KPFS Pepper Food Servic (MM)

PART I

Note: Earnings per share have been restated to reflect the 2-for-1 common share split effective on September 1, 2017.

Dividends

The Companies Act (Act No. 86 of July 26, 2005), or the Companies Act, which is the primary corporation law in Japan, permits interim dividends to be paid once a year upon resolution by the board of directors if the company meets certain criteria and its articles of incorporation so stipulate. The Company may distribute interim dividends from surplus pursuant to Article 454, Paragraph 5 of the Companies Act to the shareholders or registered share pledgees whose names have been entered or recorded in the latest register of shareholders as of June 30 of each year pursuant to a resolution of the board of directors. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3.0 million.

The amount of retained earnings available for dividends under the Companies Act is based on the amount of retained earnings recorded in our general books of account prepared using Japanese generally accepted accounting principles, or Japanese GAAP. The adjustments included in the consolidated financial statements for IFRS purposes but not recorded in the general books of account have no effect on the determination of retained earnings available for dividends under the Companies Act. The adjustments relate to the differences in recognition and measurement of property plant and equipment, Niku (Beef) Mileage Program rewards, and assessment of the recoverability of deferred tax assets, and other differences between reported Japanese GAAP and IFRS. The adjustments increased retained earnings on the consolidated statement of financial position under IFRS from Japanese GAAP by ¥252,955 thousand as of December 31, 2018, and decreased retained earnings on the consolidated statement of financial position under IFRS from Japanese GAAP by ¥236,192 thousand and ¥49,084 thousand as of December 31, 2017 and 2016, respectively.

Both annual and interim dividends were distributed during fiscal year 2018. Interim dividends were distributed effective September 7, 2018 for an amount of ¥15 per share. Annual dividends were distributed effective March 29, 2019 in an amount of ¥15 per share.

Both annual and interim dividends were distributed during fiscal year 2017. Interim dividends were distributed effective September 8, 2017 for an amount of ¥20 per share. Annual dividends were distributed effective March 30, 2018 in an amount of ¥15 per share.

Both annual and interim dividends were distributed during fiscal year 2016. Interim dividends were distributed effective September 8, 2016 for an amount of ¥10 per share. Annual dividends were distributed effective March 30, 2017 in an amount of ¥10 per share.

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Not applicable.

Not applicable.

We caution you that our business and operations are subject to a number of risks and uncertainties. The factors listed below are important factors that could cause our actual results to differ materially from our historical results and from projections in forward-looking statements contained in this annual report on Form 20-F, in our news releases, and in filings we make with regulatory authorities in Japan. If any of the following events actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected. This could cause the trading price of our common shares to decline and you may lose all or part of your investment. Moreover, the risks described below 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, operating results, prospects or financial condition.

Risks Related to our General Business

We may not achieve our development goals, which could adversely affect our operations and financial results.

Our number of stores has increased from 655 (200 directly-owned) in 2017 to 883 (315 directly-owned) at the end of 2018. We intend to continue our growth either through developing additional directly-owned stores or through new restaurant development by franchisees, both in existing markets and in new markets, particularly in the United States and Asia. Such rapid development involves substantial risks, including the risk of:

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Although we manage our growth and development activities to help reduce such risks, we cannot provide assurance that our present or future growth and development activities will perform in accordance with our expectations. Our inability to expand in accordance with our plans or to manage the risks associated with our growth could have a material adverse effect on our results of operations and financial condition.

Our outstanding debt agreements may limit our flexibility in operating our business and we are operating in negative working capital.

In March 2016, March 2017 and March 2018, we entered into three separate Delayed Draw Term Loan Agreements with MUFG Bank, Ltd. for loans in the aggregate amount of ¥2,500,000 thousand. These loans were originally secured by certain of our assets, but as of April 10, 2018, the collateral on each loan has been removed as a result of improvements in our credit. No other material terms were changed. These agreements contain various restrictive covenants including, among others, continuously maintaining a positive “ordinary profit” under Japanese GAAP each year throughout the period of the loans. Ordinary profit is profit excluding extraordinary items as defined under Japanese GAAP, such as impairment losses and provisions for onerous lease contracts, from profit before tax and was ¥3,876,615 thousand, ¥2,322,776 thousand and ¥973,054 thousand for the years ended 2018, 2017 and 2016, respectively.

A breach of these or other covenants could result in an event of default under these agreements and could lead to an increase in the applicable interest rates under these agreements. Although we are currently in compliance with all covenants, in the case of a continuing event of default, MUFG Bank, Ltd. could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit.

Amounts attributable to repayment of these loans contributed to our negative working capital as of December 31, 2018. If our revenues decrease materially or we experience a significant increase in our expenses, we may not have enough available cash or be able to raise additional funds on satisfactory terms, if at all, through equity or debt financings to make any required prepayment or repay such indebtedness at the time any such event of default occurs. In such an event, we may be required to delay, limit, reduce or terminate our business development or expansion efforts. Our business, financial condition and results of operations could be materially adversely affected as a result.

Substantially all of our revenues are from Japan, but an increase in our international presence could expose us to fluctuations in foreign currency exchange rates, or a change in monetary policy may harm our financial results.

Our reporting currency is the Japanese yen and our operations in other countries use the applicable local currency. Substantially all of our revenues are from Japan, but an increase in our international presence could expose us to fluctuations in foreign currency exchange rates. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies which, among other factors, may be influenced by government policies and domestic and international economic and political developments. If our non-Japanese revenues increase substantially in the future, any significant change in the value of the currencies of the countries in which we do business against the Japanese yen could adversely affect our financial condition and results of operations as expressed in Japanese yen.

We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the amount of our revenues that will be generated in other countries, the variability of currency exposures and the potential volatility of currency exchange rates. We do not take actions to manage our foreign currency exposure, such as entering into hedging transactions.

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We are actively expanding in Japan and overseas markets, and we may be adversely affected if Japanese and global economic conditions and financial markets deteriorate.

We opened our first franchise store operated by an overseas franchisee in November 2003. As of December 31, 2018, we had overseas franchises in the United States, Republic of Singapore, Australia, Canada, and elsewhere. We seek to proactively expand our overseas business in the future including into new regions for us, particularly Europe, Asia and New Zealand. As a result, our financial condition and results of operations may be materially affected by general economic conditions and financial markets in Japan and foreign countries, which would be influenced by the changes of various factors. These factors include fiscal and monetary policies, and laws, regulations and policies on financial markets. In addition, we could be impacted by labor shortages in Japan or other markets. The deterioration of Japanese and global economic conditions, or financial market turmoil, could result in a worsening of our liquidity and capital conditions, an increase in our credit costs, and, as a result, adversely affect our business, financial condition and results of operations.

We are substantially dependent upon SFoods Inc. for the food supply to our restaurants.

We rely on one food supplier, SFoods Inc., for a large majority of our food supply of directly-owned and franchised restaurants, accounting for approximately 68% of the Company’s and our franchisees’ overall supply requirements, which primarily includes food supplies. If we lost SFoods Inc. as a supplier, it could disrupt our operations until we are able to find an alternative supplier. They are also a related party and our second largest shareholder with 2,466,000, or approximately 12%, of our common shares as of December 31, 2018.

Failure by SFoods Inc., or another supplier to our restaurants, to meet its service requirements could lead to a disruption of service or supply until a new supplier or distributor is engaged, and any disruption could have an adverse effect on our business. In addition, SFoods Inc. provides us with credit on terms that might not be available in other supply relationships.

We have negative working capital and may not be able to raise additional funds on satisfactory terms to repay outstanding indebtedness, which could adversely impact our operations and development plans.

We had negative working capital in the amount of ¥5,063,863 as of December 31, 2018 as a result of our arrangements under our principal food supply agreements, including those with SFoods Inc. The agreements provide us with credit terms for food and supply purchases. We frequently collect cash from sales activities (including store sales and sales to our franchise operators) within a shorter period of time than that required for payment under the food supply agreements. This provides us with favorable liquidity to help fund our operations and investment activities, including restaurant expansions. In addition, we have historically used bank borrowings to finance our operations and investment activities.

A key factor affecting the cost and availability of bank borrowings to finance operations and investment activities is our credit rating. Our credit rating depends on many factors, some of which are outside of our control. Significant factors in determining our credit ratings or that otherwise could affect our ability to raise financing include our ownership structure, asset quality, liquidity profile, short and long-term financial prospects, risk exposures, and capital ratios. Deterioration in any one of these factors or in any combination of these factors, including extraordinary losses, may lead rating agencies to downgrade our credit ratings.

If our revenues decrease materially, or key suppliers, including SFoods Inc., change payment terms, or we experience a downgrade in our credit ratings, we may not have enough available cash to repay outstanding indebtedness when due. Further, we may not be able to raise additional funds on satisfactory terms, if at all, through equity or debt financings to repay such indebtedness. In such an event, we may be required to delay, limit, reduce or terminate our business development or expansion efforts. Our business, financial condition and results of operations could be materially adversely affected as a result.

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Shortages or interruptions in the availability and delivery of food and other supplies may disrupt our operations and result in increased costs or reduced revenues.

We rely on a supply of beef from a specific place of origin, with around 90% of our beef originating from the U.S. Further, the remaining 10% of our beef is supplied from Commonwealth of Australia (Australia).

We, along with our franchisees, are also dependent upon third parties to make frequent deliveries of food and beverage products and supplies that meet our specifications at competitive prices. Shortages or interruptions in the supply of food items and other supplies to our restaurants could adversely affect the availability, quality and cost of items we use and the operations of our restaurants. Such shortages or disruptions could be caused by inclement weather, natural disasters, increased demand, problems in production or distribution, restrictions on imports or exports, the inability of vendors to obtain credit, political instability in the countries in which suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards, product quality issues, inflation, the price of gasoline, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pronouncements, the cancelation of supply or distribution agreements or an inability to renew such arrangements or to find replacements on commercially reasonable terms, or other conditions beyond our control or the control of our franchisees. While we will aim to diversify our food supply, there is no assurance that we will be able to diversify our procurement of beef or other raw materials.

A shortage or interruption in the availability of certain food products, such as beef, or supplies could increase costs and limit the availability of products critical to our restaurant operations, which in turn could lead to restaurant closures and/or a decrease in sales.

An increase in food prices may have an adverse impact on our and our franchisees’ profit margins.

We and our franchisees are subject to volatility in food and commodity costs and availability. Accordingly, our profitability depends in part on our ability to anticipate and react to changes in food costs and availability. As is true of all companies in the restaurant industry, we are susceptible to increases in food costs, such as those for beef, that are outside of our control. Factors that can impact food and commodity costs include general economic conditions, seasonal fluctuations, weather and climate conditions, global demand, trade protections and subsidies, food safety issues, infectious diseases, possible terrorist activity, currency fluctuations, product recalls and government regulatory schemes. As a result, the historical prices of raw materials used in the operation of our restaurant locations have fluctuated. We cannot assure you that we or our franchisees will continue to be able to purchase raw materials at reasonable prices, or that prices of raw materials will remain stable in the future. In addition, a significant increase in gasoline prices could result in the imposition of additional charges by our distributors.

Because our franchisees provide competitively priced food, we may not have the ability to pass through to customers the full amount of any commodity price increases. If we and our franchisees are unable to manage the cost of raw materials or to increase the prices of products proportionately, it may have an adverse impact on our and our franchisees’ profit margins and their ability to remain in business, which would adversely affect our results of operations.

Our success depends substantially on our ability to maintain our corporate reputation and on the value and perception of our brands.

Our success depends in large part upon our and our franchisees’ ability to maintain and enhance the value of our brands and our customers’ loyalty to our brands. Brand value is based in part on consumer perceptions on a variety of subjective qualities. Business incidents, whether isolated or recurring, and whether originating from us, franchisees, competitors, suppliers or distributors, can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation. For example, our brands could be

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damaged by claims or perceptions about the quality or safety of our products or the quality or reputation of our suppliers, distributors or franchisees, regardless of whether such claims or perceptions are true. Any such incidents (even if resulting from actions of a competitor or franchisee) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our brands and/or our products and reduce consumer demand for our products, which would likely result in lower revenues and profits. Additionally, our corporate reputation could suffer from a real or perceived failure of corporate governance or misconduct by a company officer, or an employee or representative of us or a franchisee.

Our success depends in part upon effective advertising and marketing campaigns, which may not be successful, and upon franchisee support of such advertising and marketing campaigns.

We believe our brands are critical to our business. We expend resources in our marketing efforts using a variety of media, including social media. We expect to continue to conduct brand awareness programs and customer initiatives to attract and retain customers. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising than us. Should our competitors increase spending on marketing and advertising, or should our advertising and promotions be less effective than our competitors, our business, financial condition and results of operations could be materially adversely affected.

The support of our franchisees is critical for the success of our advertising and marketing campaigns we seek to undertake, and the successful execution of these campaigns will depend on our ability to maintain alignment with our franchisees. While we maintain control over advertising and marketing materials and can mandate certain strategic initiatives pursuant to our franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be successful.

Food safety and food-borne illness concerns disrupt our operations and adversely affect our operations and financial results.

Food safety is a top priority for our company, and we expend significant resources on food safety programs to ensure that our customers are able to enjoy safe and high-quality food products. Nonetheless, food safety risks cannot be completely eliminated, and food safety and food-borne illness issues do occur in the food service industry, especially those specializing in serving meet, such as beef. Food-borne illnesses, such as E. coli, hepatitis A, trichinosis and salmonella, occur or may occur within our system from time to time. In addition, food safety issues such as food tampering, contamination and adulteration occur or may occur within our system from time to time. Any report or publicity linking one of our restaurants, or linking our competitors or our industry generally, to instances of food-borne illness or food safety issues could adversely affect our brands and reputations as well as our revenues and profits, and possibly lead to product liability claims, litigation and damages. If a customer of one of our restaurant locations becomes ill as a result of food safety issues, restaurants in our system may be temporarily closed, which would decrease our revenues. In addition, instances or allegations of food-borne illness or food safety issues, real or perceived, involving our restaurants, restaurants of competitors, or suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our restaurants, could result in negative publicity that could adversely affect our sales or the sales of our franchisees. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our franchisees.

Failure to protect our trademarks or other intellectual property could diminish the value of our brand and harm our business.

We regard our trademarks and other marks related to our restaurant businesses, particularly our Pepper Lunch ^™ and Ikinari! Steak ^™ trademarks, our jointly-owned patents for equipment used in our restaurants, as well as our solely owned patent for our steak serving system as having significant value and being important to our

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marketing efforts. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, design rights and other rights, such as trade secret and unfair competition laws, to protect our directly-owned and franchise stores and services from infringement. We have two jointly-owned patents for equipment used in our restaurants, as well as registered trademarks in Japan, the United States and various other foreign jurisdictions. We have an exclusive right to purchase an electromagnetic cooker under our agreement with the co-owner of our patent. We also have a right to purchase an iron plate on a non-exclusive basis pursuant to our agreement with the joint holder of the iron plate’s patent. If our competitors begin purchasing and utilizing the iron plate, it could diminish the value of our brand, which may adversely impact our revenues and results.

From time to time we become aware of names and marks confusingly similar to ours, or similar equipment, being used by other persons or businesses. Although our policy is to oppose any such infringement of our patents or trademarks, further or unknown unauthorized uses or other misappropriation of our trademarks or other marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection may not be available in every country in which our franchisees have, or intend to open or franchise, a restaurant. There can be no assurance that these protections will be adequate and defending or enforcing our service marks and other intellectual property could result in the expenditure of significant resources. We may also face claims of infringement that could interfere with the use of the proprietary know-how, concepts, recipes, or trade secrets used in our business. Defending against such claims may be costly, and we may be prohibited from using such proprietary information in the future or forced to pay damages, royalties, or other fees for using such proprietary information, any of which could negatively affect our business, reputation, financial condition, and results of operations.

We could be party to litigation that could adversely affect us by increasing our expenses, diverting management attention or subjecting us to significant monetary damages and other remedies.

We may become involved in legal proceedings involving consumer, employment, real estate related, tort, intellectual property, breach of contract, securities, derivative and other litigation. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may not be accurately estimated. Regardless of whether any such claims have merit, or whether we are ultimately held liable or settle, such litigation may be expensive to defend and may divert resources and management attention away from our operations and negatively impact reported earnings. With respect to insured claims, a judgment for monetary damages in excess of any insurance coverage could adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also adversely affect our reputation, which in turn could adversely affect our results of operations.

In addition, the restaurant industry around the world has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to customer health issues, including weight gain and other adverse effects. These concerns could lead to an increase in the regulation of the content or marketing of our products. We may also be subject to such claims in the future and, even if we are not, publicity about these matters (particularly directed at the quick service and fast-casual segments of the retail food industry) may harm our reputation and adversely affect our business, financial condition and results of operations.

We depend on our key personnel for the success of our business, and losing their services would severely disrupt our business.

Our future success is heavily dependent upon the continued service of our key executives. If we lose the services of senior members of our management or other key employees, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and growth. Although we maintain key person life insurance for Mr. Kensaku Ichinose, our Chief Financial Officer, such coverage may not be adequate to protect us in the event of loss of such personnel. Competition for qualified individuals could cause us to offer higher compensation and other

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benefits to attract and retain them, which could materially and adversely affect our financial condition and results of operations.

Changes in, or noncompliance with, governmental regulations may adversely affect our business operations, growth prospects or financial condition.

We and our franchisees are subject to numerous laws and regulations in the countries in which we operate. These laws and regulations may change regularly and are becoming increasingly complex.

Compliance with new or existing laws and regulations could impact our operations. The compliance costs associated with these laws and regulations could be substantial. Any failure or alleged failure to comply with these laws or regulations could adversely affect our reputation, international expansion efforts, growth prospects and financial results or result in, among other things, litigation, revocation of required licenses, internal investigations, governmental investigations or proceedings, administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance could also harm our reputation and adversely affect our revenues.

Risks Related to our Relationships with Franchisees

If we or our franchisees are unable to protect our customers’ credit card data and other personal information, we and our franchisees could be exposed to data loss, litigation, and liability, and our reputation could be significantly harmed.

Privacy protection is increasingly demanding, and the use of electronic payment methods and collection of other personal information expose us and our franchisees to increased risk of privacy and/or security breaches as well as other risks. In connection with credit or debit card transactions in-restaurant, confidential information is collected and transmitted by way of secure private retail networks. Additionally, we and our franchisees collect and store personal information from individuals, including customers and employees.

Although we use secure private networks to transmit confidential information and debit card sales, our security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer and software capabilities, new tools, and other developments may increase the risk of such a breach.

If a person is able to circumvent our or our franchisees’ security measures or those of third parties, he or she could destroy or steal valuable information or disrupt our operations. We or our franchisees may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we or our franchisees may also be subject to lawsuits or other proceedings relating to these types of incidents. Additionally, any such incident may cause a breach of the privacy laws of Japan or other jurisdictions, which may subject us to fines or other penalties, as well as reputational damage. Any such claim or proceeding could cause us or our franchisees to incur significant unplanned expenses, which could have an adverse impact on our financial condition, results of operations and cash flows. Further, adverse publicity resulting from these allegations could significantly harm our reputation and may have a material adverse effect on us and our franchisees’ restaurants.

We and our franchisees rely on computer systems to process transactions and manage our business, and a disruption or a failure of such systems or technology could harm our ability to effectively manage our business.

Network and information technology systems are integral to our business. We and our franchisees rely on computer systems and information technology to conduct our business. Our operations depend upon our ability to

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protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure, or a breach in the security of our computer systems caused by malware or other attack, could cause reduced efficiency in operations, loss or misappropriation of data, or other business interruptions; or could negatively impact delivery of food to restaurants, or financial functions such as vendor payment, employee payroll, franchise operations reporting, or our ability to receive customer payments through our POS or other systems, which, in each case, could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities.

Despite the implementation of protective measures, our systems are subject to damage and/or interruption as a result of power outages, computer and network failures, computer viruses and other disruptive software, security breaches, catastrophic events, and improper usage by employees. Such events could result in a material disruption in operations, a need for a costly repair, upgrade or replacement of systems, or a decrease in, or in the collection of, royalties and advertising fund contributions paid to us by our franchisees. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability which could materially affect our results of operations. It is also critical that we establish and maintain certain licensing and software agreements for the software we use in our day-to-day operations. A failure to procure or maintain these licenses could have a material adverse effect on our business operations.

We may engage in litigation with our franchisees, which could be costly and time-consuming to our management and adversely affect our ability to attract and retain franchisees.

Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brands, the consistency of our products and the customer experience. We may also engage in future litigation with franchisees to enforce our contractual indemnification rights if we are brought into a matter involving a third party due to the franchisee’s alleged acts or omissions. In addition, we may be subject to claims by our franchisees relating to our franchise disclosure document, including claims based on financial information contained in our franchise disclosure document or failure to properly provide a disclosure document. Engaging in such litigation may be costly and time-consuming and may distract management and materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our franchise system and may damage our reputation and brands. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.

We are subject to various Japanese laws that may adversely impact our relationship with our franchisees and expose us to financial risk.

Various Japanese laws, including the Small and Medium-sized Retail Business Promotion Act which aims to promote and protect small and medium-sized companies such as many of our franchisees, among others, govern our relationship with our franchisees. A franchisee and/or a government agency, such as the Small and Medium Enterprise Agency, may facilitate or bring legal action against us based on the franchisee/franchisor relationships that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.

In addition, we are required, as a restaurant business, under national and local government regulations to obtain and maintain licenses, permits, and approvals to operate our businesses. Such regulations are subject to

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change from time to time. Any failure by us or our franchisees to obtain and maintain these licenses, permits, and approvals could adversely affect our financial results.

The failure of our franchisees to operate successful and profitable restaurants or a termination of our franchise agreement by a franchisee prior to the termination of our lease for a sub-leased franchise location could negatively impact our business.

The opening and continued success of franchise-operated restaurants depends on various factors, including the demand for our franchises, the selection of appropriate franchisee candidates, the identification and availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the availability of financing, and the financial and other capabilities of our franchisees and developers. Despite the due diligence we perform during the recruiting process, we cannot assure you that the franchisees and developers planning the opening of franchise-operated restaurants will have the business abilities or sufficient access to financial resources necessary to open the restaurants as required by their agreements. Nor can we assure that they will prove to be effective operators and remain aligned with us with respect to operations, pricing, promotional or capital-intensive initiatives.

If our franchisees incur too much debt, if their operating expenses, including commodity prices of food supplies, such as beef, increase or if economic or sales trends deteriorate such that they are unable to operate profitably or repay existing debt, it could result in their financial distress, including insolvency or bankruptcy. If a significant number of our franchisees become financially distressed, our operating results could be impacted through reduced or delayed royalty payments. Our success also depends on the willingness and ability of our franchisees to implement major initiatives, which may include financial investment. Our franchisees may be unable to successfully implement strategies that we believe are necessary for their further growth, which in turn may harm the growth prospects and financial condition of the company. Additionally, the failure of our franchisees to focus on the fundamentals of restaurant operations, such as quality service and cleanliness (even if such failures do not rise to the level of breaching the related franchise documents), could have a negative impact on our business.

In addition, some of our franchised locations are directly leased by us, and then sub-leased to our franchisees. If our franchise agreement with our franchisee is terminated prior to the termination of the lease, we may be required to incur significant costs if we are unable to select an alternative franchisee for that location or are unable to otherwise directly operate that location. Therefore, a termination of our franchise agreement prior to the termination of our lease could result in significant expenses as well as a loss of the associated franchise fees and royalty payments which may not be fully offset by the security deposits, which could adversely affect our revenues, cash flow and liquidity.

Our franchisees could take actions that could harm our business and may not accurately report sales.

Our franchisees are contractually obligated to operate their restaurants in accordance with the operations, safety, and health standards set forth in our agreements with them and applicable laws. However, although we will attempt to properly train and support all of our franchisees, franchisees are independent third parties whom we do not control. The franchisees own, operate, and oversee the daily operations of their restaurants, and their employees are not our employees. Accordingly, their actions are outside of our control. Although we have developed criteria to evaluate and screen prospective franchisees, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate successful franchises at their approved locations, and applicable franchise laws in the jurisdictions where our restaurants are located may limit our ability to terminate or not renew these franchise agreements. Moreover, despite our training, support and monitoring, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and adequately train qualified managers and other restaurant personnel. The failure of our franchisees to operate their franchises in accordance with our standards or applicable law, actions taken by

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their employees or a negative publicity event at one of our franchised restaurants or involving one of our franchisees could have a material adverse effect on our reputation, our brands, our ability to attract prospective franchisees, our directly-owned restaurants, and our business, financial condition or results of operations.

If we fail to identify, recruit and contract with a sufficient number of qualified franchisees, our ability to open new franchised restaurants and increase our revenues could be materially adversely affected.

The opening of additional franchised restaurants depends, in part, upon the availability of prospective franchisees who meet our criteria. Our growth strategy requires us to identify, recruit and contract with a significant number of new franchisees each year. We may not be able to identify, recruit or contract with suitable franchisees in our target markets on a timely basis or at all. In addition, our franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements with us, or they may elect to cease restaurant development for other reasons. If we are unable to recruit suitable franchisees or if franchisees are unable or unwilling to open new restaurants as planned, our growth may be slower than anticipated, which could materially adversely affect our ability to increase our revenues and materially adversely affect our business, financial condition and results of operations.

Our brands may be limited or diluted through franchisee and third-party activity.

Although we monitor and regulate franchisee activities through our franchise agreements, franchisees or other third parties may refer to or make statements about our brands that do not make proper use of our trademarks or required designations, that improperly alter trademarks or branding, or that are critical of our brands or place our brands in a context that may tarnish our reputation. This may result in dilution of or harm to our intellectual property or the value of our brands. Franchisee’s noncompliance with the terms and conditions of our franchise agreements may reduce the overall goodwill of our brands, whether through the failure to meet health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of our brands, resulting in consumer confusion or dilution. Any reduction of our brands’ goodwill, consumer confusion, or dilution is likely to impact sales, and could materially and adversely impact our business and results of operations.

Risks Related to Our Industry

The retail food industry in which we operate is highly competitive and an increase in competition could adversely affect our business.

The retail food industry in which we operate is highly competitive with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. If consumer or dietary preferences change, if our marketing efforts are unsuccessful, or if our restaurant locations are unable to compete successfully with other retail food outlets in new and existing markets, our business could be adversely affected. We also face growing competition as a result of convergence in grocery, convenience, and restaurant services, including the offering by the grocery industry of convenient meals. Competition from delivery aggregators and other food delivery services has also increased in recent years, particularly in urbanized areas. Increased competition could have an adverse effect on our sales, profitability or development plans, which could harm our financial condition and operating results.

Changes in demographic trends and in customer tastes and preferences could cause sales to decline.

Changes in customer preferences, demographic trends, and the number, type, and location of competing restaurants have great impact in the restaurant industry. Our sales could be impacted by changes in customer preferences in response to dietary concerns, such as preferences regarding calories, sodium content,

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carbohydrates, and fat. Such preference changes could result in customers favoring other foods to the exclusion of some or all of our menu items. If we fail to adapt to changes in customer preferences and trends, we may lose customers and our sales may deteriorate.

Our business may be adversely impacted by changes in consumer discretionary spending and general economic conditions.

Purchases at our restaurant locations are discretionary for consumers and, therefore, our results of operations are susceptible to economic slowdowns and recessions. Some of the factors that impact discretionary consumer spending include unemployment rates, fluctuations in the level of disposable income, the price of gasoline, stock market performance and changes in the level of consumer confidence. These and other macroeconomic factors could have an adverse effect on sales at our restaurant locations, which could lead to an adverse effect on our profitability or development plans, and harm our financial condition and operating results.

Negative publicity relating to one of our restaurant locations or the industry could reduce sales at some or all of our other restaurant locations.

Our success is dependent in part upon our ability to maintain and enhance the value of our brands, consumers’ connection to our brands and positive relationships with our franchisees. We may, from time to time, be faced with negative publicity relating to food quality, public health concerns, restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing, employee relationships or other matters, regardless of whether the allegations are valid or whether we are held to be responsible. The negative impact of adverse publicity relating to one restaurant location may extend far beyond that restaurant or franchisee involved to affect some or all of our other directly-owned or franchised restaurants. In addition, our business can be materially and adversely affected by widespread negative publicity of any type, particularly regarding food quality, food safety, nutritional content, safety or public health issues (such as outbreaks, epidemics, or the prospect of a pandemic), obesity or other health concerns, animal welfare issues, and employee relations issues, among other things.

The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis. The considerable expansion in the use of social media over recent years can further amplify any negative publicity that could be generated by such incidents. A similar risk exists with respect to unrelated food service businesses, if consumers associate those businesses with our own operations. Additionally, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the number of successful claims would have a material adverse effect on our business, financial condition and results of operations. Consumer demand for our products and our brand’s value could diminish significantly if any such incidents or other matters create negative publicity or otherwise erode consumer confidence in us or our products, which would likely result in lower sales and could have a material adverse effect on our business, financial condition and results of operations.

Health concerns arising from outbreaks of viruses or other diseases may have an adverse effect on our business.

Our business could be materially and adversely affected by the outbreak of a widespread health epidemic. The occurrence of such an outbreak of an epidemic illness or other adverse public health developments could materially disrupt our business and operations. Such events could also significantly impact our industry and cause a temporary closure of restaurants, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations.

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Furthermore, viruses may be transmitted through human contact, and the risk of contracting viruses could cause employees or guests to avoid gathering in public places, which could adversely affect restaurant guest traffic or the ability to adequately staff restaurants. We could also be adversely affected if jurisdictions in which our restaurants operate impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may affect our business.

Natural disasters could disrupt our operations temporarily or permanently and negatively affect our business performance.

If a large-scale natural disaster, such as an earthquake, flood, typhoon, among others, occurs in an area that includes the Company’s restaurants, distribution centers, or the like, or should regions in which franchisees are located experience the disruption of social infrastructure or power shortages and other impacts due to similar natural disasters, it may become difficult to perform ordinary business activities and the Company’s business performance may be negatively affected (e.g., decrease in sales due to the inability to operate the stores, physical harm suffered by customers and employees, difficulty in purchasing as a result of damage to a distribution center or the ordering system).

Risks Related to the Ownership of our American Depositary Shares (ADSs)

We expect that the price of our ADSs may fluctuate substantially due to internal and external factors, many of which are beyond our control.

The market price of our ADSs could be affected by a number of factors, including:

In the past, securities markets have experienced significant price and volume fluctuations not related to the operating performance of particular companies. Future market fluctuations may also materially adversely affect the market price of our ADSs. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. Any such class action suit or other securities litigation would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, could materially adversely affect our business, financial condition, results of operations and prospects.

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The value of our ADSs may not exactly track the price of our common shares.

Our common shares currently trade on the Tokyo Stock Exchange (TSE) under stock code number 3053.T. Active trading volume and efficient pricing for our common shares on the TSE will usually, but not necessarily, indicate similar characteristics in respect of our ADSs. In addition, the terms and conditions of our agreement with our depositary may result in less liquidity or lower market value of our ADS than for our common shares. Since the holders of our ADSs may surrender our ADSs to take delivery of and trade our common shares (a characteristic that allows investors in ADSs to take advantage of price differentials between different markets), an illiquid market for our common shares may result in an illiquid market for our ADSs. Therefore, the trading price of our common shares may not be correlated with the price of our ADSs.

If securities or industry analysts publish negative reports or cease to publish reports about our business, the price and trading volume of our securities could decline.

The trading market for our ADSs depends in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering us downgrade their estimates or evaluation of our common shares, the price of the ADSs could decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the market for the ADSs, which in turn could cause the price of the ADSs or trading volume to decline or adversely affect the liquidity of the market for the ADSs.

We cannot assure you that a liquid trading market for our ADSs will develop.

We have listed our ADSs representing our common shares on the NASDAQ Global Market on September 27, 2018; however, we cannot assure you that we will be able to maintain any such listing. Furthermore, although we anticipate a mechanism allowing shares of common shares to be exchanged at a certain variable to ADSs, we may experience procedural or regulatory difficulties in the exchange of common shares for ADSs.

In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling ADSs representing our common shares, which may further affect the liquidity of our common shares. This would also make it more difficult for us to raise additional capital or attract qualified employees or franchisees.

Furthermore, the stock market in general has historically experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our ADSs representing our common shares, which could cause a decline in the value of any ADSs representing our common shares. Price volatility might be worse if the trading volume of any ADSs representing our common shares is low.

Rights of shareholders under Japanese law may be different from those under the laws of the United States and holders of ADSs may have difficulty asserting voting and other rights.

Our articles of incorporation, the regulations of our board of directors and the Companies Act govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholders rights are different from those that would apply if we were a company incorporated in the United States. Shareholders’ rights under Japanese law are different in some significant respects from shareholders’ rights under the laws of the United States. These differences include, but are not limited to, limitations on voting shares that comprise less than one full unit of our shares, the right to participate in a demand for the convocation of a general meeting of shareholders, and the right to join with other shareholders to propose an agenda item to be addressed at a general meeting of shareholders. Only holders of

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“units,” each comprised of 100 common shares, are entitled to vote. A holder of less than one unit is not entitled to any voting rights pertaining to the underlying shares. Since each ADS represents one-fifth of a common share, ADS holders who do not hold at least one unit will have more difficulty in asserting rights as a shareholder of our Company than they would as a shareholder of a corporation organized in the United States.

Dividend payments and the amount you may realize upon a sale of our common shares or 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 the common shares represented by our 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 the common 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 common shares.

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 the shares of our common 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 their voting rights only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from them in the manner set forth in the deposit agreement, the depositary will make efforts to vote the shares underlying the ADSs in accordance with the instructions of ADS holders. The depositary and its agents may not be able to send voting instructions 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.

Our Chief Executive Officer owns a substantial amount of our common shares, which may limit a shareholder’s ability to influence our business and affairs.

As of December 31, 2018, Kunio Ichinose, the Company’s Chief Executive Officer and director, beneficially owned approximately 17% of our outstanding common shares (including common shares represented by ADSs). In his role as an officer and director of our Company, Mr. Ichinose is subject to restrictions under the Companies Act of Japan, which requires a director to refrain from voting on matters in which he is materially interested at meetings of our Board of Directors. However, as a shareholder, Mr. Ichinose may be able to influence the outcome of matters submitted to shareholders for approval, including the election of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transactions. This may prevent or discourage unsolicited acquisition proposals or offers for our common shares or ADSs that you may feel are in your best interest as one of our shareholders. Circumstances may occur in which the interests of our Chief Executive Officer could be in conflict with your interests or the interests of other shareholders. Accordingly, a shareholder’s ability to fully influence our business and affairs through voting its common shares may be limited.

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

The deposit agreement governing the ADSs representing our common 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 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. However, we believe 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 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 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.

We require significant resources and management attention, and we have incurred and will continue to incur increased costs as a result of being a U.S.-listed public company.

As a public company in the United States, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other rules and regulations of the SEC, including Sarbanes-Oxley, and the listing and other requirements of NASDAQ. The various financial and other reporting obligations place significant demands on our management, administrative, operational and accounting resources and will cause us to incur significant legal, accounting and other expenses. These rules and regulations to increase our legal and financial compliance costs and may divert management’s attention to ensure compliance and to make some activities more time-consuming and costly. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. We cannot accurately predict the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on our business.

Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, results of operations and financial condition. Furthermore, if we are

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unable to satisfy our obligations as a public company, we could be subject to delisting of our ADSs from NASDAQ Global Market, fines, sanctions and other regulatory action.

Sarbanes-Oxley requires, among other things, that we maintain and periodically evaluate our internal control over financial reporting as well as disclosure controls and procedures. In particular, subject to certain phase-in periods that may be available to us as an emerging growth company, we will have to perform systems and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of Sarbanes-Oxley. Although we currently qualify as an emerging growth company, which presently exempts us from the internal control requirements of Section 404 of Sarbanes-Oxley, we may lose our emerging growth status in the future if we no longer meet the qualifications. For example, if we become a large accelerated filer, with a public float in excess of US$700 million, we could become subject to the requirements of Section 404 as early as December 31, 2019.

When we become subject to Section 404, we expect that compliance will incur substantial accounting expenses and significant management efforts, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to satisfy ongoing compliance requirements. The costs of compliance with the foregoing requirements may have a material adverse effect on our future performance, results of operations, cash flows and financial condition.

As a “foreign private issuer” we are permitted, and intend, to follow certain home country corporate governance and other practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

Our status as a foreign private issuer exempts us from compliance with certain SEC laws and regulations and certain regulations of NASDAQ, including certain governance requirements such as independent director oversight of the nomination of directors and executive compensation. In addition, we are not required under the Exchange Act to file current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we are generally exempt from filing quarterly reports with the SEC. Also, we are not required to provide the same executive compensation disclosures regarding the annual compensation of our five most highly compensated senior executives on an individual basis as are required of U.S. domestic issuers. As a foreign private issuer, we are permitted to disclose executive compensation on an aggregate basis and need not supply a Compensation Discussion & Analysis, as is required for domestic companies. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act.

These exemptions and accommodations will reduce the frequency and scope of information and protections to which you are entitled as an investor.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make the ADSs less attractive to investors.

We are an “emerging growth company” as defined in the U.S. federal securities laws, and, for so long as we remain an emerging growth company, we have chosen 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, or Section 404, and reduced disclosure obligations regarding executive compensation in our periodic reports. We also plan to take advantage of the extended transition period under Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We cannot predict if investors will find the ADSs less attractive because we have chosen to rely on these exemptions. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the trading price of the ADSs may be more volatile.

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Sales of a substantial number of our common shares or ADSs in the public markets by our existing shareholders in the future could cause the price of our ADSs to fall.

Sales of a substantial number of shares of our common shares or ADSs in the public market in the future or the perception that these sales might occur, could depress the market price of the ADSs and could impair our ability to raise capital through the sale of additional equity securities from time to time. We are unable to predict the effect that any such sales may have on the prevailing market price of the ADSs.

Shares eligible for future sale, including stock options that we grant from time to time, may adversely affect the market of our common shares or ADSs.

We have a material number of common shares underlying securities of our Company, the future sale of which could dilute our existing shareholders and depress the price of our publicly-traded shares. As of December 31, 2018, 1,140,300 common shares are issuable upon exercise of outstanding stock options at a weighted average exercise price of ¥1,683.24 per share. If and when these options are exercised into our common shares, our shares outstanding will increase. Such increase in our outstanding securities, and any sales of such shares, could have a material adverse effect on the market for our common shares and ADSs, and the market price of our common shares and ADSs.

We provide a stock option plan for the Company’s directors, internal corporate auditors, and employees. We currently plan to continue granting stock options and other incentives so that we can continue to secure talented personnel in the future. Accordingly, the Company may issue new stock for the plan, which may dilute the value and voting power of the ADSs of existing holders.

The right of holders of ADSs to participate in any future rights offerings may be limited, which may cause dilution to their holdings and holders of ADSs may not receive cash dividends if it is impractical to make them available to them.

We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to our ADS holders in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to ADS holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act.

The depositary has agreed to pay ADS holders the cash dividends or other distributions it or the custodian receives on our common shares or other deposited securities after deducting its fees and expenses. However, because of these deductions, ADS holders may receive less, on a per share basis with respect to their ADS than they would if they owned the number of shares or other deposited securities directly. ADSs holders will receive these distributions in proportion to the number of common shares the ADSs represent. In addition, the depositary may, at its discretion, decide that it is not lawful or practical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and ADS holders will not receive such distribution.

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

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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 common 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 common 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 joint stock corporation ( kabushiki kaisha ) 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 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 corporate auditors, 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.

Since November 2003, we have introduced Pepper Lunch ^™ store locations outside of Japan, including in Taipei, Taiwan; Republic of Singapore; Beijing, People’s Republic of China (China); Jakarta, Republic of Indonesia (Indonesia); Sydney, Australia; Bangkok, Thailand; Manila, Republic of the Philippines (Philippines); Kuala Lumpur, Malaysia; and British Columbia, Canada.

In December 2013, we opened our first Ikinari! Steak ^™ restaurant in Ginza, Japan, and in February 2017, we opened our first United Sates Ikinari! Steak ^™ location in New York. The concept for Ikinari! Steak ^™ is low-priced, standing-style steak restaurant, resulting in quicker turnover of customers.

Our U.S. operations are managed by Kuni’s Corporation, our wholly-owned U.S. subsidiary and our resident agent in the United States. Its headquarters is located at 98 8th Ave., New York, New York 10011, USA.

The following table sets forth the average JPY check amount per customer for our Pepper Lunch ^™ and Ikinari! Steak ^™ restaurants for the periods presented.

The price of entrée menu items at Pepper Lunch ^™ ranges from ¥560 to ¥1,880 and the price of steak ranges from ¥6.6 to ¥12 per gram at Ikinari! Steak ^™ .

Our common shares were initially listed on the Tokyo Stock Exchange’s Mothers market, or the TSE, in September 2006. In May 2017, our common shares were promoted to the Second Section of the TSE under the rules of the TSE which provide that companies listed on Mothers for 10 years are to be promoted to the Second Section. In August 2017, our common shares were promoted to the First Section of the TSE in order to sell our Company’s common shares on a larger and more prominent stock market. We believe there are certain benefits for us due to our promotion to the First Section, including facilitating employee hiring and interest from potential franchisees. In September 2018, we completed our registration under the Exchange Act and listed our ADSs, each representing one-fifth of one of our ordinary shares, on the NASDAQ Global Market under the ticker symbol “KPFS.”

Our growth strategy focuses on recruiting new franchisees and opening new directly-owned restaurants. Accordingly, mergers and acquisitions have not been a material part of our growth strategy, and we have not engaged in any mergers and acquisitions or divestitures in the last three years.

General

Under a variety of brand names, we directly-own or franchise restaurants. We operate substantially all of our directly-owned restaurants, although a limited number are outsourced and operated under contracts with third parties, who cover certain operating activities and associated costs, primarily labor. Our primary brands include our Pepper Lunch ^™ and Ikinari! Steak ^™ brands, both of which utilize at all stores electromagnetic cookers that incorporate a temperature sensor to automatically switch off the heat at appropriate intervals, and serve food on a skillet to allow for maintained warmth.

As of March 31, 2019, there were a total of (i) 478 Pepper Lunch ^™ locations, (56 directly-owned and 422 franchised) of which 160 restaurants (55 directly-owned and 105 franchised) are located in Japan and 318 (1 directly-owned and 317 franchised) are located outside of Japan; and (ii) 439 Ikinari! Steak ^™ restaurants (283 directly-owned and 156 franchised), of which 433 (277 directly-owned and 156 franchised) are located in Japan and six are located outside of Japan (all are directly-owned by Kuni’s Corporation, our subsidiary).

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In addition to Pepper Lunch ^™ and Ikinari! Steak ^™ , we also franchise and operate other restaurant businesses, such as “Chargrilled Steak Kuni,” a cut-to-order steak restaurant, “Kodawari Tonkatsu Katsukitei,” a pork cutlet restaurant, and “Gyutan Natori,” which is a beef tongue restaurant. There are 15 total restaurant locations that fall under the other restaurant category. For additional details, please see “Other Restaurants” below.

As of March 31, 2019, we were under contract with 41 separate outsourced operators, representing 41 stores in total. Of these operators, eight operated Pepper Lunch ^™ restaurants, one operated a Gyutan Natori, and 32 operated Ikinari! Steak ^™ restaurants.

Our business activities are focused principally on franchised stand-alone and food court restaurants. We aim to utilize franchise agreements with our franchisees in Japan and at international locations that contain standardized terms developed by us and consistent with industry practice. This enables us to monitor performance in compliance with our standards and eliminates the need for our management to be involved in day-to-day operations of each franchised location.

In addition to our restaurant businesses, we also operate a product sales business which offers certain Japanese specialty food products, including tonkatsu sauce, frozen pepper rice, frozen hamburg steak, the Ikinari! Steak ^™ set as well as other products.

Products and Brands

Pepper Lunch ^™

General Overview . Pepper Lunch ^™ ’s distinguishing feature is a unique system that can serve steaks, Hamburg steaks (a patty of ground beef similar to the Salisbury steak), and other dishes quickly and at lower price points than our competitors by using a patented electromagnetic cooker with a thermal sensor co-developed by the Company. Pepper Lunch ^™ serves meals throughout the day. The dishes served at Pepper Lunch ^™ are generally considered at other restaurants in Japan to be expensive dishes and require significant preparation time. However, at our Pepper Lunch ^™ restaurants, our staff places and serves raw ingredients (meats, vegetables, etc.) on a special iron plate that is quickly heated using an electromagnetic cooker. The customer can then continue to grill and cook the ingredients on the heated iron plate once served. This process and technology allows us to serve meals in a short amount of time and at affordable prices by having customers participate in the cooking process. Pepper Lunch ^™ primarily targets families and offers various set meals on the menu that cater to patrons of all ages.

We are pursuing an aggressive expansion strategy of our Pepper Lunch ^™ restaurants primarily through franchising relationships. Pepper Lunch ^™ restaurants can be adapted to a variety of sites, including among others, stand-alone locations, food court sites, as well as units located inside office buildings.

Electromagnetic Cooker and Iron Plate. We differentiate ourselves from other restaurants by the use of our patented electromagnetic cooker with a thermal sensor which measures the temperature of the food and turns off

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the heat supply when the food reaches a preset temperature. We also developed and received a patent for a special lightweight iron plate with superior heat storage, allowing meat to continue to cook after being served to the customer. We believe that our electromagnetic cooker as well as our special iron plate provides our customers with a dining experience that sets us apart from our competitors.

Franchising . Our franchise business engages in various activities, including recruiting franchisees, developing properties where the franchisees will open their stores, managing the construction of stores, selling store equipment and ingredients, and providing know-how regarding store operations. The Company receives a franchise fee, commission as an agent, royalties, and other payments from its franchisees.

We use our form franchise agreement, or Pepper Lunch ^™ Franchise Agreement, with franchisees of the Pepper Lunch ^™ restaurants in Japan. The standard terms of the Pepper Lunch ^™ Franchise Agreement include, among others, a non-refundable franchise fee of ¥3,000,000 paid at the inception to the Company, a guarantee fee of ¥1,200,000 per store paid at the inception to the Company to cover any potential future debt owed to the Company in connection with the Pepper Lunch ^™ Franchise Agreement, a brand royalty fee usually equal to 3% of the franchisee’s total sales per month, an upfront design and supervision fee of ¥2,000,000 (for stand-alone restaurants) and ¥1,500,000 (for food-court restaurants) due to the Company for the purposes of restaurant design, construction and facilities instruction, a training fee of ¥250,000, due to the Company and a monthly rental fee of ¥35,000 for our electromagnetic cooker. Under the Pepper Lunch ^™ Franchise Agreement, franchisees must also pay the Company a deposit of ¥2,000,000 and a franchise selection fee of ¥200,000. The typical estimated investment capital for opening a Pepper Lunch ^™ franchise store at a food court location is approximately ¥25,252,000. The Franchise Agreement includes a license for the use of certain of our trademarks essential to the operation of our brand.

The standard term for a Pepper Lunch ^™ Franchise Agreement is five years. Unless either party expresses an intention to not renew the agreement by at least 180 days prior to the expiration of the then-current term, the Pepper Lunch ^™ Franchise Agreement will be extended for additional one-year periods thereafter. The Company can terminate the Pepper Lunch ^™ Franchise Agreement without notice due to: (a) any breach by the franchisee of the terms of the Pepper Lunch ^™ Franchise Agreement; (b) destruction of the store by fire due to fault of franchisee; (c) the failure by the franchisee to open the store within three months after execution of the Pepper Lunch ^™ Franchise Agreement, absent justifiable reason; (d) termination of lease agreement during the term of the Pepper Lunch ^™ Franchise Agreement and the failure by franchisee to resume the operation within three months after such termination of the previous location lease; (e) the absence of the eligible store manager due to, for example, death, resignation or disqualification; or (f) any documented cases of food poisoning. If we terminate the Pepper Lunch ^™ Franchise Agreement due to the fault of the franchisee as set forth above, such franchisee is subject to an additional liquidated damages fee of ¥5,000,000 payable to us. If a franchisee terminates the Pepper Lunch ^™ Franchise Agreement for any reason, such franchisee must pay to us an amount equivalent to a royalty for the remainder term of the Pepper Lunch ^™ Franchise Agreement that is calculated on the basis of the average royalty immediately prior to the termination.

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Directly-Owned . We directly-manage certain of our owned Pepper Lunch ^™ restaurants. In addition to operating the restaurants for general business purposes, we also utilize our directly-managed restaurants to introduce new products and services on a trial basis before fully incorporating them into franchised locations. Additionally, we use our directly-managed Pepper Lunch ^™ restaurants to provide staff education and training programs for our franchise owners and management. Our directly-managed locations also provide us with direct feedback from customers, which we in turn utilize to modify our menu offerings and services, as well as provide new know-how to our franchise stores.

Certain of our directly-owned stores are operated by contractors on an outsourced basis. Such stores are operated like directly-managed restaurants, except that the store level operations, including employment matters, are outsourced to an agent. Our outsourcing agents have day to day operational authority, primarily overseeing restaurant staffing, supervision and customer service, while we control product offerings, inventory, pricing, supply chain, and other management activities for outsourced restaurants. Under our standard outsourcing contract, the outsourcing agent receives a fixed monthly payment plus certain additional incentive payments, including formula-based profit sharing and incentive payments if they maintain staff costs below a specified level of store revenues. The outsourcing agent contract, in general, has terms of one year and can be extended at the end of every contract period upon mutual agreement between the Company and agent. The contractors manage the day-to-day operations of the stores in accordance with our standards, including customary insurance requirements, and the supervisors inspect the operation on site at the outsourcing stores once a month. During the course of inspection, we endeavor to maintain the proper operation by assessing and instructing based on the visitation report (covering management of human resources, properties and funds), QSC check list (covering quality of products, services at stores and cleanliness) and hygiene check list designated by the Company. A contractor candidate will operate a store after completion of in-store training and acquiring the skills and knowledge required to be a store operator.

We obtain certain benefits from outsourcing stores. Such benefits primarily include receiving savings in staffing-related expenses. During the term of an outsourced business agreement, we do not assign any of our own staff to the outsourced business, and thus save management time, recruiting expenses, pension expenses, and social insurance expenses, among others.

Ikinari! Steak ^™

Ikinari! Steak ^™ utilizes a cost effective serving style where customers enjoy steak and other products, such as wine, typically while standing, which is a popular style in Japanese business districts. In particular, by streamlining the menu and implementing a serving style where customers eat while standing, we are able to sell steak to customers at roughly half the price per gram as compared to our “Chargrilled Steak Kuni” restaurants. With regard to food preparation, Ikinari! Steak ^™ has also adopted a cut-to-order system where the meat is cut to the customer’s desired weight from a single slab of meat that is kept fresh in the kitchen. The beef is then chargrilled rare, and then placed on a hot iron plate to continue to cook after serving to the customer. This method allows us to provide steak to our customers quickly, while also giving customers the opportunity to cook the steak to their preference. Serving products through a cut-to-order steak service system where the customers eat while standing is a business model that is first in the industry.

We currently only franchise Ikinari! Steak ^™ locations domestically in Japan, and use our standard form franchise agreement, or the Ikinari Franchise Agreement, with franchisees of the Ikinari! Steak ^™ restaurants. The standard terms of the Ikinari Franchise Agreement include, among others, a non-refundable franchise fee of ¥4,000,000 paid at the inception to the Company, a guarantee fee of ¥5,000,000 per store paid at the inception to the Company to cover any potential future debt owed to the Company in connection with the Ikinari Franchise Agreement, a brand royalty fee usually equal to 3.0% of the franchisee’s total sales per month, an upfront design instruction fee of ¥2,000,000 for the purposes of restaurant design, construction and facilities instruction, and a training fee of ¥1,000,000 due to the Company. Under the Ikinari Franchise Agreement, franchisees must also pay the Company a deposit of ¥3,000,000 and a franchise selection fee of ¥500,000. The typical estimated

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investment capital for opening an Ikinari! Steak ^™ franchise store at a food court location is approximately ¥41,852,000. The Ikinari Franchise Agreement also includes a license for use of certain of our trademarks during the term that we consider essential to the operation of our brand.

The standard term for an Ikinari Franchise Agreement is five years. Unless either party expresses an intention to not renew the agreement by at least 180 days prior to the expiration of the then-current term, the Ikinari Franchise Agreement will be extended for additional one-year periods thereafter. The Company can terminate the Ikinari Franchise Agreement without notice due to: (a) any breach by the franchisee of the terms of the Ikinari Franchise Agreement; (b) destruction of the store by fire due to fault of franchisee; (c) the failure by the franchisee to open the store within three months after execution of the Ikinari Franchise Agreement, absent justifiable reason; (d) termination of lease agreement during the term of the Ikinari Franchise Agreement and the failure by franchisee to resume the operation within three months after such termination of the previous location lease; (e) the absence of the eligible store manager due to, for example, death, resignation or disqualification; or (f) any documented cases of food poisoning. If the Company terminates the Ikinari Franchise Agreement due to the fault of the franchisee as set forth above, the franchisee is subject to an additional liquidated damages fee to the Company of ¥5,000,000. If a franchisee terminates the Ikinari Franchise Agreement for any reason, the franchisee must pay the Company an amount equivalent to a royalty for the remainder term of the Ikinari Franchise Agreement that is calculated on the basis of the average royalty immediately prior to the termination.

All of our Ikinari! Steak ^™ locations, including franchised locations, are leased from third parties. Additionally, some of our franchised locations are directly leased by us, and then sub-leased to our franchisees. For each of these sub-leased locations, we may be jointly and severally liable with our franchisees under Japanese law for liabilities.

Pre-Paid Cards and Loyalty Program . We began issuing the “Niku (Beef) Mileage Card” in 2014 as an Ikinari! Steak ^™ membership card that functions as a rewards card. There are four types of Niku (Beef) Mileage Cards, issued on the basis of the total beef mileage on the card: (i) Members Card, (ii) Gold Card, (iii) Platinum Card and (iv) Diamond Card. In 2015, we initiated a pre-payment function using the Niku (Beef) Mileage Card whereby users can charge money called “Niku (Beef) Money” that can be used to purchase food and goods at Ikinari! Steak ^™ restaurants. The Niku (Beef) Money retains the charged value for a period of one year from the customer’s last use of the card. The pre-payment function currently takes the form of both a physical card as well as a virtual pre-paid card that customers can download using their smart-phones. Customers can obtain a physical Niku (Beef) Mileage Card by visiting an Ikinari! Steak ^™ location in Japan. For the virtual Niku (Beef) Mileage Card, a customer must download the Ikinari! Steak ^™ application and register certain information on the application. The virtual card can be obtained by customers without charge.

Other Restaurants

As a part of our restaurant business, as of March 31, 2019, we also operate 15 other restaurants in Japan, such as “Chargrilled Steak Kuni,” a cut-to-order steak restaurant (six locations), “Kodawari Tonkatsu Katsukitei,” a pork cutlet restaurant (one location), and “Gyutan Natori” (eight locations), which are beef tongue restaurants. Of the 15 other restaurants, four are franchised units being run by independent parties, and 11 units are directly-owned units under our direct management. Of those locations, six are stand-alone units and 9 units are located in food courts.

Product Sales Business

In addition to our restaurant business, our Company also sells a variety of specialty products to our customers at restaurants and online, as well as wholesale. Our products available at our restaurants include tonkatsu sauce, frozen pepper rice, dressings, steak sauce and other food items. Items available online include our frozen Hamburg steak, frozen pepper rice, frozen beef tongue, the Ikinari! Steak ^™ set, dressings, steak sauce and clear masks for food service workers. Finally, we sell certain items wholesale to specialty restaurants, including our tonkatsu sauce.

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In-store sales are expected to increase in proportion to the number of stores that are opened, but in the future, our Company intends to enhance our online product offerings and expand our sales in the commercial market as well as to the Japanese Consumers’ Co-operative Union (JCCU).

International Development

To date, our operations outside of Japan account for approximately 2.5% of our total revenues. Our strategy is to continue our growth internationally in our existing regions as well as in new regions, particularly in Asia, Europe and New Zealand. Our Pepper Lunch ^™ restaurants outside of Japan are operated by franchisees in Canada, Asia, California, Guam and Australia pursuant to master franchise agreements containing customary terms consistent with industry practice in the respective regions.

In February 2017, we started operation of Ikinari! Steak ^™ in Manhattan, New York—our first expansion of this business outside of Japan. As at December 31, 2018, we operated 11 Ikinari! Steak ^™ restaurants in Manhattan; however, the operating performance was significantly below our initial plans. As a result, we recorded impairment losses of ¥1,158,006 thousand on “Property, plant and equipment” and “Intangible assets”, reducing their respective carrying amounts to zero. Further, we recorded provisions for onerous lease contracts related to these restaurants of ¥766,801 thousand since it is no longer expected that their operating cash flows will recover non-cancellable lease expenses. Such impairment losses and provisions for onerous contracts are included in “Other operating expense” in our consolidated statement of profit or loss.

In 2019, we are planning to close seven out of the 11 restaurants. Further we plan to change two of the restaurants to Pepper Lunch ^™ restaurants and to continue Ikinari! Steak ^™ operations at the two remaining Manhattan locations. We also plan to open a new Pepper Lunch ^™ restaurant in Las Vegas.

Product Development

We have a master product sales agreement with Oshin Co., Ltd., or Oshin, a Japanese company and the joint-holder of our Iron Plate patent, for the manufacture and supply of this skillet for use at our restaurants. The Company and Oshin are registered as joint-holders of the Iron Plate’s patent. The master product sales agreement has been effective since March 2011 and automatically renews annually. We do not have an exclusive right under the agreement to purchase the products jointly developed. Although the master product sales agreement can be terminated by either party upon one month’s notice prior to the expiration of the then-current term, because we are a joint-holder of the patent, we do not consider there to be a significant risk of termination. Nonetheless, in the event of a dispute with Oshin Co., Ltd., there are other sources of supply available in the market that we can readily access for similar products in the event of a dispute. Even in a case where the master product sales agreement with Oshin terminates, as a co-owner of the patent rights and utility rights to the Iron Plate, the Company has the right to continue to have the Iron Plate manufactured, even by a separate manufacturer, and to utilize the Iron Plate for our branded restaurants as we choose.

We have a transaction service agreement with two Japanese companies, Eishin Sangyo K.K., or Eishin Sangyo, and Eishin Denki K.K., or Eishin Denki, which provides for the joint development of certain products related to the electromagnetic cooker and its components used at our restaurants. We also have an exclusive right under the agreement to purchase the products jointly developed. The patent rights and utility rights related to these products are co-owned as to 50% by each of the Company and Eishin Denki. The original term of the agreement was 10 years, and it has been in effect since 2006, automatically renewing annually. The transaction service agreement may be terminated by either the Company or Eishin Sangyo upon three months’ notice prior to the expiration of the then-current term. Nevertheless, we expect it to continue to be renewed for the foreseeable future. Even in a case where the transaction service agreement with Eishin Denki terminates, as a co-owner of the patent rights and utility rights to the electromagnetic cooker, the Company has the right to continue to have the electromagnetic cooker manufactured, even by a separate manufacturer, and to utilize the electromagnetic cooker for our branded restaurants as we choose.

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Under Article 73 of the Patent Act of Japan, where a patent right is jointly owned, unless otherwise agreed upon by contract, each of the joint owners of the patent right may “work” (e.g., produce, use, export or import) the patented invention without the consent of the other joint owner(s). Further, joint owners of the patent right may cause a third party to work the jointly owned patent right on a joint owner’s own account, and such work is deemed as a working by the joint owners themselves, regardless of whether or not the joint owners perform the task. However, when a third party conducts such “work” on their own account, the third party must obtain approval from the other joint owner, or such work will be an infringement of the other joint owner’s patent rights. In this case, “work” would include our outsourcing of the manufacturing of the electromagnetic cooker. Accordingly, so long as we outsource manufacturing of the electromagnetic cooker on our own account, we can do so without infringing the patent rights of Oshin or Eishin Denki, respectively, even in a case where our transaction service agreement is terminated.

While the Company values its relationships with these companies, it does not consider its business to be substantially dependent upon either the master product sales agreement or the transaction services agreement.

Industry

The Company’s primary industry is the restaurant industry in Japan. The restaurant industry experiences constant cross-industry competition in development of new stores as well as on pricing. The size of the market was approximately ¥29.7 trillion of sales in 1997, which decreased to approximately ¥24.6 trillion in 2007 and then to approximately ¥22.8 trillion in 2011. However, following the Great East Japan Earthquake of March 11, 2011, the restaurant industry in Japan has been on a steady increase beginning in 2012 and has recovered to ¥25.2 trillion in 2015. According to the results of surveys conducted by the Japan Foodservice Association revenue in the Japanese food service industry in 2017 was the highest since 2007, and the industry has seen a consistent increase in revenue each year from 2014 through 2017. There was ¥25.6 trillion in total industry revenue as of the end of 2017. The increase in activity has resulted in labor shortages in Japan, which has impacted the cost of labor throughout the industry.

The Japan Franchise Association

We are a member of the Japan Franchise Association, or the JFA, which is a public interest corporation established under the approval of the Ministry of International Trade and Industry for the purpose of contributing to the healthy development of franchising in Japan. JFA members consist of leading franchisors in Japan, and engage in a variety of activities, including:

The JFA requires all JFA member organizations to comply with its Code of Ethics. Among other things, the JFA Code of Ethics requires its members to maintain a proven track record prior to providing service to franchisees, provide accurate information when recruiting franchisees, assure quality and preservation of reliability in their trademarks and other brand images, comply with relevant laws, and protect intellectual property.

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Principal Markets

As of March 31, 2019, we had restaurants and stores in Japan, Indonesia, Australia, Canada, Cambodia, Republic of Singapore, Thailand, Philippines, Vietnam, Macau, Malaysia, Hong Kong, Taiwan, China, Brunei, and the United States. Almost all Pepper Lunch ^™ stores overseas (317 as of March 31, 2019) are franchised, while the six Ikinari! Steak ^™ stores as of March 31, 2019, each of which were located in the United States, were directly-owned by our subsidiary Kuni’s Corporation. Japan is our principal market. While, the number of restaurants outside of Japan is relatively high (324 total stores as of March 31, 2019), our restaurants in Japan represent approximately 97.5% of our revenues and substantially all of our gross profit for the year ended December 31, 2018. Our corporate office in Japan is responsible for support activities in each of the countries in which we operate from time to time. However, sales and marketing are handled by the franchisee in the specific area. We believe that opportunities exist in other countries and regions, such as Europe, Asia and New Zealand, where we hope to expand in the near future.

The following table summarizes total revenues by category of activity and geographic market for each of the last three completed fiscal years:

Business Strategy

We are expanding the Pepper Lunch ^™ franchise in the medium to long-term with the goal of increasing revenues and profit margins, while focusing on a high level of customer satisfaction, food quality and safety. In 2017, 78 total new Pepper Lunch ^™ stores opened for business, while 56 were opened in 2018. We intend to expand our Pepper Lunch ^™ segment through sustained domestic and international development. For 2019, we intend to open approximately 25 stores, the majority of which are expected to be franchised stores. Two-thirds of the new stores are expected to be opened in international locations. We are seeking to open Pepper Lunch ^™ stores at new venues, such as highway rest stops and amusement parks, in addition to the traditional store locations such as shopping and entertainment districts and inside shopping centers.

We intend to expand our Ikinari! Steak ^™ segment through franchise and directly-owned restaurants in existing and new geographical markets, including Europe and New Zealand. In 2017, 73 total new Ikinari! Steak ^™ stores opened for business, while 211 were opened in 2018. We expect that, over time, this brand will continue to be our premier brand. For 2019, we intend to open approximately 210 stores, of which approximately half are expected to be franchised stores. Substantially all of the new stores are expected to be opened in Japan. Consequently, we intend to devote a substantial portion of our expansion efforts and capital resources into promoting the Ikinari! Steak ^™ brand and developing new opportunities for highly-skilled franchisees.

We estimate that the total capital cost to be incurred in 2019 for the opening of planned company-owned Pepper Lunch ^™ and Ikinari! Steak ^™ stores will be approximately ¥82,705 thousand and ¥2,328,796 thousand, respectively. The estimated expenses above are based on historical costs of opening company-owned Pepper Lunch ^™ and Ikinari! Steak ^™ stores.

Seasonality

Neither we nor our franchisees have experienced significant seasonal variability in financial performance.

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Marketing Strategy

We engage in marketing activities to increase the number of customers who visit existing stores and we have been working to further improve our visibility by taking advantage of our increasing number of stores. Our marketing initiatives include a robust mix of in-store campaigns, partnerships, promotions, social media, traditional media and word of mouth advertising. We have increased our focus on mobile, social and digital advertising to leverage the content we generate from public relations and experiential marketing activities in order to better connect with our customers and to share information about new menu offerings, promotions, new store openings and other relevant information about our Company and restaurants. We aim to communicate with our customers in creative and organic ways that fortify our connections with them and increase brand awareness.

Our Pepper Lunch ^™ segment has worked to improve our repeat customer rate through our efforts to promote increased usage of the “Rakuten Point Card” which began in 2016, the d POINT program and the WAON Point program which began in 2018 as well as our campaigns, scratch coupons, and similar methods using the Pepper Lunch ^™ application. The Ikinari! Steak ^™ ’s own point system, the Niku (Beef) Mileage Card, allows customers who utilize the card to receive discounts and other benefits based on the points earned in accordance with the weight of meat purchased at Ikinari! Steak ^™ locations. In April 2017, we launched the credit card charge feature for Niku (Beef) Money through our application. Our gift cards are also available for purchase at Ikinari! Steak ^™ restaurants as well as convenience stores and other third party locations.

Intellectual Property Rights

Trademarks and Other Marks

We hold trademark registrations for our logos and names used at our restaurants in Japan, including Pepper Lunch ^™ and Ikinari! Steak ^™ , with some of these marks holding corresponding foreign trademark and service mark registrations in 24 international jurisdictions, including Canada, Australia, European Union, Brazil, Hong Kong, Cambodia, Thailand, Laos, Macao, Malaysia, Mongolia, Brunei, China, Taiwan, India, Indonesia, Republic of Korea, Singapore, Philippines, Myanmar, Russia, Vietnam, United Arab Emirates, and the United States.

Our trademark registrations were granted and expire on various dates, although most of them will be renewed automatically. We believe that these trademarks provide significant value to us and are an important factor in the marketing of our products and services. We believe that we do not infringe on the trademarks or other intellectual property rights of any third parties.

Patent Rights

We hold three primary patents. The first is the Iron Plate, the second is the electromagnetic cooker with a thermal sensor and the third is the Steak-Serving System. The Iron Plate patent expires August 25, 2025, the electromagnetic cooker patent expires February 25, 2022, and the Steak Serving System patent expires June 4, 2034.

The Iron Plate patent (including a separate design right patent) is jointly held by us with Oshin Co., Ltd. The main body of the Iron Plate is primarily made of aluminum, the periphery is primarily made of iron, various holes penetrating the Iron Plate are made, and flanges are formed on the upper edge under which the top of the magnetic materials are placed. These features make the Iron Plate durable by enabling it to emit hot steam from the Iron Plate and enable the Iron Plate to conduct heat efficiently at the same time. We use the Iron Plate in substantially all of our restaurants globally.

The second primary patented invention is the electromagnetic cooker with a thermal sensor, which we hold jointly with Eishin Denki K.K. It enables the electromagnetic cooker to heat the Iron Plate to a certain proper temperature regardless of the starting temperature. It functions by the combination of the heating devices undermined in the bottom of the cooker and the thermal sensor installed at the upper portion of the cooker. We use the electromagnetic cooker in substantially all of our Pepper Lunch ^™ and Ikinari! Steak ^™ restaurants, as well as most of our other restaurants globally.

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The company applied for the patent of the Steak-Serving System on June 4, 2014 and it was registered successfully at June 10, 2016. A third party alleged the Steak-Serving System patent did not satisfy the requirement of the Patent Act and filed an opposition to the Japan Patent Office on November 24, 2016. The Japan Patent Office canceled the patent on November 28, 2017. The Company appealed the decision to the Intellectual Property High Court and the court declared that the former cancelation performed by the Japan Patent Office was revoked on October 17, 2018. The judgment became final and binding after approximately two weeks passed after the judgment without appeal from the Japan Patent Office.

The Steak-Serving System enables efficient service through a streamlined system of escorting customers to standing-style tables, taking orders and providing the requested cuts and quantities of meat promptly upon request. Steak served at restaurants is typically eaten while being seated in a chair and engaging in conversation, and because this extends the meal time and eating process, it inevitably leads to higher rent and labor costs, making steak an expensive item. The Steak-Serving System allows the company to provide a more rapid food service and less expensive steak to its customers.

We believe that our technology has been developed independently and does not infringe on the proprietary rights of others. However, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future. In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license. We cannot assure you that we would be able to do either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action. Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management. Failure to do any of the foregoing could have a material adverse effect on us. Furthermore, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which could have a material adverse effect on us.

Trade Secrets

We rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information. Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization.

Further, the laws of foreign jurisdictions where we sell and seek to sell our products may afford little or no protection of our intellectual property rights. We cannot assure you that the protection provided to our intellectual property rights by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law.

Competition

The primary companies operating in the general food service industry in Japan include, among others, Zensho Holdings, which operate Sukiya, Nakau, Coco’s, Big Boy, and others; McDonald’s Holdings Company (Japan), Ltd.; Skylark, which operates Gusto, Bamiyan, Jonathan’s, Yumean; Colowide, which operates Gyukaku, Onyasai, Kappa Sushi, Steak Miya, Amataro, and others; Nissin Healthcare Food Service; Plenus, which operates Hotto Motto and Yayoiken; Monteroza, which operates Shirokiya, Uotami, Warawara, Sennen no Utage, Yamauchi Nojo, among others; KFC Holdings Japan, which operates Kentucky Fried Chicken and Pizza Hut; Akindo Sushiro, which operates Sushiro; and Aim Services, which supplies food to companies, schools, hospitals, and other facilities.

The food service industry consists of various business types, business categories, product offerings, and price ranges, so it is difficult to clearly identify which other food service companies are operating in the same market space as us. Nevertheless, we believe that restaurants in Japan that use beef as the main ingredient are our

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primary competitors. Accordingly, we are aware of the following companies in the same industry that use beef as the main ingredient and are considered to be relatively similar in terms of business category, product offering, and price range. Such companies include, among others, Yoshinoya Holdings Co., Ltd and Matsuya Foods Holdings Co., Ltd., which primarily offer beef topped bowls of rice; Bronco Billy Co., Ltd., which primarily serves steaks and Hamburg steaks; Flying Garden Co., Ltd., another Hamburg steak and steak restaurant chain; M’Grant Food Service Co., Ltd., another Hamburg steak and steak restaurant chain; and The Monogatari Corporation and Amiyaki Tei Co., Ltd., which primarily offer grilled meat and steak restaurant chain.

Staff

We continually seek to develop outstanding talent by strictly implementing employee hiring criteria, franchise agreement criteria, and outsourced store business criteria. We also provide comprehensive education and training, including a training program for store operators. Staff who will operate new franchisee stores undergo a month-long education and training program, while candidate store managers for directly-operated stores undergo a similar program under the leadership of our resident trainer chefs at stores designated as training facilities. The training facilities offer discounts on standard menu prices, and patrons are informed that the location is for training purposes. Additionally, from a compliance perspective, we make efforts to create a safe and comfortable work environment for our employees and customers.

Customers

The primary customers for our Pepper Lunch ^™ restaurants are families, for which we provide a range of options for children, including a children’s menu. Accordingly, our Pepper Lunch ^™ restaurants are focused in suburban areas and shopping malls, among other locations. Ikinari! Steak ^™ restaurants, on the other hand, are geared toward working professionals. The core customers are business persons in their 20s through 40s. There is usually limited table seating with chairs, which would typically be necessary for children; a specific children’s menu is not offered at our Ikinari! Steak ^™ restaurants. In addition to our direct customers, as a franchisor, our customers also include our franchise partners who own and operate our restaurants.

Suppliers

We have executed agreements with our top suppliers, representing approximately 83% of our aggregate supply requirements, including SFoods Inc., Kabushiki Kaisha Hokubee, DELICA FOODS CO., LTD., ZEN-NOH Pearl Rice Corp., and Fuji Echo, Ltd. These agreements include standard warranties for agreements of this nature, including warranties relating to quality, specification, non-infringement on rights of third parties and freedom from defects. SFoods Inc. accounts for a significant majority (approximately 68% for the year ended December 31, 2018, based on total purchases) of the Company’s and our franchisees’ supply requirements, which include food and restaurant supplies. SFoods Inc. provides food to our directly-owned and franchised restaurants. Each of the other suppliers account individually for less than 7%. SFoods Inc. is also our second largest shareholder, owning approximately 12% of our common shares as of December 31, 2018. See Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.

Our policy is to select suppliers from among those companies that are able to timely supply goods of an appropriate quality in the proper quantity and at a lower price. To help manage price volatility, we generally make our decisions on selecting new suppliers after obtaining a quote from at least two companies and comprehensively weighing factors such as quality, price, delivery date, level of cooperation, and terms of trade. We also utilize the information provided to us by outside credit research firms, and only enter into transactions after confirming the favorable credit standing of our suppliers. We have a purchasing department that generally is in charge of selecting new suppliers. A transaction agreement with suppliers is executed after obtaining the approval of the arrangement at a meeting of management.

Our suppliers’ unit prices, including those of SFoods Inc., are determined through a comprehensive evaluation process which includes receiving periodic quotes from multiple suppliers and comparing prices. With

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regard to agreements with new suppliers that will exceed ¥1 million in purchases per month, participants of our management meetings discuss the pricing and must approve the terms prior to executing a contract. With regard to supply agreements of ¥1 million per month or less, the purchase price is determined through obtaining written approval from our internal directors. We have not experienced significant volatility in the price of food ingredients in the past.

In the case of beef products, the quantity is determined by taking into account the sales figures from the same month of the previous year, the store sales budget for the current period, whether or not there will be any limited-time campaigns, and seasonal price trends. The shelf life of chilled beef is 62 days for U.S. beef and 77 days for Australian beef, and if it cannot be used during this time frame, it will be flash-frozen before the best-before date and will be consumed through use in other menu items.

Inventory

In-store inventory is managed by the store manager at each location. Products are generally ordered six days a week and orders are placed by the store manager according to each ordering cycle. The ordered products are delivered from an outside distribution center to each store, and each store performs an inspection of the products.

The optimal inventory quantity varies for each product. For products with a high sales quantity, we carry approximately 1.5 days’ worth of inventory based on the amount of daily sales, and for products with low sales quantity, we carry such quantities as can be sold within the sell-by date established by the Company, as determined by each store manager according to the characteristics of each store and under the guidance of each section supervisor. A supervisor visits each store in his or her assigned area monthly and monitors the status of inventory management at each store.

At the end of each month, the store manager checks the inventory numbers at the manager’s store and submits this information on a table of performance results, which analyzes the fluctuation in the inventory numbers compared to previous periods. The results in such analysis are used to implement any necessary changes. Inventory management conditions are then reported to our executives through an internal report. We carry fewer number of items compared to our competitors, in order to enable us to manage our inventory in an efficient and productive manner.

Quality Control

We maintain strict food safety management procedures to provide customers with safe food products by carefully selecting the origins and suppliers of ingredients for the safe and stable supply of products while also promoting diversification. We have executed a contract with a Japanese company specializing in food sanitation management, Japan Foods Inspection Corporation (JFIC), pursuant to which we outsource certain inspection and improvement guidance of the sanitation management system at the factories of suppliers providing us ingredients. JFIC is responsible for performing a thorough inspection and creating a report for our review, which ranks four broad categories, including management system, process management, standard sanitation management, and facility management. Each of these four categories are ranked with a percentage with 100% being the best score showing proper compliance. The report also contains detailed explanations of areas that require improvement, including photographic evidence when appropriate.

In addition, microbial testing is performed for each production lot of the key types of meat that will be used by us, following such time as we have confirmed with the supplier that they fall within the standard range established by our corporate group. Once this process of quality control is complete, each applicable supplier loads the products to be dispatched to the designated distribution center.

Once the products are shipped to the distribution center, if there is any quality abnormality, our purchasing department promptly addresses the concern with the supplier and takes appropriate corrective action as necessary.

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Our domestic franchisees purchase their food supply through us, and receive their food supply from the suppliers we designate, and which are the same suppliers we use. Accordingly, the food supplied to our franchisees undergoes the same food safety management procedures and distribution standards stated above.

Japanese Foodservice Association

We are a member of the Japanese Foodservice Association, or JF. JF is the largest food service-related organization in Japan, with total membership of approximately 800 companies, and its aim is to proactively contribute to, among other things, food safety and safe handling of food, education of industry workers and creation of employment within the food service industry. According to the JF website, the Japanese food service industry is currently at ¥25.6 trillion in total industry revenue as of end of 2017 with a workforce of approximately 5,000,000 people.

Regulatory Environment

Prepaid Cards

Our Niku (Beef) Mileage Card in Japan functions as a prepaid card, and is valid for use only inside the territory of Japan for a period of more than six months. As such, it falls under a “prepaid payment method,” or PPM, as set forth in the Act on Settlement of Funds (Act No. 59 of 2009), or the Settlement Act, so long as it can be valid for a period of more than six months. Issuers of prepaid cards with a validity of longer than six months are referred to as PPM Providers. There are two categories of PPM Providers:

Niku (Beef) Money can be used at restaurants operated by franchisees, which are considered third parties for the purposes of the Settlement Act. As such, we are considered a Public Use PPM Provider. A Public Use PPM Provider must file an application with the Kanto Local Financial Bureau and receive a license issue PPM cards. The Company received its license from the Kanto Local Financial Bureau on September 15, 2015.

A PPM Provider typically holds a certain amount of its customers’ cash in the form of prepaid amounts on the cards that have not yet been exchanged for goods or services. The total of such amounts for all customers of a PPM Provider is called the “Outstanding Amount”. The Outstanding Amount of Niku (Beef) Money as of December 31 2018 was ¥1,261,944 thousand. For additional information on the accounting treatment of Niku (Beef) Money, please refer to Note 2.3 of Notes to Audited Consolidated Financial Statements. In addition to receiving the license, Public Use PPM Providers are obligated to maintain deposits of at least half of their Outstanding Amounts at the local legal affairs bureau (although other arrangements are possible), in order to ensure that there are adequate funds for the individuals who are effectively loaning their money to the Public Use PPM Provider through their purchase of the prepaid card. At the end of September and March of each year, the Public Use PPM Provider must calculate its Outstanding Amount and deposit half that amount at the legal affairs office within two months. Instead of deposit mechanics, the Company enters into guarantee agreements with Sumitomo Mitsui Banking Corporation semi-annually to secure at least one half of the Outstanding Amount for a nominal fee. The guarantee agreements are renegotiated every six months.

Restaurant Licensing

In order to operate a restaurant in Japan, the operator must apply for and obtain a restaurant license, or a Restaurant License, pursuant to the Food Sanitation Act (Act No. 233 of December 24, 1947) from the local health department overseeing the prefecture in which the restaurant is located. This license system is in place to ensure that proper safety and sanitation is maintained in restaurants where food is cooked and served.

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The core requirements for a Restaurant License generally relate to the equipment and facilities within the restaurant. These typically include requirements such as having certain refrigeration, dish washing and hot water facilities, as well as requirements to maintain the store’s cleanliness by making sure that all utensils and plates are stored in cupboards with doors, and that the kitchen is separated from the seating space, among others.

It is the responsibility of each individual restaurant operator of the Company to obtain the Restaurant License. To do so, the operator must file an application with the local health department prior to opening for business. After the application has been submitted, an officer of the health department will conduct an on-site inspection of the restaurant to determine if the restaurant meets the relevant standards. After passing such inspection, a license may be granted, making it possible for the operator to begin its restaurant business.

Because our overseas operations comprise a small amount of our revenue, accounting for only around 2.5% of our annual revenue in fiscal year 2018, the licensing and regulatory impacts in other jurisdictions are not significant.

Food Sanitation

The purpose of the Food Sanitation Act is to prevent sanitation risks and further the interest of public health in Japan. Under the Food Sanitation Act, any individual or entity that intends to conduct a covered business (34 types of businesses are covered) which have a significant impact on public health, such as restaurants and others, must obtain approval from the prefectural governor (through the local health department). The prefectural governor may set out necessary conditions such as a valid period of not less than five years from the time of approval to operate the establishment. In order to operate the business, the business must meet facility standards set out for each type of business by the prefectural governor. Any such individual or entity that intends to conduct a covered business such as restaurant business, cafe business, food sales, and shaved ice sales must appoint a “Food Sanitation Manager” based on the standards determined by the prefectural governor.

We maintain the following principal measures, among others, to prevent against food contamination:

Because our overseas operations comprise only a small amount of our revenue, the impacts of food sanitation regulations in other jurisdictions are not significant.

Small and Medium-sized Retail Business Promotion Act

Our franchise business is subject to the Small and Medium-sized Retail Business Promotion Act, which aims to promote small and medium retail businesses in Japan by modernizing the management of small and medium-sized retail businesses through developing shopping streets, store associations, joint shops, and others.

Although the Act regulates franchise businesses, it only regulates certain franchise relationships where the franchisee is a small or medium-sized retail business as set forth in the Act. One of the primary regulations in the

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Act sets forth disclosure requirements for franchisors who seek to enter into covered franchise relationships with small and medium-sized retail businesses. Such disclosures cover the franchisor’s name, address, and number of employees; the franchisor’s capital amount or total investment amount and the names of its major shareholders; the franchisor’s balance sheet and profit and loss statement for the past three fiscal years; and matters regarding any money that will be periodically collected from the franchisee, among others.

We have a wholly-owned subsidiary in the United States called Kuni’s Corporation, a corporation organized under the laws of the State of Delaware. This subsidiary has been established to oversee and manage the opening of our Ikinari! Steak ^™ stores in Manhattan, New York and elsewhere in the United States as we continue to expand our operations.

Our principal executive offices are located at 17 ^th floor, Olinas Tower, 4-1-3 Taihei, Sumida-ku, Tokyo, Japan as of June 25, 2018. The leased area is 1,757.77 square meters, and the term of the lease is effective March 1, 2018 for a two-year period expiring on February 29, 2020. The lease has an automatic renewal of successive two-year terms. The monthly rent for the property is ¥9,040,211 in addition to a monthly common area charge of ¥2,659,506, each of which are not inclusive of an 8.0% consumption tax that must be paid by the Company.

With regard to our restaurant leases, as of December 31, 2018, we had 379 total leases for restaurants, substantially all of which are in Japan, and 64 of which were subleased to our franchisees.

In addition, we own one room in a building located at 3-4-2 and 3-4-26 Azumabashi, Sumida-ku, Tokyo, Japan. The space is approximately 36 square meters. This location is leased to an individual who operates a noodle restaurant for a monthly rent under a lease agreement expiring November 14, 2021.

Please refer to Note 2.3 in our audited consolidated financial statements for additional information regarding leases.

franchisees based on terms and conditions of a franchise agreement. Our restaurant business includes Pepper Lunch ^™ , Ikinari! Steak ^™ , and other restaurants. This business has accounted for the vast majority of our revenues in recent years.

We are also engaged in sales of frozen food and related products. Our own-brand products business is mainly comprised of sales of our proprietary tonkatsu sauce, frozen pepper rice, dressings, Lachs ham, and other foods, as well as the Pitaribashi (a pair of chopsticks that stick together with a built-in magnet).

According to the results of surveys conducted by the Japan Foodservice Association, or JF, revenue in the Japanese food service industry in 2017 was the highest since 2007, and the industry has seen a consistent increase in revenue each year from 2014 through 2017. There was ¥25.6 trillion in total industry revenue as of the end of 2017. Nevertheless, there has been a general increase in labor costs in the industry due to a growing labor shortage and fierce competition with other business categories for the acquisition of customers. As a result, the business climate continues to be challenging.

There is currently no significant impact on our Company from the labor shortage in the Japanese food service industry, in part, because recruitment has increased due to the favorable results of our restaurants and our overall positive brand image. Nevertheless, we have implemented certain measures to prevent a personnel shortage. In order to improve employee retention and recruitment, we are implementing measures such as introducing a defined contribution pension system and setting high hourly wages to improve part-time job retention and hiring. With regard to development of our directly-managed stores, issues maintaining sufficient staff may have an effect on our ability to effectively operate stores and open new stores, so we believe such counter-measures are appropriate.

We recognize revenue from sales by directly-owned restaurants, royalty income from franchised restaurants, and sales of products.

Revenue recognition from sales of food and beverage products at restaurants owned by the Company corresponds to the delivery of food and beverage products to the customers, which is when they consume their meal at the restaurant or purchase food and beverage products to consume later.

Operation of the directly-owned restaurants is either directly-managed by the Company or outsourced to contractors. With respect to directly-owned restaurants, which are either directly-managed by the Company or outsourced to contractors, the company acts as a principal for the delivery of food and beverage products to the customers. As a result, the revenues and related food costs are recognized gross when customers consume their meal at the restaurant. The stores directly-managed by the Company are positioned as the primary place for introducing new products and services on a trial basis and providing staff education and training to franchise stores. These stores also serve as a base from which we can directly receive feedback from customers and learn about their reactions to our products and services, enabling us to provide new know-how to the franchise stores.

The outsourced store business is a business where contractors operate stores owned by us in exchange for a fee to the contractors based on the store’s performance. A contractor candidate operates a store after he or she has gone through in-store training and has acquired the skills and knowledge required to be a store operator. For the operation of outsourced stores, we control product offerings, inventory, pricing, supply chain, and other management activities for outsourced restaurants. The contractor is responsible for hiring employees or paying employee-related costs. Under our standard outsourcing contract, the outsourcing agent receives a fixed monthly payment plus certain additional incentive payments, including formula-based profit sharing and incentive payments if they maintain staff costs below a specified level of store revenues. The outsourcing agent contract, in general, has terms of one year and can be extended at the end of every contract period upon mutual agreement between the Company and the agent.

We receive royalties based on contracts that allow franchised restaurants and other third parties to use the trademark and the proprietary trade secret know-how regarding the operation of restaurants. Royalties are

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calculated based on the contractual percentages and actual revenue generated from using of the trademark. Royalties are recognized on an accrual basis in accordance with the substance of related contracts.

Revenue from our wholesale distribution of food and beverage products to franchised restaurants in Japan is recognized, in general, on the date of the delivery of related food and beverage products to franchised restaurants. In these transactions, we primarily act as an agent for franchised restaurants and thus revenue is presented in the amount received from franchised restaurants less the amount paid on behalf of the franchised restaurants to suppliers.

We operate our business with a focus on franchising, and the development of franchisees is a key challenge for the continued expansion of our operations. In addition to the traditional methods for developing franchisees, we are aggressively working on the development of franchisees by holding information sessions for new prospective franchisees who are referred by financial institutions and other outside cooperating parties.

Revenue for fiscal year 2018 was ¥49,086,078 thousand (2017: ¥28,629,731 thousand), which was an increase of ¥20,456,347 thousand compared to fiscal year 2017. This increase was principally the result of an overall increase in the number of total stores by 228 or 34.8%, of which 115 were directly-owned stores. In particular, we had a ¥20,577,530 thousand increase in the Ikinari! Steak ^™ segment, primarily due to an increase of 209 stores year-over-year.

The revenue for fiscal year 2017 was ¥28,629,731 thousand (2016: ¥18,135,190 thousand), which was an increase of ¥10,494,541 thousand compared to fiscal year 2016. This increase was principally the result of an overall increase in the number of total stores by 114 or 21.1%, of which 47 were directly-owned stores. In particular, we had a ¥9,895,944 thousand increase in the Ikinari! Steak ^™ segment, primarily due to an increase of 73 stores year-over-year.

Segment Information

We divide our business into four segments, based on the types of goods and services provided at each restaurant, as follows: (1) Pepper Lunch ^™ , (2) Ikinari! Steak ^™ , (3) Other Restaurants, and (4) Own-brand products. Ikinari! Steak ^™ has become our most significant segment, accounting for 86.1% of our total revenues for fiscal 2018. The other three segments account for our total revenue as follows: Pepper Lunch ^™ (10.8%), Other Restaurants (2.6%) and Own-brand products (0.4%). Substantially all of our revenue (approximately 97.5% for the year ended December 31, 2018) is attributable to our domestic Japanese restaurant operations and product sales.

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The table below provides information on the number of restaurants operated by segment for each of 2018, 2017 and 2016.

The table below provides information on the average number of restaurants operated by segment for each of 2018, 2017 and 2016, which is used to provide explanation of changes in financial statement elements below.

The average number of stores is calculated by using the average of the number of stores on the last day of each month during each period.

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Pepper Lunch ^™

For fiscal 2018, revenue from the Pepper Lunch ^™ segment increased ¥269,282 thousand or 5.3% to ¥5,311,194 thousand. The results in 2018 reflect stronger operating performance primarily due to the increase in the number of domestic customers in Japan. In January 2018, we exhibited at the JAPAN INTERNATIONAL FRANCHISE SHOW with the aim of promoting franchises. In April, we introduced the “d POINT” point program operated by NTT DOCOMO, INC., commemorating the event with a campaign in which original Pepper Lunch ^™ d POINT cards with special promotions such as free soft drinks were distributed to the first 100,000 applicants. In November, the Pepper Lunch ^™ Business adopted the delivery service already operating in the Ikinari! Steak ^™ Business and is steadily expanding the number of its restaurants that provide this service. Overseas, we opened our first Pepper Lunch ^™ restaurant on the U.S. mainland in a suburb of Los Angeles in January.

Revenue from directly-owned stores in fiscal 2018 increased ¥104,255 thousand or 3.3% over fiscal 2017 to ¥3,299,091 thousand driven principally by an increase of 1.8% in the average number of customers per restaurant.

Revenue from Japanese franchisees primarily consists of wholesale distribution of food and beverage products to franchisees (commission income recognized in net), in addition to royalty income and franchise fees. Revenue from overseas franchisees primarily consists of royalty income from area franchisees and their sub-franchisees (i.e., area franchisees may further develop franchised restaurants within agreed-upon countries or areas). Revenue from franchise stores in fiscal 2018 increased by ¥165,027 thousand or 8.9% to ¥2,012,103 thousand. The increase in revenue was principally due to an increase of 7.2% in the average number of stores operated in 2018 compared to 2017, as well as an increase of 1.8% in the average number of customers per restaurant, which resulted in higher wholesale distribution commissions. The increase in the average number of customers per restaurant was mainly driven by the promotional campaigns in Japan as described above.

For fiscal 2017, revenue from the Pepper Lunch ^™ segment increased ¥764,913 thousand or 17.9% to ¥5,041,912 thousand. The results in 2017 reflect stronger operating performance primarily due to the increase in

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the number of domestic customers in Japan. In June 2017, we introduced a special promotional campaign in collaboration with the movie “Space Battleship Yamato 2202”, the latest episode of a famous science fiction animation series, and we decorated one of our Pepper Lunch ^™ stores in Tokyo with photos of “Yamato” for several weeks in the summer to attract new and existing customers. In addition, the Company introduced a Yamato sweepstakes campaign at Pepper Lunch ^™ stores in the fall in which customers who ordered a certain premium steak and signed up for a drawing via mobile application received a chance to win Yamato promotional goods.

Revenue from directly-owned stores in fiscal 2017 increased by ¥477,847 thousand or 17.6% over fiscal 2016 to ¥3,194,836 thousand driven principally by an increase of 10.9% in the average number of restaurants operated in 2017 compared to 2016. In addition, the average number of customers per restaurant increased by 8.6%, which was slightly offset by a decrease in average revenue per customer. The increase in the average number of customers per restaurant was mainly due to the various promotional campaigns described above.

Revenue from Japanese franchisees primarily consists of wholesale distribution of food and beverage products to franchisees (commission income recognized in net), in addition to royalty income and franchise fees. Revenue from overseas franchisees primarily consists of royalty income from area franchisees and their sub-franchisees (i.e., area franchisees may further develop franchised restaurants within agreed-upon countries or areas). Revenue from franchise stores in fiscal 2017 increased by ¥287,066 thousand or 18.4% to ¥1,847,076 thousand. The increase in revenue was principally due to an increase of 14.7% in the average number of stores operated in 2017 compared to 2016, as well as an increase of 5.4% in the average number of customers per restaurant, which resulted in higher wholesale distribution commissions. The increase in the average number of customers per restaurant was mainly driven by the promotional campaigns in Japan as described above.

Ikinari! Steak ^™

In fiscal 2018, revenue from the Ikinari! Steak ^™ segment increased ¥20,577,530 thousand or 94.8% over fiscal 2017 to ¥42,274,865 thousand. The results in 2018 reflect stronger operating performance primarily due to the increased number of stores, the popularity of lean meat in Japan, and the increased recognition of the Ikinari! brand through various promotional campaigns and advertisements.

Our Ikinari! Steak ^™ also worked to strengthen brand recognition and improve our repeat customer rate through marketing initiatives, such as the collaboration campaign with popular movies such as “Avengers: Infinity War” and “Bohemian Rhapsody,” a business agreement with Japan Airlines Co., Ltd. (JAL) regarding mileage program (where 9,000 JAL miles is exchanged to ¥10,000 in Niku (Beef) Money), a coupon campaign with “ZOZOTOWN” operated by ZOZO, Inc. (September 10 to September 30), and sales of a collaboration product with Lawson, Inc., called “dekaraage-kun.” In November, we attempted to set a new Guinness World Record for serving the most beef-steaks within 24 hours in a restaurant and achieved a new world record, serving 1,734 steaks. In December, we held a “New Year’s Big Thank You Campaign” to commemorate the achievement of 200 store openings in one year and the presence of at least one store in each of Japan’s 47 prefectures.

Revenue from directly-owned stores increased ¥18,317,990 thousand or 90.5% in 2018 from 2017 to ¥38,551,698 thousand, driven principally by an increase of 95.8% in the average number of restaurants operated in 2018 compared to 2017 and an increase in the number of customers per restaurant by 5.3% in the same period. The increase in the number of customers per restaurant primarily resulted from promotional campaigns and brand penetration in Japan.

Revenue from franchise stores primarily consists of wholesale distribution of food and beverage products to franchisees, in addition to royalty income and franchise fees. Revenue from franchise stores increased ¥2,259,539 thousand or 154.4% from 2017 to ¥3,723,166 thousand in 2018. The increase in revenue from franchise restaurants compared to 2017 was mainly due to a 165.2% increase in the average number of restaurants operated in 2018 compared to 2017.

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In fiscal 2017, revenue from the Ikinari! Steak ^™ segment increased ¥9,895,944 thousand or 83.9% over fiscal 2016 to ¥21,697,335 thousand. The result in 2017 reflects stronger operating performance primarily due to the increased number of stores, the popularity of lean meat in Japan, and the increased recognition of the Ikinari! brand through various promotional campaigns and advertisements.

Our Ikinari! Steak ^™ also worked to strengthen brand recognition and improve our repeat customer rate through marketing initiatives, such as the collaboration campaign with the movie “Space Battleship Yamato 2202”, the latest episode of a famous science fiction animation series. We also collaborated with SEGA Games Co., Ltd. on a promotional campaign in its release of the second series of its game software.

In addition, we introduced a mobile application where customers can use our virtual Niku (Beef) Mileage Card and charge Niku (Beef) Money with their credit cards. This mobile application enables us to improve our repeat customer rate, and more customers are expected to charge Niku (Beef) Money.

Revenue from directly-owned stores increased ¥9,087,016 thousand or 81.5% in 2017 from 2016 to ¥20,233,708 thousand, driven principally by an increase of 44.9% in the average number of restaurants operated in 2017 compared to 2016 and an increase in the number of customers per restaurant by 30.6% in the same period. The increase in the number of customers per restaurant primarily resulted from promotional campaigns and brand penetration in Japan.

Revenue from franchise stores primarily consists of wholesale distribution of food and beverage products to franchisees, in addition to royalty income and franchise fees. Revenue from franchise stores increased ¥808,928 thousand or 123.6% from 2016 to ¥1,463,627 thousand in 2017. The increase in revenue from franchise restaurants compared to 2016 was mainly due to a 73.9% increase in the average number of restaurants operated in 2017 compared to 2016. In addition, revenue benefited from a 13.5% increase in the number of customers per restaurant, mainly due to the various promotional campaigns in Japan as described above, which resulted in higher wholesale food distribution commissions.

Other Restaurants

Our Restaurants Business worked to improve sales and profits at existing restaurants by introducing volume-increase sales promotions for steak and seasonal menus as individual store promotions for each business format, as well as limited-time promotional events to express gratitude to customers.

In fiscal 2018, revenue from the Other Restaurants segment decreased ¥522,483 thousand or 28.8% from fiscal 2017 to ¥1,290,526 thousand. In fiscal 2018, revenue from directly-owned stores decreased ¥518,409 thousand or 29.6% from fiscal 2017 to ¥1,234,493 primarily due to the decrease in the number of stores, partly offset by an increase in the number of customers at existing stores.

In fiscal 2017, revenue from the Other Restaurants segment decreased ¥185,841 thousand or 9.3% from fiscal 2016 to ¥1,813,009 thousand. In fiscal 2017, revenue from directly-owned stores decreased ¥182,477 thousand or 9.4% from fiscal 2016 to ¥1,752,902 primarily due to the decrease in the number of stores, partly offset by an increase in the number of customers at existing stores.

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Cost of sales primarily includes food and ingredient products used in our restaurant operations.

For 2018, cost of sales increased by 72.3%. On a segment basis, the increase was substantially consistent with the increase in revenues. For 2017, cost of sales increased by 60%. On a segment basis, the increase was substantially consistent with the increase in revenues.

Gross profit represents a measure of restaurants sales less costs of sales, which includes predominantly food supplies and supply costs used at our restaurants. This is a measure commonly used by Japanese companies to assess performance and profitability and we use this measure in order to analyze pricing effectiveness at recovering food and supply costs.

In 2018, gross profit increased ¥10,654,867 thousand or 70.7% to ¥25,735,737 thousand. The increase was primarily driven by the Ikinari! Steak ^™ segment which grew 102.2%.

In 2017, gross profit increased ¥5,413,176 thousand or 56.0% to ¥15,080,870 thousand. The increase was primarily driven by the Ikinari! Steak ^™ segment which grew 89%.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consists of staff costs, lease expense and depreciation and amortization.

In 2018, selling, general and administrative expenses increased ¥9,140,476 thousand or 68.8 % to ¥22,417,000 thousand, which was primarily due to the increases in staff costs of ¥4,880,650 thousand (excluding directors’ compensation) and lease expenses for directly-owned stores of ¥1,247,824 thousand. Other administrative expenses such as depreciation and amortization, utilities, service and commission fees, and consumables and equipment fees also increased from ¥2,462,428 thousand to ¥4,569,605 thousand primarily due to its business expansion.

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Employee benefits expense (composed of salaries, bonus, social welfare, transportation and other employee benefits) significantly increased mainly due to the increase in the number of full time and part-time employees working in the directly-managed restaurants. Total number of full-time employees on average rose from 455 in 2017 to 718 in 2018, an increase of 57.8%, while part-time employees increased on average from 1,687 in 2017 to 2,923 in 2018, an increase of 73.3%. Salary expense of full-time employees and wages of part-time employees increased by 73.9% and 78.8%, respectively, primarily due to the increase of number of full-time and part-time employees as mentioned above. In addition, the Company increased base salary for full-time employees, which contributed to an approximately 8% increase in salary expense, in order to attract more people and quality human resources to expand its business. We have increased both full-time and part-time employees in order to deal with increased customers, expand sales forces to further develop directly-owned and franchised stores and respond to increased administrative work.

Lease expense for directly-owned stores increased ¥1,247,824 thousand or 59.6% in 2018, mainly due to the increase of 57.5% in the average number of directly-owned stores in 2018 over 2017.

In 2017, selling, general and administrative expenses increased ¥4,448,108 thousand or 50.4% to ¥13,276,576 thousand, which was primarily due to the increases in staff costs of ¥2,075,912 thousand (excluding directors’ compensation), lease expense for directly-owned stores of ¥620,596 thousand, and outsourcing expense of ¥307,057 thousand.

Employee benefits expense (composed of salaries, bonus, social welfare, transportation and other employee benefits) significantly increased mainly due to the increase in the number of full time and part-time employees working in the directly-managed restaurants. Total number of full-time employees on average rose from 353 in 2016 to 455 in 2017, an increase of 28.9%, while part-time employees increased on average from 1,029 in 2016 to 1,687 in 2017, an increase of 63.9%. Accordingly, salary expense of full-time employees and wages of part-time employees increased by 26.0% and 61.7%, respectively, because the number of full-time and part-time employees increased primarily in the Ikinari! Steak ^™ segment. We have increased both full-time and part-time employees in order to deal with increased customers, expand sales forces to further develop directly-owned and franchised stores and respond to increased administrative work.

Lease expense for directly-owned stores increased ¥620,596 thousand or 42.2% in 2017, mainly due to the increase of 27.4% in the average number of directly-owned stores in 2017 over 2016. Also contributing to the rise in lease expense was pre-opening costs for 11 Ikinari! Steak ^™ restaurants in New York.

Outsourcing expense represents commission to operators of the directly-owned stores, which increased in 2017 ¥307,057 thousand or 185.4%, mainly due to the increase in the average number of outsourced restaurants, and the increase in the commissions to contractors as a result of increased sales in the Ikinari! Steak ^™ segment.

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Segment Income

The table below shows segment income used by the Chief Operating Decision Maker (CODM) for the purposes of making decisions about resource allocation to the operating segments and of assessing performance of the segments, and is prepared in accordance with Japanese GAAP. Segment income below is reconciled to its profit or loss before tax under IFRS operating income for each of fiscal year 2018, fiscal year 2017 and fiscal year 2016. This information should be read in connection with Note 5 to our Audited Annual Consolidated Financial Statements for segment information.

Segment income total increased ¥2,785,075 thousand or 69.6% to ¥6,789,130 thousand for the fiscal year 2018. The increase was primarily driven by the Ikinari! Steak ^™ segment which grew 111% year over year. The Ikinari increase in segment income is in excess of the corresponding increase in revenue as a significant portion of Selling, general and administrative expenses are more fixed in nature, which allows a larger portion of the increase in customer revenues to flow directly to segment income.

Segment income total increased ¥1,927,634 thousand or 92.8% to ¥4,004,055 thousand for the fiscal year 2017. The increase was primarily driven by the Ikinari! Steak ^™ segment which grew 200% year over year. The Ikinari increase in segment income is in excess of the corresponding increase in revenue as a significant portion of Selling, general and administrative expenses are more fixed in nature, which allows a larger portion of the increase in customer revenues to flow directly to segment income.

Other Operating Expenses

Other operating expenses for fiscal year 2018 was ¥2,114,577 thousand (2017: ¥80,074 thousand), which was an increase of ¥2,034,503 thousand compared to fiscal year 2017. The main reasons for the increase are impairment losses of ¥1,291,844 thousand and onerous contract provisions of ¥766,801 thousand recognized in respect of our U.S. Ikinari! Steak ^™ stores in fiscal year 2018.

Income Tax Expense

Income tax expense in 2018 increased ¥711,762 thousand or 111.4% to ¥1,350,710 thousand even though consolidated profit before tax decreased as taxable Japanese profit increased due principally to stronger operating

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performance as described above and not recognizing future tax benefits related to tax losses and temporary differences for our subsidiary. The statutory tax rate in 2018 and 2017 was 30.9% in Japan while the overall effective tax rates in 2018 and 2017 were 80.8% and 35.8%, respectively. In 2018, the effective tax rate was significantly higher primarily due to the increase in unrecognized deferred tax assets at its subsidiary, which primarily derived from impairment losses and provisions for onerous lease contracts.

Income tax expense in 2017 increased ¥328,938 thousand or 106.1% to ¥638,948 thousand as profit before tax increased due principally to stronger operating performance as described above. The effective tax rates in 2017 and 2016 were 35.8% and 34.9%, respectively, while the statutory tax rates in 2017 and 2016 were 30.9% and 33.1%, respectively. In 2017, the effective tax rate was slightly higher primarily due to unrecognized deferred tax assets, partially offset by the decrease in the Japan tax rate and the availability of salary-based tax credits.

Changes in unrecognized deferred tax assets for 2017 primarily arose from an increase in unrecognized tax losses and temporary differences for the subsidiary. The Japanese statutory effective tax rate for 2017 changed from the prior year due to the revision of the Japanese Tax Act. Tax credits for salary growth is a system where the Company may claim tax credits for employee salary increases when certain requirements are met.

Net Profit

Based on the above, net profit in 2018 decreased ¥824,440 thousand or 72.0% to ¥320,377 thousand and net profit in 2017 increased ¥566,989 thousand or 98.1% to ¥1,144,817 thousand.

Financial Position

As of December 31, 2018, current assets were ¥12,554,811 thousand, an increase of ¥4,677,541 thousand from December 31, 2017 (¥7,877,270 thousand), primarily due to cash and cash equivalents from operating activities, which increased by ¥2,368,165 thousand, and trade and other receivables, which increased by ¥1,803,424 thousand primarily consisting of deposits to shopping centers and Asahi Security. Sales to franchise owners increased due to an increase in the number of franchise restaurants by 113 or 24.8% from 455 at December 31, 2017 to 568 at December 31, 2018. The amount of deposits to the shopping centers increased mainly due to an increase in the number of restaurants in shopping centers by 30, from 77 at December 31, 2017 to 107 at December 31, 2018. The existing restaurants have also started using Asahi Security, a security company which collects cash proceeds daily.

Non-current assets were ¥14,697,842 thousand at December 31, 2018, an increase of ¥6,059,029 thousand from December 31, 2017 (¥8,638,813 thousand), primarily resulting from an increase of ¥4,111,711 thousand in property, plant and equipment attributable to the growth in the number of directly-owned restaurants by 115 which resulted in an increase of acquisition costs of these assets. The acquisition costs for leasehold improvements and kitchen equipment and furniture and fixtures in 2018 totaled ¥5,340,713 thousand, ¥325,832 thousand and ¥383,227 thousand, respectively. Construction in progress in total decreased by ¥469,061 thousand, which primarily includes certain kitchen equipment and furniture and fixtures for stores to be opened in 2019, which was partially offset by impairment losses of ¥1,291,844 thousand primarily recognized for the assets of Kuni’s Corporation.

Current liabilities were ¥17,618,674 thousand at December 31, 2018, an increase of ¥7,896,166 thousand from December 31, 2017 (¥9,722,508 thousand), primarily due to the increase in trade and other payables and related party trade payables by ¥3,367,858 thousand. This is mainly due to the increase in purchases of food materials, such as meats, vegetables, rice and beverages, resulting from the growth in the number of restaurants in 2018. Other payables for miscellaneous expenses also increased mainly due to an increase in operating expenses incurred at restaurants such as uniform cleaning, floor cleaning, purchases of face masks, Niku (Beef) Mileage cards and the electromagnetic cookers.

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Interest-bearing loans and borrowings (current and non-current) increased by ¥2,670,991 thousand, which was mainly used for financing directly-owned restaurants (125 in total). We use a combination of current and non-current borrowing to finance operations, based on market conditions.

Provisions (current and non-current) increased by ¥1,361,265 thousand primarily due to provisions for onerous contracts, as described in International Development.

As of December 31, 2018, total equity was ¥3,981,818 thousand, a decrease of ¥115,540 thousand from the December 31, 2017 (¥4,097,358 thousand). Retained earnings decreased by ¥253,814 thousand primarily due to the payment of cash dividends of ¥621,158 thousand.

The table below shows the reconciliation of free cash flow to cash from operating activities for each of the past three fiscal years ( in thousands of yen ):

Operating activities

Cash provided by operating activities totaled ¥6,644,688 thousand and free cash flow was ¥686,239 thousand in 2018 while cash provided by operations totaled ¥4,189,609 thousand and free cash flow was ¥1,522,271 thousand in 2017. In 2018, cash provided by operations increased by ¥2,455,079 thousand or 58.6% compared with 2017, as improved operating results were partly offset by higher income tax payments and other working capital changes.

Cash provided by operating activities totaled ¥4,189,609 thousand and free cash flow was ¥1,522,271 thousand in 2017 while cash provided by operations totaled ¥1,691,520 thousand and free cash flow was ¥417,955 thousand in 2016. In 2017, cash provided by operations increased by ¥2,498,089 thousand or 147.7% compared with 2016, as improved operating results were partly offset by higher income tax payments and other working capital changes.

Investing activities

Cash used in investing activities totaled ¥6,444,953 thousand in 2018, an increase of ¥3,069,746 thousand compared with 2017. The increase was primarily due to an increase in purchases of property, plant and equipment of ¥3,291,111 thousand associated with new store openings, payment of lease deposits receivable of ¥296,921 thousand and construction loan receivable from lessors of ¥705,810 thousand partly offset by increase in proceeds from sales of property, plant and equipment of ¥1,034,241 thousand. We opened 117 new directly-operated stores in 2018: 109 Ikinari! Steak ^™ stores, nine of which are located in the U.S. and managed by our subsidiary, Kuni’s Corporation, and eight Pepper Lunch ^™ stores.

Cash used in investing activities totaled ¥3,375,207 thousand in 2017, an increase of ¥2,028,376 thousand compared with 2016. The increase was primarily due to an increase in purchases of property, plant and equipment of ¥1,393,773 thousand associated with new stores openings. We opened 56 new directly-operated stores in 2017: 53 Ikinari! Steak ^™ stores, two of which are located in the U.S. and managed by our subsidiary, Kuni’s Corporation, and three Pepper Lunch ^™ stores.

Financing activities

Cash provided by financing activities totaled ¥2,179,096 thousand in 2018, an increase of ¥973,219 thousand compared with 2017. The increase was primarily due to an increase in proceeds from long-term borrowings of ¥2,507,000 thousand partly offset by an increase in repayment of long-term borrowings of ¥982,455 thousand and paid dividends of ¥321,136 thousand.

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Cash provided by financing activities totaled ¥1,205,877 thousand in 2017, an increase of ¥817,755 thousand compared with 2016. The increase was primarily due to an increase in proceeds from long-term borrowings of ¥950,000 thousand and stock option exercises of ¥349,912 thousand, partly offset by an increase in repayment of long-term borrowings of ¥311,692 thousand and paid dividends of ¥104,591 thousand.

Restaurant development and capital expenditures

In 2018, we opened 137 directly-owned restaurants, closed 2 restaurants and transferred 18 restaurants to our franchisees. In 2017, we opened 56 restaurants and closed 9 restaurants. We close restaurants for a variety of reasons, such as existing sales and profit performance, change to a type of store with stronger performance, or termination of the building lease by reason of the expiration of the period or by request from the lessor.

New restaurant investments in all years were concentrated in locations and areas with strong returns and or opportunities for long-term growth. Average development costs vary widely by locations and areas depending on the types of restaurants built and construction costs within each location. These costs, which primarily include leasehold improvements and equipment, are managed through the use of optimally-sized restaurants, construction and design efficiencies, and leveraging best practices. Total development costs (mainly consisting of leasehold improvements and equipment) for new restaurants in Japan and the U.S. averaged approximately ¥45,255 thousand and ¥122,170 thousand, respectively in 2018.

For 2019, we intend to open approximately 25 Pepper Lunch ^™ stores, the majority of which are expected to be franchised stores. Two-thirds of these new stores are expected to be opened in international locations. We also intend to open approximately 210 Ikinari! Steak ^™ stores, of which approximately half are expected to be franchised stores. Substantially all of the new Ikinari! Steak ^™ stores are expected to be opened in Japan.

Financing Activities

In March 2016, March 2017 and March 2018, we entered into three separate Delayed Draw Term Loan Agreements with MUFG Bank, Ltd. for loans in the aggregate amount of ¥2,500,000 thousand. At March 31, 2018, we had ¥291,680 thousand outstanding under the 2016 Term Loan and ¥641,668 thousand outstanding under the 2017 Term Loan. These loans were originally secured by certain of our assets, but as of April 10, 2018, the collateral on each loan has been removed as a result of improvements in our credit. No other material terms were changed. These agreements contain various restrictive covenants including, among others, continuously maintaining a positive “ordinary profit” under Japanese GAAP (profit excluding extraordinary items, such as

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impairment losses and provisions for onerous lease contracts from profit before tax) each year throughout the period of the loans. For 2018, the Company recorded a positive “ordinary profit” under Japanese GAAP and is in compliance with the covenants. A breach of these or other covenants could result in an event of default under these agreements and could lead to upward adjustments in the applicable interest rate. In the case of a continuing event of default, MUFG Bank, Ltd. could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit.

With regard to overseas stores, while Pepper Lunch ^™ has been opening more stores mainly in the Asia region, we have also opened Ikinari! Steak ^™ stores in the United States (Manhattan, New York) since 2017. Refer to International Development for more information. We will continue to expand our overseas locations in Asia and the United States and consider additional market opportunities in Europe, New Zealand and elsewhere.

Critical Accounting Policies and Estimates

Management is required to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. See Note 3 of Notes to the Audited Consolidated Financial Statements for additional information on significant accounting judgments, estimates and assumptions.

Revenue from contracts with customers

The Group recognizes revenue arising from contracts with customers based on a five-step model.

Step 1: Identify the contract(s) with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

The Group satisfies a performance obligation and recognizes revenue over time if one of the following criteria is met.

The Group recognizes revenue for a performance obligation that is satisfied at a point in time when the Group transfers a promised good or service to a customer as described in the following each transactions.

Revenue from restaurants owned and operated by the Group

Sale of food and beverage products at restaurants owned and operated by the Group

The Group is obligated to provide food and beverages products to customers at restaurants owned and operated by the Group. Performance obligations to provide food and beverages to customers at restaurants are satisfied when the Group transfers food and beverage products to customers and the customers obtain control of those products. Customers may redeem discount coupons that can be applied against the payment for food and beverage products at restaurants owned and operated by the Group. The Group measures revenue at an amount equal to consideration promised in a contract with a customer less those discounts.

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The Group recognizes revenue when the services above are provided and the performance obligations are satisfied.

Niku (Beef) Mileage Program

The Group’s Niku (Beef) Mileage Program offers customers incentives to dine at Ikinari! Steak ^™ restaurants. This program allows members to earn mileage credits equivalent to the weight in grams of steak purchased at Ikinari! Steak ^™ restaurants. Members are rewarded with certain status level such as “Gold Member” and “Platinum Member” as they accumulate mileage credits. Members at certain status levels receive rewards in accordance with their accumulated mileage credits and can enjoy free or discounted food for their respective status levels with these rewards. The rewards have expiry dates, and the right of redemption is forfeited at a specified future expiration date.

The Group recognizes a contract liability corresponding to the sale giving rise to the mileage credits for the rewards. Such liability corresponds to the estimated future redemption amount calculated based on historical redemption patterns, taking into account rewards that are not expected to be utilized (referred to as ‘breakage’). There is uncertainty in the redemption patterns. Such liability is derecognized and revenue is recognized subsequently at the time when the rewards are redeemed and services, such as free or discounted steaks, are provided, satisfying the performance obligation. The same accounting treatment is applied at the expiration of rewards.

Niku (Beef) Money

The Group’s Niku (Beef) Money offers customers electronic money services whereby customers can charge (prepay) money as electronic money and can then use it for payment for the purchase of products, services, and other transactions in lieu of cash at restaurants. The Group recognizes a contract liability when customers charge their cards at the amount of the prepayment for its performance obligation to transfer, or to stand ready to transfer, goods or services in the future. Such liability is derecognized and revenue is recognized subsequently at the time when food and beverages products are provided to customers at restaurants, satisfying the performance obligation. The Group recognizes the expected breakage at the amount calculated based on historical breakage patterns.

Revenue from franchised restaurants

Services provided to franchised restaurants

The Group has the following performance obligations in the contracts with franchised restaurants:

The Group recognizes revenue when the services above are provided and the performance obligations are satisfied.

Royalties

The Group also has the following performance obligations in the contracts with franchised restaurants in addition to above:

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The Group receives royalties for satisfying the performance obligations stated above. The performance obligations are satisfied over the contractual period, and accordingly, the Group recognizes revenue in proportion to monthly sales of franchised restaurants.

Franchise fees

In addition, the Group receives franchise fees primarily for such one-time performance obligations in the contracts with franchised restaurants as business plan developments and market and location research prior to store opening. The Group recognizes franchise fees as revenue when it satisfies these obligations.

Wholesale distribution of food and beverage products—Commission

Commission revenue from wholesale distribution of food and beverage products to franchisees is recognized, in general, on the date of the delivery of the related food and beverage products to franchised restaurants.

In these transactions, the Group primarily acts as a purchasing agent on behalf of a franchised restaurant, and revenue is presented as the amount received from the franchised restaurant less the amount paid on behalf of the franchised restaurant to the supplier. The Group acts as a principal in import transactions only. The following indicators are considered when determining whether the Group is acting as a principal or an agent with respect to a transaction:

Revenue from master franchise agreements

The Group has the following performance obligations in the master franchise agreements with master franchisors:

The Group recognizes revenue when it satisfies the performance obligations stated above. The performance obligations above are satisfied over the contractual period, and accordingly, the Group recognizes revenue evenly over the period, and records a contract liability for the deferred potion of master franchise fees.

In addition to these contract liabilities described above, “Advances received” are also recorded as a contract liability.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price, any directly attributable costs of bringing the asset to its working condition and location for its intended use, and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

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Items of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Depreciation is recognized in the consolidated statements of profit or loss as “Selling, general and administrative expenses.” Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of profit or loss when the asset is derecognized.

The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the depreciation period or method, as appropriate, and are treated as changes in accounting estimates.

Provisions for Onerous Lease Contracts

A provision is recognized for a present obligation arising under an onerous contract, which is defined as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Judgment is required in determining if a present obligation exists, taking into account all available evidence. Once the existence has been established, the Group recognizes provisions for the present value of the amount by which the unavoidable costs to fulfill the agreements exceed the expected benefits from such agreements, which comprises the estimated non-cancellable lease payments, including contractually required real estate taxes, common area maintenance and insurance costs, expected sub-lease income and other exit costs associated with store closing commitments.

The Group regularly reviews the operational performance of our stores and makes assessments of the future developments of these stores. In some cases, we decide to close stores, which requires management to make a number of judgments to ensure that these decisions are appropriately reflected in our financial statements. This involves testing non-financial assets for impairment and also the recognition of provisions relating to store closures such as provisions for onerous contracts.

Impairment of Non-Financial Assets

The Group assesses during each reporting period whether there is any indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset, such as goodwill or intangible assets with indefinite life, is required, the Group estimates the asset’s recoverable amount. Recoverable amount is determined for an individual asset unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount of the cash-generating unit, or CGU, to which the asset belongs is determined. Recoverable amount is the higher of fair value less costs of disposal or its value in use. When the carrying amount of an asset or a CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or quoted share prices for publicly traded companies or other available fair value indicators.

The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. In principle, each restaurant is considered as an individual CGU and recoverable amounts of each CGU are generally calculated based on value in use as this is generally considered to be higher than fair value less costs of disposal. These budgets and forecast calculations generally cover a period of three years. No growth rate is applied to project future cash flows after the third year.

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Impairment losses of continuing operations are recognized in the consolidated statements of profit or loss as “Other operating expenses.”

Assets other than goodwill are assessed to determine whether there is any indication that previously recognized impairment losses no longer exist or have decreased. If such an indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of profit or loss.

Deferred Tax

Deferred tax is provided using the asset and liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized. At the end of 2018, the unrecognized deferred tax assets were predominately in foreign jurisdictions.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income (OCI) or directly in equity.

Deferred tax assets and deferred tax liabilities are offset if and only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

The Company does not currently conduct material research and development activities.

Our trend information is contained elsewhere in this annual report, including but not limited to “Item 4.B. Business Overview,” and “—A. Operating Results,” and “—B. Liquidity and Capital Resources” in this Item.

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Capital commitment

At December 31, 2018, we had capital commitments of ¥571,682 thousand relating to the completion of the renovation of new stores. This is primarily being funded through the Company’s own funds and borrowings. There were no capital commitments as at December 31, 2017 and January 1, 2017.