10-K: Exceed World Reports Steep Revenue Decline, Net Loss in FY2025

Exceed World, Inc. announced a significant drop in revenue and a shift to a net loss for the fiscal year ended September 30, 2025, alongside identified material weaknesses in internal controls.

Summary

• Reported a substantial decrease in revenue to $8.62 million for FY2025, down from $24.38 million in FY2024.
• Shifted from a net income of $1.17 million in FY2024 to a net loss of $6.88 million in FY2025.
• Experienced a significant cash outflow from operations of $8.15 million in FY2025, compared to an inflow of $2.72 million in FY2024.
• Working capital decreased sharply to $5.26 million in FY2025 from $13.80 million in FY2024.
• Identified material weaknesses in internal control over financial reporting, including domination by a single individual, lack of outside directors, inadequate segregation of duties, and insufficient accounting personnel.
• Settled five legal cases for approximately $59,000 and has four pending cases claiming $120,000, with an estimated settlement of $48,000 accrued.
• Launched a new Game Business (Connector Plan) website in June 2024, earning membership fees and game points.
• Secured new short-term and long-term loans totaling approximately $1.48 million in September 2025.

Sentiment

Score: 2

Explanation: The company's financial performance for FY2025 is severely deteriorated, marked by a 64.6% revenue drop, a shift from profit to a substantial net loss, and negative operating cash flow. Furthermore, it disclosed material weaknesses in internal controls and corporate governance, indicating significant operational and financial challenges. While there are plans for expansion and remediation, the current financial performance and governance issues are highly concerning.

Positives

• Launched a new Game Business (Connector Plan) website in June 2024, diversifying revenue streams.
• Increased personnel resources and technical accounting expertise as part of remediation initiatives for internal control weaknesses.
• Secured new short-term and long-term loans totaling approximately $1.48 million in September 2025, improving financing activities.
• Maintained a cash position of $7.44 million as of September 30, 2025, despite significant outflows.
• Advertising expenses increased to $1,156,209 in FY2025 from $1,053,125 in FY2024, indicating increased promotional activities to attract customers.

Negatives

• Revenue decreased by 64.6% to $8.62 million in FY2025 from $24.38 million in FY2024, primarily attributed to a decrease in recruitment activities of premium Force Club members.
• Shifted from a net income of $1.17 million in FY2024 to a net loss of $6.88 million in FY2025.
• Cash flow from operations turned negative, with an outflow of $8.15 million in FY2025 compared to an inflow of $2.72 million in FY2024.
• Working capital significantly declined by 61.9% to $5.26 million in FY2025 from $13.80 million in FY2024.
• Basic earnings per share dropped from $0.04 in FY2024 to a loss of $0.21 in FY2025.
• Disclosure controls and procedures were deemed ineffective as of September 30, 2025.
• Internal control over financial reporting was deemed ineffective as of September 30, 2025, due to several material weaknesses.

Risks

• Domination of management by a single individual (Tomoo Yoshida) 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.
• Absence of an audit committee, leading to ineffective oversight of internal controls.
• Lack of appropriate controls around IT General Controls (ITGC).
• Insufficient accounting and finance personnel or written policies and procedures with respect to US GAAP and SEC reporting requirements.
• Dependence on multilevel marketing (MLM) for Force Club membership recruitment, which saw a decrease in activity.
• Exposure to foreign currency translation adjustments, which resulted in a $907,850 loss in FY2025.
• Ongoing legal proceedings related to contract cancellations and disagreements, with potential settlement costs.
• The company's ability to implement remediation initiatives for internal control weaknesses may be slowed by a lack of adequate working capital and positive cash flow from operations.

Future Outlook

The company intends to focus on expanding its sales network and providing additional benefits and incentives to premium members as value-added services over the next twelve months.

Management Comments

• The decrease in revenue, in our opinion, is attributed to the decrease in recruitment activities of premium Force Club members.
• The increase in operating cash outflow, in our opinion, is mainly attributed to an increase in net loss and changes in other current assets primarily due to the increase in consumption tax recoverable.
• Management believes that the material weaknesses did not have an effect on our financial results.
• Management believes that the lack of a functioning audit committee and inadequate segregation of duties results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
• Management recognizes that its controls and procedures would be substantially improved if we had an audit committee and two individuals serving as officers and as such is actively seeking to remediate this issue.
• We will work as quickly as possible to implement these initiatives; however, the lack of adequate working capital and positive cash flow from operations will likely slow this implementation.

Industry Context

The company operates in the competitive Japanese e-learning and online gaming market, competing with established players like Recruit Marketing Partners Co., Ltd., JustSystem Corporation, Benesse Corporation, and SuRaLa Net Co., Ltd. The shift to online platforms and mobile devices for e-learning is a key trend, which the company has addressed by making its programs available on smartphones and tablets since 2012. The introduction of the Connector Plan for online games also reflects an attempt to diversify within the digital entertainment and education space. The significant revenue decline, however, suggests challenges in its multilevel marketing model and competitive pressures within the industry.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to global benchmarks.
• The company's revenue decline and shift to a net loss suggest underperformance relative to a healthy growth trajectory often seen in the digital education and gaming sectors, especially in a developed market like Japan.
• The identified material weaknesses in internal controls and corporate governance (e.g., single individual domination, lack of audit committee) fall significantly below best practices and regulatory expectations for publicly traded companies, regardless of size.

Corporate Governance

Legal Proceedings

• Settled five legal cases for approximately $59,000 related to contract cancellations during the year ended September 30, 2025.
• Four pending legal cases claiming approximately $120,000 in damages related to contract disagreements.
• Accrued a contingency liability of approximately $48,000 as of September 30, 2025, for estimated settlements of pending cases.

Related Party Transactions

• Due to director Tomoo Yoshida: $741,248 as of September 30, 2025, unsecured, due on demand, and bears no interest.
• Due to related parties (Keiichi Koga, a shareholder and director of subsidiaries, and Force Internationale, the majority shareholder): $2,144,985 as of September 30, 2025, unsecured, due on demand, and bears no interest.
• Force Internationale paid expenses on behalf of the company totaling $153,625 during the year ended September 30, 2025.
• Tomoo Yoshida provided guarantees for the company's office leases.
• No formal policies or procedures for the review, approval, or ratification of related party transactions are in place.

Stakeholder Impact

• Shareholders: Negative impact due to significant revenue decline, net loss, negative EPS, and identified material weaknesses in internal controls, which could erode shareholder value and confidence.
• Employees: The company has 57 full-time employees; the financial downturn and operational challenges could create uncertainty regarding job security or future benefits, although no specific plans for layoffs or benefit changes were mentioned.
• Customers: Potential impact on service quality or future offerings if financial difficulties persist, though the company plans to expand its sales network and provide more incentives.
• Creditors: Increased risk due to the company's shift to a net loss and negative operating cash flow, although new loans were secured. The unsecured nature of related party payables might also be a factor.
• Management: Increased workload and pressure to remediate internal control weaknesses and reverse financial performance trends.

Next Steps

• Expand sales network to strengthen business activities.
• Provide benefits and incentives to premium members as value-added services.
• Increase personnel resources and technical accounting expertise to remediate internal control weaknesses.
• Appoint one or more outside directors to the board to form a fully functioning audit committee.

Key Dates

Recommendation

The company's financial performance for FY2025 is severely deteriorated, marked by a 64.6% revenue drop, a shift from profit to a substantial net loss, and negative operating cash flow. This indicates significant operational challenges and a potential erosion of the business model's effectiveness, particularly in its core MLM-based e-learning. Compounding these financial woes are critical corporate governance issues, including a single-person dominated board, lack of independent oversight, and numerous material weaknesses in internal controls over financial reporting. These governance failures raise serious concerns about the reliability of financial statements and the company's ability to manage risks effectively. While management has stated plans for remediation, the acknowledged lack of working capital and positive cash flow will likely impede these efforts. Given the severe financial decline, poor governance, and uncertain path to recovery, the stock presents a high-risk profile with significant downside potential.

Keywords

e-learning, online education, Japan, multilevel marketing, Force Club, Connector Plan, financial results, SEC filing, 10-K, EXDW, corporate governance, internal controls, net loss, revenue decline, cash flow, risk management