EXCEED WORLD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net Income (loss)
|
$
|
1,528,721
|
$
|
(976,590)
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
775,125
|
|
825,314
|
|
Loss on sale of marketable securities
|
|
108,396
|
|
-
|
|
Change in fair value of investments
|
|
(1,678,440)
|
|
50,994
|
|
Loss on written off of intangible asset
|
|
-
|
|
8,584
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
275
|
|
(79)
|
|
Prepaid expenses
|
|
(608,046)
|
|
(752,871)
|
|
Inventories
|
|
(518,952)
|
|
806,919
|
|
Other current assets
|
|
(86,109)
|
|
136,061
|
|
Long-term prepaid expenses
|
|
(22,010)
|
|
-
|
|
Accounts payable
|
|
(4,201,387)
|
|
(214,769)
|
|
Accrued expenses and other current liabilities
|
|
(112,842)
|
|
(248,018)
|
|
Income tax payable
|
|
664,379
|
|
(360,607)
|
|
Income tax recoverable
|
|
446,329
|
|
-
|
|
Deferred income
|
|
(4,345,918)
|
|
1,229,524
|
|
Net cash provided by (used in) operating activities
|
|
(8,050,479)
|
|
504,462
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Collection of short-term loan receivable
|
|
405,515
|
|
-
|
|
Purchase of property, plant and equipment
|
|
(103,111)
|
|
-
|
|
Proceeds from sale of marketable securities
|
|
89,159
|
|
-
|
|
Purchase of intangible assets
|
|
(80,396)
|
|
(341,696)
|
|
Proceeds from surrender of company-owned life insurance policies
|
|
1,448,067
|
|
-
|
|
Advances to related party
|
|
(3,192)
|
|
(24,076)
|
|
Disposal of a subsidiary, net of cash disposed of
|
|
(79,875)
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
1,676,167
|
|
(365,772)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Repayment of capital lease obligation
|
|
(6,894)
|
|
(7,029)
|
|
Advances from related parties
|
|
185,481
|
|
289,422
|
|
Repayment to related parties
|
|
(45,874)
|
|
(59,330)
|
|
Net cash provided by financing activities
|
|
132,713
|
|
223,063
|
|
|
|
|
|
|
Net effect of exchange rate changes on cash
|
|
927,017
|
|
184,583
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
$
|
(5,314,582)
|
$
|
546,336
|
Cash and cash equivalents - beginning of period
|
|
22,737,755
|
|
13,226,698
|
Cash and cash equivalents - end of period
|
$
|
17,423,173
|
$
|
13,773,034
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING TRANSACTIONS
|
|
|
|
|
Operating expense paid by related parties on behalf of the Company
|
$
|
307,734
|
$
|
-
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
Interest paid
|
$
|
-
|
$
|
3,055
|
Income
taxes paid (refunded)
|
$
|
(297,998)
|
$
|
356,736
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
-F4-
Table of Contents
EXCEED WORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JUNE 30, 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 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 an 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. 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 Group's consolidated financial statements.
As of June 30, 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, 2018, included in our Form 10-K/A.
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
|
Place of Organization
|
Percentage of
Effective
Ownership
|
Force International Holdings Limited (“Force Holdings”)
|
Hong Kong
|
100%
|
e-Learning Laboratory Co., Ltd. (“e-Learning”)
|
Japan
|
100% (*1)
|
e-Communications Co., Ltd. (“e-Communications”)
|
Japan
|
100% (*2)
|
(*1) Wholly owned subsidiary of Force Holdings
(*2) Wholly owned subsidiary of e-Learning
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 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 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 recorded corresponding to the allowance when identified.
INVESTMENTS
The Company's investments in marketable securities are reported at their fair values as quoted by market exchanges in the
consolidated balance sheets with changes in fair value recognized in earnings. The Company regularly reviewed its investments
in marketable securities for impairments. In the event that the carrying value of an investment exceeds its fair value and
the decline in value is determined to be other than temporary, the Company would record an impairment charge and establish
a new carrying value.
The Company also has investments in corporate-owned life insurance policies recorded at their cash surrender values in the
consolidated balance sheets with change in the cash surrender value during the period recorded in earnings. Company-owned
life insurance policies with carrying value of approximately $1.4 million were surrendered during the period ended June 30,
2019.
INVENTORIES
Inventories, consisting of mainly educational
products accounted for using the weighted average method and health related products accounted for using the first-in, first-out
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
|
10 years on straight-line method
|
Equipment
|
2 to 15 years on declining balance method or straight-line method
|
Vehicle
|
3 years on declining 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 finite useful life 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 finite 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 depreciation and 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.
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 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:
|
June 30, 2019
|
|
June 30, 2018
|
Current JPY: US$1 exchange rate
|
107.88
|
|
110.66
|
Average JPY: US$1 exchange rate
|
110.97
|
|
110.13
|
|
|
|
|
Current HK$: US$1 exchange rate
|
7.81
|
|
7.81
|
Average HK$: US$1 exchange rate
|
7.84
|
|
7.81
|
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.
On October 1, 2018, the Company adopted ASC
606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed
as of October 1, 2018. Results for reporting periods beginning after October 1, 2018 are presented under ASC 606, while prior period
amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC
605, Revenue Recognition. The adoption had no material impact on the Company’s consolidated financial statements and there
was no adjustment to the beginning retained earnings on October 1, 2018.
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 nine months ended June 30, 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 June 30, 2019 and September 30, 2018, the Company's deferred income was $225,451 and $4,460,652, respectively.
During the nine months ended June 30, 2019, the Company recognized $4,460,652 of deferred income in the opening balance.
The Company does not have any contract asset.
ADVERTISING
Advertising costs are expensed as incurred
and included in selling and distributions expenses. Advertising expense was $1,422,496 and $1,073,667 for the nine months ended
June 30, 2019 and 2018, respectively.
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 June 30, 2019 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.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers (ASC 606)” and issued subsequent amendments to the initial guidance or implementation guidance
between August 2015 and November 2017 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13, and
ASU 2017-14 (collectively, including ASU 2014-09, “ASC 606”). Under ASC 606, revenue is recognized when a customer
obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects
to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers. Effective October 1, 2018, the Company adopted
the standard using the modified retrospective method, the adoption of ASC 606 did not have a material impact on our consolidated
financial statements. See Note 2 – Revenue Recognition for further discussion.
In January 2016, the FASB issued ASU 2016-01
“Financial Instruments – Overall.” The amendments in ASU 2016-01 are intended to improve the recognition, measurement,
presentation and disclosure of financial assets and liabilities to provide users of financial statements with information that
is more useful for decision-making purposes. Among other changes, ASU 2016-01 would require equity securities to be measured at
fair value with changes in fair value recognized through net income, but would allow equity securities that do not have readily
determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification
of an impairment. The amendments would simplify the impairment assessment of such equity securities and would require enhanced
disclosure about these investments. ASU 2016-01 would also require separate presentation of financial assets and liabilities by
measurement category and type of instrument, such as securities or loans, on the balance sheet or in the notes, and would eliminate
certain other disclosures relating to the methods and assumptions used to estimate fair value. For public entities, the amendments
in ASU 2016-01 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted ASU
2016-01 on October 1, 2018 with no impact to the Company’s beginning retained earnings.
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 will be effective for the Company
beginning October 1, 2019, with early adoption permitted. The Company will adopt the standard on October 1, 2019 on a modified
retrospective basis and will not restate comparable periods. The Company will elect 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 will also elect 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 Company anticipates this standard
will have a material impact on the Company’s consolidated balance sheets. However, the Company does not expect adoption
will have a material impact on the consolidated statements of operations and comprehensive income. While the Company is continuing
to assess potential impacts of the standard, the Company currently expects the most significant impact will be the recognition
of ROU assets and lease liabilities for the ongoing leases.
-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 June 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)
|
|
Balance as of
June 30, 2019
|
Marketable
Securities:
|
|
|
|
|
|
|
|
|
Publicly held equity securities
|
$
|
963,685
|
|
-
|
|
-
|
|
963,685
|
NOTE 4 - INCOME TAXES
For the nine months ended June 30, 2019 and
2018, the Company incurred income tax expenses (benefit) in the amount of $666,272 and $(68,045), respectively.
Japan
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.
The Company’s subsidiaries, e-Learning
and e-Communications (“Japanese Subsidiaries”), were incorporated in Japan and are subject to a number of income taxes,
which, in aggregate, represent a statutory income tax rate of approximately 30%. Effective tax rate of Japanese subsidiaries is
27.78% for the nine months ended June 30, 2019.
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
did not generate any estimated assessable profits in Hong Kong during the periods ended June 30, 2019 and June 30, 2018.
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 nine months ended June 30, 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.
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 elected to account for GILTI tax in
the period the tax is incurred, and no provision is made during the nine months period ended Jun 30, 2019.
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.
The Company and its subsidiaries file a U.S.
federal consolidated income tax return as well as returns in State of Delaware, Japan and Hong Kong. As of June 30, 2019, the Company’s
earliest open tax year for U.S. federal income tax purposes is its fiscal year ended September 30, 2017. The Company's tax attributes
from prior periods remain subject to adjustment. Open tax years in state and foreign jurisdictions generally range from three to
six years.
NOTE 5 - RELATED-PARTY TRANSACTIONS
For the nine months ended June 30, 2019, Tomoo
Yoshida, CEO and sole director, paid the Company’s expense of $297,564, and the Company repaid $364. As of June 30, 2019
and September 30, 2018, the total amount due to the director was $740,796 and $596,059, respectively. The balance is unsecured,
due on demand and bears no interest.
For the nine months ended June 30, 2018, Tomoo
Yoshida advanced $218,327 to the Company, and the Company repaid $1,391. The advance is unsecured, due on demand and bears no interest.
For the nine months ended June 30, 2019,
Force Internationale paid the Company’s expense of $10,170, advanced $185,481 to the Company, and the Company repaid
$45,251. As of June 30, 2019 and September 30, 2018, the total amount due to this related party was $429,010 and $291,015,
respectively. The balance is unsecured, due on demand and bears no interest.
For the nine months ended June 30, 2018, Force
Internationale advanced $23,506 to the Company, and the Company repaid $57,939. The advance is unsecured, due on demand and bears
no interest.
For the nine months ended June 30, 2019,
the Company repaid $259 to Keiichi Koga, the director of Force Holdings and e-Learning. As of June 30, 2019 and September 30,
2018, the total amount due to this related party was $47,562 and $47,710, respectively. The balance is unsecured, due on
demand and bears no interest.
For the nine months ended June 30, 2018, Keiichi
Koga advanced to the Company of $47,589. The advance is unsecured, due on demand and bears no interest.
As of June 30, 2019, the Company had $136,197
owed to School TV. The balance due to this related party is unsecured, due on demand and bears no interest.
As of June 30, 2019, the Company had a short-term loan of $92,696
to School TV included in due from related party as a result of the deconsolidation (also see Note 1). The loan is unsecured, due
on demand and bears 1% interest per annum. As of June 30, 2019, the interest receivable was $1,349 and included in other current
assets.
For the nine months ended June 30, 2019, the
Company advanced $3,192 to School TV. As of June 30, 2019, the advance to School TV was $3,192 included in due from related party.
The advance is unsecured, due on demand and bears no interest.
As of June 30, 2019, the Company had a long-term
loan of $231,739 to School TV as a result of the deconsolidation (also see Note 1). The loan is unsecured, mature on May 24, 2023
with an interest rate 1% per annum. As of June 30, 2019, the interest receivable was $3,136 included in other current assets.
For the nine months ended June 30, 2018, the
Company advanced $204,265 to Universe Incorporation Limited (“UIL”), a related party company controlled by Tomoo Yoshida
and Keiichi Koga. The advance is unsecured, due on demand and bears no interest. The balance was repaid by September 30, 2018.
NOTE 6 – SHORT-TERM LOAN RECEIVABLE
On September 14, 2018, the Company entered
into a loan agreement to lend JPY45,000,000 ($405,991) to a third party, Star Gate Investment Holdings Limited. The loan was unsecured
with the maturity date on June 30, 2019 with an interest of JPY 400,000 ($3,577) per quarter. The loan was collected in full on
April 24, 2019.
NOTE
7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the
following:
|
June 30, 2019
|
September 30, 2018
|
|
US$
|
US$
|
Buildings
|
57,323
|
54,984
|
Equipment
|
788,559
|
741,083
|
Vehicles
|
124,371
|
119,296
|
Construction in process
|
89,011
|
-
|
|
1,059,264
|
915,363
|
|
|
|
Accumulated depreciation
|
(659,420)
|
(569,650)
|
|
399,844
|
345,713
|
Net effect of exchange rate
|
-
|
(1,722)
|
Total net book value
|
399,844
|
343,991
|
The aggregate depreciation
expense of property, plant and equipment were $66,763 and $78,340 for the nine months ended June 30, 2019 and 2018, respectively.
NOTE
8 – INTANGIBLE ASSETS
Intangible assets consist of the following:
|
June 30, 2019
|
September 30, 2018
|
|
US$
|
US$
|
Software
|
4,455,033
|
5,121,311
|
Franchise right
|
-
|
667,378
|
Membership
|
446,037
|
450,285
|
|
4,901,070
|
6,238,974
|
|
|
|
Accumulated depreciation
|
(2,798,918)
|
(2,978,171)
|
|
2,102,152
|
3,260,803
|
Net
effect of exchange rate
|
-
|
(32,148)
|
Total
net book value
|
2,102,152
|
3,228,655
|
The
aggregate amortization expense related to the intangible assets was $708,362 and $746,974 for the nine months
ended June 30, 2019 and 2018, respectively.
NOTE
9 - DISPOSAL OF SUBSIDIARY
On December
6, 2018, School TV was deconsolidated from the Company's consolidated financial statements. The Company recorded the additional
paid in capital of $162,076 at this deconsolidation. This disposal does not constitute a strategic shift of the Company’s
operation and business after Reorganization.
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.
In 2019, the Company settled seven legal cases
in total amount of JPY35,052,800 (approximately $325,000) related to the cancellation of contracts. As of the filing date, the
Company has five pending legal cases whose total amount of claim was JPY35,544,500 (approximately $329,000) under the same nature.
Our legal counsel has estimated the loss to be probable, and the total amount of the settlements approximates JPY10,000,000 (approximately
$90,000). The Company has recorded JPY10,000,000 as an accrued expense as of June 30, 2019.
-F6-
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