10-Q: Exceed World Reports Steep Revenue Drop, Widening Loss

Exceed World, Inc. reported a significant decline in revenue and a substantial increase in net loss for the nine months ended June 30, 2025, primarily due to decreased Force Club member recruitment.

Summary

• Revenue for the nine months ended June 30, 2025, decreased by 61.4% to $7,534,051 from $19,544,418 in the prior year period.
• The company recorded a net loss of $4,408,267 for the nine months ended June 30, 2025, a significant increase from a net loss of $393,586 in the same period last year.
• Operating cash flow shifted from an inflow of $3,091,926 for the nine months ended June 30, 2024, to an outflow of $6,135,888 for the nine months ended June 30, 2025.
• Working capital decreased by nearly 50% to $7,062,097 as of June 30, 2025, from $13,800,283 as of September 30, 2024.
• The decline in revenue is primarily attributed to a decrease in recruitment activities of premium Force Club members.
• Revenue from the new Connector Plan Game Business increased significantly to $1,918,604 for the nine months ended June 30, 2025, from $92,839 in the prior year period.
• Material weaknesses in internal controls were identified, including domination of management by a single individual, lack of outside directors, inadequate segregation of duties, and lack of an audit committee.
• The company settled six legal cases for approximately $66,400 and has two pending cases claiming damages of approximately $110,400, with an accrued probable settlement of $44,100.

Sentiment

Score: 3

Explanation: The company experienced a severe financial downturn with a massive revenue decline, significantly widened net losses, and a shift to negative operating cash flow. While a new business segment shows growth, it is not enough to offset the core business's struggles. Additionally, significant corporate governance weaknesses raise concerns about future stability and oversight.

Positives

• The new Connector Plan Game Business showed significant revenue growth, reaching $1,918,604 for the nine months ended June 30, 2025, up from $92,839 in the prior year.
• Research and development expenses decreased, indicating progress in the Connector Plan's development into the application stage.
• The company's cash balance of $9,248,305 is currently deemed sufficient to fund operations without the need for additional funding.
• Six legal cases related to contract cancellations were settled during the nine months ended June 30, 2025.

Negatives

• Revenue for the nine months ended June 30, 2025, plummeted by 61.4% to $7.53 million from $19.54 million in the prior year, primarily due to a sharp decline in Force Club member recruitment.
• Net loss widened substantially to $4.41 million for the nine months ended June 30, 2025, compared to a net loss of $0.39 million in the same period last year.
• Operating cash flow turned negative, with an outflow of $6.14 million for the nine months ended June 30, 2025, a significant reversal from an inflow of $3.09 million in the prior year.
• Working capital decreased by nearly 50% from $13.80 million to $7.06 million.
• The overall cash balance declined by over $8 million from September 30, 2024, to June 30, 2025.

Risks

• Material weaknesses in internal controls, including domination of management by a single individual without adequate compensating controls.
• Lack of a majority of outside directors on the board of directors.
• Inadequate segregation of duties consistent with control objectives.
• Lack of well-established procedures to identify, approve, and report related party transactions.
• Lack of an audit committee.
• Reliance on the multi-level marketing (MLM) model for Force Club, which experienced a significant decrease in recruitment activities.
• Ongoing legal proceedings related to contract disagreements, with potential liabilities of approximately $110,400.
• Exposure to foreign currency translation adjustments due to operations in Japan and Hong Kong, which can lead to significant comprehensive losses.

Future Outlook

The company plans to continue focusing on expanding its sales network over the next twelve months to strengthen business activities. It also intends to provide additional benefits and incentives to premium members as value-added services, beyond the standard compensation package.

Management Comments

• "The decrease in revenue, in our opinion, is primarily attributed to a decrease in recruitment activities of premium Force Club members."
• "The increase in net loss is attributed to a decrease in revenue."
• "The increase in operating cash outflow, in our opinion, is mainly attributed to an increase in net loss, and decrease in accounts payable, deferred income, receipts of accounts receivable and other assets."
• "The decrease in research and development expenses is mainly due to the decrease of activities incurred during the preliminary project stage related to the connector plan. The development of connector plan is progressing into the application development stage."
• "Currently, our cash balance is sufficient to fund our operations without the need for additional funding."
• "The officers concluded that the disclosure controls and procedures were not effective as of the end of the period covered by this report due to material weaknesses identified below."
• "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."

Industry Context

Exceed World, Inc. operates in the educational services and online gaming sectors, primarily through a multi-level marketing (MLM) model for its core 'Force Club' business. The substantial decline in Force Club revenue suggests significant challenges within its MLM recruitment activities, potentially reflecting market saturation, increased competition, or evolving consumer preferences away from traditional MLM structures. The growth in the 'Connector Plan' game business indicates a strategic pivot or diversification attempt into digital entertainment, aligning with broader industry trends of increasing online content consumption and gaming engagement. However, the new segment's growth is currently insufficient to offset the severe decline in the legacy business.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or industry benchmarks to assess the results against global standards.

Corporate Governance

Legal Proceedings

• Settled six legal cases during the nine months ended June 30, 2025, for approximately $66,400 related to contract cancellations.
• Two pending legal cases as of the filing date, claiming damages of approximately $110,400 related to disagreements in contracts.
• Accrued a total liability of approximately $44,100 as of June 30, 2025, for the probable settlement of pending legal cases.

Related Party Transactions

• Due to director Tomoo Yoshida (CEO, CFO, sole director, and shareholder) amounted to $741,248 as of June 30, 2025.
• Due to related parties (Keiichi Koga, a shareholder and director of certain subsidiaries, and Force Internationale, the majority shareholder where Tomoo Yoshida is a director) totaled $2,126,085 as of June 30, 2025.
• Force Internationale paid expenses on behalf of the Company in the amount of $134,725 during the nine months ended June 30, 2025.
• Tomoo Yoshida provided guarantees for the Company's office leases.
• All payable balances to related parties are unsecured, due on demand, and bear no interest.

Stakeholder Impact

• Shareholders face significant negative impacts due to the substantial decline in revenue, widening net losses, and negative operating cash flow, which could lead to decreased share value and reduced future profitability.
• The identified material weaknesses in corporate governance, including lack of independent oversight and inadequate internal controls, pose a risk to shareholder value and confidence.
• Customers, particularly Force Club members, may experience a diminished value proposition or reduced engagement opportunities given the reported decrease in recruitment activities in the core MLM business.
• Employees and sales agents involved in the Force Club business may face reduced compensation or opportunities due to the significant decline in recruitment activities.
• Creditors might view the company with increased scrutiny due to the shift to negative operating cash flow and the nearly 50% reduction in working capital, potentially impacting future financing terms if these trends persist.

Next Steps

• Continue to focus on expanding the sales network.
• Strengthen business activities.
• Provide benefits and incentives to premium members as value-added services.
• Continue the development of the Connector Plan, which is progressing into the application development stage.

Key Dates

Recommendation

The company's financial performance is severely deteriorating, marked by a drastic 61.4% revenue decline, a substantial increase in net loss, and a concerning shift to negative operating cash flow. While the new 'Connector Plan' shows growth, it is insufficient to offset the core business's struggles. Compounding these financial woes are critical corporate governance deficiencies, including a lack of independent oversight and inadequate internal controls, which expose the company to significant operational and financial risks. These factors collectively indicate a high probability of continued underperformance and potential for further erosion of shareholder value, making it a strong sell.

Keywords

Educational services, Online gaming, Force Club, Connector Plan, Multilevel marketing, Financial results, Net loss, Revenue decline, Internal controls, Related party transactions, SEC filing, 10-Q