NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF December 31, 2018
(UNAUDITED)
NOTE
1 - ORGANIZATION, DESCRIPTION OF BUSINESS, AND BASIS OF PRESENTATION
Exceed
World, Inc., (the “Company”), was incorporated under the laws of the State of Delaware on November 25, 2014.
On
September 26, 2018, e-Learning Laboratory Co., Ltd. (“e-Learning”), a direct wholly owned subsidiary of Force International
Holdings Limited, which was incorporated in Hong Kong with limited liability (“Force Holdings”), entered into a share
purchase agreement with Force Internationale Limited (“Force Internationale”), the holding company of Force Holdings,
in which e-Learning agreed to sell and Force Internationale agreed to purchase 74.5% equity interest of the Company at a consideration
of US$26,000.
On
September 26, 2018, the same date, Force Internationale entered into a share purchase agreement with the Company, in which Force
Internationale agreed to sell and the Company agreed to purchase 100% equity interest of Force Holdings. In consideration of the
agreement, the Company issued 12,700,000 common stock at US$1 each to Force Internationale. The results of these transactions
are that Force Internationale is a 84.4% owner of the Company and the Company is a 100% owner of Force Holdings (the “Reorganization”).
On
December 6, 2018, the Company entered into a share contribution agreement (the "Agreement") with Force Internationale, a 84.4%
owner of the Company. Under the Agreement, the Company transferred 100% of the equity interest of School TV Co., Ltd. ("School
TV"), to Force Internationale without consideration. This Agreement was approved by the boards of directors of the Company, Force
Internationale and School TV. Upon the completion of the disposal, School TV was deconsolidated from the Group's consolidated
financial statements.
As
of December 31, 2018, we operate through our wholly owned subsidiaries, which are engaged in provision of the educational services
through an internet platform called “Force Club”.
The
Company has elected September 30th as its fiscal year end.
The
accompanying unaudited consolidated financial statements of Exceed World, Inc. have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation
S-X. In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a
fair statement of the results for the three months ended December 31, 2018, have been made. Results for the interim periods presented
are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the
terms “Company”, “we”, “us” or “our” mean the Company. Certain information and
note disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles
in the United States of America has been omitted from these statements pursuant to such accounting principles and, accordingly,
they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction
with our consolidated financial statements for the year ended September 30, 2018, included in our Form 10-K.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION
The
accompanying consolidated financial statements include the accounts of the Company and its subsidiaries (the “Group”).
Inter-company accounts and transactions have been eliminated.
|
Name
of Subsidiary
|
State
or Other Jurisdiction of Incorporation or Organization
|
|
Force
International Holdings Limited
|
Hong
Kong
|
|
e-Learning
Laboratory Co., Ltd.
|
Japan
|
|
e-Communications
Co., Ltd. (“e-Communications”)
|
Japan
|
USE
OF ESTIMATES
The
presentation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
as the date of the financial statements and the reported amounts of revenue and expenses reported in those financial statements.
Certain significant accounting policies that contain subjective management estimates and assumptions include those related to
going concern, allowance for doubtful accounts, valuation allowance on deferred income tax, write-down in value of inventory and
sales allowance. Operating results in the future could vary from the amounts derived from management's estimates and assumptions.
RELATED
PARTY TRANSACTION
A
related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate
families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under
common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company.
A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related
parties. The Company conducts business with its related parties in the ordinary course of business.
Transactions
involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive,
free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such
representations can be substantiated.
CASH
EQUIVALENTS
The Company
considers all highly liquid investments with maturities of three months or less at the date of purchase are classified as cash
equivalents.
ACCOUNTS
RECEIVABLE AND ALLOWANCE
Accounts
receivable are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate
for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off against the
allowance when identified.
MARKETABLE
SECURITIES
Investments
in marketable securities with readily determinable fair values and all investments in equity securities are reported at their
fair values as quoted by market exchanges in the consolidated balance sheets. Unrealized and realized gains and losses are included
in the change in fair value of marketable securities.
INVENTORIES
Inventories,
consisting of educational products accounted for using the weighted average method, are valued at the lower of cost and market
value.
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment are stated at cost less depreciation and impairment loss. Depreciation is calculated using the straight-line
method or reducing balance method at the following estimated useful life:
|
Building
|
Over
the shorter of the lease terms or 10 years on straight-line method
|
|
Equipment
|
2
to 15 years on reducing balance method
|
|
Vehicle
|
3
years on reducing balance method
|
Assets
held under capital lease obligation are depreciated over their expected useful lives on the same basis as owned assets. However,
when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over
the shorter of the lease term and their useful lives.
INTANGIBLE
ASSETS
The
Company amortizes its intangible assets with definite useful lives over their estimated useful lives and periodically evaluated
for recoverability, and those evaluations take into account events or circumstances that warrant revised estimates of useful lives
or that indicate that impairment exists.
The
intangible assets with definite useful life are amortized using the straight-line basis over the following estimated useful life:
|
Software
|
5
years
|
|
Membership
|
15
years – 30 years
|
IMPAIRMENT
OF LONG-LIVED ASSETS
The
carrying value of property, plant and equipment and intangible assets subject to amortization is evaluated whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be measured
by the amount by which the carrying value of the asset exceeds the fair value of the asset. Management has determined there were
no events or changes in circumstances that required an impairment during the three months ended December 31, 2018 and December
31, 2017.
REVENUE
RECOGNITION
The
Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”)
Topic 606 - Revenue from contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the
contract; and (5) recognize revenue when each performance obligation is satisfied. When payments are received in advance
of recognizing revenue, the Company includes the amount in deferred income on the consolidated balance sheets. Membership income
of e-Learning educational services was recognized when the membership services are rendered.
ADVERTISING
Advertising
costs are expensed as incurred and included in selling and distributions expenses. Advertising expense was $214,513 and $314,773
for the three months ended December 31, 2018 and 2017, respectively.
FOREIGN
CURRENCY TRANSLATION
The
Company maintains its books and records in its local currencies, Japanese YEN (“JPY”) and Hong Kong Dollars (“HK$”),
which are the functional currencies as being the primary currencies of the economic environment in which their operations are
conducted. Transactions denominated in currencies other than the functional currency are translated into the functional currency
at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet
dates. The resulting exchange differences are recorded in the consolidated statements of operations and comprehensive income.
The
reporting currency of the Company is the United States Dollars (“US$”) and the accompanying consolidated financial
statements have been expressed in US$. In accordance with ASC Topic 830-30,
Translation of Financial Statement
, assets
and liabilities of the Group whose functional currency is not US$ are translated into US$, using the exchange rate on the balance
sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting
from translation of financial statements are recorded as a separate component of accumulated other comprehensive income within
the statements of shareholders’ equity.
Translation
of amounts from the local currency of the Group into US$1 has been made at the following exchange rates:
|
|
December
31, 2018
|
|
Current
JPY: US$1 exchange rate
|
109.56
|
|
Average
JPY: US$1 exchange rate
|
112.77
|
|
|
|
|
|
December
31, 2018
|
|
Current
HK$: US$1 exchange rate
|
7.83
|
|
Average
HK$: US$1 exchange rate
|
7.83
|
COMPREHENSIVE
INCOME OR LOSS
ASC
Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income or loss,
its components and accumulated balances. Comprehensive income or loss as defined includes all changes in equity during a period
from non-owner sources. Accumulated comprehensive income, as presented in the accompanying consolidated statements of shareholders’
equity consists of changes in unrealized gains and losses on foreign currency translation.
BASIC
EARNINGS PER SHARE
The
Company computes basic and diluted earnings per share in accordance with ASC Topic 260,
Earnings per Share
. Basic
earnings per share is computed by dividing net income by the weighted average number of common stock outstanding during the reporting
period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to
issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings
of the Company.
The
Company does not have any potentially dilutive instruments as of December 31, 2018 and September 30, 2018 and, thus, anti-dilution
issues are not applicable.
INCOME
TAXES
The
provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between
the financial statements and the income tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured
using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized
in income or loss in the period that includes the enactment date. A valuation allowance is provided to reduce deferred tax assets
to the amount of future tax benefit when it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the
need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial
impact on the Group’s income tax provision and net income or loss in the period the determination is made.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842). This new guidance will require that a lessee recognize
assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being
the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company
is currently evaluating the impact of the new guidance on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement
(Topic 820). This new guidance removes and modifies disclosure
requirements on fair value statements. This update is effective for fiscal years beginning after December 15, 2019 and interim
periods within those fiscal year. The Company is currently evaluating the impact, if any, on its disclosures in the Notes to Consolidated
Financial Statements.
NOTE
3 – FAIR VALUE MEASUREMENT
The
Company’s valuation techniques used to measure the fair value of marketable equity securities are derived from quoted prices
in active markets for identical assets or liabilities.
NOTE
4 - INCOME TAXES
The
Group conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities,
the Group files tax returns that are subject to examination by the local tax authority.
National
income tax in Japan is charged at 15% with taxable income up to JPY8,000,000 and 23.2% at December 31, 2018 and September 30,
2018, with taxable income over JPY8,000,000. The Company’s subsidiaries, e-Learning and e-Communications (“Japanese
Subsidiaries”), were incorporated in Japan and are subject to Japanese national income tax and local corporate tax, business
tax and corporate inhabitant taxes at the applicable tax rates on the taxable income as reported in their Japanese statutory accounts
in accordance with the relevant enterprises income tax laws applicable to foreign enterprises.
For
the three months ended December 31, 2018 and December 31, 2017, income tax expense for Japanese Subsidiaries is $66,499 and $0,
respectively.
Exceed
World, Inc., which acts as a holding company on a non-consolidated basis, does not plan to engage any business activities and
current or future loss will be fully allowed. For the three months ended December 31, 2018 and 2017, respectively, Exceed World,
Inc., as a holding company registered in the state of Delaware, has incurred net loss and, therefore, has no tax liability. The
net deferred tax asset generated by the loss carry forward has been fully reserved.
United
States
The
Company is a Delaware corporation that is subject to U.S. corporate income tax on its taxable income at a rate of up to 21% for
taxable years beginning after December 31, 2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax
years. Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “2017 Act”), was
signed into law on December 22, 2017. The 2017 Act significantly modified the U.S. Internal Revenue Code by, among other things,
reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017;
limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition
tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain
limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes
on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum.
The
2017 Act also includes provisions for a new tax on the Global Intangible Low-taxed Income (“GILTI”) effective for
tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess
of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of
foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.
The
Company’s management is still evaluating the effect of the 2017 Act on the Company. Management may update its judgment of
that effect based on its continuing evaluation and on future regulations or guidance issued by the U.S. Department of the Treasury,
and specific actions the Company may take in the future.
To
the extent that portions of the Company’s U.S. taxable income, such as Subpart F income or GILTI, are determined to be from
sources outside of the U.S., subject to certain limitations, the Company may be able to claim foreign tax credits to offset its
U.S. income tax liabilities. If dividends that the Company receives from its subsidiaries are determined to be from sources outside
of the U.S., subject to certain limitations, the Company will generally not be required to pay U.S. corporate income tax on those
dividends. Any liabilities for U.S. corporate income tax will be accrued in the Company’s consolidated statements of operations
and comprehensive income and estimated tax payments will be made when required by U.S. law.
One-Time
Transition Tax Related to the 2017 Act
The
Group estimated the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s
share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the 2017 Act. The Group retained
an accumulated deficit as of December 31, 2017 and therefore did not recognize any one-time transition tax. The actual impact
of the 2017 Act on the Company may differ from management’s estimates, and management may update its judgments based on
future regulations or guidance issued by the U.S. Department of the Treasury, and specific actions the Company may take in the
future.
NOTE
5 - RELATED-PARTY TRANSACTIONS
On
September 26, 2018, e-Learning, a direct wholly owned subsidiary of Force Holdings, which was incorporated in Hong Kong with limited
liability, entered into a share purchase agreement with Force Internationale, the holding company of Force Holdings, in which
e-Learning agreed to sell and Force Internationale agreed to purchase 74.5% equity interest of the Company at a consideration
of US$26,000.
On
September 26, 2018, the same date, Force Internationale entered into a share purchase agreement with the Company, in which Force
Internationale agreed to sell and the Company agreed to purchase 100% equity interest of Force Holdings at a consideration by
issuance of 12,700,000 common stock at US$1 each to Force Internationale.
On
December 6, 2018, the Company entered into a share contribution agreement (the “Agreement”) with Force Internationale,
a 84.4% owner of the Company. Under the Agreement, the Company transferred 100% of the equity interest of School TV, to Force
Internationale without consideration. This Agreement was approved by the boards of directors of each of the Company, Force Internationale
and School TV. Upon the completion of the disposal, School TV was deconsolidated from the Group’s consolidated financial
statements.
As
of December 31, 2018, and September 30, 2018, the Company had $339,013 and $382,544, respectively, owed to Tomoo Yoshida, Chief
Executive Officer, Chief Financial Officer and the shareholder of the Company. The advance is unsecured, due on demand and bears
no interest.
As
of December 31, 2018, and September 30, 2018, the Company had $47,428 and $47,710, respectively, owed to Keiichi Koga, who is
the shareholder of the Company and the director of the Company’s certain subsidiaries. The advance is unsecured, due on
demand and bears no interest.
As
of December 31, 2018, and September 30, 2018, the Company had $291,785 and $291,015, respectively, owed to Force Internationale
which is our holding company and Tomoo Yoshida, our CEO, is also the director of Force Internationale. The advance is unsecured,
due on demand and bears no interest.
As
of December 31, 2018, the Company had $131,144, owed to School TV. Tomoo Yoshida, our CEO, is also the CEO of School TV. The advance
is unsecured, due on demand and bears no interest.
As
of December 31, 2018, the Company had a long-term loan JPY25,000,000 ($228,992, which included the principal $228,186 and the
interest receivable $806) to School TV. Tomoo Yoshida, our CEO, is also the CEO of School TV. The loan is unsecured, mature on
May 24, 2023 with an interest rate 1% per annum.
NOTE
6 – SHORT-TERM LOAN RECEIVABLE
On
September 14, 2018, the Company entered into a loan agreement to lend JPY45,000,000 ($414,385) to an independent third party,
Star Gate Investment Holdings Limited. The loan is unsecured, matures on March 31, 2019 with an interest of JPY 400,000 per quarter.
As
of December 31, 2018, the Company had short-term loan JPY10,000,000 ($91,274) to School TV. Tomoo Yoshida, our CEO, is also the
CEO of School TV. The loan is unsecured, matures on January 15, 2019 with an interest rate 1% per annum.
NOTE
7 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
|
December
31, 2018
|
September
30, 2018
|
|
|
US$
|
US$
|
|
Buildings
|
54,398
|
54,984
|
|
Equipment
|
733,444
|
741,083
|
|
Vehicles
|
118,025
|
119,296
|
|
|
905,867
|
915,363
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
(579,413)
|
(569,650)
|
|
|
326,454
|
345,713
|
|
|
|
|
|
Net
effect of exchange rate
|
12,399
|
(1,722)
|
|
|
|
|
|
Total
net book value
|
338,853
|
343,991
|
Depreciation
and amortization of property, plant and equipment were $17,536 and $21,086 for the three months ended December 31, 2018 and 2017,
respectively.
NOTE
8 – INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
December
31, 2018
|
September
30, 2018
|
|
|
US$
|
US$
|
|
Software
|
5,066,238
|
5,121,311
|
|
Membership
|
440,432
|
450,285
|
|
Franchise
right
|
-
|
667,378
|
|
|
5,506,670
|
6,238,974
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
(3,125,595)
|
(2,978,171)
|
|
|
2,381,075
|
3,260,803
|
|
|
|
|
|
Net
effect of exchange rate
|
91,547
|
(32,148)
|
|
|
|
|
|
Total
net book value
|
2,472,622
|
3,228,655
|
The
aggregate amortization expenses related to the intangible assets was $241,764 and $239,721 for the three months
ended December 31, 2018 and 2017, respectively.
NOTE
9 - SHAREHOLDERS’ EQUITY
On
September 26, 2018, the Company issued 12,700,000 common stock at US$1 each to Force Internationale for the acquisition of 100%
equity interests of Force Holdings.
NOTE
10 – SUBSEQUENT EVENTS
None.
-F4-
Table
of Contents