NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2020
(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, 2020, 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”) and 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 shareholders’ equity.
Translation of amounts from the local currency
of the Company into US$1 has been made at the following exchange rates:
|
December 31, 2020
|
|
December 31, 2019
|
Current JPY: US$1 exchange rate
|
103.24
|
|
108.61
|
Average JPY: US$1 exchange rate
|
104.44
|
|
108.71
|
|
|
|
|
Current HK$: 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 three months ended December 31, 2020. 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 December 31, 2020, and September 30,
2020, the Company's deferred income was $566,494 and $3,571,723 respectively. During the three months ended December 31, 2020,
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 December 31, 2020 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 December 31, 2020 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 December 31, 2020
|
$
|
632,522
|
|
-
|
|
-
|
|
632,522
|
As of September 30, 2020
|
$
|
1,123,696
|
|
-
|
|
-
|
|
1,123,696
|
NOTE 4 - INCOME TAXES
For the three months ended December 31, 2020
and 2019, the Company had income tax expenses of $186,762 and $227,488 respectively. Effective tax rate was 7.53% and 31.72% for
the three months ended December 31, 2020 and 2019, 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 December 31,
|
|
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 three months ended December 31, 2020 and 2019, 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, 2020, and September 30,
2020, the Company’s due to related parties and directors are as follows:
|
|
December 31, 2020
|
|
September 30, 2020
|
Due to director
|
|
|
|
|
Tomoo Yoshida, CEO, CFO, sole director and a shareholder of the Company
|
$
|
741,350
|
$
|
741,248
|
Total due to director
|
$
|
741,350
|
$
|
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
|
|
800,655
|
|
713,405
|
Total due to related parties
|
$
|
848,290
|
$
|
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.
Tomoo Yoshida provided guarantee for the Company’s
office leases during the three months ended December 31, 2020 and 2019.
NOTE
6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the
following:
|
|
December 31, 2020
|
|
September 30, 2020
|
Building
|
$
|
255,271
|
$
|
249,921
|
Leasehold improvement
|
|
59,899
|
|
58,644
|
Equipment
|
|
1,055,460
|
|
1,028,506
|
Vehicles
|
|
51,080
|
|
50,009
|
|
|
1,421,710
|
|
1,387,080
|
|
|
|
|
|
Accumulated depreciation
|
|
(807,572)
|
|
(757,296)
|
|
|
|
|
|
Total net book value
|
$
|
614,138
|
$
|
629,784
|
The aggregate depreciation
expense of property, plant and equipment was $28,793 and $10,727 for the three months ended December 31, 2020 and 2019, respectively.
NOTE
7 – SOFTWARE
The book value of the Company’s software
as of December 31, 2020 and September 30, 2020 was as follows:
|
|
December 31, 2020
|
|
September 30, 2020
|
Software
|
$
|
2,767,984
|
$
|
2,718,887
|
Accumulated amortization
|
|
(1,598,540)
|
|
(1,451,737)
|
|
|
1,169,444
|
|
1,267,150
|
The aggregate amortization expense related
to the software was $123,397 and $181,693 for the three months ended December 31, 2020 and 2019, respectively, included
in cost of revenues.
NOTE
8 – COMMITMENTS
As of December 31, 2020, the Company had four
finance leases of equipment and vehicles with a gross value of approximately $106,000 and $54,000, 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 three months ended December 31,
|
|
|
2020
|
|
|
|
Operating lease cost
|
$
|
121,062
|
Short term lease cost
|
|
3,447
|
Finance lease cost:
|
|
|
Amortization of right-of-use asset
|
|
7,473
|
Interest on lease liability
|
|
949
|
Total finance lease cost
|
|
8,422
|
Total lease cost
|
$
|
132,931
|
The following table presents the Company’s
supplemental information related to operating and finance leases:
|
|
For the three months ended December 31,
|
|
|
2020
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from finance lease
|
$
|
949
|
Operating cash flows from operating lease
|
$
|
121,062
|
Financing cash flows from finance lease
|
$
|
6,609
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
|
2.22 years
|
Finance leases
|
|
3.08 years
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
1.84%
|
Finance leases
|
|
3.00%
|
The future maturity of lease liabilities as
of December 31, 2020 are as follows:
Year ending September 30
|
|
Finance lease
|
|
Operating lease
|
2021 (remaining)
|
$
|
28,118
|
$
|
335,335
|
2022
|
|
37,491
|
|
370,189
|
2023
|
|
57,006
|
|
177,734
|
2024
|
|
16,163
|
|
-
|
2025
|
|
2,461
|
|
-
|
Thereafter
|
|
-
|
|
-
|
Total
|
$
|
141,239
|
$
|
883,258
|
Less imputed interest
|
|
(18,416)
|
|
(17,941)
|
Total lease liabilities
|
|
122,823
|
|
865,317
|
Less current portion
|
|
(31,130)
|
|
(426,392)
|
Long-term lease liabilities
|
$
|
91,693
|
$
|
438,925
|
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.
For the three months ended December 31, 2020, the Company has settled three cases related to the cancellation of contracts
with the amount of approximately JPY6.8 million (approximately $66,000). From balance sheet date to filing date, the Company
settled three cases with the amount of approximately JPY4.0 million (approximately $39,000). As of February 22, 2021, the
filing date of this 10-Q report, the Company had 20 pending legal cases, claiming a damage of approximately JPY133.6 million
(approximately $1.3million) under the same nature. Our legal counsel estimated a probable settlement of these cases with total
settlement amount of approximately JPY50.0 million (approximately $484,000). The Company has recorded contingency liability
in the amount of JPY54.0 million (approximately $523,000) for cases settled in subsequent period and pending legal cases as
of filing date.
-F6-
Table of Contents