,229 for the fiscal year ended March 31, 2022. The decrease in revenue from directly-operated physical stores in Japan was mainly attributable to the state of emergency called by the Japanese government in April 2021 because of the COVID-19 pandemic. Due to this state of emergency, almost all of our physical stores were temporarily closed during the period between late April 2021 and the end of May 2021. After our physical stores resumed their business in June 2021, most of our physical stores were still closed on Saturdays or Sundays, and the opening hours were reduced by two to four hours to eight to nine hours every day. From July onwards, most of our physical stores resumed their normal business with only reduced working hours by one to three hours every day; however, due to the restriction imposed by the local government and a lack of international tourists, our business was still negatively affected. Hence, our revenue from directly-operated physical stores in Japan decreased significantly during the fiscal year ended March 31, 2022. The decrease was partially offset by the increased revenue generated from our directly-operated physical stores in Hong Kong by $986,789, or 86.3%, from $1,142,886 for the fiscal year ended March 31, 2021 to $2,129,675 for the fiscal year ended March 31, 2022. The increase in revenue from directly-operated physical stores was mainly attributable to opening of three new physical stores during the fiscal year ended March 31, 2022.
Our online stores and services accounted for 52.0% and 49.6% of our total revenue for the fiscal years ended March 31, 2022 and 2021, respectively. Revenue from online stores and services increased by $10,714,764, or 9.6%, to $122,150,105 for the fiscal year ended March 31, 2022, from $111,435,341 for the fiscal year ended March 31, 2021. The increase was mainly due to the increase in online sales revenue generated by companies in Japan during the fiscal year ended March 31, 2022 by $9,729,006, or 8.7%, from $111,435,341 for the fiscal year ended March 31, 2021 to $121,164,347 for the fiscal year ended March 31, 2022. Due to the growing popularity of the online shopping, the e-commence industry has been growing rapidly in recent years. In order to seize the opportunities, we expanded our online store network by opening new stores on multiple popular and reputable third-party e-commerce marketplaces in overseas regions as well as improving the efficiency of our supply chain and storage and inventory management. Our revenue from overseas online sales increased during the first three quarters of the fiscal year ended March 31, 2022; however, it deceased during the last quarter of the fiscal year ended March 31, 2022, due to the resurgence of COVID-19 in China. During the last quarter of the fiscal year ended March 31, 2022, shipments and customer clearance for overseas exports and imports were delayed due to a shipping container shortage and the stricter border control protocols, and 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 many provinces across China. Therefore, our revenue from overseas online sales increased by $11,750,549 during the fiscal year ended March 31, 2022, as compared to the same period last year. The increase was partially offset by the decreased revenue from Japanese domestic online sales of $2,021,543, which was mainly due to the closing of three unprofitable domestic online stores. The increase was also due to the increased revenue from online stores and services generated by companies in Hong Kong and other by $985,758, or 100.0%, from $nil for the fiscal year ended March 31, 2021 to $985,758 for the fiscal year ended March 31, 2022. The increase was mainly due to increased revenue from KOLs as we entered into the advertising business of KOLs due to the rapid growth of live streaming e-commerce market in the fiscal year ended March 31, 2022.
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Our franchise stores and wholesale customers sales accounted for 42.4% and 36.8% of our total revenue for the fiscal years ended March 31, 2022 and 2021, respectively. Revenue from franchise stores and wholesale customers increased by $16,958,571, or 20.5%, to $99,636,571 for the fiscal year ended March 31, 2022, from $82,678,000 for the fiscal year ended March 31, 2021. The increase was mainly due to the increase in revenue from franchise stores and wholesale customers generated by companies in Japan during the fiscal year ended March 31, 2022 by $16,578,322, or 28.7%, from $57,810,643 for the fiscal year ended March 31, 2021 to $74,388,965 for the fiscal year ended March 31, 2022. With the improvement of our supply chain and storage and logistic capacity, we added two new franchise stores and developed more overseas wholesale customers, and our sales to overseas wholesale customers on a per customer basis increased during the fiscal year ended March 31, 2022. Although our overseas franchise stores and wholesale customers sales during the last quarter of the fiscal year ended March 31, 2022 declined due to the shipping container shortage caused by the COVID-19 pandemic and soaring shipping charges, our sales to overseas franchise stores and wholesale customers during the fiscal year ended March 31, 2022 increased by $16,922,873 as compared to last year. The increase was partially offset by a slight decrease of $344,551 in our Japanese domestic wholesale.
Cost of Revenue
Our overall cost of revenue increased by $9,539,474, or 5.3%, from $181,501,073 for the fiscal year ended March 31, 2021 to $191,040,547 for the fiscal year ended March 31, 2022. The increase in our cost of revenue was primarily due to increased cost of revenue from franchise stores and wholesale customers and online stores and services, which was partially offset by the decreased cost of revenue from directly-operated physical stores.
The following table sets forth the breakdown of our cost of revenue for the fiscal years ended March 31, 2022 and 2021, respectively:
| For the Fiscal Years Ended March 31, | Variance | |||||||||||||||||||||||
| 2022 | % | 2021 | % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 11,261,970 | 5.9 | % | $ | 25,570,591 | 14.1 | % | $ | (14,308,621 | ) | (56.0 | )% | |||||||||||
| Online stores and services | 98,589,103 | 51.6 | % | 88,899,645 | 49.0 | % | 9,689,458 | 10.9 | % | |||||||||||||||
| Franchise stores and wholesale customers | 81,189,474 | 42.5 | % | 67,030,837 | 36.9 | % | 14,158,637 | 21.1 | % | |||||||||||||||
| Total Cost of Revenue | $ | 191,040,547 | 100.0 | % | $ | 181,501,073 | 100.0 | % | $ | 9,539,474 | 5.3 | % | ||||||||||||
Cost of revenue from directly-operated physical stores decreased by $14,308,621, or 56.0%, from $25,570,591 for the fiscal year ended March 31, 2021 to $11,261,970 for the fiscal year ended March 31, 2022. The percentage decrease in cost of revenue was less than the percentage in revenue, as discussed in greater details below.
Cost of revenue from online stores and services increased by $9,689,458, or 10.9%, from $88,899,645 for the fiscal year ended March 31, 2021 to $98,589,103 for the fiscal year ended March 31, 2022. The percentage increase in cost of revenue was largely in line with the percentage increase in revenue.
Cost of revenue from franchise stores and wholesale customers increased by $14,158,637, or 21.1%, from $67,030,837 for the fiscal year ended March 31, 2021 to $81,189,474 for the fiscal year ended March 31, 2022. 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 increased slightly by $454,550 or 1.1%, from $43,257,483 for the fiscal year ended March 31, 2021 to $43,712,033 for the fiscal year ended March 31, 2022. The increase was mainly attributable to the increased gross profit from franchise stores and wholesale customers and online stores and services, which was partially offset by the decreased gross profit from directly-operated physical stores. Our overall gross margin, remained relatively stable with a slight decrease by 0.6 percentage points from 19.2% for the fiscal year ended March 31, 2021 to 18.6% for the fiscal year ended March 31, 2022.
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The following table sets forth the breakdown of our gross profit for the fiscal years ended March 31, 2022 and 2021, respectively:
| For the fiscal years ended March 31, | Variance | |||||||||||||||||||||||
| 2022 | Margin % | 2021 | Margin % | Amount | % | |||||||||||||||||||
| Directly-operated physical stores | $ | 1,703,934 | 13.1 | % | $ | 5,074,624 | 16.6 | % | $ | (3,370,690 | ) | (66.4 | )% | |||||||||||
| Online stores and services | 23,561,002 | 19.3 | % | 22,535,696 | 20.2 | % | 1,025,306 | 4.5 | % | |||||||||||||||
| Franchise stores and wholesale customers | 18,447,097 | 18.5 | % | 15,647,163 | 18.9 | % | 2,799,934 | 17.9 | % | |||||||||||||||
| Total Gross Margin and Margin % | $ | 43,712,033 | 18.6 | % | $ | 43,257,483 | 19.2 | % | $ | 454,550 | 1.1 | % | ||||||||||||
The gross profit of directly-operated physical stores decreased by $3,370,690, or 66.4%, from $5,074,624 for the fiscal year ended March 31, 2021 to $1,703,934 for the fiscal year ended March 31, 2022, which was mainly due to the decrease in revenue. The gross margin from directly-operated physical stores decreased by 3.5 percentage points from 16.6% for the fiscal year ended March 31, 2021 to 13.1% for the fiscal year ended March 31, 2022. The decrease in gross profit margin was mainly attributable to increased promotion activities and price discounts given to our customers by our directly-operated physical stores in Japan, so that we could attract more customers to visit our physical stores during the fiscal year ended March 31, 2022, when the number of customer visits was adversely affected by the COVID-19 pandemic.
The gross profit of online stores and services increased by $1,025,306, or 4.5%, from $22,535,696 for the fiscal year ended March 31, 2021 to $23,561,002 for the fiscal year ended March 31, 2022, which was in line with the increase in revenue from online stores and services. The gross margin from online stores and services remained relatively stable with a slight decreased by 0.9 percentage points from 20.2% for the fiscal year ended March 31, 2021 to 19.3% for the fiscal year ended March 31, 2022.
The gross profit of franchise stores and wholesale customers increased by $2,799,934, or 17.9%, from $15,647,163 for the fiscal year ended March 31, 2021 to $18,447,097 for the fiscal year ended March 31, 2022, which was in line with the increase in revenue from franchise stores and wholesale customers. The gross margin from franchise stores and wholesale customers remained stable with a slight decreased by 0.4 percentage points from 18.9% for the fiscal year ended March 31, 2021 to 18.5% for the fiscal year ended March 31, 2022.
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 15.5% and 14.5% of our revenue for the fiscal years ended March 31, 2022 and 2021, respectively.
| For the fiscal years ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Shipping expense | $ | 13,609,683 | 37.3 | % | $ | 10,977,723 | 33.8 | % | $ | 2,631,960 | 24.0 | % | ||||||||||||
| Payroll, employee benefit expenses and bonus expenses | 6,022,056 | 16.5 | % | 4,708,478 | 14.5 | % | 1,313,578 | 27.9 | % | |||||||||||||||
| Professional service fees | 1,439,811 | 4.0 | % | 657,242 | 2.0 | % | 782,569 | 119.1 | % | |||||||||||||||
| Transaction commission | 6,077,241 | 16.7 | % | 6,035,202 | 18.5 | % | 42,039 | 0.7 | % | |||||||||||||||
| Promotion and advertising expenses | 3,154,574 | 8.7 | % | 4,080,568 | 12.5 | % | (925,994 | ) | (22.7 | )% | ||||||||||||||
| Other expenses | 6,119,407 | 16.8 | % | 6,081,709 | 18.7 | % | 37,698 | 0.6 | % | |||||||||||||||
| Total operating expenses | $ | 36,422,772 | 100.0 | % | $ | 32,540,922 | 100.0 | % | $ | 3,881,850 | 11.9 | % | ||||||||||||
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Operating expenses increased by $3,881,850, or 11.9%, from $32,540,922 for the fiscal year ended March 31, 2021 to $36,422,772 for the fiscal year ended March 31, 2022. The increase in operating expenses was primarily attributable to the following factors:
| (1) | an increase in shipping expenses by $2,631,960, or 24.0%, from $10,977,723 for the fiscal year ended March 31, 2021 to $13,609,683 for the fiscal year ended March 31, 2022. The increase was mainly due to the increased sales from online stores, franchise stores, and wholesale customers. However, the percentage increase in shipping expenses was more than the percentage increase in revenue due to increased shipping rate charged by shipping companies during the fiscal year ended March 31, 2022; |
| (2) | an increase in payroll, employee benefit expenses, and bonus expenses by $1,313,578, or 27.9%, from $4,708,478 for the fiscal year ended March 31, 2021 to $6,022,056 for the fiscal year ended March 31, 2022, which was mainly due to increased salary increments and increased employee benefit, performance bonus, and retirement pension expenses in Japan, as well as the increased headcount in Hong Kong during the fiscal year ended March 31, 2022, which was in line with the increased revenue; |
| (3) | an increase in consulting and professional service fees by $782,569, or 119.1%, from $657,242 for the fiscal year ended March 31, 2021 to $1,439,811 for the fiscal year ended March 31, 2022. The increase was due to increased professional fees for legal, audit, and advisory services as we became a public company upon the completion of the IPO; |
| (4) | an increase in transaction commission paid to third-party e-commerce marketplace operators by $42,039, or 0.7%, from $6,035,202 for the fiscal year ended March 31, 2021 to $6,077,241 for the fiscal year ended March 31, 2022. We paid third-party e-commerce marketplace operators transaction commission ranging from 1.8% to 3.0% based on our sales amount. The increase was due to the increase in our online sales. However, the percentage increase in transaction commission was less than the percentage increase in online sales, because we outsourced the operations of some of our online stores to third-party companies, and we did not need to pay transaction commission for the products we sold to these third-parties; and |
| (5) | a decrease in promotion and advertising expenses by $925,994, or 22.7%, from $4,080,568 for the fiscal year ended March 31, 2021 to $3,154,574 for the fiscal year ended March 31, 2022. We advertised on outdoor billboards in busy commercial districts, popular tourist attractions, and 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. Our promotion and advertising expenses in Japan decreased by $567,896, the decrease was mainly due to decreased promotion expenses by $842,229 in our physical stores, as the business of our physical stores was significant impact by the COVID-19 pandemic. The decrease was partially offset by increased advertising expenses by $274,333, as we spent more on advertising activities to enhance our brand awareness and attract more customers in Japan. Our promotion and advertising expenses in Hong Kong decreased by $358,098, as we engaged a third-party advertiser to produce contents to advertise and promote our business during the fiscal year ended March 31, 2021. However, we did not engage third-party company but advertised through our KOL which caused a decreased promotion and advertising expenses during the fiscal year ended March 31, 2022. |
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 increased by $598,366, or 27.4%, from $2,187,400 for the fiscal year ended March 31, 2021 to $2,785,766 for the fiscal year ended March 31, 2022. The increase was mainly due to an increase in interest expenses at interest rate by $477,564. The increase was mainly due to an increase in interest expenses at interest rate of $445,992 in Japan, which resulted from an increased weighted average loan balance from $69.2 million during the fiscal year ended March 31, 2021 to $76.1 million during the fiscal year ended March 31, 2022, as well as the increased weighted average interest rate from 0.97% during the fiscal year ended March 31, 2021 to 1.51% during the fiscal year ended March 31, 2022, as we borrowed more long-term loans with higher annual interests rate during the fiscal year ended March 31, 2022. Meanwhile, the amortized loan service costs in relation to our syndicated loans and other borrowings increased by $120,687.
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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 $256,326, or 75.0%, from $341,880 for the fiscal year ended March 31, 2021 to $598,206 for the fiscal year ended March 31, 2022. The increase was mainly due to an increase in other income, such as increased receipt of government subsidies as the financial support during the COVID-19 pandemic, as well as an increase in royalty fees collected from our franchisees during the fiscal year ended March 31, 2022.
Gain (Loss) from Foreign Currency Exchange
Gain from foreign currency exchange was $833,547 for the fiscal year ended March 31, 2022 as compared to a loss from foreign currency exchange of $582,424 for the fiscal year ended March 31, 2021. The increase in the gain from foreign currency exchange was 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, 2022.
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 income and comprehensive income. Change in fair value of representative’s warrants liability was amounted to $369,404 during the fiscal year ended March 31, 2022.
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. Loss from equity method investment increased by $116,586, or 398.7%, from $29,242 for the fiscal year ended March 31, 2021 to $145,828 for the fiscal year ended March 31, 2022. The increase was due to the increase net loss generated by Palpito during the fiscal year ended March 31, 2022 as compared to the same period last year.
Provision for Income Taxes
Our provision for income taxes was $2,234,676 and $3,307,048 for the fiscal years ended March 31, 2022 and 2021, respectively. Our provision for income taxes decreased by $1,072,372. The decrease in provision for income taxes was mainly due to the decreased taxable income for the fiscal year ended March 31, 2022.
Net Income
As a result of the foregoing, we reported a net income of $3,924,148 for the fiscal year ended March 31, 2022 as compared to a net income of $4,952,327 for the fiscal year ended March 31, 2021.
B. Liquidity and Capital Resources
On January 13, 2022, we closed our 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, was approximately $21.4 million. In connection with the IPO, the ADSs began trading on the Nasdaq Capital Market under the symbol “TKLF” on January 18, 2022.
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As of March 31, 2023, we had $1,766,441 in cash as compared to $18,266,000 as of March 31, 2022. As of March 31, 2023, we also had approximately $89.4 million of accounts receivable balance due from third parties. The increase in account receivable was because our collection of account receivables was slowed down due to delayed shipments and longer payment processing procedures as affected by the COVID-19 pandemic in fiscal year 2023. 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. The Company has been monitoring and making great efforts to maintain the provision at a lower risk level. Approximately 33.4% of the March 31, 2023 balance has been subsequently collected, and majority of the remaining balance is expected to be collected by September 30, 2023. The collection of such receivables made cash available for use in our operations as working capital, if necessary.
As of March 31, 2023, our merchandise inventories balance amounted to approximately $7.2 million, which we believe are able to be sold quickly based on the analysis of the current trends in demand for our products. As of March 31, 2023, we also had approximately $60.6 million in short-term borrowings and $13.1 million in long-term borrowings outstanding. 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, 2023, we had consumption tax payable of approximately $16.6 million due to tax examination. The Tokyo Regional Taxation Bureau had conducted a tax examination of our consumption tax filling for the period from July 2018 to December 2021. As a result of the examination, we were required to return consumption tax amounted to approximately $28.3 million (approximately ¥3.8 billion) for export transactions that were determined as not meeting the tax exemption requirements due to incomplete submission of relevant export documents. In addition, the additional tax for understatement and delinquent tax computed by our tax consultant amounted to approximately $6.1 million (approximately ¥0.8 billion). Therefore, as of March 31, 2023, we 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 refundable income tax that arose from the payments of additional consumption tax amounted to approximately $4.9 million (approximately ¥0.7 billion). However, as the failure in the 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. Total compensation receivable was approximately $23.7 million (approximately ¥3.2 billion) as of March 31, 2023, which was more than the net consumption tax payable to tax authority. Therefore, 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, 2023 | March 31, 2022 | |||||||||
| Syndicated Loans Tranche A (1) | September 2022* | TIBOR^+0.70% | $ | - | $ | 40,328,982 | ||||||
| Syndicated Loans Tranche B (2) | September 2023 | TIBOR+0.70% | 60,636,412 | - | ||||||||
| Total short-term borrowings | $ | 60,636,412 | $ | 40,328,982 | ||||||||
| * | The loans were fully repaid upon maturity. |
| ^ | 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, 2021, the Company entered into a one-year syndicated loan agreement, which was effective from September 30, 2021, with a consortium of banks, with an aggregate credit line of ¥7.5 billion (approximately $61.6 million). As of March 31, 2022, the Company borrowed an aggregated of ¥5.0 billion (approximately $41.0 million) under the agreement, and the net outstanding balance of this loan was approximately ¥4.9 billion (approximately $40.3 million), net off the unamortized loan service cost of ¥86.6 million ($711,018). The syndicated loan is guaranteed by Mr. Kanayama. |
| (2) | On September 27, 2022, the Company entered into another 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). 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). The syndicated loan is guaranteed by Mr. Kanayama. |
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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 current organization structure, specified ratios of debt to tangible net assets and debt service coverage, and positive net income, etc. The terms also prohibit the Company from transferring part or all of its assets to third-party companies or receiving part of all of the assets from other third-party companies. As of March 31, 2023, although we were in net loss, we did not receive any notices from banks, such as terminating our ability to borrow under the relevant agreements or accelerating our obligations to repay outstanding borrowings. 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.
Long-term borrowings consisted of the following:
| Maturity | Interest Rate | March 31, 2023 | March 31, 2022 | |||||||||
| Toei Shinkin Bank (1) | December 2053 | 1.10% | $ | 1,981,520 | $ | 2,233,520 | ||||||
| Japan Finance Corporation (2) | July 2023 - April 2025 | 0.71% - 4.25% | 1,665,007 | 1,975,830 | ||||||||
| BOT Lease Co., Ltd. (3) | March 2028 | TIBOR (3M) + 6.0% | 1,503,800 | 1,641,600 | ||||||||
| MUFG Bank (4) | August 2026 | TIBOR (3M) + 0.8% | 5,210,667 | 6,377,616 | ||||||||
| Messanine Solution No.4 Investment Limited Liability Union (5) | October 2026 | 9.0% - 10.5% | - | 8,208,000 | ||||||||
| Tokyo Higashi Shinkin Bank | July 2026 | 2.0% | 100,153 | 142,228 | ||||||||
| The Hongkong and Shanghai Banking Corporation Limited (6) | June 2023 – February 2033 | 2.750% - 3.375% | 619,032 | 577,953 | ||||||||
| Universe Holdings (China) Co., Ltd (7) | No maturity date | 5% | - | 1,021,640 | ||||||||
| DFL-Shutoken Leasing (Hong Kong) Company Limited | March 2024 – October 2025 | 2.990% | 518,731 | 393,976 | ||||||||
| Resona Merchant Bank Asia Limited | No maturity date | 1.2% | 1,510,934 | - | ||||||||
| Total long-term borrowings | $ | 13,109,844 | $ | 22,572,363 | ||||||||
| Current portion of long-term borrowings | $ | 2,783,445 | $ | 1,454,378 | ||||||||
| Non-current portion of long-term borrowings | $ | 10,326,399 | $ | 21,117,985 | ||||||||
| (1) | Guaranteed by Mr. Kanayama. |
| (2) | Two of the loans were fully repaid upon maturity during the fiscal year ended March 31, 2023. |
| (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 our bank borrowings from MUFG Bank, we pledged a piece of land of 16,165 square feet with a carrying value of ¥340.1 million (approximately $2.6 million) as of March 31, 2023 as collateral to safeguard the loan. |
| (5) | The loan bears an interest rate of 9.0% from October 13, 2021 to March 31, 2024, and 10.5% from April 1, 2024 to October 30, 2026. The loan was fully repaid in advance during the fiscal year ended March 31, 2023. |
| (6) | Guaranteed by Mr. Kanayama. One of the loans was fully repaid upon maturity in April 2023. |
| (7) | Guaranteed by our Company. The loan was fully repaid during the fiscal year ended March 31, 2023. |
| (8) | On September 27, 2022, Tokyo Lifestyle Limited entered into a revolving credit facility agreement with Resona Merchant Bank Asia Limited for an aggregated credit line of ¥200 million (approximately $1.5 million), with no specific maturity date. As of March 31, 2022, we borrowed an aggregated of ¥200 million (approximately $1.5 million) under the agreement. |
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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. The net loss we incurred during the fiscal year ended March 31, 2023, was mainly due to the decreased revenue resulted from the impact of COVID-19 resurgence in China as well as non-recurring expenses resulted from additional and delinquent tax due to consumption tax correction. However, 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, but the spread of the COVID-19 had been slowed down and it was successfully under control currently in China. Meanwhile, we continue to modify our business strategies so that we could concentrate our management resources on core businesses and improving operation efficiency and profitability. On June 30, 2023, we entered into sales agreement with Seihinkokusai, a related party of us to sells our 100% equity interests in Kaika International and 40% equity interests in Palpito to Seihinkokusai. In addition, besides opening directly-operated physical stores by ourselves, we will also seek an asset-light business model through opening franchise stores. With this business model, we hope to build strong store brand awareness, accelerate our business expansion and optimize its revenue streams by leveraging the advantages of strategic alliances with franchisees. Additionally, by adopting the asset-light franchise model, we expect to accelerate the development and launch of products, allowing to respond more promptly to market trends and customer demands, and improve our profitability. Therefore, we expect our revenue and net income will increase in fiscal year 2024 as compared to fiscal year 2023. Furthermore, our controlling shareholder, Mr. Mei Kanayama, and Seihinkokusai have made pledges to provide continuous financial support to us for at least 12 months from the issuance of the consolidated financial statements as of and for the fiscal year ended March 31, 2023. We believe our cash on hand, our operating cash flows, the available bank facilities and the continuous support from our shareholder and related party 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.
Meanwhile, 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 Japan, with a focus on suburban areas around Tokyo, and expect the expenses related to opening these stores to be approximately ¥350 million to ¥500 million ($2.6 million to $4.1 million); 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., Malaysia, 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.
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The following table sets forth summaries of our cash flows for the periods indicated:
| For the fiscal years ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net cash used in operating activities | $ | (25,738,414 | ) | $ | (7,005,764 | ) | $ | (3,237,063 | ) | |||
| Net cash used in investing activities | (743,271 | ) | (3,105,239 | ) | (1,993,926 | ) | ||||||
| Net cash provided by financing activities | 12,745,818 | 13,763,803 | 13,934,473 | |||||||||
| Effect of exchange rate change on cash | (2,763,692 | ) | (2,230,388 | ) | (549,504 | ) | ||||||
| Net increase (decrease) in cash | (16,499,559 | ) | 1,422,412 | 8,153,980 | ||||||||
| Cash at beginning of year | 18,266,000 | 16,843,588 | 8,689,608 | |||||||||
| Cash at end of year | $ | 1,766,441 | $ | 18,266,000 | $ | 16,843,588 | ||||||
Operating Activities
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.
Net cash used in operating activities was $3,237,063 for the fiscal year ended March 31, 2021, mainly derived from a net income of $4,952,327 for the year, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable from third parties of $13,547,385 in line with the increase in revenue. Merchandise inventories increased by $4,820,636 and accounts payable increased by $6,996,895, as we increased the stockpile of inventories in anticipation of increased sales in the coming months.
Investing Activities
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.
Net cash used in investing activities amounted to $1,993,926 for the fiscal year ended March 31, 2021, mainly due to the purchases of property and equipment of $2,939,471, partially offset by the repayments from related parties of $857,582.
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Financing Activities
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.
Net cash provided by financing activities was $13,934,473 for the fiscal year ended March 31, 2021, which primarily consisted of proceeds from short-term borrowings of $424,758,382, proceeds from long-term borrowings of $3,643,270, and capital contributions of $1,446,612, partially offset by repayments of short-term borrowings of $415,796,955 and repayments of long-term borrowings of $1,511,354.
Contractual Obligations
As of March 31, 2023, our contractual obligations were as follows:
| Less than | ||||||||||||||||||||||||||||
| Contractual obligations | Total | 1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | Thereafter | |||||||||||||||||||||
| Short-term borrowings (1) | $ | 60,636,412 | $ | 60,636,412 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| Long-term borrowings (2) | 14,227,444 | 3,005,628 | 1,208,756 | 1,038,064 | 3,573,936 | 1,745,080 | 3,655,980 | |||||||||||||||||||||
| Operating lease payments (3) | 3,206,685 | 1,440,693 | 595,742 | 164,213 | 123,188 | 123,188 | 759,661 | |||||||||||||||||||||
| Finance lease payments (4) | 1,113,172 | 362,452 | 327,019 | 194,657 | 143,380 | 73,321 | 12,343 | |||||||||||||||||||||
| Total | $ | 79,183,713 | $ | 65,445,185 | $ | 2,131,517 | $ | 1,396,934 | $ | 3,840,504 | $ | 1,941,589 | $ | 4,427,984 | ||||||||||||||
| (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, 2023, our future lease payments totaled $3,206,685. |
| (4) | We lease software, equipment, and furniture, which are classified as finance leases in accordance with Topic 842. As of March 31, 2023, our future lease payments totaled $1,113,172. |
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2023 and 2022.
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, 2022 to March 31, 2023 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.
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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.
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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 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. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of 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 large-scale natural disasters, such as the March 2011 Great East Japan Earthquake and the related Fukushima Daiichi nuclear disaster, 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.
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. 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. As a result, 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 COVID-19 pandemic. We had a net loss was $8,048,822 during the fiscal year ended March 31, 2023 as compared to a net income of $3,924,148 during the fiscal year ended March 31, 2022. Please refer to “—A. Operating Results—Comparison of Results of Operations for the Fiscal Years Ended March 31, 2023 and 2022.”
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As of the date of this report, the daily life of the Japanese residents is largely back to its normal state. The Japanese government reopened its borders to holders of visitors, 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, but the spread of the COVID-19 had been slowed down and it was 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 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; (iii) leases; and (iv) fair value measurements. 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, 2023, 2022, and 2021.
Allowance for doubtful accounts
We determine the adequacy of reserves for doubtful accounts based on general and individual account analysis and historical collection trend. We establish general and specific allowance when there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivable balances, with a corresponding charge recorded in the consolidated statements of operations and comprehensive income (loss). Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of March 31, 2023 and 2022, allowance for accounts receivable amounted to $3,219,772 and $237,037, respectively. As of March 31, 2023 and 2022, allowance for prepaid expenses and other current assets amounted to $904,598 and $885,972, respectively. As of March 31, 2023 and 2022, allowance for compensation receivable for consumption tax amounted to $436,145 and $nil, respectively.
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Write-down of 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). We periodically evaluate 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, 2023 and 2022, merchandise inventories write-down was $152,759 and $nil, 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, 2023 and 2022, we recorded deferred tax assets of $4,930,891 and $1,021,073, net of valuation allowance of $597,777 and $386,436, respectively.
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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 | 43 | Representative Director and Director (Principal Executive Officer) | ||
| Youichiro Haga | 57 | Director and Corporate Officer (Principal Accounting and Financial Officer) | ||
| Keiichi Kimura* | 57 | Corporate Auditor | ||
| Tadao Iwamatsu* | 48 | Corporate Auditor | ||
| Junji Sato* | 63 | Corporate Auditor | ||
| Yoji Takenaka | 59 | Independent Director | ||
| Tetsuya Sato | 52 | 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 Univesity 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 |
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| 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 75.39% 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, 2023, we paid an aggregate of approximately $640,643 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.
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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.
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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 36,250,054 Ordinary Shares outstanding as of the date of this annual report.
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.
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| Ordinary Shares | ||||||||
| Beneficially Owned | ||||||||
| Number | Percent | |||||||
| Directors and Senior Management(1) : | ||||||||
| Mei Kanayama(2) | 25,264,000 | 69.69 | % | |||||
| Youichiro Haga | — | — | ||||||
| Keiichi Kimura | — | — | ||||||
| Tadao Iwamatsu | — | — | ||||||
| Junji Sato | — | — | ||||||
| Yoji Takenaka | — | — | ||||||
| Tetsuya Sato | — | — | ||||||
| All directors and senior management as a group (seven individuals): | 25,264,000 | 69.69 | % | |||||
| 5% Shareholders: | ||||||||
| Tokushin G.K.(3) | 14,775,050 | 40.76 | % | |||||
| Grand Elec-Tech Limited(4) | 2,672,460 | 7.37 | % | |||||
| Yingjia Yang(5) | 2,672,754 | 7.37 | % | |||||
| Prometheus Capital Fund I, L.P.(6) | 2,063,300 | 5.69 | % | |||||
| (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) 14,775,050 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 held 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 their Ordinary Shares. |
| (3) | The number of Ordinary Shares beneficially owned prior to this annual report represents 14,775,050 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. |
| (6) | The number of Ordinary Shares beneficially owned prior to this annual report represents 2,063,300 Ordinary Shares held by Prometheus Capital Fund I, L.P., a Cayman Islands exempted limited partnership, whose sole general partner is Prometheus Capital GP Limited, a Cayman Islands company. The registered address of Prometheus Capital Fund I, L.P. is Suite #4-210, Governors Square, 23 Lime Tree Bay Avenue, PO Box 32311, Grand Cayman KY1-1209, Cayman Islands. |
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 31.99% 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.
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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. | |
| Palpito | Our equity investment entity | |
| All Seas Global Limited | The entity’s representative director is Mr. Kanayama. | |
| 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, 2023 | March 31, 2022 | |||||||
| Name | ||||||||
| Seihinkokusai | $ | 266,523 | $ | 345 | ||||
| Palpito | 35,106 | - | ||||||
| Tokushin G.K. | 2,118 | - | ||||||
| Shintai Co., Ltd. | 24,060 | 250 | ||||||
| Subtotal | 327,807 | 595 | ||||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Total accounts receivable, net - related parties | $ | 327,807 | $ | 595 | ||||
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.
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| b. | Due from related parties |
Due from related parties consisted of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Name | ||||||||
| Palpito | $ | - | $ | 1,717 | ||||
| Seihinkokusai (1) | 443,664 | 691,278 | ||||||
| All Seas Global Limited | - | 1,433 | ||||||
| Shintai Co., Ltd. | 903 | - | ||||||
| Total due from related parties | $ | 444,567 | $ | 694,428 | ||||
| (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, 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, 2023 | March 31, 2022 | |||||||
| Name | ||||||||
| Seihinkokusai | $ | - | $ | 34,043 | ||||
| Palpito | - | 98,004 | ||||||
| Total accounts payable - related parties | $ | - | $ | 132,047 | ||||
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, 2023 | March 31, 2022 | |||||||
| Name | ||||||||
| Mr. Mei Kanayama | $ | 63,916 | $ | 170,397 | ||||
| Seihinkokusai | 233,643 | 23,444 | ||||||
| Total due to related parties | $ | 297,559 | $ | 193,841 | ||||
| (1) | Our due to Mr. Kanayama was for the reimbursement of his business travel and entertainment. As of May 31, 2023, the amount due to Mr. Kanayama had been fully repaid. |
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| (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, 2023, the amount due to Seihinkokusai had been fully repaid. |
| e. | Sales to related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Seihinkokusai | $ | 642,018 | $ | 22,092 | $ | 8,246 | ||||||
| Shintai Co., Ltd. | 113,559 | 1,347 | 657 | |||||||||
| Palpito | 87,200 | 83,290 | - | |||||||||
| Tokushin G.K. | 4,950 | - | - | |||||||||
| Takuetsu Kokusai Co., Ltd. | 259 | 6,507 | - | |||||||||
| YST (HK) Limited | - | 130,523 | 153,129 | |||||||||
| Total revenue from related parties | $ | 847,986 | $ | 243,759 | $ | 162,032 | ||||||
| (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, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Seihinkokusai | $ | 125,496 | $ | 401,341 | $ | 667,156 | ||||||
| Palpito | 77,020 | 122,520 | 37,677 | |||||||||
| YST (HK) Limited | - | 13,885 | 139,925 | |||||||||
| Total purchase from related parties | $ | 202,516 | $ | 537,746 | $ | 844,758 | ||||||
| (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. |
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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, 2023. 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
We are currently not a party to any material legal proceeding. From time to time, however, we may be subject to various claims and legal actions arising in the ordinary course of business.
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.
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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. |
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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. |
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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 the Nasdaq Capital Market since January 18, 2022 under the symbol “TKLF.”
B. Plan of Distribution
Not applicable.
C. Markets
The ADSs have been listed on the Nasdaq Capital Market 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.
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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. |
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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.
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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.
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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.
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Material Tax Consequences Applicable to U.S. Holders of Our 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. |
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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 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.
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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.
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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 the Nasdaq Capital Market. If the ADSs or Ordinary Shares are regularly traded on the Nasdaq Capital Market 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.
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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.
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H. Documents on Display
We have previously filed with the SEC our registration statements on Form F-1 (File No. 333-259129), 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, 2023 and 2022, we had an unrealized foreign currency translation loss of $4,266,206 and $3,466,261, 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, 2023, 2022, and 2021, $1,015,905, $17,568,176, and $16,320,040 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.
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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 2.3%, (0.2)%, and 0.0% in 2022, 2021, and 2020, 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.
94
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.
95
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.
96
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
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, 2023, we had used $8.2 million, $4.2 million, $2.5 million, and $0.1 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).
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, 2023.
Based on that evaluation, our management has concluded that, as of March 31, 2023, 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 had deficiencies in our IT general controls regarding access and password management, IT operations, and cybersecurity of our financial system and key operation systems.
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.
97
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, 2023. 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, 2023. 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) deficiencies in our IT general controls regarding access and password management, IT operations, and cybersecurity of our financial system and key operation systems.
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.
98
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, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Audit fees(1) | $ | 599,150 | $ | 420,000 | $ | 410,000 | ||||||
| Audit-Related fees | - | - | ||||||||||
| Tax fees | - | - | ||||||||||
| All other fees(2) | 40,000 | - | ||||||||||
| Total | $ | 599,150 | $ | 460,000 | $ | 410,000 | ||||||
| (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.
99
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. |
Item 16H. MINE SAFETY DISCLOSURE
Not applicable.
Item 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
Item 16J. INSIDER TRADING POLICIES
We will be required to begin compliance with the disclosure and tagging requirements under this item in the annual report on Form 20-F for the fiscal year ending March 31, 2024.
100
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
101
102
103
| * | Filed with this annual report on Form 20-F |
| ** | Furnished with this annual report on Form 20-F |
104
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 31, 2023 | ||
105
YOSHITSU CO., LTD
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Yoshitsu Co., Ltd
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Yoshitsu Co., Ltd and its subsidiaries (collectively, the “Company”) as of March 31, 2023, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year ended March 31, 2023, 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, 2023, and the results of its operations and cash flows for the year ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited the retrospective adjustments to the 2022 and 2021 consolidated financial statements related to the business combination under common control as described in Note 1 and 11. 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 and 2021 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 and 2021 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 financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/
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
July 31, 2023
F-2
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 11, 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 (loss), changes in shareholders’ equity, and cash flows for each of the two years in the period 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 11 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 11, 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 each of the two years in the period 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 11, 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-3
YOSHITSU CO., LTD
CONSOLIDATED BALANCE SHEETS
| March 31, | March 31, | |||||||
| 2023 | 2022 (1) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Accounts receivable - related parties, net | ||||||||
| Merchandise inventories, net | ||||||||
| Due from related parties | ||||||||
| Compensation receivable for consumption tax, current | ||||||||
| Prepaid expenses and other current assets, net | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Long term investment | ||||||||
| Compensation receivable for consumption tax, non-current, net | ||||||||
| Long-term prepaid expenses and other non-current assets, net | ||||||||
| Deferred tax assets, net | - | |||||||
| TOTAL ASSETS | $ | $ | ||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term borrowings | $ | $ | ||||||
| Current portion of long-term borrowings | ||||||||
| Accounts payable | ||||||||
| Accounts payable - related parties | - | |||||||
| Due to related parties | ||||||||
| Deferred revenue | ||||||||
| Taxes payable | ||||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Representative's warrants liability | ||||||||
| Other payables and other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Finance lease liabilities, non-current | ||||||||
| Long-term borrowings | ||||||||
| Other non-current liabilities | ||||||||
| Deferred tax liabilities, net | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, | ||||||||
| Capital reserve | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
| (1) |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
YOSHITSU CO., LTD
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| For the Fiscal Years Ended March 31 | ||||||||||||
| 2023 | 2022 (1) | 2021 (1) | ||||||||||
| REVENUE | ||||||||||||
| Revenue – third parties | $ | $ | $ | |||||||||
| Revenue – related parties | ||||||||||||
| Total revenue | ||||||||||||
| COSTS AND OPERATING EXPENSES | ||||||||||||
| Merchandise costs | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Total operating expenses | ||||||||||||
| INCOME FROM OPERATIONS | ||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ||||||
| Additional and delinquent tax due to consumption tax correction | ( | ) | ||||||||||
| Other income, net | ||||||||||||
| Gain (loss) from foreign currency exchange | ( | ) | ||||||||||
| Change in fair value of representative’s warrants liability | ||||||||||||
| Income (loss) from equity method investment | ( | ) | ( | ) | ||||||||
| Total other expenses, net | ( | ) | ( | ) | ( | ) | ||||||
| INCOME (LOSS) BEFORE INCOME TAX PROVISION | ( | ) | ||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||
| NET INCOME (LOSS) | ( | ) | ||||||||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||
| Foreign currency translation loss | ( | ) | ( | ) | ( | ) | ||||||
| TOTAL COMPREHENSIVE INCOME (LOSS) | $ | ( | ) | $ | $ | |||||||
| $ | ( | ) | $ | $ | ||||||||
| * | |
| (1) |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
YOSHITSU CO., LTD
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED MARCH 31, 2023, 2022, AND 2021
| Ordinary Shares | Capital | Retained | Accumulated Other Comprehensive | Total Shareholders' | ||||||||||||||||||||
| Shares* | Amount | Reserve | Earnings | Income (Loss) | Equity (1) | |||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | ||||||||||||||||||||||
| - | ||||||||||||||||||||||||
| Capital contribution from SHUR Co., Ltd. | ||||||||||||||||||||||||
| Net income for the year | - | |||||||||||||||||||||||
| Capital contribution in the form of debt exemption | - | |||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Capital contribution from Grand Elec-Tech Limited | ||||||||||||||||||||||||
| Issuance of ordinary shares and additional shares under overallotment option in initial public offerings, net of issuance costs | ||||||||||||||||||||||||
| Capital contribution in the form of debt exemption | - | - | ||||||||||||||||||||||
| Issuance of representative’s warrants | - | ( | ) | ( | ) | |||||||||||||||||||
| Net income for the year | - | - | ||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Business combinations under common control | - | ( | ) | - | - | ( | ) | |||||||||||||||||
| Capital contribution received by Malaysia subsidiary | - | - | - | |||||||||||||||||||||
| Net loss for the year | - | - | ( | ) | - | ( | ) | |||||||||||||||||
| Foreign currency translation loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| * | |
| (1) |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
YOSHITSU CO., LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Fiscal Years Ended March 31 | ||||||||||||
| 2023 | 2022 (1) | 2021 (1) | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net Income (loss) | $ | ( | ) | $ | $ | |||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Loss from disposal of property and equipment | ||||||||||||
| Loss (gain) from unrealized foreign currency translation | ( | ) | ||||||||||
| Provision for (reversal of) doubtful accounts | ( | ) | ||||||||||
| Merchandise inventories write-down | - | - | ||||||||||
| Amortization of operating lease right-of-use assets | ||||||||||||
| Deferred tax provision (benefit) | ( | ) | ( | ) | ||||||||
| Change in fair value of representative’s warrants liability | ( | ) | ( | ) | ||||||||
| Investment loss (income) from equity method investment | ( | ) | ||||||||||
| Accrued interest expense | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Accounts receivable – related parties | ( | ) | ||||||||||
| Merchandise inventories | ( | ) | ( | ) | ||||||||
| Compensation receivable for consumption tax | ( | ) | ||||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||||||
| Long term prepaid expenses and other non-current assets | ( | ) | ( | ) | ||||||||
| Accounts payable | ( | ) | ||||||||||
| Accounts payable – related parties | ( | ) | ||||||||||
| Deferred revenue | ( | ) | ( | ) | ||||||||
| Taxes payable | ( | ) | ||||||||||
| Other payables and other current liabilities | ( | ) | ||||||||||
| Operating lease liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Other non-current liabilities | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Payment made for a long-term equity method investment | ( | ) | ||||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from disposal of property and equipment | ||||||||||||
| Collection of amount due from (advances made to) related parties | ( | ) | ||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Capital contribution | ||||||||||||
| Proceeds from initial public offerings, net of issuance costs | ||||||||||||
| Cash consideration paid for business combination under common control | ( | ) | ||||||||||
| Proceeds from short-term borrowings | ||||||||||||
| Repayments of short-term borrowings | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from long-term borrowings | ||||||||||||
| Repayments of long-term borrowings | ( | ) | ( | ) | ( | ) | ||||||
| Advances received from (payments made to) related parties | ( | ) | ||||||||||
| Repayment of obligations under finance leases | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||||||
| Effect of exchange rate fluctuation on cash | ( | ) | ( | ) | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||||||
| Cash at beginning of year | ||||||||||||
| Cash at end of year | $ | $ | $ | |||||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for income taxes | $ | $ | $ | |||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| Supplemental non-cash operating activities | ||||||||||||
| Purchase of property and financed under long-term payment | $ | $ | $ | |||||||||
| Purchase of property and equipment financed under finance leases | $ | $ | $ | |||||||||
| Right of use assets obtained in exchange for operating lease liabilities | $ | $ | $ | |||||||||
| Capital contribution in the form of debt exemption | $ | $ | $ | |||||||||
| Deduction of right of use assets and operating lease liabilities in relation to lease concession | $ | $ | $ | |||||||||
| Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement | $ | $ | $ | |||||||||
| Deferred IPO cost offset with capital reserve | $ | $ | $ | |||||||||
| (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-7
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
On January 13, 2022, the Company closed its IPO
of
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
On October
26, 2022, the board of directors of TLS approved the acquisition of Reiwatakiya from All
Seas Global Limited, who held
F-8
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Uses 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, the valuation of accounts receivable, 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.
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 and Malaysia. 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, 2023 and 2022, the Company did not have any cash equivalents.
Accounts receivable
Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts.
The Company determines the adequacy of reserves
for doubtful accounts based on general and individual account analysis and historical collection trend. The Company establishes general
and specific allowance when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based
on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections.
The provision is recorded against accounts receivable balances, with a corresponding charge recorded in the consolidated statements of
operations and comprehensive income (loss). Actual amounts received may differ from management’s estimate of credit worthiness
and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management
has determined that the likelihood of collection is not probable. As of March 31, 2023 and 2022, allowance for uncollectible balances amounted to $
F-9
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which is effective for annual reporting periods (including interim periods) beginning after December 15, 2018, and early adoption is permitted. The Company early adopted the Topic 842 on April 1, 2018 using a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.
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.
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 as of March 31, 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.
F-10
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases (continued)
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 $
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
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 estimated allowance for uncollectible accounts.
The Company determines the adequacy of reserves
for doubtful accounts based on general and individual account analysis and historical collection trend. The Company establishes general
and specific allowance when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based
on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections.
The provision is recorded against compensation receivable for consumption tax balances, with a corresponding charge recorded in the consolidated
statements of operations and comprehensive income (loss). Actual amounts received may differ from management’s estimate of credit
worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after
management has determined that the likelihood of collection is not probable. As of March 31, 2023 and 2022, allowance for compensation
receivable for consumption tax amounted to $
F-11
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2023
and 2022, merchandise inventories write-down was $
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 | ||
| Land | ||
| Leasehold improvements | ||
| Equipment and furniture | ||
| Automobiles | ||
| Software |
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.
F-12
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2023 and 2022, the balance of asset
retirement obligations included in other non-current liabilities was $
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, 2023, 2022, and 2021.
Revenue recognition
The Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), on April 1, 2018 using the modified retrospective approach.
ASC 606 requires the use of a new 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 scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
F-13
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
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.
The Company currently generates its revenue through retail and wholesale of Japanese beauty and health products, as well as sundry products and other products and services, through a multi-channel distribution network. Currently, the Company sells its products and rendered its services through: (i) directly-operated physical stores, (ii) online stores and services, and (iii) franchise stores and wholesale customers. For Japanese and Hong Kong domestic sales, 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 generally offers a seven-day product return policy, as long as the products are undamaged, in their original condition, and can be resold. Products sold in the Company’s physical stores may be returned in store with receipt subject to certain restrictions. Historically, the customer returns were immaterial. Therefore, the Company did not provide any sales return allowances as of March 31, 2023 and 2022. 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 Tik Tok and Kuaishou. Revenue from these services is recognized at a point in time when the service is rendered by the Company.
The Company enters into trademark license agreements
with franchisees under which the franchisee is granted a revocable license and non-exclusive right to use the Company’s trademarks
solely for the purposes of selling, promoting sales of, and performing post-sale and other support relating to the products the Company
sells to the franchisee. In exchange, the franchisee is required to pay a monthly royalty fee of ¥
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.
In directly-operated physical stores in
Japan and Hong Kong, 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 one membership point for each ¥
F-14
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
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, 2023 and 2022. The Company’s contract liabilities, which are reflected in its consolidated
balance sheets as deferred revenue of $
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, 2023, 2022, and 2021 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, 2023, 2022, and 2021 was as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Japan domestic market | $ | $ | $ | |||||||||
| China market | ||||||||||||
| Other overseas markets | ||||||||||||
| Total revenue | $ | $ | $ | |||||||||
F-15
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Revenue by product categories
The summary of the Company’s total revenue by product categories for the fiscal years ended March 31, 2023, 2022, and 2021 was as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Beauty products | $ | $ | $ | |||||||||
| Health products | ||||||||||||
| Sundry products* | ||||||||||||
| Other products and services^ | ||||||||||||
| Total revenue | $ | $ | $ | |||||||||
| * | |
| ^ | 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, 2023, 2022, and 2021 was as follows:
F-16
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, 2023 and 2022 based upon the short-term nature of the assets and liabilities.
Foreign currency translation
The Company maintains its books and record 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, and Malaysia use their respective currencies Hong Kong Dollar (“HK$”), Chinese Yuan (“RMB”), and Malaysia Ringgit (“MYR”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations and comprehensive income (loss).
The reporting currency of the Company is the United States Dollars (“US$”) 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.
F-17
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation (continued)
The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
| March 31, 2023 | March 31, 2022 | March 31, 2021 | ||||||||||
| Year-end spot rate | Average rate | Year-end spot rate | Average rate | Year-end spot rate | Average rate | |||||||
| US$ against YEN | ||||||||||||
| US$ against HK$ | ||||||||||||
| US$ against RMB | ||||||||||||
| US$ against MYR | ||||||||||||
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
The Company’s operating entities in Japan are subject to the income tax laws of Japan. As of March 31, 2023, the tax years ended March 31, 2017 through March 31, 2023 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, 2023, the tax years ended March 31, 2017 through March 31, 2023 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, 2023, the tax years ended December 31, 2018 through December 31, 2022 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, 2023, all of the tax returns of the Company’s Malaysian subsidiary remain open for statutory examination by relevant tax authorities.
F-18
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. As of March 31, 2023 and 2022, there were no dilutive shares.
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 $
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 $
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in YEN, HK$, RMB and MYR to US$ 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.
Risks and uncertainties
Political and economic risk
The directly-operated physical stores of the Company are all located in Japan and Hong Kong, and the online stores and franchise stores and wholesale partners of the Company are mainly located in Japan and mainland China. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in Japan, Hong Kong and mainland China, 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 and mainland China. 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.
F-19
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and uncertainties (continued)
Credit risk
As of March 31, 2023 and 2022, $
As of March 31, 2023 and 2022, $
As of March 31, 2023 and 2022, $
As of March 31, 2023 and 2022, $
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risks. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Concentrations
For the fiscal years ended March 31, 2023, 2022, and 2021, majority of the Company’s assets were located in Japan and Hong Kong, and all of the Company’s revenue was generated by the Company and its subsidiaries, which are located in Japan, Hong Kong and China.
For
the fiscal year ended March 31, 2023, one customer accounted for
As of March 31, 2023, four wholesales customers accounted for
For
the fiscal year ended March 31, 2023, three suppliers accounted for approximately
F-20
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326),” which significantly changed the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life, instead of when incurred. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” which amended Subtopic 326-20 (created by ASU No.2016-13) to explicitly state that operating lease receivables are not in the scope of Subtopic 326-20. Additionally, in April 2019, the FASB issued ASU No.2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” in May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief,” and in November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” and ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” which updated the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations, and certain smaller reporting companies applying for credit losses standard and to provide further clarifications on certain aspects of ASU No. 2016-13. In February 2020, the FASB issued ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (topic 842).” This ASU provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The new effective date for these preparers is for annual and interim periods in fiscal years beginning after December 15, 2022. The Company adopted this ASU on April 1, 2023 and the adoption of this ASU did not have a material impact on its consolidated 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.
F-21
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LIQUIDITY
As
reflected in the consolidated financial statements, the Company had a net loss of $
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.
As of March 31, 2023, the Company had net consumption tax payable of
approximately $
The Company’s accounts receivable increased
by $
As of March 31, 2023, the Company had approximately
$
The net loss the Company incurred during the fiscal year ended March
31, 2023, was mainly due to the decreased revenue resulted from the impact of COVID-19 resurgence in China as well as non-recurring expenses
resulted from additional and delinquent tax due to consumption tax correction. However, 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, but the
spread of the COVID-19 had been slowed down and it was successfully under control currently in China. Meanwhile, the Company plans to
continue 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. On
June 30, 2023, the Company entered into sales agreement with Seihinkokusai, a related party of the Company to sells its
F-22
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LIQUIDITY (continued)
Currently, the Company is working to improve its liquidity and capital sources primarily through cash flows from operation, debt financing, and financial support from its principal shareholder and related party. 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.
NOTE 4 – ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
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.
Allowance for doubtful accounts movement was as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions (reductions) | ( | ) | ||||||
| Foreign currency translation adjustments | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
NOTE 5 – MERCHANDISE INVENTORIES, NET
Merchandise inventories, net consisted of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Beauty products | $ | $ | ||||||
| Health products | ||||||||
| Other products | ||||||||
| Merchandise inventories, net | $ | $ | ||||||
Merchandise inventories write-down was $
F-23
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, 2023 | March 31, 2022 | |||||||
| Compensation receivable for consumption tax | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ||||||
| Subtotal | ||||||||
| Less: compensation receivable for consumption tax, current | ( | ) | ||||||
| Long-term compensation receivable for consumption tax, net | $ | $ | ||||||
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 amounting to approximately $
NOTE 7 – PREPAID EXPENSES AND OTHER ASSETS, NET
Prepaid expenses and other assets, net consisted of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Deposits (1) | $ | $ | ||||||
| Consumption tax receivable | ||||||||
| Other receivables (2) | ||||||||
| Advance to suppliers (3) | ||||||||
| Prepaid expenses and others (4) | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Subtotal | ||||||||
| Less: prepaid expenses and other current assets, net | ( | ) | ( | ) | ||||
| Long-term prepaid expenses and other non-current assets, net | $ | $ | ||||||
| (1) |
F-24
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, 2023 and 2022 included $
Other receivables as of March 31, 2023 also included approximately
$ |
| (3) |
| (4) |
NOTE 8 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Property and buildings | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Land | ||||||||
| Equipment and furniture | ||||||||
| Automobiles | ||||||||
| Software | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense was $
As of March 31, 2023 and 2022, the Company pledged
a piece of land of
F-25
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 2023 | March 31, 2022 | |||||||
| Operating lease right-of-use lease assets | $ | $ | ||||||
| Operating lease liabilities – current | $ | $ | ||||||
| Operating lease liabilities – non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of March 31, 2023 and 2022:
| March 31, 2023 | March 31, 2022 | |||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate * | % | % | ||||||
| * | The Company used incremental borrowing rate of |
During the fiscal years ended March 31,
2023, 2022, and 2021, the Company incurred total operating lease expenses of $
F-26
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LEASES (continued)
Finance Leases
The components of finance lease expenses were as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Finance leases cost: | ||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | |||||||||
| Interest on lease liabilities | ||||||||||||
| Total finance leases cost | $ | $ | $ | |||||||||
Supplemental cash flow information related to finance leases was as follows:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flows from finance leases | $ | $ | $ | |||||||||
Supplemental balance sheet information related to leases was as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Finance leases cost: | ||||||||
| Software | $ | $ | ||||||
| Equipment and furniture | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
The weighted average remaining lease terms and discount rates for all of finance leases as of March 31, 2023 and 2022 were as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
F-27
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LEASES (continued)
Finance Leases (continued)
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2023:
| Operating Leases | Finance Leases | |||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
NOTE 10 – INVESTMENTS
On December 25, 2020, the Company
and an individual investor established Palpito Co., Ltd. (“Palpito”), a stock company incorporated in Japan pursuant to the
laws of Japan with a registered capital of ¥
The Company’s investment in unconsolidated entity consists of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Palpito | $ | $ | ||||||
| Total investment | $ | $ | ||||||
Summarized financial information of unconsolidated entity is as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Current liabilities | ||||||||
| Noncurrent liabilities | ||||||||
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net sales | $ | $ | $ | |||||||||
| Gross profit | ||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||
F-28
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – ACQUISITIONS
TLS Acquisition
On July
20, 2022, the Company entered into an Agreement with All Seas Global Limited to acquire
The carrying amounts of the assets and liabilities of TLS as of the transaction date were as follows:
| July 20, 2022 | ||||
| Assets | $ | |||
| Liabilities | ||||
| Net liabilities | $ | ( | ) | |
| Consideration in excess of net liabilities acquired | $ | |||
| Total purchase consideration | $ | |||
Reiwatakiya Acquisition
On October 26, 2022, the board
of directors of TLS approved the acquisition of Reiwatakiya from All Seas Global Limited
who held
The carrying amounts of the assets and liabilities of Reiwatakiya as of the transaction date were as follows:
| October 26, 2022 | ||||
| Assets | $ | |||
| Liabilities | ||||
| Net liabilities | $ | ( | ) | |
| Non-controlling interests | ||||
| Consideration in excess of net liabilities acquired | $ | |||
| Total purchase consideration | $ | |||
F-29
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – BORROWINGS
Short-term borrowings consisted of the following:
| Maturity | Interest Rate | March 31, 2023 | March 31, 2022 | |||||||||
| Syndicated Loans Tranche A (1) | $ | $ | ||||||||||
| Syndicated Loans Tranche B (2) | ||||||||||||
| Total short-term borrowings | $ | $ | ||||||||||
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 current organization structure, specified ratios of debt to tangible net assets and debt service coverage, and positive net income, etc. The terms also prohibit the Company from transferring part or all of its assets to third-party companies or receiving part of all of the assets from other third-party companies. Although the Company incurred a net loss in 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 etc.
| * |
| ^ |
| (1) |
| (2) |
F-30
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – BORROWINGS (continued)
Long-term borrowings consisted of the following:
| Maturity | Interest Rate | March 31, 2023 | March 31, 2022 | |||||||||
| Toei Shinkin Bank (1) | $ | $ | ||||||||||
| Japan Finance Corporation (2) | ||||||||||||
| BOT Lease Co., Ltd. (3) | ||||||||||||
| MUFG Bank (4) | ||||||||||||
| Messanine Solution No.4 Investment Limited Liability Union (5) | ||||||||||||
| Tokyo Higashi Shinkin Bank | ||||||||||||
| The Hongkong and Shanghai Banking Corporation Limited (6) | ||||||||||||
| Universe Holdings (China) Co., Ltd (7) | ||||||||||||
| DFL-Shutoken Leasing (Hong Kong) Company Limited | ||||||||||||
| Resona Merchant Bank Asia Limited (8) | ||||||||||||
| Total long-term borrowings | $ | $ | ||||||||||
| Current portion of long-term borrowings | $ | $ | ||||||||||
| Non-current portion of long-term borrowings | $ | $ | ||||||||||
| (1) |
| (2) |
| (4) |
F-31
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – BORROWINGS (continued)
| (5) |
| (6) |
| (7) |
| (8) |
The future maturities of long-term borrowings as of March 31, 2023 were as follows:
| 12 months ending March 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total long-term borrowings | $ | |||
For
the above mentioned short-term and long-term loans, the Company recorded interest expenses of $
F-32
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – 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 | ||
| Seihinkokusai Co., Ltd. (“Seihinkokusai”) | ||
| Takuetsu Kokusai Co., Ltd. | ||
| Shintai Co., Ltd. | ||
| Palpito | ||
| All Seas Global Limited | ||
| Tokushin G.K. | ||
| YST (HK) Limited |
| a. | Accounts receivable, net–- related parties |
Accounts receivable, net–- related parties consisted of the following: | |
| Name | March 31, 2023 | March 31, 2022 | ||||||
| Seihinkokusai | $ | $ | ||||||
| Palpito | ||||||||
| Tokushin G.K. | ||||||||
| Shintai Co., Ltd. | ||||||||
| Subtotal | ||||||||
| Less: allowance for doubtful accounts | ||||||||
| Total accounts receivable, net–- related parties | $ | $ | ||||||
F-33
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – RELATED PARTY TRANSACTIONS (continued)
| b. | Due from related parties |
| Due from related parties consisted of the following: | |
| Name | March 31, 2023 | March 31, 2022 | ||||||
| Palpito | $ | $ | ||||||
| Seihinkokusai (1) | ||||||||
| All Seas Global Limited | ||||||||
| Shintai Co., Ltd. | ||||||||
| Total due from related parties | $ | $ | ||||||
| (1) |
| c. | Accounts payable–- related parties |
Accounts payable–- related parties consisted of the following:
| Name | March 31, 2023 | March 31, 2022 | ||||||
| Seihinkokusai | $ | $ | ||||||
| Palpito | ||||||||
| Total accounts payable–- related parties | $ | $ | ||||||
| d. | Due to related parties |
Due to related parties consisted of the following:
| Name | March 31, 2023 | March 31, 2022 | ||||||
| Mr. Mei Kanayama | $ | $ | ||||||
| Seihinkokusai | ||||||||
| Total due to related parties | $ | $ | ||||||
F-34
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – RELATED PARTY TRANSACTIONS (continued)
| e. | Sales to related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| Name | 2023 | 2022 | 2021 | |||||||||
| Seihinkokusai | $ | $ | $ | |||||||||
| Shintai Co., Ltd. | ||||||||||||
| Palpito | ||||||||||||
| Tokushin G.K. | ||||||||||||
| Takuetsu Kokusai Co., Ltd. | ||||||||||||
| YST (HK) Limited | ||||||||||||
| Total revenue from related parties | $ | $ | $ | |||||||||
| f. | Purchase from related parties |
| For the Fiscal Years Ended March 31, | ||||||||||||
| Name | 2023 | 2022 | 2021 | |||||||||
| Seihinkokusai | $ | $ | $ | |||||||||
| Palpito | ||||||||||||
| YST (HK) Limited | ||||||||||||
| Total purchase from related parties | $ | $ | $ | |||||||||
| g. | Other related party transactions |
Mr. Kanayama provided guarantees in connection with certain loans the Company borrowed (see Note 12).
F-35
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – 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
Hong Kong
TLS is incorporated in Hong Kong and is subject
to profit taxes in Hong Kong at a rate of
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
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
The income (loss) before tax were as follows:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Japan | $ | ( | ) | $ | $ | |||||||
| Hong Kong | ( | ) | ( | ) | ||||||||
| PRC | - | |||||||||||
| Malaysia | ( | ) | - | - | ||||||||
| Income (loss) before tax | ( | ) | ||||||||||
F-36
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
The components of the income tax provision were as follows:
| For the Fiscal Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Current tax provision (benefit) | ||||||||||||
| Japan | $ | ( | ) | $ | $ | |||||||
| Hong Kong | - | - | - | |||||||||
| PRC | ||||||||||||
| Malaysia | ||||||||||||
| ( | ) | |||||||||||
| Deferred tax provision (benefit) | ||||||||||||
| Japan | $ | $ | ( | ) | $ | ( | ) | |||||
| Hong Kong | ||||||||||||
| PRC | ||||||||||||
| Malaysia | ||||||||||||
| ( | ) | ( | ) | |||||||||
| Income tax provisions | $ | $ | $ | |||||||||
The following table reconciles the Japan statutory rate to the Company’s effective tax rates for the fiscal years ended March 31, 2023, 2022, and 2021:
| For the Fiscal Years Ended March 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Japanese statutory income tax rate | % | % | % | |||||||||
| Non-deductible expenses | ( | )% | % | % | ||||||||
| Non-taxable income | ( | )% | ( | )% | ||||||||
| Tax rate difference in non-Japan subsidiaries | ( | )% | % | % | ||||||||
| Change in valuation allowance | ( | )% | % | |||||||||
| Effect of additional consumption tax charge from tax examination (1) | ( | )% | ||||||||||
| Others | ( | )% | ( | )% | % | |||||||
| Subtotal | ( | )% | % | % | ||||||||
| Undistributed retained earnings tax (2) | % | % | ||||||||||
| Effective tax rate | ( | )% | % | % | ||||||||
| (1) |
| (2) |
F-37
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
The Company’s deferred tax assets (liabilities), net comprised of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | $ | ||||||
| Accrued member rewards | ||||||||
| Accrued employee bonus | ||||||||
| Accrued asset retirement obligation | ||||||||
| Accrued employee retirement pension | ||||||||
| Investment loss from equity method investment | ||||||||
| Net operating loss carry-forwards | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Change in fair value of purchase option | ( | ) | ( | ) | ||||
| Accrued interest income on consumption tax receivable | ( | ) | ||||||
| Compensation receivable for consumption tax | ( | ) | ||||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Deferred tax assets (liabilities), net | $ | ( | ) | $ | ||||
The Company’s movement of the valuation allowance were as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions | ||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
As of March 31, 2023, the Company had net operating
loss carried forward from the entities in Japan of $
As of March 31, 2023, the Company had net operating
loss carried forward from the entities in Hong Kong of $
| (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 income (loss) and comprehensive
income (loss). Before October 1, 2019, the applicable consumption tax rate was
F-38
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – TAXES (continued)
| (c) | Taxes payable |
Taxes payable consisted of the following:
| March 31, 2023 | March 31, 2022 | |||||||
| Income tax payable | $ | $ | ||||||
| Additional consumption tax payable due to tax examination (1) | ||||||||
| Consumption tax payable and others | ||||||||
| Total taxes payable | $ | $ | ||||||
| (1) |
NOTE 15 – REPRESENTATIVE’S WARRANTS LIABILITY
Because the strike price of the Representative’s Warrants is denominated in U.S. dollars, a currency other than the Company’s functional currency, ¥, 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, 2023, these Representative’s Warrants were issued and outstanding but none of the warrants had been exercised. For the fiscal years ended March 31, 2023, 2022, and 2021, 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 $
F-39
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – REPRESENTATIVE’S WARRANTS LIABILITY (continued)
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, 2023 and 2022 using the following assumptions:
| March 31, 2023 | March 31, 2022 | January 13, 2022 | ||||||||||
| Representative’s Warrants liability | ||||||||||||
| Stock price | $ | $ | $ | |||||||||
| Exercise price | $ | $ | $ | |||||||||
| Expected term (years) | ||||||||||||
| Risk-free interest rate | % | % | % | |||||||||
| Expected volatility | % | % | % | |||||||||
NOTE 16 – 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
On April 25, 2011, the number of authorized ordinary
shares was increased to
On October 15, 2014,
On July 30, 2016,
On March 30, 2017,
On October 22, 2020,
On November 10, 2020,
F-40
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – SHAREHOLDERS’ EQUITY (continued)
Ordinary shares (continued)
On February 5 and 12, 2021, an issuance of
On August 18, 2021, shareholders of the Company
approved an increase in the number of the Company’s authorized Ordinary Shares from
Initial public offering
On January 13, 2022, the Company closed its IPO
of
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, 2023 and 2022, the total restricted net assets of the Company amounted to $
NOTE 17 – 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, 2023 and 2022, there were no legal claims and litigation against the Company.
F-41
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – 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 revenues for each of these individual products and services.
Directly-operated physical stores segment includes physical stores in Japan and Hong Kong. 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 the U.S. and the U.K., and wholesale customers in Japan and other countries including China, the U.S., 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, 2023, 2022, and 2021, respectively:
| For the Fiscal Year Ended March 31, 2023 | ||||||||||||||||
| Directly- Operated Physical Stores | Online Stores and Services | Franchise Stores and Wholesale Customers | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Merchandise costs | $ | $ | $ | $ | ||||||||||||
| Interest expenses, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Provision for income tax | $ | $ | $ | $ | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| For the Fiscal Year Ended March 31, 2022 | ||||||||||||||||
| Directly- Operated Physical Stores | Online Stores and Services | Franchise Stores and Wholesale Customers | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Merchandise costs | $ | $ | $ | $ | ||||||||||||
| Interest expenses, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Provision for income tax | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
F-42
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – SEGMENT REPORTING (continued)
| For the Fiscal Year Ended March 31, 2021 | ||||||||||||||||
| Directly- Operated Physical Stores | Online Stores and Services | Franchise Stores and Wholesale Customers | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Merchandise costs | $ | $ | $ | $ | ||||||||||||
| Interest expenses, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Provision for income tax | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Total assets: | ||||||||
| Directly-Operated Physical Stores | $ | $ | ||||||
| Online Stores and Services | ||||||||
| Franchise Stores and Wholesale Customers | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities: | ||||||||
| Directly-Operated Physical Stores | $ | $ | ||||||
| Online Stores and Services | ||||||||
| Franchise Stores and Wholesale Customers | ||||||||
| Total liabilities | $ | $ | ||||||
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, 2023, 2022, and 2021.
NOTE 19 – SUBSEQUENT EVENTS
On June 30, 2023, the Company
entered into sales agreement (the “Agreements”) with Seihinkokusai, a related party of the Company to sells its
These consolidated financial statements were approved by management and available for issuance on July 31, 2023, and the Company has evaluated subsequent events through this date. The Company did not identify any subsequent events except disclosed above that would have required adjustment or disclosure in the financial statements.
F-43
Exhibit 4.4
SECOND AMENDED AND RESTATED
SHAREHOLDERS’ AGREEMENT
Of
Trademark License Agreement
Date: March 26th, 2022
Parties:
| (1) | Yoshitsu Co., Ltd. (“Licensor”) |
| (2) | Valur Holding LLC (“Licensee”) |
Operative Provisions:
| Article 1 | Definitions |
| 1.1 | “License” shall mean the license of Trademarks (as defined below) granted by Licensor to Licensee under Article 2 of this Agreement. |
| 1.2 | “Products” shall mean the products sold by Licensor to Licensee under Sales Agreement (as defined below). |
| 1.3 | “Sales Agreement” shall mean the Basic Sales and Purchase Agreement entered into by and between the parties hereto as of March 26th, 2022. |
| 1.4 | This agreement is valid for 1 year from the date of this agreement. Subsequently,this agreement shall be considered automatically renewed year on year unless the notice is given 3 months before the annual expiry date. |
| 1.5 | “Territory” shall mean United States of America. |
| 1.6 | “Trademarks” shall mean Licensor’s trademark(s) as described in Exhibit. |
| Article 2 | Grant of License |
| 2.1 | During the term of this Agreement and subject to the terms and conditions stated herein, Licensor grants to Licensee a revocable license and non-exclusive right to use the Trademarks in the Territory solely for the purpose of selling, promoting sales of, and performing post-sale and other support relating to, the Products, provided that any use of the Trademarks must be, in the absolute opinion of the Licensor, considered to be appropriate. This grant of License shall be treated as Licensor’s permission under Article 11.1 of Sales Agreement. |
| 2.2 | Must purchase 75% of the products in Yoshitsu Co., Ltd. or more than 75% of the products as the standard. |
| 2.3 | Provide company financial statements every quarter for both parties to know. |
| Article 3 | Exclusion of Trademark Right Infringement |
| 3.1 | When you become aware that a third party without legitimate authority infringes or may infringe the Trademark Right, you immediately eliminate or eliminate the infringement. You must prevent it and notify us to that effect. |
| Article 4 | Obligation to Cooperate |
| 4.1 | First Party shall cooperate in good faith with Second Party regarding matters arising from the permission of the normal use right by Second Party. |
| Article 5 | Notice of Usage Mode and Change of Usage Mode |
| 5.1 | When using this trademark right, you will notify us in advance of the mode of the trademark used. Notify when the usage mode is changed. |
| 5.2 | Whenever you sell a new product that should use the registered trademark of this trademark right, you will notify us to that effect. |
| Article 6 | Transfer of Trademark Right |
| 6.1 | If we transfer this trademark right to a third party other than you, we will notify you in advance. |
| Article 7 | Prohibition of Transfer of Normal use Right to a Third Party and Permission of use |
| 7.1 | Second Party shall not transfer the normal usage right to a third party. |
| 7.2 | Second Party shall not permit a third party to use a registered trademark for which a normal license has been granted. |
| Article 8 | Cancellation of This Contract |
| 8.1 | If one of the parties to this Agreement fails to meet the obligations set forth in this Agreement, the other party may urge them to do so and may terminate this Agreement if they do not perform within one month after the notification. |
| 8.2 | If the party who canceled this contract in the preceding paragraph suffers damages, it does not prevent the other party from claiming damages. |
| Article 9 | Dispute Resolution with a Third Party |
| 9.1 | If a dispute arises between you and a third party in connection with the license of this trademark right, you will immediately report it to us and cooperate with us to resolve the dispute. |
| Article 10 | Request for Trial of Trademark Right |
| 10.1 | Second Party will not take any action that is disadvantageous to us, such as a request for a trial for cancellation of trademark right registration or a request for a trial for invalidation of trademark registration, regardless of whether the Trademark is direct or indirect. |
| Article 11 | Consultation Clause |
| 11.1 | If there is any doubt about the operation or interpretation of this contract or matters not stipulated in this contract, First Party and Second Party shall discuss and handle it in good faith. |
[Signatures in the following page]
2
| YOSHITSU CO., LTD. | ||
| /s/ Kanayama Mei | ||
| Name: | Kanayama Mei | |
| Title: | Representative Director | |
| VALUR HOLDING LLC | ||
| /s/ Wan lan Hew | ||
| Name: | Wan lan Hew | |
| Title: | Director | |
3
Exhibit
Trademarks
| Country | Trademark | Class | Registration No. | Registration Date | |||||
| 1 | U.S.A | REIWATAKIYA | 35 | 6234999 | Dec 29th,2020 | ||||
| 2 | U.S.A | 東京生活館 | 35 | 5694575 | Mar 12th,2019 | ||||
| 3 | Japan | 令和多喜屋 | 3,5,35，44 | 6325574 | Dec 7th,2020 |
4
Exhibit 4.5
SECOND AMENDED AND RESTATED
SHAREHOLDERS’ AGREEMENT
Of
Trademark License Agreement
Date: March 29th, 2022.
Parties:
| (1) | Yoshitsu Co., Ltd. (“Licensor”) |
| (2) | Jacato Holding INC. (“Licensee”) |
Operative Provisions:
| Article 1 | Definitions |
| 1.1 | “License” shall mean the license of Trademarks (as defined below) granted by Licensor to Licensee under Article 2 of this Agreement. |
| 1.2 | “Products” shall mean the products sold by Licensor to Licensee under Sales Agreement (as defined below). |
| 1.3 | “Sales Agreement” shall mean the Basic Sales and Purchase Agreement entered into by and between the parties hereto as of March 29th, 2022. |
| 1.4 | This agreement is valid for 1 year from the date of this agreement. Subsequently, this agreement shall be considered automatically renewed year on year unless the notice is given 3 months before the annual expiry date. |
| 1.5 | “Territory” shall mean Canada. |
| 1.6 | “Trademarks” shall mean Licensor’s trademark(s) as described in Exhibit. |
| Article 2 | Grant of License |
| 2.1 | During the term of this Agreement and subject to the terms and conditions stated herein, Licensor grants to Licensee a revocable license and non-exclusive right to use the Trademarks in the Territory solely for the purpose of selling, promoting sales of, and performing post-sale and other support relating to, the Products, provided that any use of the Trademarks must be, in the absolute opinion of the Licensor, considered to be appropriate. This grant of License shall be treated as Licensor’s permission under Article 11.1 of Sales Agreement. |
| 2.2 | Must purchase 75% of the products in Yoshitsu Co., Ltd. or more than 75% of the products as the standard. |
| 2.3 | Provide company financial statements every quarter for both parties to know. |
| Article 3 | Exclusion of Trademark Right Infringement |
| 3.1 | When you become aware that a third party without legitimate authority infringes or may infringe the Trademark Right, you immediately eliminate or eliminate the infringement. You must prevent it and notify us to that effect. |
| Article 4 | Obligation to Cooperate |
| 4.1 | First Party shall cooperate in good faith with Second Party regarding matters arising from the permission of the normal use right by Second Party. |
| Article 5 | Notice of Usage Mode and Change of Usage Mode |
| 5.1 | When using this trademark right, you will notify us in advance of the mode of the trademark used. Notify when the usage mode is changed. |
| 5.2 | Whenever you sell a new product that should use the registered trademark of this trademark right, you will notify us to that effect. |
| Article 6 | Transfer of Trademark Right |
| 6.1 | If we transfer this trademark right to a third party other than you, we will notify you in advance. |
| Article 7 | Prohibition of Transfer of Normal use Right to a Third Party and Permission of use |
| 7.1 | Second Party shall not transfer the normal usage right to a third party. |
| 7.2 | Second Party shall not permit a third party to use a registered trademark for which a normal license has been granted. |
| Article 8 | Cancellation of This Contract |
| 8.1 | If one of the parties to this Agreement fails to meet the obligations set forth in this Agreement, the other party may urge them to do so and may terminate this Agreement if they do not perform within one month after the notification. |
| 8.2 | If the party who canceled this contract in the preceding paragraph suffers damages, it does not prevent the other party from claiming damages. |
| Article 9 | Dispute Resolution With a Third Party |
| 9.1 | If a dispute arises between you and a third party in connection with the license of this trademark right, you will immediately report it to us and cooperate with us to resolve the dispute. |
| Article 10 | Request for Trial of Trademark Right |
| 10.1 | Second Party will not take any action that is disadvantageous to us, such as a request for a trial for cancellation of trademark right registration or a request for a trial for invalidation of trademark registration, regardless of whether the Trademark is direct or indirect. |
| Article 11 | Consultation Clause |
| 11.1 | If there is any doubt about the operation or interpretation of this contract or matters not stipulated in this contract, First Party and Second Party shall discuss and handle it in good faith. |
[Signatures in the following page]
2
| YOSHITSU CO., LTD. | ||
| /s/ Kanayama Mei | ||
| Name: | Kanayama Mei | |
| Title: | Representative Director | |
| JACATO HOLDING INC. | ||
| /s/ Wan Lan Hew | ||
| Name: | Wan Lan Hew | |
| Title: | Director | |
3
Exhibit
Trademarks
| Country | Trademark | Class | Registration No. | Registration Date | |||||
| 1 | Canada | 東京生活館 | 35,44 | TMA1087885 | Nov 18th,2020 | ||||
| 2 | Japan | 東京生活館 | 3,5,44 | 5855378 | Jun 3th,2016 | ||||
| 3 | Japan | 令和多喜屋 | 3,5,35, 44 | 6325574 | Dec 7th,2020 | ||||
| 4. | Canada | REIWATAKIYA | 35 | 1992964 | Oct 30th,2019 |
4
Exhibit 4.11
SECOND AMENDED AND RESTATED
SHAREHOLDERS’ AGREEMENT
Of
Trademark License Agreement
Date: March 26th, 2022
Parties:
| (1) | Yoshitsu Co., Ltd. (“Licensor”) |
| (2) | TOKYO LIFESTYLE Ltd. (“Licensee”) |
Operative Provisions:
| Article 1 | Definitions |
| 1.1 | “License” shall mean the license of Trademarks (as defined below) granted by Licensor to Licensee under Article 2 of this Agreement. |
| 1.2 | “Products” shall mean the products sold by Licensor to Licensee under Sales Agreement (as defined below). |
| 1.3 | “Sales Agreement” shall mean the Basic Sales and Purchase Agreement entered into by and between the parties hereto as of March 26th, 2022. |
| 1.4 | This agreement is valid for 1 year from the date of this agreement. Subsequently, this agreement shall be considered automatically renewed year on year unless the notice is given 3 months before the annual expiry date. |
| 1.5 | “Territory” shall mean Hongkong. |
| 1.6 | “Trademarks” shall mean Licensor’s trademark(s) as described in Exhibit. |
| Article 2 | Grant of License |
| 2.1 | During the term of this Agreement and subject to the terms and conditions stated herein, Licensor grants to Licensee a revocable license and non-exclusive right to use the Trademarks in the Territory solely for the purpose of selling, promoting sales of, and performing post-sale and other support relating to, the Products, provided that any use of the Trademarks must be, in the absolute opinion of the Licensor, considered to be appropriate. This grant of License shall be treated as Licensor’s permission under Article 11.1 of Sales Agreement. |
| 2.2 | Must purchase 75% of the products in Yoshitsu Co., Ltd. or more than 75% of the products as the standard. |
| 2.3 | Provide company financial statements every quarter for both parties to know. |
| Article 3 | Exclusion of Trademark Right Infringement |
| 3.1 | When you become aware that a third party without legitimate authority infringes or may infringe the Trademark Right, you immediately eliminate or eliminate the infringement. You must prevent it and notify us to that effect. |
| Article 4 | Obligation to Cooperate |
| 4.1 | First Party shall cooperate in good faith with Second Party regarding matters arising from the permission of the normal use right by Second Party. |
| Article 5 | Notice of Usage Mode and Change of Usage Mode |
| 5.1 | When using this trademark right, you will notify us in advance of the mode of the trademark used. Notify when the usage mode is changed. |
| 5.2 | Whenever you sell a new product that should use the registered trademark of this trademark right, you will notify us to that effect. |
| Article 6 | Transfer of Trademark Right |
| 6.1 | If we transfer this trademark right to a third party other than you, we will notify you in advance. |
| Article 7 | Prohibition of Transfer of Normal use Right to a Third Party and Permission of use |
| 7.1 | Second Party shall not transfer the normal usage right to a third party. |
| 7.2 | Second Party shall not permit a third party to use a registered trademark for which a normal license has been granted. |
| Article 8 | Cancellation of This Contract |
| 8.1 | If one of the parties to this Agreement fails to meet the obligations set forth in this Agreement, the other party may urge them to do so and may terminate this Agreement if they do not perform within one month after the notification. |
| 8.2 | If the party who canceled this contract in the preceding paragraph suffers damages, it does not prevent the other party from claiming damages. |
| Article 9 | Dispute Resolution With a Third Party |
| 9.1 | If a dispute arises between you and a third party in connection with the license of this trademark right, you will immediately report it to us and cooperate with us to resolve the dispute. |
2
| Article 10 | Request for Trial of Trademark Right |
| 10.1 | Second Party will not take any action that is disadvantageous to us, such as a request for a trial for cancellation of trademark right registration or a request for a trial for invalidation of trademark registration, regardless of whether the Trademark is direct or indirect. |
| Article 11 | Consultation Clause |
| 11.1 | If there is any doubt about the operation or interpretation of this contract or matters not stipulated in this contract, First Party and Second Party shall discuss and handle it in good faith. |
[Signatures in the following page]
3
| YOSHITSU CO., LTD. | ||
| /s/ Kanayama Mei | ||
| Name: | Kanayama Mei | |
| Title: | Representative Director | |
| TOKYO LIFESTYKE LTD. | ||
| /s/ Kanayama Mei | ||
| Name: | Kanayama Mei | |
| Title: | Director | |
4
Exhibit
Trademarks
| Country | Trademark | Class | Registration No. | Registration Date | ||||||
| 2 | Hongkong | Tokyo Lifestyle | 35 | 304969081 | Jun 21st,2019 | |||||
| 3 | Japan | 東京生活館 | 3，5，44，35 |
5855378 5865658 |
Jun 3rd,2016 Jul 8th,2016 | |||||
| 4 | Hongkong | 東京生活館 | 3，5，35，44 | 304300073 |
Oct 12th,2017 |
5
Exhibit 4.13
SECOND AMENDED AND RESTATED
SHAREHOLDERS’ AGREEMENT
Of
Trademark License Agreement
Date: March 29th, 2022
Parties:
| (1) | Yoshitsu Co., Ltd. (“Licensor”) |
| (2) | Fancy Lifestyle Ltd. (“Licensee”) |
Operative Provisions:
| Article 1 | Definitions |
| 1.1 | “License” shall mean the license of Trademarks (as defined below) granted by Licensor to Licensee under Article 2 of this Agreement. |
| 1.2 | “Products” shall mean the products sold by Licensor to Licensee under Sales Agreement (as defined below). |
| 1.3 | “Sales Agreement” shall mean the Basic Sales and Purchase Agreement entered into by and between the parties hereto as of March 29th,2022. |
| 1.4 | This agreement is valid for 1 year from the date of this agreement. Subsequently, this agreement shall be considered automatically renewed year on year unless the notice is given 3 months before the annual expiry date. |
| 1.5 | “Territory” shall mean United Kingdom. |
| 1.6 | “Trademarks” shall mean Licensor’s trademark(s) as described in Exhibit. |
| Article 2 | Grant of License |
| 2.1 | During the term of this Agreement and subject to the terms and conditions stated herein, Licensor grants to Licensee a revocable license and non-exclusive right to use the Trademarks in the Territory solely for the purpose of selling, promoting sales of, and performing post-sale and other support relating to, the Products, provided that any use of the Trademarks must be, in the absolute opinion of the Licensor, considered to be appropriate. This grant of License shall be treated as Licensor’s permission under Article 11.1 of Sales Agreement. |
| 2.2 | Must purchase 75% of the products in Yoshitsu Co., Ltd. or more than 75% of the products as the standard. |
| 2.3 | Provide company financial statements every quarter for both parties to know. |
| Article 3 | Exclusion of Trademark Right Infringement |
| 3.1 | When you become aware that a third party without legitimate authority infringes or may infringe the Trademark Right, you immediately eliminate or eliminate the infringement. You must prevent it and notify us to that effect. |
| Article 4 | Obligation to Cooperate |
| 4.1 | First Party shall cooperate in good faith with Second Party regarding matters arising from the permission of the normal use right by Second Party. |
| Article 5 | Notice of Usage Mode and Change of Usage Mode |
| 5.1 | When using this trademark right, you will notify us in advance of the mode of the trademark used. Notify when the usage mode is changed. |
| 5.2 | Whenever you sell a new product that should use the registered trademark of this trademark right, you will notify us to that effect. |
| Article 6 | Transfer of Trademark Right |
| 6.1 | If we transfer this trademark right to a third party other than you, we will notify you in advance. |
| Article 7 | Prohibition of Transfer of Normal use Right to a Third Party and Permission of use |
| 7.1 | Second Party shall not transfer the normal usage right to a third party. |
| 7.2 | Second Party shall not permit a third party to use a registered trademark for which a normal license has been granted. |
| Article 8 | Cancellation of This Contract |
| 8.1 | If one of the parties to this Agreement fails to meet the obligations set forth in this Agreement, the other party may urge them to do so and may terminate this Agreement if they do not perform within one month after the notification. |
| 8.2 | If the party who canceled this contract in the preceding paragraph suffers damages, it does not prevent the other party from claiming damages. |
| Article 9 | Dispute Resolution With a Third Party |
| 9.1 | If a dispute arises between you and a third party in connection with the license of this trademark right, you will immediately report it to us and cooperate with us to resolve the dispute. |
2
| Article 10 | Request for Trial of Trademark Right |
| 10.1 | Second Party will not take any action that is disadvantageous to us, such as a request for a trial for cancellation of trademark right registration or a request for a trial for invalidation of trademark registration, regardless of whether the Trademark is direct or indirect. |
| Article 11 | Consultation Clause |
| 11.1 | If there is any doubt about the operation or interpretation of this contract or matters not stipulated in this contract, First Party and Second Party shall discuss and handle it in good faith. |
[Signatures in the following page]
3
| YOSHITSU CO., LTD. | ||
| /s/ Kanayama Mei | ||
| Name: | Kanayama Mei | |
| Title: | Representative Director | |
| Fancy Lifestyle Ltd. | ||
| /s/ Xiaonan Xie | ||
| Name: | Xiaonan Xie | |
| Title: | Director | |
4
Exhibit
Trademarks
| Country | Trademark | Class | Registration No. | Registration Date | ||||||
| 1 | UK | REIWATAKIYA | 35 | UK00003441105 | Jan 24th,2020 |
5
Exhibit 4.21
Revolving Credit Facility Agreement
(8.15 billion yen)
| Borrower | Yoshitsu Co., Ltd. | |
| Guarantor | Mei Kanayama | |
| Arranger | MUFG Bank, Ltd. | |
| Mizuho Bank, Ltd. | ||
| Agent | MUFG Bank, Ltd. | |
| Lenders | Financial institutions listed in | |
| the Lenders column of Appendix 1 | ||
| attached to this agreement | ||
September 27, 2022
TABLE OF CONTENTS
| Page | ||
| 1. | Definitions | 2 |
| 2. | Rights and Obligations of Lenders | 10 |
| 3. | Use of Proceeds | 11 |
| 4. | Application for the Loan | 11 |
| 5. | Prerequisites for Assumption of Loan Obligation | 12 |
| 6. | Conditions Precedent for Lending Obligations | 13 |
| 7. | non-disbursement of individual loans | 14 |
| 8. | Lender’s Disclaimer | 15 |
| 9. | Increased costs and illegality | 15 |
| 10. | Principal Repayment | 15 |
| 11. | Interest | 15 |
| 12. | Prepayment | 16 |
| 13. | Late Payment Charge | 16 |
| 14. | Commitment Fee | 17 |
| 15. | Agent Fee | 18 |
| 16. | Expenses; Taxes and Public Charges | 18 |
| 17. | Guarantees | 18 |
| 18. | Performance of obligations of the Borrower and the Guarantor | 20 |
| 19. | Distribution to Lenders | 21 |
| 20. | Borrower’s Representations and Warranties | 25 |
| 21. | Covenants of Borrower and Guarantor | 27 |
| 22. | Grounds for Forfeiture of the Benefit of Time Limit | 32 |
| 23. | Set-Off, Exercise of Security Interests | 34 |
| 24. | Arrangement among Lenders and Agents | 36 |
| 25. | Rights and Obligations of the Agent | 37 |
| 26. | Resignation and Dismissal of the Agent | 39 |
| 27. | Clarification of the intention of the Majority Lenders | 40 |
| 28. | Amendment to this Agreement | 41 |
| 29. | Assignment of this Agreement | 41 |
| 30. | Assignment of Loan Receivables | 42 |
| 31. | Collection from Third Party | 43 |
| 32. | Termination of this Agreement | 45 |
| 33. | General Provisions | 45 |
| Particular Table 1 (Party List) | 49 | |
| Particular Table 2 (Anti-social Forces and Anti-social Behavior) | omitted |
| Separate sheet 1 (Loan Application Form) | omitted |
| Separate sheet 2 (Confirmation) | omitted |
| Separate sheet 3 (Report on compliance with the terms and conditions of the guarantee and third-party recovery) | omitted |
| Separate sheet 4 (Report on Borrowing Funds) | omitted |
Revolving Credit Facility Agreement dated September 27, 2022 for Yoshitsu Co.,Ltd
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Yoshitsu Co.,Ltd (hereinafter referred to as the “Borrower”); the financial institutions described in the Particular Table 1 (hereinafter respectively referred to as a “Lender”, and collectively referred to as “All Lenders”); and MUFG Bank (hereinafter referred to as the “Agent”), as of the date of 27 September 2022, enter into this Revolving Credit Facility Agreement (hereinafter referred to as this “Agreement”).
1. DEFINITIONS
In this Agreement, the following terms shall have the meaning set forth below, unless it is apparent that such terms mean otherwise in the context hereof.
1.1 “Business Day” means any day other than those that are bank holidays in Japan.
1.2 “Agent Services” means the services set forth in the provisions of this Agreement whereby the Agent was entrusted by All Lenders to perform for the benefit of All Lenders.
1.3 “Agent’s Account” means the checking deposit account (Account No. 0041097, Account Holder: MUFG Bank Syndicate Loan) held by the Agent at MUFG Bank Tokyo Main Office.
1.4 “Agent Fee” means the fees that the Borrower shall pay to the Agent as separately agreed upon between the Borrower and the Agent.
1.5 “Parent company, subsidiaries and affiliates” means that the Definition in Article 8 of the Regulations Concerning Terms, Forms and Preparation Methods of Financial Statements, etc.
1.6 “Loan Term” means the period commencing on the Drawdown Date (inclusive) and ending on the Maturity Date (inclusive).
1.7 “Loan Obligation” means the obligation of a lender to lend money to a borrower as provided in Article 2.1.
1.8 “Commitment Amount” means the amount set forth in Schedule 1 attached hereto for each Lender (or, if modified in accordance with the provisions of Article 2.5, such modified amount).
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1.9 “Loan Receivables” means the loan claim in relation to each Individual Loan.
1.10 “Not Loanable Term” means the period from the date of receipt of the notice under Paragraph 1 of Article 8 (including the same date) to the date of receipt of the notice under Paragraph 2 of Article 8 (including the same date)
1.11 “Not Loanable Cases” means (i) The outbreak of a natural disaster, war, or terrorist attack, (ii) the interruption or failure of electricity, telecommunications, or various settlement systems, (iii) events occurring in the Tokyo interbank market that make it impossible to conduct yen fund lending transactions, or (iv) other events beyond the control of the lender, for which the majority lender (or the agent if the majority lender has difficulty in reaching its decision) determines that the loan cannot be executed as a result.
1.12 “Credit Limit on a Loan” means (l) if such date falls on a non-business day, on or before the 15th day of the month (or, if such 15th day falls on a non-business day, on the business day immediately following such date), or, if such date falls on the 22nd day of the month in which such date falls, on or before the last day of such month, on or before the 15th day of such month (or, if such 15th day falls on a non-business day, on the business day immediately following such day), based on a document in the form of Exhibit 4 attached to this Agreement submitted by the Borrower to all Lenders and the Agent under Section 21.1(l) (a) The amount to be calculated in accordance with the following formula. However, if the desired date of execution is any day from the Commencement Date of the Commitment to October 21, 2022, the amount shall mean 11,738,754,765 yen.
| Formula: Maximum borrowing amount = (④ + ⑤ + ⑥ - ⑦) - ② |
| ④ = Amount of cash and deposits |
| ⑤ = Total amount of accounts receivable |
| ⑥ ＝ Total Inventories |
| ⑦ ＝ Total amount of accounts payable |
| ② ＝ Total principal balance of borrowings not based on this agreement that are used for working capital |
1.13 “Loan Application Form” means the application form in the form attached hereto as Exhibit 1, submitted by the Borrower to the Agent in accordance with Article IV, Section 1, if the Borrower desires to borrow under this Agreement.
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1.14 “Refinance of Old Loan” means an individual loans that have already been executed with a repayment date on the desired date for the new refinancing loan.
1.15 “Refinancing” means an individual loan whose desired drawdown date is the repayment date of the Loan that has already been drawn down.
1.16 “Standard Loan Period” A period of time that is entered on the loan application form to be used as an index for setting the base interest rate.
1.17 “Base Rate” means the interest rate corresponding to the base loan period of the Japanese Yen TIBOR (Telerate17097 page or its successor page) published by the JBA TIBOR Management Institution as of 11:00 a.m. two business days prior to the desired drawdown date or as close to 11:00 a.m. as possible. However, if the standard loan period is longer than one week but less than one month, the interest rate shall be the higher of one week or one month, or if the standard loan period is longer than one month but less than three months, the interest rate shall be the higher of one month or three months, or if the standard loan period is less than one week, the interest rate shall be the rate for one week. In the case where such standard loan period is one week, one month or three months, and such interest rate is not announced for some reason, the interest rate (expressed as an annual percentage rate) reasonably determined by the Agent as the Offered Rate for Yen funds lending transactions in the Tokyo interbank market for the period corresponding to such standard loan period at 11:00 a.m. two business days prior to the desired drawdown date or at the latest time preceding such date. The interest rate (expressed as an annual percentage rate) reasonably determined by the Agent as the offered rate. (2) “Base Loan Period” means a period of one week. If the reference loan period is more than one week but less than one month, more than one month but less than three months, or less than one week, and the interest rate is not announced for some reason, it means the interest rate reasonably determined by the agent. However, if the interest rate determined above is less than 0% per annum, it shall mean 0% per annum.
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1.18 “Permitted Security Interest” means (i) revolving security interests that have already been established over the assets of the Borrower or the Guarantor at the time of execution of this Agreement and that include as secured claims the loan claims or the claims for performance of guarantee obligations under this Agreement, (ii) security interests established by the Borrower or the Guarantor pursuant to Article 21.1.2 (including but not limited to those approved in advance by all Lenders and the Agent), and security interests created by the Borrower or the Guarantor that are secured by or include a loan claim or a claim for performance of a guaranteed obligation under the Agreement, and (iii) security interests based on statutory provisions such as liens and rights of retention.
1.19 “Financial Statements, etc.” means the following items (i) through (iv) below.
(i) Financial statements for each business year stipulated in Article 435, Paragraph 2 of the Companies Act (meaning the balance sheet and profit and loss statement stipulated in the same paragraph, and the statement of changes in net assets and notes to non-consolidated financial statements stipulated in Article 59, Paragraph 1 of the Corporate Accounting Rules) and business report (ii) Extraordinary financial statements as defined in Article 441, Paragraph 1 of the Companies Act that have actually been prepared (meaning the balance sheet as of the extraordinary settlement date as defined in the same paragraph and the statement of income for the period from the first day of the fiscal year that includes the said extraordinary settlement date to the extraordinary settlement date). (iii) Consolidated financial statements (meaning consolidated balance sheets, consolidated statements of income, consolidated statements of changes in net assets and notes to consolidated financial statements as defined in Article 61 of the Corporate Calculation Regulations) for each fiscal year as defined in Article 444, Paragraph 3 of the Companies Act. The same shall apply hereinafter in this item (iii)) for each fiscal year. In the case where the preparation of the consolidated financial statements (meaning the consolidated balance sheet, consolidated statement of income, consolidated statement of changes in net assets and notes to consolidated financial statements provided for in Article 61 of the Ordinance on Company Accounting) is mandatory, the consolidated financial statements for each business year provided for in Article 444, Paragraph 1 of the Companies Act (iv) Consolidated and non-consolidated balance sheets, statements of income, statements of changes in net assets and notes thereto actually prepared.
1.20 “Taxes and Public Charges” means all public taxes or public charges including income taxes, corporate taxes and other taxes, which are applicable in Japan.
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1.21 “Individual Loan” means a loan made by a Lender respectively pursuant to the same Drawdown Application.
1.22 “Individual Loan Money” means the money lent (or to be lent) by a Lender to the Borrower as an Individual Loan, and the “Individual Loan Amount” means the amount of the Individual Loan Money (the amount calculated by multiplying the aggregate amount of Loan in relation to the relevant Drawdown Application by the Commitment Ratio of that Lender).
1.23 “Outstanding Individual Loan Money” means the principal, the interest, default interest, Break Funding Costs and any other payment obligation that the Borrower owes pursuant to this Agreement with respect to Individual Loan, and the “Outstanding Individual Loan Amount” means the amount of such Outstanding Individual Loan Money.
1.24 “Commitment Commencement Date” 30 September 2022
1.25 “Commitment Period” means the period from the Commencement Date (including the Commencement Date) to the date on which all lenders’ loan obligations terminate (including the same date).
1.26 “Commitment Deadline” 29 September 2023 (or the preceding business day if such date falls on a non-business day).
1.27 “Commitment Fee” means a fee paid by the borrower to the lender as consideration for the loan obligation.
1.28 “Commitment Fee Calculation Period” means the period from the Commencement Date of Commitment (including the same date) to March 31, 2023 (including the same date) and the period from April 1, 2023 (inclusive) to the Commitment Period (inclusive). However, if, for any reason whatsoever, the loan obligation with respect to any lender terminates on a date prior to the Commitment Period, the Commitment Fee Calculation Period with respect to such lender shall terminate on such date (including the same date). ), and no Commitment Fee Calculation Period shall exist after such Commitment Fee Calculation Period.
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1.29 “Commitment Fee Rate” 03% per annum
1.30 “Percentage of Participation” means the ratio of the maximum amount of loans per lender to the total maximum amount of loans.
1.31 “Preferred Execution Date” means the date on which the Loan is executed.
1.32 “Execution Date” means the total of the Commitment Amounts of All Lenders.
1.33 “Repayment Date” means 10:30 a.m. of the Repayment Date in the case where the Repayment Date is specified in the Agreement.
1.34 “Syndicate Account” means a savings account (account number: 0019752, account name: Yoshitsu Co., Ltd. held by the Borrower at the Kameido Branch of MUFG Bank or an account opened by the Borrower and accepted by the Agent at the head office or any branch of MUFG Bank
1.35 “Spread” 0.7% per annum
1.36 “Liquidation Fees” means, (i) in the case where the principal of an individual loan has been repaid or set off prior to the repayment date (including the case where the guaranteed obligation of a guarantor with respect to the principal of said individual loan has been repaid or set off), or (ii) In the case where the principal of an individual loan has been repaid or set off after the repayment date. The same shall apply hereinafter in this item.), (iii) In the case where the Individual Loan is not executed because all or part of the conditions in Article 5 are not satisfied, or (iv) in the case where the Borrower loses the benefit of term of the Individual Loan and the re-deployment interest rate is lower than the Applicable Interest Rate, the amount calculated by multiplying the principal amount subject to liquidation payment by the difference between the re-deployment interest rate and the Applicable Interest Rate and the actual number of days remaining in the remaining period. However, such amount shall be an amount that does not violate any laws or regulations. The “Commencement Date of Liquidation Payment Calculation” means, with respect to this item (i), the date of such repayment or offsetting, and with respect to this item (ii) and (iii), the desired date of execution with respect to such Individual Loan, and with respect to this item (iii), the date of such individual loan. The “principal amount subject to liquidation proceeds” means, with respect to this item (i), the principal amount on which the repayment or setoff was made, with respect to this item (ii) and (iii), the amount of the individual loans made with respect to such individual loans, and with respect to this item (iv), the principal amount of such individual loans on the date when the borrower forfeited the benefit of time, as reasonably determined by the lender. Remaining period” means the period from the commencement date of the liquidation payment calculation (including the same date) to the repayment date (including the same date). “Residual Period” means the period from the commencement date (including the same date) to the repayment date (including the same date). “Re-operation interest rate” means the interest rate reasonably determined by the lender based on the assumption that the principal amount subject to the liquidation proceeds is re-operated in the Tokyo interbank market over the remaining period.
The “re-deployment interest rate” means the interest rate reasonably determined by the lender based on the assumption that the principal amount subject to liquidation proceeds is re-deployed in the Tokyo interbank market over the remaining period. The method of calculation of such liquidation proceeds shall be one end of a post-drop and a daily prorated calculation based on a 365-day year, with division made at the end and rounded down to the nearest yen.
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1.37 “Total Loan Amount” means the sum of the maximum loan amounts of all lenders.
1.38 “Total Loan Balance” means the aggregate principal amount of all individual loan accruals of all lenders.
1.39 “Incremental Cost” means, in the event that a lender’s loan costs hereunder increase due to (i) the enactment, repeal, or amendment of any law or regulation, or any change in the interpretation or operation thereof, (ii) the establishment of reserves or any increase thereof, or (iii) any change in accounting regulations or operation thereof (excluding, however, any increase resulting from a change in the tax rate on such lender’s taxable income)
1.40 “Lender who has Incremental Expenses” means a lender that incurred incremental expenses.
1.41 “Damages, etc.” means the damages, losses and expenses, etc. (including attorney’s fees and costs).
1.42 “Multiple Lender” means the total of the following is 66.7% or more of the total of the following. (However, during the period after all lenders’ loan obligations have been extinguished and all obligations under the Loan Agreement with respect to the Loan have not been repaid, the ratio shall be the ratio of the total principal amount of outstanding individual loans for each lender to the total balance of outstanding loans as of the date of the Rally of Intent). However, in the case of a declaration of intent to determine whether or not to give a notice of forfeiture of the benefit of time pursuant to Article 22, Paragraph 2, it means a single or multiple lenders for whom the aggregate ratio of the principal amount outstanding of the individual loans for each lender to the total outstanding loans as of the base date for declaration of intent is 66.7% or more. The “cutoff time” is the time when the agent receives the notice stipulated in Article 27.1.1 if the lender determines that an event requiring instructions by the majority lender has occurred, or the time when the agent issues the notice stipulated in Article 27.2 if the agent determines that the agent itself requires a decision by the majority lender.
1.43 “Advance Payment Cost” means, in the event that the Agent makes an advance payment, the amount of the advance payment multiplied by the Procured Interest Rate and the actual number of days of the Advance Period. The “Advance Period” means the period from the date on which the Agent makes the Advance Payment to the date on which the Agent receives the amount of such Advance Payment from the Lender or the Borrower or the Guarantor, and the “Interest Rate” means the interest rate reasonably determined by the Agent as the rate at which the amount of the Advance Payment is financed over the Advance Period. The method of calculation of such replacement cost shall be one end by debit and one day per year on the basis of 365 days per year, with division made at the end and rounded down to the nearest one yen.
1.44 “Advance Payment” means, with respect to the repayment by the Borrower or the Guarantor on the Repayment Date, the Agent shall pay to the Lenders an amount equivalent to the amount to be distributed to the Lenders pursuant to Article 19, Paragraphs 1 through 5 before the repayment by the Borrower or the Guarantor is completed. The Borrower, the Guarantor or the Lender shall not object to the Agent’s making the Advance Payment.
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1.45 “Eligible Assignee” means lenders as of the date of this Agreement, persons engaged in the banking business with a license under the Japanese Banking Act or Long-Term Credit Bank Act, or persons engaged in the life insurance business or non-life insurance business with a life insurance business license or non-life insurance business license under the Japanese Insurance Business Act, Shinkin banks, Shinkin Central Bank, labor banks, federations of labor banks, federations of credit agricultural cooperatives in each prefecture, Norinchukin Bank, credit cooperatives, National Federation of Credit Cooperatives, National Mutual Insurance Federation of Agricultural Cooperatives or Shoko Chukin Bank, trust companies as defined in the Trust Business Law and leasing companies registered under Article 3-1 of the Money Lending Business Law.
1.46 “Applicable Rate” means the interest rate that is the base rate plus a spread.
1.47 “Antisocial Behavior” means the acts defined in Paragraph 2 of Schedule 2 attached to this Agreement.
1.48 “Antisocial Forces e” means a person as defined in Paragraph 1 of Schedule 2 attached to this Agreement.
1.49 “Due Date” means, with respect to the principal and interest on the Loan, the Maturity Date; with respect to the Commitment Fee, the date specified in Article 14.1; and with respect to other money, the date specified as the date on which payment is to be made in accordance with this Agreement.
1.50 “Reports, etc.” means annual securities reports, semi-annual reports, quarterly reports, extraordinary reports, and correction reports.
1.51 “Laws and Regulations, etc.” means treaties, laws, ordinances, cabinet orders, ministerial ordinances, regulations, public notices, judgments, decisions, arbitral awards, notifications, and policies of relevant authorities.
1.52 “Loans” means the total number of individual loans executed based on the same loan application.
1.53 “Revolving Credit Guarantee” means the meaning defined in Article 17, Section 1.
1.54 “Principal Determination Date” means the meaning defined in Article 17, Section
1.55 “Maturity Date” means the date specified in Article 4, Paragraph 3.
1.56 “Unused Maximum Loan Amount” means the amount of the maximum loan amount less the total principal amount of the individual loan accruals.
1.57 “Assignee” means a person to whom a loan claim is assigned pursuant to Article 30, Paragraph 1.
1.58 “Assignor” means a person who assigns a loan claim in accordance with Article 30, Paragraph 1.
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2. RIGHTS AND OBLIGATIONS OF LENDERS
(1) The Lenders shall owe the Lending Obligations.
(2) Unless otherwise provided for in this Agreement, the obligations of each Lender under this Agreement shall be independent, and a Lender shall not be released from its obligations under this Agreement for the reason that any of the other Lenders fails to perform such obligations. A Lender shall not be responsible for any failure of other Lenders to perform their obligations under this Agreement.
(3) If a Lender, in breach of its Lending Obligation, fails to make an Individual Loan on the Desired Drawdown Date, such Lender shall, upon request by the Borrower, immediately compensate the Borrower for all damages, losses and expenses incurred by the Borrower as a result of such breach; provided, however, that the maximum amount of such compensation to the Borrower for the damages, losses and expenses incurred shall be the difference between (i) the interest and other expenses that is required or would be required to be paid if the Borrower separately makes a drawdown as a result of the Individual Loan’s failure to be made on the Desired Drawdown Date, and (ii) the interest and other expenses that would have been required to be paid if the Individual Loan were made on the Desired Drawdown Date.
(4) Unless otherwise provided for in this Agreement, each Lender may exercise its rights under this Agreement separately and independently.
(5) During the Commitment Period, the Borrower may terminate the loan obligation in whole or reduce a part of the Total Maximum Amount by giving at least 10 business days’ prior notice to the Agent. In the event that the total credit limit is partially reduced, the amount of such reduction shall be an integral multiple of 100 million yen, but not less than 100 million yen. In the event that any portion of the Total Loan Limit is reduced, the Lender’s Loan Limit shall be reduced pro rata in proportion to such Lender’s percentage participation at such time, respectively. Upon receipt of such notice from the Borrower, the Agent shall notify the Lender thereof without delay. Such notice shall be irrevocable by the Borrower, and any termination of the Loan Obligation in its entirety or reduction of any portion of the Total Loan Amount shall be effective as of the date of such desired termination or reduction as indicated in such notice. However, even if, as a result of the termination of the loan obligation or partial reduction of the total maximum amount of loans pursuant to the provisions of this paragraph, the amount equivalent to the principal amount of the individual unpaid loan amount of the lender exceeds the maximum amount of loans of such lender, the borrower shall repay the amount equivalent to the principal amount of such individual unpaid loan amount on the maturity date thereof.
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3. USE OF PROCEEDS
The Borrower will use the funds procured through the Loan for working capital (including refinancing of the Borrower’s borrowings under the Revolving Credit Facility Agreement dated September 27, 2021 with MUFG Bank, Ltd. as Agent).The funds shall be used solely as Neither the Lenders nor the Agent shall have any obligation to supervise or review the actual use of the proceeds of the Loan.
4. APPLICATION FOR THE LOAN
(1) If the Borrower wishes to make the Loan, it shall indicate its intention to apply for the Loan to all Lenders by submitting a Borrowing Application Form to the Agent no later than noon three business days prior to the desired drawdown date. The loan application shall be submitted by sending the loan application form by facsimile and confirming the Agent’s receipt thereof by telephone.
(2) The amount of the Loan to be stated in the Loan Application shall be 10 million yen or more, in increments of 1 million yen or the total amount of unused credit lines of all lenders, and the total amount of the principal amount of the Individual Loans Payable expected after the execution of such Loan shall not exceed the maximum borrowing amount for such Loan. For all lenders, the amount of the individual loans calculated from the amount of the relevant Loan shall be the amount of the Lender’s unused credit limit as of the desired drawdown date stated in the Loan Application (provided, however, that the amount of the individual loans to be repaid by the desired drawdown date (including such date) shall not exceed the maximum borrowing amount for the relevant Loan).
(3) The standard loan period to be indicated on the loan application form shall be a period of one week, one month, three months, or more than one week but less than one month, as specified by the borrower (in this case, the standard loan period on the loan application form shall indicate “more than one week but less than one month”). (In this case, the standard loan period on the loan application form shall state “more than 1 week but less than 1 month”) or “more than 1 month but less than 3 months” (in this case, the standard loan period on the loan application form shall state “more than 1 month but less than 3 months”). In the case where the Standard Loan Period is one week, the maturity date shall be the day of the week following the week in which the requested drawdown date falls on the same day of the week as the requested drawdown date (however, if such day falls on a non-business day, it shall be the next business day regardless of whether or not the month is crossed). In the case of a standard loan period of either one month or three months, the maturity date shall be the anniversary of the desired date in the calendar month that follows the number of months of the standard loan period from the month in which the desired date falls, and if such anniversary falls on a day that is not a business day, the following business day, but if the following business day carries over into the next month, the business day immediately preceding it. If the next business day falls on a non-business day, it shall be the business day immediately preceding the business day. However, when the standard loan period is either one month or three months, and the requested drawdown date is the last business day of the month, the maturity date shall be the anniversary date of the last calendar month of the standard loan period (if such anniversary date falls on a non-business day, the next business day shall be the maturity date, but if the next business day is to be carried over to the following month, the business day immediately preceding it shall be the maturity date). (If the next business day falls on a non-business day, the maturity date shall be the business day immediately preceding the business day.) However, the Borrower may not request the execution of the Loan where such maturity date falls on a non-business day. The Borrower may not specify a standard loan period whose maturity date exceeds the Commitment Period. However, only in the case where the maturity date in the case of selecting a Standard Loan Period of one week exceeds the Commitment Period, the Borrower may request the Loan with the Commitment Period as the maturity date and the Standard Loan Period as a period of less than one week (in such case, the Standard Loan Period in the loan application form shall state less than one week).
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(4) The number of Loans to be made on the same requested date is limited to one.
(5) The declaration of intent to apply for this Loan pursuant to Paragraph 1 of this Article shall become effective in relation to all Lenders upon receipt of the Borrowing Application by the Agent in accordance with the provisions of Paragraph 1 of this Article. After the receipt of the Borrowing Application by the Agent, the Borrower may not cancel, terminate, or modify the Loan Application or the Loan Agreement pertaining to such application under Paragraph 1 of this Article, regardless of the reason, in relation to any Lender, except as permitted by laws and regulations. Upon receipt of a Loan Application from a Borrower, the Agent shall notify the Borrower of the fact that the Borrower has applied for the Loan and the details thereof by sending a copy of the Loan Application to all Lenders at least three business days prior to the desired drawdown date.
(6) If the loan application received in accordance with the procedures in this Article pertains to an application for a new refinancing loan, the Agent shall promptly perform the differential calculation provided for in the proviso of Article 6.1 and shall notify all lenders of the result of such calculation when it sends a copy of the loan application to all lenders in accordance with the preceding paragraph.
5. PREREQUISITE FOR ASSUMPTION OF LOAN OBLIGATION
Each lender shall, during the Commitment Period, assume the loan obligations provided that all of the conditions set forth in the following items are satisfied as of the desired drawdown date (regardless of whether or not notice is given pursuant to Article 7.1) (1) The lender shall assume the obligation to provide the loan. The determination of the satisfaction of such conditions shall be made by each lender, and neither the other lenders nor the Agent shall be liable for the determination of such lender or for the failure to execute individual loans.
(i) That the application for this loan meets the requirements of Paragraphs 1 through 4 of the preceding article.
(ii) That the loan obligation of all lenders has not been exempted pursuant to Article 8, Paragraph 3
(iii) All of the items of Article 20, Paragraph 1 and Paragraph 2 are true and accurate.
(iv) Neither the Borrower nor the Guarantor is in breach of any provision of this Agreement and such breach is not likely to occur on or after the said desired date of execution.
(v) The loan obligations of such lender have not been terminated in accordance with the provisions of this Agreement (including, but not limited to, Article 32).
(vi) All or part of the loan agreement pertaining to the loan has not been terminated in accordance with the first sentence of Article 587-2, Paragraph 2 of the Civil Code.
(vii) The Borrower submits to Agent all of the following documents on the date of execution of this Agreement, the contents of which are satisfactory to all Lenders and Agent
(a) A certificate of seal impression of the representative of the Borrower who will affix his/her name and seal to this Agreement (issued within three months prior to the date of execution of this Agreement)
(b) A certified copy of the commercial register or a certificate of all current or historical matters of the Borrower (issued within 3 months prior to the date of execution of this Agreement)
(c) A certified copy of the original Articles of Incorporation of the Borrower
(d) Notification of the Borrower’s seal or signature in the form prescribed by the Agent
(e) Acknowledgement in the form attached hereto as Exhibit 2 (certifying that the Borrower has completed all procedures required for the execution of this Agreement and the borrowing hereunder in accordance with laws and regulations and the internal rules and regulations of the Borrower, certified by an authorized officer or employee).
(viii) The Guarantor has submitted to the Agent all of the following documents on the date of execution of this Agreement, all of which are satisfactory to the Lenders and the Agent
(a) A certificate of seal impression of the Guarantor whose name and signature appear on this Agreement (but issued within three months prior to the date of execution of this Agreement)
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(b) Notification of the seal or signature of the guarantor in the form prescribed by the Agent
(c) A copy of the document confirming the identity of the guarantor
(d) A certified copy of an original document that confirms that the Guarantor is one of the persons specified in each item of Article 465-9 of the Civil Code (unless otherwise acknowledged by all Lenders and the Agent as being confirmed by documents already submitted pursuant to any other provision of this Agreement).
6. CONDITIONS PRECEDENT FOR LENDING OBLIGATIONS
(1) If the Lender receives an application for the Loan in accordance with Article 4 and does not give notice in accordance with Article 7.1, and if all the conditions specified in the items of the preceding article are satisfied on the desired drawdown date, the Lender shall deposit the amount of the Individual Loan into the Syndicate Account on the desired drawdown date (provided, however, that the Lender shall complete the procedures for remitting funds to the Syndicate Account for such deposit by 11:00 a.m. on such desired drawdown date).
(i) If the amount of the Individual Loan for the New Loan for Refinancing exceeds the amount equivalent to the principal amount of the outstanding Individual Loan for the Old Loan for Refinancing If the Lender receives an application for the Loan in accordance with Article 4 and does not give notice in accordance with Article 7.1, and if all of the conditions set forth in the items of the preceding article are satisfied as of the desired drawdown date, the Lender shall deposit the full amount of the difference between the Individual Loan Amount for the New Loan for Refinancing and the amount equivalent to the principal amount outstanding for the Old Loan for Refinancing in the Syndicate Account on the desired drawdown date. (However, the lender shall complete the procedures for remitting funds to the syndicate account by 11:00 a.m. on the desired drawdown date.) When such money is deposited into the Syndicate Account, the individual loan for the New Loan for Refinancing shall be deemed to have been executed for the entire amount of the Individual Loan Amount. However, even if the difference between the amount of the Individual Loan Amount and the amount equivalent to the unpaid principal of the Individual Loan for the Old Loan for Refinancing has been credited to the Syndicate Account by the lender, if interest on the Old Loan for Refinancing and other amounts other than the principal of the Old Loan for Refinancing that are payable by the lender to the respective borrowers on the requested date of execution are not paid by the Payment Date, then the amount of interest for the Old Loan for Refinancing and the principal of the Old Loan for Refinancing that are payable to the respective borrowers on the requested date of execution shall not be paid. If payment of the interest on the Old Loan and other amounts other than the principal of the Old Loan to be paid by the Borrower to each of the Lenders as of the relevant Desired Drawdown Date is not made by the Payment Date, the Individual Loan for the New Loan for Refinancing shall be deemed not to have been extended in full, and the Borrower shall immediately return the amount paid into the Syndicate Account on the Desired Drawdown Date to the Agent.
(ii) If the amount of the Individual Loan for the New Loan for Refinancing is equal to or less than the amount equivalent to the principal amount of the outstanding Individual Loan for the Old Loan for Refinancing. If the lender receives an application for the loan in accordance with Article 4 and does not give notice in accordance with Article 7, Paragraph 1, and if all of the conditions specified in each item of the preceding article are satisfied as of the desired drawdown date, the individual loan for the New Loan for Refinancing shall be deemed to have been extended for the entire amount of the Individual Loan Amount as of the time limit for payment of the Old Loan for Refinancing. However, if the difference between the amount equivalent to the principal of the outstanding amount of the individual loans for the Old Loan for Refinancing and the amount of the Individual Loan Amount, together with interest on the Old Loan for Refinancing and any other amounts other than the principal of the Old Loan for Refinancing payable by the borrower to the respective lender on the requested date of disbursement, are not paid by the Payment Time Limit, the individual loans for the New Loan for Refinancing shall not be disbursed.
(2) If the Loan is not made in whole or in part pursuant to the preceding paragraph, the Borrower shall immediately notify the Agent thereof. Upon receipt of such notice, the Agent shall promptly notify all Lenders thereof.
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7. NON-DISBURSEMENT OF INDIVIDUAL LOANS
(1) A lender who decides not to execute an individual loan on the grounds that all or part of the conditions in Article 5 are not satisfied (hereinafter referred to as a “non-executing lender”) ) may notify the Borrower, all other Lenders and the Agent to that effect, with reasons attached, by 5:00 p.m. on the business day preceding the desired date of execution. However, if such notice is given and the individual loan is not executed despite the fulfillment of all the conditions in Article 5, the Non-Executing Lender shall not be exempt from liability for breach of loan obligations.
(2) If the Individual Loan that the Non-Performing Lender decided not to execute based on the preceding paragraph is based on an application for a New Refinancing Loan, the Borrower shall pay the amount equivalent to the principal of the unpaid amount of the Individual Loan that the Non-Performing Lender executed out of the Old Refinancing Loan in accordance with the main clause of Article 18(1) (the proviso of the same clause shall not apply).
(3) If the Non-Performing Lender fails to execute the Individual Loan, the Borrower shall pay liquidation money to such Non-Performing Lender for such failure to execute the Individual Loan. However, this shall not apply if the failure to execute the individual loan constitutes a breach of the lender’s loan obligation by the nonperforming lender.
(4) If the Borrower cancels a loan agreement pertaining to an Individual Loan based on the first sentence of Article 587-2(2) of the Civil Code after the application for the loan but before the execution of the Individual Loan pertaining to the application for the loan, the Borrower shall give notice to that effect to the Lenders and the Agent pertaining to the loan agreement to be cancelled. In this case, the Agent shall give notice to that effect to all other lenders promptly after receipt of said notice. In the event of such cancellation, the Borrower shall pay to the Lenders whose Loan Agreement has been cancelled the liquidated amount for the cancellation of such Loan Agreement.
(5) In the cases referred to in the preceding two paragraphs, such lender shall notify the Agent of the amount of such liquidation proceeds immediately after the commencement date of the liquidation proceeds calculation. The Agent shall notify the Borrower and the Guarantor thereof promptly after receipt of such notice. The Borrower shall pay such Liquidating Payment immediately upon receipt of such notice from the Agent.
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8. LENDER’S DISCLAIMER
(1) In the event of an event of non-loanability with respect to a lender, the Agent shall immediately notify the borrower, guarantor, and all lenders of the occurrence of such event.
(2) If, after the notice under the preceding paragraph has been given, the majority lender (or the agent if the majority lender has difficulty in reaching its decision) determines that such event of loan default has been resolved, the agent shall immediately notify the borrower, guarantor, and all lenders that such event of loan default has been resolved.
(3) During the period of inability to lend, the loan obligation of all lenders shall be discharged.
9. INCREASED COSTS AND ILLEGALITY
(1) A Lender incurring Incremental Expenses may, by notice to the Borrower through the Agent, request the Borrower to bear the Incremental Expenses, and upon such request, the Borrower shall pay such Incremental Expenses to the Lender incurring such Incremental Expenses.
(2) If the execution and performance of this Agreement and the transactions contemplated thereunder are in violation of any law or regulation binding on either lender, such lender may, by giving notice to the borrower to that effect, (i) if the maintenance of the loan obligation, the making of the individual loans, or the financing for making the individual loans is held to be illegal (ii) if the maintenance of an individual loan that has already been executed is deemed illegal on the repayment date for the individual loan or on an earlier date, the lender may terminate the lender’s loan obligation as of the day before the date on which the individual loan is deemed illegal (however, if the deadline for repayment is stipulated in the relevant laws and regulations, etc.).
10. PRINCIPAL REPAYMENT
The Borrower shall pay the principal of the Loan in a lump sum on the maturity date thereof.
11. INTEREST
(1) Borrowers 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 of the loan period.
(2) The method of calculating interest set forth in the preceding paragraph shall be one end of a post-drop and a daily prorated calculation based on a year of 365 days, with division made at the end and rounded down to the nearest one yen.
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12. PREPAYMENT
(1) The Borrower may not repay all or part of the principal of the Loan prior to the maturity date (hereinafter in this Article referred to as “Prepayment”). Provided, however, that if pursuant to Article 9 or in accordance with the procedures set forth in the following paragraph, all lenders who have made the Loan to which the Borrower has given notice of its desire to make prepayment (hereinafter in this Article referred to as “Prepayment Lenders”) This shall not apply if the Borrower has obtained prior consent from the Lenders and the Agent.
(2) If the Borrower wishes to make an early repayment of the principal of the Loan, the Borrower shall provide (i) the date, repayment date and principal amount of the Loan for which the early repayment is desired, (ii) the principal amount for which the early repayment is desired (such amount shall be the entire principal balance of the Loan or 10,000,000 yen or more in increments of 1,000,000 yen) at least 15 business days prior to the date on which the early repayment is desired (hereinafter referred to as the “Desired Early Repayment Date”). If the principal amount for which prepayment is desired is not the entire principal balance of the relevant Loan, such amount shall be prepaid to the Prepayment Lender pro rata in proportion to the percentage of the principal balance of the individual Loan of the Prepayment Lender in respect of such Loan. (iii) With respect to the principal amount for which prepayment is desired, interest accrued up to the desired date of prepayment (including the same date) and (iv) to notify the Agent of the desired date of prepayment. The Agent shall immediately after receiving such notice from the Borrower notify such Prepayment Lenders of the details of (i) through (iv) hereof, and such Prepayment Lenders shall notify the Agent of their acceptance or rejection of such Prepayment at least 10 business days prior to the desired Prepayment Date. If such notice is not received by the Agent from any of the Prepayment Lenders at least 10 business days prior to the requested Prepayment Date, such Prepayment Lender shall be deemed not to have accepted such Prepayment. The Agent shall determine whether or not the prepayment is acceptable and notify the Borrower, the Guarantor and the Prepayment Lenders of such determination no later than eight business days prior to the requested prepayment date.
(3) If prepayment is accepted in accordance with the preceding paragraph, the Prepayment Lender shall notify the Borrower, the Guarantor and the Agent of the amount of the Liquidating Distribution for such prepayment at least two business days prior to the requested Prepayment Date. The Borrower shall pay the principal amount of the Loan to be prepaid, together with accrued interest and such liquidated damages, on the requested Prepayment Date.
13. LATE PAYMENT CHARGE
(1) In the event that the Borrower or the Guarantor delays in the performance of any of its obligations hereunder to the Lender or the Agent, the Borrower or the Guarantor shall, from the date on which such obligation is to be performed (including the same date) (hereinafter in this paragraph referred to as “obligation in arrears”) for the period from the date of performance of such obligation (including the same date) to the date of performance of all such obligations in arrears (including the same date) (hereinafter in this paragraph, “Delayed Performance Obligations”), the amount of the Delayed Performance Obligations shall be multiplied by 14% per annum (provided, however, that this is not contrary to laws and regulations, etc.).
(2) The method of calculating the amount of late payment as set forth in the preceding paragraph shall be calculated on a pro-rata basis with both ends and one year being 365 days, division being made at the end, and amounts less than one yen shall be rounded down.
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14 COMMITMENT FEE
(1) The Borrower shall pay to the Lenders a commitment fee for each Commitment Fee Calculation Period in an amount equal to the average balance of the Unused Loan Amounts due to such Lender for such Commitment Fee Calculation Period multiplied by the Commitment Fee Rate on any date not later than five Business Days after the end of such Commitment Fee Calculation Period as Agent shall notify the Borrower and all Lenders. If an individual loan of a lender is extended or repaid or the maximum loan amount is modified pursuant to the provisions of Article 2.5, each unused loan amount of such lender on the date of such extension, repayment or modification shall be the increased or decreased amount of each unused loan amount as a result of such extension, repayment or modification. In cases where a loan agreement pertaining to an individual loan has been canceled pursuant to the first sentence of Article 587-2(2) of the Civil Code, the principal amount of said individual loan and the principal amount of an individual loan that the nonperforming lender has decided not to execute shall not be deducted from the maximum amount of loans in calculating the unused credit line of the lender for said individual loan. The Agent’s calculation of the Commitment Fee hereunder shall be final and binding, absent manifest error.
(2) Notwithstanding the provisions of the preceding paragraph, if the loan obligations of all lenders are discharged pursuant to Article 8.3, the Borrower shall not be obligated to pay commitment fees to all lenders corresponding to the period of such loan disability.
(3) Notwithstanding the provisions of paragraph (1) of this Article, the Borrower shall not be liable to any non-bank lender (meaning a lender registered under Article 3, paragraph (1) of the Money Lending Business Act. (Hereinafter the same shall apply in this paragraph.) (i) If the annual percentage rate of interest and commitment fee (calculated by the following formula) exceeds 15% as of the end of any Commitment Fee Calculation Period, the Company shall not be obligated to pay interest and commitment fee to such nonbank lender with respect to the portion of the interest and commitment fee calculated by the following formula that exceeds 15% as of the end of such Commitment Fee Calculation Period Formula: (Total commitment fees payable to the non-bank lender + interest and liquidation proceeds on all individual loans to the non-bank lender) / (Total average principal balance of all individual loans to the non-bank lender) x 365 / (Actual number of days of commitment fee calculation period) (%)
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(4) The commitment fee under Paragraph 1 of this Article shall be calculated on a pro-rata basis with both ends and one year being 365 days, with divisions made at the end and rounded down to the nearest yen.
15. AGENT FEE
The Borrower shall pay the Agent Fee to the Agent as separately agreed between the Borrower and the Agent, for the performance of the Agent Services set forth in this Agreement.
16. EXPENSES; TAXES AND PUBLIC CHARGES
(1) All expenses (including attorneys’ fees) incurred by Lender or Agent in securing or performing its rights or performing its obligations under this Agreement and the related documents If the Lender or the Agent incurs any such costs on behalf of the Borrower, the Borrower shall pay the same as soon as it is invoiced by the Agent.
(2) All stamp taxes and other similar taxes and dues incurred in connection with the preparation, modification or execution of this Agreement and any documents related hereto shall be borne by the Borrower, and if the Lender or the Agent bears the same on behalf of the Borrower, the Borrower shall pay the same as soon as the Agent so requests.
17 GUARANTEES
(1) Guarantor hereby guarantees to each Lender and Agent, jointly and severally with Borrower, all present and future obligations of Borrower to each Lender and Agent under this Agreement. In addition, the guarantee by the Guarantor to each Lender as provided in this paragraph (the “Root Guarantee”) The Guarantor shall be liable for the performance of the principal, interest, penalties, damages and all other obligations subordinate to the principal obligation and the amount of any penalties or damages agreed upon with respect to the guaranteed obligation of each Guarantee, up to a maximum amount equal to the maximum loan amount of such Lender as of the date of execution of this Agreement. The Company shall be liable for the performance of the loan to the lender. In addition, with respect to the Guarantee Agreements relating to each of the Revolving Guarantees, the day following the Commitment Date (hereinafter referred to as the “Revolving Guarantee Principal Fixing Date”) shall be the Principal Fixing Date of such Guarantee. The Principal Fixing Date shall be the Principal Fixing Date of such Guarantee. Each Lender and Agent may demand performance of the Guarantee Obligations from the Guarantor without any right or demand to the Borrower, and if each Lender or Agent demands performance of the Guarantee Obligations from the Guarantor, such demand for performance shall also be effective against the Borrower. In the event that any payment by the Borrower already made under this Agreement is repudiated or otherwise cancelled or returned due to the Borrower’s liquidation, dissolution, commencement of bankruptcy proceedings, commencement of corporate reorganization proceedings, commencement of civil rehabilitation proceedings or similar proceedings, the Guarantor shall be liable for the obligation to guarantee such payment as if such payment had not been made.
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(2) Guarantor shall not assert any claim against or otherwise contest any security or guarantee held by each Lender or Agent with respect to any and all present and future obligations of Borrower to each Lender and Agent hereunder, even if such security or guarantee is modified or released, in whole or in part, for the convenience of such Lender or Agent, unless such modification or release is not reasonably justified in light of socially accepted transactional practices. The Guarantor shall not make any claim for compensation against such Lender or Agent for any loss or damage suffered thereby.
(3) If any transaction is ongoing between the Borrower and any lender or agent (including but not limited to a lender or agent who has performed the obligation of guarantee), the Borrower shall not exercise any rights acquired from the lender or agent by subrogation based on the performance of such obligation of guarantee without the consent of all such lenders and agents during such ongoing transaction. The guarantor shall, upon request of the majority lender or agent, assign such right or ranking to the lender or agent designated by the majority lender or agent without charge.
(4) If the Guarantor guarantees any transaction between the Borrower and any Lender or Agent in addition to its guaranteed obligation under Paragraph 1 of this Article for such Lender or Agent, such guarantee shall not be modified in any way by the incurrence of a guaranteed obligation under Paragraph 1 of this Article. If the guarantor has made a revolving guarantee for such lender or agent with respect to a transaction between the borrower and any lender or agent with a limit amount, such limit amount shall be added to such lender’s loan limit amount. The same shall apply if the guarantor gives any future guarantee for the benefit of such lender or agent for any transaction between the borrower and any lender or agent.
(5) Guarantor will not assert any right of setoff, right of rescission or release which Borrower may have against each Lender or Agent or any other defense which Borrower may assert against each Lender or Agent.
(6) Pursuant to Article 458-2 of the Civil Code, the Guarantor may, upon request to each Lender through the Agent, request the Lenders to provide information as to whether or not the Lenders are in default with respect to the principal of the obligations relating to the Loan and interest, penalties, damages and all other items subordinate to such obligations and the balance thereof and the amount thereof which is due and payable. Each Lender shall, without delay after receipt of such request, notify such Guarantor, through its Agent, of the information requested to be provided.
(7) In the event that any lender or agent files a petition for liquidation of its guaranteed obligations in accordance with the Guidelines for Management Guarantees published by the Study Group on Management Guarantees (with the Japanese Bankers Association and the Japan Chamber of Commerce and Industry serving as secretariat) on December 5, 2013, all lenders and agents shall endeavor to respond in good faith to such liquidation in accordance with such Guidelines.
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18. PERFORMANCE OF OBLIGATIONS OF THE BORROWER AND THE GUARANTOR
(1) The Borrower and the Guarantor shall, in order to repay their obligations under this Agreement, deposit the money for such repayment into the Agent’s account by the Payment Time Limit if the repayment date is specified in this Agreement, or immediately upon request from the Agent if the repayment date is not specified in this Agreement, to the extent not in violation of any laws or regulations. In such case, the performance of the obligation of the borrower or guarantor to the lender or agent shall be deemed to have occurred at the time of deposit in the agent’s account. However, if a New Loan for Refinancing is made in accordance with the proviso of Article 6, paragraph 1, item 1 based on the application under Article 4, paragraph 6, the time limit for payment of the principal of the unpaid amount of the Individual Loan for the Old Loan for Refinancing shall be extended until the time when the New Loan for Refinancing is supposed to be made under the proviso of Article 6, paragraph 1, item 1, and the principal obligations of the Individual Loan for Refinancing shall be deemed to have been performed at the time when the New Loan for Refinancing is made under the proviso of Article 6, paragraph 1, item 1. In addition, if the New Loan for Refinancing is extended pursuant to the provisions of Article 6, Paragraph 1, Proviso, Item 2, the principal amount of the Old Loan for Refinancing equivalent to the individual loan amount extended under the New Loan for Refinancing shall be deemed to have been paid as of the time the New Loan for Refinancing is supposed to have been extended.
(2) Except as otherwise provided in this Agreement, and contrary to the preceding paragraph, neither the Borrower nor the Guarantor shall pay directly to any Lender other than the Agent any of its obligations under this Agreement. The lender receiving such payment shall immediately pay the Agent the money received, and upon receipt of such money by the Agent, the lender shall be deemed to have performed its obligation with respect to such money. No Borrower or Guarantor shall perform its obligations hereunder by payment in lieu thereof without the prior consent of all Lenders and the Agent.
(3) Payments by the Borrower and the Guarantor under this Agreement shall be applied to the following obligations (however, with respect to the Guarantor, including the guarantee obligations with respect to the obligations of the Borrower listed in each item) However, in the event that a New Loan for Refinancing is executed based on the application under Article 4.6, the proviso of paragraph 1 of this Article shall prevail with respect to the principal obligations of the Individual Loan for the Old Loan for Refinancing.
(i) Expenses, etc. which are to be borne by the Borrower or the Guarantor under the Agreement and which are borne by the Agent on behalf of the Borrower or the Guarantor, agent fees, and late charges in relation to such expenses, etc.
(ii) Expenses, etc. which are to be borne by the Borrower or the Guarantor under the Agreement and which are to be paid to a third party
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(iii) Expenses, etc. that are to be borne by the Borrower or the Guarantor under the Agreement and for which the Lender is acting on behalf of such Borrower or the Guarantor, and any related late payment damages
(iv) Delayed payments (excluding the delayed payments provided for in items (i) and (iii) of this paragraph) and liquidated damages
(v) Commitment fee
(vi) Interest on the Loan
(vii) Principal of the Loan
(4) In the event that the amount of the appropriation under the preceding paragraph is less than the amount of any item, the amount remaining after the appropriation to the first item (hereinafter referred to as “deficiency item”) shall be allocated proportionately to the amount of each individual payment obligation that has fallen due that is owed by the borrower or guarantor with respect to the deficiency item.
(5) Neither the Borrower nor the Guarantor shall deduct any taxes, dues, or other charges from the payment of its obligations under this Agreement, except as required by law or regulation. If the amount payable by the borrower or guarantor is subject to the deduction of taxes and public dues, etc., such borrower or guarantor shall pay the additional amount necessary to enable the lender or agent to receive the amount that would be received if no taxes and public dues, etc., were imposed on the lender or agent. In such case, such borrower or guarantor shall send directly to such lender or agent a certificate of tax payment issued by the Japanese tax authorities or other supervisory authorities for withholding tax within 30 days from the date of such payment.
19. DISTRIBUTION TO LENDERS
(1) If, after deducting the amounts equivalent to Items 1 and 2 of Paragraph 3 of the preceding Article from the amount paid by the borrower or guarantor pursuant to the preceding Article, there still remains any residual amount, the Agent shall immediately distribute such residual amount to the lender in accordance with the provisions of this Article.
(2) If (i) an order of provisional attachment, preservative attachment, or seizure pertaining to a loan claim or a claim for performance of a guarantee obligation is served on the borrower or guarantor prior to distribution by the agent to the lender under this Article, (ii) an assignment pertaining to a loan claim is made, or (iii) a third party payment is made, the rights and obligations among the borrower, guarantor, lender and agent shall be subject to the following provisions.
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1,(a) the Agent completes the distribution to the Lender under this Article before receiving notice from the Borrower or Guarantor of service of an order of provisional attachment, temporary restraining order, or garnishment on the Loan Receivables or Guarantee Obligation Performance Claims under Article 21.1(5) or 21.2(3).
In this case, the agent shall not bear any responsibility for any damage, etc. incurred by the holder of provisional seizure, holder of provisional seizure, holder of right of seizure, borrower, guarantor, lender or any other third party as a result of such act of distribution by the agent, and such borrower or guarantor shall handle such matters at its own cost and responsibility. If the Agent suffers any damage or other loss as a result of such act of distribution, the borrower or guarantor concerned shall indemnify the Agent.
(b) if the Agent receives notice from the Borrower or the Guarantor, after the performance by the Borrower or the Guarantor of its obligations pursuant to Paragraphs 1 and 2 of the preceding Article and before completing the distribution to the Lenders under this Article, that the Agent has received service of an order of provisional attachment, provisional seizure or attachment under Article 21.1(5) or 21.2(3) with respect to the loan claim or the claim for performance of guaranteed obligation pertaining to such distribution.
In such case, (i) the Agent may withhold the distribution under this Article with respect to the money in respect of such notice or otherwise act in accordance with such other manner as the Agent deems reasonable. (ii) The Agent shall also distribute any money paid by such Borrower or Guarantor, other than money pertaining to such notice, in accordance with the method of appropriation set forth in Paragraphs 3 and 4 of the preceding Article. In the event that any action taken by the Agent pursuant to this paragraph (b)(i) or any act of distribution by the Agent pursuant to this paragraph (b)(ii) results in any loss or damage to the holder of a provisional attachment, the holder of a right of foreclosure, the borrower, guarantor, lender or other third party, the Agent shall not assume any liability relating thereto and such borrower or guarantor shall be responsible for handling the same at its own expense and responsibility. If the Agent suffers any damage or other loss as a result of such distribution response or distribution action, the borrower or guarantor concerned shall indemnify the Agent.
(c) The Agent receives notice from the Borrower or the Guarantor that the Agent has received service of an order of provisional attachment, provisional seizure or garnishment under Article 21(1)(v) or (2)(iii) prior to the performance by the Borrower or the Guarantor of its obligations pursuant to Paragraphs 1 and 2 of the preceding Article.
In such a case, the Agent shall distribute the claim pertaining to such notice as if it did not exist, in accordance with the method of appropriation provided for in Paragraphs 3 and 4 of the preceding Article. In the event that any act of distribution by the Agent causes any damage or other loss to the holder of provisional seizure, holder of provisional seizure, holder of foreclosure, borrower, guarantor, lender or any other third party, the Agent shall not bear any responsibility for such, and such borrower or guarantor shall be responsible for handling such at its own expense and responsibility. If the Agent suffers any damage or other loss as a result of such act of distribution, the borrower or guarantor concerned shall indemnify the Agent.
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(ii) Where the assignor and the assignee jointly notify the Agent of the fact of the assignment pertaining to the loan claim in accordance with Article 30(1). In cases where a loan receivable is assigned in accordance with the provisions of Article 29, this item shall be applied by replacing the assignor with the assignee of status and the assignee with the assignee of status.
In such case, the agent shall immediately commence all administrative procedures necessary to treat the assignee as a creditor on such loan claim upon receipt of such notice, and the agent shall be excused from treating the previous lender as a valid lender until it personally notifies the borrower, guarantor, assignor, and assignee that such administrative procedures have been completed. In the event that the assignee or any other third party incurs any damages or losses as a result of such handling by the Agent, the Agent shall not bear any responsibility for such damages or losses, and the Borrower and the assignee of such loan receivables shall handle such matters at their own expense and responsibility. In the event that the Agent suffers any damage or other loss as a result of this item, the Borrower and the assignee(s) of said loan receivables shall jointly and severally compensate the Agent.
(iii) Where the third party who has made repayment pursuant to the provisions of Article 31(3) and the lender who has received such repayment jointly or the borrower or guarantor alone has notified the Agent of the fact of the third-party repayment in accordance with Article 31(3).
In such a case, the agent shall immediately commence all administrative procedures necessary to treat the right to indemnification acquired by the third party and the claim acquired through subrogation in the same manner as the loan claim pertaining to such repayment, after receiving either of such notices, and the agent shall be discharged if it treats the third party repayment as if it had not been made until it notifies the borrower or guarantor, the third party and the lender who received such third party repayment that such administrative procedures are completed. In the event that any damage or other loss is caused to the third party or any other third party as a result of such handling by the Agent, the Agent shall not bear any responsibility for such damage or loss, and the relevant borrower or guarantor and the lender who received such third-party reimbursement shall handle the matter at their own cost and responsibility. If the Agent suffers any damage, etc. as a result of this item, the said borrower or guarantor and the lender who received the said third-party reimbursement shall jointly and severally indemnify the Agent.
(3) Distributions by the Agent to the lenders shall be made in the order of Items 3 through 7 of Paragraph 3 of the preceding Article. In the event that there is a shortfall in the amount to be distributed, the allocation and distribution of such shortfall shall be in accordance with the provisions of Paragraph 4 of the preceding Article.
In this case, notwithstanding the provisions of Paragraphs 3 and 4 of the preceding Article, each lender may, at its discretion, determine the order and method of application of such distributed amount to the repayment of the obligations of the borrower and guarantor to such lender, and the borrower or guarantor shall not object to such determination. However, even if any lender makes an appropriation of repayments in an order different from that provided in Paragraphs 3 and 4 of the preceding Article, the Agent may deem that such lender has made an appropriation in accordance with Paragraphs 3 and 4 of the preceding Article, and thereafter the Agent may make a distribution to each lender on the assumption that all lenders have made an appropriation in accordance with Paragraphs 3 and 4 of the preceding Article, and so long as such distribution is made, the Agent shall not be liable for anything even if the amount so distributed differs from the amount appropriated by each lender.
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(4) If the deposit provided for in Paragraph 1 of the preceding Article by the Borrower or the Guarantor is delayed beyond the time limit for payment, the Agent shall not be obligated to make the distribution provided for in Paragraph 1 of this Article on the same day.
In such case, the Agent shall make such distribution immediately after receiving payment from such lender or guarantor, and any loss or damage incurred by either lender or Agent as a result thereof shall be borne by such lender or guarantor.
(5) If the Agent’s request is made and such request is based on reasonable grounds, the Lender receiving such request shall immediately notify the Agent the amount of its claim hereunder against the Borrower or the Guarantor (including the breakdowns).
In such case, the obligation to make the distribution provided for in paragraph 1 of this Article shall accrue to the Agent at the time all such notices reach the Agent. If any damage or other loss is incurred by either lender or the Agent as a result of the delay in giving such notice without reasonable cause, the lender who failed to give such notice shall be liable for such damage or loss.
(6) The Agent may (but is not obligated to) make distributions to lenders by way of advances. Such replacement payment shall not constitute performance of any obligation of the Borrower or the Guarantor. If a replacement payment is made and the borrower or guarantor fails to fulfill its obligations under such replacement payment by the payment deadline, the lender who has received a distribution by way of replacement payment under this paragraph shall return the amount so replaced to the agent as soon as the agent requests the return of the amount so replaced. In addition, the lender shall pay to the agent the replacement cost of such replacement payment in proportion to the amount of the replacement payment received, immediately upon request from the agent. If the lender pays such replacement cost to the agent, the borrower or guarantor shall indemnify such lender for such replacement cost. In addition, if the Agent has completed the procedure for the advance payment of the distribution to the Lender prior to receiving notice from the Borrower or the Guarantor of the service of an order of provisional attachment, temporary restraining order, or garnishment under Article 21.1(5) or (2)(iii). In the event that any damage or other loss is caused to the holder of provisional attachment, the holder of provisional attachment, the holder of foreclosure, the borrower, the guarantor, the lender or any other third party as a result of the Agent’s advance payment of such distribution, the Agent shall not bear any responsibility for such damage or loss, and such borrower or guarantor shall be responsible for handling the same at its own expense and responsibility. If the Agent suffers any damage, etc. (including, but not limited to, any money not returned or paid in the event that the Lender specified in the third and fourth sentences of this paragraph fails to return or pay any money due to the Agent from the Lender as provided in the third and fourth sentences of this paragraph) arising out of the making of the advance of such distribution, such Borrower or Guarantor shall indemnify the Agent.
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20. BORROWER’S REPRESENTATIONS AND WARRANTIES
(1) Borrower represents and warrants to Lender and Agent that the following statements are true and correct on the date of execution of this Agreement, on the Commitment Commencement Date and at each point in time when individual loans are made.
(i) Establishment and Survival
The Borrower shall be a stock company legally incorporated and currently in existence in accordance with the laws of Japan.
(ii) Internal Procedures, etc.
The execution and performance by the Borrower of the Agreement and the transactions contemplated thereunder are within the scope of the Borrower’s corporate purposes, and the Borrower has completed all procedures required by law, the Borrower’s articles of incorporation and other internal regulations with respect thereto.
(iii) Compliance with Laws and Regulations.
The execution and performance by the Borrower of this Agreement and the transactions contemplated thereby (a) will not be contrary to any law or regulation binding on the Borrower, (b) will not be contrary to the Articles of Incorporation or other internal rules of the Borrower, and (c) will not be contrary to any contract to which the Borrower is a party or by which the Borrower or its property is bound.
(iv) Lawful Authority.
The person signing or affixing his/her name and seal to this Agreement on behalf of the Borrower is authorized to sign or affix his/her name and seal to this Agreement on behalf of the Borrower in accordance with the procedures required by law, the Borrower’s Articles of Incorporation and other internal regulations.
(v) Validity.
This Agreement is lawful, valid, binding and enforceable against the Borrower in accordance with its terms and conditions.
(vi) Financial Documents, etc. (Reports, etc.)
The financial statements, etc. (or, if the Borrower is obligated by law or regulation to audit such financial statements, etc. or has otherwise conducted an audit, the audited financial statements, etc.) (or if the Borrower has prepared reports, etc., the reports, etc.) prepared by the Borrower are accurate and legal in light of accounting standards generally accepted in Japan.
(vii) Accuracy of Information.
Any material changes in the information provided by Borrower to Lender or Agent with respect to this Agreement that could materially affect Borrower’s or Guarantor’s performance of its obligations under this Agreement.
(viii) Absence of Litigation, etc.
No litigation, arbitration, administrative proceeding or other dispute has been commenced or is likely to be commenced against the Borrower that has or is likely to have a material adverse effect on the performance of the obligations under this Agreement.
(ix) Absence of Any Cause for Forfeiture of the Benefit of Time, etc.
Absence of events prescribed in each item of Article 22(1) or (2), or events constituting such events due to the passage of notice or the passage of time or both, have not occurred and are not likely to occur.
(Ⅹ) Non-Applicability to Anti-Social Forces
The Borrower shall not fall under the category of Anti-Social Forces.
(Ⅺ) Accuracy and Sufficiency of Information Provided to the Guarantor
Pursuant to Article 465-10, Paragraph 1, of the Civil Code, the Borrower shall provide the Lenders or the Agent with information on (a) the status of the Borrower’s assets and income and expenditure, (b) the existence, amount and status of performance of any obligations under this Agreement owed by the Borrower to the Lenders or the Agent (hereinafter in this item, the “Principal Obligations”) and (c) if the Borrower has provided or intends to provide any other security for its principal obligations, that it has provided accurate and sufficient information to the Guarantor with respect to the nature and content of such security.
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(2) Guarantor represents and warrants to Lender and Agent that the following statements are true and correct on the date of execution of this Agreement, on the Commitment Commencement Date, and at each point in time when individual loans are made.
(i) Capacity of Rights, Intentional Capacity and Capacity to Act
The Guarantor shall have the capacity to enter into this Agreement and to perform its obligations under this Agreement, and the Guarantor shall have the capacity of right, will and act.
(ii) Transactions Based on Free Will
The execution and performance of this Agreement by the Guarantor and transactions based thereon are based on the free will of the Guarantor.
(iii) Compliance with Laws, etc.
The execution and performance by the Guarantor of this Agreement and the transactions contemplated thereby (a) shall not be contrary to any law or regulation binding on the Guarantor, and (b) shall not be contrary to any agreement with any third party to which the Guarantor is a party or which binds the Guarantor or its property.
(iv) Validity.
This Agreement is lawful, valid, binding and enforceable against the Guarantor in accordance with its terms and conditions.
(v) Accuracy of Information.
No changes have occurred that could materially affect the Borrower’s or Guarantor’s performance of its obligations under this Agreement with respect to information provided by Guarantor to Lender or Agent with respect to this Agreement.
(vi) Absence of Lawsuit, etc.
No litigation, arbitration, administrative proceeding or other dispute has been commenced or is threatened with respect to the Guarantor which has or may have a material adverse effect on the performance of its obligations under this Agreement.
(vii) Absence of Cause for Forfeiture of the Benefit of Time, etc.
Absence of events prescribed in each item of Article 22(1) or (2), or events constituting such events due to the passage of notice or the passage of time or both, have not occurred and are not likely to occur.
(viii) Non-Applicability to Antisocial Forces
The Borrower shall not fall under the category of Anti-Social Forces.
(ix) Applicability of Exceptions to Notarization of Declaration of Intention to Guarantee
The Guarantor must be one of the persons specified in each item of Article 465-9 of the Civil Code as of the date of execution of this Agreement.
(Ⅹ) Accuracy and Sufficiency of Information Provided to the Guarantor
Pursuant to Article 465-10, Paragraph 1, of the Civil Code, the Borrower shall provide the Lenders or the Agent with information on (a) the status of the Borrower’s assets and income and expenditure, (b) the existence, amount and status of performance of any obligations under this Agreement owed by the Borrower to the Lenders or the Agent (hereinafter in this item, the “Principal Obligations”) and (c) if the Borrower has provided or intends to provide any other security for its principal obligations, that it has provided accurate and sufficient information to the Guarantor with respect to the nature and content of such security.
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21. COVENANTS OF BORROWER AND GUARANTOR
(1) Borrower’s Covenants
(i) Reporting The Borrower shall ensure that the following (a) through (m) are carried out at its own expense.
(a) Events of Forfeiture of the Benefit of Termination of Loan, etc.
If any event specified in each item of Article 22.1 or Article 22.2 or any event constituting such event has occurred or is likely to occur due to the passage of time or notice or both, immediately report to all Lenders and the Agent to that effect.
(b) Financial Statements, etc. (Reports, etc.)
If the Borrower prepares any Financial Statements, etc., it shall promptly submit copies of such Financial Statements, etc. to all Lenders and the Agent. However, if the Borrower prepares a report, etc., a copy of the report, etc. shall be submitted to all Lenders and the Agent promptly after submission to the Director of the Finance Bureau having jurisdiction, in lieu of a copy of the relevant financial statements, etc. In the event that the Borrower conducts electronic disclosure of the Report, etc. through the Electronic Disclosure for Investors (EDINET), which is an electronic disclosure system for disclosure documents such as securities reports under the Financial Instruments and Exchange Act (electronic data processing system for disclosure as stipulated in Article 27-30-2 of the Financial Instruments and Exchange Act), a copy shall be deemed to have been submitted at the time such disclosure was made. If any Lender or Agent requests a copy of the Report or other documents, the Borrower shall promptly submit such copy to such Lender or Agent. In addition, when preparing such financial statements, etc. (however, in the event that the Borrower prepares reports, etc., the reports, etc.), they shall be prepared accurately and legally in accordance with accounting standards generally accepted in Japan, and when required by law to be audited, such financial statements, etc. shall be audited as necessary.
(c) Compliance Status Report
If the Borrower prepares any financial statements or reports, etc. for any fiscal period ending on or after the date of execution of this Agreement, promptly submit to all Lenders and the Agent a document in the form of Exhibit 3 attached to this Agreement that enables the Agent to confirm compliance with each of the provisions set forth in Item 2 of this Section and Section 31.2 of this Agreement.
(d) Property, Management or Business Conditions, etc.
Immediately upon request of Agent or any Lender through Agent, report to all Lenders and Agent the property, management or business affairs of Borrower and its Subsidiaries and Affiliates, or the property, income or borrowings of any Guarantor, and to provide such other information as may be necessary to enable Agent to make such investigation.
(e) Changes in Property, Management or Business Conditions, Litigation, etc.
Changes occur in the assets, management, or business conditions of the Borrower or its subsidiaries or affiliates, or in the assets, income, or borrowing conditions of the Guarantor or the passage of time is likely to cause such change or if any litigation, arbitration, administrative proceeding or other dispute is commenced against the Borrower or the Guarantor that materially affects or is likely to materially affect the performance of the obligations under this Agreement; or here is a risk that such event may occur or be initiated immediately inform all Lenders and Agents of any such event.
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(f) Breach of Representations and Warranties.
If any of the items of Paragraph 1 or Paragraph 2 of the preceding Article are found to be untrue, immediately report to all Lenders and Agents to that effect.
(g) Resignation, Death, etc. of Guarantor.
Immediately report to all Lenders and the Agent in the event of the Guarantor’s resignation from the position of Representative Director of the Borrower, the Guarantor’s death, or the Guarantor’s whereabouts becoming unknown.
(h) Copies of Tax Returns.
If the Borrower has filed a tax return for each fiscal year ending on or after the date hereof, a copy of such tax return shall be furnished to all Lenders and the Agent within four months after the last day of such fiscal year.
(i) Trial Balance.
Prepare a non-consolidated trial balance of the Borrower with the last day of September 2022 as the initial preparation base date and the last day of the interim period of each fiscal year of the Borrower as the preparation base date, and submit such trial balance to all Lenders and the Agent promptly after disclosure of the financial statements, etc. for such interim period (but if reports, etc. have been prepared, the reports, etc.)
(j) Schedule of Outstanding Loans and Inventory by Financial Institution
A list of the Borrower’s outstanding loans by financial institution (including, but not limited to, the amount of the loan, the start date of the loan, the repayment date, and the use of the funds), with the last day of September 2022 as the first preparation base date and the last day of each month as the preparation base date and prepare an inventory statement, and submit such statement of outstanding loans by financial institution and inventory statement to all lenders and the Agent by the 15th day of the second month following the month in which such preparation record date falls (or, if such 15th day falls on a non-business day, the business day immediately following such day).
(k) Accounts Receivable Details
Prepare a statement of accounts receivable for the borrower’s top 20 accounts receivable balances with the end of March, June, September, and December of each year, using the end of September 2022 as the initial preparation base date; and submit such accounts receivable statements to all Lenders and Agents by the 15th day of the second month following the month in which such preparation record date falls (or, if such 15th day falls on a non-business day, the business day immediately following such day)
(l) Reports on Loans
Prepare a document in the form of Exhibit 4 attached to this Agreement reporting compliance with the items specified in Item 3(h) of this paragraph, with the last day of August 2022 as the initial preparation record date and the last day of each month as the record date for preparation; and submit such documents to all Lenders and the Agent by the 15th day of the second month following the month in which such record date for preparation falls (or, if such 15th day falls on a non-business day, the business day immediately following such business day)
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(m) Listing Approval.
Notify all Lenders and Agents promptly after such listing approval is obtained for the Borrower’s Shares.
(ii) Restrictions on Pledging of Collateral.
The Borrower will not provide collateral for obligations incurred by the Borrower, the Guarantors or any third party without the prior consent of all Lenders and the Agent. However, this shall not apply in cases falling under either (a) or (b) below.
(a) When pledging assets to be acquired as collateral for a loan for the purpose of acquiring assets.
(b) Acquisition of assets for which security interests have already been established (including acquisition of assets for which security interests have already been established in connection with a merger, company split, or business transfer).
(iii) Other Covenants
The Borrower shall ensure that the following (a) through (i) are complied with.
(a) Maintain the necessary permits, etc. to operate the principal business and continue the business in compliance with all laws and regulations.
(b) Not to change the nature of the principal business.
(c) Except as otherwise required by law or regulation, to treat all payments of any and all obligations hereunder as not subordinated to the payment of other unsecured and unsubordinated obligations (including secured loans that will be under-recovered even after the collateral is realized and disposed of), and to treat such obligations as at least of equal priority to the payment of all other unsecured and unsubordinated obligations.
(d) without the consent of all Lenders and the Agent, any reorganization (within the meaning of Section 2.26 of the Companies Act) of the Borrower or any subsidiary or affiliate of the Borrower that has or may have a material adverse effect on the Borrower’s or Guarantor’s performance of its obligations under this Agreement a merger, demerger, share exchange, share transfer, business. Assignment of all or a part of its assets to a third party (including assignment for the purpose of sale and leaseback). A capital reduction, or an acquisition of all or part of the material business or assets of a third party (excluding, however, an acquisition made in connection with a reorganization relating to the listing of the Borrower’s shares). None of the above shall be conducted.
(e) Not to fall under the category of antisocial forces
(f) Not engage in antisocial activities by themselves or through the use of third parties
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(g) The aggregate amount of the Borrower’s non-consolidated working capital borrowings outstanding at the end of September 2022 and at the end of each month thereafter shall not exceed 9 billion yen. For purposes of this paragraph (g), “Working Capital Borrowing” means a borrowing the use of which is for working capital as shown on the Schedule of Outstanding Borrowings by Financial Institution as of the record date for the preparation of which is the last day of the relevant calendar month, as submitted by the Borrower to all Lenders and the Agent pursuant to this paragraph 1(j).
(h) the aggregate principal amount of all individual outstanding loans of all lenders at the end of September 2022 and at the end of each month thereafter (including the total amount of individual loan disbursements of all Lenders for the Loan with such desired disbursement date and excluding the total amount of unpaid principal of individual loans for the Old Refinancing Loan of all Lenders with such desired disbursement date) The principal amount of the Loan (excluding the Loan procured through the Loan) and the principal balance of the Borrower’s borrowings for working capital purposes (excluding the Loan) as of the date hereof should not exceed the sum of the Borrower’s cash and cash equivalents, accounts receivable and inventories on such date less the amount of accounts payable.
(i) Without the prior consent of all Lenders and the Agent, no new revolving line of credit agreements (including, without limitation, commitment line of credit agreements and special overdraft agreements the same shall apply hereinafter in this (i)).
(iv) Financial Restrictions
(a) The Borrower shall ensure that the amount of net assets on the non-consolidated balance sheet of the Borrower as of the end of each fiscal year of the Borrower shall be at least 75% of the amount of net assets on the non-consolidated balance sheet of the Borrower as of the end of the fiscal year immediately preceding such fiscal year, respectively. The first fiscal year subject to compliance with this (a) shall be the fiscal year ending March 2023.
(b) The Borrower covenants that it will not incur any ordinary loss with respect to ordinary income or loss on the Borrower’s stand-alone statement of income for each of the Borrower’s fiscal years. The first fiscal year subject to compliance with this paragraph (b) shall be the fiscal year ending March 2023.
(c) The Borrower shall ensure that the amount of interest-bearing debt on the Borrower’s non-consolidated balance sheet (The total amount of “short-term borrowings,” “long-term borrowings,” “current portion of long-term borrowings,” “bonds payable,” “current portion of bonds payable,” “bonds with stock acquisition rights,” “current portion of bonds with stock acquisition rights,” “commercial paper” and “discounted notes” in the relevant balance sheets) as of the end of each fiscal year divided by the amount of net assets on the Borrower’s non-consolidated balance sheet as of the end of such fiscal year shall be maintained between 0 and 2.5, respectively.
(v) Notice of Seizure, etc.
Upon service of an order of provisional seizure, temporary restraining order, or seizure with respect to a loan claim, the borrower shall immediately notify all lenders to that effect through its agent, together with a copy of said order.
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(2) Guarantor’s Covenants
(i) Reporting
The Guarantor shall undertake to perform the following (a) through (e) at its own expense.
(a) Grounds for Forfeiture of the Benefit of Time, etc.
If any event specified in each item of Article 22.1 or Article 22.2 or any event constituting such event has occurred or is likely to occur due to the passage of notice or time or both, to immediately report to all lenders and the Agent to that effect.
(b) Property, Management or Business Status.
Immediately upon request of Agent or any Lender through Agent, report to all Lenders and Agent the property, management or business affairs of Borrower and its Subsidiaries and Affiliates or the property, income or borrowings of any Guarantor, and provide Agent with such information as may be necessary to investigate such matters. Provide them with the benefit of such investigation.
(c) Changes in Property, Management or Business Conditions, Litigation, etc.
If there has been a material change in the assets, management, or business conditions of the Borrower or its subsidiaries or affiliates, or in the assets, income, or borrowing conditions of the Guarantor, or if such a change is likely to occur over time; or immediately inform all Lenders and Agents of the commencement or threatened commencement of any litigation, arbitration, administrative proceeding or other dispute with respect to any Borrower or Guarantor that materially affects or may materially affect the performance of its obligations under this Agreement.
(d) Breach of Representations and Warranties.
If any of the items of Paragraph 1 or Paragraph 2 of the preceding Article are found to be untrue, immediately report to all Lenders and Agents to that effect.
(e) Resignation of Representative Director Position.
Immediately inform all Lenders and Agents of any resignation from the position of Representative Director of any Borrower.
(ⅱ) Other Covenants
The Guarantor shall ensure that the following (a) through (d) are complied with.
(a) Except as otherwise required by law or regulation, to treat the payment of any and all obligations under this Agreement as not subordinated to the payment of other unsecured and unsubordinated obligations (including secured loans that will be under-recovered even after the collateral is realized and disposed of), but at least in the same order of priority as such obligations.
(b) Without the consent of all Lenders and the Agent, assign to any third party all or any part of the Guarantor’s assets or acquire all or any part of the material assets of any third party which will or may have a material adverse effect on the Borrower’s or the Guarantor’s performance of its obligations under this Agreement.
(c) Not to fall under the category of antisocial forces
(d) Not engage in antisocial activities by themselves or through the use of third parties
(iii) Notice of Seizure, etc. If a guarantor receives service of an order of provisional seizure, provisional attachment, or seizure with respect to a claim for performance of a guaranteed obligation against the guarantor, the guarantor shall immediately notify all lenders to that effect through the agent, together with a copy of said order.
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22. GROUNDS FOR FORFEITURE OF THE BENEFIT OF TIME LIMIT
(1) In the event of the occurrence of any one of the following events, the Borrower shall, without notice or demand from the Lenders or the Agent, immediately pay the principal of and interest and liquidated damages on the Loan and all other amounts payable by the Borrower and the Guarantors hereunder, and the loan obligations of all the Lenders shall be terminated.
(i) Where the Borrower or the Guarantor has ceased to make payments, or where a petition for commencement of bankruptcy proceedings, civil rehabilitation proceedings, corporate reorganization proceedings, special liquidation or other similar legal liquidation proceedings (including similar petitions filed outside Japan) has been filed. (Including similar petitions filed outside Japan).
(ii) If the Borrower passes a resolution of dissolution or receives an order of dissolution (excluding cases where the Borrower is dissolved as a result of an absorption-type merger or incorporation-type merger)
(iii) The Borrower discontinues its business
(iv) If the Borrower or the Guarantor is subject to a suspension of transactions by a clearing house or by the Zengin Electronic Claims Network, Inc. or equivalent action by another electronic claims recording institution
(v) Where an order or notice of provisional seizure or provisional seizure (including similar procedures outside Japan) has been dispatched to the borrower or guarantor, or a judicial decision ordering execution of a provisional seizure or seizure has been made
(2) If any one of the following events occurs, upon notice by the Agent to the Borrower and the Guarantors at the request of any of the Majority Lenders, the Borrower shall forfeit all of its obligations hereunder to all Lenders and the Agent and immediately pay the principal of and interest and liquidated damages on the Loan and all other amounts due and owing to the Borrower and the Guarantors under this Agreement, and the loan obligations of all Lenders shall be extinguished. In the event that the Agent gives such notice to the Borrower, the Agent shall, without delay (but at the latest within two months from the date on which the Borrower loses the benefit of time under this paragraph), notify the Guarantor that the Borrower has lost the benefit of time.
(i) If the Borrower or the Guarantor defaults in the performance of all or any part of its monetary obligations to either Lender or Agent, whether or not such obligations are monetary obligations under this Agreement.
(ii) If any of the items of Article 20, Paragraph 1 and Paragraph 2 are found to be untrue.
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(iii) Except for Item (i) hereof, the occurrence of a breach of any of the Borrower’s or Guarantor’s obligations hereunder (provided, however, that if such breach is curable, such breach has occurred and has not been cured for more than 10 business days).
(iv) Where an order or notice of seizure, provisional seizure, provisional seizure or provisional disposition (including similar procedures outside Japan) is issued with respect to the subject matter of the collateral pledged to the lender by the borrower or guarantor.
(v) If the Borrower loses the benefit of time with respect to the Bonds issued by the Borrower.
(vi) If the Borrower or the Guarantor defaults in the performance of all or part of its monetary obligations other than the monetary obligations under this Agreement or loses the benefit of time with respect to such obligations or in the event that the Borrower or the Guarantor delays the performance of all or part of its guarantee obligation for a debt owed by the Borrower or the Guarantor to a third party, even though the obligation to perform the guarantee has accrued.
(vii) If the Borrower suspends its business or receives a disposition of business suspension, etc. from a competent governmental agency, etc.
(viii) When a petition for specified mediation is filed with respect to the borrower or guarantor.
(ix) If the guarantor resigns from the position of representative director of the borrower, if the guarantor dies, or if the whereabouts of the guarantor become unknown and a successor guarantor is not promptly added.
(x) If the sum of all voting rights held by the Guarantor and the Guarantor’s spouse, children and father, directly or indirectly, against the Borrower, becomes less than one-half of the total voting rights of the Borrower’s outstanding shares.
(xi) Except for the preceding items, when the condition of the borrower’s or guarantor’s business or assets has deteriorated or is likely to deteriorate and it is deemed necessary for the preservation of claims.
(3) If the notice set forth in the preceding paragraph to the Borrower is delayed or not received due to the fault of the Borrower or the Guarantor the Borrower shall be deemed to have forfeited all of its obligations under this Agreement at the time when such obligations would ordinarily become due and payable to the Borrower, and the principal of the Loan and all interest and liquidated damages and all other amounts payable by the Borrower and the Guarantor hereunder shall be immediately paid, and the loan obligations of all Lenders shall be extinguished.
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(4) If a lender becomes aware of the occurrence of any of the events specified in Items 1.1 through 1.4 of this Article or any of the items of Paragraph 2 of this Article, the lender shall immediately notify the Agent of such occurrence, and the Agent shall notify all other lenders of the occurrence of such event. If any of the events specified in Paragraph 1.5 of this Article occurs, and the lender who is the obligor of the claim pertaining to such event becomes aware that such event has occurred, such lender shall notify the borrower, guarantor, all other lenders and agents of the occurrence of such event. In addition, upon receipt of notice from either lender that any of the events specified in each item of Paragraph 1 of this Article has occurred with respect to the Borrower, the Agent shall promptly notify the Guarantor that the Borrower has forfeited the benefit of time due to the occurrence of such event. The Agent shall not assume any liability for failing to give such notice to the Guarantor if it has not received such notice from the Lender.
(5) In the event that the Borrower loses the benefit of term of an individual loan, the Lender shall notify the Agent of the amount of the liquidation proceeds for such loss of term immediately after the commencement date of the liquidation proceeds calculation, and the Agent shall notify the Borrower and the Guarantor thereof promptly after receipt of such notice. Notwithstanding the provisions of the first sentence of this paragraph, the lender shall, upon the commencement of bankruptcy proceedings, rehabilitation proceedings, reorganization proceedings, special liquidation or other similar legal liquidation proceedings against the borrower or thereafter, notify the borrower and the guarantor directly of the amount of such liquidation proceeds. The Borrower shall pay such liquidation proceeds immediately upon receipt of notice thereof from the Agent (or, in the case provided in the second sentence of this paragraph, such Lender).
23. SET-OFF, EXERCISE OF FLOATING SECURITY INTERESTS
(1) If the borrower or guarantor is required to perform any obligation to any lender or agent by reason of the arrival of the due date, forfeiture of the benefit of the due date or otherwise, such lender or agent shall (i) Notwithstanding the provisions of Article 18.2, any claim hereunder against such Borrower or Guarantor may be set off against any deposit obligation, insurance policy obligation or other obligation of such Lender or Agent to such Borrower or Guarantor, regardless of the maturity of such obligation, and (ii) The borrower or guarantor may receive refunds of deposits on behalf of the borrower or guarantor and apply them to the repayment of obligations without prior notice and without following the prescribed procedures. The interest rate or rate of charge shall be calculated in accordance with the provisions of the contract pertaining to such interest rate or rate of charge, and the foreign exchange rate shall be the rate at the time of the calculation as reasonably determined by the lender or agent concerned.
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(2) Notwithstanding the provisions of Article 18.2, the Borrower or the Guarantor may set off such claims against the obligations hereunder that have become due and payable to such Lenders or Agents only when it is necessary to preserve claims with respect to deposit claims, claims under insurance contracts or other claims that have become due and payable that such Borrower or Guarantor has against any Lender or Agent. In such case, such borrower or guarantor shall give notice of setoff to such lender or agent and promptly submit to such lender or agent the certificate of deposit claims, claims under insurance contracts, and other claims set off, as well as the passbook bearing the seal of registration. In the case of such setoff, interest, late charges, etc. on claims and debts shall be calculated as if such claims and debts were extinguished on the date of arrival of such setoff notice, and the interest rate or charge rate shall be in accordance with the provisions of the contract pertaining to such interest rate or charge rate, and the foreign exchange rate shall be the rate at the time of calculation reasonably determined by the lender or agent in question.
(3) If the Borrower or the Guarantor is obligated to perform an obligation to any Lender or Agent due to the arrival of the due date, forfeiture of the benefit of time or other cause, such Lender or Agent may, notwithstanding the provisions of Article 18(2), enforce (including subrogation and collection by receipt of payment in kind or by voluntary disposition thereof with the assets on which such permitted security interest has been created) any permitted security interest.
(4) Notwithstanding the provisions of Article 18.2, in the event that the Borrower or the Guarantor is required to perform its obligations to any Lender or Agent due to the arrival of the due date, forfeiture of the benefit of time or any other reason, such Lender or Guarantor shall, upon giving prior notice to Agent, sell the assets subject to the permitted security interest with such Lender or Agent as the security interest holder, at its option, pursuant to an agreement with such Lender or Agent．The money received may be paid directly to such lender or agent in performance of its obligations hereunder, or the assets subject to an acceptable security interest in which such lender or agent is a security interest holder may be paid in lieu thereof in performance of its obligations hereunder pursuant to an agreement with such lender or agent, and such payment shall be deemed performance of its obligations hereunder.
(5) If, for reasons not attributable to the lender, the principal of an individual loan of such lender is repaid or offset prior to the due date of such individual loan, (including, but not limited to, cases where the principal of the Individual Loan is extinguished by setoff in accordance with Paragraph 1 of this Article and cases where the guarantor’s guarantee obligation with respect to the principal of such Individual Loan is paid or setoff. The same shall apply hereinafter in this paragraph) and the reapplied interest rate for the individual loan so repaid or offset is less than the applicable interest rate for such individual loan, then, except as otherwise provided herein, the borrower shall pay to such lender, on the same day that such repayment or offset is made, the liquidation amount for such repayment or offset.
(6) In the event of a setoff or an appropriation of payment pursuant to Paragraph 1 or Paragraph 2 of this Article, or in the event of an exercise of a permitted security interest pursuant to Paragraph 3 of this Article, or in the event of a voluntary sale or substitute payment of assets subject to a permitted security interest pursuant to Paragraph 4 of this Article, the lender with respect to Paragraphs 1 and 3 of this Article, or the relevant borrower or guarantor with respect to Paragraphs 2 and 4 of this Article shall promptly notify the Agent of the details thereof. If any damage or other loss is incurred by either Lender or the Agent as a result of any delay in giving such notice without reasonable cause, such damage or loss shall be borne by the Lender who failed to give such notice or by such Borrower or Guarantor.
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24. ARRANGEMENTS AMONG LENDERS AND AGENTS
(1) If the obligations of the Borrower or the Guarantor under this Agreement to any of the Lenders are extinguished without complying with the provisions of Articles 18 and 19 (excluding, however, cases where a setoff or an allocation of payment has been made pursuant to the provisions of Paragraph 1 or Paragraph 2 of the preceding Article) (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, in order to achieve the same result as if the payment had been made in accordance with the provisions of Articles 18 and 19 and the obligations to the Lenders and Agents had been extinguished, assign or receive claims in accordance with the following provisions, or take other appropriate measures to coordinate their activities. In the event that all Lenders and the Agent cannot agree on such assignment or transfer of the Receivables or other appropriate measures, all Lenders shall follow such measures as the Agent shall determine in its discretion. However, if an assignment of the Receivables is contemplated as part of the adjustment between the Lenders and the Agent as provided in this paragraph (including, but not limited to, the case provided in item (ii) of this paragraph) ), the lender who is the assignee of such claim may refuse such assignment. Even if such assignment is refused, such assignment shall be deemed to have been made for the purpose of calculating the unused credit limit amount.
(i) Assuming that the amount pertaining to the extinguishment of such obligation had been paid to the Agent in accordance with the provisions of Article 18(1) at the time of the extinguishment of such obligation, the Agent shall identify the other lenders and the Agent (hereinafter in this paragraph referred to as “other lenders, etc.”) under Article 18 and Article 19.
(ii) The extinguished lender shall purchase from the other lender, etc. the portion of the claims of the other lender, etc. identified by the agent in accordance with the provisions of the preceding item, which is equivalent to the amount calculated by the agent in accordance with the provisions of the preceding item, at par value.
(iii) When the purchase of the claim set forth in the preceding item is made, the other lender, etc. that sold the claim shall, at its own expense, give notice to the borrower or guarantor concerned by a deed with a definite date as provided for in Article 467 of the Civil Code promptly after the sale of such claim.
(2) Notwithstanding the preceding paragraph, in the following cases, no adjustment is made between lenders and agents as provided in the preceding paragraph and only the relevant lender shall receive repayment.
(i) In the event of the execution of an allowable security interest by the lender
(ii) If, as a result of compulsory execution by a third party or an auction for the exercise of a security interest, the lender receives payment of a claim held by the lender against the borrower or guarantor under this Agreement in connection with the permitted security interest
(iii) When the obligations of the Borrower or the Guarantor under the Agreement are extinguished as a result of a setoff or an allocation of payment in accordance with the provisions of Paragraph 1 or Paragraph 2 of the preceding Article
(iv) if a voluntary sale of the assets subject to the permitted security interest with the lender as security interest holder takes place in accordance with the provisions of Paragraph 4 of the preceding article and the money received is paid directly to such lender to satisfy its obligations under this Agreement, or if the assets subject to the permitted security interest with the lender as security interest holder are paid in substitution and the obligations hereunder to such lender are extinguished
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25. RIGHTS AND DUTIES OF THE AGENT
(1) The Agent shall, on behalf of all Lenders, perform the Agent’s duties and exercise such powers and exercise such authority as the Agent deems ordinarily necessary or appropriate in the performance of the Agent’s duties. Agent shall have no obligations other than those expressly set forth in the respective provisions of this Agreement and shall not be liable for any failure by Lender to perform its obligations under this Agreement. In addition, the Agent shall be an agent of the Lender and shall not be an agent of the Borrower or the Guarantor unless otherwise specified.
(2) Agent may rely on communications, documents and papers (including loan applications received from Borrowers by facsimile in accordance with the provisions of Article 4.1) which it believes to be true and correct and which are signed or stamped with the name and seal of an appropriate person and delivered by such person. The Agent may also act in reliance on the written opinions and explanations of experts reasonably appointed by the Agent to the extent necessary in connection with this Agreement.
(3) The Agent shall exercise due care as a good manager in discharging its duties and exercising its authority as set forth herein.
(4) Neither Agent nor any of its directors, employees or agents shall be liable to any Lender for any act or omission under or in connection with this Agreement unless such act or omission is willful or grossly negligent. The lender shall not be liable for any liabilities and damages, etc. (including, but not limited to, expenses incurred to prevent the Agent from suffering damages or losses and expenses incurred to recover damages or losses (including attorney’s fees)) incurred by the Agent in the performance of its obligations under this Agreement. However, if the agent also serves as a lender, the lender other than the agent shall be deemed to be a lender that is an agent from the above costs to the lender’s participation ratio (provided, however, that after the termination of all lenders’ loan obligations, the ratio of the total principal amount of such lender’s individual outstanding loans to the total outstanding loans as of such time shall be the ratio of such lender’s total outstanding loans to the total principal amount of such lender’s individual outstanding loans. The same shall apply hereinafter). (However, when there is a lender who is unable to fulfill said compensation obligation, the ratio shall be the ratio obtained by dividing the participation ratio of the lender who is an agent by the total participation ratio of all lenders excluding said lender) The lender shall jointly and severally compensate the agent for the remaining amount after deducting the portion of the burden calculated in accordance with the following formula.
(5) The Agent shall, upon the direction of the Majority Lender, act in accordance with such direction so long as it is lawful to do so, and in such case the Agent shall not be liable to the Borrower, the Guarantor or the Lender for any consequences resulting from such action.
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(6) The Agent shall be deemed not to have had knowledge of the existence of such event unless it has received from the Borrower, the Guarantor or the Lender an event specified in each item of Article 22.1 or each item of Article 22.2, or a notice or the passage of time, or both, to the effect that an event constituting such event exists.
(7) The Agent makes no warranty as to the validity of this Agreement or the matters expressed herein, and the Lenders shall enter into this Agreement and conduct the transactions contemplated herein at their own discretion after examining the creditworthiness of the Borrower and the Guarantor and other necessary matters based on documents and information deemed appropriate by the Agent.
(8) If the Agent is also a lender, its rights and obligations as a lender hereunder shall be the same as those of any other lender, notwithstanding the Agent’s obligations hereunder.
In addition, the Agent may enter into generally acceptable banking arrangements with the Borrower or the Guarantor outside of this Agreement. The Agent shall not be obligated to disclose to other Lenders any information concerning the Borrower or the Guarantor obtained in transactions outside of this Agreement (information received from the Borrower or the Guarantor shall be deemed to have been obtained in transactions outside of this Agreement, unless it is expressly indicated that such information was sent pursuant to this Agreement) to other Lenders, and shall not be obligated to distribute to other Lenders any money paid by such Borrower or Guarantor in transactions outside of this Agreement with the Borrower or Guarantor.
(9) The calculation of the Individual Loan Amount and the amount to be distributed to lenders pursuant to Article 19 shall be made by the lender designated by the Agent (hereinafter in this paragraph referred to as “Fractional Accrual Lender”．However, if the agent also serves as the lender, the lender who also serves as the agent shall be the fractional aggregate lender.) The distribution amount to a lender other than the agent shall be rounded down to the nearest yen, and the distribution amount to a fractional cumulative lender shall be the total distribution amount minus the distribution amount to the other lender. Fractional amounts less than one yen required under this Agreement shall be treated in a manner deemed appropriate by the Agent, except in this case.
(10) The determination of the rate of interest, loan term and repayment date, and any other determinations contained in any notice given by Agent to Borrower, Guarantor or Lender, and the amounts payable hereunder, shall be binding upon Borrower, Guarantor and Lender as if fixed, in the absence of manifest error.
(11) If Agent receives any notice to be communicated by Borrower or Guarantor hereunder to Lenders, Agent shall promptly notify all Lenders of the contents thereof, and if Agent receives any notice to be communicated by Lenders hereunder to Borrower, Guarantor, or any other Lender, Agent shall promptly notify Borrower, Guarantor, or all Lenders, respectively, of the contents thereof. Documents obtained and kept by the Agent from the Borrower, or the Guarantor shall be made available for inspection by the Agent for the benefit of the Lenders during normal business hours of the Agent.
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26. RESIGNATION AND DISMISSAL OF THE AGENT
(1) The procedure for the resignation of an Agent shall be as follows
(i) An Agent may resign by giving notice to all Lenders, Borrowers and Guarantors. However, such resignation shall not be effective until a successor Agent is appointed and accepts office.
(ii) If the notice referred to in the preceding item is given, the majority lender shall appoint a replacement agent with the consent of the borrower.
(iii) On the date on which the notice referred to in item (i) of this paragraph is given (including the same date). If no successor agent has been appointed by the majority lender, or if the person appointed by the majority lender has not consented to the appointment, within 30 days of the date of the notice, the agent in office may, with the consent of the borrower, appoint a successor agent in place of the majority lender.
(2) The procedure for the dismissal of an agent shall be as follows
(i) A multiple lender may remove an agent by giving notice to all other lenders, borrowers, guarantors and agents. However, such removal shall not take effect until a successor agent is appointed and accepts the appointment.
(ii) If the notice referred to in the preceding item is given, the majority lender shall appoint a replacement agent with the consent of the borrower.
(3) In the event that the person appointed as the successor agent pursuant to paragraph 1 of this Article or the preceding paragraph accepts the appointment, the predecessor agent shall deliver to the successor agent the complete set of documents in its custody as agent under this Agreement and shall provide all necessary cooperation to enable the successor agent to fulfill its responsibilities as agent under this Agreement.
(4) The successor Agent shall succeed to the rights and obligations under this Agreement held by the predecessor Agent, and the predecessor Agent shall be relieved of all obligations assumed as Agent upon the appointment of the successor Agent. However, each provision of this Agreement shall remain in full force and effect with respect to any acts (including omissions) of the predecessor agent during his/her term of office.
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(5) Notwithstanding the provisions of the preceding four paragraphs, an agent may resign as agent by agreement with the majority lender if any of the following events occur．In the event of the resignation of an Agent pursuant to this Section, the resigning Agent shall promptly notify the Borrower and the Guarantor thereof, and the Borrower or the Guarantor shall not object to such resignation. The resignation of an Agent pursuant to this paragraph shall not relieve the Borrower of its obligation to pay Agent Fees already incurred.
(i) If a petition for commencement of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement of corporate reorganization proceedings, commencement of special liquidation or other similar legal liquidation proceedings (including similar petitions filed outside Japan) is filed against the Borrower
(ii) When the Borrower has failed to pay the Agent Fees and has not paid them within a reasonable period of time despite a demand for such payment with a reasonable period of time specified.
27. CLARIFICATION OF THE INTENTION OF THE MAJORITY LENDERS
(1) The procedures for rallying the intent of the majority lender shall be as follows.
(i) If the lender determines that an event has occurred that requires instructions by the majority lender as provided herein, the lender may notify the Agent of its request to rally the intentions of the majority lender.
(ii) Upon receipt of the notice in the preceding item, the Agent shall promptly notify all lenders of its intention to rally the intentions of the majority lenders.
(iii) Upon receipt of the notice in the preceding item, the lender shall make its own decision on the said cause and notify the Agent of the details of its decision within five business days.
(iv) In the event that the majority lender’s declaration of intent is made pursuant to the preceding three items, the Agent shall promptly notify the borrower, guarantor, and all lenders of the contents of such declaration as an instruction by the majority lender.
(2) In addition to the preceding paragraph, the Agent may notify all lenders of its intention to rally the intentions of the majority of lenders if it determines on its own that an event has occurred that requires rallying the intentions of the majority of lenders. The procedures after such notification shall be in accordance with the provisions of items 3 and 4 of the preceding paragraphs.
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28. AMENDMENT TO THIS AGREEMENT
(1) This Agreement shall not be modified without the written agreement of the Borrower, the Guarantors, all Lenders and the Agent.
(2) Notwithstanding the provisions of the preceding paragraph, if an agent resigns pursuant to Article 26.5 and a successor agent is not immediately appointed by agreement of the majority lender, this Agreement may be amended by written agreement of the majority lender and the agent (but if the agent has already resigned, the majority lender) to the extent reasonably necessary to allow each lender to exercise its rights individually. The party that modifies this Agreement in accordance with the provisions of this paragraph shall notify the other parties to this Agreement of such modification without delay.
29. ASSIGNMENT OF THIS AGREEMENT
(1) The Borrower will not assign its position or rights and obligations under this Agreement to any third party without the prior consent of all Lenders, Guarantors and the Agent.
(2) The Guarantor shall not transfer its position or rights or obligations under this Agreement without the prior consent of the Borrower, all Lenders and the Agent.
(3) The Lender has obtained the prior consent of all other Lenders, Borrowers, Guarantors and Agents (this shall not apply to the assignment of loan claims as provided in Article 24 or Article 30) and all of the positions under this Agreement and the rights and obligations associated with them may be transferred to a third party only if all of the following requirements are met (partial transfer of positions under this Agreement and the rights and obligations associated with them is not permitted). (In this Article, the lender making such assignment shall be referred to as the “assignee of status” and the person receiving such assignment shall be referred to as the “assignee of status”).In such cases, the assignor and assignee of status shall jointly send a notice of assignment of status to the agent with copies of the authorizations of all other lenders, borrowers, guarantors, and the agent. All other lenders, borrowers, guarantors and agents may not refuse such consent without reasonable cause, and the Agent shall notify all lenders of any such assignment.
(i) If the loan claim or any other claim stipulated in this Agreement against the Borrower held by the assignee of status is assigned to the assignee of status as a result of such assignment, the Borrower’s consent shall include consent to the assignment of such claim, and a definitive assignment date shall be obtained with respect to such consent.
(ii) The transferee of title is a qualified transferee.
(iii) The amount of interest paid by the borrower or the guarantor to the assignee of the relevant status will not increase in accordance with the provisions of Article 18, Paragraph 5 due to withholding taxes, etc. arising as a result of such assignment. (Except in the case where the lender transfers its position under the Agreement to an overseas subsidiary or affiliate of the lender due to the lender’s discontinuation of its loan business in Japan)
(4) The transferee of status shall bear all expenses, etc. incurred as a result of the transfer in accordance with the preceding paragraph. In addition, the transferee of status shall pay to the Agent 500,000 yen, together with consumption tax and local consumption tax, as consideration for the administrative procedures related to such transfer by the date of such transfer.
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30. ASSIGNMENT OF LOAN RECEIVABLES
(1) Except as otherwise provided in this Agreement, the Lenders may assign all of the Loan Receivables and other claims under this Agreement (partial assignment of Loan Receivables is not permitted) only if all of the following requirements are met. The assignor and assignee shall, as of the date of such assignment, fulfill the requirements for third party and debtor counterparties with respect to such assignment, and in such case, the assignor and assignee shall immediately notify the guarantor and agent of such assignment under their joint names. Such notice shall be given by sending a notice of assignment of claims to the Guarantor and the Agent. In the event of an assignment of a claim under this paragraph, the assignee shall be treated as the lender in the application of the respective provisions of this Agreement with respect to such claim.
(i) to be bound by each of the relevant provisions of the Agreement with respect to the receivables transferred by the transferee (and further, the transferee shall not assume any loan obligations)
(ii) The transferee is a qualified transferee.
(iii) The amount of interest paid by the borrower or guarantor to such transferee will not increase in accordance with the provisions of Article 18, Paragraph 5 due to withholding tax, etc. arising from such transfer (except where the lender makes a transfer to an overseas subsidiary or affiliate of such lender due to such lender’s discontinuation of its lending business in Japan).
(2) The transferor shall bear all expenses incurred as a result of the transfer in accordance with the preceding paragraph. In addition, the transferor shall pay to the agent 500,000 yen, together with consumption tax and local consumption tax, as compensation for administrative procedures, etc. related to said transfer by the date of said transfer.
(3) In the event of an assignment pursuant to paragraph (1) of this Article, the unused credit limit shall be calculated as if such assignment had never been made.
(4) If any lender assigns a loan claim or any other claim under this Agreement that does not satisfy the requirements set forth in this Agreement (hereinafter in this Article referred to as an “Unauthorized Assignment,” the assignee in an Unauthorized Assignment is referred to as the “Unauthorized Assignee,” the assignee is referred to as the “Assignor” and the claim subject to assignment is referred to as the “Assigned Claim”). ), it shall be sufficient for the borrower, guarantor, other lenders, and agent to handle the claim as provided in the following items or otherwise on the assumption that the unauthorized assignment is not made and that the unauthorized assignor continues to be a creditor with respect to the assigned claim, and they shall not be liable for any damages, etc. arising therefrom.
(i) Even when the Agent has received a notice of the fact of assignment pertaining to a loan claim, the Agent shall not be required to perform the administrative procedures prescribed in Article 19(2)(ii) if said assignment is an unauthorized assignment.
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(ii) As long as the unauthorized assignor has the authority to receive payment of the unauthorized assigned claim pursuant to Article 466, Paragraph 3 of the Civil Code, payment for the unauthorized assigned claim shall be received by the agent to whom the exercise of such authority is delegated by the unauthorized assignor under this Agreement and, unless otherwise provided in this Agreement, direct payment to the unauthorized assignor or unauthorized assignee shall not be deemed performance of obligations under this Agreement and the provisions of Article 18, Paragraph 2 shall apply. Distributions by the agent under Article 19 regarding payment on unauthorized assignee claims shall be made to the unauthorized assignor. The Borrower waives its right to terminate the delegation of the exercise of authority provided for in this item and does not assign its right to claim distribution against the Agent. In the event that the Borrower or the Guarantor receives a demand from the Unauthorized Assignee to fulfill its guaranteed obligation with respect to the Unauthorized Assigned Claim or the Unauthorized Assigned Claim, the Borrower and the Guarantor shall immediately notify the Agent of such fact.
(iii) The definition of “majority lender” applies as if the unauthorized transferee has an unauthorized assigned claim, and the unauthorized transferee is bound by the decision made by such majority lender. The unauthorized transferee may also, by agreement of the unauthorized transferee, modify this Agreement in accordance with Article 28.1, and the unauthorized transferee shall be bound by the terms of such modification of the Agreement.
(5) Notwithstanding the provisions of Article 23(1), an unauthorized assignee shall not make a setoff or an allocation of payment with respect to an unauthorized assigned claim. The unauthorized transferee and the unauthorized assignee shall handle disputes arising out of the unauthorized transfer at their own expense and responsibility, and if the borrower, guarantor, other lenders or agent suffers any damage or other loss arising out of the unauthorized transfer, the unauthorized transferee shall indemnify such borrower, such guarantor, other lenders or agent against such damage or loss.
(6) No other lender, guarantor or agent shall lose the benefits provided in the preceding two paragraphs even if the borrower consents to the unauthorized assignment, unless it consents to such unauthorized assignment itself.
31. COLLECTION FROM THIRD PARTY
(1) Except as provided in Section 3 of this Article, with respect to the obligations of the Borrower or the Guarantor hereunder, no third party other than the Borrower (except for the Guarantor defined as the Guarantor hereunder) shall, without the prior consent of all Lenders and the Agent, be No repayment by the Agent shall be permitted.
(2) The Borrower shall, from and after the date of execution of this Agreement and unless otherwise approved in advance by all the Lenders and the Agent, provide guarantees (including physical guarantees) to the extent that the obligations of the Borrower under this Agreement are secured obligations, except for guarantees provided by the Guarantors under this Agreement (However, this excludes revolving guarantees and physical guarantees that are secured by a revolving guarantee.) and not to have any third party assume any of its obligations under this Agreement or the performance of such obligations.
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(3) The Lender shall not be liable for the repayment of any obligation of the Borrower or the Guarantor under this Agreement from a third party (excluding the Guarantor defined as the Guarantor under this Agreement) by receiving repayment of the obligation with such third party as the obligor or by the execution of a security interest created by the physical guarantor, by repayment with money received from a voluntary sale of assets covered by a security interest created by the physical guarantor or by payment in substitution by the assets covered by a security interest created by the physical guarantor, unless all of the following requirements are satisfied. If a lender receives repayment from a third party pursuant to the provisions of this paragraph, such lender shall immediately notify the Agent of such repayment jointly with such third party, and the borrower and guarantor shall each independently notify the Agent of the fact of such repayment. The provisions of Article 18.2 shall not apply to the receipt of repayment pursuant to the provisions of this paragraph, and no adjustment shall be made between the Lender and the Agent as provided in Article 24.1 with respect to the extinguishment of the obligations hereunder of the Borrower or the Guarantor upon receipt of such repayment.
(i) In exercising any right of indemnity acquired as a result of such payment and any claim acquired in subrogation to the lender or the guarantor, the third party agrees in writing that such right of indemnity and any claim acquired in subrogation shall be treated in the same manner as a claim pertaining to such payment and that such third party shall be bound by each provision of this Agreement to the extent of such right, and such written agreement shall be submitted to the Agent on behalf of the lender and the Agent.
(ii) The third party is a Qualified Assignee and is not a subsidiary or affiliate of the Borrower, or the Borrower is not a subsidiary or affiliate of such third party.
(iii) If such repayment is the repayment of a debt pertaining to a loan claim, the full amount of such loan claim is to be repaid.
(iv) Withholding tax, etc. is incurred as a result of such repayment, and the amount of interest payable by the borrower or guarantor to the third party is not increased in accordance with the provisions of Article 18, Paragraph 5.
In cases where a third party exercises a right of exoneration or acquires a loan claim in subrogation, the acquisition of said right of exoneration or said acquisition in subrogation shall be deemed to be an assignment of the loan claim under the provisions of the preceding Article, and the provisions of paragraphs 2 and 3 of said Article shall apply mutatis mutandis.
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32. TERMINATION OF THIS AGREEMENT
The loan obligations of all lenders shall be extinguished upon the occurrence of any of the following events. In such case, the Borrower shall pay all obligations hereunder immediately (or, with respect to the Borrower’s obligations with respect to the Commitment Fee in the event of an event under Item 1 or Item 3 of this Article and the Borrower’s obligations with respect to the Loan not yet due and payable in the event of an event under Item 3 of this Article, on the due date for payment of such obligations). The relevant provisions of the Agreement shall remain in effect until the Borrower and the Guarantor have completed the performance of all their obligations under the Agreement.
(i) If the Commitment Period expires
(ii) Where the Borrower has forfeited the benefit of time pursuant to the provisions of Article 22
(iii) If the Borrower terminates its loan obligations in accordance with the provisions of Article 2.5.
33. GENERAL PROVISIONS
(1) Confidentiality
The Borrower and the Guarantor shall not object to the disclosure of the following information
(i) in the event of a notice of non-disbursement of individual loans pursuant to Article 7.1, or in the event of the occurrence of any event specified in any item of Article 22.1 or Article 22.2, or any event constituting such event by notice or lapse of time or both, or in the event that a majority of the lenders are required to make a declaration of intent pursuant to Article 27 to disclose to each other, to the extent reasonably necessary, information concerning the Borrower or any Guarantor and transactions with the Borrower or any Guarantor obtained by the Lender and Agent in connection with this Agreement or any other agreement
(ii) In the event of an assignment of status under Article 29 or an assignment of loan claims under Article 30, information concerning this Agreement shall be disclosed to the assignee (including an assignee of status as defined in Article 29) on the condition that the lender obligates the other party to maintain confidentiality. Information related to the Agreement as used herein means information relating to the credit of the Borrower and the Guarantor obtained in connection with the Agreement, the details of the Agreement and information incidental thereto, and the details of the loan receivables subject to assignment and information incidental thereto and does not include information relating to the credit of the Borrower or the Guarantor obtained in connection with agreements other than the Agreement.
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(iii) Disclosure by the Lenders or the Agent of information relating to this Agreement in response to orders, guidance, or requests by Applicable Laws, administrative, judicial, or other relevant government agencies, central banks, or self-regulatory organizations in or outside Japan, and disclosure of information relating to this Agreement to lawyers, judicial scriveners, certified public accountants, auditing corporations, tax accountants, rating agencies, or other professionals who are required to disclose such confidential information in the course of their duties, to the extent reasonably necessary.
(iv) Disclosure by the account opening bank for the Syndicate Account to the Lenders and the Agents of information regarding the account statements for the Syndicate Account, if deemed necessary for the preservation or exercise of the Lenders’ or the Agents’ claims. In addition, the information obtained by the lender and the agent from the bank where the account was opened shall be disclosed to third parties to the extent reasonably necessary.
(2) Risk assumption, indemnification and compensation
(i) If any document furnished by the Borrower or the Guarantor to either Lender or the Agent is lost, destroyed, or damaged due to an event, disaster, or other unavoidable circumstances, such Borrower or Guarantor shall, after consultation with the Agent, perform its obligations under this Agreement based on the books, vouchers, and other records of such Lender or Agent. In addition, such Borrower or Guarantor shall promptly prepare and furnish to such Lender, through its Agent or Agents, substitute documents if requested by such Lender, through its Agent or Agents.
(ii) If there is any accident such as forgery, alteration or theft of the seal, etc., in connection with a transaction in which the Lender or the Agent has checked the signature or seal impression of the representative of the Borrower or the agent of the Borrower or the Guarantor used for transactions under this Agreement with due care and found no difference from the signature or seal impression provided by such Borrower or Guarantor in advance, and if any damage or loss is caused by such accident, such Borrower or Guarantor shall bear the burden thereof.
(iii) The Borrower or the Guarantor has violated any provision of this Agreement or any of the items of Article 20.1 or 20.2 is untrue (including the matters stipulated in Article 20.1.10 or 20.2.8 are untrue, the Borrower has violated the provisions of Article 21.1.3(e) or (f), or the Guarantor has violated Article 21.2.2(c) or (d)) (Hereinafter in this item, “Breach of Borrower’s Obligations, etc.”). The Borrower or the Guarantor shall not make any claim against the Lender or the Agent even if the Borrower or the Guarantor incurs any damage or other loss as a result of the Lender’s or the Agent’s performance of any of the following acts. In addition, any damage, etc. incurred by either lender or agent due to a breach of the borrower’s or other obligation, etc. or due to the lender’s failure to provide compensation under Article 25, Paragraph 4 shall be borne by the borrower or guarantor concerned.
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(3) Severability of this Agreement.
If any provision of this Agreement is held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be impaired or affected.
(4) Headings.
The headings in this Agreement are for convenience of reference only and do not in any way affect the meaning or interpretation of this Agreement.
(5) Relationship with the Banking Agreements
With respect to this Agreement and the transactions hereunder, in the event of any inconsistency between the provisions of this Agreement and any bank transaction agreement or other comprehensive written agreement regarding financial transactions separately submitted to the lender by the borrower or guarantor or separately executed between the borrower or guarantor and the lender (hereinafter in this paragraph, “Transaction Agreements, etc.”), the provisions of this Agreement shall prevail.
(6) Notices, etc.
(i) All notices, reports, requests, offers, acceptances, instructions and other communications required or permitted under this Agreement (hereinafter in this paragraph referred to as “Notices, etc.”) shall be in writing and shall be addressed to the Agent (or, if addressed to the Agent, to the Agent’s contact address set forth in Schedule 1 attached hereto) by the other party, as the recipient, in any of the following methods (a) through (d). Each party to this Agreement may change the contact person by sending a notice of change of contact person to the Agent.
(a) In-person delivery
(b) Registered mail or courier service
(c) Facsimile communications
(d) Exchange mail (limited to notices between lenders and agents)
(ii) The effective time of the Notice, etc. set forth in the preceding item shall be, in the case of facsimile transmission, the time when the receipt of the Notice, etc. is confirmed by the sender’s facsimile transmitter, or in the case of other methods, the time when the Notice, etc. is actually received.
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(7) Changes in Notified Matters
(i) The lender, borrower and guarantor shall promptly notify the Agent of any change in their trade name, name, representative, agent, signature, seal, address or any other matters notified to the Agent.
(ii) If any notice given under this Agreement is delayed or not received due to failure to file the notification in the preceding item, it shall be deemed to have been received at the time when it should normally have been received.
(8) Payment of Funds.
Fees and other charges for payments made under this Agreement from either party to the other party to this Agreement shall be borne by the party making the payment.
(9) Calculation
In the absence of any other explicit provision for calculation in this Agreement, calculations shall be made on a daily basis, with the last division being made at the end of the year and any fraction less than one yen being rounded down to the nearest one yen.
(10) Notarization.
The Borrower and the Guarantor shall, whenever requested by the Majority Lender or the Agent, commission a notary public to take the necessary procedures for the acknowledgment of the obligations under the Indenture and for the preparation of a notarial deed with the language of approval of compulsory execution for the obligations under the Indenture. The cost of preparation of such notarial deed shall be borne by said lender or guarantor.
(11) Governing Law and Agreed Jurisdiction
This Agreement shall be governed by the laws of Japan, and the Tokyo District Court shall have non-exclusive jurisdiction over any disputes arising in connection with this Agreement.
(12) Language
This Agreement shall be prepared in Japanese and shall be the original.
(13) Matters to be Discussed
If any matter is not provided for in this Agreement or if any question arises between the parties concerning the interpretation of this Agreement, the Borrower, the Guarantor and the Lenders shall consult with each other through the Agent.
As evidence of the execution of this Agreement, one original of this Agreement shall be prepared and signed by or affixed the name and seal of the Borrower, the Guarantor, each Lender and the representative or representative’s agent of the Agent and shall be kept by the Agent. The Borrower, Guarantor and each Lender shall receive a copy from the Agent.
48
Particular Table 1
(Party List)
| １．Borrower | Yoshitsu Co., Ltd |
| ２．Guarantor | Mei Kanayama |
| ３．Agent | MUFG Bank, Ltd. |
| ４．Lenders | |
| Financial institutions | Commitment Amount | |
| MUFG Bank,LTD. | 1.3 Billion yen | |
| MUZUHO Bank,LTD. | 1.55 Billion yen | |
| Resona Bank, Limited. | 1.0 Billion yen | |
| SUMITOMO MITSUI BANKING CORPORATION | 0.9 Billion yen | |
| The Iyo Bank,Ltd. | 0.5 Billion yen | |
| The Chiba Bank, Ltd. | 0.4 Billion yen | |
| The Tokyo Star Bank, Limited | 0.4 Billion yen | |
| Sumitomo Mitsui Trust Bank, Limited | 0.4 Billion yen | |
| THE ASHIKAGA BANK, LTD | 0.3 Billion yen | |
| Suruga Bank Ltd. | 0.3 Billion yen | |
| THE BANK OF KOCHI, LTD. | 0.3 Billion yen | |
| THE TOKUSHIMA TAISHO BANK LTD | 0.3 Billion yen | |
| THE TOWA BANK,LTD. | 0.2 Billion yen | |
| Kansai Mirai Bank, Limited | 0.1 Billion yen | |
| THE HACHIJUNI BANK,LTD. | 0.1 Billion yen | |
| The Kita-Nippon Bank, Ltd. | 0.05 Billion yen | |
| Toei shinkin bank | 0.05 Billion yen | |
| total | 8.15 Billion yen |
49
Exhibit 4.22
Contract No. 000134
THIS LOAN AGREEMENT (the “Agreement”) is made on the 22nd September, 2022.
BETWEEN:
| (1) | DFL-Shutoken Leasing (Hong Kong) Company Limited, a company, duly incorporated and validly existing under the laws of Hong Kong and having its registered office at 15/F, Wai Fung Plaza, No.664 Nathan Road, Mongkok, Kowloon, Hong Kong (the“Lender”) ; and |
Tokyo Lifestyle Limited, a company duly incorporated and validly existing under the laws of HONG KONG and having its registered office at Room 11,12/F, Wing On Plaza,62 Mody Road, Tsimshatsui, Kowloon, HONG KONG (the“Borrower”).
WHEREAS:
| A. | The Borrower has requested the Lender to advance the Loan to it. |
| B. | The Lender has agreed to advance the Loan to the Borrower on the terms and conditions set out herein and in the Memorandum of the Agreement set out in Schedule 1 hereto. |
IT IS HEREBY AGREED as follows:
| 1. | This Agreement sets out the terms and conditions upon and subject to which the Lender agrees to advance a loan in the principal amount of JPY50,000,000 (the “Loan “) to the Borrower. |
| 2. | Without prejudice to the foregoing provisions, the Borrower agrees and declares that if the Loan is paid to any payee at the written request of the Borrower, such payment shall for all intents and purposes be deemed to be an advance of the Loan by the Lender to the Borrower pursuant to this Agreement. |
| 3. | The Borrower may prepay the Loan or any portion thereof by giving prior written notice of not less than 10 business days (the “Prepayment Notice”) to the Lender, specifying the date of prepayment and the amount intended to be prepaid. The Prepayment Notice, once issued by the Borrower to the Lender, cannot be revoked and the Borrower shall be bound to make the prepayment pursuant to the Prepayment Notice. For the avoidance of doubt, any partial amount of the Loan so prepaid shall not be re-borrowed by the Borrower until and unless the principal amount of the Loan plus interest are repaid in full, and in which case the Borrower is required to follow the procedures set out by the Lender to apply for the grant of a new loan. In situation where the Loan is repaid by instalments, any amount so prepaid shall be applied against and shall reduce the number of the repayment instalments in an inverse order of their maturity. Business day referred to in this Agreement means a day on which banks in Hong Kong are open for business, excluding Saturdays. |
| 4. | If the Loan or any outstanding portion thereof is prepaid, the Borrower shall also pay to the Lender on the prepayment date: |
| (i) | all interest accrued thereon and such interest shall accrue from day to day and shall be calculated on the basis of the actual number of days elapsed; |
| (ii) | such other sum as the Lender may notify the Borrower, which is considered to be necessary to compensate the Lender for any losses (e.g., the loss of interest for the remaining term of the Loan) or expenses(administrative expenses in preparing written statement showing the Borrower’s current position under this Agreement and so forth) reasonably incurred as a consequence of such prepayment. |
| 5. | Subject to full compliance with the provisions set out in Clause 6 and the relevant provisions of the Money Lenders Ordinance(as summarized in Appendix 1 to Schedule 1 hereto), the drawdown date of the Loan is 5th October, 2022(the “Drawdown Date”) |
| 6. | To facilitate the advance of the Loan, the Borrower shall provide the Lender with the following documents not less than 5 business days prior to the Drawdown Date: |
| (i) | with regard to the Borrower, certified true copies of: |
| (a) | the Certificate of Incorporation and, where applicable, the Certificate of Incorporation on Change of Name; |
| (b) | the Articles of Association; |
| (c) | the latest annual return filed with the Companies Registry; and |
| (d) | the Business Registration Certificate; |
| (e) | the board minutes or resolutions by all its directors: |
| (A) | approving this Agreement and the transactions contemplated herein; |
| (B) | authorizing such person to sign this Agreement, the Notice of Drawdown(as defined below) and such other documents and to do such other act(s) and thing(s) for and on behalf of the Borrower to effect the grant of the Loan and any related matters/transactions; |
| (ii) | a guarantee (the “Guarantee” )(or such other form of security for repayment of the Loan plus interest acceptable to the Lender) in form and substance satisfactory to the Lender such that the guarantor named therein irevocably, unconditionally and absolutely guarantees to the Lender the full, due and punctual repayment of the Loan and interest thereon by the Borrower: |
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| (a) | on the Maturity Date (which is sh day of October,2025); |
| (b) | where applicable, on each of the interest payment dates; or |
| (c) | if the Loan is repaid by instalments, each of the repayment dates; |
and unconditionally undertakes that whenever the Borrower shall fail to repay the Loan and interest thereon on the Maturity Date, the interest payment date or the repayment date for any reason whatsoever, the guarantor shall forthwith on demand in writing(the “Written Demand”) by the Lender repay the Loan or any remaining balance thereof and interest accrued thereon in the currency and in the manner provided for in the Written Demand;
| (iii) | a duly completed notice of drawdown (the “Notice of Drawdown”) in the form |
set out in Schedule 2 hereto; and
| (iv) | any other documents as may reasonably be required by the Lender in relation to |
the grant of the Loan contemplated hereunder.
| 7. | Subject to Clause 13, the Borrower shall repay: |
| (i) | Where the Loan is repaid by instalments, such amount of the Loan plus interest on each of the repayment dates (each of which is referred to herein as the “Repayment Date” )j.as show on the Schedule 3 hereto |
The Borrower hereby acknowledges that it will be for the Lender to determine the mode of repayment (i.e., one of the repayment options stated in this Clause 7) taking into account factors such as the financial position of the Borrower and the financial strength of the guarantor, so on and so forth. The Borrower further acknowledges that a letter in writing signed by any authorised person of the Lender certifying the current position of the Borrower under this Agreement, including how much has been paid, how much is due or will be due and the rate of interest shall be conclusive evidence of the amount of the indebtedness due at the relevant time.
| 8. | The Borrower shall pay simple interest on the Loan or, as the case may be, any outstanding balance thereof at the rate of 2.990% per annum. Interest shall accrue from the Drawdown Date on the basis of the actual number of days elapsed and a 360 day year up to the Maturity Date or, as the case may be, each of the Interest Payment Dates or the Repayment Dates. |
| 9. | Without prejudice to the Lender’s right under the Guarantee or any other security arrangement(s) provided by the Borrower, if the Borrower fails to pay the Loan (or any portion thereof) and interest due and payable under this Agreement on the Maturity Date, the Interest Payment Date or the Repayment Date, the Borrower shall pay simple interest on such outstanding sum from the due date to the date of actual payment at the default interest rate of 2.990% per annum(such interest rate shall not exceed the interest rate set out in Clause 8). Default interest shall accrue from day to day on the basis of the actual number of days elapsed and a 360 day year. |
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| 10. | The Borrower represents and warrants to the Lender that: |
| (i) | the Borrower is a company duly incorporated and validly existing under the laws of HONG KONG; |
| (ii) | the Borrower has full capacity and legal right to enter into and engage in the transactions contemplated by this Agreement and this Agreement constitutes legal, valid and binding obligations of the Borrower in accordance with its terms; |
| (iii) | neither the borrowing of the Loan nor the performance by the Borrower of its obligations hereunder will conflict with any obligation applicable to the Borrower or result in or oblige the Borrower to create any encumbrance on any of its assets; and |
| (iv) | there are no pending or, to the best of the knowledge and belief of the Borrower, threatened actions or proceedings before any court, arbitrator, administrative tribunal or governmental authority which might materially and adversely affect the business, assets or condition (financial or otherwise) of the Borrower or its ability to perform its obligations hereunder. |
| 11. | The Borrower acknowledges that the Lender has entered into this Agreement in reliance |
upon the representations and warranties contained in Clause 10.
| 12. | The Borrower undertakes that so long as any sum remains owing hereunder it will: |
| (i) | maintain its corporate existence and ensure that all applicable laws, regulations and tax obligations are complied with; |
| (ii) | ensure that its obligations hereunder at all times rank at least pari passu with all other direct or contingent unsecured liabilities of the Borrower, except for any statutory preference applicable in the bankruptcy of the Borrower; |
| (iii) | provide the Lender any financial or other information relating to the Borrower’s affairs and business upon the Lender’s request; |
| (iv) | forthwith notify the Lender of any material litigation, arbitration or administrative proceedings which are brought or, to its knowledge, threatened by or against the Borrower; and |
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| (v) | not to create any security interest over any of the Borrower’s assets unless approved by the Lender in writing, |
| 13. | The principal amount of the Loan or, as the case may be, any outstanding balance thereof, together with interests and all other sums payable under this Agreement, shall become immediately due and payable upon the happening of any of the following events: |
| (i) | the Borrower defaults in any payment on the Maturity Date, the Interest Payment Date or the Repayment Date or breaches any obligation under this Agreement; |
| (ii) | the Borrower is deemed for the purposes of any law to be unable to pay its debts as they fall due or becomes insolvent, or admits its inability to pay its debts as they fall due; |
| (iii) | any representation or warranty made by the Borrower in this Agreement is or proves to have been untrue or inaccurate in any material respect; |
| (iv) | any step taken by any person for the winding-up, insolvency, administration, reorganisation, reconstruction, dissolution or bankruptcy of the Borrower or for the appointment of a liquidator, receiver, administrator, trustee or similar officer of the Borrower or of all or any part of its business or assets; |
| (v) | any litigation, arbitration or administrative proceeding becomes current, pending or threatened against the Borrower; |
| (vi) | any material adverse change in the business or financial condition of the Borrower or the ability of the Borrower to perform its obligations under this Agreement; and/or |
| (vii) | if an event occurs which in the opinion of the Lender may materially and adversely affect the ability of the Borrower to perform its obligations under this Agreement. |
| 14. | This Agreement shall be binding upon the assigns of the Borrower. The Borrower shall not assign or transfer all or any part of its rights or obligations under this Agreement without the prior written consent of the Lender. |
| 15. | The Borrower shall indemnify and keep the Lender indemnified from and against all costs and expenses reasonably incurred by the Lender in connection with the negotiation, preparation , execution, enforcement or preservation of any rights under this Agreement and any other documentation as required by this Agreement, including, without limitation, all costs and expenses incurred by the Lender in engaging legal advisers, collection agents and/or other agents in relation to the recovery of any amount payable under this Agreement. |
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| 16. | No failure or delay by the Lender in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise by the Lender of any right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. |
| 17. | If any provision of this Agreement shall be illegal, invalid or unenforceable in any respect under any applicable law, the legality, validity and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired. |
| 18. | The Borrower acknowledges that it has been advised of its right to seek independent legal advice in respect of this Agreement and the transactions contemplated herein and has been given full opportunity to take such advice. |
| 19. | The Borrower further acknowledges that at the time of signing this Agreement, it has also signed the memorandum of agreement (the “MOA”)in the form set out in Schedule I and has been provided with a copy of the signed MOA, together with a copy of the summary set out in Appendix 1 thereto. |
| 20. | All notices, requests, demands and other communications given or required to be given under this Agreement shall be in English and in writing and may be given by personal delivery, post, courier, facsimile or e-mail and shall be sent to the respective addresses of the parties set out herein or to such other address (including facsimile no, and e-mail address) as may be notified in writing by one party to the other party for that purpose, from time to time during the continuance of this Agreement. Notices shall be deemed to be served if by personal delivery, when delivered; if by post, two days after posting(five days if fiom one country to another); if by courier, one day after despatch (three days if from one country to another); if by facsimile, immediately on transmission provided that an error-free transmission report of a facsimile transmission is generated from the sender’s machine; if by e-mail, when sent. |
| 21. | This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in all respects in accordance with the laws of the Hong Kong SAR (“Hong Kong”) and the parties hereto hereby irrevocably submit to the non-exclusive jurisdiction of the Hong Kong Courts. |
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IN WITNESS whereof this Agreement has been duly executed the day and year first above written.
| The Lender | For and on behalf of | |
| DFL- Shutoken Leasing (Iiong Kong) Company Linited | ||
| Signed by | ||
| /s/ HIRASAWA Hideo | ||
| for and on behalf of | HIRASAWA Hideo/Managing Director | |
| DFL-Shutoken Leasing (Hong Kong) | ||
| Company Limited | ||
| in the presence of: | ||
| The Borrower | For and on behalf of | |
| Tokyo Lifestyle Limited | ||
| Signed by | ||
| for and on behalf of | /s/ Kanayama Mei | |
| Tokyo Lifestyle Limited | Kanayama Mei/Chairman | |
| in the presence of: |
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SCHEDULE 1
MEMORANDUM OF AGREEMENT
MADE UNDER SECTION 18 OF THE MONEY LENDERS ORDINANCE
CHAPTER 163 OF THE LAWS OF HONG KONG
The following information is included for the purpose of Section 18 of the Money Lenders Ordinance, Chapter 163 of the Laws of Hong Kong.
| (a) | Name and Address of the Lender |
DFL-Shutoken Leasing (Hong Kong) Company Limited, a company incorporated under the laws of Hong Kong and having its registered office at 15/F, Wai Fung Plaza, No. 664 Nathan Road, Mongkok, Kowloon, Hong Kong.
| (b) | Name and Address of the Borrower |
********************,a company incorporated under the laws of HONG KONG and having its registered office at ******************
| (c) | Name and Address of the Surety |
For corporate surety:****************************************,a company incorporated under the laws of JAPAN and having its registered office at
****************************************
| (d) | The Amount of the Principal of the Loan |
****************************************
（*****************）
| (e) | The Date of Making of the Agreement |
The***day of ****20**
| (f) | The Date of Availability of the Loan |
The ** day of***20*
| (g) | Terms of Repayment of the Loan |
The Borrower shall repay by instalments, such amount of the Loan plus interest on each of the repayment dates (each of which is referred to herein as the”Repayment Date”) as shown on the Schedule 3 hereto
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| (h) | The Form of Security for the Loan |
Guarantee given by*************************
| (i) | Interest Rate Charged on the Loan |
The Borrower shall pay simple interest on the Loan or, as the case may be, any outstanding balance thereof at the rate of *.**% per annum. Interest shall accrue from the date of drawdown on the basis of the actual number of days elapsed and a 36*day year up to the Maturity Date or any other day as designated by the Agreement.
| (j) | The Place of Negotiation and Completion of the Agreement |
The Borrower hereby declares that the negotiation and completion of the Agreement took place at the Lender’s registered office at 15/F, Wai Fung Plaza, No. 664 Nathan Road, Mongkok, Kowloon, Hong Kong.
The Borrower’s attention has been drawn to Schedule 3 of the Money Lenders Regulations (Chapter 163A of the Laws of the Hong Kong), a copy of which is set out in Appendix 1 hereto, which summarizes the provisions contained in Part III and Part IV of the Money Lenders Ordinance, Chapter 163 of the Laws of Hong Kong
| Dated the xxx day of xxxx 20xx. | ||
| Declared by: | ||
| By: | ||
| XXXXXXX xxxxxxxx | ||
| Borrower |
Acknowledgment of Receipt
The Borrower hereby acknowledges receipt of a copy of this Memorandum of the Agreement made under Section 18 of the Money Lenders Ordinance and a copy of the summary of Part Ⅲ and Part IV of the Money Lenders Ordinance.
| By: | ||
| XXXXXXXXXXXXxxxxx |
| Borrower | ||
| Date: xxx day of xxxxx 20xx | ||
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APPENDIXI
SUMMARY OF THE PROVISIONS OF THE ORDINANCE
TO BE INCLUDED IN OR ATTACHED TO A NOTE OR
MEMORANDUM OF A LOAN AGREEMENT
The provisions of the Money Lenders Ordinance, Chapter 163 of the Laws of Hong Kong (the “Ordinance “), summarized below are important for the protection of all parties to a loan agreement and should be read carefully. The summary is not part of the law, and reference should be made to the provisions of the Ordinance itself in case of doubt.
I. Summary of Part III of the Ordinance-Money Lenders’Transactions
Section 18 sets out the requirements relating to loans made by a money lender. Every agreement for a loan must be put into writing and signed by the borrower within 7 days of making the agreement and before the money is lent. A copy of the signed note of the agreement must be given to the borrower, with a copy of this summary, at the time of signing. The signed note must contain full details of the loan, including the terms of repayment, the form of security and the rate of interest. An agreement which does not comply with the requirements will be unenforceable, except where a court is satisfied that it would be unjust not to enforce it.
Section 19 provides that a money lender must, if requested in writing and on payment of the prescribed fee for expenses, give the original and a copy of a written statement of a borrower’s current position under a loan agreement, including how much has been paid, how much is due or will be due, and the rate of interest. The borrower must endorse on the copy of the statement words to the effect that he has received the original of the written statement and return the copy as so endorsed to the money lender. The money lender must retain the copy of the statement so returned during the continuance of the agreement to which that statement relates. If the money lender does not do so he commits an offence. The money lender must also, upon a request in writing, supply a copy of any document relating to the loan or security. But a request cannot be made more than once per month. Interest is not payable for so long as the money lender, without good reason, fails to comply with any request mentioned in this paragraph.
Section 20 provides that the surety, unless he is also the borrower, must within 7 days of making the agreement be given a copy of the signed note of the agreement, a copy of the security instrument (if any) and a statement with details of the total amount payable. The money lender must also give the surety, upon request in writing at any time (but not more than once per month) a signed statement showing details of the total sum paid and remaining to be paid. The security is not enforceable for so long as the money lender, without good reason, fails to comply.
Section 21 provides that a borrower may at any time, on giving written notice, repay a loan together with interest to the date of repayment, and no higher rate of interest may be charged for early repayment. This provision, however, will not apply where the money lender is recognized, or is a member of an association recognized, by the Financial Secretary by notice in the Gazette in force under section 33A(4) of the Ordinance.
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Section 22 states that a loan agreement is illegal if it provides for the payment of compounc interest, or provides that a loan may not be repaid by instalments. A loan agreement is also illegal if it charges a higher rate of interest on amounts due but not paid, although it may provide for charging simple interest on that part of the principal and interest outstanding at a rate not exceeding the rate payable apart from any default. The illegal agreement may, however, be declared legal in whole or in part by a court if the court is satisfied that it would be unjust if the agreement were illegal because it did not comply with this section.
Section 23 declares that a loan agreement with a money lender and any security given for the loan will not be enforceable if the money lender was unlicensed at the time of making the agreement or taking the security. The loan agreement or security may, however, be declared enforceable in whole or in part by a court if the court is satisfied that it would be unjust if the agreement or security were unenforceable by virtue of this section.
Ⅱ . Summary of Part IV of the Ordinance-Excessive Interest Rates
Section 24 fixes the maximum effective rate of interest on any loan at 60% per annum(the “effective rate” is to be calculated in accordance with the Second Schedule to the Ordinance). A loan agreement providing for a higher effective rate will be unenforceable and the lender will be liable to prosecution. This maximum rate may be changed by the Legislative Council but not so as to affect existing agreements. The section does not apply to any loan made to a company which has a paid up share capital of not less than $1,000,000 or, in respect of any such loan, to any person who makes that loan.
Section 25 provides that where court proceedings are taken to enforce a loan agreement ol security for a loan or where a borrower or surety himself applies to a court for relief, the court may look at the terms of the agreement to see whether the terms are grossly unfair or exorbitant (an effective rate of interest exceeding 48% per annum or such other rate as is fixed by the Legislative Council, may be presumed, on that ground alone, to be exorbitant), and, taking into account all the circumstances, it may alter the terms of the agreement in such a manner as to be fair to all parties. The section does not apply to any loan made to a company which has a paid up share capital of not less than $1,000,000 or, in respect of any such loan, to any person who makes that loan.
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SCHEDULE 2
NOTICE OF DRAWDOWN
| To: | DFL-Shutoken Leasing (Hong Kong) Company Limited |
| 15/F, Wai Fung Plaza, No. 664 Nathan Road, | |
| Mongkok, Kowloon, | |
| Hong Kong |
Date
Dear Sirs,
We refer to the loan agreement dated xxx XXXX 20xx (the “Agreement “) entered into by and between DFL-Shutoken Leasing(Hong Kong) Company Limited (“DSHK”) as lender and our company as borrower, and we hereby give you notice that we wish to make a drawing of the Loan in the sum of xxxxxxxxxxxxxxxx on xxx day of XXXX 20xx.
We hereby irrevocably authorise and direct DSHK to make available the Loan to us by way of bank transfer of the whole sum of xxxxxxxxxxxxxxxxxxto the following bank account:
Name of Bank
Branch Address
Name of A/C Holder
A/C Number
We hereby confirm and certify that the representations, warranties, covenants and undertakings contained in the Agreement remain true, correct and fulfilled as if repeated, mutatis mutandis at the date hereof, and that no event of default referred to in Clause 13 of the Agreement has at the date hereof occurred or is foreseeable,
Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement.
Yours faithfully,
For and on behalf of
XXXXXXXXXXXXXXX
| By: | ||
| Name: | XXXXXXX XXXXXxxxx | |
| Title: | Director |
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SCHEDULE 3
Repayment Schedule
【JPY】
| Period | Repayment | |||||||||||||||||||||
| No. | From | To | Date | Installment | Interest | Principal | O/S Balance | |||||||||||||||
| 50,000,000 | ||||||||||||||||||||||
| 1 | 2022/10/5 | 2023/1/20 | 2023/1/20 | 4,611,013 | 444,347 | 4,166,666 | 45,833,334 | |||||||||||||||
| 2 | 2023/1/20 | 2023/4/20 | 2023/4/20 | 4,509,270 | 342,604 | 4,166,666 | 41,666,668 | |||||||||||||||
| 3 | 2023/4/20 | 2023/7/20 | 2023/7/20 | 4,481,585 | 314,919 | 4,166,666 | 37,500,002 | |||||||||||||||
| 4 | 2023/7/20 | 2023/10/20 | 2023/10/20 | 4,453,208 | 286,542 | 4,166,666 | 33,333,336 | |||||||||||||||
| 5 | 2023/10/20 | 2024/1/20 | 2024/1/20 | 4,421,370 | 254,704 | 4,166,666 | 29,166.670 | |||||||||||||||
| 6 | 2024/1/20 | 2024/4/20 | 2024/4/20 | 4,387,109 | 220,443 | 4,166,666 | 25,000,004 | |||||||||||||||
| 7 | 2024/4/20 | 2024/7/20 | 2024/7/20 | 4,355,617 | 188,951 | 4,166,666 | 20,833,338 | |||||||||||||||
| 8 | 2024/7/20 | 2024/10/20 | 2024/10/20 | 4,325,856 | 159,190 | 4,166,666 | 16,666,672 | |||||||||||||||
| 9 | 2024/10/20 | 2025/1/20 | 2025/1/20 | 4,294,018 | 127,352 | 4,166,666 | 12,500,006 | |||||||||||||||
| 10 | 2025/1/20 | 2025/4/20 | 2025/4/20 | 4,260,104 | 93,438 | 4,166,666 | 8,333,340 | |||||||||||||||
| 1 | 2025/4/20 | 2025/7/20 | 2025/7/20 | 4,229,650 | 62,984 | 4,166,666 | 4,166,674 | |||||||||||||||
| 12 | 2025/7/20 | 2025/10/5 | 2025/10/5 | 4,193,321 | 26,647 | 4,166,674 | 0 | |||||||||||||||
| Total | 52,522,121 | 2,522,121 | 50,000,000 | |||||||||||||||||||
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Exhibit 4.23
27 September 2022
Kanayama Mei
Director
Tokyo Lifestyle Limited
Dear Mr. Kanayama,
BANKING FACILITY ARRANGEMENT
We are pleased to advise that Resona Merchant Bank Asia Limited (the "Bank") is agreeable to provide to Tokyo Lifestyle Limited (the “Borrower” ) a Revolving Credit Facility of JPY200,000,000. This Letter of Offer sets out the terms and conditions of the Proposed Revolving Credit Facility as detailed below as well as the terms and conditions in the annexed Standard Terms and Conditions Governing Banking Facilities (the "Standard Terms") as stipulated in Appendix 1. In the event of any inconsistency between the terms and conditions stated herein and the Standard Terms, it is agreed that those stated herein shall prevail.
| 1. | Revolving Credit Facility (the "Facility"): JPY200,000,000 (Japanese Yen Two Hundred Million) only. |
| 2. | Terms and Conditions governing the Facility are as below: |
| a. | Purpose |
For financing the Borrower's working capital needs.
| b. | Security support |
Standby letter of credit (the "SBLC") from Resona Bank, Limited subject to the Bank's acceptance of format and one month claim period.
| c. | The facility is available for multiple drawdowns of advances with interest period of 1 month, 3 months or 6 months. |
Each Advance is available upon the Bank's receipt of a Utilisation Request from the Borrower subject to the following requirements:
| i) | Upon satisfactory completion and fulfilment of conditions precedent; |
| ii) | Each Drawdown is subject to a before 9:00 a.m. (Singapore time) 3 Business Days' advance notice; |
| iii) | Each Drawdown is subject to the Bank's availability of funds; and |
| iv) | The availability of the Facility is subject to the Bank's discretion and outstanding under the Facility is repayable on demand by the Bank. |
| d. | Drawdown Condition |
Borrower shall be permitted to utilise the Facility for its working capital needs, specifically, for settlement of trade payables to Yoshitsu Co., Ltd.
The Utilisation Request (Appendix 2 of Facility Letter) for each new drawdown, shall be accompanied by certified true copies of invoices issued by Yoshitsu Co., Ltd to Borrower for payment of its trade payables.
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| e. | Maturity Date of Each Drawdown |
Each advance shall be repaid on the maturity date which is 1 month, 3 months or 6 months from drawdown date. If the maturity date falls on a Saturday, Sunday or public holiday in Singapore and/or Japan, the outstanding amount shall be repaid on the next succeeding day in which banks in Singapore and/or Japan are open for business, provided however in that event that such extended date will instead fall in the next calendar month, the date shall be the immediately preceding business day of the original due date.
| f. | Facility Maturity Date |
The Facility shall be fully repaid before the expiry date of the Standby Letter of Credit from Resona Bank, Limited, unless it is renewed before the expiry date.
Notwithstanding this, the Facility is subject to annual review at the Bank's sole discretion. The Bank shall have the right to cancel the Facility upon 30-days' prior notice to the Borrower, whereupon the Bank shall demand immediate repayment upon expiry of the notice period of all monies and liabilities owing to the Bank under the Facility (whether actual, contingent or otherwise).The Bank shall also have the right from time to time and at any time to vary or modify the terms and conditions of the Facility (including the interest rates).
| g. | Undertakings |
Standard loan undertaking common for loan of this type. These shall include but not limited to the following:
| (i) | The Borrower shall submit audited fiscal financial statements within 210 days after the end of the financial year; and |
| (ii) | The Borrower shall promptly provide the Bank with the following upon its occurrence: |
| a. | Details of any material litigation, arbitration or administrative proceedings; and |
| b. | Notice of any event of default or cross default. |
| h. | Interest Rate |
The Bank's Cost of Funds + 1.20% per annum; Interest is payable in arrears at the end of each interest period and shall be calculated on a 365-day year basis for Japanese Yen.
Cost of Funds refers to the percentage rate per annum quoted by the Bank 3 Business Days prior to the first day of that Interest Period as being the cost to the Bank of funding that loan or unpaid sum from whatever source it may select.
| i. | Interest Period |
The interest period of the Facility is 1 month, 3 months or 6 months for the advance stated in the Utilisation Request.
| j. | Default Interest Rate |
2.0% p.a. over the Interest rate on all amount due and unpaid and shall be calculated from the due date to the date of actual payment. The Bank at its sole discretion shall impose a late payment administrative fee of Singapore Dollars 30 payable by the Borrower.
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| k. | Conditions Precedent for Drawdown of the Facility |
The Facility shall be available for utilisation upon the completion of all requisite documentation as advised by us, including but not limited to the following herein:
| (i) | Certified copies of the following: |
| a. | the Memorandum and Articles of Association of the Borrower; |
| b. | Certificate of Incorporation and Certificate of Change of Name (if applicable) of the Borrower; and |
| c. | the current Business Registration Certificate of the Borrower. |
(ii) | A certified copy of the resolutions of the Borrower's Board of Directors: |
| a. | resolving that it in the best interest of that body corporate to enter into agreement with the Bank by accepting the terms and conditions of this Facility Letter (including all referenced terms and conditions therein) (the "Agreement") and the transactions contemplated by that Agreement; |
| b. | approving the Revolving Credit Facility, the terms of the Agreement and the borrowings thereunder; |
| c. | authorising identified individuals to execute and deliver the Agreement and all other documents contemplated by the Agreement and to take any other action in connection with the transactions contemplated therein on behalf of the Borrower; and |
| d. | specimen signatures of each individual authorised by the Borrower to execute and deliver the Agreement and all other documents contemplated by the Agreement, including the specimen signature of the authorised signatory who accepts confirms the terms of this Facility Letter on behalf of the Borrower. |
| (iii) | If required, a certificate from a director of the Borrower certifying that each copy document relating to it specified in the list is correct, complete and in full force and effect as at a date no earlier than the date of the Agreement. |
| (iv) | If required, evidence that any process agent referred to in the Agreement has accepted its appointment. |
| (v) | Certified true copies of the Beneficial Owner's and the Authorized Signatories' identification document of the Borrower; |
| (vi) | This Facility Letter duly accepted; |
| (vii) | The Utilisation Request in Appendix 2 subject to a 3 Business Days' advance notice; and |
| (viii) | The SBLC to be received from Resona Bank, Limited. |
| l. | Currency Indemnity |
Repayment of the Facility shall be in Japanese Yen. The Borrower shall indemnify the Bank against/for any currency exchange losses if the repayment is made in a currency other than Japanese Yen.
| m. | Cross-Default |
A failure by the Borrower or any of its group companies to pay any indebtedness (direct borrowings and contingent obligations; contingent obligations include but not limited to guarantees, indemnities and warranties) when due, or a breach of any covenants or terms or conditions relating to such indebtedness, and in any event such default is not remedied within the relevant grace period.
| n. | Notices |
All notices or communication under or in connection with this Facility Letter may be delivered personally, by post, facsimile transmission or email address provided in this Facility Letter.
| o. | Governing Law |
The laws of Singapore govern this Facility Letter.
If the terms and conditions outlined in this Facility Letter are satisfactory to you, kindly confirm your acceptance by signing and returning to us the duplicate of this letter within seven days from the date of this letter.
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We look forward to working with you through this deal. Please do not hesitate to contact the following should you require any assistance:
Mr Tanaka Yoshiro
Mr Sakai Yu
Yours sincerely,
| /s/ Tanaka Yoshiro | |
| Tanaka Yoshiro | |
| Head, Japanese Business Development |
| /s/ Mok Wai Ming | |
| Mok Wai Ming | |
| Senior Risk Manager, Risk Management |
4
@ Resona Merchant Bank Asia
Limited
CONFIRMATION OF ACCEPTANCE
I confirm the agreement to the terms set out in Resona Merchant Bank Asia's letter dated 27 September 2022 relating to the proposed Revolving Credit Facility of JPY200,000,000.
/s/ Kanayama Mei
Authorised Signatory
5
@ Resona Merchant Bank Asia
Limited
| Name | Kanayama Mei |
| Designation | Director |
| Date 27 September 2022 |
6
Exhibit 8.1
Subsidiaries of the Registrant
| Subsidiaries | Place of Incorporation | |
| Tokyo Lifestyle Limited | Hong Kong | |
| Shenzhen Qingzhiliangpin Network Technology Co., Ltd. | China | |
| REIWATAKIYA (MYS) SDN. BHD. | Malaysia |
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 31, 2023
| 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 31, 2023
| 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, 2023, 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 31, 2023
| 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, 2023, 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 31, 2023
| By: | /s/ Youichiro Haga | ||
| Name: | Youichiro Haga | ||
| Title: | Director and Corporate Officer (Principal Accounting and Financial Officer) | ||
Exhibit 15.1
July 31, 2023
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 fiscal year ended March 31, 2023 (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 |