The accompanying notes are an integral
part of these unaudited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JUNE 30, 2021
(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 June 30, 2021, 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, 2020, 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.
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 valuation allowance on deferred income tax, write-down in value of inventory, useful
lives and impairment of long-lived assets and legal contingencies. The extent to which the COVID-19 pandemic may directly or indirectly
impact our business, financial condition, and results of operations is highly uncertain and subject to change. Due to the high uncertainty
of the evolving situation, the Company has limited visibility on the full impact brought upon by the COVID-19 pandemic and the related
financial impact cannot be estimated at this time. 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.
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”), Hong Kong Dollars (“HK$”) and the United States Dollars (“US$”),
which are the functional currencies as being the primary currencies of the economic environment in which their operations are conducted.
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional
currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statements of operations and comprehensive income.
The reporting currency of the Company is US$ and the
accompanying consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, Translation of
Financial Statement, assets and liabilities of the Company whose functional currency is not US$ 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 changes
in shareholders’ equity.
Translation of amounts from the local currency of
the Company into US$1 has been made at the following exchange rates:
|
June 30, 2021
|
|
June 30, 2020
|
Current JPY: US$1 exchange rate
|
110.58
|
|
107.92
|
Average JPY: US$1 exchange rate
|
106.69
|
|
108.40
|
|
|
|
|
Current HK$: US$1 exchange rate
|
7.80
|
|
7.80
|
Average HK$: US$1 exchange rate
|
7.80
|
|
7.80
|
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 nine months ended June 30, 2021. 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 content 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 content is recognized over a period of time ratably over the effective
period.
The Company's chief operating decision maker 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. Substantially all of the Company’s revenue was generated in Japan.
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, 2021, and September 30, 2020, the Company's
deferred income was $1,389,782 and $3,571,723 respectively. During the nine months ended June 30, 2021, the Company recognized $3,571,723
of deferred income in the opening balance.
The Company does not have any contract asset.
OPERATING
LEASES
The Company recognizes its leases in accordance with
ASC 842 - Leases. Under ASC 842, lessees are required to recognize all qualified operating 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 initial lease liability is equal to the future fixed minimum lease payments discounted using the Company’s
incremental borrowing rate, on a secured basis. The lease term includes option renewal periods and early termination payments when it
is reasonably certain that the Company will exercise those rights. The initial measurement of the ROU asset is equal to the initial lease
liability plus any initial direct costs and prepayments, less any lease incentives.
The Company 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 Company recognizes lease expenses for such leases on a straight-line basis over the lease term.
In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired
land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
-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.
In August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements
for fair value measurements by removing, modifying, or adding certain disclosures. The Company adopted ASU 2018-13 effective October 1,
2020 and determined that the adoption had no material impact to its consolidated financial statements.
The Company considers the carrying amount of its financial
assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, income tax recoverable, prepaid expenses,
other current assets, accounts payable, income tax payable, contingency liabilities, deferred income, accrued expenses and other payables,
other current liabilities and current portion of operating and finance lease obligations approximate the fair value of the respective
assets and liabilities as of June 30, 2021 and September 30, 2020 owing to their short-term or present value nature or present value of
the assets and liabilities.
The following table presents information about the
Company’s assets that are measured at fair value on a recurring basis as of June 30, 2021 and September 30, 2020 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 June 30, 2021
|
$
|
557,279
|
|
-
|
|
-
|
|
557,279
|
As of September 30, 2020
|
$
|
1,123,696
|
|
-
|
|
-
|
|
1,123,696
|
NOTE 4 - INCOME TAXES
For the nine months ended June 30, 2021 and 2020,
the Company had income tax expenses of $22,452 and income tax credit of $100,641, respectively. Effective tax rate was 1.11% and 6.37%
for the nine months ended June 30, 2021 and 2020, respectively.
Japan
The Company conducts its major businesses in Japan
and e-Learning and e-Communications Co., Ltd. (collectively, “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 June 30,
|
|
Up to JPY 4 million
|
|
Up to JPY 8 million
|
|
Over JPY 8 million
|
2020
|
|
21.42%
|
|
23.20%
|
|
33.80%
|
2021
|
|
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
nine months ended June 30, 2021 and 2020, 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 June 30, 2021, and September 30, 2020, the Company’s
due to related parties and directors are as follows:
|
|
June 30, 2021
|
|
September 30, 2020
|
Due to director
|
|
|
|
|
Tomoo Yoshida, CEO, CFO, sole director and a shareholder of the Company
|
$
|
741,249
|
$
|
741,248
|
Total due to director
|
$
|
741,249
|
$
|
741,248
|
|
|
|
|
|
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
|
|
890,236
|
|
713,405
|
Total due to related parties
|
$
|
937,871
|
$
|
761,040
|
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. During the nine months ended June 30, 2021, Force Internationale paid expenses on behalf of the Company in the amount of $125,549 and
advanced $51,282 to the Company.
Tomoo Yoshida provided guarantee for the Company’s
office leases during the nine months ended June 30, 2021 and 2020.
NOTE
6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
June 30, 2021
|
|
September 30, 2020
|
Building
|
$
|
294,250
|
$
|
249,921
|
Leasehold improvement
|
|
55,923
|
|
58,644
|
Equipment
|
|
933,913
|
|
1,028,506
|
Vehicles
|
|
47,929
|
|
50,009
|
|
|
1,332,015
|
|
1,387,080
|
|
|
|
|
|
Accumulated depreciation
|
|
(800,443)
|
|
(757,296)
|
|
|
|
|
|
Total net book value
|
$
|
531,572
|
$
|
629,784
|
The aggregate depreciation
expense of property, plant and equipment was $85,280 and $89,173 for the nine months ended June 30, 2021 and 2020, respectively.
NOTE
7 – SOFTWARE
The book value of the Company’s software as
of June 30, 2021 and September 30, 2020 was as follows:
|
|
June 30, 2021
|
|
September 30, 2020
|
Software
|
$
|
2,584,253
|
$
|
2,718,887
|
Accumulated amortization
|
|
(1,717,709)
|
|
(1,451,737)
|
Total net book value
|
$
|
866,544
|
$
|
1,267,150
|
The aggregate amortization expense related to the
software was $354,285 and $103,928 for the nine months ended June 30, 2021 and 2020, respectively, included in cost of revenues.
NOTE
8 – COMMITMENTS
As of June 30, 2021, the Company had four finance
leases of equipment and vehicles with a gross value of approximately $101,000 and $48,000, respectively, included in property, plant and
equipment. The Company also leases its offices under operating lease and short-term lease. The estimated effect of lease renewal and termination
options, as applicable, was included in the consolidated financial statements in current period.
The components
of lease expense were as follows:
|
|
For the nine months ended June 30,
|
|
|
2021
|
2020
|
|
|
|
|
Operating lease cost
|
$
|
355,525
|
361,337
|
Short term lease cost
|
|
10,123
|
3,963
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use asset
|
|
21,957
|
24,738
|
Interest on lease liability
|
|
2,466
|
1,674
|
Total finance lease cost
|
|
24,423
|
26,412
|
Total lease cost
|
$
|
390,072
|
391,752
|
The following table presents the Company’s supplemental
information related to operating and finance leases:
|
|
For the nine months ended June 30,
|
|
|
2021
|
2020
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from finance leases
|
$
|
2,466
|
1,674
|
Operating cash flows from operating leases
|
$
|
355,525
|
352,396
|
Financing cash flows from finance leases
|
$
|
60,343
|
28,239
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
Operating leases
|
|
2.36 Years
|
1.54 years
|
Finance leases
|
|
3.01 Years
|
3.23 years
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
|
1.84%
|
1.84%
|
Finance leases
|
|
3.19%
|
2.76%
|
The future maturity of lease liabilities as of June
30, 2021 are as follows:
Year ending September 30
|
|
Finance lease
|
|
Operating lease
|
2021 (remaining)
|
$
|
8,721
|
$
|
114,340
|
2022
|
|
34,764
|
|
457,358
|
2023
|
|
34,764
|
|
333,485
|
2024
|
|
46,094
|
|
79,761
|
2025
|
|
2,088
|
|
-
|
Thereafter
|
|
-
|
|
-
|
Total
|
$
|
126,641
|
$
|
984,944
|
Less imputed interest
|
|
(17,502)
|
|
(26,887)
|
Total lease liabilities
|
|
109,139
|
|
958,057
|
Less current portion
|
|
(28,835)
|
|
(443,470)
|
Long-term lease liabilities
|
$
|
80,304
|
$
|
514,587
|
NOTE 9 - 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 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.
During the nine months ended June 30, 2021, the Company
has settled seven cases related to the cancellation of contracts with the amount of approximately JPY18.3 million (approximately $172,000).
As of filing date, the Company had 19 pending legal cases, claiming a damage of approximately JPY114.4 million (approximately $1,000,000)
under the same nature, and the Company’s legal counsel estimated a probable settlement for these cases with total settlement amount
of approximately JPY42.3 million (approximately $382,000). The Company accrued a total liability of JPY42.3 million (approximately $382,000)
as of June 30, 2021 for pending legal cases as of filing date.
NOTE 10 - CORRECTION OF PRIOR PERIOD INFORMATION
During the review of the Company’s financial
statements for the nine months ended June 30, 2021, the Company identified an error in the presentation of inventories and cost of revenues
in the financial statements for the three and six months ended March 31, 2021 due to an input error of inventory in the accounting data.
The inventories should have been $770,931 but was stated as $319,301 as of March 31, 2021, and the cost of revenues should have been $1,997,755
and $7,267,151 but was stated as $2,472,679 and $7,742,075 for the three and six months ended March 31,2021 respectively, resulting in
adjustments to the previous reported financial statements of the Company for the three and six months ended March 31, 2021. In accordance
with the SEC’s Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the Company evaluated this error and, based on analysis
of quantitative and qualitative factors, determined that the error was immaterial to the prior reporting period. However, if the adjustments
to correct the cumulative effect of the above error had been recorded in the three months ended June 30, 2021, the Company believed the
impact would have been material and would impact comparison to the prior period. Therefore, as permitted by SAB108, the Company corrected,
in the current filing, the previously reported results for the three and nine months ended June 30, 2021.
-F6-
Table of Contents