NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2019
(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 $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 an 84.4% owner of
the Company and the Company is a 100% owner of Force Holdings.
On December 6, 2018, the Company entered into
a share contribution agreement with Force Internationale. Under this 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
board of directors of the Company, Force Internationale and School TV. Upon the completion of the disposal, School TV was deconsolidated
from the Company's consolidated financial statements.
As of December 31, 2019, the Company operates
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 financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
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, 2019, 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. Inter-company accounts and transactions have been eliminated.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current period presentation. These reclassifications had no impact on net earnings and financial position.
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, sales allowance, useful lives and impairment of long-lived
assets, and legal contingencies. 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.
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. Shareholders’ equity is translated at historical exchange rate at the time
of transaction. The gains and losses resulting from translation of financial statements are recorded as a separate component of
accumulated other comprehensive income within the consolidated 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, 2019
|
|
December 31, 2018
|
Current JPY: US$1 exchange rate
|
108.61
|
|
109.56
|
Average JPY: US$1 exchange rate
|
108.71
|
|
112.77
|
|
|
|
|
Current HK$: US$1 exchange rate
|
7.80
|
|
7.83
|
Average HK$: US$1 exchange rate
|
7.80
|
|
7.83
|
REVENUE RECOGNITION
The Company operates and manages multilevel
marketing (“MLM”) in operating its businesses as the Force Club Membership and generates revenues primarily by providing
the rights to access the Company’s educational content and to recruit new members.
The Company
recognizes revenue by applying the following steps in accordance with ASC 606 - Revenue from contracts with Customers. The
Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the
consideration we expect to be entitled to receive in exchange for those products or services.
- Identification of the contract, or contracts,
with a customer
- Identification of the performance obligations
in the contract
- Determination of the transaction price
- Allocation of the transaction price to the
performance obligations in the contract
- Recognition of revenue when (or as) we satisfy
the performance obligation
Force Club Membership fee
Nature of operation
Our revenue generated from Force Club Membership
arrangements accounted for substantially all of our revenues during the three months ended December 31, 2019. Generally, the Company
grants Force Club members the rights to access the Company’s educational content. There are two tiers of members, namely
standard members and premium members.
The premium members are granted full access
to the Company’s educational contents and the right to recruit prospect customers to become the Company’s members.
Each premium member needs to purchase a premium pack, containing promotional materials aiding the recruiting process, from the
Company. The standard members are granted limited access to the Company’s educational content.
Revenue from the premium pack is recognized at a point in time upon
delivery. Revenue from the right to access the Company’s educational contents is recognized over a period of time ratably
over the effective period.
The Company's chief operating decision make
reviews results analyzed by customers and the analysis is only presented at the revenue level with no allocation of direct or indirect
costs. The Company determines that it has only one operating segment. Consequently, the Company does not disaggregate revenue recognized
from contracts with customers
Contract asset and liability
Deferred income is recorded when consideration
is received from a member prior to the goods were delivered or the access was granted. As of December 31, 2019 and September 30,
2019, the Company's deferred income was $1,326,683 and $3,267,399, respectively. During the three months ended December 31, 2019,
the Company recognized $3,267,399 of deferred income in the opening balance.
The Company does not have any contract asset.
RECENT
ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)” and issued subsequent amendments to the initial guidance or implementation guidance including
ASU 2017-13, 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively, including ASU 2016-02, “ASC 842”). Under
ASC 842, lessees will be required to recognize all leases at the commencement date including a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use (ROU) asset, which is
an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
The standard was effective for the Company
beginning October 1, 2019, with early adoption permitted. The Company adopted the standard on October 1, 2019 on a modified retrospective
basis and will not restate comparable periods. The Company elected the package of practical expedients permitted under the transition
guidance, which allows the Company to carry forward the historical lease classification, the assessment whether a contract is or
contains a lease and initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected
the practical expedient not to separate lease and non-lease components for certain classes of underlying assets and the short-term
lease exemption for contracts with lease terms of 12 months or less.
The primary impact of applying ASC Topic 842
is the initial recognition of approximately $652,000 of lease liabilities and corresponding right-of-use assets of approximately
$696,000 on the Company’s consolidated balance sheet as of October 1, 2019, for leases classified as operating leases under
ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained
earnings or other components of equity recognized as of October 1, 2019 and the adoption of this standard did not impact the consolidated
statement of operations and comprehensive income or consolidated statement of cash flows of the Company.
On December 18, 2019, the FASB issued ASU
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its overall
simplification initiative to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions
from Topic 740, Income Taxes, including (i) the exception to the incremental approach for intra period tax allocation; (ii) the
exception to accounting for basis differences when there are ownership changes in foreign investments; and (iii) the exception
in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also simplifies GAAP
in several other areas of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) transactions with
a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject
to tax; and (iv) enacted changes in tax laws in interim periods. ASU 2019-12 is effective for annual reporting periods and interim
periods within those years beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating
the impact of adopting ASU 2019-12 on its consolidated financial statements and related disclosures.
-F5-
Table of Contents
NOTE 3 - FAIR VALUE MEASUREMENT
FASB ASC 820, Fair Value Measurements
and Disclosures, ("ASC 820") defines fair value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair
value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
Level 1: Quoted prices in active markets
for identical assets or liabilities.
Level 2: Significant other inputs that
are directly or indirectly observable in the marketplace.
Level 3: Significant unobservable inputs
which are supported by little or no market activity.
The following table presents information about
the Company’s assets that are measured at fair value as of December 31, 2019 and September 30, 2019, and indicates the fair
value hierarchy of the valuation.
|
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Balance
|
Marketable Securities:
|
|
|
|
|
|
|
|
|
Publicly held equity securities
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
$
|
1,364,372
|
|
-
|
|
-
|
|
1,364,372
|
As of September 30, 2019
|
$
|
1,156,108
|
|
-
|
|
-
|
|
1,156,108
|
NOTE 4 - INCOME TAXES
For the three months ended December 31, 2019
and 2018, the Company incurred income tax expenses in the amount of $227,488 and $66,499, respectively. Effective tax rate was
31.72% and (22.91%) for the three months ended December 31, 2019 and 2018, respectively.
Japan
The Company conducts its major businesses in
Japan and e-Learning and e-Communications (“Japanese Subsidiaries”) are subject to tax in this jurisdiction. As a result
of its business activities, Japanese Subsidiaries file tax returns that are subject to examination by the local tax authority.
Japanese Subsidiaries are subject to a number of income taxes, which,
in aggregate, represent a statutory tax rate approximately as follows:
|
|
Company’s assessable profit
|
For the period ended December 31,
|
|
Up to JPY 4 million
|
|
Up to JPY 8 million
|
|
Over JPY 8 million
|
2019
|
|
21.42%
|
|
23.20%
|
|
33.80%
|
2020
|
|
21.42%
|
|
23.20%
|
|
33.80%
|
Hong Kong
Force Holdings, a direct wholly owned subsidiary of the Company in Hong Kong, is engaged in investment holding. Hong Kong
profits tax has been provided at the rate of 16.5% on the estimated assessable profit arising in Hong Kong.
No provision for
the Hong Kong profits tax has been made as Force Holdings has not generated any estimated assessable profits in Hong Kong
from its inception.
United States
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, 2019 and 2018, 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.
NOTE 5 - RELATED-PARTY TRANSACTIONS
As of December 31, 2019 and September 30, 2019,
the Company’s due to related parties and directors are as follows:
|
|
December 31, 2019
|
|
September 30, 2019
|
Due to director
|
|
|
|
|
Tomoo Yoshida, CEO, CFO, sole director and a shareholder of the Company
|
$
|
741,111
|
$
|
741,133
|
Total due to director
|
$
|
741,111
|
$
|
741,133
|
|
|
|
|
|
Due to related parties
|
|
|
|
|
Keiichi Koga, a shareholder of the Company and a director of certain subsidiaries of the Company
|
$
|
47,635
|
$
|
47,635
|
Force Internationale, the Company’s majority shareholder. Tomoo Yoshida is a director of Force Internationale
|
|
536,655
|
|
633,578
|
School TV Co., Ltd., a wholly-owned subsidiary of Force Internationale
|
|
132,291
|
|
132,940
|
Total due to related parties
|
$
|
716,581
|
$
|
814,153
|
The payable balances are unsecured, due on
demand, and bear no interest. From time to time, these related parties have advanced to the Company or paid expenses on behalf
of the Company, and the Company has also made repayments.
Tomoo Yoshida provided guarantee for the Company’s
office leases during the three months ended December 31, 2019 and 2018.
Due from related parties
As of December 31, 2019 and September 30, 2019,
the Company had a long-term loan of $230,995 and $232,128, respectively, due from School TV. The loan is unsecured, bears a 1%
per annum interest, and is due on May 24, 2023.
As of December 31, 2019 and September 30, 2019,
the Company had a short-term loan of $92,073 and $92,524, respectively, due from School TV included in due from related party.
The loan is unsecured, due on demand, and bears a 1% interest per annum.
NOTE 6 – SHORT-TERM LOAN RECEIVABLE
On November 15, 2019, the Company entered into a loan agreement
to lend JPY30,000,000 (approximately $276,000) to a third party, CAI Media Co., Ltd (“CAI”). The loan is secured by
common shares of CAI. The loan charges an annual interest rate of 2% and matures on May 14, 2020.
NOTE
7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the
following:
|
|
December 31, 2019
|
|
September 30, 2019
|
Building
|
$
|
299,587
|
$
|
243,840
|
Leasehold improvement
|
|
-
|
|
57,217
|
Equipment
|
|
1,082,586
|
|
1,086,546
|
Vehicles
|
|
63,646
|
|
68,930
|
|
|
1,445,819
|
|
1,456,533
|
|
|
|
|
|
Accumulated depreciation
|
|
(665,292)
|
|
(664,081)
|
|
|
|
|
|
Total net book value
|
$
|
780,527
|
$
|
792,452
|
The aggregate depreciation
expense of property, plant and equipment was $10,727 and $17,536 for the three months ended December 31, 2019 and 2018, respectively.
NOTE
8 – SOFTWARE
The book value of the Company’s software
as of December 31, 2019 and September 30, 2019 was as follows:
|
|
December 31, 2019
|
|
September 30, 2019
|
Software
|
$
|
3,898,802
|
$
|
3,917,921
|
Accumulated amortization
|
|
(3,034,394)
|
|
(2,866,523)
|
|
|
864,408
|
|
1,051,398
|
The aggregate amortization expense related
to the software was $181,693 and $193,478 for the three months ended December 31, 2019 and 2018, respectively, included
in cost of revenues.
NOTE
9 – COMMITMENTS
As of December 31, 2019, the Company has three
capital leases of equipment and vehicle with a gross value of $85,797 and $63,646, respectively, included in property, plant and
equipment.
The Company also leases its offices under operating
lease, and the rental expense is $129,590 for the three months ended December 31, 2019. Cash paid for amounts included in the measurement
of operating lease liabilities is $129,590. The weighted-average remaining lease term for these leases is 1.68 years and the weighted-average
discount rate is 1.84%.
The future minimum lease payments as of
December 31, 2019 are as follows:
Year ending September 30
|
|
Capital lease
|
|
Operating lease
|
2020 (remaining)
|
$
|
20,924
|
$
|
301,176
|
2021
|
|
27,898
|
|
161,377
|
2022
|
|
39,154
|
|
67,942
|
2023
|
|
18,004
|
|
-
|
2024
|
|
10,503
|
|
-
|
Thereafter
|
|
-
|
|
-
|
Total
|
$
|
116,483
|
$
|
530,495
|
Less imputed interest
|
|
(3,411)
|
|
(8,252)
|
Total capital lease obligation
|
|
113,072
|
|
522,243
|
Less current portion
|
|
(26,002)
|
|
(360,774)
|
Long-term lease obligation
|
$
|
87,070
|
$
|
161,469
|
NOTE 10 - CONTINGENCIES
The Company
is subject to various claims and legal proceedings in the course of conducting the business related to Force Club Membership and,
from time to time, the Company may become involved in additional claims and lawsuits incidental to the businesses. The Company’s
legal counsel and the management routinely assess the likelihood of adverse judgments and outcomes to these matters, as well as
ranges of probable losses; to the extent losses are reasonably estimable. Accruals are recorded for these matters to the extent
that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.
In the
opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability
of a material loss beyond the amounts accrued is remote. Nevertheless, the Company cannot predict the impact of future developments
affecting our pending or future claims and lawsuits. The Company expenses legal costs as incurred, and all recorded legal liabilities
are adjusted as required as better information becomes available to the Company. The factors the Company considers when recording
an accrual for contingencies include, among others: (i) the opinions and views of the Company’s legal counsel; (ii) the Company’s
previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints.
For the three months ended December 31, 2019, the Company did not settle any legal cases. From December 31, 2019 to the filing
date, the Company has settled one case related to the cancellation of contracts with the amount of approximately JPY2.7 million
(approximately $25,000), which has already been recorded in the net loss for the year ended September 30, 2019. As of the
filing date, the Company had 25 pending legal cases, claiming a damage of approximately JPY165.7 million (approximately $1.5
million) under the same nature. Our legal counsel estimated a probable settlement of 24 of these cases with total settlement
amount of approximately JPY44.1 million (approximately $406,000) with one pending legal case unable to estimate the likelihood
of the loss with original claim of approximately JPY25.1million ($231,000). The Company has contingency liability in the amount
of $431,185 and $409,428 as of December 31, 2019 and September 30, 2019, respectively. The change in the estimate was recorded
in earnings during the three months ended December 31, 2019.
-F6-
Table of Contents