SEC Form 20-F filed by Yoshitsu Co. Ltd

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from            to            

Commission file number: 001-41181

Yoshitsu Boueki Kabushiki Kaisha

(Exact name of Registrant as specified in its charter)

Yoshitsu Co., Ltd

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

Harumi Building, 2-5-9 Kotobashi,

Sumida-Ku, Tokyo, 130-0022

Japan

+81356250668

(Address of principal executive offices)

Mei Kanayama, Representative Director

Telephone: +81356250668

Email: [email protected]

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.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 42,220,206 ordinary shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐   No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐    No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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:

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

INTRODUCTION

In this annual report on Form 20-F, unless the context otherwise requires, references to:

This annual report on Form 20-F includes our audited consolidated financial statements for the fiscal years ended March 31, 2024, 2023, and 2022. In this annual report, we refer to assets, obligations, commitments, and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of ¥ to United States dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations and the value of our assets.

This annual report contains translations of certain ¥ amounts into U.S. dollars at specified rates. Unless otherwise stated, the following exchange rates are used in this annual report:

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:

If we are unable to anticipate and fulfill the merchandise needs of the regions in which our products are sold, our net sales may decrease and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition, and results of operations.

We may be subject to product liability claims if our customers are harmed by the products sold through our distribution channels.

We sell products manufactured by third parties, some of which may be defectively designed or manufactured, of inferior quality, or counterfeit. For example, beauty products in general, regardless of their authenticity or quality, may cause allergic reactions or other illness that may be severe for certain customers. Sales and distributions of products in our directly-operated physical stores, online stores, and franchise stores, or to our wholesale customers could expose us to product liability claims relating to personal injury and may require product recalls or other actions. Third parties that suffered such injury may bring claims or legal proceedings against us as the retailer of the products. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations regarding Product Quality and Customer Protection.” Although we would have legal recourse against the manufacturers or suppliers of such products under Japanese law, attempting to enforce our rights against the manufacturers or suppliers may be expensive, time-consuming, and ultimately futile. Defective, inferior, or counterfeit products or negative publicity as to personal injury caused by products we sell may adversely affect consumer perceptions of our Company or our products, which could harm our reputation and brand image. In addition, we do not currently maintain any third-party liability insurance or product liability insurance with respect to the products we sell. As a result, any material product liability claim or litigation could have a material adverse effect on our business, financial condition, and results of operations. Even unsuccessful claims could result in the expenditure of funds and management time and effort in defending them and could have a negative impact on our reputation and results of operations.

We rely substantially on short-term borrowings to fund our operations, and the failure to renew these short-term borrowings or the failure to continue to obtain financing on favorable terms, if at all, may adversely affect our ability to operate our business.

Our liquidity relies significantly on short-term borrowings. As of March 31, 2024, we had approximately $53.2 million in short-term borrowings outstanding. As of March 31, 2023, we had approximately $60.6 million in short-term borrowings outstanding. As of March 31, 2022, we had approximately $40.3 million in short-term borrowings outstanding. As of the date of this annual report, we extended the outstanding short-term borrowings for an additional six months with a maturity date of December 30, 2024 and repaid $8.7 million of the outstanding short-term borrowing as of March 31, 2023. We repaid all of our outstanding $40.4 million short-term borrowings as of March 31, 2022, upon their maturity. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experience and outstanding credit history. However, we cannot assure you that we will be able to renew these loans in the future as they mature. If we are unable to renew these bank loans in the future, our liquidity position would be adversely affected, and we may be required to seek more expensive sources of short-term or long-term funding to finance our operations.

Further financing may also not be available to us on favorable terms, if at all. If we are unable to obtain short-term financing in an amount sufficient to support our operations, it may be necessary, to suspend or curtail our operations, which would have a material adverse effect on our business and financial condition. In that event, current shareholders would likely experience a loss of most or all of their investment.

Our substantial indebtedness could materially and adversely affect our business, financial condition, results of operations, and cash flows.

As of March 31, 2024, we had approximately $53.2 million in short-term borrowings and $7.4 million in long-term borrowings outstanding.

The amount of our debt could have significant consequences on our operations, including:

Any of these factors and other consequences that may result from our substantial indebtedness could have a material adverse effect on our business, financial condition, results of operations, and cash flows impacting our ability to meet our payment obligations under our debts. Our ability to meet our payment obligations under our outstanding indebtedness depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, and regulatory factors as well as other factors that are beyond our control.

The business operations and results of operations of our directly-operated physical stores and wholesale operations in Japan are susceptible to adverse impact caused by pandemics, such as the COVID-19 pandemic.

The COVID-19 pandemic has spread throughout the world and resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.

The COVID-19 pandemic materially and adversely affected our business operations and operating results during the fiscal years ended March 31, 2023 and 2022. Our total revenue decreased by $65,028,234, or 27.7%, from $234,752,580 for the fiscal year ended March 31, 2022 to $169,724,346 for the fiscal year ended March 31, 2023 due to the impact of the COVID-19 pandemic. Partially offset by the decrease in our operating expenses, our net income decreased from $3,924,148 during the fiscal year ended March 31, 2022 to a net loss of $8,048,822 during the fiscal year ended March 31, 2023, representing a decrease of 305.1%. During the fiscal year ended March 31, 2024, the COVID-19 pandemic did not have a material impact on our financial position and operating results. For additional information, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information—COVID-19 Affecting Our Results of Operations.”

As of the date of this annual report, the daily life of Japanese residents is largely back to its normal state. However, there is no assurance that a disease outbreak, such as the COVID-19 pandemic, and any similar natural disasters will not occur in the future. The extent to which such natural diseases may impact our operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted, including the duration, severity, and recurrence of any such disease outbreak, the effectiveness of mitigation strategies, and third-party actions taken to contain its spread and mitigate its public health effects. Any of these factors may materially and adversely affect our business, financial condition, and results of operations.

Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets.

One of the key means of achieving our growth strategies will be through opening and operating new stores on a profitable basis for the foreseeable future. During the fiscal year ended March 31, 2022, we opened three new directly-operated physical stores in Hong Kong, opened two new overseas online stores and two new domestic online stores, added two franchise stores, and added 16 new wholesale customers. During the period from April 1, 2023 to the date of this annual report, we opened four new directly-operated physical stores in the U.S., one new directly-operated physical store in Canada, and one new directly-operated physical store in Hong Kong. We also added five franchise stores and added 75 new wholesale customers. However, during the same fiscal year, we closed one directly-operated physical store in Japan and two directly-operated physical stores in Hong Kong, converted four directly-operated physical stores in Japan into franchise stores, converted three franchise stores in the U.S. into wholesale customers, and converted four franchise stores in Canada into wholesale customers. We identify target markets, taking into account numerous factors, such as the locations of our current stores, demographics, traffic patterns, information gathered from various sources, and, recently, whether known consumer patterns will remain at the same level as prior to the COVID-19 pandemic and if we need to modify the layout of our new stores to minimize contact with customers. We may not be able to open our planned new stores within budget or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect our business, financial condition, and results of operations. As we operate more stores, our rate of expansion relative to the size of our store base will eventually decline.

The number and timing of new stores opened during any given period may be negatively impacted by a number of factors, including:

Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital constraints, difficulties in staffing and operating new store locations, or lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.

Additionally, customer trends, preferences, and demand may vary significantly by region, and our experience in the markets in which our products are currently sold may not be applicable in other regions or countries. As a result, we may not be able to leverage our experience to expand into other parts of Japan and overseas. When we enter new markets, we may face intense competition from companies with greater experience or an established presence in the targeted geographical areas or from other companies with similar expansion targets. In addition, our business model may not be successful in new and untested markets and markets with a different business environment. We may not be able to grow our revenue in the new cities we enter, but we will incur substantial costs in connection with any such expansion. Consequently, we cannot assure you that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will be profitable, which could have a material adverse effect on our results of operations.

We lease a substantial amount of space and are required to make substantial lease payments under our operating leases. Any failure to make these lease payments when due would likely harm our business, financial condition, and results of operations.

We lease the premises of all our physical store locations. Many of our lease agreements have escalating rent provisions over the initial term and any extensions. As our stores mature and as we expand our store base, our lease expenses, and our cash outlays for rent under our lease agreements will increase. Our substantial operating lease obligations could have significant negative consequences, including:

If an existing or future store is not profitable, and we decide to close it, we may nonetheless remain obligated to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease.

We depend on our cash flow from operations to pay our lease obligations, finance our growth capital strategy, and fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, we may not be able to achieve our growth plans, fund our other liquidity and capital needs, or ultimately service our lease obligations, which would materially and adversely affect our business.

Unexpected termination of our leases, failure to renew our leases, or failure to renew our leases at acceptable terms could materially and adversely affect our business.

We lease the premises of all of our directly-operated physical stores. As a result, we may be subject to compulsory acquisition, closure, or demolition of any of the properties on which our stores are situated. Although we may receive liquidated damages or compensation if our leases are terminated unexpectedly, we may be forced to suspend operations of the relevant store and divert management attention, time, and costs to find a new site and relocate our store, which will negatively affect our business and results of operations.

We enter into leases of approximately one to 15 years with an option to renew for our directly-operated physical stores. Rent for our leases is typically a fixed amount and subject to annual or biennially incremental increase as stipulated in the lease agreements. We cannot assure you that we would be able to renew the relevant lease agreements without substantial additional cost or increase in the rental cost payable by us. If a lease agreement is renewed at a rent substantially higher than the current rate, or currently existing favorable terms granted by the lessor are not extended, our business and results of operations may be materially and adversely affected. If we are unable to renew the leases for our store sites, we will have to close or relocate the store, which could subject us to additional costs, expenses, and risks, and loss of existing customers, and could have a material adverse effect on our business and results of operations. In addition, the relocated store may not perform as well as the existing store.

Our earnings and business growth strategy depend in part on the success of our franchisees, and we may be harmed by actions taken by our franchisees, or employees of our franchisees, that are outside of our control.

A significant portion of our revenue is generated by sales to our franchise stores. As of the date of this annual report, we have one franchisee operating two franchise stores in the U.S., two franchisees operating two franchise stores in the U.K., and three franchisees operating three franchise stores in Japan. Franchisees are independent operators, and their employees are not our employees.

We enter into trademark license agreements with overseas franchisees, pursuant to which, we license certain trademarks, such as “東京生活館” and “REIWATAKIYA,” and sell our products to the franchisees. We enter into franchise agreements with domestic franchisees, pursuant to which, we grant the franchisees the right to operate the stores under the names “TOKYO LIFESTYLE” and “REIWATAKIYA” and provide management support to the franchisee, including joint procurement and ordering, while the franchisee takes charge of daily operation under our guidance. The quality of franchise store operations, and its effect on our brand, may be diminished by any number of factors beyond our control. Additionally, franchisees may not operate their stores in a manner consistent with our standards and requirements or they or their employees may take other actions that adversely affect the value of our brand. In such event, our business and reputation may suffer, and as a result our revenue could decline.

While we try to ensure that franchisees maintain the quality of our brand and comply with their trademark license agreements, franchisees may take actions that adversely affect the value of our intellectual property or reputation or that are inconsistent with their contractual obligations. Although our trademark license agreements permit us to terminate the agreement under certain circumstances, including violation of the agreement by a franchisee and deterioration of financial conditions of a franchisee, there can be no assurance that such remedy will be available or sufficient to prevent or undo harm to our brand and protect our intellectual property.

Our franchisees may not operate their franchises successfully. Since we currently have only six franchisees operating our franchise stores, if one of them were to become insolvent, choose to not renew their trademark license agreement with us, or otherwise were unable or unwilling to pay us amounts due to us pursuant to the terms of their agreements, our business and results of operations would be materially and adversely affected.

The operation of our franchise stores relies significantly on three franchisees and if any of them terminate their trademark license agreements or franchise agreements with us and if we are unable to find suitable replacements, our business could be materially and adversely affected.

A significant portion of our revenue is generated by sales to our franchise stores, the operation of which relies on our three existing franchisees. As of the date of this annual report, we have one franchisee operating two franchise stores in the U.S., two franchisees operating two franchise stores in the U.K., and three franchisees operating three franchise stores in Japan. Our trademark license agreements and franchise agreements with the franchisees have a term of one to three years and automatically renew for successive one-year terms, unless either party notifies the other of its intention to the contrary in writing no later than two months before the expiration of the current term. Our franchisees may determine to terminate their agreements with us for a number of reasons, including low sales volumes or high costs, or their failure to secure lease renewals. If any of our three franchisees terminate their trademark license agreements or franchise agreements with us or request more favorable terms than the ones we currently have to continue such agreements, our business and results of operations would be materially and adversely affected.

Any decrease in customer traffic in the shopping malls or street locations in which our stores are located could cause our sales to be less than expected.

Our stores are typically located in shopping malls or street locations near busy commercial districts or popular tourism attractions. Sales at these stores are derived, to a significant degree, from the volume of customer traffic in those locations and surrounding areas. Our stores benefit from the current popularity of shopping malls and street locations near busy commercial districts or popular tourism attractions as shopping destinations and their ability to generate customer traffic in the vicinity of our stores. Our sales volume and customer traffic may be adversely affected by, among other things:

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:

The costs of all these capital improvements or any of the above noted factors could have a material adverse effect on us, including our financial condition, liquidity, and results of operations.

We rely on our relationships with suppliers to purchase high-quality beauty and health products on reasonable terms. If these relationships were to be impaired, or if certain suppliers were unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in beauty products or health products, either of which could have a material adverse effect on our competitive position, our business, and financial performance.

We have no long-term supply agreements or exclusive arrangements with our suppliers and, therefore, our success depends on maintaining good relationships with our suppliers. Our business depends to a significant extent on the willingness and ability of our suppliers to supply us with a sufficient selection and volume of products to stock our stores. Some of our suppliers that have many other customers may not have the capacity to supply us with sufficient merchandise to keep pace with our growth plans. We have also entered into supply agreements with certain well-known Japanese brands, such as Shiseido, Sato, Kao, and Kosé, which have allowed us to benefit from the growing popularity of such brands. During the fiscal years ended March 31, 2024, 2023, and 2022, our product sales attributable to these brands accounted for approximately 5.7%, 19.87%, and 22.89% of our total product sales, respectively. Any of our suppliers could in the future decide to scale back or end its relationship with us and strengthen its relationship with our competitors, which could negatively impact the revenue we earn from the sale of products from such supplier. If we fail to maintain strong relationships with our existing suppliers or fail to continue acquiring and strengthening relationships with additional suppliers of beauty and health products, our ability to obtain a sufficient amount and variety of merchandise on reasonable terms may be limited, which could have a negative impact on our competitive position.

During the fiscal year ended March 31, 2024, three suppliers accounted for approximately 22.5%, 21.2%, and 5.9% of our total purchases, respectively. During the fiscal year ended March 31, 2023, three suppliers accounted for approximately 18.2%, 16.3%, and 12.0% of our total purchases, respectively. During the fiscal year ended March 31, 2022, three suppliers accounted for approximately 30.1%, 19.7%, and 17.9% of our total purchases, respectively. The loss of or a reduction in the amount of merchandise made available to us by any one of these key suppliers, or by any of our other suppliers, could have an adverse effect on our business.

The capacity of our distribution and order fulfillment infrastructure may not be adequate to support our recent growth and expected future growth plans, which could prevent the successful implementation of these plans or cause us to incur costs to expand this infrastructure, which could have a material adverse effect on our business, financial condition, and results of operations.

We currently operate two distribution centers, which house the distribution operations for our physical stores together with the order fulfillment operations of our franchise stores. We plan to open a new distribution center in Malaysia in 2024 to support and replenish inventory at our physical stores and franchise stores in Malaysia. If we are unable to successfully implement the expansion of our distribution infrastructure or upgrade of our information systems, the efficient flow of our merchandise could be disrupted. In order to support our recent and expected future growth and to maintain the efficient operation of our business, additional distribution centers may need to be added in the future. Our failure to expand our distribution capacity on a timely basis to keep pace with our anticipated growth in stores could have a material adverse effect on our business, financial condition, and results of operations.

Any significant interruption in the operations of our distribution centers could disrupt our ability to deliver merchandise to our stores and customers in a timely manner, which could have a material adverse effect on our business, financial condition, and results of operations.

Our directly-operated physical stores, online stores, and sales to our franchise stores and wholesale customers are supported by two distribution centers. This dependence on two distribution centers, combined with the fact that we are a retailer and wholesaler carrying approximately 40,700 stock keeping units (“SKUs”) of beauty products that change on a regular basis in response to beauty trends, makes the success of our operations particularly vulnerable to disruptions in our distribution system. Any significant interruption in the operation of our distribution infrastructure, including events beyond our control, such as disruptions in our information systems, disruptions in operations due to fire or other catastrophic events, labor disagreements, or shipping problems, could drastically reduce our ability to receive and process orders and provide products to our stores and customers. This could result in lost sales and a loss of customer loyalty, which could have a material adverse effect on our business, financial condition, and results of operations.

Increased distribution costs or disruption of product transportation could adversely affect our business and financial results.

Distribution costs have historically fluctuated significantly over time, particularly in connection with oil prices, and increases in such costs could result in reduced profits. In addition, certain factors affecting distribution costs are controlled by third-party carriers. To the extent that the market price for fuel or freight or the number or availability of carriers fluctuates, our distribution costs could be affected. In addition, temporary or long-term disruption of product transportation due to weather-related problems, strikes, lockouts, or other events could impair our ability to supply products affordably and in a timely manner or at all. Any increases in the cost of transportation, and any disruption in transportation, could have a material adverse effect on our business, financial condition, and results of operations.

Any material disruption of our information systems could materially and adversely affect our business operations and negatively impact our financial results.

We are increasingly dependent on a variety of information systems to effectively manage the operations of our growing store base and fulfill customer orders from our online stores. In addition, we have identified the need to expand and upgrade our information systems to support recent and expected future growth, including the opening of our new distribution center in October 2022. As part of this expansion of our information systems, we have modified our warehouse management system to support our distribution centers. The failure of our information systems to perform as designed, including the failure of our warehouse management system to operate as expected during the holiday season or to support our distribution centers, could have a material adverse effect on our business and results of our operations. Any material disruption of our information systems could disrupt our ability to track, record, and analyze the merchandise that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and credit card transactions, and our ability to receive and process online orders or engage in normal business activities. Moreover, security breaches or leaks of proprietary information, including leaks of customers’ private data, could result in liability, decrease customer confidence in our company, and weaken our ability to compete in the marketplace, which could have a material adverse effect on our business, financial condition, and results of operations.

If we are unable to conduct our marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.

We have incurred expenses on a variety of marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our marketing and promotional activities may not be well received by customers and may not result in the increased levels of product sales that we anticipate. We incurred $752,425, $1,367,485, and $3,154,574 in promotion and advertising expenses during the fiscal years ended March 31, 2024, 2023, and 2022, respectively. Marketing approaches and tools in the beauty and health products markets in Japan, China, Canada, the U.K., and the U.S. are evolving. This further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and customer preferences, which may not be as cost-effective as our marketing activities in the past and may lead to significantly higher marketing expenses in the future. We cannot assure you that we can produce, or benefit from, unique and effective marketing campaigns in the future. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could reduce our market share, cause our net revenue to decline, and negatively impact our profitability.

If we fail to effectively manage our inventory, our results of operations, financial condition, and liquidity could be materially and adversely affected.

Our business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory. Demand for products, however, can change significantly between the time inventory is ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer preferences with respect to our products, and other factors, and our customers may not order products in the quantities that we expect. It may be difficult to accurately forecast demand, and determine appropriate amounts of inventory for our products. In addition, in order to secure more favorable commercial terms, we may need to continue to enter into supply arrangements without unconditional return clauses or with more restrictive return policies.

If we fail to effectively manage our inventory or obtain favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory value, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory levels or to pay higher prices to our suppliers in order to secure the right to return products to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results of operations, financial condition, and liquidity.

Sales to the China market represented approximately 61.2%, 51.1%, and 84.2% of our revenue for the fiscal years ended March 31, 2024, 2023, and 2022, respectively, and we expect such sales to continue to represent a significant part of our revenue and any negative impact to our ability to sell our products to customers based in China could materially and adversely affect our results of operations and financial condition.

To date we have generated a significant portion of our revenue from sales to the China market. During the fiscal years ended March 31, 2024, 2023, and 2022, sales to the China market accounted for approximately 61.2%, 51.1%, and 84.2% of our revenue, respectively. We expect such sales to continue to comprise a significant part of our revenue going forward. As a result, any unforeseen events or circumstances that negatively impact our ability to sell our products to customers based in China would materially and adversely affect our results of operations and financial condition. These negative events and circumstances include, but may not be limited to, the following:

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:

As a result of the geographic concentration of our business, we face a greater risk of a negative impact on our business, financial condition, results of operations, and prospects in the event that any of the countries to which we sell our products is more severely impacted by any such adverse condition, as compared to other countries.

A downturn in the economy of the markets in which our products are sold may affect consumer purchases of discretionary items, such as beauty and health products, which could delay our growth strategy and have a material adverse effect on our business, financial condition, profitability, and cash flows.

We appeal to a wide demographic consumer profile and offer a broad selection of Japanese beauty and health products. A downturn in the economy of the markets in which our products are sold could adversely impact consumer purchases of discretionary items, such as beauty and health products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit, and consumer confidence in future economic conditions. In the event of an economic downturn, consumer spending habits could be adversely affected and we could experience lower than expected net sales, which could force us to delay or slow our growth strategy and have a material adverse effect on our business, financial condition, profitability, and cash flows.

In recent years, the economic indicators in Japan have also shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide Suga and Prime Minister Shinzo Abe have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. This policy was terminated in April 2024. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of the U.K.’s exit from the European Union (“Brexit”) on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, the occurrence of pandemics, such as the COVID-19 pandemic, the occurrence of large-scale natural disasters, such as earthquakes and typhoons, as well as an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.

If the relevant PRC regulatory agencies were to determine that we are subject to the cybersecurity review or other regulations and policies that have been issued by the Cyberspace Administration of China, our business, financial conditions, and results of operations could be materially and adversely affected.

On April 27, 2020, the Cyberspace Administration of China (the “CAC”), along with 11 other authorities, promulgated the Measures for Cybersecurity Review, effective on June 1, 2020, which are applicable to “critical information infrastructure operators” (“CIIO”) who purchase network products and services in China. On July 10, 2021, the CAC released a revised draft for comments of the Cybersecurity Review Measures, which expanded the scope of review to include data processors who engage in data processing activities that affect or may affect the national security of China. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) was promulgated and took effect on February 15, 2022.

On August 20, 2021, the Standing Committee of the National People’s Congress of China adopted and promulgated the Personal Information Protection Law of the PRC (the “PIPL”), which became effective on November 1, 2021. The PIPL applies to the activities of processing the personal information of individuals inside China that are carried out outside China “for the purpose of providing products or services to individuals inside China,” or those constituting “analysis or evaluation of the behaviors of individuals inside China.” The “processing of personal information” includes, but is not limited to, the collection, storage, use, processing, transmission, provision, disclosure, and deletion of personal information.

The regulations and policies that have been issued by the CAC to date do not apply to us for the following reasons: for online sales in China, we have entrusted the operations of all of our online stores on Tmall Global, JD Worldwide, Pinduoduo, and other online platforms in China to third-party Chinese e-commerce marketplace operators (the “Entrusted Third Parties”) pursuant to cooperation agreements between us and the Entrusted Third Parties. Consumer purchase data and personal information generated by these online stores are collected, used, managed, and stored in China by the Entrusted Third Parties, and we only receive necessary information, such as the numbers and types of products ordered from the Entrusted Third Parties in order to complete orders for these online stores. We have no right to obtain any personal information of Chinese consumers from the Entrusted Third Parties. In addition, our PRC legal counsel, Finance & Commerce Law Firm of China, has advised us that our PRC subsidiary, Qingzhiliangpin, is not a CIIO and does not collect or process personal information of individuals inside China in its business. As a result of the foregoing, (i) we are not subject to the cybersecurity review as required by the Measures for Cybersecurity Review (2021 version) and (ii) we are not subject to the PIPL since we have not engaged in activities of processing personal information of individuals inside China or those constituting analysis or evaluation of the behaviors of individuals inside China.

There remains uncertainty, however, inherent in relying on an opinion of counsel in connection with whether aspects of our business could be subject to Chinese laws and regulations. The PRC regulatory agencies, including the CAC, may not reach the same conclusion as our PRC counsel has and they may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Measures for Cybersecurity Review (2021 version) or the PIPL. In light of the significance of online sales in China to our business, if the CAC or other relevant PRC regulatory agencies were to determine that we are subject to the cybersecurity review as required by Measures for Cybersecurity Review (2021 version) or the PIPL, we may be required to suspend part of our operations or experience other disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations.

Our management has a limited history managing rapid expansion. If we cannot effectively and efficiently manage our growth strategy, our results of operations or profitability could be materially and adversely affected.

We have been growing rapidly in recent years, and we intend to continue to expand our business by opening new physical and online stores. Since this rapid expansion is a new strategy for us and our management has a limited history managing such an expansion, we may not be able to adapt quickly to such major business change, compete successfully in new markets, build our brand in new countries or areas, or generate sufficient net income from our new stores. As a result, it is difficult for us to predict our results of operations with respect to our newly opened stores and you should not rely on our historical results of operations as an indication of our future financial performance.

This growth strategy has placed, and will continue to place, substantial demands on our managerial, operational, technological, and other resources. Our growth strategy will also place significant demands on us to maintain the quality of our product and customer services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our product and customer services. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures, and controls, including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train, manage, and motivate our workforce and manage our relationships with customers, suppliers, and other service providers. As we selectively increase our product offerings, we will need to work with different groups of new suppliers efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers. All of these endeavors involve risks and will require substantial management effort and significant additional expenditures. We cannot assure you that we will be able to effectively manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our results of operations and profitability.

We may be unsuccessful in expanding and operating our business internationally, which could adversely affect our results of operations.

We plan to add an aggregate of 15 new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore ,Thailand ,Malaysia, and Taiwan during the next three years. The entry and operation of our business in these markets could cause us to be subject to unexpected, uncontrollable, and rapidly changing events and circumstances outside Japan. As we grow our international operations, we may need to recruit and hire new product development, sales, marketing, and support personnel in the countries in which we have or will establish new stores or otherwise have a significant presence. Entry into new international markets typically requires the establishment of new marketing and distribution channels. In addition, the opening of a new store typically results in initial recruiting and training expenses and reduced labor efficiencies. Our ability to continue to expand into international markets involves various risks, including the possibility that our expectations regarding the level of returns we will achieve on such expansion will not be achieved in the near future, or ever, and that competing in markets with which we are unfamiliar may be more difficult than anticipated. If we are less successful than we expect in a new market, we may not be able to realize an adequate return on our initial investment and our operating results could suffer.

Our international operations may also fail due to other risks inherent in foreign operations, including:

Our current and any future international expansion plans will require management attention and resources and may be unsuccessful. We may find it impossible or prohibitively expensive to continue expanding internationally or we may be unsuccessful in our attempt to do so, and our results of operations could be adversely impacted.

If we are unable to provide a high-quality customer experience, our business, reputation, financial condition, and results of operations may be materially and adversely affected.

The success of our business largely depends on our ability to provide a high-quality customer experience, which in turn depends on a variety of factors. These factors include our ability to continue to offer authentic products at competitive prices, source products to respond to customer demand and preferences, maintain the quality of our products, provide clean and attractive physical stores and reliable and user-friendly website interfaces for our customers to visit and purchase products, and provide timely and reliable delivery for products in our online stores and high-quality after-sales service. If our customers are not satisfied with our products or customer service experience, or the prices at which we offer the products, or our internet platform for online stores is severely interrupted or otherwise fail to meet our customers’ expectations, our reputation and customer loyalty could be adversely affected.

We rely on contracted third-party delivery service providers to deliver our products sold through our online stores. Interruptions to or failures in the delivery services could prevent the timely or successful delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as inclement weather, natural disasters, or labor unrest. If our products are not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in our services. Furthermore, the delivery personnel of contracted third-party delivery service providers act on our behalf and interact with our customers directly. Any failure to provide high-quality delivery services to our customers may negatively impact the shopping experience of our customers, damage our reputation, and cause us to lose customers.

In addition, we hired third-party e-commerce marketplace operators to operate our overseas online stores and depended on online customer service representatives from these third-party e-commerce marketplace operators to provide live assistance to our overseas online customers 24 hours a day, seven days a week. As of August 2022, we used approximately 12 customer service representatives from third-party e-commerce marketplace operators. In August 2022, to reduce our operating expenses and credit risk, we outsourced the entire operations of our overseas online stores to the third-party e-commerce marketplace operators and transited from selling products to individual overseas online customers to selling products to the third-party e-commerce marketplace operators, who therefore became our e-commerce wholesale customers (the “EC Wholesale Customers”) and were authorized to continue operating the overseas online stores on our behalf, including using their online customer service representatives to provide live assistance to the overseas online customers.

For more detailed discussion of the overseas online stores and our EC Wholesale Customers, please refer to “Item 4. Information on the Company—B. Business Overview—Our Distribution Channels—Online Stores.” If our EC Wholesale Customers and their customer service representatives fail to provide satisfactory service, or if wait times are too long due to the high volume of requests from customers at peak times, our brand and customer loyalty may be adversely affected. In addition, any negative publicity or poor feedback regarding the customer service may harm our brand and reputation and in turn cause us to lose customers and market share.

As a result, if we or any of our EC Wholesale Customers are unable to continue to provide, or maintain, a high-quality customer service, we may not be able to retain existing customers or attract new customers, which could have a material adverse effect on our business, reputation, financial condition, and results of operations.

Failure to maintain or enhance our brands or image could have a material adverse effect on our business and results of operations.

We believe our “晴の良品,” “東京生活館,” and other brands are well-recognized among our customers and other Japanese beauty and health product industry players, such as other Japanese beauty and health product retailers in the local markets our products are sold in. Our brands are integral to our sales and marketing efforts. Our continued success in maintaining and enhancing our brands and image depends to a large extent on our ability to satisfy consumer needs by further developing and maintaining the quality of our products, as well as our ability to respond to competitive pressures. If we are unable to satisfy consumer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers may decline, which could in turn adversely affect our results of operations.

Failure to obtain and maintain required licenses and permits or to comply with liquor, pharmaceutical, medical device, and other regulations could lead to the loss of our liquor, pharmaceutical, and other licenses and, thereby, harm our business, financial condition, or results of operations.

The sale of beauty and health products are subject to various government regulations in the markets in which our products are sold, including those relating to the sale of pharmaceuticals, and medical devices. In addition, we also sell liquor in certain of our stores, which is also subject to government regulation. Such regulations are subject to change from time to time. See “Item 4. Information on the Company—B. Business Overview—Regulations.” The failure to obtain and maintain licenses, permits, and approvals relating to such regulations could adversely affect our business, financial condition, or results of operations. Licenses may be revoked, suspended, or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits, and approvals could adversely affect us or cause a delay or result in our decision to cancel the opening of new stores, either of which could adversely affect our business, financial condition, or results of operations.

Data security breaches and attempts thereof could negatively affect our reputation, credibility, and business.

The third-party e-commerce marketplace operators for our online stores collect and store personal information relating to our customers, including their personally identifiable information, and rely on third parties for the various social media tools and websites we use as part of our marketing strategy. Our directly-operated physical stores in Hong Kong also collect and store personally identifiable information during membership registering for Customers. Customers are increasingly concerned over the security of personal information transmitted over the Internet (or through other mechanisms), consumer identity theft, and user privacy. Any perceived, attempted, or actual unauthorized disclosure of personally identifiable information regarding our employees, customers, or website visitors could harm our reputation and credibility, reduce our online sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers, and could result in litigation against us or the imposition of significant fines or penalties. We cannot assure you that any of our third-party service providers with access to such personally identifiable information will maintain policies and practices regarding data privacy and security in compliance with all applicable laws, or that they will not experience data security breaches or attempts thereof which could have a corresponding adverse effect on our business.

Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new foreign, national, provincial or state, and local laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased compliance costs.

A breach of security of confidential customer information related to our electronic processing of credit and debit card transactions, or a breach of security of our employee information, could substantially affect our reputation, business, financial condition, and results of operations.

A significant portion of the sales in our stores are by credit or debit cards. Other retailers have experienced security breaches in which credit and debit card information has been stolen. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. We may ultimately be held liable for the unauthorized use of a cardholder’s credit card information in an illegal activity and be required by card issuers to pay charge-back fees. In addition, many of the jurisdictions in which our products are sold, including Japan, Nevada, and New York, have enacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding could cause us to incur significant expenses, which could have an adverse impact on our business, financial condition, or results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on our Company and could substantially affect our reputation, business, financial condition, or results of operations.

If we are unable to attract, train, assimilate, and retain employees that embody our culture, including store personnel, store managers, and senior managers, we may not be able to grow or successfully operate our business.

Our success depends in part upon our ability to attract, train, assimilate, and retain a sufficient number of employees, including store personnel and store managers, who understand and appreciate our culture, are able to represent our brand effectively and establish credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers, and knowledge of the products we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected, and our brand image may be negatively impacted. Our growth strategy will require us to attract, train, and assimilate even more personnel. Any failure to meet our staffing needs or any material increases in team member turnover rates could have a material adverse effect on our business or results of operations.

We place substantial reliance on the retail and wholesale industry experience and knowledge of our senior management team as well as their relationships with other industry participants. Mr. Mei Kanayama, our representative director, is particularly important to our future success due to his substantial experience and reputation in the retail and wholesale markets. We do not carry, and do not intend to procure, key person insurance on any of our senior management team. The loss of the services of one or more members of our senior management team due to their departure, or otherwise, could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for our current senior management could be difficult, and competition for such personnel of similar experience is intense. If we fail to retain our senior management, our business and results of operations could be materially and adversely affected.

Our private label products may not appeal to our customers, and may compete with our brand partners.

We recently started to cooperate with suppliers to develop our own private label products. However, there is no assurance that our private label product offerings will generate customer interest and meet consumer needs or expectations. If we are unable to generate sufficient sales of our private label products, we may fail to cover our development, manufacturing, and marketing costs and expenses with respect to these products, and our business, results of operations, and financial condition may be adversely affected.

Moreover, as we sell both branded products sourced from our suppliers and our private label products through our distribution channels, we are likely to face competition from our suppliers. Branded products may have an advantage over our private label products primarily due to name recognition, even though private label products are typically more competitively priced compared to branded products. In addition, selling private label products may harm our relationship with our suppliers. If we lose our suppliers or if our relationships with our suppliers deteriorate, our business may be adversely affected. See “—We rely on our relationships with suppliers to purchase high-quality beauty and health products on reasonable terms. If these relationships were to be impaired, or if certain suppliers were unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in beauty products or health products, either of which could have a material adverse effect on our competitive position, our business, and financial performance.”

Fluctuation of the value of the Japanese yen against certain foreign currencies may have a material adverse effect on the results of our operations.

Some of our foreign operations’ functional currencies are not the Japanese yen, and the financial statements of such foreign operations prepared initially using their functional currencies are translated into Japanese yen. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. During the fiscal years ended March 31, 2024, 2023, and 2022, 70.7%, 57.5%, and 90.6%, respectively, of our revenue was derived from markets outside of Japan. We expect that an increasing portion of our revenue and expenses in the future will be denominated in currencies other than the Japanese yen. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies in which we conduct our business. In recent years, the value of the Japanese yen against our functional currencies or the U.S. dollar has fluctuated widely, and may continue to fluctuate and is affected by, among other things, changes in governmental policies and domestic and international economic and political developments. For example, in 2022 and 2023, the Japanese yen depreciated approximately 5.6% and 16.9%, respectively, against the U.S. dollar. It is difficult to predict how market forces or government policies may impact such exchange rates between the Japanese yen and the U.S. dollar or our functional currencies in the future. Moreover, we do not take actions to manage our foreign currency exposure, such as entering into hedging transactions. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the amount of our revenue that will be generated in other countries, the variability of currency exposures, and the potential volatility of currency exchange rates.

Future acquisitions may have a material adverse effect on our ability to manage our business and our results of operations and financial condition.

We may acquire businesses, technologies, services, or products which are complementary to our core Japanese beauty and health product retail and wholesale business. Future acquisitions may expose us to potential risks, including risks associated with the integration of new operations, services, and personnel, unforeseen or hidden liabilities, the diversion of resources and management attention from our existing business and technology, our potential inability to generate sufficient revenue to offset new costs, the costs and expenses incurred in connection with such acquisitions, or the potential loss of or harm to relationships with suppliers, employees, and customers resulting from our integration of new businesses.

Any of the potential risks listed above could have a material adverse effect on our ability to manage our business or our results of operations and financial condition. In addition, we may need to fund any such acquisitions through the incurrence of additional debt or the sale of additional debt or equity securities, which would result in increased debt service obligations, including additional operating and financing covenants, or liens on our assets, that would restrict our operations, or dilution to our shareholders. 

Risks Relating to Our Ordinary Shares and the Trading Market

The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.

Sales of substantial amounts of the ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. As of the date of this annual report, 42,220,206 of our Ordinary Shares are issued and outstanding. Among these shares, 21,428,666 are in the form of ADSs. All our ADSs are freely tradable without restriction or additional registration under the Securities Act. The remaining Ordinary Shares outstanding are available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs.

If securities or industry analysts do not publish research or reports about our business, or if they publish a negative report regarding the ADSs, the price of the ADSs and trading volume could decline.

Any trading market for the ADSs may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of the ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of the ADSs and the trading volume to decline.

The market price of the ADSs may be volatile or may decline regardless of our operating performance.

From the closing of our initial public offering on January 13, 2022 to July 16, 2024, the closing price of the ADSs has ranged from $0.20 to $29.52 per ADS. The trading price of the ADSs is likely to continue to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in Japan that have listed their securities in the United States.

In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

If we fail to implement and maintain an effective system of internal controls or fail to remediate the material weaknesses in our internal control over financial reporting that have been identified, we may fail to meet our reporting obligations or be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.

We used to be a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in preparing our consolidated financial statements as of and for the fiscal year ended March 31, 2024, we have identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board (United States) and other control deficiencies. The material weaknesses identified were (i) a lack of internal accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements and (ii) a lack of proper control over logical access security of IT systems, IT operations and service organization management. Following the identification of the material weaknesses and control deficiencies, we plan to take remedial measures including: (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; and (iii) improving our IT environment and daily management. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. Our failure to correct the material weaknesses or our failure to discover and address any other material weaknesses or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations, and prospects, as well as the trading price of the ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

In addition, once we cease to be an “emerging growth company,” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” in April 2027, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. We may be unable to complete our evaluation testing and any required remediation in a timely manner.

The requirements of being a public company may strain our resources and divert management’s attention.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal, accounting, and financial compliance costs and investor relations and public relations costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual reports and reports of foreign private issuer with respect to our business and operating results as well as proxy statements.

As a result of disclosure of information in the Form 20-F and in filings required of a public company, our business and financial condition are more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation, and results of operations.

Being a public company and these new rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and senior management.

As a foreign private issuer, we have followed home country practice even though we are considered a “controlled company” under Nasdaq corporate governance rules, which could adversely affect our public shareholders.

Our largest shareholder, Mr. Mei Kanayama, owns more than a majority of the voting power of our outstanding Ordinary Shares. Under the Nasdaq corporate governance rules, a company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain Nasdaq corporate governance standards, including the requirements that:

As a foreign private issuer, however, Nasdaq corporate governance rules allow us to follow corporate governance practice in our home country, Japan, with respect to appointments to our board of directors and committees. We have followed home country practice as permitted by Nasdaq rather than relying on the “controlled company” exception to the corporate governance rules. See “—Because we are a foreign private issuer and have taken advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.” Accordingly, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

We do not intend to pay dividends for the foreseeable future.

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the operation, development, and growth of our business and, as a result, we do not expect to declare or pay any dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.

Rights of shareholders under Japanese law may be different from rights of shareholders in other jurisdictions.

Our articles of incorporation, as amended (the “Articles of Incorporation”) and the Companies Act of Japan (the “Companies Act”) govern our corporate affairs. Legal principles relating to matters such as the validity of corporate procedures, directors’ and executive officers’ fiduciary duties, and obligations and shareholders’ rights under Japanese law may be different from, or less clearly defined than, those that would apply to a company incorporated in any other jurisdiction. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the law of other countries. For example, under the Companies Act, only holders of 3% or more of our total voting rights or our outstanding shares are entitled to examine our accounting books and records. Furthermore, there is a degree of uncertainty as to what duties the directors of a Japanese stock company may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced than that in other jurisdictions.

As holders of ADSs, you may have fewer rights than holders of our Ordinary Shares and must act through the depositary to exercise those rights.

The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records, and exercising appraisal rights, are available only to shareholders of record. ADS holders are not shareholders of record. The depositary, through its custodian agents, is the record holder of our Ordinary Shares underlying the ADSs. ADS holders will not be able to bring a derivative action, examine our accounting books and records, or exercise appraisal rights through the depositary.

Holders of ADSs may exercise their voting rights only in accordance with the provisions of the deposit agreement. If we instruct the depositary to ask for your voting instructions, upon receipt of voting instructions from the ADS holders in the manner set forth in the deposit agreement, the depositary will make efforts to vote the Ordinary Shares underlying the ADSs in accordance with the instructions of the ADS holders. The depositary and its agents may not be able to send voting instructions to ADS holders or carry out their voting instructions in a timely manner. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote. 

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Ordinary Shares provides that, to the fullest extent permitted by applicable law, owners and holders of ADSs irrevocably waive the right to a jury trial for any claim that they may have against us or the depositary arising from or relating to our Ordinary Shares, the ADSs, or the deposit agreement, including any claim under the U.S. federal securities laws.

However, ADS holders will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder. In fact, ADS holders cannot waive our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder. If we or the depositary opposed a demand for jury trial relying on jury trial waiver mentioned above, it is up to the court to determine whether such waiver was enforceable considering the facts and circumstances of that case in accordance with the applicable state and federal law.

If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court or by the United States Supreme Court. Nonetheless, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York. In determining whether to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable in the case of the deposit agreement or the ADSs. If you or any other owners or holders of ADSs bring a claim against us or the depositary relating to the matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other owner or holder may not have the right to a jury trial regarding such claims, which may limit and discourage lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may have different outcomes compared to that of a jury trial, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if the jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any owner or holder of ADSs or by us or the depositary of compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder.

Holders of ADSs may not receive distributions on our Ordinary Shares or any value for them if it is illegal or impractical to make them available to such holders.

Subject to the terms of the deposit agreement, the depositary has agreed to pay holders of ADSs the cash dividends or other distributions it or the custodian for the ADSs receives on the Ordinary Shares or other deposited securities after deducting its fees and expenses and any taxes or other government charges. Holders of ADSs will receive these distributions in proportion to the number of our Ordinary Shares that such ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit distributions on our Ordinary Shares to holders of ADSs. This means that holders of ADSs may not receive the distributions we make on our Ordinary Shares if it is illegal or impractical to make them available to such holders. These restrictions may materially reduce the value of the ADSs.

Holders of ADSs may be subject to limitations on transfer of their ADSs.

ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer, or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or cancelling and withdrawing the underlying our Ordinary Shares.

We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or prejudices a substantial existing right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or cancelling and withdrawing the underlying our Ordinary Shares. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances.

We are incorporated in Japan, and it may be more difficult to enforce judgments obtained in courts outside Japan.

We are incorporated in Japan as a stock company with limited liability. All of our directors are non-U.S. residents, and a substantial portion of our assets and the personal assets of our directors and senior management are located outside the United States. As a result, when compared to a U.S. company, it may be more difficult for investors to effect service of process in the United States upon us or to enforce against us, our directors or senior management, judgments obtained in U.S. courts predicated upon civil liability provisions of the federal or state securities laws of the U.S. or similar judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal and state securities laws of the United States.

Dividend payments and the amount you may realize upon a sale of our Ordinary Shares or the ADSs that you hold will be affected by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen.

Cash dividends, if any, in respect of our Ordinary Shares represented by the ADSs will be paid to the depositary in Japanese yen and then converted by the depositary or its agents into U.S. dollars, subject to certain conditions and the terms of the deposit agreement. Accordingly, fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect, among other things, the amounts a holder of ADSs will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that a holder of ADSs would receive upon sale in Japan of our Ordinary Shares obtained upon cancellation and surrender of ADSs and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar value of dividends and sales proceeds received by holders of our Ordinary Shares.

If we cease to qualify as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers, and we would incur significant additional legal, accounting, and other expenses that we would not incur as a foreign private issuer.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our senior management, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information that United States domestic issuers are required to disclose. We may cease to qualify as a foreign private issuer in the future, in which case we would incur significant additional expenses that could have a material adverse effect on our results of operations.

Because we are a foreign private issuer and have taken advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.

Nasdaq listing rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to, and we have followed home country practice in lieu of the above requirements. The corporate governance practice in our home country, Japan, does not require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests of the company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, Nasdaq listing rules also require U.S. domestic issuers to have an audit committee, a compensation committee, and a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. Consistent with corporate governance practices in Japan, we have a three-member board of corporate auditors instead of an audit committee and we do not have a standalone compensation committee or nomination and corporate governance committee of our board. Moreover, Nasdaq listing rules require a listed company to obtain shareholder approval for certain dilutive events listed in Listing Rule 5635. However, consistent with corporate governance practices in Japan, we are not required to obtain shareholder approval for such dilutive events, unless they constitute a favorable issue of shares or stock acquisition rights or an acquisition of the entire business requiring a special resolution of shareholders’ meeting. See “Item 16G. Corporate Governance.” As a result of these exemptions, investors would have less protection than they would have if we were a domestic issuer. Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq listing rules in determining whether shareholder approval is required on such matters.

If we cannot continue to satisfy the continued listing requirements and other rules of Nasdaq, the ADSs may be delisted, which could negatively impact the price of the ADSs and your ability to sell them.

In order to maintain our listing on Nasdaq, we are required to comply with certain rules of Nasdaq, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of publicly held shares, and various additional requirements. On December 20, 2023, we received a letter from the Listing Qualifications Department of Nasdaq notifying us that we are not in compliance with the minimum bid price requirement as set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given a period of 180 calendar days, or until June 17, 2024, to regain compliance with Nasdaq Listing Rule 5550(a)(2). On June 18, 2024, we were given an additional period of 180 calendar days, or until December 16, 2024, to regain compliance. To regain compliance, the ADSs must have a closing bid price of at least US$1.00 for a minimum of 10 consecutive business days. In the event we do not regain compliance by December 16, 2024, we may face delisting.

If Nasdaq subsequently delists the ADSs from trading, we could face significant consequences, including:

We are an “emerging growth company” within the meaning of the Securities Act, and we have taken advantage of certain exemptions from disclosure requirements available to emerging growth companies, which will make it more difficult to compare our performance with other public companies.

We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This will make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Because we are an “emerging growth company”, we may not be subject to requirements that other public companies are subject to, which could affect investor confidence in us and the ADSs.

For as long as we remain an “emerging growth company,” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of other public companies. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the ADS price may be more volatile.

If we are classified as a passive foreign investment company, United States taxpayers who own the ADSs or our Ordinary Shares may have adverse United States federal income tax consequences.

A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either:

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds the ADSs or our Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

Based on our operations and the composition of our assets, it is possible that, for our 2025 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC, which could have adverse U.S. federal income tax consequences for U.S. taxpayers who are shareholders. We will make this determination following the end of any particular tax year.

The classification of certain of our income as active or passive, and certain of our assets as producing active or passive income, and hence whether we are or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations as well as certain IRS guidance relating to the classification of assets as producing active or passive income. Such regulations and guidance are potentially subject to different interpretations. If due to different interpretations of such regulations and guidance the percentage of our passive income or the percentage of our assets treated as producing passive income increases, we may be a PFIC in one or more taxable years.

For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were or are determined to be a PFIC, see “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—PFIC.”

U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES, THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE COMPANY IS A PFIC.

Item 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Corporate History and Structure

We began our operations through Yoshitsu, a stock company incorporated on December 28, 2006 pursuant to the laws of Japan. On October 24, 2019, Yoshitsu incorporated a wholly owned subsidiary, Tokyo Lifestyle Co., Ltd., pursuant to the laws of Japan. On August 25, 2022, Tokyo Lifestyle Co., Ltd. changed its name to Kaika International Co., Ltd.

On December 25, 2020, we established a new company in Japan, Palpito Co., Ltd. (“Palpito”), owned 40% by Yoshitsu and 60% by two unrelated third parties. Palpito is a retailer and wholesaler of art toys, which are toys and collectibles created by artists and designers that are either self-produced or made by small, independent toy companies, typically in very limited editions.

On January 13, 2022, we closed our initial public offering (“IPO”) of 6,250,000 ADSs at a public offering price of $4.00 per ADS, which included 250,000 ADSs issued pursuant to the partial exercise of the underwriters’ over-allotment option. Each ADS represents one ordinary share of the Company. The closing for the sale of the over-allotment shares took place on February 21, 2022. Gross proceeds of our IPO, including the proceeds from the sale of the over-allotment shares, totaled $25.0 million, before deducting underwriting discounts and other related expenses. Net proceeds of our IPO, including over-allotment shares, were approximately $21.4 million. In connection with the IPO, the ADSs began trading on Nasdaq under the symbol “TKLF” on January 18, 2022.

On July 20, 2022, we entered into a definitive agreement (the “Agreement”) with All Seas Global Limited (the “Seller”). Mr. Mei Kanayama, the representative director of our Company, holds 100% of the equity interests in the Seller, and hence, the Seller and us are related parties under common control. Tokyo Lifestyle Limited is a company principally engaged in the import and retail of Japanese beauty and cosmetic products in Hong Kong and engaged in the live e-commerce business through its wholly-owned subsidiary, Shenzhen Qingzhiliangpin Network Technology Co., Ltd. (“Qingzhiliangpin”). Pursuant to the Agreement, we agreed to acquire 100% of the equity interests in Tokyo Lifestyle Limited in consideration of the sum of ¥392,000,000 in cash (approximately US$2,842,173), subject to certain terms. The transaction contemplated by the Agreement was approved by our board of directors at a meeting on June 27, 2022, and closed on July 27, 2022. This acquisition is a critical initiative of our business strategy to boost our business expansion in the Southeast Asia market and advance the digital transformation of live streaming e-commerce in our retail business.

On October 26, 2022, the board of directors of Tokyo Lifestyle Limited approved the acquisition of REIWATAKIYA (MYS) SDN. BHD. (“Reiwatakiya”) from the Seller, who held 60% equity interests in Reiwatakiya. Reiwatakiya is an entity incorporated on June 14, 2022 and is not in operation as of the date of this annual report. It is expected to principally engage in the import and retail of Japanese beauty and cosmetic products in Malaysia. The 60% equity interests in Reiwatakiya were transferred to Tokyo Lifestyle Limited on October 26, 2022 with no consideration. As Tokyo Lifestyle Limited and Reiwatakiya previously were controlled by the same ultimate controlling shareholder before this acquisition of a business between entities under common control, and therefore, the related acquired assets and liabilities were transferred at Reiwatakiya’s historical carrying value. On January 4, 2023, Tokyo Lifestyle Limited acquired the remaining 40% of the equity interests in Reiwatakiya from a third-party shareholder with no consideration and Reiwatakiya became the wholly owned subsidiary of Tokyo Lifestyle Limited.

On June 30, 2023, we entered into two share transfer agreements with Seihinkokusai Co., Ltd. (“Seihinkokusai”), an entity of which Mr. Mei Kanayama’s wife is a director and the representative director, to sell our 100% equity interests in Kaika International and 40% equity interests in Palpito to Seihinkokusai, for cash consideration of ¥5,000,000 (approximately $37,595) and ¥40,000,000 (approximately $300,760), respectively. The transactions were negotiated at arm’s length and were approved by our board on June 30, 2023. The cash consideration was fully received, and the transactions were completed on July 1, 2023.

On September 6, 2023, Tokyo Lifestyle Limited incorporated a wholly-owned subsidiary, RAKKISTAR HOLDING INC., in the Province of Ontario, Canada. On October 17, 2023, Tokyo Lifestyle Limited incorporated a wholly-owned subsidiary, Tokyo Lifestyle Holding Inc. (“TSL Holding”), in the State of Delaware. On October 26, 2023, TSL Holding organized a wholly-owned subsidiary, REIWATAKIYA BOS LLC, a limited liability company in the Commonwealth of Massachusetts. On November 8, 2023, TSL Holding organized a wholly-owned subsidiary, REIWATAKIYA NYC LLC, a limited liability company in the State of New York. These entities are currently not engaging in any active business operations.

The following chart illustrates our corporate structure as of the date of this annual report.

Notes: All percentages reflect the equity interests held by each of our shareholders, excluding the shares issuable under the outstanding warrants.

For details of our principal shareholders’ ownership, please refer to the beneficial ownership table in “Principal Shareholders.”

Corporate Information

Our headquarters are located at Harumi Building, 2-5-9 Kotobashi, Sumida-ku, Tokyo, 130-0022, Japan, and our phone number is +81356250668. Our English website address is www.ystbek.co.jp/en/. The information contained in, or accessible from, our website or any other website does not constitute a part of this annual report. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

The SEC maintains a website at www.sec.gov that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC using its EDGAR system.

For information regarding our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”

B. Business Overview

Overview

Headquartered in Tokyo, we are a retailer and wholesaler of Japanese beauty and health products, as well as sundry products and other products. We currently offer approximately 40,700 SKUs of beauty products, including cosmetics, skin care, fragrance, and body care, among others, 15,200 SKUs of health products, including over-the-counter (“OTC”) drugs, nutritional supplements, and medical supplies and devices, 44,200 SKUs of sundry products, including home goods, 150 SKUs of electronic products, including entertainment gaming products such as Nintendo Switch and Xbox Series, 850 SKUs of luxury products, including branded watches, perfume, handbags, clothes and jewelry, and 50,600SKUs of other products, including food and alcoholic beverages.

We currently sell our products through directly-operated physical stores, through online stores, and to franchise stores and wholesale customers. Leveraging our deep understanding of consumer needs and preferences, we have rapidly expanded our operations. Specifically, we opened three new directly-operated physical stores in Hong Kong, opened two new overseas online stores and two new domestic online stores, added two franchise stores, and added 16 new wholesale customers during the fiscal year ended March 31, 2022; and during the period from April 1, 2023 to the date of this report, we opened four new directly-operated physical stores in the U.S., one new directly-operated physical store in Canada and one new directly-operated physical store in Hong Kong; we also added five franchise stores and added 75 new wholesale customers. We believe our distribution channels are a trusted destination for consumers to discover and purchase branded Japanese beauty and health products, sundry products, and other products.

Since our inception, we have built a large base of customers, which has been essential for our rapid growth. During the fiscal years ended March 31, 2024, 2023, and 2022, our physical stores served approximately 473,369, 542,276, and 431,484 customers, respectively, and orders placed by our repeat customers accounted for approximately 42%, 40%, and 47% of total orders in our physical stores, respectively. During the same fiscal years, our online stores served approximately 307,785, 615,571, and 2,091,231 customers, respectively, and orders placed by our repeat customers accounted for approximately 52%, 54%, and 39% of total orders in our online stores, respectively. During the same fiscal years, our franchise stores served approximately 402,734, 154,344, and 259,746 customers, and orders placed by our repeat customers accounted for approximately 60%, 54%, and 51% of total orders in our franchise stores, respectively.

Since our inception, we have established long-term relationships with over 173 suppliers, consisting primarily of cosmetics and pharmaceutical companies and distributors, including many well-known Japanese brands, such as Shiseido, Sato, Kao, and Kosé.

Since our inception, we have achieved growth and profitability. Our revenue increased from $224,758,556 during the fiscal year ended March 31, 2021 to $234,752,580 during the fiscal year ended March 31, 2022, representing a slight increase of 4.4%. However, due to the negative impact of the resurgence of COVID-19 in 2022 on our revenue and an increase in our operating expenses, our revenue decreased to $169,724,346 during the fiscal year ended March 31, 2023, representing a decrease of 27.7%. Our revenue increased from $169,724,346 during the fiscal year ended March 31, 2023 to $195,681,315 during the fiscal year ended March 31, 2024, representing an increase of 15.3%. Our net income decreased from $4,952,327 during the fiscal year ended March 31, 2021 to $3,924,148 during the fiscal year ended March 31, 2022, representing a decrease of 20.8%. During the fiscal year ended March 31, 2023, our net income decreased to a net loss of $8,048,822, representing a decrease of 305.1%. During the fiscal year ended March 31, 2024, our net income increased to $6,435,622, representing an increase of 180.0%.

Since our inception, we have financed our operations primarily through bank loans. As of the date of this annual report, we have approximately $53.2 million in short-term borrowings outstanding, with a maturity date in December 2024, and approximately $7.4 million in long-term borrowings outstanding, with maturity dates ranging from June 2024 to August  2026. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We rely substantially on short-term borrowings to fund our operations, and the failure to renew these short-term borrowings or the failure to continue to obtain financing on favorable terms, if at all, may adversely affect our ability to operate our business” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our substantial indebtedness could materially and adversely affect our business, financial condition, results of operations, and cash flows.”

Sales to the China market represent a significant part of our revenue. During the fiscal years ended March 31, 2024, 2023, and 2022, sales to the China market accounted for approximately 61.2%, 51.1%, and 84.2% of our revenue, respectively, mainly due to the increased online sales in China. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Sales to the China market represented approximately61.2%, 51.1%, and 84.2% of our revenue for the fiscal years ended March 31, 2024, 2023, and 2022, respectively, and we expect such sales to continue to represent a significant part of our revenue and any negative impact to our ability to sell our products to customers based in China could materially and adversely affect our results of operations.” As we plan to expand into new markets by opening new stores, including adding additional directly-operated physical stores in Japan, Hong Kong, the U.S., and Canada, and add new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore, Thailand, Malaysia and Taiwan during the next three years, we expect the percentage of sales to the China market to decrease in the future. See “—Our Growth Strategies—Expanding into New Markets by Opening New Stores.”

Our Competitive Strengths

We believe that the following competitive strengths have contributed to our success and differentiated us from our competitors:

Diverse and High-Quality Product Offerings

We have developed a diverse merchandise portfolio, including approximately 40,700 SKUs of beauty products,15,200 SKUs of health products, 44,200 SKUs of sundry products, 150 SKUs of electronic products, 850 SKUs of luxury products, and 50,600 SKUs of other products. In particular, we have rigorously analyzed a large quantity of beauty and health products available for sale in Japan and developed an insightful knowledge and understanding of our customers’ needs and preferences by analyzing historical sales data, seasonality impact, customer feedback, and beauty and fashion trends. We believe our strong product selection and recommendation expertise deliver value, quality, and convenience for our customers and enhance our brand image. In addition, we have also entered into supply agreements with many well-known Japanese brands, including Shiseido, Sato, Kao, and Kosé.

A Multi-Channel Distribution Network

We have built a multi-channel distribution network that consists of (i) directly-operated physical stores, (ii) online stores, and (iii) franchise stores and wholesale customers. Our directly-operated physical stores, online stores, and franchise stores and wholesale customers contributed 7.6%, 5.5%, and 86.9% of our total revenue for the fiscal year ended March 31, 2024, respectively, 7%, 12%, and 81% of our total revenue for the fiscal year ended March 31, 2023, respectively, and 6%, 52%, and 42% of our total revenue for the fiscal year ended March 31, 2022, respectively.

We operate our five physical stores in Japan, six physical stores in Hong Kong, four physical stores in the U.S., and one physical store in Canada directly, staffed by our employees rather than franchisees, which we believe is critical in building a strong brand name and offering a consistent customer experience across our store network. We have developed uniform standards among various aspects of physical store operations and are able to provide a consistently high-quality level of services in all of our physical stores. Direct operation also enables us to select store locations that meet the consumer traffic requirements, target new neighborhoods, and leverage our existing distribution centers. In addition, the directly-operated physical stores allow us to address local demand for specific products more accurately, to control our corporate overhead expenses, and to provide uniform and high-quality training for our employees.

We extend the reach of our distribution network by operating online stores in Japan, China, and Korea and selling to franchise stores in the U.S., Canada, Hong Kong, and the U.K. and wholesale customers in Japan and overseas. Such geographic diversification helps us explore additional revenue generating opportunities and maintain the stability of our revenue, especially during times when customer volume in our physical stores decreases, such as during the COVID-19 pandemic.

Proven Ability to Expand Rapidly While Maintaining Profitability

We have expanded our distribution channels at a rapid pace in recent years, while maintaining our gross margin. In particular, the number of our directly-operated physical stores increased from seven as of March 31, 2019 to 16 as of the date of this annual report, the number of our franchise stores only decreased slightly from 11 as of March 31, 2019 to seven as of the date of this annual report, and the number of our wholesale customers increased from 28 as of March 31, 2019 to 171 as of the date of this annual report. However, due to the negative impact of the resurgence of COVID-19 in 2022 on our revenue and the increase in our operating expenses, our overall gross margin decreased slightly by 2 percentage points from 19% for the fiscal year ended March 31, 2022 to 17% for the fiscal year ended March 31, 2023. Our overall gross margin decreased by 20.6 percentage points from 17.3% for the fiscal year ended March 31, 2023 to 11.9% for the fiscal year ended March 31, 2024. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results.” Our rapid expansion is supported by our two distribution centers. We believe our distribution centers enable us to provide effective support to our physical stores and online stores, cope with distinct regional factors, such as local regulatory requirements and demographics, and reduce the incremental cost of opening additional distribution centers in cities close to our existing distribution centers. These attributes have allowed us to effectively shorten the amount of time required for us to open new stores and for new stores to become profitable.

An Experienced Management Team

Our management team is comprised of highly-skilled and dedicated professionals who have worked with us for many years or otherwise have wide ranging experience in retail, services, management, business development, and marketing. Our representative director, Mr. Mei Kanayama, has 12 years of experience in retail and wholesale of Japanese beauty and health products.

We have cultivated an experienced and skilled work force, emphasizing collaboration, individual accountability, flexibility, and willingness to deliver high-quality customer service. Our senior management team is able to leverage the capabilities of this broader work force to facilitate our ongoing and long-term relationships that are key to our retail and wholesale businesses. Our combined team offers substantial industry experience and in-depth knowledge of the beauty and health products markets in Japan and China.

Our Strategy

We intend to develop our business and strengthen brand loyalty by implementing the following strategies:

Expanding into New Markets by Opening New Stores

We plan to explore new markets while enhancing our current presence in Japan, China, the U.S., the U.K., and Canada by analyzing features of customer trends in different regions, continuously focusing on improving customer in-store experience, further expanding our distribution network, and exploring new partnership opportunities. In particular, during the next three years, we intend to open 10 additional directly-operated physical stores in Hong Kong, and expect the expenses related to opening these stores to be approximately HKD15 million to HKD20 million ($1.9 million to $2.5 million); and, as our overall strategy is to focus more on the development of overseas franchise and wholesale sales, we also intend to add an aggregate of 15 new franchise stores in the U.S., Canada, Australia, New Zealand, the U.K., Singapore ,Malaysia, Thailand and Taiwan. We expect the expenses related to adding these franchise stores to be borne by franchisees in each geographic area. We also plan to establish a new distribution center in Malaysia See “—Enhancing Our Technology Platform and Infrastructure” below.

We face financial and logistical challenges associated with our plans for accelerated and geographically expansive growth. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets,” “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—The capacity of our distribution and order fulfillment infrastructure may not be adequate to support our recent growth and expected future growth plans, which could prevent the successful implementation of these plans or cause us to incur costs to expand this infrastructure, which could have a material adverse effect on our business, financial condition, and results of operations,” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our management has a limited history managing rapid expansion. If we cannot effectively and efficiently manage our growth strategy, our results of operations or profitability could be materially and adversely affected.”

Expansion into different countries subject us to risks associated with entry and operations in those countries. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be unsuccessful in expanding and operating our business internationally, which could adversely affect our results of operations.”

Developing Our Own Private Label Products

We have been extending our product offerings by collaborating with beauty and other product suppliers to develop our own private label products. The private label products we currently sell include reusable shopping bags, toning lotion, milk lotion, purified water, sneakers, thermosteel flasks, and face masks. We have been exploring the possibility of adding facial masks, facial essences, T-shirts, and other footwear, among others. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our private label products may not appeal to our customers and may compete with our brand partners.”

Improving Customer Experience and Enhance Customer Loyalty

We are dedicated to improving customer experience and enhancing customer loyalty. In our physical stores, we strive to provide high-quality customer service and showcase our high product quality and professional knowledge in beauty and health products, which we believe will foster trust and loyalty among our new and existing customers. In addition, we intend to increase our fulfillment speed, improve the packaging of our products, and offer more customized services, including enhanced product recommendations, to our online store customers. We also intend to continue using social media platforms to engage with our customers and to receive real-time feedback on our product and services. We plan to refine our online store shopping experience by further integrating our online stores with social media platforms, such as Facebook and Instagram, and adopting new marketing methods, including livestreaming e-commerce, which is broadcasting of live video in real time via the internet to promote and sell goods, and influencer marketing, which is a form of social media marketing involving endorsements and product placement from influencers. See “—Marketing” for the timing and estimated cost for such plan.

Enhancing Our Technology Platform and Infrastructure

We intend to continue to invest in IT and equipment to enhance operational efficiency and reliability, improve customer experience, and reduce costs. Our initiatives include wider use of warehouse management systems and increased use of packaging automation in our distribution centers. We also upgraded and improved the integration of our existing operation and financial systems. In addition, we opened a new distribution center in Hong Kong in 2022 to support and replenish inventory at our physical stores and wholesale customers in Hong Kong. The cost for opening the new distribution center was approximately $0.3 million.

Product Offerings

Product Categories

We offer high-quality and affordable beauty products. We currently have approximately 40,700 SKUs of beauty products available through our distribution channels. The following table illustrates the categories of beauty products we sell:

We supplement our beauty products with health products and we currently have approximately 15,200 SKUs of health products available through our distribution channels. The following table illustrates the categories of health products we sell:

We also currently have approximately 44,200 SKUs of sundry products available through our distribution channels. The following table illustrates the categories of sundry products we sell:

We also currently have approximately 850 SKUs of luxury products available through our distribution channels. The following table illustrates the categories of luxury products we sell:

We also currently have approximately 150 SKUs of electronic products available through our distribution channels. The following table illustrates the categories of electronic products we sell:

We also currently have approximately 50,600 SKUs of other products available through our distribution channels. The following table illustrates the categories of other products we sell:

The following tables illustrate our revenue for the fiscal years ended March 31, 2024, 2023, and 2022 by product categories:

Pricing and Payment of Products

We offer competitive pricing to attract and retain customers. Prices are set either by our suppliers or by us with reference to major online and offline competitors, taking into account our overall pricing strategy for different categories. We constantly monitor the prices of products offered by our competitors. We also occasionally offer significant discounts on certain products for a limited time in flash sales or other promotional activities. We typically evaluate the profitability of our products every three months and make continuous efforts to maintain and improve an efficient cost structure and create incentives for our suppliers to provide us with competitive prices.

We provide customers with flexible payment options, including in-person settlement in physical stores with cash, credit cards and debit cards, and Japanese transportation IC cards, bank transfers, online payments with credit cards and debit cards, and payment through third-party mobile payment platforms, such as PayPay, WeChat Payment, and Alipay.

Our Distribution Channels 

Our distribution channels consist of (i) our directly-operated physical stores in Japan, Hong Kong, U.S. and Canada, (ii) online stores through our websites and various e-commerce marketplaces in Japan, China, and Korea, (iii) franchise stores in the U.S. and the U.K., and wholesale customers in Japan and other countries including China, the U.S., and Canada. We sell our products in similar manners to our franchise stores and wholesale customers, and we also license certain trademarks, such as “東京生活館” and “REIWATAKIYA,” to be used by these franchise stores.

The following tables illustrate our revenue for the fiscal years ended March 31, 2024, 2023, and 2022 by geographic areas and distribution channels.

Physical Stores

We currently directly operate five physical stores in four cities in Japan, six physical stores in Hong Kong, four physical stores in the U.S., and one physical store in Canada under the names “Tokyo Lifestyle,” “東京生活館,” and “REIWATAKIYA.” We choose to directly operate these physical stores because it allows us to exercise greater control over product quality, front-end sales, customer service quality, and overall shopping environment. This model also makes it easier to initiate transparent communication between our central management team and employees at our stores and to more efficiently manage our entire business operation.

The following table summarizes the information on our directly-operated physical stores as of the date of this annual report:

We employ a rigorous analytical process to identify new store locations, whereby we usually look for retail space on the first floor of street locations near busy commercial districts or popular tourist attractions, and evaluate locations based on market characteristics, demographic characteristics, including income and education levels, the presence of key anchor stores and co-tenants, population density, convenience for parking and other means of transportation, and the overall surrounding environment, among other factors. Before entering into a lease agreement, our management team conducts comprehensive research on rents paid near the selected location and identifies factors that may influence the rent amount. We also actively monitor and manage the performance of our stores and seek to incorporate information learned through the monitoring process into our future site selection decisions.

Each physical store is typically staffed with a general manager, who usually oversees multiple stores, two full-time employees, and eight independent contractors. The general manager oversees all store activities, including inventory management, merchandising, cash management, scheduling, hiring, and customer services. The full-time employees assist the general manager with store activities and the independent contractors are responsible for daily activities of the store, such as greeting customers, answering questions, offering assistance, suggesting items, lending opinions, providing product information, and cleaning. General managers and full-time employees receive bonuses depending on their position and performance. Each general manager reports to our director of store management, who in turn reports to our corporate officer who reports to our representative director, Mr. Mei Kanayama.

Our physical stores are typically open for eight to 14 hours a day, seven days a week. Some of our stores have extended hours during the New Year season.

Online Stores

We sell our products through 11 domestic online stores on our websites and on various e-commerce marketplaces, including Rakuten, Yahoo! Japan, Amazon Japan, and Wowma! in Japan.

The domestic online stores are directly operated by our employees and independent contractors. For the overseas online stores, from April 2022 to August 2022, we hired third-party e-commerce marketplace operators to operate the overseas online stores and improve our online interaction with overseas customers and the efficiency of our overseas customers’ online ordering process, and paid these third-party e-commerce marketplace operators transaction commissions ranging from 1.8% to 3% based on our sales amount. In August 2022, to reduce our operating expenses and credit risk, we outsourced the entire operations of our overseas online stores to third-party e-commerce marketplace operators and transited from selling products to individual overseas online customers to selling products to the third-party e-commerce marketplace operators, who therefore became our EC Wholesale Customers and were authorized to continue operating the overseas online stores on our behalf. We have since then ceased paying the transaction commissions, and entered into customary master sales and purchase agreements with the EC Wholesale Customers. For a more detailed discussion of the customary master sales and purchase agreements with our wholesale customers, please refer to “—Franchise Stores and Wholesale Customers—Relationships with Wholesale Customers.” We classify the income generated from the sales to the EC Wholesale Customers as our wholesale customers income, and transfer the payments of individual online customers we received from overseas e-commerce marketplaces to the EC Wholesale Customers.  

Integrating convenience, aesthetics, and functionality, our online stores aim to actively drive consumer spending by strategically featuring a carefully selected catalog of popular items. We focus on creating a high-quality online shopping experience for our customers whereby they are aided by detailed product descriptions, thoughtful peer reviews, and multiple angel picture illustrations in making purchase decisions. Our online store interface is fully integrated with our warehouse management system, enabling us to track order and delivery status on a real-time basis.

Our online store design offers several user-friendly features that enhance customer experience and convenience, including:

We deliver orders placed on our online stores or by our EC Wholesale Customers to all areas in Japan, China, and Korea from our distribution centers or third-party warehouses through reputable third-party delivery companies with nationwide coverage, such as Nippon Express, FedEx, UPS, and EMS China, and regional delivery companies. We leverage our large-scale operations and reputation to obtain favorable contractual terms from third-party delivery companies. To reduce the risk of reliance on any single delivery company and optimize the delivery process, we typically contract with two or more regional delivery companies in each major city. We regularly monitor and review the delivery companies’ performance and their compliance with our contractual terms. Our logistics agreements with third-party delivery companies typically have a term of one year and are automatically renewed for successive one-year terms, unless earlier terminated.

Franchise Stores and Wholesale Customers

As of the date of this annual report, we have two franchise stores in the U.S., two franchise stores in the U.K., and three franchise stores in Japan. The following table summarizes the information on our franchise stores:

In addition, as of the date of this annual report, we have approximately 171 wholesale customers in Japan and other countries, including China, the U.S., and Canada.

Franchise Profile and Trademark License Agreements

As of the date of this annual report, we have one franchisee operating two U.S. franchise stores, two franchisees operating two U.K. franchise stores, and three franchisees operating three Japan franchise stores. Our franchise formula enables franchisees to benefit from our brand recognition with a relatively low initial capital investment.

We enter into trademark license agreements with overseas franchisees, under which the overseas franchisee is granted a revocable license and non-exclusive right to use certain of our trademarks, such as “東京生活館” and “REIWATAKIYA,” solely for the purposes of selling, promoting sales of, and performing post-sale and other support relating to the products we sell to the overseas franchisee. In exchange, the overseas franchisee is required to pay a monthly royalty fee of ¥60,000 (approximately $568) per franchise store and to purchase at least 75% of the products sold in their stores (except heavy products, such as purified water) from us. Regarding the remaining 25% of the products sold in their stores, we do not limit the kinds of products that our overseas franchisees may purchase from third parties or the sources of such products. The trademark license agreements have a term of one year and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of the then current term. We also have the right, subject to applicable laws in Japan, to terminate a trademark license agreement for a variety of reasons, including a franchisee’s violation or threatened violation of the agreement, discontinuation of business, or a material change in the shareholding structure of the franchisee, among others.

We do not require our overseas franchisees to pay an initial fee to purchase the franchise, and we do not charge them additional fees for new franchise locations, other than increased royalty fees, which are billed monthly on a per franchise store basis. Our overseas franchise stores are not subject to mandatory requirements contracts and we do not earn commission on sales of products sold by the overseas franchise store. Instead, we enter into customary master sales and purchase agreements, similar to those with our wholesale customers as discussed below, with each of the overseas franchise stores operated by the overseas franchisees. We do not provide financing to our overseas franchisees.

We enter into franchise agreements with domestic franchisees, under which the domestic franchisee is granted a non-exclusive right to use our trademarks, logos, and related symbols, service marks, design signs, and other business-related indications and operate the domestic franchise store at the location specified in the agreement. The domestic franchisee also receives management support from us, including joint procurement and ordering of products. In particular, the domestic franchisee is required to procure products from us, or from the vendors designated by us with our prior approval. In exchange, the domestic franchisee is required to pay a franchisee fee of ¥3,000,000 (approximately $21,582), and a monthly royalty fee equals to 5% of the monthly sales proceeds plus the monthly cost of rent, security cameras, POS register system, and office management services. The franchise agreements have a term of three years and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of the then current term. We also have the right, subject to the terms of the franchise agreements and applicable laws in Japan, to terminate the franchise agreement for a variety of reasons, including a franchisee’s violation or threatened violation of the agreement, discontinuation of business, or a material change in the shareholding structure of the franchisee, among others.

Relationships with Wholesale Customers

We enter into customary master sales and purchase agreements with our wholesale customers with respect to the products we sell to them providing for the terms of our relationship, such as delivery and purchase of goods, terms and conditions of payment, acceptance inspection, complaint handling, and disputes with third parties, among other things. These agreements typically have a term of one year and automatically renew for successive one-year terms, unless either party sends a written non-renewal notice no later than two months prior to the expiration of such agreement. During the term of the master sales and purchase agreement, we send purchase orders to the wholesale customer for each sale and purchase to specify the terms of each order, such as product names, unit prices, quantities, and delivery dates, among other things.

Key Opinion Leaders Advertising Services

Since June 2021, our wholly-owned subsidiary, Qingzhiliangpin, has provided online advertising solutions endorsing products or services in China for merchants (“Merchant Customers”) through a platform partner (the “Platform Partner”), Wuhan Juliangxingtu Technology Limited, and a key opinion leader (“KOL”) employee, who is a prominent social media influencer. Qingzhiliangpin enters into a platform service agreement (the “Platform Service Agreement”) with the Platform Partner to obtain an account (the “Account”) and access to the advertisement order platform operated by the Platform Partner (the “Platform”). The Platform Service Agreement has no specified end date and will continue to be valid unless and until the Platform Partner terminates the Platform Service Agreement by giving Qingzhiliangpin a written notice 15 days in advance. Through the Platform, Qingzhiliangpin receives advertisement orders from Merchant Customers with details of their advertising needs and requirements. Qingzhiliangpin determines with the Merchant Customers customary commission fees on an order-by-order basis prior to accepting the orders. After the orders are accepted, the KOL employee produces and posts online short video advertisements on Chinese short video platforms, such as TikTok and Kuaishou, according to the requirements of the Merchant Customers. After reviewing the work products and confirming acceptance with the Platform Partner, the Merchant Customers issue the commission fees to the Platform Partner, who settles the Account with Qingzhiliangpin every month and issues the commission fees to the bank account designated by Qingzhiliangpin after deducting certain service fees at a ratio that is determined in the Platform Service Agreement and is subject to updates through notices by the Platform Partner. As of the date of this annual report, Qingzhiliangpin has served 28 Merchant Customers and employed one KOL. The revenue generated from the KOL advertising services was $2,039,346, $1,889,367, and $985,758, representing 1.0%, 1.1%, and 0.4% of our total revenue during the fiscal years ended March 31, 2024, 2023, and 2022, respectively.

Customers and Customer Service

Since our directly-operated physical stores in Japan are mostly located in commercial districts and tourist areas which foreigners who live in Japan and tourists often visit, the majority of the customers of our physical stores in Japan are foreigners who live in Japan and tourists who visit Japan and are between the ages of 30 to 50 years old. Our directly-operated physical stores in Hong Kong are mostly located in commercial districts and tourist areas and the majority of the customers of our physical stores in Hong Kong are residents and tourists and are between the ages of 30 to 50 years old. The majority of the customers of our online stores are between the ages of 18 to 45 years old. We periodically conduct qualitative customer surveys, helping us build a stronger understanding of our market position and our customers’ purchasing habits. For details about our wholesale customers, see “—Our Distribution Channels—Franchise Stores and Wholesale Customers—Relationships with Wholesale Customers.”

We believe our emphasis on customer service enhances our brand image and customer loyalty. As of March 31, 2024, our directly-operated physical stores had approximately 35 full-time employees and independent contractors, who also serve as customer service representatives and are required to complete mandatory training conducted by experienced managers on product knowledge, complaint handling, and communication skills before they are allowed to begin working at our stores. As of August 2022, the third-party e-commerce marketplace operators of our overseas online stores used approximately 12 customer service representatives. After outsourcing our overseas online stores operations in August 2022, the third-party e-commerce marketplace operators, who became our EC Wholesale Customers, continued to use customer service representatives for our overseas online stores. For details about outsourcing operations of our overseas online stores, see “—Our Distribution Channels—Online Stores.” Customers can access these online representatives 24 hours a day, seven days a week. The third-party e-commerce marketplace operators train these customer service representatives to answer customer inquiries and proactively educate potential customers about our products and promptly resolve customer complaints.

We generally offer a seven-day product return policy, as long as the products are undamaged, in their original condition, and can be resold. Products sold in our physical stores may be returned in store with receipt. For products sold in our online stores, customers must submit a return application request online, and the customer service representatives then review and process the return request or contact the customer by e-mail or by phone if there are questions relating to the request before it can be processed. Upon receipt of the returned product, the customer’s payment account will be credited with the purchase price. We believe our hassle-free return policies help build customer trust and increase customer loyalty.

Marketing

Our marketing and promotion strategy is to build brand recognition, attract new customers, increase customer traffic to our physical and online stores, build strong customer loyalty, maximize repeat customer visits, and develop incremental revenue opportunities.

Our marketing department designs the marketing efforts for our directly-operated physical stores, third-party e-commerce marketplace operators design promotions for our online stores, and our franchise stores design regional promotions based on local demographics and market conditions. Our store managers and staff are also encouraged to propose their own advertising and promotion plans, including holiday promotions, posters, and billboards. In addition, we offer special discounts and gift promotions for selected merchandise periodically in conjunction with our suppliers’ marketing programs.

Many of our promotion programs are designed to encourage cosmetics and pharmaceutical companies to invest resources to market their brands within our stores. For instance, some cosmetics and pharmaceutical companies provide point-of-purchase displays, which are marketing materials to be placed on top of or alongside the promoted merchandise in our physical stores to promote their products, and free product samples during promotional events. We believe that these promotions improve our customers’ shopping experience because cosmetics and pharmaceutical companies provide purchasing incentives and information to help customers make informed purchase decisions. We work to maintain strong inventory positions for merchandise featured in our promotions, as we believe this increases the effectiveness of our spending on promotion activities.

As part of our marketing campaign, customers in our directly-operated physical stores in Japan and Hong Kong and our franchise stores in the U.S. can enroll in our rewards program, which is primarily a spend-based loyalty program, and get a rewards card. In Japan, members of our rewards program earn one membership point for each ¥100 spent in our directly-operated physical stores and subsequently each membership point can be used as ¥1 at our directly-operated physical stores when making payments; in Hong Kong, members of our rewards program earn one membership point for each HKD spent in our directly-operated physical stores and subsequently each 250 membership points can be used as HKD1 at our directly-operated physical stores when making payments; the membership points are valid for one year starting from the last use of the rewards card. In the U.S., members of our rewards program earn one membership point for each one U.S. dollar spent in our franchise stores, and subsequently these membership points can be redeemed for different products at our franchise stores; the membership points do not expire. Certain discount pricing is only available to members of our rewards program. After a customer enrolls in our rewards program, we communicate via the customer’s preferred method: e-mail, traditional mail, or text messages. As of March 31, 2024, 2023, and 2022, approximately 523,628, 477,844, and 387,700 customers had enrolled in our rewards program, respectively. We intend to further extend this program to enhance customer acquisition and retention.

Our physical stores periodically hand out flyers and leaflets and use direct mail advertising to promote our brand and the products carried in our stores. Our online stores on third-party websites participate in shopping events on those websites, such as Rakuten Super Sale and Singles’ Day and Double 12 on Tmall Global. In addition, we enhance publicity of our products and the effectiveness of our other marketing strategies by advertising on outdoor billboards in busy commercial districts, popular tourist attractions, and airports, newspapers, magazines, and social media platforms, such as Instagram, Twitter, TikTok, and WeChat.

We are developing a mobile shopping app named “TOKYOLIFESTYLE” (the “App”) on the App Store and Google Play. As of the date of this annual report, the APP is in the process of internal testing. Featuring wide product availability, customized product recommendations, and convenient shopping experiences, the App is designed to become one of the leading global retail e-commerce platforms, by offering users a distinctive Japanese shopping experience. We plan to expand our business overseas by providing both online live sales promotions and physical store shopping experiences. We estimate the cost associated with developing the App and related logistics facilities to be approximately $8 million to $10 million.

Suppliers

We have an extensive network of suppliers, consisting primarily of cosmetics and pharmaceutical companies and distributors. During the fiscal year ended March 31, 2024, we directly sourced from 113 cosmetics companies and distributors and 11 pharmaceutical companies and distributors. During the fiscal year ended March 31, 2023, we directly sourced from 83 cosmetics companies and distributors and nine pharmaceutical companies and distributors. During the fiscal year ended March 31, 2022, we directly sourced from 83 cosmetics companies and distributors and eight pharmaceutical companies and distributors. For the fiscal year ended March 31, 2024, three suppliers accounted for approximately 22.5%, 21.2%, and 5.9% of our purchases in terms of monetary value, respectively. For the fiscal year ended March 31, 2023, three suppliers accounted for approximately 18.2%, 16.3%, and 12.0% of our purchases in terms of monetary value, respectively. For the fiscal year ended March 31, 2022, three suppliers accounted for approximately 30.1%, 19.7%, and 17.9% of our purchases in terms of monetary value, respectively.

See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We rely on our relationships with suppliers to purchase high-quality beauty and health products on reasonable terms. If these relationships were to be impaired, or if certain suppliers were unable to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a sufficient selection or volume of merchandise on reasonable terms, and we may not be able to respond promptly to changing trends in beauty products or health products, either of which could have a material adverse effect on our competitive position, our business, and financial performance.”

Supplier and Product Selection

When choosing suppliers, we take into consideration, among other things, whether their products complement our overall product offering, the quality and prices of their products, market reputation, production and/or distribution capacity, the market potential of their products, and the availability of supplier rebates. Before we engage with any new supplier, we also examine their qualifications and licenses to verify that they operate their businesses in compliance with applicable laws, rules, and regulations.

Our merchandising team members possess insightful knowledge and understanding of existing and potential customers’ needs and preferences. Before selecting each product, we consider and analyze historical sales data, beauty and fashion trends, seasonality, and customer feedback to project how many items of a particular product we should offer in our physical stores and online stores.

Our Relationship with Cosmetics and Pharmaceutical Companies and Key Suppliers

We work closely with our top suppliers, especially cosmetics and pharmaceutical companies, to strengthen our relationships with them. We constantly communicate with our suppliers to keep them informed of any changes to the inventory levels of their products in order for them to timely respond to our sales demands. Before hosting a major sales event, we provide advance notice to our suppliers so that they can prepare ample stock to meet potential surge in demand and increased purchases.

For the same product, the price from a cosmetics or pharmaceutical company is generally 5% to 8% lower than that from a distributor. Cosmetics and pharmaceutical companies in Japan typically do not limit the number of distributors that may directly source from them or impose requirements, such as those for volume or geographic areas, on these distributors. As a result, we aim to directly source from major cosmetics and pharmaceutical companies so as to get lower prices. We also seek to cooperate with other distributors who directly source from cosmetics and pharmaceutical companies that do not have an established relationship with us. We believe our cooperation with these distributors allows us to expand our product offerings and procure products manufactured by cosmetics and pharmaceutical companies without an established relationship with us.

We generally enter into supply agreements with suppliers which lay out the general terms of our relationship, such as order of goods, delivery and acceptance, processing of returns, terms and conditions of payments, and handling of confidential information, among other things. These supply agreements typically have a term of one year and automatically renew for successive one-year terms unless either party sends written notice of non-renewal no later than two or three months prior to the expiration of the then-current term of such agreement. 

Distribution

Our directly-operated physical stores, online stores, and sales to our franchise stores and wholesale customers are supported by our two distribution centers. The following table summarizes the information on our distribution centers as of the date of this annual report:

Our suppliers deliver merchandise either directly to our physical stores or to our distribution centers, depending on demand from each distribution center or physical store, before we deliver them to our physical stores, customers of our online stores, and wholesale customers using our own vehicles and third-party logistics companies. At each distribution center, we maintain a small fleet of trucks to deliver to our physical stores and we typically replenish merchandise for each of our physical stores once every five days. For details about distribution for our online stores, see “—Our Distribution Channels—Online Stores.”

Our franchise stores have access to substantially the same types of merchandise as offered in our directly-operated physical stores in Japan, and each franchise store places its orders to us based on factors it determines, such as demand of consumers, popularity of merchandise, and seasonal trends. We typically wait until we have a sufficient amount of such orders to fill a shipping container before shipping merchandise from our distribution centers to our franchise stores through third-party logistics companies. In the event that a franchise store has an urgent need to replenish certain merchandise, we can also ship merchandise from our distribution centers to the franchise store through express delivery services provided by third-party logistics companies.

Warehouse Management System and Inventory Control

The operations of our Tokyo and Hong Kong distribution centers, including inventory management and deliveries, are integrated and coordinated using the warehouse management systems of Logizard ZERO, a cloud-based warehouse management system service providers in Japan, and of Eastop ERP, a cloud-based warehouse management system service providers in Hong Kong. The systems enable us to closely monitor each step of the fulfillment process of our online stores from the time a purchase order is confirmed and the product stocked in our distribution centers, up to when the product is packaged and picked up for delivery by third-party logistics companies for delivery to a customer. At each distribution center, inventory is bar-coded and tracked through our warehouse management system, allowing real-time monitoring of inventory level and item tracking in our distribution center. When preparing items for shipping, we repackage different types of products ordered by the same customer to our standardized boxes for optimized storage and sourcing in our distribution centers.

We manage our inventory carefully in order to minimize inventory holding costs, ensure timely delivery of merchandise, and maintain the variety of merchandise available in our stores. We hire a third-party inventory services provider to perform quarterly inventory counts in our directly-operated physical stores and distribution centers, and randomly pick 10 products to double-check the count results. We require our store and distribution center managers to follow up on any inventory discrepancies discovered during each inventory count and report the results to the management.

Cash Control

Approximately 30% of the sales in our physical stores in Japan are made in cash, and we have adopted strict cash control procedures in all of our stores in Japan. In particular, the details of each sales event are recorded in our integrated information management system, and the cash generated at our stores in Japan is collected and deposited every two to three days in designated bank accounts, which are controlled by our headquarters. After the cash is deposited, our financial department also carries out a reconciliation of sales data collected on our information management system with cash receipts as confirmed by the banks. The cash needs of each physical store are dispatched centrally two to three times a month based on budgeted amounts. Approximately 15% to 25% of the sales in our physical stores in Hong Kong are made in cash. We check and make an inventory of the cash generated at our stores in Hong Kong daily before we seal and date the cash. The cash generated at our Hong Kong stores is collected and deposited every two weeks in designated bank accounts controlled by our Hong Kong subsidiary. Approximately 20% to 25% of the sales in our physical stores in the U.S. and Canada are made in cash. We check and make an inventory of the cash generated at our stores in the U.S. and Canada daily before we seal and date the cash. The cash generated at the U.S. and Canada stores is collected and deposited every week in designated bank accounts controlled by the local subsidiaries.

Quality Control

We place strong emphasis on quality control for both merchandise sourcing and in-store services. Our quality control starts with procurement. In particular, we have screened cosmetics and pharmaceutical companies in Japan and selected a core set of companies as our suppliers after reviewing product selection and quality, manufacturing, packaging, transportation, storage capabilities, and cost competitiveness.

We conduct random quality inspections of each batch of products we procure. We replace our suppliers if they consistently fail to pass our quality inspections. Since there is a significant manufacturing capability surplus within the Japanese beauty and health products industry, it is possible for us to change suppliers without a material interruption to our business. We regularly dispatch quality inspectors to our stores to monitor the service quality of our staff. We consider the feedback received during these inspections when determining the bonus portion of our store employee’s salaries.

Competition

The beauty and health products markets in Japan, China, Canada, the U.K., and the U.S. are fragmented and highly competitive. We primarily compete against other offline and online retailers and wholesalers of beauty and health products, but also increasingly face competition from retail pharmacies, discount stores, convenience stores, and supermarkets as we increase our offering of sundry products and other products. We believe we are well-positioned to effectively compete on the basis of price, quality of products, in-store presence, customer service, and e-commerce initiatives. However, some of our current or future competitors may have longer operating histories, greater brand recognition, or greater financial, technical, or marketing resources than we do. For a discussion of risks relating to competition, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We operate in a highly-competitive market and our failure to compete effectively could adversely affect our results of operations.”

Employees

We had 140, 135, and 124 full-time employees as of March 31, 2024, 2023, and 2022, respectively. The following table sets forth the number of our full-time employees categorized by areas of operations as of March 31, 2024:

We enter into employment agreements with our full-time employees. The employment agreements have an indefinite term and may be terminated by the employee with a 30-day advance notice. Dismissal of the employee by us is required to meet the following requirements: (i) the dismissal is objectively reasonable and socially acceptable; (ii) the dismissal is based on the grounds set forth in the labor regulations; (iii) the dismissal does not fall under any of the prohibited grounds stipulated by law; and (iv) a 30-day advance notice is given, or a dismissal allowance is paid in lieu of such notice. In addition, we enter into confidentiality and non-compete agreements with our key employees before they leave our Company.

In addition to our full-time employees, we had 99, 112, and 102 independent contractors as of March 31, 2024, 2023, and 2022, respectively. These independent contractors are primarily responsible for customer services and assisting our full-time employees.

We believe that we maintain a good working relationship with our employees and independent contractors, and we have not experienced material labor disputes in the past. None of our employees are represented by labor unions.

Facilities

We own our headquarters location in Tokyo and we lease an aggregate of approximately 13,778 square feet of physical store, franchise stores, office, and residence space in Tokyo. We also own premises in Koshigaya on which we are operating a distribution center of approximately 26,900 square feet, lease an aggregate of approximately 12,000 square feet of physical and franchise store space in Koshigaya, Saitama, Yokohama, and three parking lots in Koshigaya, Saitama, and Tokyo, lease an aggregate of approximately 9255 square feet of physical store and warehouse space in Hong Kong, lease an aggregate of approximately 636 square feet of the physical store in Canada, and lease an aggregate of approximately 7113 square feet of physical stores in the U.S.. A summary of our leased properties as of the date of this annual report is shown below:

We lease these premises from independent third parties, except as discussed below, under operating lease agreements, which are typically renewable every one to three years.

We have been leasing approximately 2,696 square feet of office space and a parking lot in Tokyo pursuant to a lease agreement we entered into on June 25, 2021 with Seihinkokusai Co., Ltd. (“Seihinkokusai”), an entity of which Mr. Kanayama’s wife is a director and the representative director. The monthly rent is ¥0 for the first eight months and ¥1,422,000 (approximately $13,415) afterwards, and we also paid ¥14 million (approximately $126,476) as a rental security deposit. The lease period is from August 1, 2021 to July 31, 2024 and may be renewed unless Seihinkokusai notifies us in writing of the termination of the lease for legitimate reasons between six months and one year prior to the expiration of the lease. The lease agreement was terminated in February 2024.

We have been leasing approximately 7,062 square feet of franchise store space in Hakuba pursuant to a lease agreement we entered into on March 22, 2021 with Seihinkokusai. The monthly rent is ¥0 for the first three months and ¥1,000,000 (approximately $9,434) afterwards, and we also paid ¥10 million (approximately $75,190) as a rental security deposit. The lease period is from April 1, 2021 to April 30, 2024. The lease terminated upon expiration of the lease period.

We believe that our existing facilities are sufficient for our near-term needs.

Intellectual Property

We regard our trademarks, service marks, domain names, trade secrets, and similar intellectual property as critical to our success. We rely on a combination of copyright and trademark law, and confidentiality agreements with employees to protect our intellectual property rights. We also regularly monitor any infringement or misappropriation of our intellectual property rights.

As March 31, 2024, we owned 19 trademarks in Japan:

No.

Trademark

Type of Mark

List of Goods and Services

Registration Number

Registration Date

Expiration Date

1

晴の良品

Word

Class 5, 10, 20, 24, 25, and 28

5804614

November 6, 2015

November 6, 2025

2

Logo

Class 5, 10, 20, 24, 25, and 28

5804613

November 6, 2015

November 6, 2025

3

東京生活館

Word

Class 3, 5, and 44

5855378

June 3, 2016

June 3, 2026

4

Logo

Class 3, 5, and 44

5855379

June 3, 2016

June 3, 2026

5

東京生活館

Word

Class 35

5865658

July 8, 2016

July 8, 2026

6

Logo

Class 35

5868655

July 22, 2016

July 22, 2026

7

Logo

Class 3, 10, 21, and 35

5880029

September 9, 2016

September 9, 2026

8

Logo

Class 3, 10, 21, and 35

5880030

September 9, 2016

September 9, 2026

9

Logo

Class 3, 10, 21, and 35

5880058

September 9, 2016

September 9, 2026

No.

Trademark

Type of Mark

List of Goods and Services

Registration Number

Registration Date

Expiration Date

10

Logo

Class 35 and 44

6044473

May 18, 2018

May 18, 2028

11

Logo

Class 3 and 35

6068378

August 3, 2018

August 3, 2028

12

Logo

Class 3 and 35

6099304

November 16, 2018

November 16, 2028

13

TOKYO PLUS

Word

Class 35

6183713

September 27, 2019

September 27, 2029

14

JLENSES

Word

Class 35

6183714

September 27, 2019

September 27, 2029

15

令和多喜屋

Word

Class 3, 5, 35, and 44

6325574

December 7, 2020

December 7, 2030

16

Tokyo beauty house

Word

Class 3, 5, 35, and 44

6247380

April 22, 2020

April 22, 2030

17

Tokyo life house

Word

Class 3, 5, 35, and 44

6247381

April 22, 2020

April 22, 2030

18

Word

Class 3, 5, 35, and 44

6264856

July 1, 2020

July 1, 2030

19

Word

Class 3, 5, 35, and 44

6270405

July 16, 2020

July 16, 2030

In addition, as of March 31, 2024, we had registered four domain names relating to our business, namely ystbek.co.jp, qingzhiliangpin.com, tokyoplus.jp, and jlenses.com, in Japan. 

As of March 31, 2024, we also had 12 pending trademark registration; we also owned the following 19 trademarks in other countries and regions:

No.

Trademark

Country/Region

Type of Mark

List of Goods and Services

Registration Number

Registration Date

Expiration Date

1

China

Word

Class 35

41941705

July 28, 2020

July 27, 2030

2

Hong Kong

Logo

Class 35

304969081

Jun 21, 2019

June 20, 2029

3

Hong Kong

Word

Class 35

305097844

October 30, 2019

October 29, 2029

4

Hong Kong

Word

Class 3

302845495

December 20, 2013

December 19, 2033

5

Hong Kong

Word

Class 3, 5, 35, and 44

304300073

April 24, 2018

October 11, 2027

6

Hong Kong

Logo

Class 35 and 44

304300064

March 19, 2018

October 11, 2027

7

Hong Kong

Logo

Class 35

304483044

April 4, 2018

April 3, 2028

8

Hong Kong

Logo

Class 35

304715703

October 29, 2018

October 28, 2028

9

Hong Kong

Logo

Class 35

304719060

October 31, 2018

October 30, 2028

10

Macao

Word

Class 35

N/161717

April 27, 2020

April 27, 2027

11

Macao

Word

Class 5

N/135119

September 10, 2018

September 10, 2025

12

Macao

Word

Class 44

N/135121

September 10, 2018

September 10, 2025

13

U.S.

Word

Class 35

87713467

March 12, 2019

March 11, 2029

14

U.S.

Logo

Class 35

87713490

September 10, 2019

September 9, 2029

15

U.S.

Word

Class 35

88675151

December 29, 2020

December 28, 2030

16

Canada

Logo

Class 35 and 44

TMA1070977

January 18, 2020

January 18, 2030

17

Canada

Word

Class 35 and 44

TMA1087885

January 28, 2020

January 28, 2030

18

Australia

Word

Class 35

2047385

June 10, 2020

October 30, 2029

19

United Kingdom

Word

Class 35

UK00003441105

January 24, 2020

November 1, 2029

Insurance 

We maintain directors and officers liability insurance for our directors and senior management and group comprehensive life insurance for our directors, senior management, and full-time employees. We do not maintain other property insurance, business interruption insurance, or general third-party liability insurance. We believe the insurance coverage we maintain is in line with the industry. For risk factors relating to our insurance policies, please see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We may be subject to product liability claims if our customers are harmed by the products sold through our distribution channels.”

Seasonality

We experience seasonality in our business, mainly reflecting the impact of online promotional events held by e-commerce companies. For instances, Rakuten holds special promotional events in March, June, and September each year and e-commerce companies in China hold special promotional campaigns on June 18, November 11, and December 12 each year, which tend to increase revenue in the respective quarter relative to other quarters.

Legal Proceedings

From time to time, we may become a party to various legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to intellectual property infringement, violation of third-party licenses or other rights, breach of contract, and labor and employment claims. We are currently not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the opinion of our management, are likely to have any material and adverse effect on our business, financial condition, cash flow, or results of operations.

Regulations

We are subject to a number of Japanese laws and regulations that affect retailers, wholesalers, or online sellers of beauty and health products in Japan. These may involve product quality and customer protection, maintenance of websites and e-commerce, labor laws, shipping of goods, environment, food and beverage product sales, advertising, lease agreements, protection of personal information, securing of safety of pharmaceuticals and medical devices, liquor tax, secondhand dealers, and consumption tax. Because we also sell our products to individual and wholesale customers in other countries, including China, the U.S., the U.K., and Canada, certain jurisdictions may claim that we are required to comply with their laws, including even jurisdictions where we have no local entity, employees, or infrastructure.

Regulations regarding Product Quality and Customer Protection

We are subject to laws and regulations, as well as pending legislative and regulatory proposals, regarding product quality and customer protection, which could affect us in jurisdictions in which we sell our products.

In Japan, the Product Liability Act (Act No.85 of July 1, 1994, as amended) and Consumer Contract Act (Act No. 61 of May 12, 2000, as amended) mainly regulate the product quality and customer protection. The Product Liability Act sets forth the liabilities of a manufacturer, processor, or importer for damages caused by defects in a product. A seller who was not involved in the manufacturing, processing, or import of a product could still be liable under this act if its name, trade name, or trademark, etc. was indicated on the product as the manufacturer, processor, or importer, such indications on the product might mislead others into believing that the seller was the manufacturer, processor, or importer, or such indications on the product might be recognized by others as those of the substantial manufacturer, processor, or importer. Liability under this act can be imposed even if the manufacturer, processor, or importer (and the said seller) was not negligent. The Consumer Contract Act invalidates certain provisions in contracts with consumers, such as exemption of compensation for damages to consumers and restrictions of termination by consumers due to the seller’s breach of contract. We comply with these regulations.

In the U.S., we are subject to regulation by the Consumer Product Safety Commission (the “CPSC”) under the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008. These statutes and the related regulations ban from the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The CPSC has the authority to require the recall, repair, replacement, or refund of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances.

In Hong Kong, we are subject to the Sale of Goods Ordinance (Cap. 26), the Consumer Goods Safety Ordinance (Cap. 456), and the Import and Export Ordinance (Cap. 60). These statutes regulate the import and sale of consumer goods in Hong Kong, including the quality, safety, and suitability of products sold under a contract of sale. We comply with these regulations.

Regulations regarding Maintenance of Websites and E-commerce

The Act on Special Provisions to the Civil Code Concerning Electronic Consumer Contracts and Electronic Acceptance Notice (Act No. 95 of June 29, 2001, as amended) and the Act on Specified Commercial Transactions (Act No. 57 of June 4, 1976, as amended) regulate sales of goods through e-commerce within Japan. For example, under these acts, we as a seller must explicitly show prices of products, timing and method of payment, timing of delivery, conditions for return of goods, our name and contact information, and name of representative person, among others. We comply with these regulations.

Labor Laws

There are various labor-related laws in Japan, including the Labor Standards Act (Act No. 49 of April 7, 1947, as amended), the Industrial Safety and Health Act (Act No. 57 of June 8, 1972, as amended), and the Labor Contracts Act (Act No. 128 of December 5, 2007). The Labor Standards Act regulates, among others, minimum standards for working conditions such as working hours, leave period, and leave days. The Industrial Safety and Health Act requires, among others, the implementation of measures to secure employee safety and protect the health of workers in the workplace. The Labor Contracts Act regulates, among others, the change of terms of employment contracts and working rules, and dismissal and disciplinary action. We comply with these regulations.

In Hong Kong, we are subject to labor-related laws such as the Employment Ordinance (Cap. 57), the Employees’ Compensation Ordinance (Cap. 282), the Mandatory Provident Schemes Ordinance (Cap. 485), and the Occupational Safety and Health Ordinance (Cap. 509). These statutes regulate the terms of employment in Hong Kong and set certain workplace health and safety requirements. These statutes also make it compulsory for an employer to purchase insurance coverage for its employees, as well as to participate in and make contributions to its employees’ pension schemes. We comply with these regulations.

Regulations regarding Shipping of Goods

Under the Civil Code (Act No. 89 of April 27, 1896, as amended), our shipping of goods is generally subject to the terms and conditions as agreed with our customers. In addition, as disclosed above, we must specify timing of delivery of goods in accordance with the Act on Specified Commercial Transactions regarding our sales through e-commerce. We comply with these regulations.

Environmental Regulations

There are various environmental-related laws in Japan, including the Air Pollution Control Act (Act No. 97 of June 10, 1968, as amended), Water Pollution Prevention Act (Act No. 138 of December 25, 1970, as amended), Soil Contamination Countermeasures Act (Act No. 53 of May 29, 2002, as amended), and Noise Regulation Act (Act No. 98 of June 10, 1968, as amended). Our business and operation do not include any type of business which are specifically subject to these environmental regulations.

Regulations regarding the Food and Beverage Product Sales

The sale business of food and beverage is subject to the Food Sanitation Act (Act No. 233 of December 24, 1947, as amended). We do not sell or deal with any food or beverage which are subject to the Food Sanitation Act.

Regulations on Advertising

The Premiums and Representations Act (Act No. 134 of May 15, 1962) stipulates the restricted methods and means of various advertisements, representations, and sales promotions, in a broad sense. When we advertise our products, we must provide appropriate information under this act, so as not to mislead our customers. We comply with these regulations.

In Hong Kong, the Trade Description Ordinance (Cap. 362) prohibits the use of false trade descriptions, information, marks, and statements in respect of goods sold during the course of trade. We comply with these regulations.

Regulations on Lease Agreements

Our lease agreements are generally subject to the Civil Code (Act No. 89 of April 27, 1896, as amended) and Act on Land and Building Leases (Act No. 90 of October 4, 1991, as amended). The terms and conditions of our lease agreements are consistent with these laws and are valid and enforceable as provided for in these agreements.

Regulations regarding Protection of Personal Information

We are subject to laws and regulations regarding protection of personal information that we may obtain in the course of retailing or other businesses in Japan and Hong Kong.

In Japan, the Act on the Protection of Personal Information (Act No. 57 of May 30, 2003, as amended) and its related guidelines impose various requirements on businesses, including us, that use databases containing personal information. Under this act, we are required to lawfully use personal information we have obtained within the purposes of use we have specified and take appropriate measures to maintain security of such information. We are also restricted from providing personal information to third parties without obtaining prior consent of the corresponding individual, except for (i) cases based on laws and regulations, (ii) cases in which there is a need to protect a human life, body or fortune, and when it is difficult to obtain a principal’s consent, (iii) cases in which there is a special need to enhance public hygiene or promote fostering healthy children, and when it is difficult to obtain a principal’s consent, or (iv) cases in which there is a need to cooperate in regard to a central government organization or a local government, or a person entrusted by them performing affairs prescribed by laws and regulations, and when there is a possibility that obtaining a principal’s consent would interfere with the performance of the said affairs. Certain types of personal information, such as race, creed, social status, medical history, criminal record, and fact of having suffered damage by a crime, are classified as “special care-required personal information.” We must not obtain such special care-required personal information without the prior consent of the principals, except for any of (i) through (iv) above, or (v) cases in which the special care-required personal information has been disclosed by the principals, a central government organization, or a local government, among others, or (vi) other cases specified by cabinet order as being equivalent to (i) through (v) above. We comply with these regulations.

In Hong Kong, the Personal Data (Privacy) Ordinance (Cap. 486) requires data users who control the collection, retention, or use of personal data to comply with certain data protection principles in respect of the collection, retention, use, and security of such data. The statute also gives data subjects certain rights, such as the right to be informed of whether any data user holds their personal data, the right to be supplied with such data, and the right to request correction of any data they consider to be inaccurate. We comply with these regulations.

Regulations for Securing Safety of Pharmaceuticals and Medical Devices

We are subject to laws and regulations for securing safety of pharmaceuticals and medical devices in Japan and Hong Kong.

In Japan, the Act on Securing Quality, Efficacy, and Safety of Products Including Pharmaceuticals and Medical Devices (Act No. 145 of August 10, 1960, as amended) (the “APMD”) has been enacted to secure the quality, efficacy, and safety of pharmaceuticals and medical devices, to provide the control required for preventing the occurrence or spread of hazards to public health and hygiene caused by the use of such pharmaceuticals and medical devices, to take measures against designated substances, and to improve public health and hygiene by taking necessary measures for the promotion of research and development of pharmaceuticals and medical devices which are especially important for medical practice.

As provided in Article 2 of the APMD, the term “pharmaceuticals” as used in the APMD refers to:

Article 24 of the APMD stipulates that no person other than one who has obtained license for establishing a pharmacy or selling pharmaceuticals shall be engaged in the business of selling, providing, or storing or exhibiting pharmaceuticals for the purpose of the sale or provision thereof. The license for selling pharmaceuticals shall be renewed every six years or otherwise expires. We have duly obtained and maintained such licenses for each of our directly-operated physical stores which sell pharmaceuticals in Japan.

In Hong Kong, the Pharmacy and Poisons Ordinance (Cap. 138) requires the retail sale of pharmaceuticals to be conducted by authorized sellers of poisons at licensed premises under the supervision of registered pharmacists. We have duly obtained and maintained the relevant authorizations and licenses for each of our directly-operated physical stores which sell pharmaceuticals in Hong Kong. We are also subject to the Food and Drugs (Composition and Labelling) Regulations (Cap. 132W) and Undesirable Medical Advertisements Ordinance (Cap. 231), which regulate the composition, advertising, and labelling of pre-packaged food and drugs sold by us. We comply with these regulations.

Regulations regarding Dealers of Secondhand Articles

The Secondhand Articles Dealer Act (Act No. 108 of May 28, 1949, as amended) regulates the dealing of secondhand articles in Japan, aiming to prevent theft and other crimes and to immediately recover damage caused by theft, etc. The act regulates secondhand article business, as defined in Article 2.2, such as purchase, sale, or exchange of secondhand articles, excluding any businesses which only conduct selling of secondhand articles or repurchasing of goods from the buyer. 

According to Article 3 of this act, secondhand article dealers are required to obtain permission from the relevant authority of each region where place(s) of business is/are located. The permission remains in effect until it is revoked by or surrendered to the relevant authority. This permission must be obtained for each store, but permissions for two or more stores can be applied by one application. We do not deal with secondhand articles and it is not necessary for us to obtain and maintain this permission; but we have nevertheless obtained and maintained such permission. 

Regulations for Liquor Retailing

Our shops sell liquor in Japan and Hong Kong, and we are subject to laws and regulations for liquor retailing.

In Japan, the Liquor Tax Act (Act No.6 of February 28, 1953, as amended) imposes tax on liquor and stipulates tax thresholds and tax rates according to types of liquor, etc. In order to operate business of selling liquor, the operator shall, pursuant to Article 9 of this act, obtain license for selling liquor. The license remains in effect until it is revoked by the relevant governmental authority. We have duly obtained and maintain such licenses for each of our directly-operated physical stores which sell liquor in Japan. We are prohibited from selling liquor to minors (under 20 years old) under Minor Drinking Prohibition Act (Act No. 20 of March 30, 1922, as amended), and must check the ID of customers if they appear to be under 20 years old.

In Hong Kong, we do not require a license for the retail sale of liquor for off-premises consumption. However, the Dutiable Commodities (Liquor) Regulations (Cap. 109B) prohibits the supply or sale of beverages containing more than 1.2% ethyl alcohol by volume to a minor in the course of business, and requires premises supplying or selling such liquor to display appropriate signage at a prominent location. We comply with these regulations.

Regulations for Operating Tax-free Shops

We are subject to laws and regulations regarding the operation of tax-free shops in Japan.

The Consumption Tax Act (Act No.108 of December 30, 1988, as amended) provides for a multi-step, broad-based tax imposed on most transactions in goods and services in Japan. Consumption tax is assessed at each stage of the manufacturing, importing, wholesale, and retail process. The current consumption tax rate is generally 10%, with an 8% rate applying to a limited number of exceptions. 

Under the Consumption Tax Act, each shop may sell goods to non-residents who intend to export such goods, if such shop obtains a permission from the relevant tax authority. Each of our directly-operated physical stores in Japan has duly obtained and maintained such permission.

Regulations for Cross-Border E-Commerce in China

We are subject to laws and regulations regarding cross-border e-commerce in China. According to the E-Commerce Law of the PRC, the Notice on Improving the Relevant Work on the Administration of Cross-border E-commerce Retail Imports, the Announcement on Regulatory Matters Relating to Cross-border E-commerce Retail Imports and Exports, and other relevant PRC laws and regulations, we are deemed a cross-border e-commerce enterprise. As a result, we are required to assume the responsibilities regarding product quality and safety, and responsibilities relating to the protection of consumer rights, including but not limited to product information disclosure, product return services, a recall system for substandard or defective products, and compensation for infringement of consumer rights for product liability. These regulations further require us to entrust a Chinese enterprise with the relevant registration with the PRC customs and timely and truthful customs declarations, which Chinese enterprise is required to accept supervision by relevant authorities and bear joint and several civil liability with us. We have entrusted such Chinese enterprise and, to our knowledge, as of the date of this annual report, we and such Chinese enterprise have complied with such requirements.

C. Organizational Structure

See “—A. History and Development of the Company.”

D. Property, Plants and Equipment

See “—B. Business Overview—Facilities.”

Item 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report. This report contains forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

Key Financial Performance Indicators

We consider a variety of financial and operating measures in assessing the performance of our business. The key financial performance measures we use are revenue, gross profit and gross margin, operating expenses, and operating income.

Revenue

Our net revenue is derived primarily from retail and wholesale of Japanese beauty and health products, luxury and electronic products, as well as sundry and other products. Luxury products include primarily branded watches, perfume, handbags, clothes and jewelry, etc. Electronic products include primarily entertainment gaming products, such as Nintendo Switch, Xbox Series, etc. Sundry products include primarily home goods, such as bedding and bath products, home décor, dining and tabletop items, storage containers, car supplies, cleaning agents, and laundry supplies. It also includes spa supplies, clothing, formula milk, and diapers. Other products and services include primarily food, such as soft drinks, packaged snacks, tea and coffee, fruit juice, mineral water, and alcoholic beverages, cigarettes, and pet food. It also includes revenue from advertising services through key opinion leaders (“KOLs”). We have experienced growth since our inception, which we believe is a result of our focus on maintaining the quality of our products and customer services. Growth of our revenue is primarily driven by expanding our distribution network, both in Japan and overseas, as well as extending our product offerings. Revenue is impacted by competition, current economic conditions, pricing, inflation, product mix and availability, promotional and competitive activities, and the spending habits of our customers. Our product offerings across diverse product categories support growth in revenue by attracting new customers and encouraging repeat visits from our existing customers to our physical and online stores.

Gross Profit and Gross Margin

Gross profit is the difference between revenue and cost of revenue. Our cost of revenue consists primarily of the costs of merchandise products. Supplies and prices of our merchandise products can be affected by a variety of factors, including seasonal fluctuations, demand, politics, and economic conditions. We may not be able to increase prices to cover increased costs due to an increase in the prices of merchandise products from our suppliers, which would have an adverse effect on our operating results and profitability. In order to negotiate more favorable prices on merchandise products, we work closely with our top suppliers, especially cosmetics and pharmaceutical companies, to strengthen our relationships with them. For the same product, the price from a cosmetics or pharmaceutical company is generally 5% to 8% lower than that from a distributor. Cosmetics and pharmaceutical companies in Japan typically do not limit the number of distributors that may directly source from them or impose requirements, such as those for volume or geographic areas, on these distributors. As a result, we aim to directly source products from major cosmetics and pharmaceutical companies so as to get lower prices. We also seek to cooperate with other distributors who directly source products from cosmetics and pharmaceutical companies, as well as luxury and electronic providers who do not have an established relationship with us. We believe our cooperation with these distributors allows us to expand our product offerings and procure products manufactured by cosmetics and pharmaceutical companies without an established relationship with us.

Gross margin is gross profit divided by revenue. Gross margin is a measure used by management to indicate whether we are selling our products at an appropriate gross profit. Our gross margin is impacted by the prices of our products, product mix, availability, and discounts offered, as some products generally provide higher gross margins, and by our merchandise costs, which may vary. We offer competitive pricing to attract and retain customers. Prices are set either by our suppliers or by us with reference to major online and offline competitors, taking into account our overall pricing strategy for different categories. We typically evaluate the profitability of our products every three months.

Operating Expenses

Our operating expenses consist of selling and marketing expenses and general and administrative expenses, which primarily include payroll and employee benefit expenses and bonus expenses, shipping expenses, promotion and advertising expenses, and other facility-related costs, such as store rent, utilities, and depreciation.

Operating expenses generally increase as we grow our store base and invest in corporate infrastructure. We have made investments in talent acquisition and infrastructure over the past six years which have resulted in higher operating expenses. Despite the decreased operating expenses during the fiscal year ended March 31, 2024 as compared to the same period last year, as discussed in detail below, our operating expenses are expected to continue increasing in the future as we invest to open new stores both in Japan and overseas, expand our distribution and logistics capacity, drive greater brand awareness, attract new customers, and increase our market penetration. To support our growth, we will continue to increase headcount, particularly in the sales and logistics related positions. This increase in headcount will drive higher payroll and employee-related expenses. Overall, we expect our operating expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company.

Operating Income

Operating income is the difference between gross profit and operating expenses. Operating income excludes other income (expense), and income tax expenses. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

A. Operating Results

Comparison of Results of Operations for the Fiscal Years Ended March 31, 2024 and 2023

The following table summarizes the results of our operations during the fiscal years ended March 31, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such fiscal years.

Revenue

We generated revenue primarily from: (i) directly-operated physical stores in Japan, Hong Kong and others, (ii) online stores through our websites and various e-commerce marketplaces in Japan, China, and Korea, as well as services income from advertising business through key opinion leaders (“KOLs”), and (iii) franchise stores in Japan, the U.S., Canada, and the U.K., and wholesale customers in Japan and other countries, including China, the U.S., and Canada.

Our total revenue increased by $25,956,969, or 15.3%, from $169,724,346 for the fiscal year ended March 31, 2023 to $195,681,315 for the fiscal year ended March 31, 2024. The increase in our revenue consists of increased revenue from directly-operated physical stores and franchise stores and wholesale customers, which was partially offset by the decreased revenue from online stores and services. Revenue generated from companies located in Japan accounted for 77.8% and 88.2% of our total revenue for the fiscal years ended March 31, 2024 and 2023, respectively. Revenue generated from companies located in Hong Kong and others accounted for 22.2% and 11.8% of our total revenue for the fiscal years ended March 31, 2024 and 2023, respectively.

The following table sets forth the breakdown of our revenue for the fiscal years ended March 31, 2024 and 2023, respectively:

Revenue from directly-operated physical stores increased by $3,345,772, or 28.8%, to $14,951,952 for the fiscal year ended March 31, 2024, from $11,606,180 for the fiscal year ended March 31, 2023. During the fiscal year ended March 31, 2024, the Company started to offer luxury products, which contributed a significant portion of increased directly-operated physical store sales in the fiscal year ended March 31, 2024. The increase in directly-operated physical stores sales was also due to revenue contributed from our newly-opened physical stores in the United States and Canada, which was partially offset by the decreased revenue as a result of the transformation of four physical stores in Japan during the fiscal year ended March 31, 2024. The transformation of the physical stores in Japan was due to the fact that these stores had underperformed and we transformed these stores into franchise stores to improve our cash flow and working capital. After the change, these physical stores purchased products from us like other franchise stores, and hence this portion of revenue was recorded under franchise stores and wholesale customers.

Revenue from online stores and services decreased by $9,994,563, or 48.3%, to $10,705,449 for the fiscal year ended March 31, 2024, from $20,700,012 for the fiscal year ended March 31, 2023. Revenue from online stores and services for the fiscal year ended March 31, 2024 consists of revenue from online stores in Japan as well as KOLs services income. The decrease was mainly due to the significant decrease in revenue from online stores and services revenue generated by our online stores in China during the fiscal year ended March 31, 2024 as compared to the same period last year resulted from a shift in our business strategy since August 2022. Instead of operating the online stores by ourselves, we entrusted the entire operations of all our online stores in China to third-party companies to minimize the operating risk. After the change, these third-party companies purchased products from us like other wholesale customers, and hence this portion of revenue was recorded under franchise stores and wholesale customers.

Revenue from franchise stores and wholesale customers increased by $32,605,760, or 23.7%, from $137,418,154 for the fiscal year ended March 31, 2023 to $170,023,914 for the fiscal year ended March 31, 2024. The increase was mainly due to expansion of products offering as we started to offer luxury products and electronic products that have higher unit selling prices. In addition, the increase was also due to the increased revenue generated from franchise stores which previously was recognized under physical stores as mentioned above, as well as the increased revenue from the new wholesale customers with whom we entered into business relationships during the fiscal year ended March 31, 2024. The increase was partially offset by the decreased sales of beauty products to wholesales customers as the demand for Japanese beauty products declined in China market.

Cost of Revenue

The following table sets forth the breakdown of our cost of revenue for the fiscal years ended March 31, 2024 and 2023, respectively:

Cost of revenue from directly-operated physical stores increased by $3,033,711, or 34.2%, from $8,882,991 for the fiscal year ended March 31, 2023 to $11,916,702 for the fiscal year ended March 31, 2024. The percentage increase in cost of revenue was more than the percentage increase in revenue, as discussed in greater detail below.

Cost of revenue from online stores and services decreased by $8,301,176, or 51.2%, from $16,221,524 for the fiscal year ended March 31, 2023 to $7,920,348 for the fiscal year ended March 31, 2024. The percentage decrease in cost of revenue was more than the percentage decrease in revenue, as discussed in greater detail below.

Cost of revenue from franchise stores and wholesale customers increased by $37,280,354, or 32.4%, from $115,188,904 for the fiscal year ended March 31, 2023 to $152,469,258 for the fiscal year ended March 31, 2024. The percentage increase in cost of revenue was more than the percentage increase in revenue, as discussed in greater detail below.

Gross Profit and Gross Margin