Exhibit 99.1
YOSHITSU CO., LTD
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-1
YOSHITSU CO., LTD
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | March 31, | |||||||
| 2023 | 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Accounts receivable - related parties | ||||||||
| Merchandise inventories, net | ||||||||
| Due from related parties | ||||||||
| Compensation receivable for consumption tax, current | ||||||||
| Prepaid expenses and other current assets, net | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Long-term investment | ||||||||
| Compensation receivable for consumption tax, non-current, net | ||||||||
| Long-term prepaid expenses and other non-current assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term borrowings | $ | $ | ||||||
| Current portion of long-term borrowings | ||||||||
| Accounts payable | ||||||||
| Accounts payable - related parties | ||||||||
| Due to related parties | ||||||||
| Deferred revenue | ||||||||
| Taxes payable | ||||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Representative’s warrants liability | ||||||||
| Other payables and other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Finance lease liabilities, non-current | ||||||||
| Long-term borrowings | ||||||||
| Other non-current liabilities | ||||||||
| Deferred tax liabilities, net | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, par value, | ||||||||
| Capital reserve | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
YOSHITSU CO., LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Six Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| REVENUE | ||||||||
| Revenue - third parties | $ | $ | ||||||
| Revenue - related parties | ||||||||
| Total revenue | ||||||||
| COSTS AND OPERATING EXPENSES | ||||||||
| Merchandise costs | ||||||||
| Selling, general and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| INCOME FROM OPERATIONS | ||||||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest expenses, net | ( |
) | ( |
) | ||||
| Additional and delinquent tax due to consumption tax correction | ( |
) | ||||||
| Gain from disposal of equity method investment | ||||||||
| Gain from disposal of a subsidiary | - | |||||||
| Other income (expenses), net | ( |
) | ||||||
| Gain from foreign currency exchange | ||||||||
| Change in fair value of representative’s warrants liability | ||||||||
| Loss from equity method investment | ( |
) | ( |
) | ||||
| Total other income (expenses), net | ( |
) | ||||||
| INCOME BEFORE INCOME TAX PROVISION | ||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ( |
) | ||||||
| NET INCOME | ||||||||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Foreign currency translation loss | ( |
) | ( |
) | ||||
| TOTAL COMPREHENSIVE LOSS | $ | ( |
) | $ | ( |
) | ||
| $ | $ | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3
YOSHITSU CO., LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| Ordinary Shares | Capital | Retained | Accumulated Other Comprehensive | Total Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Reserve | Earnings | Income (Loss) | Equity | |||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | ( | ) | ||||||||||||||||||||
| Business combinations under common control | ( | ) | ( | ) | ||||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4
YOSHITSU CO., LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For
the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss from disposal of property and equipment | ||||||||
| Loss (gain) from unrealized foreign currency translation | ( | ) | ||||||
| Allowance for (net recovery of) credit losses | ( | ) | ||||||
| Reversal of merchandise inventories written down | ( | ) | ||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Deferred tax benefit | ( | ) | ( | ) | ||||
| Change in fair value of representative’s warrants liability | ( | ) | ( | ) | ||||
| Investment loss from equity method investment | ||||||||
| Gain from disposal of equity method investment | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable - related parties | ||||||||
| Merchandise inventories | ( | ) | ||||||
| Compensation receivable for consumption tax | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Long-term prepaid expenses and other non-current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable - related parties | ( | ) | ||||||
| Deferred revenue | ||||||||
| Taxes payable | ( | ) | ( | ) | ||||
| Other payables and other current liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Other non-current liabilities | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Proceeds from disposal of equity method investment | ||||||||
| Proceeds from disposal of a subsidiary | ||||||||
| Disposal of a subsidiary, net of cash | ( | ) | ||||||
| Collection of amount due from related parties | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Cash consideration paid for business combination under common control | ( | ) | ||||||
| Proceeds from short-term borrowings | ||||||||
| Repayments of short-term borrowings | ( | ) | ||||||
| Proceeds from long-term borrowings | ||||||||
| Repayments of long-term borrowings | ( | ) | ( | ) | ||||
| Payments made to related parties | ( | ) | ( | ) | ||||
| Repayment of obligations under finance leases | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate fluctuation on cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental non-cash operating activities | ||||||||
| Purchase of property and equipment financed under finance leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION
Yoshitsu Co., Ltd (the “Company”) is a stock company incorporated in Japan pursuant to the laws of Japan on December 28, 2006.
Prior to July 1, 2023, the Company owned
On June
30, 2023, the Company entered into a share transfer agreement with Seihinkokusai Co., Ltd. (“Seihinkokusai”),
a related party of the Company, to sells its
On September 6, 2023, TLS incorporated a wholly-owned subsidiary, RAKKISTAR HOLDING INC., in the State of Ontario, Canada. On October 17, 2023, TLS incorporated a wholly-owned subsidiary, Tokyo Lifestyle Holding Inc. (“TSL Holding”), in the State of Delaware. TSL Holding also incorporated a wholly-owned subsidiary, REIWATAKIYA BOS LLC, a limited liability company on October 26, 2023, in the Commonwealth of Massachusetts. These companies are currently not engaging in any active business operations.
The Company and its subsidiaries (collectively,
“Yoshitsu”) are a retailer and wholesaler of Japanese beauty and health products, as well as luxury and electronic products,
sundry products, and other products and services.
Acquisition Under Common Control
On July 20, 2022, the Company entered into a definitive
agreement (the “Agreement”) with All Seas Global Limited to acquire its
F-6
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION (continued)
On October 26, 2022, the board of directors of
TLS approved the acquisition of Reiwatakiya from All Seas Global Limited, who held
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”). The accompanying unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany balances and transactions are eliminated upon consolidation. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the afore-mentioned SEC rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended March 31, 2023 and 2022. Operating results for the six-month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending March 31, 2024.
Use of estimates
In preparing the unaudited condensed 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 unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, assessment of expected credit losses for accounts receivable, compensation receivable for consumption tax, current and non-current prepaid expenses and other assets, valuation of inventories, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, inputs used in the calculation of the asset retirement obligation, and implicit interest rate of operating leases and financing leases. Actual results could differ from those estimates.
Cash
Cash includes currency on hand and deposits held by banks that can be added or withdrawn without limitation. The Company maintains its bank accounts in Japan, Hong Kong, China and Malaysia. The Company considers all highly-liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. As of September 30, 2023 and March 31, 2023, the Company did not have any cash equivalents.
F-7
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Receivables and credit losses
On April 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss impairment methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The expected credit loss impairment model requires the entity to recognize its estimate of expected credit losses for affected financial assets using an allowance for credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements.
The Company’s account receivables, compensation receivable for consumption tax and other receivable included in current and non-current prepaid expenses and other assets are within the scope of ASC Topic 326. The Company makes estimates of expected credit and collectability trends for the allowance for credit losses based upon assessment of various factors, including historical experience, the age of the receivables, credit-worthiness of the customers and other debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and other debtors. The Company also provides specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.
Expected credit losses are included
in selling, general, and administrative expenses in the unaudited condensed consolidated
statements of operations and comprehensive loss. After all attempts to collect a receivable have failed, the receivable is written
off against the allowance. Account receivables, compensation receivable for consumption tax and other receivable is
recognized and carried at original amount less an allowance for credit losses, as necessary. As of September 30, 2023 and March
31, 2023, allowance for credit losses for accounts receivable amounted to $
Leases
The Company adopted Financial Accounting Standards Board (the “FASB”) ASC No. 842, Leases (“Topic 842”) on April 1, 2018 using the modified retrospective approach.
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty.
F-8
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company leases retail store facilities and distribution centers, which are classified as operating leases and leases certain software and equipment and furniture as finance lease in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current, and operating lease liabilities, non-current, and finance leases are included in property and equipment, finance lease liabilities, current, and finance lease liabilities, non-current in the unaudited condensed consolidated balance sheet.
At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The operating lease right-of-use asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All operating lease right-of-use assets are reviewed for impairment annually. There was no impairment for operating lease right-of-use lease assets as of September 30, 2023 and March 31, 2023.
The Company has elected the short-term lease exception, and therefore operating lease right-of-use assets and liabilities do not include leases with a lease term of twelve months or less.
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in Topic 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in Topic 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
Based on
the nature of the agreements reached with many of its landlords, the Company has accounted for rent concessions as if they were part of
the enforceable rights and obligations of the existing lease contracts and did not account for the concessions as lease modifications.
The Company has received a total of lease concessions amounting to $
F-9
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity investment
An investment
in which the Company has the ability to exercise significant influence, but does not have a controlling interest, is accounted for using
the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock
between
Common control transactions
In business combinations under common control, the assets and liabilities acquired are measured at the historical amounts of the acquirees in the unaudited condensed consolidated financial statements of acquirer on the acquisition date. The difference between the carrying amounts of the net assets acquired and the consideration paid is adjusted to the equity account of the acquirer. The operating results for all periods presented are retrospectively restated as if the current structure and operations resulting from the acquisition had been in existence since the beginning of the earliest year presented, with financial data of previously separate entities consolidated. The subsequent adjustment of contingent consideration after the acquisition date is also accounted for as an equity transaction.
Merchandise inventories
Merchandise
inventories are stated at the lower of cost or net realizable value, on a weighted average basis. Costs include mainly the cost of merchandise
inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to sell products. Write-down
is recorded when future estimated net realizable value is less than cost, which is recorded in merchandise costs in the unaudited
condensed consolidated statements of operations and comprehensive loss. The Company periodically
evaluates merchandise inventories for their net realizable value adjustments, and reduces the carrying value of those merchandise inventories
that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging
and expiration dates, as applicable, taking into consideration historical and expected future product sales. As of September 30, 2023
and March 31, 2023, merchandise inventories write-down was $
Property and equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Except for assets that are not subject to depreciation,
such as land and construction in progress, depreciation and amortization of property and equipment are mainly provided using the straight-line
method or declining balance method, which allocates an asset’s cost over the periods during which the Company benefits from the
use of the asset.
| Useful life | ||
| Property and buildings | ||
| Land | ||
| Leasehold improvements | ||
| Equipment and furniture | ||
| Automobiles | ||
| Software |
F-10
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Land has infinite useful life and is not subjected to amortization. Management reviews for impairment accordance with the accounting policy stated under impairment of long-lived assets.
Expenditures for maintenance and repair, which do not materially extend the useful lives of the assets, are charged to expenses as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the unaudited condensed consolidated statements of operations and comprehensive loss in other income or expenses.
Asset retirement obligations
The Company
records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the
long-lived assets. The Company’s asset retirement obligations are primarily related to leasehold improvement of its retail stores
leases, that, at the end of the leases, are required to be returned to the landlords in their original condition. As of September 30,
2023 and March 31, 2023, the balance of asset retirement obligations included in other non-current liabilities was $
Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment, operating lease right-of-use assets and long-term prepaid expenses and non-current assets for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When these events occur, the Company evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Given no events or changes in circumstances indicating the carrying amount of long-lived assets may not be recovered through the related future net cash flows, the Company did not recognize any impairment loss on long-lived assets for the six months ended September 30, 2023 and 2022.
F-11
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), on April 1, 2018 using the modified retrospective approach.
ASC 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance (ASC Topic 605, Revenue Recognition) did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s unaudited condensed consolidated financial statements upon adoption of ASC 606.
Under ASC 606, revenue is recognized when control of promised goods is transferred or service is rendered to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from the specified goods and services.
The Company
currently generates its revenue through retail and wholesale of Japanese beauty and health products, luxury and electronic products, as
well as sundry and other products and services, through a multi-channel distribution network. Currently, the Company sells its products
and rendered its services through: (i) directly-operated physical stores, (ii) online stores and services, and (iii) franchise stores
and wholesale customers. For Japanese and Hong Kong domestic sales, revenue is recognized at the point of sales or delivery of the related
products and control is transferred. For international sales, the Company sells goods under Cost Insurance and Freight (“CIF”)
shipping point term, and revenue is recognized when product is loaded on the ships and control is deemed as transferred. The Company generally
offers a seven-day product return policy, as long as the products are undamaged, in their original condition, and can be resold. Products
sold in the Company’s physical stores may be returned in store with receipt subject to certain restrictions. Historically, the customer
returns were immaterial. Therefore, the Company did not provide any sales return allowances for the six months ended September 30, 2023
and 2022. The Company’s service revenue primarily consists advertising services of KOLs for its customers. The Company produces
short videos with the online celebrities to promote the brands of its customers on social media platforms, such as Tik Tok and Kuaishou.
Revenue from these services is recognized at a point in time when the service is rendered by the Company. The Company enters into franchise
agreements with franchisees in Japan under which the franchisee is granted a revocable license and non-exclusive right to use the Company’s
trademarks and stores. The Company requires an entire non-refundable initial franchise fee of ¥
F-12
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company is the principal for its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise before it is transferred to customers, which generally is established when the Company is primarily responsible for merchandising decisions, maintains the relationship with customer, including assurance of member service and satisfaction, and has pricing discretion.
In directly-operated
physical stores in Japan and Hong Kong, customers can enroll in the Company’s rewards program, which is primarily a spending-based
rewards program, and get a rewards card. Members of the rewards program usually earn one membership point for each ¥
Contract balances and remaining performance obligations
Contract
balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs.
The Company did not have contract assets as of September 30, 2023 and March 31, 2023. The Company’s contract liabilities, which
are reflected in its unaudited condensed consolidated balance sheets as deferred revenue
of $
F-13
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Disaggregation of revenue
The Company disaggregates its revenue by geographic areas, product categories, and distribution channels, which the Company believes best depicts how the nature, amount, timing, and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenue for the six months ended September 30, 2023 and 2022 is as following:
Revenue by geographic areas
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Japan domestic market | $ | $ | ||||||
| China market | ||||||||
| Other overseas markets | ||||||||
| Total revenue | $ | $ | ||||||
Revenue by product categories
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Beauty products | $ | $ | ||||||
| Health products | ||||||||
| Sundry products | ||||||||
| Luxury products | ||||||||
| Electronic products | ||||||||
| Other products and services | ||||||||
| Total revenue | $ | $ | ||||||
F-14
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue by distribution channels
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Directly-operated physical stores | $ | $ | ||||||
| Online stores and services | ||||||||
| Franchise stores and wholesale customers | ||||||||
| Total revenue | $ | $ | ||||||
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, due from related parties, current portion of compensation receivable for consumption tax, prepaid expenses and other current assets, short-term borrowings, current portion of long-term borrowings, accounts payable, due to related parties, deferred revenue, taxes payable, and other payables and other current liabilities, approximate the fair value of the respective assets and liabilities as of September 30, 2023 and March 31, 2023 based upon the short-term nature of the assets and liabilities.
Foreign currency translation
The Company maintains its books and record in its local currency, Japanese yen (“YEN” or “¥”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. The Company’s subsidiaries in Hong Kong, the PRC, and Malaysia use their respective currencies Hong Kong Dollar (“HK$”), Chinese Yuan (“RMB”), and Malaysia Ringgit (“MYR”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations and comprehensive loss.
F-15
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The reporting currency of the Company is the United States Dollars (“US$”) and the accompanying unaudited condensed consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statement,” assets and liabilities of the Company are translated into US$, using the exchange rate on the balance sheet date. Revenue and expenses are translated at the average rates prevailing during the period. Shareholders’ equity is translated at the historical exchange rate at the time of transaction. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.
| For
the Six Months Ended September 30, 2023 |
For
the Six Months Ended September 30, 2022 |
March 31, 2023 | ||||||||||
| Period-end spot rate |
Average rate |
Period-end spot rate |
Average rate |
Year-end spot rate |
Average rate | |||||||
| US$ against YEN | ||||||||||||
| US$ against HK$ | ||||||||||||
| US$ against RMB | ||||||||||||
| US$ against MYR | ||||||||||||
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the unaudited condensed 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
F-16
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company’s operating entities in Japan are subject to the income tax laws of Japan. As of September 30, 2023, the tax years ended March 31, 2021 through March 31, 2023 for the Company’s operating entities in Japan remain open for statutory examination by the Japanese tax authorities. The Company’s subsidiary in Hong Kong is subject to the profit taxes in Hong Kong. As of September 30, 2023, the tax years ended since the year of incorporation through March 31, 2023 for the Company’s subsidiary in Hong Kong remain open for statutory examination by the Hong Kong taxing jurisdictions. The Company’s subsidiary in China is subject to the income tax laws of the PRC. As of September 30, 2023, the tax years ended since the year of incorporation through December 31, 2022 for the Company’s PRC subsidiary remain open for statutory examination by PRC tax authorities. The Company’s subsidiary in Malaysia is subject to the income tax laws of Malaysia. As of September 30, 2023, all of the tax returns of the Company’s Malaysian subsidiary remain open for statutory examination by relevant tax authorities.
Earnings per share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential ordinary shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were no dilutive shares for the six months ended September 30, 2023 and 2022.
Shipping and handling cost
All shipping
and handling costs are expensed as incurred and included in selling, general, and administrative expenses in the unaudited condensed
consolidated statements of operations and comprehensive loss. Total shipping and handling expenses
were $
Advertising expenses
Advertising
costs are expensed as incurred and included in selling, general, and administrative expenses in the unaudited condensed consolidated
statements of operations and comprehensive loss. Advertising expenses amounted to $
Comprehensive loss
Comprehensive loss consists of two components, net income and other comprehensive loss. The foreign currency translation gain or loss resulting from the translation of the financial statements expressed in YEN, HK$, RMB and MYR to US$ is reported in other comprehensive loss in the unaudited condensed consolidated statements of operations and comprehensive loss.
F-17
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Related parties and transactions
The Company identifies related parties, and accounts for, discloses related party transactions in accordance with ASC 850, “Related Party Disclosures,” and other relevant ASC standards.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence. Transactions between related parties commonly occurring in the normal course of business are considered to be related party transactions.
Segment reporting
The Company uses the management approach in determining its operating segments. The management approach considers the internal reporting used by the Company’s chief operating decision maker (“CODM”). The Company’s CODM has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the Company. Management has determined that the Company has three operating segments, which are (i) directly-operated physical stores, (ii) online stores and services, and (iii) franchise stores and wholesale customers.
Risks and uncertainties
Political and economic risk
The directly-operated physical stores of the Company are all located in Japan and Hong Kong, and the online stores and franchise stores and wholesale partners of the Company are mainly located in Japan and mainland China. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in Japan, Hong Kong and mainland China, as well as by the general state of their economy. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in Japan, Hong Kong and mainland China. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, including its organization and structure disclosed in Note 1, such experience may not be indicative of future results.
Credit risk
As of September
30, 2023 and March 31, 2023, $
As of September
30, 2023 and March 31, 2023, $
As of September
30, 2023 and March 31, 2023, $
F-18
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of September
30, 2023 and March 31, 2023, $
As of September
30, 2023 and March 31, 2023, $
Accounts receivable are typically unsecured and derived from revenue earned from customers, compensation receivables are typically unsecured and derived from damages the Company claimed from certain suppliers as well as customers, thereby exposed to credit risks. The risk is mitigated by the Company’s assessment of its customers and suppliers’ creditworthiness and its ongoing monitoring of outstanding balances.
Concentrations
For the six months ended September 30, 2023 and 2022, majority of the Company’s assets were located in Japan and Hong Kong, and all of the Company’s revenue was generated by the Company and its subsidiaries, which are located in Japan, Hong Kong and China.
For the
six months ended September 30, 2023, one customer accounted for
As of September
30, 2023, two wholesale customers accounted for
For the
six months ended September 30, 2023, four suppliers accounted for approximately
F-19
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures.” This ASU expands required public entities’ segment disclosures, including disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company plans to adopt this guidance effective April 1, 2025 and the adoption of this ASU is not expected to have a material impact on its financial statements.
Except for the above-mentioned pronouncement, there are no new recently issued accounting standards that will have material impact on the Company’s unaudited condensed consolidated financial position, statements of operations, and cash flows.
NOTE 3 – GOING CONCERN
Although
the Company incurred a net loss in fiscal year ended March 31, 2023, the financial performance of the Company has improved during the
six months ended September 30, 2023. As reflected in the unaudited condensed consolidated
financial statements, the Company had a net income of $
The Company’s accounts receivable decreased
by $
As of September
30, 2023, the Company had approximately $
Based on the foreseeable future projection of continuing operating profit or loss and the need for future business funding, management has determined that these additional conditions raise substantial doubt about the Group’s ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements do not include adjustments that may result from this uncertainty. Therefore, the unaudited condensed consolidated financial statements are prepared on the assumption that the Group will continue as a going concern.
NOTE 4 – ACCOUNTS RECEIVABLE, NET
| September 30, 2023 | March 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
The Company’s accounts receivable primarily include balance due from customers when the Company’s products have been sold and delivered to customers, which has not been collected as of the balance sheet dates.
F-20
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – ACCOUNTS RECEIVABLE, NET (continued)
| September 30, 2023 | March 31, 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions | ||||||||
| Foreign currency translation adjustments | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
NOTE 5 – MERCHANDISE INVENTORIES, NET
| September 30, 2023 | March 31, 2023 | |||||||
| Beauty products | $ | $ | ||||||
| Health products | ||||||||
| Luxury products | ||||||||
| Electronic products | ||||||||
| Other products | ||||||||
| Merchandise inventories, net | $ | $ | ||||||
Reversal
of merchandise inventories write-down was $
NOTE 6 – COMPENSATION RECEIVABLE FOR CONSUMPTION TAX, NET
| September 30, 2023 | March 31, 2023 | |||||||
| Compensation receivable for consumption tax | $ | $ | ||||||
| Less: allowance for credit losses | ( | ) | ( | ) | ||||
| Subtotal | ||||||||
| Less: compensation receivable for consumption tax, current | ( | ) | ( | ) | ||||
| Long-term compensation receivable for consumption tax, net | $ | $ | ||||||
The Tokyo
Regional Taxation Bureau had conducted a tax examination into the Company’s consumption tax filing for the period from July 2018
to December 2021. As a result of the examination, the Company was required to return consumption tax refund for export transactions that
were determined not to meet the tax exemption requirements due to failure in submission of relevant export documents (see Note 13) by
the Company’s certain suppliers and customers. In June 2023, the Company entered into agreements with relevant suppliers and customers
to claim compensation for damages from the additional consumption tax payment.
These suppliers and customers agreed to compensate the Company and the compensation receivable for consumption tax will be paid over two
years from the date of the agreements. As of March 31, 2023, the net total of approximately $
F-21
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – PREPAID EXPENSES AND OTHER ASSETS, NET
| September 30, 2023 | March 31, 2023 | |||||||
| Deposits (1) | $ | $ | ||||||
| Consumption tax receivable | ||||||||
| Other receivables (2) | ||||||||
| Advance to suppliers (3) | ||||||||
| Prepaid expenses and others (4) | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Subtotal | ||||||||
| Less: prepaid expenses and other current assets, net | ( | ) | ( | ) | ||||
| Long-term prepaid expenses and other non-current assets, net | $ | $ | ||||||
| (1) |
| (2) | Other receivables as of September 30, 2023 and March 31, 2023 included $
Other receivables as of September 30, 2023 and March 31, 2023 included approximately $ |
| (3) |
| (4) |
F-22
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – PROPERTY AND EQUIPMENT, NET
| September 30, 2023 | March 31, 2023 | |||||||
| Property and buildings | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Land | ||||||||
| Equipment and furniture | ||||||||
| Automobiles | ||||||||
| Software | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
As of September
30, 2023 and March 31, 2023, the Company pledged a piece of land of 16,165 square feet with a carrying value of ¥
NOTE 9 – LEASES
The Company leases retail store facilities and distribution centers under non-cancellable operating leases, with terms ranging from one to 15 years, as well as finance leases for software, equipment, and furniture with a term of five years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of right-of-use assets and lease liabilities.
Operating lease expenses for lease payment are recognized on a straight-line basis over the lease term. Finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased assets, and interest expenses, which are recognized following an effective interest rate method. Leases with initial term of 12 months or less are not recorded on the balance sheet.
Operating Leases
| September 30, 2023 | March 31, 2023 | |||||||
| Operating lease right-of-use lease assets | $ | $ | ||||||
| Operating lease liabilities – current | $ | $ | ||||||
| Operating lease liabilities – non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
F-23
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LEASES (continued)
| September 30, 2023 | March 31, 2023 | |||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate * | % | % | ||||||
| * |
During the
six months ended September 30, 2023 and 2022, the Company incurred total operating lease expenses of $
Finance Leases
The components of finance lease expenses were as follows:
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Finance leases cost: | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance leases cost | $ | $ | ||||||
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from finance leases | $ | $ | ||||||
| September 30, 2023 | March 31, 2023 | |||||||
| Finance leases cost: | ||||||||
| Software | $ | $ | ||||||
| Equipment and furniture | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
F-24
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LEASES (continued)
The weighted average remaining lease terms and discount rates for all of finance leases as of September 30, 2023 and March 31, 2023 were as follows:
| September 30, 2023 | March 31, 2023 | |||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
| 12 months ending September 30, | Operating Leases | Finance Leases | ||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
NOTE 10 – ACQUISITIONS
TLS Acquisition
On July
20, 2022, the Company entered into an Agreement with All Seas Global Limited to acquire
| July 20, 2022 | ||||
| Assets | $ | |||
| Liabilities | ||||
| Net liabilities | $ | ( | ) | |
| Consideration in excess of net liabilities acquired | $ | |||
| Total purchase consideration | $ | |||
F-25
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – ACQUISITIONS (continued)
Reiwatakiya Acquisition
On October
26, 2022, the board of directors of TLS approved the acquisition of Reiwatakiya from All Seas Global Limited who held
The carrying amounts of the assets and liabilities of Reiwatakiya as of the transaction date were as follows:
| October 26, 2022 | ||||
| Assets | $ | |||
| Liabilities | ||||
| Net liabilities | $ | ( | ) | |
| Non-controlling interests | ||||
| Consideration in excess of net liabilities acquired | $ | |||
| Total purchase consideration | $ | |||
NOTE 11 – BORROWINGS
| Maturity | Interest Rate | September 30, 2023 | March 31, 2023 | |||||||||
| Syndicated Loans (1) | TIBOR (1M)+1.20% | $ | $ | |||||||||
| Total short-term borrowings | $ | $ | ||||||||||
The terms of the various loan agreements related to short-term borrowings contain certain restrictive covenants which, among other things, require the Company to maintain current organization structure, specified ratios of debt to tangible net assets and debt service coverage, and positive net income. The terms also prohibit the Company from transferring part or all of its assets to third-party companies or receiving part of all of the assets from other third-party companies. Although the Company incurred a net loss in fiscal year ended March 31, 2023, the financial performance of the Company has improved during the six months ended September 30, 2023, and the Company did not receive any notices from banks, such as notices of terminating its ability to borrow under the relevant agreements and notices of accelerating its obligations to repay outstanding borrowings.
| ^ |
| (1) |
F-26
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – BORROWINGS (continued)
| Maturity | Interest Rate | September 30, 2023 | March 31, 2023 | |||||||||
| Toei Shinkin Bank (1) | $ | $ | ||||||||||
| Japan Finance Corporation (2) | ||||||||||||
| BOT Lease Co., Ltd. (3) | ||||||||||||
| MUFG Bank (4) | ||||||||||||
| Tokyo Higashi Shinkin Bank | ||||||||||||
| The Hongkong and Shanghai Banking Corporation Limited (5) | ||||||||||||
| DFL-Shutoken Leasing (Hong Kong) Company Limited | ||||||||||||
| Resona Merchant Bank Asia Limited (6) | ||||||||||||
| Total long-term borrowings | $ | $ | ||||||||||
| Current portion of long-term borrowings | $ | $ | ||||||||||
| Non-current portion of long-term borrowings | $ | $ | ||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
F-27
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – BORROWINGS (continued)
| 12 months ending September 30, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total long-term borrowings | $ | |||
For the
above mentioned short-term and long-term loans, the Company recorded interest expenses of $
NOTE 12 – RELATED PARTY TRANSACTIONS
| Name of Related Party | Relationship to the Company | |
| Mr. Mei Kanayama | ||
| Seihinkokusai Co., Ltd. (“Seihinkokusai”) | ||
| Shintai Co., Ltd. | ||
| Palpito | ||
| Tokushin G.K. |
| a. | Accounts receivable, net–- related parties |
| Name | September 30, 2023 | March 31, 2023 | ||||||
| Seihinkokusai | $ | | $ | |||||
| Palpito | ||||||||
| Tokushin G.K. | ||||||||
| Shintai Co., Ltd. | ||||||||
| Subtotal | ||||||||
| Less: allowance for credit losses | ||||||||
| Total accounts receivable, net–- related parties | $ | $ | ||||||
F-28
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
| b. | Due from related parties |
| Name | September 30, 2023 | March 31, 2023 | ||||||
| Seihinkokusai (1) | $ | $ | ||||||
| Shintai Co., Ltd. | ||||||||
| Total due from related parties | $ | $ | ||||||
| (1) |
| c. | Accounts payable – related party |
| Name | September 30, 2023 | March 31, 2023 | ||||||
| Seihinkokusai | $ | $ | ||||||
| Total accounts payable – related party | $ | $ | ||||||
F-29
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
| d. | Due to related parties |
| Name | September 30, 2023 | March 31, 2023 | ||||||
| Mr. Mei Kanayama | $ | $ | ||||||
| Seihinkokusai | ||||||||
| Total due to related parties | $ | $ | ||||||
| e. | Sales to related parties |
| For the Six Months Ended September 30, | ||||||||
| Name | 2023 | 2022 | ||||||
| Seihinkokusai | $ | $ | ||||||
| Shintai Co., Ltd. | ||||||||
| Palpito | ||||||||
| Total revenue from related parties | $ | $ | ||||||
| f. | Purchase from related parties |
| For the Six Months Ended September 30, | ||||||||
| Name | 2023 | 2022 | ||||||
| Seihinkokusai | $ | $ | ||||||
| Palpito | ||||||||
| Total purchase from related parties | $ | $ | ||||||
| g. | Other related party transactions |
Mr. Kanayama provided guarantees in connection with certain loans the Company borrowed (see Note 11).
F-30
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES
| (a) | Corporate Income Taxes |
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Japan
The Company
and its subsidiary in Japan are mainly subject to Japanese national and local income taxes, inhabitant tax, and enterprise tax, which,
in the aggregate, represent a statutory income tax rate of approximately
Hong Kong
TLS is incorporated
in Hong Kong and is subject to profit taxes in Hong Kong at a rate of
PRC
Qingzhiliangpin
is incorporated in the PRC and is subject to the PRC Enterprise Income Tax. Under the Enterprise Income Tax Law of PRC, domestic enterprises
and Foreign Investment Enterprises are subject to a unified
Malaysia
Reiwatakiya
is incorporated in Malaysia, and is governed by the income tax laws of Malaysia. The income tax provision in respect of operations in
Malaysia is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations,
and practices. Under the Income Tax Act of Malaysia, enterprises incorporated in Malaysia are usually subject to a unified
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Japan | $ | ( | ) | $ | ( | ) | ||
| Hong Kong | ||||||||
| PRC | ||||||||
| Malaysia | ( | ) | ||||||
| Income before tax | $ | $ | ||||||
F-31
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
| For the Six Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| Current tax provision | ||||||||
| Japan | $ | $ | ||||||
| Hong Kong | ||||||||
| PRC | ||||||||
| Malaysia | ||||||||
| Deferred tax benefit | ||||||||
| Japan | $ | ( |
) | $ | ( |
) | ||
| Hong Kong | ||||||||
| PRC | ||||||||
| Malaysia | ||||||||
| ( |
) | ( |
) | |||||
| Income tax provision (benefit) | $ | ( |
) | $ | ||||
| For the Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Japanese statutory income tax rate | % | % | ||||||
| Non-deductible expenses | % | % | ||||||
| Non-taxable income | ( | )% | ( | )% | ||||
| Tax rate difference in non-Japan subsidiaries and different prefectures in Japan | ( | )% | ( | )% | ||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Effect of additional consumption tax charge from tax examination (1) | % | |||||||
| Prior year income tax true-up | ( | )% | ||||||
| Others | % | % | ||||||
| Effective tax rate | ( | )% | % | |||||
| (1) |
F-32
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
| September 30, 2023 | March 31, 2023 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for credit losses | $ | $ | ||||||
| Accrued member rewards | ||||||||
| Accrued employee bonus | ||||||||
| Accrued asset retirement obligation | ||||||||
| Accrued employee retirement pension | ||||||||
| Investment loss from equity method investment | - | |||||||
| Net operating loss carry-forwards | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Change in fair value of purchase option | ( | ) | ( | ) | ||||
| Accrued interest income on consumption tax receivable | - | ( | ) | |||||
| Compensation receivable for consumption tax | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Deferred tax liabilities, net | $ | ( | ) | $ | ( | ) | ||
| September 30, 2023 | March 31, 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions (reduction) | ( | ) | ||||||
| Disposal of a subsidiary | ( | ) | ||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
F-33
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – TAXES (continued)
| (a) | Corporate Income Taxes (continued) |
As of September
30, 2023, the Company had net operating loss carried forward from the entities in Japan of $
As of September
30, 2023, the Company had net operating loss carried forward from the entities in Hong Kong of $
| (b) | Consumption tax |
In Japan,
consumption tax collected and remitted to tax authorities is excluded from revenue, cost of sales, and expenses in the unaudited
condensed consolidated statements of operations and comprehensive loss. Before October 1, 2019,
the applicable consumption tax rate was
| (c) | Taxes payable |
| September 30, 2023 |
March 31, 2023 |
|||||||
| Income tax payable | $ | $ | ||||||
| Additional consumption tax payable due to tax examination (1) | ||||||||
| Consumption tax payable and others | ||||||||
| Total taxes payable | $ | $ | ||||||
| (1) |
|
F-34
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – REPRESENTATIVE’S WARRANTS LIABILITY
In connection
with the Company’s IPO, the Company agreed to issue warrants to a representative of several underwriters, for a nominal consideration
of $
Because the strike price of the Representative’s Warrants is denominated in U.S. dollars, a currency other than the Company’s functional currency, ¥, the Representative’s Warrants were not considered indexed to the Company’s own stock. As such, the Representative’s Warrants were classified as a derivative liability under ASC 815-10, and recorded initially and subsequently at fair value with all future changes in the fair value recognized currently in earnings until such time as the warrants are exercised or expired. As of September 30, 2023, these Representative’s Warrants were issued and outstanding but none of the warrants had been exercised. For the six months ended September 30, 2023 and 2022, these Representative Warrants were antidilutive and accordingly were not included in the diluted EPS calculation based on treasury stock method.
On January
13, 2022, the Company recorded a fair value of $
| September 30, 2023 | March 31, 2023 | January 13, 2022 | ||||||||||
| Representative’s Warrants liability | ||||||||||||
| Stock price | $ | $ | $ | |||||||||
| Exercise price | $ | $ | $ | |||||||||
| Expected term (years) | ||||||||||||
| Risk-free interest rate | % | % | % | |||||||||
| Expected volatility | % | % | % | |||||||||
F-35
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SHAREHOLDERS’ EQUITY
Ordinary shares
The Company is a stock company incorporated in Japan pursuant to the laws of Japan on December 28, 2006.
At the incorporation,
the number of authorized ordinary shares was
On April
25, 2011, the number of authorized ordinary shares was increased to
On October
15, 2014,
On July
30, 2016,
On March
30, 2017,
On October
22, 2020, the Company’s shareholders approved an increase in the number of the Company’s authorized ordinary shares from
On November
10, 2020,
On February
5 and 12, 2021, an issuance of
On August
18, 2021, shareholders of the Company approved an increase in the number of the Company’s authorized Ordinary Shares from
F-36
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SHAREHOLDERS’ EQUITY (continued)
Initial public offering
On January
13, 2022, the Company closed its IPO of
Restricted net assets
The Company
is restricted in its ability to transfer a portion of its net assets, equivalent to its share capital to its shareholders in the form
of loans, advances, or cash dividends. The payment of dividends by the Company organized in Japan is subject to limitations, procedures,
and formalities. Regulations in Japan currently permit payment of dividends only out of accumulated profits as determined in accordance
with accounting standards and regulations in Japan. As of September 30, 2023 and March 31, 2023, the total restricted net assets of the
Company amounted to $
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Contingencies
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of September 30, 2023 and March 31, 2023, there were no legal claims and litigation against the Company.
F-37
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT REPORTING
Segments
The Company
is engaged in the operation of retail and wholesale of Japanese beauty and health products, as well as sundry products and other products
and services. The Company’s operations are conducted in
Directly-operated physical stores segment includes physical stores in Japan and Hong Kong. Online stores and services segment includes sales through the Company’s websites and various e-commerce marketplaces in Japan, China, and Korea, as well as services from advertising business through KOLs. Franchise stores and wholesale customers segments include franchise stores in Japan, the U.S. and the U.K., and wholesale customers in Japan and other countries including China, the U.S., and Canada.
The Company measures the results of its segments using, among other measures, each segment’s revenue, merchandise costs, interest expenses, net, provision for income tax, net income (loss), depreciation and amortization, capital expenditures, total assets as well as total liabilities, which includes certain corporate overhead allocations. From time to time, the Company revises the measurement of each segment’s revenue and other measures, including any corporate overhead allocations, as determined by the information regularly reviewed by its CODM. When the measurement of a segment significantly changes, previous period amounts and balances are reclassified to be comparable to the current period’s presentation.
| For the six months ended September 30, 2023 | ||||||||||||||||
| Directly- Operated Physical Stores | Online Stores and Services | Franchise Stores and Wholesale Customers | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Merchandise costs | $ | $ | $ | $ | ||||||||||||
| Interest expenses, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Benefit for income tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
F-38
YOSHITSU CO., LTD AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT REPORTING (continued)
| For the six months ended September 30, 2022 | ||||||||||||||||
| Directly- Operated Physical Stores | Online Stores and Services | Franchise Stores and Wholesale Customers | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Merchandise costs | $ | $ | $ | $ | ||||||||||||
| Interest expenses, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Provision for income tax | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| September 30, 2023 | March 31, 2023 | |||||||
| Total assets: | ||||||||
| Directly-Operated Physical Stores | $ | $ | ||||||
| Online Stores and Services | ||||||||
| Franchise Stores and Wholesale Customers | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities: | ||||||||
| Directly-Operated Physical Stores | $ | $ | ||||||
| Online Stores and Services | ||||||||
| Franchise Stores and Wholesale Customers | ||||||||
| Total liabilities | $ | $ | ||||||
Disaggregated Revenue
The Company disaggregates its revenue by geographic areas, product categories, and distribution channels, which the Company believes best depicts how the nature, amount, timing, and uncertainty of the revenue and cash flows are affected by economic factors. See Note 2 for the Company’s disaggregation of revenue for the six months ended September 30, 2023 and 2022.
NOTE 18 – SUBSEQUENT EVENTS
On December
14, 2023, the Company entered into a Real Estate Sales Agreement with a third party (the
“Buyer”). Pursuant to the agreement, the Company will sell its head office in Japan including the building and
land with a net book value of approximately ¥
These unaudited condensed consolidated financial statements were approved by management and available for issuance on December 22, 2023, and the Company has evaluated subsequent events through this date. The Company did not identify any subsequent events except those disclosed above that would have required adjustment or disclosure in the financial statements.
F-39