Yoshitsu (TKLF) F-1/ARegistration statement (foreign) (amended)

As filed with the Securities and Exchange Commission on October 27, 2021

Registration No. 333-259129

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2

TO

FORM F-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

Yoshitsu Boueki Kabushiki Kaisha

(Exact name of registrant as specified in its charter)

Yoshitsu Co., Ltd

(Translation of Registrant’s name into English)

Harumi Building, 2-5-9 Kotobashi,

Sumida-ku, Tokyo, 130-0022

Japan

+81356250668

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

800-221-0102

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With a Copy to:

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

CALCULATION OF REGISTRATION FEE

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 27, 2021

YOSHITSU CO., LTD

6,000,000 American Depositary Shares

Representing 6,000,000 Ordinary Shares

This is an initial public offering of American depositary shares (“ADSs”) representing our ordinary shares (“Ordinary Shares”). We are offering 6,000,000 ADSs and each ADS represents one Ordinary Share. Prior to this offering, there has been no public market for ADSs or our Ordinary Shares. We expect the initial public offering price of the ADSs to be in the range of $4.00 to $6.00 per ADS.

We have applied to list the ADSs on the Nasdaq Capital Market under the symbol “TKLF.” It is a condition to the closing of this offering that the ADSs qualify for listing on a national securities exchange.

Investing in the ADSs involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 7 to read about factors you should consider before buying the ADSs.

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements. Please read the disclosures beginning on page 4 of this prospectus for more information.

Following the completion of this offering, our largest shareholder will beneficially own approximately 75.91% of the aggregate voting power of our issued and outstanding Ordinary Shares assuming no exercise of the underwriters’ over-allotment option, or approximately 74.06% assuming full exercise of the underwriters’ over-allotment option. As such, we will be deemed a “controlled company” under Nasdaq Listing Rule 5615(c). However, even if we are deemed a “controlled company,” we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the Nasdaq Listing Rules. See “Risk Factors” and “Management—Controlled Company.”

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about       , 2021.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Prospectus dated          , 2021 

TABLE OF CONTENTS

About this Prospectus

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. The information contained in this prospectus is current only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, and prospects may have changed since that date.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.

In this prospectus, we refer to assets, obligations, commitments, and liabilities in our consolidated financial statements in U.S. dollars. These dollar references are based on the exchange rate of Japanese yen to U.S. 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 U.S. dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

RISK FACTORS

An investment in the ADSs involves a high degree of risk. Before deciding whether to invest in the ADSs, you should consider carefully the risks described below, together with all of the other information set forth in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected, which could cause the trading price of the ADSs to decline, resulting in a loss of all or part of your investment. The risks described below and discussed in other parts of this prospectus are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business. You should only consider investing in the ADSs if you can bear the risk of loss of your entire investment.

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, 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 other products. See “Business—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 “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 the date of this prospectus, we had approximately $68.5 million in short-term borrowings outstanding. As of March 31, 2021, we had approximately $65.1 million in short-term borrowings outstanding. As the date of this prospectus, we repaid $6.2 million and renewed $58.9 million of our short-term borrowings outstanding as of March 31, 2021 upon their maturity. As of March 31, 2020, we had approximately $58.6 million in short-term borrowings outstanding. As the date of this prospectus, we repaid all of our outstanding $58.6 million short-term borrowings as of March 31, 2020 upon their maturity. As of the date of this prospectus, we have secured an aggregate amount of $68.5 million short-term borrowings as working capital for six months to one year. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experience and outstanding credit history. However, we cannot assure you that we will be able to renew these loans in the future as they mature. If we are unable to renew these bank loans in the future, our liquidity position would be adversely affected, and we may be required to seek more expensive sources of short-term or long-term funding to finance our operations.

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

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

As of the date of this prospectus, we had approximately $68.5 million in short-term borrowings and $23.4 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 recent COVID-19 outbreak has spread throughout the world. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, which has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.

The COVID-19 pandemic has materially and adversely affected the business operations and operating results of our directly-operated physical stores and wholesale operations in Japan. Our revenue generated from our directly-operated physical stores in Japan decreased by approximately $6.9 million, or 65%, during the three months ended June 30, 2021, as compared to the same period last year, although our overall revenue increased by approximately $16.8 million, or 38%, during the same period due to an increase in revenue from online stores and franchise stores and wholesale customers. Our revenue attributable to our directly-operated physical stores and wholesale customers in Japan decreased by approximately $18.5 million, or 38%, during the fiscal year ended March 31, 2021, as compared to the previous fiscal year, although our overall revenue increased during the same fiscal year due to an increase in revenue from online stores and overseas franchise stores and wholesale customers. During the three months ended June 30, 2021 and the fiscal year ended March 31, 2021, we did not open any new directly-operated physical stores and closed a franchise store in the U.S. and a franchise store in Hong Kong due to the impact of the COVID-19 pandemic. In addition, the construction of our new distribution center in Koshigaya, Japan was delayed until September 2021. Construction has since been completed and the distribution center is in use as of the date of this prospectus. For more additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Affecting Our Results of Operations.”

As of the date of this prospectus, the daily life of Japanese residents is largely back to its normal state, but the COVID-19 pandemic in Japan is still not completely under control. In addition, since the Japanese government has imposed border enforcement measures to control the spread of COVID-19, such as denial of entry to Japan for certain foreign nationals, strengthened quarantine measures, suspension of visa validity, and suspension of visa exemption measures, Japan’s tourism industry is still negatively affected. The COVID-19 pandemic in many other countries, including the United States and Canada, is still not under control and there have been business closures and a substantial reduction in economic activity in these countries. Although there are vaccines for COVID-19 that have been approved for use, distribution of the vaccines did not begin until late 2020, and, due to logistical and manufacturing challenges which have delayed the production and administration of the vaccines, a majority of the public in the markets in which our products are currently sold will likely not be fully vaccinated until late 2021 or later. Additionally, new strains of COVID-19 are surfacing, and the effectiveness of the approved vaccines on these new strains is unknown. As a result, the extent to which the COVID-19 outbreak impacts our results of operations in fiscal year 2022 will depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable.

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. We opened three new directly-operated physical stores and 10 new online stores, and added four new franchise stores during the fiscal year ended March 31, 2020. During the fiscal year ended March 31, 2021, we added a franchise store in Canada, but we did not open any new directly-operated physical store and closed a franchise store in the U.S. and a franchise store in Hong Kong due to the impact of the COVID-19 pandemic. 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 and a distribution center, and own the premises of our new distribution center that was completed in September 2021. 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 and a distribution center, and own the premises of our new distribution center that was completed in September 2021. 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 June 30, 2021, we had one franchisee operating nine franchise stores in the U.S., one operating six franchise stores in Canada, one operating two franchise stores in Hong Kong, and one operating one franchise store in the U.K. Franchisees are independent operators, and their employees are not our employees. We license certain trademarks, such as “東京生活館” and “REIWATAKIYA,” and sell our products to the franchisees, but 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 four 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 four franchisees and if any of them terminate their trademark license 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 four existing franchisees. As of June 30, 2021, we had one franchisee operating nine franchise stores in the U.S., one operating six franchise stores in Canada, one operating two franchise stores in Hong Kong, and one operating one franchise store in the U.K. Our trademark license agreements with these franchisees have a term of one year 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 four franchisees terminate their trademark license 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, 2021 and 2020, our product sales attributable to these brands accounted for approximately 65.35% and 49.63% 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, 2021, two suppliers accounted for approximately 34.9% and 28.2% of our total purchases, respectively. During the fiscal year ended March 31, 2020, four suppliers accounted for approximately 25.9%, 17.1%, 15.3%, and 13.4% 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 online stores. We plan to open a new distribution center in the U.S. in 2022 or 2023 to support and replenish inventory at our franchise stores in the U.S. and Canada. See “Business—Our Growth Strategies—Enhancing Our Technology Platform and Infrastructure.” If we are unable to successfully implement the expansion of our distribution infrastructure or upgrade of our information systems, the efficient flow of our merchandise could be disrupted. In order to support our recent and expected future growth and to maintain the efficient operation of our business, additional distribution centers may need to be added in the future. Our failure to expand our distribution capacity on a timely basis to keep pace with our anticipated growth in stores could have a material adverse effect on our business, financial condition, and results of operations.

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

Our directly-operated physical stores, online stores, and sales to our franchise stores and wholesale customers are supported by our two distribution centers located near our headquarters in Tokyo. This dependence on a small number of distribution centers, combined with the fact that we are a retailer and wholesaler carrying approximately 12,400 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 September 2021. As part of this planned expansion of our information systems, we have modified our warehouse management system to support our new distribution center. 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 new distribution center, 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 $3,680,768 and $1,328,269 in promotion and advertising expenses during the fiscal years ended March 31, 2021 and 2020, respectively. Marketing approaches and tools in the beauty and health products markets in Japan, China, Canada, 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.

Our directly-operated physical stores are all located in Japan, and our current business and future growth could be materially and adversely affected if we experience a decline in customers in Japan.

Our directly-operated physical stores are all located in Japan. We also have the broadest product offerings in our Japanese physical stores, and generated 19.3% and 39.8% of our revenue in Japan during the fiscal years ended March 31, 2021 and 2020, respectively. We expect to continue to derive a substantial portion of our revenue from Japan in the near future. Our current business and future growth could be materially and adversely affected if we experience a decline in consumer sales or customer engagement in Japan.

Due to the importance of the Japanese market to our business, we are also subject to macroeconomic risks specific to Japan. See “—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.”

Sales to the China market represented approximately 77.0% and 55.4% of our revenue for the fiscal years ended March 31, 2021 and 2020, 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, 2021 and 2020, sales to the China market accounted for approximately 77.0% and 55.4% of our revenue, respectively. We expect such sales to continue to comprise a significant part of our revenue going forward. As a result, any unforeseen events or circumstances that negatively impact our ability to sell our products to customers based in China would materially and adversely affect our results of operations and financial condition. These negative events and circumstances include, but may not be limited to, the following:

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 Yoshihide Suga and the former administration of Prime Minister Shinzo Abe have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, the occurrence of pandemics, such as the COVID-19 pandemic, the occurrence of large-scale natural disasters, such as the March 2011 Great East Japan Earthquake and the related Fukushima Daiichi nuclear disaster, as well as an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.

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 (the “Cybersecurity Review Measures”), 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 (the “Draft”), 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 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 will become effective on November 1, 2021. The PIPL applies to the activities of processing the personal information of natural persons inside China that are carried out outside China “for the purpose of providing products or services to natural persons inside China,” or those constituting “analysis or evaluation of the behaviors of natural persons 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.

Our PRC legal counsel, GFE Law Office, has advised us based on their understanding of the Cybersecurity Review Measures, the Draft, the PIPL, and other current PRC law, rules, and regulations that 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. As a result of the foregoing and according to our PRC counsel, (i) we are not subject to the cybersecurity review as required by the Draft and (ii) we have not engaged in activities of processing personal information of natural persons inside China or those constituting analysis or evaluation of the behaviors of natural persons inside China. Therefore, we will not be subject to the PIPL upon its effectiveness.

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 Cybersecurity Review Measures, the Draft, 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 the Draft or the PIPL upon its effectiveness, 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 10 new franchise stores in the U.S., Canada, Hong Kong, Australia, New Zealand, and the U.K. during the next five 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 hire third-party e-commerce marketplace operators to operate our online stores and depend on online customer service representatives from these third-party e-commerce marketplace operators to provide live assistance to our online customers 24 hours a day, seven days a week. We used approximately 18 customer service representatives from third-party e-commerce marketplace operators as of March 31, 2021. If these 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 our customer service may harm our brand and reputation and in turn cause us to lose customers and market share.

As a result, if we 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. In addition, such regulations are subject to change from time to time. See “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. 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 beauty and other 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, 2021 and 2020, 80.7% and 60.2%, respectively, of our revenue was derived from markets outside of Japan. We expect that an increasing portion of our revenue and expenses in the future will be denominated in currencies other than the Japanese yen. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies in which we conduct our business.

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

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

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

Risks Relating to this Offering and the Trading Market

An active trading market for our Ordinary Shares or the ADSs may not develop. 

We have applied to list the ADSs on the Nasdaq Capital Market. We have no current intention to seek a listing for our Ordinary Shares on any other stock exchange. Prior to this offering, there has not been a public market for the ADSs or our Ordinary Shares, and we cannot assure you that an active public market for the ADSs will develop or be sustained after this offering. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected.

You will experience immediate and substantial dilution in the net tangible book value of ADSs purchased.

The initial public offering price of the ADSs is substantially higher than the pro forma net tangible book value per ADS of the ADSs. Consequently, when you purchase the ADSs in the offering, upon completion of the offering you will incur immediate dilution of $3.58 per ADS, assuming an initial public offering price of $5.00, which is the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus. See “Dilution.” In addition, you may experience further dilution to the extent that additional ADSs are issued upon exercise of outstanding options we may grant from time to time.

After the completion of this offering, share ownership will remain concentrated in the hands of our principal shareholders and management, who will continue to be able to exercise a direct or indirect controlling influence on us.

We anticipate that our directors, senior management, and current five percent or greater shareholders will together beneficially own approximately 81.67% of our Ordinary Shares issued and outstanding after the completion of this offering, assuming the underwriters do not exercise their over-allotment option and excluding shares issuable upon exercise of unexercised options or the Representative’s Warrants, or 79.67% assuming the underwriters exercise their over-allotment option in full. As a result, these shareholders, acting together, will have significant influence over all matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other shareholders, including those who purchase ADSs in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our Company that other shareholders may view as beneficial.

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 after the completion of this offering, 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. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and Ordinary Shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. As of the date of this prospectus, 30,000,054 of our Ordinary Shares are issued and outstanding. There will be 6,000,000 ADSs (representing 6,000,000 Ordinary Shares) issued and outstanding immediately following the consummation of this offering, assuming no exercise of the underwriters’ over-allotment option or the Representative’s Warrants, or 6,900,000 ADSs (representing 6,900,000 Ordinary Shares) if the underwriters exercise their over-allotment option in full. In connection with this offering, our directors and senior management, and our shareholders owning 5% or more of our Ordinary Shares have agreed not to sell any Ordinary Shares, ADSs, or similar securities for six months after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”). 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. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

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, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for the ADSs will be determined through negotiations between the underwriters and us and may vary from the market price of the ADSs following our initial public offering. If you purchase the ADSs in our initial public offering, you may not be able to resell those ADSs at or above the initial public offering price. We cannot assure you that the initial public offering price of the ADSs, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our Ordinary Shares that have occurred from time to time prior to our initial public offering. The market price of the ADSs may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

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.

Prior to this offering, we have been 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 years ended March 31, 2021 and 2020, we and our independent registered public accounting firm 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 was a lack of internal accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements. Following the identification of the material weaknesses and control deficiencies, we plan to continue 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; (iii) setting up an internal audit function as well as engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control; and (iv) appointing independent directors and strengthening our corporate governance. 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.

Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending March 31, 2022. In addition, once we cease to be an “emerging growth company,” as such term is defined in the JOBS Act, 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.

We will incur substantial increased costs as a result of being a public company.

Upon consummation of this offering, we will incur significant legal, accounting, and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies.

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as senior management.

We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of the ADSs that is held by non-affiliates exceeds $700 million as of the prior September 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we will be required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.

We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

As a foreign private issuer, we intend to follow home country practice even though we will be considered a “controlled company” under Nasdaq corporate governance rules, which could adversely affect our public shareholders.

Following this offering, our largest shareholder will continue to own 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 intend to follow home country practice as permitted by Nasdaq rather than rely on the “controlled company” exception to the corporate governance rules. See “—Because we are a foreign private issuer and intend to take advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.” Accordingly, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

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 after this offering 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 after this offering 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.

Our management has broad discretion to determine how to use the net proceeds raised in this offering and may use them in ways that may not enhance our results of operations or the price of the ADSs.

We anticipate that we will use the net proceeds from this offering to open new directly-operated physical stores and add franchise stores, for brand marketing, to improve our distribution centers and logistic systems, and for talent acquisition and retention. Our management will have significant discretion as to the use of the net proceeds to us from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the market price of the ADSs.

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

Our 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.

Holders of ADSs have fewer rights than shareholders under Japanese law, and their voting rights are limited by the terms of the deposit agreement.

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. Because the depositary, through its custodian agents, is the record holder of our Ordinary Shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. 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 voting rights with respect to deposited Ordinary Shares only in accordance with the provisions of the deposit agreement. If we ask the depositary to solicit voting instructions, upon receipt of voting instructions from them 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 ADS holders. The depositary and its agents may not be able to send information materials to holders of ADSs 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.

By agreeing to the provisions of the deposit agreement, you will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

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 law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our Ordinary Shares, the ADSs, or the deposit agreement, which may include any claim under the U.S. federal securities laws.

If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. We believe, however, that a contractual pre-dispute jury trial waiver provision is generally enforceable, including 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, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently, and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging 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 result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action. Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation, or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs (including purchasers of our ADSs in the secondary market) or by us or the depositary of compliance with any substantive provision of the 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.

The depositary of the ADSs 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. 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 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 material 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 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 into U.S. dollars, subject to certain conditions. 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 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.

We expect to qualify as a foreign private issuer upon the completion of this offering. As a foreign private issuer, we will be exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our senior management, directors, and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be 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 will not be required to disclose in our periodic reports all of the information that United States domestic issuers are required to disclose. While we currently expect to qualify as a foreign private issuer immediately following the completion of this offering, 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 intend to take advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would have if we were a domestic issuer.

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 intend to follow 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 and a compensation committee and a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. Consistent with corporate governance practices in Japan, we have a three-member board of corporate auditors instead of an audit committee and we do not have a standalone compensation committee or nomination and corporate governance committee of our board. As a result of these exemptions, investors would have less protection than they would have if we were a domestic issuer. Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq listing rules in determining whether shareholder approval is required on such matters.

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

We have applied to list the ADSs on Nasdaq upon consummation of this offering. We cannot assure you that we will be able to meet those initial listing requirements at that time. Even if the ADSs are listed on Nasdaq, we cannot assure you that the ADSs will continue to be listed on Nasdaq.

In addition, following this offering, in order to maintain our listing on Nasdaq, we will be required to comply with certain rules of Nasdaq, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of publicly held shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable rules of Nasdaq, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy Nasdaq criteria for maintaining our listing, the ADSs could be subject to delisting.

If Nasdaq does not list the ADSs, or 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 if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this 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. See “Implications of Our Being an ‘Emerging Growth Company.’”

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.

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2021 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 “Material Income Tax Consideration—United States Federal Income Taxation—Passive Foreign Investment Company.”

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.

We may be subject to securities litigation, which is expensive and could divert management’s attention.

The market price of the ADSs may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events, all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statements are likely to address our growth strategy, financial results and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

We describe certain material risks, uncertainties, and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Industry Data and Forecasts

This prospectus contains data related to the beauty and health products industry. This industry data includes projections that are based on a number of assumptions which have been derived from industry and government sources which we believe to be reasonable. The beauty and health products industry may not grow at the rate projected by industry data, or at all. The failure of the industry to grow as anticipated is likely to have a material adverse effect on our business and the market price of the ADSs. In addition, the rapidly changing nature of the beauty and health products industry subjects any projections or estimates relating to the growth prospects or future condition of our industry to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the industry data turns out to be incorrect, actual results may, and are likely to, differ from the projections based on these assumptions.

ENFORCEABILITY OF CIVIL LIABILITIES

We are a stock company organized under Japanese law. All of our directors and our corporate auditors reside in Japan and significantly all of our assets and the assets of such persons are located outside of the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Cogency Global Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Soga Law Office, our counsel with respect to the laws of Japan, has advised us that there is uncertainty as to whether the courts of Japan would (i) recognize or enforce judgments of United States courts obtained against us or our directors or senior management predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in Japan against us or our directors or senior management predicated upon the securities laws of the United States.

USE OF PROCEEDS

Based upon an assumed initial public offering price of $5.00 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering, after deducting the estimated underwriting discounts and the estimated offering expenses payable by us, of approximately $25,922,318, assuming the underwriters do not exercise their over-allotment option, and $30,062,318 if the underwriters exercise their over-allotment option in full.

We plan to use the net proceeds we receive from this offering for the following purposes:

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have flexibility and discretion to apply the net proceeds of this offering. See “Risk Factors—Risks Relating to this Offering and the Trading Market—Our management has broad discretion to determine how to use the net proceeds raised in this offering and may use them in ways that may not enhance our results of operations or the price of the ADSs.” To the extent that the net proceeds we receive from this offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.

DIVIDEND POLICY

Since our inception, we have not declared or paid cash dividends on our Ordinary Shares. Any decision to pay dividends in the future will be subject to a number of factors, including our financial condition, results of operations, the level of our retained earnings, capital demands, general business conditions, and other factors our board of directors may deem relevant. We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the operation, development, and growth of our business, and, as a result, we do not expect to pay any dividends in the foreseeable future. Consequently, we cannot give any assurance that any dividends may be declared and paid in the future.

If declared, holders of our outstanding shares on a dividend record date will be entitled to the full dividend declared without regard to the date of issuance of the shares or any subsequent transfer of the shares. Payment of declared annual dividends in respect of a particular year, if any, will be made in the following year after approval by our shareholders at the annual general meeting of shareholders, subject to certain provisions of our articles of incorporation and the Companies Act. See “Description of Share Capital—Restriction on Distribution of Surplus.”

Subject to the terms of the deposit agreement for the ADSs, you will be entitled to receive dividends on our Ordinary Shares represented by ADSs to the same extent as the holders of our Ordinary Shares, less the fees and expenses payable under the deposit agreement in respect of, and any Japanese tax applicable to, such dividends. See “Material Income Tax Consideration—Japanese Taxation” and “Description of American Depositary Shares.” The depositary will generally convert the Japanese yen it receives into U.S. dollars and distribute the U.S. dollar amounts to holders of ADSs. Cash dividends on our Ordinary Shares, if any, will be paid in Japanese yen.

EXCHANGE RATE INFORMATION

We maintain our books and record in our local currency, JPY. Transactions denominated in currencies other than JPY are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than JPY are translated into JPY using the applicable exchange rates at the balance sheet dates. Revenue and expenses are translated at the average rates prevailing during the period. Shareholders’ equity is translated at the historical exchange rate at the time of transaction. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.

The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this prospectus:

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2021:

You should read this capitalization table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase (decrease) each of total shareholders’ equity and total capitalization by $5.5 million if the underwriters’ over-allotment option is not exercised, or $6.3 million if the underwriters’ over-allotment option is exercised in full, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated expenses payable by us. An increase (decrease) of 1,000,000 ADSs in the number of ADSs offered by us would increase (decrease) each of total shareholders’ equity and total capitalization by $4.6 million if the underwriters’ over-allotment option is not exercised, or $5.3 million if the underwriters’ over-allotment option is exercised in full, based on an assumed initial public offering price of $5.00 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated expenses payable by us.

DILUTION

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to (i) share issuances to Mr. Mei Kanayama and Mr. Yingjia Yang on October 22, 2020 and (ii) a forward split of our outstanding Ordinary Shares at a ratio of 294-for-1 approved by our board of directors on August 18, 2021 and became effective on the same day.

If you invest in the ADSs, your interest will be diluted for each ADS you purchase to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Ordinary Share is substantially in excess of the net tangible book value per Ordinary Share attributable to the existing shareholders for our presently outstanding Ordinary Shares.

Our net tangible book value as of March 31, 2021 was $21,520,187, or $0.79 per Ordinary Share as of that date and $0.79 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per Ordinary Share, after giving effect to the additional proceeds we will receive from this offering, from the assumed initial public offering price of $5.0 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us.

After giving effect to our sale of 6,000,000 ADSs offered in this offering based on the assumed initial public offering price of $5.00 per ADS after deduction of the estimated underwriting discounts and the estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2021, would have been $47,442,505, or $1.42 per Ordinary Share and $1.42 per ADS. This represents an immediate increase in net tangible book value of $0.63 per Ordinary Share and $0.63 per ADS to the existing shareholders, and an immediate dilution in net tangible book value of $3.58 per Ordinary Share and $3.58 per ADS to investors purchasing ADSs in this offering. The as adjusted information discussed above is illustrative only.

A $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per ADS would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by $5,520,000, the pro forma as adjusted net tangible book value per Ordinary Share and per ADS after giving effect to this offering by $0.17 per Ordinary Share and $0.17 per ADS, and the dilution in pro forma as adjusted net tangible book value per Ordinary Share and per ADS to new investors in this offering by $0.83 per Ordinary Share and $0.83 per ADS, assuming no change to the number of ADSs offered by us as set forth on the front cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us.

An increase (decrease) of 1,000,000 ADSs in the number of ADSs offered by us would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by $4,600,000, increase (decrease) the pro forma as adjusted net tangible book value per Ordinary Share and per ADS after giving effect to this offering by $0.10 per Ordinary Share and $0.10 per ADS, and decrease (increase) the dilution in pro forma as adjusted net tangible book value per Ordinary Share and per ADS to new investors in this offering by $0.10 per Ordinary Share and $0.10 per ADS, based on an assumed initial public offering price of $5.00 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us.

The following tables illustrate such dilution: 

The following tables summarize, on a pro forma as adjusted basis as of March 31, 2021, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares (in the form of ADSs) purchased from us, the total consideration paid and the average price per Ordinary Share before deducting the estimated underwriting discounts and the estimated offering expenses payable by us.

The pro forma as adjusted information as discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our Ordinary Shares and other terms of this offering determined at the pricing.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to (i) share issuances to Mr. Mei Kanayama and Mr. Yingjia Yang on October 22, 2020 and (ii) a forward split of our outstanding Ordinary Shares at a ratio of 294-for-1 approved by our board of directors on August 18, 2021 and became effective on the same day.

Overview

Headquartered in Tokyo, we are a retailer and wholesaler of Japanese beauty and health products, as well as other products. We offer approximately 12,400 SKUs of beauty products, including cosmetics, skin care, fragrance, and body care, among others, 3,600 SKUs of health products, including OTC drugs, nutritional supplements, and medical supplies and devices, and 7,900 SKUs of other products, including lingerie, home goods, 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 and opened three new directly-operated physical stores and 10 new online stores, added four franchise stores, and developed 29 new wholesale customers during the fiscal year ended March 31, 2020; we opened five new online stores, added a franchise store in Canada, and developed 30 new wholesale customers during the fiscal year ended March 31, 2021. As of June 30, 2021, our distribution channels consisted of (i) 10 directly-operated physical stores in Japan, (ii) 22 online stores through our websites and various e-commerce marketplaces in Japan and China, and (iii) nine franchise stores in the U.S., six franchise stores in Canada, two franchise stores in Hong Kong, one franchise store in the U.K., and approximately 116 wholesale customers in Japan and other countries, including China, the U.S., and Canada. We believe our distribution channels are a trusted destination for consumers to discover and purchase branded Japanese beauty and health products and other products.

We have built a large base of customers, which has been essential for our rapid growth. During the fiscal years ended March 31, 2021 and 2020, our physical stores served approximately 537,537 and 955,580 customers, respectively, and orders placed by our repeat customers accounted for approximately 48% and 42% of total orders in our physical stores, respectively. During the same fiscal years, our online stores served approximately 2,203,000 and 1,893,000 customers, respectively, and orders placed by our repeat customers accounted for approximately 26% and 20% of total orders in our online stores, respectively. During the same fiscal years, our franchise stores served approximately 92,000 and 86,080 customers, respectively, and orders placed by our repeat customers accounted for approximately 45% and 40% of total orders in our franchise stores, respectively.

Since our inception, we have established long-term relationships with over 90 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 significant growth and profitability. Despite the impact of the COVID-19 pandemic, our revenue increased from $139,573,958 during the fiscal year ended March 31, 2020 to $221,514,742 during the fiscal year ended March 31, 2021, representing an increase of 58.7%. Our net income increased from $4,890,837 during the fiscal year ended March 31, 2020 to $5,522,601 during the fiscal year ended March 31, 2021, representing an increase of 12.9%.

Since our inception, we have financed our operations primarily through bank loans. As of the date of this prospectus, we had approximately $68.5 million in short-term borrowings outstanding, with maturity dates ranging from November 30, 2021 to September 30, 2022, and approximately $23.4 million in long-term borrowings outstanding, with maturity dates ranging from May 31, 2022 to December 31, 2053. See “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 “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, 2021 and 2020, sales to the China market accounted for approximately 77.0% and 55.4% of our revenue, respectively. See “Risk Factors—Risks Related to Our Business—Sales to the China market represented approximately 77.0% and 55.4% of our revenue for the fiscal years ended March 31, 2021 and 2020, respectively, and we expect such sales to continue to represent a significant part of our revenue and any negative impact to our ability to sell our products to customers based in China could materially and adversely affect our results of operations.” As we plan to expand into new markets by opening new stores, including adding additional directly-operated physical stores in Japan and adding new franchise stores in the U.S., Canada, Australia, New Zealand, and the U.K. during the next five years, we expect the percentage of sales to the China market to decrease in the future. See “Business—Our Growth Strategies—Expanding into New Markets by Opening New Stores.”

Key Factors that Affect Our Results of Operations

We believe the following key factors may affect our financial condition and results of operations:

Changes in Consumer Preferences and Discretionary Spending

Our success depends in substantial part on our ability to recognize and define product and beauty trends; anticipate, gauge, and react to changing consumer demand in a timely manner; translate market trends into appropriate, saleable product offerings in our stores in advance of our competitors; develop and maintain supplier relationships that provide us access to the newest merchandise on reasonable terms; and distribute merchandise to our stores in an efficient and effective manner and maintain appropriate in-stock levels. If we are unable to anticipate and fulfill the merchandise needs of the regions in which our products are sold, it could result in decreased demand for our products or require us to change our pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial results, and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. We appeal to a wide demographic consumer profile and offer a broad selection of Japanese beauty and health products. A downturn in the economy could adversely impact consumer purchases of discretionary items such as beauty and health products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit, and consumer confidence in future economic conditions. In the event of an economic downturn, consumer spending habits could be adversely affected and we could experience lower than expected net sales, which could force us to delay or slow our growth strategy and have a material adverse effect on our business, financial condition, profitability, and cash flows.

Our Ability to Increase Awareness of Our Brand and Develop Customer Loyalty

We believe our “晴の良品,” “東京生活館,” and other brands are well-recognized among our customers and other Japanese beauty and health product industry players such as other Japanese beauty and health product retailers in the local markets our products are sold in. Our brands are integral to our sales and marketing efforts. We believe that maintaining and enhancing our brand name recognition in a cost-effective manner is critical to satisfying consumer needs by further developing and maintaining the quality of our products, as well as our ability to respond to competitive pressures. We have incurred expenses on a variety of different marketing and brand promotion efforts designed to enhance our brand recognition and increase sales of our products. Our marketing and promotional activities may not be well received by customers and may not result in the levels of product sales that we anticipate. Therefore, brand promotion activities may not necessarily yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in marketing activities. If we are unable to satisfy consumer needs or if our public image or reputation were otherwise diminished, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or retain our existing customers, in which case our business transactions with our customers may decline, and our operating results and financial condition, would be materially adversely affected.

Our Ability to Maintain Good Relationship with Existing Suppliers and Develop New Suppliers

We have no long-term supply agreements or exclusive arrangements with our suppliers and, therefore, our success depends on maintaining good relationships with our suppliers. Our business depends to a significant extent on the willingness and ability of our suppliers to supply us with a sufficient selection and volume of products to stock our stores. Some of our suppliers that have many other customers may not have the capacity to supply us with sufficient merchandise to keep pace with our growth plans. We have also entered into supply agreements with certain well-known Japanese brands, such as Shiseido, Sato, Kao, and Kosé, which have allowed us to benefit from the growing popularity of such brands. Any of these brands could in the future decide to scale back or end its partnership with us and strengthen its relationship with our competitors, which could negatively impact the revenue we earn from the sale of such products. As we selectively increase our product offerings, we will need to work with different groups of new suppliers efficiently and establish and maintain mutually beneficial relationships with our existing and new suppliers. If we fail to maintain strong relationships with our existing suppliers, or fail to continue acquiring and strengthening relationships with additional suppliers of beauty and health products, our ability to obtain a sufficient amount and variety of merchandise on reasonable terms may be limited, which could have a negative impact on our competitive position.

Our Ability to Compete Successfully

The beauty and health products markets in Japan, China, Canada, 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 other products. Our current or future competitors may have longer operating histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities, or greater financial, technical, or marketing resources than we do. Competitors may leverage their brand recognition, experience, and resources to compete with us in a variety of ways, including investing more heavily in research and development and making acquisitions for the expansion of their products. Some of our competitors may be able to secure more favorable terms from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies, and devote substantially more resources to their store and website development than us. In addition, new and enhanced technologies may increase the competition in the online retail market. Increased competition may reduce our profitability, market share, customer base, and brand recognition. There can be no assurance that we will be able to compete successfully against current or future competitors, and such competitive pressures may have a material adverse effect on our business, financial condition, and results of operations.

A Downturn in Economy

In recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minster Yoshihide Suga and the former administration of Prime Minister Shinzo Abe have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, the occurrence of large-scale natural disasters, such as the March 2011 Great East Japan Earthquake and the related Fukushima Daiichi nuclear disaster, as well as an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.

Key Financial Performance Indicators

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

Revenue

Our net revenue is derived primarily from retail and wholesale of Japanese beauty and health products, as well as other products. We have experienced rapid growth since our inception, resulting from our focus on maintaining the quality of our products and customer services. Growth of our revenue is primarily driven by expanding our distribution network, both in Japan and overseas. Revenue is impacted by competition, current economic conditions, pricing, inflation, product mix and availability, promotional and competitive activities, and spending habits of our customers. Our product offerings across diverse product categories support growth in revenue by attracting new customers and encouraging repeat visits from our existing customers to our physical and online stores.

Gross Profit and Gross Margin

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

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

Operating Expenses 

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

Operating expenses generally increase as we grow our store base and invest in corporate infrastructure. We have made investments in talent acquisition and infrastructure over the past years which have resulted in higher operating expenses. Our operating expenses are expected to continue increasing in the future as we invest to open new stores both in Japan and overseas, expend our distribution and logistics capacity, drive greater brand awareness, attract new customers, and increase our market penetration. To support our growth, we will continue to increase headcount, particularly in the sales and logistics related positions. This increase in headcount will drive higher payroll and employee-related expenses. We also expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering. Overall, we expect our operating expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company.

Operating Income

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

COVID-19 Affecting Our Results of Operations

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.

The COVID-19 pandemic has materially and adversely affected the business operations and operating results of our directly-operated physical stores and wholesale operations in Japan. Our revenue generated from our directly-operated physical stores in Japan decreased by approximately $6.9 million, or 65%, during the three months ended June 30, 2021, as compared to the same period last year. The decrease was resulted from a state of emergency called by the Japanese government in April 2021 because of the COVID-19 pandemic. Due to this state of emergency, almost all of our physical stores were temporarily closed during the period between late April 2021 and the end of May 2021. After our physical stores resumed their business in June 2021, most of our physical stores were still closed on Saturdays or Sundays, and the opening hours were reduced by two to four hours to eight to nine hours every day. In contrast, our revenue from online stores increased by approximately $18.9 million, or 110% during the three months ended June 30, 2021, as compared to the same period last year, due to the generally increasing trend in online shopping and the opening of one new store on a third-party e-commerce marketplace. Our revenue from franchise stores and wholesale customers increased by approximately $4.8 million, or 30%, during the three months ended June 30, 2021, as compared to the same period last year. Hence, our overall revenue increased by approximately $16.8 million, or 38%, during the three months ended June 30, 2021, as compared to the same period last year.

During the fiscal year ended March 31, 2021, we did not open any new directly-operated physical store and closed a franchise store in the U.S. and a franchise store in Hong Kong due to the impact of the COVID-19 outbreak. During the three months ended June 30, 2021, we did not open any new directly-operated physical store, but opened one new online store, added one franchise store in Hong Kong and one franchise store in the U.K., and developed 13 new wholesale customers. In addition, the construction of our new distribution center in Koshigaya was delayed and the distribution center until September 2021. Construction has since been completed and the distribution center is in use as of the date of this prospectus.

As of the date of this prospectus, the daily life of the Japanese residents is largely back to its normal state, but the COVID-19 pandemic in Japan is still not completely under control. Since the Japanese government has imposed border enforcement measures to control the spread of COVID-19, such as denial of entry to Japan for certain foreign nationals, strengthened quarantine measures, suspension of visa validity, and suspension of visa exemption measures, Japan’s tourism industry is still negatively affected. Regarding our other major target markets, the COVID-19 outbreak appears to have been under relative control in China, but it is still not under control in the U.S. and Canada. Although there are vaccines for COVID-19 that have been approved for use, distribution of the vaccines did not begin until late 2020, and, due to logistical and manufacturing challenges which have delayed the production and administration of the vaccines, a majority of the public in the markets in which our products are currently sold will likely not be fully vaccinated until late 2021 or later. Additionally, new strains of COVID-19 are surfacing, and the effectiveness of the approved vaccines on these new strains is unknown. The extent to which the COVID-19 pandemic impacts our results of operations in fiscal year 2022 will depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable.

We have also taken various preventative and quarantine measures across our stores and headquarters, including conducting monthly nucleic acid tests for selective employees, monitoring our employees’ health conditions through daily temperature checks, and requiring all of our employees to wear masks and gloves throughout the day. All our customers who visit our stores are also required to wear masks and have their temperature checked.

We have taken actions to monitor liquidity during the COVID-19 pandemic. As of the date of this prospectus, we have repaid $6.2 million and renewed $58.9 million of our approximately $65.1 million short-term borrowings outstanding as of March 31, 2021 upon their maturity, and secured an aggregate amount of $68.5 million short-term borrowings as working capital for six months to one year. In addition, we secured approximately $16.8 million in long-term borrowings with maturity dates between July 30, 2026 and October 30, 2026. We expect that we will be able to renew all of the existing bank loans upon maturity based on our past experience and outstanding credit history. In addition, we have closely monitored the collection of our accounts receivable, and all of the March 31, 2021 balance has been subsequently collected.

Results of Operations

Comparison of Results of Operations for the Fiscal Years Ended March 31, 2021 and 2020

The following table summarizes the results of our operations during the fiscal years ended March 31, 2021 and 2020, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such years.

Revenue

During the fiscal year ended March 31, 2021, we generated revenue from: (i) 10 directly-operated physical stores in Japan, (ii) 21 online stores through our websites and various e-commerce marketplaces in Japan and China, and (iii) sales to nine franchise stores in the U.S., six franchise stores in Canada, one franchise store in Hong Kong, and approximately 103 wholesale customers in Japan and other countries including China, the U.S., and Canada.

Our total revenue increased by $81,940,784, or 58.7%, from $139,573,958 for the fiscal year ended March 31, 2020 to $221,514,742 for the fiscal year ended March 31, 2021. The increase in our revenue was primarily due to increased revenue from online stores, franchise stores, and wholesale customers, which was partially offset by the decrease in revenue from directly-operated physical stores.

The following table sets forth the breakdown of our revenue for the fiscal years ended March 31, 2021 and 2020, respectively:

Our directly-operated physical stores sales accounted for 13.3% and 32.8% of our total revenue for the fiscal years ended March 31, 2021 and 2020, respectively. Revenue from directly-operated physical stores decreased by $16,322,274, or 35.6%, from $45,824,603 for the fiscal year ended March 31, 2020 to $29,502,329 for the fiscal year ended March 31, 2021. The decrease in revenue from directly-operated physical stores was mainly attributable to the impact of the COVID-19 pandemic during the fiscal year ended March 31, 2021, as we saw a significant decrease in the number of international tourists in Japan due to global travel restrictions, as well as a decrease in customer traffic from Japanese domestic customers.

Our online stores sales, through our websites and various e-commerce marketplaces, accounted for 50.3% and 36.2% of our total revenue for the fiscal years ended March 31, 2021 and 2020, respectively. Revenue from online stores increased by $60,971,090, or 120.8%, from $50,464,251 for the fiscal year ended March 31, 2020 to $111,435,341 for the fiscal year ended March 31, 2021. Due to the growing popularity of the online shopping, the e-commence industry has been growing rapidly in recent years. In addition, due to the travel restrictions caused by the COVID-19 pandemic during the fiscal year ended March 31, 2021, online shopping has become more popular as it is safer and more convenient for our customers. In order to seize the opportunities, we expanded our online store network by opening new stores on multiple popular and reputable third-party e-commerce marketplaces both in Japan and overseas regions as well as improving the efficiency of our supply chain and storage and inventory management. In order to reduce our operating expenses and credit risk, we outsourced the entire operations of some of our online stores to third-party companies, and sold products to these third-party companies instead of to individual customers. During the fiscal year ended March 31, 2021, revenue from Japanese domestic online sales increased by $4,619,668 and revenue from overseas online sales, which was mainly from the China market, increased by $56,351,422. The increase in overseas sales was in line with the fast-growing purchasing power of the Chinese consumers, and the increasing popularity of high-quality Japanese products among Chinese consumers.

Our franchise stores and wholesale customers sales accounted for 36.4% and 31.0% of our total revenue for the fiscal years ended March 31, 2021 and 2020, respectively. Revenue from franchise stores and wholesale customers increased by $37,291,968, or 86.2%, from $43,285,104 for the fiscal year ended March 31, 2020 to $80,577,072 for the fiscal year ended March 31, 2021. The increase was mainly due to the increased sales to overseas franchise stores and wholesale customers amounting to $38,451,537, offset by a slight decrease of $1,159,569 in our Japanese domestic wholesale. With the improvement of our supply chain and storage and logistic capacity, we added a new franchise store and increased our sales to overseas wholesale customers on a per customer basis during the fiscal year ended March 31, 2021. Meanwhile, our Japanese domestic wholesales decreased slightly during the fiscal year ended March 31, 2021 due to the impact of the COVID-19 pandemic.

Cost of Revenue

The following table sets forth the breakdown of our cost of revenue for the fiscal years ended March 31, 2021 and 2020, respectively:

Our overall cost of revenue increased by $69,471,890, or 62.0%, from $112,088,049 for the fiscal year ended March 31, 2020 to $181,559,939 for the fiscal year ended March 31, 2021. The increase in our cost of revenue was primarily due to increased cost of revenue from online stores and franchise stores and wholesale customers, which was partially offset by the decrease in cost of revenue from directly-operated physical stores.

Cost of revenue from directly-operated physical stores decreased by $12,251,840, or 33.2%, from $36,860,755 for the fiscal year ended March 31, 2020 to $24,608,915 for the fiscal year ended March 31, 2021. The percentage decrease in cost of revenue was more than the percentage decrease in revenue, as discussed in greater details below.

Cost of revenue from online stores increased by $50,563,644, or 131.9%, from $38,336,001 for the fiscal year ended March 31, 2020 to $88,899,645 for the fiscal year ended March 31, 2021. The percentage increase in cost of revenue was more than the percentage increase in revenue, as discussed in greater details below.

Cost of revenue from franchise stores and wholesale customers increased by $31,160,086, or 84.5%, from $36,891,293 for the fiscal year ended March 31, 2020 to $68,051,379 for the fiscal year ended March 31, 2021. The increase in cost of revenue was in line with the increase in revenue from franchise stores and wholesale customers.

Gross Profit and Gross Margin

Our gross profit increased by $12,468,894, or 45.4%, from $27,485,909 for the fiscal year ended March 31, 2020 to $39,954,803 for the fiscal year ended March 31, 2021. The increase was mainly attributable to the overall increase in revenue. Our overall gross margin, however, decreased slightly by 1.7 percentage points from 19.7% for the fiscal year ended March 31, 2020 to 18.0% for the fiscal year ended March 31, 2021. The decrease was primarily due to increased promotion activities and price discounts, and increased sales on lower margin products.

The following table sets forth the breakdown of our gross profit for the fiscal years ended March 31, 2021 and 2020, respectively:

The gross profit of directly-operated physical stores decreased by $4,070,434, or 45.4%, from $8,963,848 for the fiscal year ended March 31, 2020 to $4,893,414 for the fiscal year ended March 31, 2021, and the gross margin from directly-operated physical stores decreased by 3.0 percentage points from 19.6% for the fiscal year ended March 31, 2020 to 16.6% for the fiscal year ended March 31, 2021. The decrease in gross profit and gross profit margin was mainly attributable to increased promotion activities and price discounts given to our customers, so that we could attract more customers to visit our physical stores during the fiscal year ended March 31, 2021, when the number of customer visits was adversely affected by the COVID-19 pandemic. In addition, we offered more types of products at our directly-operated physical stores during the fiscal year ended March 31, 2021, and some of our popular products with increased sales, such as liquor and high-end beauty products, have relatively lower gross margin, which contributed to the decrease in gross profit and gross margin of directly-operated physical stores.

The gross profit of online stores increased by $10,407,446, or 85.8%, from $12,128,250 for the fiscal year ended March 31, 2020 to $22,535,696 for the fiscal year ended March 31, 2021, which was in line with the increase in revenue from online stores. The gross margin from online stores decreased by 3.8 percentage points from 24.0% for the fiscal year ended March 31, 2020 to 20.2% for the fiscal year ended March 31, 2021. The decrease was mainly due to (i) a 2.0% increase in operation service fees as a percentage of revenue as compared to the previous year, because of increased rates of operation service fees charged by third-party e-commerce marketplace operators. We engage third-party e-commerce marketplace operators to operate our online stores. While we are responsible for warehousing and logistics of merchandise products to our end customers, these third-party operators are in charge of the operations, including maintenance, marketing, and customer services. We paid these third-party operators service fees ranging from 3.0% to 5.0% based on our sales amount during the fiscal year ended March 31, 2021, as compared to 1.0% to 3.0% during the fiscal year ended March 31, 2020, (ii) more promotion activities and price discounts given to our customers, so that we could attract more customers to shop at our online stores, and (iii) an increase in sales of liquor and high-end beauty products, have relatively lower gross margin.

The gross profit of franchise stores and wholesale customers increased by $6,131,882, or 95.9%, from $6,393,811 for the fiscal year ended March 31, 2020 to $12,525,693 for the fiscal year ended March 31, 2021, which was in line with the increase in revenue from franchise stores and wholesale customers. The gross margin from franchise stores and wholesale customers remained relatively stable with a slight increase of 0.7 percentage points from 14.8% for the fiscal year ended March 31, 2020 to 15.5% for the fiscal year ended March 31, 2021.

Operating Expenses

Our operating expenses consist of selling and marketing expenses and general and administrative expenses, which primarily include payroll, employee benefit expenses and bonus expenses, shipping expenses, promotion and advertising expenses, and other facility related costs, such as store rent, utilities, and depreciation. Our operating expenses accounted for 13.2% and 13.0% of our revenue for the fiscal years ended March 31, 2021 and 2020, respectively.

Operating expenses increased by $11,220,994, or 62.1%, from $18,076,688 for the fiscal year ended March 31, 2020 to $29,297,682 for the fiscal year ended March 31, 2021. The increase in operating expenses was primarily attributable to the following factors:

Interest Expense, net

Our interest expense, net included interest expense calculated at interest rate per loan agreements and loan service costs, which were directly incremental to the loan agreements and amortized over the loan periods. Interest expense, net increased by $65,472, or 3.5%, from $1,888,018 for the fiscal year ended March 31, 2020 to $1,953,490 for the fiscal year ended March 31, 2021. The increase consisted of an increase in amortized loan service costs in relation to our syndicated loans by $385,159, partially offset by a decrease in interest expense at interest rate by $319,687. Although our weighted average loan balance increased from $61.2 million during the fiscal year ended March 31, 2020 to $69.2 million during the fiscal year ended March 31, 2021, our interest expense decreased. It was primarily due to the decreased weighted average interest rate from 1.46% for the fiscal year ended March 31, 2020 to 0.97% for the fiscal year ended March 31, 2021. The amortized loan service costs increased due to more syndicated loans borrowed from the banks during the fiscal year ended March 31, 2021. We had $59.1 million in weighted average syndicated loans during the fiscal year ended March 31, 2021 as compared to $48.4 million during the fiscal year ended March 31, 2020.

Other Income, net

Our other income, net primarily includes tax refund, foreign exchange gain or loss, disposal gain or loss from property and equipment, government subsidy, and other immaterial income and expense items. Other income, net increased by $129,840, or 510.8%, from $25,420 for the fiscal year ended March 31, 2020 to $155,260 for the fiscal year ended March 31, 2021. The increase was mainly due to an increase of $211,056 in receipt of government subsidies as the financial support during the COVID-19 pandemic, and a decrease in foreign exchange transaction loss by $57,287 as a result of foreign exchange rate fluctuations. The increase was partially offset by a decrease in disposal gain from property and equipment by $143,298 during the fiscal year ended March 31, 2021.

Provision for Income Taxes

Our provision for income taxes was $3,307,048 and $2,655,786 for the fiscal years ended March 31, 2021 and 2020, respectively. Our provision for income taxes increased by $651,262 and our effective income tax rate increased from 35.2% to 37.5%. The increase was mainly due to the increased taxable income for the fiscal year ended March 31, 2021, and an accumulated earnings tax imposed by the tax authority as our share capital exceeded JPY100 million in the fiscal year ended March 31, 2021.

Net Income

As a result of the foregoing, we reported a net income of $5,522,601 for the fiscal year ended March 31, 2021 as compared to a net income of $4,890,837 for the fiscal year ended March 31, 2020.

Liquidity and Capital Resources

To date, we have financed our operations primarily through bank loans. We plan to support our future operations primarily from cash flows provided by operating activities and bank loans.

As of March 31, 2021, we had $16,380,363 in cash as compared to $7,529,219 as of March 31, 2020. As of March 31, 2021, we also had approximately $43.7 million and $3.5 million accounts receivable balance due from third parties and related parties, respectively. All of the March 31, 2021 balance has been subsequently collected. The collection of such receivables made cash available for use in our operations as working capital, if necessary.

As of March 31, 2021, our merchandise inventories balance amounted to approximately $27.1 million, which we believe are able to be sold quickly based on the analysis of the current trends in demand for our products. As of March 31, 2021, we also had approximately $65.1 million in short-term borrowings and $7.1 million in long-term borrowings outstanding. As of the date of this prospectus, we have repaid $6.2 million and renewed $58.9 million of our short-term borrowings outstanding as of March 31, 2021 upon their maturity. As of the date of this prospectus, we have secured an aggregate amount of $68.5 million in short-term borrowings as working capital for six months to one year. In addition, we secured approximately $16.8 million in long-term borrowings with maturity dates between July 30, 2026 and October 30, 2026. 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.

The following table sets forth the breakdown and terms of our short-term and long-term outstanding borrowings as of March 31, 2021 and 2020.

Short-term borrowings consisted of the following:

The terms of the various loan agreements related to short-term borrowings contain certain restrictive covenants which, among other things, require us to maintain current organization structure, specified ratios of debt to tangible net assets and debt service coverage, and positive net income. The terms also prohibit us from transferring part or all of our assets to third-party companies or receiving part of all of the assets from other third-party companies. As of March 31, 2021 and 2020, we were in compliance with such covenants.

Long-term borrowings consisted of the following:

As of March 31, 2021 and 2020, our working capital balance was approximately $13.6 million and $5.5 million, respectively. We believe our cash on hand, our ability to generate revenue in the future, and the available bank facilities will be sufficient to meet our working capital needs over the next 12 months. However, if we were to experience an adverse operating environment or incur unanticipated capital expenditures, or if we decide to accelerate our growth, then additional financing may be required. Our capital expenditures, including development costs related to the opening additional physical stores and facilities, maintenance and remodel expenditures, and other capital needs such as other infrastructure to support ongoing operational initiatives have been and will continue to be significant. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debts or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

In the coming years, we will be looking to other sources, such as equity financing, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital to be raised, we are confident that we can continue to meet operational needs mainly by utilizing cash flows generated from our operating activities and bank loans, and from shareholder working capital funding when necessary. We plan to explore new markets while enhancing our current presence in Japan, China, the U.S., 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, we intend to open 10 additional directly-operated physical stores in Japan, with a focus on suburban areas around Tokyo, during the next five years, and expect the expenses related to opening these stores to be approximately JPY500 million to JPY800 million ($4.62 million to $7.40 million); we also intend to add an aggregate of 10 new franchise stores in the U.S., Canada, Hong Kong, Australia, New Zealand, and the U.K. during the next five years. We plan to extend our product offerings by cooperating with beauty product and other product suppliers to develop our own private label products. We believe this will help us attract additional customers, enhance the shopping experience of our existing customer base, encourage repeat purchases, and increase customer engagement and loyalty. Even though we still expect to invest a significant amount of resources on our current expansion plans in the next few years, we are confident that we would be able to generate sufficient net income and cash flow from the operating activities of our planned new stores in the long run to support our future operations.

The following table sets forth summaries of our cash flows for the periods indicated:

Operating Activities

Net cash used in operating activities was $3,376,825 for the fiscal year ended March 31, 2021, mainly derived from a net income of $5,522,601 for the year, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable from third parties and related parties of $10,160,567 in line with the increase in revenue. Merchandise inventories increased by $5,344,367 and accounts payable increased by $7,818,308, as we increased the stockpile of inventories in anticipation of increased sales in the coming months.

Net cash used in operating activities was $7,649,721 for the fiscal year ended March 31, 2020, mainly derived from a net income of $4,890,837 for the year, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable from third parties and related parties of $10,906,764 in line with the increase in revenue. All of the March 31, 2020 balance has been subsequently collected. Merchandise inventories increased by $1,140,268, as we increased the stockpile of inventories in order to prepare in anticipation of increased sales in the coming months.

Investing Activities

Net cash provided by investing activities amounted to $1,779,674 for the fiscal year ended March 31, 2021, mainly due to the collection of a long-term loan made to a related party of $3,773,600 and repayments from related parties of $857,582, partially offset by the purchases of property and equipment of $2,939,471. 

Net cash used in investing activities amounted to $3,312,757 for the fiscal year ended March 31, 2020, including a long-term loan made to a related party of $3,680,400 and purchases of property and equipment of $3,414,703, partially offset by the repayments from related parties of $2,500,610 and proceeds from disposal of property and equipment of $1,281,736.

Financing Activities

Net cash provided by financing activities was $11,055,306 for the fiscal year ended March 31, 2021, which primarily consisted of proceeds from short-term borrowings of $424,201,158, proceeds from long-term borrowings of $2,802,275, and capital contribution $1,446,612, partially offset by repayments of short-term borrowings of $415,796,955 and repayments of long-term borrowings of $1,511,354.

Net cash provided by financing activities was $16,150,880 for the fiscal year ended March 31, 2020, which primarily consisted of proceeds from short-term borrowings of $260,918,369, partially offset by repayments of short-term borrowings of $233,253,603 and repayments of long-term borrowings of $11,388,520.

Contractual Obligations

As of March 31, 2021, our contractual obligations were as follows:

Trend Information

Other than as disclosed elsewhere in this prospectus, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenue, income from continuing operations, profitability, liquidity, or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2021 and 2020.

Inflation

Inflation does not materially affect our business or the results of our operations.

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 boost sales in the respective quarter relative to other quarters.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this prospectus reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

Uses of estimates

In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and implicit interest rates of operating leases and financing leases. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts.

We determine the adequacy of reserves for doubtful accounts based on general and individual account analysis and historical collection trend. We establish general and specific allowance when there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivable balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of March 31, 2021 and 2020, allowance for uncollectible balances amounted to $483,124 and $392,626, respectively. 

Merchandise inventories, net

Merchandise inventories are stated at the lower of cost or net realizable value, on a weighted average basis. Costs include mainly the cost of merchandise inventories. Any excess of the cost over the net realizable value of each item of merchandise inventories is recognized as a provision for diminution in the value of merchandise inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to sell products. We periodically evaluate merchandise inventories for their net realizable value adjustments, and reduces the carrying value of those merchandise inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging and expiration dates, as applicable, taking into consideration historical and expected future product sales. For the fiscal years ended March 31, 2021 and 2020, no merchandise inventory reserve was recorded because no slow-moving, obsolete, or damaged merchandise inventory was identified.

Revenue recognition

We adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), on April 1, 2018 using the modified retrospective approach.

ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance (ASC Topic 605, Revenue Recognition) did not result in significant changes in the way we record our revenue. We have assessed the impact of the guidance by reviewing our existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of our performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. Based on the assessment, we concluded that there was no change to the timing and pattern of revenue recognition for our current revenue streams in scope of Topic 606 and therefore there was no material changes to our consolidated financial statements upon adoption of ASC 606.

Under ASC 606, revenue is recognized when control of promised goods or services is transferred to our customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from the specified goods and services.

We currently generate our revenue through retail and wholesale of Japanese beauty and health products, as well as other products, through a multi-channel distribution network. Currently, we sell our products through directly-operated physical stores, through online stores, and to franchise stores and wholesale customers. For Japanese domestic sales, revenue is recognized at the point of sales or delivery of the related products and control is transferred. For international sales, we sell goods under Cost Insurance and Freight (“CIF”) shipping point term, and revenue is recognized when product is loaded on the ships and control is deemed as transferred. 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 subject to certain restrictions. Historically, the customer returns were immaterial. Therefore, we did not provide any sales return allowances as of March 31, 2021 and 2020.

We enter into trademark license agreements with franchisees, under which the franchisee is granted a revocable license and non-exclusive right to use our trademarks solely for the purposes of selling, promoting sales of, and performing post-sale and other support relating to the products we sell to the franchisee. In exchange, the franchisee is required to pay a monthly royalty fee of JPY60,000 (approximately $542) per franchise store and to purchase at least 75% of the products sold in store (except heavy products such as purified water) from us. 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 are the principal for the majority of our transactions and recognizes revenue on a gross basis. We are the principal when it has control of the merchandise before it is transferred to customers, which generally is established when we are primarily responsible for merchandising decisions, maintains the relationship with customer, including assurance of member service and satisfaction, and has pricing discretion.

In our directly-operated physical stores in Japan, customers can enroll in our rewards program, which is primarily a spending-based rewards program, and get a rewards card. Members of the rewards program usually earn one membership point for each JPY100 spent in our directly-operated physical stores, and subsequently one membership point can be used as JPY1 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. We initially account for these membership points as a reduction in sales based on the estimated monetary value of the membership points with the corresponding liability classified as deferred revenue in the consolidated balance sheets. When a customer redeems earned membership points at our stores, we recognize revenue and reduce the deferred revenue. Unused membership points are recognized as breakage, which is recorded as revenue in the consolidated statement of income and comprehensive income. Membership point breakage was immaterial for the fiscal years ended March 31, 2021 and 2020.

Contract balances and remaining performance obligations

Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs.

We did not have contract assets as of March 31, 2021 and 2020. Our contract liabilities, which are reflected in our consolidated balance sheets as deferred revenue of $186,046 and $534,444 as of March 31, 2021 and 2020, respectively, consisted primarily of revenue for amount received in advance from our wholesale customers and unredeemed membership points. These amounts represent our unsatisfied performance obligations as of the balance sheet dates. The amount of revenue recognized in the fiscal years ended March 31, 2021 and 2020 that was included in the opening deferred revenue was $531,612 and $165,479, respectively. As of March 31, 2021, the amount received in advance from wholesale customers and unredeemed membership points was $186,046. We expect to recognize revenue when products are delivered to the wholesale customers or when customers redeem their membership points, which is expected to occur within one year.

Disaggregation of revenue

We disaggregate our revenue by geographic areas, product categories and distribution channels, which we believe best depicts how the nature, amount, timing, and uncertainty of the revenue and cash flows are affected by economic factors. Our disaggregation of revenue for the fiscal years ended March 31, 2021 and 2020 is as following:

Revenue by geographic areas

The summary of our total revenue by geographic areas for the fiscal years ended March 31, 2021 and 2020 was as follows:

Revenue by product categories

The summary of our total revenue by product categories for the fiscal years ended March 31, 2021 and 2020 was as follows:

Revenue by distribution channels

The summary of our total revenue by distribution channels for the fiscal years ended March 31, 2021 and 2020 was as follows:

Income taxes

We account for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes were incurred during the fiscal years ended March 31, 2021 and 2020. We do not believe there was any uncertain tax provision as of March 31, 2021 and 2020.

Our operating subsidiary in Japan is subject to the income tax laws of Japan. As of March 31, 2021, the tax years ended March 31, 2015 through March 31, 2021 for us and our subsidiary remain open for statutory examination by the Japanese tax authorities.

Recent Accounting Pronouncements 

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326),” which significantly changed the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life, instead of when incurred. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” which amended Subtopic 326-20 (created by ASU No.2016-13) to explicitly state that operating lease receivables are not in the scope of Subtopic 326-20. Additionally, in April 2019, the FASB issued ASU No.2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” in May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief,” and in November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” and ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” which updated the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations, and certain smaller reporting companies applying for credit losses standard and to provide further clarifications on certain aspects of ASU No. 2016-13. In February 2020, the FASB issued ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (topic 842).” This ASU provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The new effective date for these preparers is for annual and interim periods in fiscal years beginning after December 15, 2022, and we are in the process of evaluating the potential effect on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards (the “Simplification Initiative”). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this ASU were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this ASU are effective for years, and interim periods within those years, beginning after December 15, 2020. We adopted this ASU on April 1, 2021 and the adoption of this ASU did not have a material impact on our consolidated financial statements.

Except for the above-mentioned pronouncement, there are no new recently issued accounting standards that will have material impact on our consolidated financial position, statements of operations, and cash flows.

INDUSTRY

All the information and data presented in this section have been derived from Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. (“Frost  Sullivan”)’s industry report commissioned by us in December 2020 entitled “The Global Beauty and Health Products Market Independent Market Research” (the “Frost & Sullivan Report”) unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion contains projections for future growth, which may not occur at the rates that are projected or at all.

OVERVIEW OF THE BEAUTY AND HEALTH PRODUCTS MARKET IN JAPAN

Introduction and Categorization

Beauty and health products refer to a category of products being used to care for the face and body. Beauty products usually cover cosmetics, skin care, personal care, and fragrances. Health products consist of dispensing pharmaceutical products, OTC medical products, medical supplies and devices, and health food. Japan is one of the leading markets for beauty and health products, driven by the rapidly aging population, consumers’ demand for diversified and high-quality products, and the growth of tourism.

Distribution channels for beauty and health products in Japan can be broadly categorized into offline channels and online channels. Recent years have witnessed the rising share of online channels, mainly supported by the increasing number of Internet users. A number of market participants have been expanding into the online sector to reach additional consumers and increase sales. Offline channels comprise diversified point of sales, such as department stores and supermarkets, specialty stores, drugstores, and convenience stores. In particular, drugstores in Japan are a key sales channel of beauty and health products due to their competitive pricing, good quality, and diversified product categories.

Source: The Frost & Sullivan Report

Value Chain Analysis

The beauty and health products market participants include raw material suppliers, brand owners and manufacturers, distribution agents and wholesalers, and retailers. Beauty and health product owners and/or manufacturers may sell their products directly or through exclusive agents and/or authorized agents, or models of direct sales, including business-to-business sales, online retailing, and self-operated physical stores.

Source: The Frost & Sullivan Report

Sales of Beauty and Health Products in Japan

In 2014, the Japan Shopping Tourism Organization (“JSTO”) announced a plan to expand tax exemption benefits allotted to foreign tourists from general goods to further include consumables, such as groceries, beverages, medicine, and cosmetics, which stimulated the sales of beauty and health products to foreign tourists. According to the Ministry of Economy, Trade and Industry (“METI”), beauty and health products market in Japan experienced a growth from $88.6 billion in 2015 to $136.8 billion in 2020, representing a compound annual growth rate (“CAGR”) of approximately 9.1%, which was attributable to the tax exemption policy promulgated by the Japanese Government, which propelled overall tourist expenditure, continuous development in retail and distribution channels, aging population and rising healthcare awareness, increasing disposable income per capita, and the strong demand for health products during the COVID-19 pandemic. Considering the growing number of elderly population and inbound tourists, Frost & Sullivan forecasts that the sales of beauty and health products in Japan will rise from $142.6 billion in 2021 to $166.0 billion in 2025, with a CAGR of approximately 3.9%.

Note: Sales value is converted from JPY to USD at a rate of 104.2.

Source: METI and the Frost & Sullivan Report

According to the Frost & Sullivan Report, the sales of beauty and health products is currently still dominated by offline channels. In 2020, however, due to the strong demand for health products and rising preference towards online shopping in view of the COVID-19 pandemic, the online sales value of beauty and health products in Japan grew by 43.7% year-over-year. Overall, online sales channels have shown a significant growth from $5.4 billion in 2015 to $10.8 billion in 2020 at a CAGR of approximately 14.8%. Frost & Sullivan estimates that the online sales value of beauty and health products in Japan will reach $14.6 billion by the end of 2025, representing a CAGR of approximately 6.0% from 2021 to 2025.

Note: Sales value is converted from JPY to USD at a rate of 104.2.

Source: The Frost & Sullivan Report

Drugstore Sales of Beauty and Health Products in Japan

Drugstores are primary competitors of our directly-operated physical stores in Japan. Due to the COVID-19 outbreak, the sales of health products including face masks and sanitary products increased significantly during 2020. However, beauty products have seen a decline in view of social distancing and restrictions on international travelling. According to the METI, drugstores sales of beauty and health products rose from $29.6 billion in 2015 to $36.7 billion in 2020, representing a CAGR of approximately 4.4%. The growth was mainly driven by an increase in elderly and health-conscious consumers and a shift of tourist spending towards daily necessities and beauty products. According to the Frost & Sullivan Report, the drugstore sales of beauty products and health products in Japan are projected to rise at a CAGR of approximately 5.0% and 6.3%, respectively, from 2021 to 2025, reaching $18.2 billion and $29.7 billion, respectively, by the end of 2025. 

Note: Sales value is converted from JPY to USD at a rate of 104.2.

Source: METI and the Frost & Sullivan Report

Market Drivers Analysis

Aging population and rising healthcare awareness. According to the Statistics Bureau of Japan, the population aged 65 and above rose from 34.0 million in 2015 to 36.2 million in 2020 with a CAGR of approximately 1.3%. In 2020, the elderly population aged 65 and above accounted for 28.8% of the total population in Japan, creating accelerating demand for medical resources and healthcare products. Together with the continuous growing healthcare awareness, consumers are willing to spend more on health products including nutritional supplements, health food, and medical supplies and devices. With the rise in total expenditure in healthcare in Japan, the beauty and health products market in Japan kept expanding during the past few years.

Expanding tourists’ consumption. The number of tourists arriving in Japan increased significantly with a CAGR of approximately 12.7%, from 19.7 million in 2015 to 31.9 million in 2019. A rising number of stores in Japan are making tax-free shopping available to cater to the demand from foreign tourists, supporting the growth of sales of beauty and health products in Japan. However, due to the COVID-19 outbreak, a number of countries and regions have announced travel restrictions and quarantine measures, which has caused a massive fall in visitor arrivals in Japan. The total number of visitor arrivals in Japan decreased to 4.1 million in 2020, representing a year-on-year decline of 87.1%. In the long run, the national economy and tourists’ consumption are expected to regain the growth momentum once the COVID-19 pandemic is effectively contained, especially under the rollout of mass vaccination since early 2021.

Competition Overview

The beauty and health products market in Japan is competitive and fragmented with various market players specializing in different distribution channels, including department stores and supermarkets, drugstores, and convenience stores. According to the METI, the number of market participants in the beauty and health products market in Japan increased from 73.1 thousand in 2015 to 79.0 thousand in 2020, representing a CAGR of approximately 1.5%.

Source: METI and the Frost & Sullivan Report

Key Market Participants in Japan

Key market participants include a number of listed companies with a wide range of distribution channels in Japan. The table below shows three key market participants in the beauty and health market in Japan in 2020.

Note: Sales value is converted from JPY to USD at a rate of 104.2.

Source: The Frost & Sullivan Report

OVERVIEW OF THE BEAUTY AND HEALTH PRODUCTS MARKET IN NORTH AMERICA

Market Size Analysis

The beauty and health products market in North America rose from $315.3 billion in 2015 to $364.8 billion in 2020, representing a CAGR of approximately 3.0%. The aging population served as one of the major growth drivers as it brought strong demand for anti-aging beauty products and health products. In addition, increasing income level and purchasing power of the residents in North America contributed to the higher spending on beauty and health products.

Source: Statistics Canada, United States Census Bureau, and the Frost & Sullivan Report

Retail Sales of Korean and Japanese Beauty and Health Products

Driven by the increasing popularity of Korean and Japanese beauty and health products, retail sales value of Korean and Japanese beauty and health products has registered a CAGR of approximately 15.5%, from $48.4 million in 2015 to $99.5 million in 2020 in North America. The high quality and performance of Korean and Japanese products are the main factors contributing to the rapid growth of the market. According to the Frost & Sullivan Report, retail sales value of Korean and Japanese beauty and health products in North America is expected to rise continuously with a CAGR of approximately 6.7% from $107.4 million in 2021 to $139.5 million in 2025.

Source: The Frost & Sullivan Report

Market Trends and Opportunities

Growing interests in natural, organic, and environmentally-friendly products. Due to increasing awareness and growing preference towards premium ingredients and luxury personal care brands, natural and organic products are gaining popularity in North America. Further, with growing consciousness of social and environmental responsibility, consumers are paying more attention to environmentally-conscious and safe products. For instance, consumers tend to prefer products labelled as “cruelty-free,” which implies that no animals are harmed in the testing period. As Japanese beauty and health products are known globally for the natural and quality ingredients and assuring and safe image, such products are gaining popularity in North America and are anticipated to contribute to the growth of beauty and health products market in North America.

Rising expenditure on anti-aging and multifunctional products. The accelerated demand for anti-aging products in North America is projected to drive the development of beauty and health products market. The growth is simulated by the aging population, increasing prevalence of age-related skin and health issues, and consciousness about personal wellness and appearance. In addition, the emergence of digital marketing and commercialization of social media are expected to stimulate the demand among younger generations. Frost & Sullivan expects that this segment, together with the advanced technology in age controlling and elderly caring, will bring new business opportunities to the beauty and health products market in North America.

Competition Overview

The beauty and health products market in North America is highly fragmented and competitive with a considerable number of regional and global market participants with no leading players. Market participants are competing in terms of prices, product portfolio, distribution networks, and logistics, among other things.

Recent years have witnessed a growing number of beauty and health brand owners with sufficient capital and established distribution networks setting up regional branches in different locations and distributing products directly to retailers without distributors and/or wholesalers. In addition, an increasing number of consumers purchase beauty and health products directly from brand owners through online platforms, which may further hinder the business development of distributors and wholesalers.

Key Success Factors

Established distribution network. Wholesalers of beauty and health products connect upstream brand owners and downstream retailers and consumers. Therefore, it is essential for market participants to have an established distribution network in order to efficiently and effectively distribute products. Market participants are usually required to build close business relationship with brand owners to get a competitive price, which can be translated into lower costs and higher profits. In addition, when entering into new markets, most beauty and health product brands generally prefer distributors with more downstream customers, abundant operation experience, and a well-established distribution network.

Significant capital investment and track record. Market participants need a large amount of working capital to finance and fund the distribution process including maintaining inventories, investing in logistics and storage, and recruiting industry professionals and talents. Meanwhile, market participants with proven track records are more likely to raise funds and get financing for their business operations. A lack of sufficient capital and proven track record may cause challenges to developing sales channels and expanding product portfolio, which may hinder the growth of the business.

OVERVIEW OF THE BEAUTY AND HEALTH PRODUCTS MARKET IN THE PRC

Market Size Analysis

Due to the strong economy of the PRC, market size of beauty and health products by sales value rose rapidly from $59.0 billion in 2015 to $90.0 billion in 2020, representing a CAGR of approximately 8.8%. The skincare and cosmetics segment accounted for the largest proportion of the total beauty and health products market in the PRC and achieved the fastest growth from 2015 to 2020. Frost & Sullivan forecasts that the sales value of beauty and health products in the PRC will reach $137.7 billion by the end of 2025, representing a CAGR of approximately 7.0% from 2021 to 2025.

Note: Sales value is converted from RMB to USD at a rate of 6.9.

Source: The Frost & Sullivan Report

Benefiting from the expanding number of Internet users and household income, the online sales segment of beauty and health products in the PRC grew from 31.4% of the total beauty and health products market in 2015 to 44.8% in 2020. The rapid growth was primarily driven by the development of e-commerce platforms and wider adoption of digital technologies and mobile devices. Frost & Sullivan estimates that the online sales segment will increase to account for 49.0% of the total beauty and health products market in the PRC by the end of 2025.

Source: The Frost & Sullivan Report

Market Drivers and Trends Analysis

Increasing disposable income. According to the National Bureau of Statistics of China, disposable income of the Chinese population rose significantly from RMB21,966.0 in 2015 to RMB32,189.0 in 2020, representing a CAGR of approximately 7.9%. Increasing disposable income has motivated people to invest more in their appearance and health. In addition, the growing awareness of skin and body care and the inclination of consumers towards value-added beauty and health products with specific functionalities is contributing to new business opportunities, further driving the growth of beauty and health products market in the PRC.

Rapid growth of e-commerce. According to the 47th China Statistical Report on Internet Development issued by the China Internet Network Information Center, the number of Internet users in the PRC rose from 688.3 million in December 2015 to 989.0 million in December 2020 with the Internet penetration rate growing from 50.3% as of December 2015 to 70.4% as of December 2020. The rising adoption of Internet and advancement of digital technologies stimulate the development of e-commerce, providing consumers easy access to a rapidly growing range of products. Frost & Sullivan estimates that online sales of beauty and health products will register the fastest growth among all distribution channels in the next five years.

Expanding share of beauty and health products for men. In recent years, a rising number of Chinese males became more aware of their appearance and wellness, which led to a rising consumption of beauty and health products for men. Male consumers, especially millennials, are growing increasingly conscious of their appearance. In light of the growing popularity of beauty and health products for men in the PRC, a number of beauty and health products brands have launched product lines and advertising campaigns specifically targeting males.

Popularity of medical-grade products. With the innovation of skincare and pharmaceutical industries, and consumers’ increasing requirements on high-quality products, functional skincare products and medical-grade products are gaining popularity in the PRC. Medical-grade beauty products contain active ingredients that have been clinically proven to have a positive effect on skin. Such products provide both aesthetic and medicinal benefits and are generally preferred by Chinese consumers. Frost & Sullivan estimates that, with increasing marketing campaigns and consumption upgrade of Chinese consumers, medical-grade products will drive the market growth in the next five years.

Competition Overview

Major sales channels of beauty and health products in the PRC consist of integrated e-commerce platforms, wholesale markets, supermarkets and department stores, dedicated counters, specialty stores, drugstores, and direct sales. The market is highly fragmented with a significant number of players including brand owners, distributors, wholesalers, and retailers.

BUSINESS

Overview

Headquartered in Tokyo, we are a retailer and wholesaler of Japanese beauty and health products, as well as other products. We offer approximately 12,400 SKUs of beauty products, including cosmetics, skin care, fragrance, and body care, among others, 3,600 SKUs of health products, including OTC drugs, nutritional supplements, and medical supplies and devices, and 7,900 SKUs of other products, including lingerie, home goods, 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 and opened three new directly-operated physical stores and 10 new online stores, added four franchise stores, and developed 29 new wholesale customers during the fiscal year ended March 31, 2020; we opened five new online stores, added a franchise store in Canada, and developed 30 new wholesale customers during the fiscal year ended March 31, 2021. As of June 30, 2021, our distribution channels consisted of (i) 10 directly-operated physical stores in Japan, (ii) 22 online stores through our websites and various e-commerce marketplaces in Japan and China, and (iii) nine franchise stores in the U.S., six franchise stores in Canada, two franchise stores in Hong Kong, one franchise store in the U.K., and approximately 116 wholesale customers in Japan and other countries including China, the U.S., and Canada. We believe our distribution channels are a trusted destination for consumers to discover and purchase branded Japanese beauty and health 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, 2021 and 2020, our physical stores served approximately 537,537 and 955,580 customers, respectively, and orders placed by our repeat customers accounted for approximately 48% and 42% of total orders in our physical stores, respectively. During the same fiscal years, our online stores served approximately 2,203,000 and 1,893,000 customers, respectively, and orders placed by our repeat customers accounted for approximately 26% and 20% of total orders in our online stores, respectively. During the same fiscal years, our franchise stores served approximately 92,000 and 86,080 customers, respectively, and orders placed by our repeat customers accounted for approximately 45% and 40% of total orders in our franchise stores, respectively.

Since our inception, we have established long-term relationships with over 90 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 significant growth and profitability. Despite the impact of the COVID-19 pandemic, our revenue increased from $139,573,958 during the fiscal year ended March 31, 2020 to $221,514,742 during the fiscal year ended March 31, 2021, representing an increase of 58.7%. Our net income increased from $4,890,837 during the fiscal year ended March 31, 2020 to $5,522,601 during the fiscal year ended March 31, 2021, representing an increase of 12.9%.

Since our inception, we have financed our operations primarily through bank loans. As of the date of this prospectus, we had approximately $68.5 million in short-term borrowings outstanding, with maturity dates ranging from November 30, 2021 to September 30, 2022, and approximately $23.4 million in long-term borrowings outstanding, with maturity dates ranging from May 31, 2022 to December 31, 2053. See “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 “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, 2021 and 2020, sales to the China market accounted for approximately 77.0% and 55.4% of our revenue, respectively. See “Risk Factors—Risks Related to Our Business—Sales to the China market represented approximately 77.0% and 55.4% of our revenue for the fiscal years ended March 31, 2021 and 2020, respectively, and we expect such sales to continue to represent a significant part of our revenue and any negative impact to our ability to sell our products to customers based in China could materially and adversely affect our results of operations.” As we plan to expand into new markets by opening new stores, including adding additional directly-operated physical stores in Japan and adding new franchise stores in the U.S., Canada, Australia, New Zealand, and the U.K. during the next five 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 the following competitive strengths are essential for our success and differentiate us from our competitors: 

Diverse and High-Quality Product Offerings

We have developed a diverse merchandise portfolio, including approximately 12,400 SKUs of beauty products, 3,600 SKUs of health products and 7,900 SKUs of other products. In particular, we have rigorously analyzed a large quantity of beauty and health products available for sale in Japan and developed an insightful knowledge and understanding of our customers’ needs and preferences by analyzing historical sales data, seasonality impact, customer feedbacks, and beauty and fashion trends. We believe our strong product selection and recommendation expertise deliver value, quality, and convenience for our customers and enhance our brand image. In addition, we have also entered into supply agreements with many well-known Japanese brands, including Shiseido, Sato, Kao, and Kosé.

A Multi-Channel Distribution Network

We have built a multi-channel distribution network that consists of (i) directly-operated physical stores, (ii) online stores, and (iii) franchise stores and wholesale customers. Our directly-operated physical stores, online stores, and franchise stores and wholesale customers contributed 13.3%, 50.3%, and 36.4% of our total revenue for the fiscal year ended March 31, 2021, respectively, and 32.8%, 36.2%, and 31.0% of our total revenue for the fiscal year ended March 31, 2020, respectively.

We operate our 10 physical stores in Japan 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 and China 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 10 as of March 31, 2021, and the number of our franchise stores increased from 11 as of March 31, 2019 to 16 as of March 31, 2021. Our gross profit increased from $27,485,909 for the fiscal year ended March 31, 2020 to $39,954,803 for the fiscal year ended March 31, 2021. Our overall gross margin decreased slightly by 1.7 percentage points from 19.7% for the fiscal year ended March 31, 2020 to 18.0% for the fiscal year ended March 31, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.” Our rapid expansion is supported by our distribution centers, which are located near our headquarters in Tokyo. 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 10 years of experience in retail and wholesale of Japanese beauty and health products. Our director, Mr. Sen Uehara, has 14 years of experience in management.

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 Growth Strategies

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., 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, we intend to open 10 additional directly-operated physical stores in Japan, with a focus on suburban areas surrounding Tokyo, during the next five years, and expect the aggregate expenses related to opening these stores to be approximately JPY500 million to JPY800 million ($4.62 million to $7.40 million); 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 10 new franchise stores in the U.S., Canada, Hong Kong, Australia, New Zealand, and the U.K. during the next five years. To achieve such expansion goals, we have added one franchise store in Hong Kong and one franchise store in the U.K. in 2021 and plan to add, by 2022, two additional franchise stores in Hong Kong, two franchise stores in Australia, and one franchise store in New Zealand. 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 the U.S. 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 “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,” “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 “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 “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, and sneakers. We have been exploring the possibility of adding facial masks, facial essences, T-shirts, other footwear, and face masks, among others. On March 1, 2021, we entered into an employment agreement with Dr. Jixun Lin, who has more than 25 years of experience in the medical device industry, pursuant to which Dr. Lin agreed to serve as our corporate officer and lead the development of private label products. The employment agreement with Dr. Lin does not have a fixed period. We believe developing private label products will help us attract additional customers, enhance the shopping experience of our existing customer base, encourage repeat purchases, and increase customer engagement and loyalty. The estimated initial cost for developing private label products is approximately $0.9 million (approximately JPY100 million), which we expect to fund using additional borrowings. As we only started developing private label products recently, no assurance can be given that such strategy and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results. See “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 information technology and equipment to enhance operational efficiency and reliability, improve customer experience, and reduce costs. Our initiatives include wider use of warehouse management systems and increased use of packaging automation in our distribution centers. We also anticipate upgrading and improving the integration of our existing operation and financial systems. In addition, we plan to open a new distribution center in the U.S. in 2022 or 2023 to support and replenish inventory at our franchise stores in the U.S. and Canada. The estimated cost for opening such new distribution center is approximately $2 million.

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, pursuant to the laws of Japan.

On December 25, 2020, we established a new company in Japan, Palpito Co., Ltd., owned 40% by Yoshitsu and 60% by two unrelated third parties. Palpito Co., Ltd. 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.

The following chart illustrates our corporate structure as of the date of this prospectus and upon completion of this IPO based on 30,000,054 Ordinary Shares outstanding as of the date of this prospectus and 6,000,000 ADSs to be sold in this IPO, assuming no exercise of the underwriters’ over-allotment option.

Notes: all percentages reflect the equity interests held by each of our shareholders.

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

Product Offerings

Product Categories

We offer high-quality and affordable beauty products. We currently have approximately 12,400 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 3,600 SKUs of health products available through our distribution channels. The following table illustrates the categories of health products we sell:

We currently also have approximately 7,900 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, 2021 and 2020 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 effort to maintain and improve an efficient cost structure and create incentives for our suppliers to provide us with competitive prices.