Executive Summary / Key Takeaways

• Exceed World, Inc. (EXDW) is at a pivotal juncture, undergoing a strategic transformation from a rapidly declining legacy e-learning business (Force Club) to a nascent, high-growth "Game Business Connector Plan."
• The company reported a steep 61.46% decline in total revenue for the nine months ended June 30, 2025, primarily due to a 70.77% drop in Force Club membership fees, resulting in a significant net loss of $4.41 million and negative operating cash flow.
• Despite the overall downturn, the newly launched Connector Plan exhibited explosive 1,968% revenue growth, indicating its potential to become a crucial future revenue driver as its development progresses into the application stage.
• EXDW faces substantial operational and governance challenges, including identified material weaknesses in internal controls and a reliance on related party transactions, which pose significant risks to its long-term stability and investor confidence.
• The investment thesis for EXDW hinges on its ability to successfully scale the gaming initiative, restore overall profitability, and rigorously address its internal control deficiencies within a competitive Japanese edtech market.

Setting the Scene: EXDW's Digital Transformation Imperative

Exceed World, Inc. (EXDW) operates in the dynamic Japanese e-learning and digital services market, primarily through its wholly-owned subsidiaries. The company’s business model has historically centered on the "Force Club," an internet platform offering educational content via a multilevel marketing (MLM) structure. This platform provides tiered access, from standard members with limited content to premium members enjoying full access, recruiting rights, and promotional materials. More recently, EXDW has embarked on a strategic pivot with the introduction of its "Game Business Connector Plan," a new website launched in June 2024 that generates revenue from membership fees and virtual points for online games. This dual-pronged approach defines EXDW's current operational landscape, positioning it as a niche player seeking to adapt to evolving digital consumption patterns.

In the broader Japanese edtech sector, EXDW competes with established giants like Benesse Holdings (9783.T), Gakken Holdings (9470.T), and Recruit Holdings (6098.T), as well as global players such as Pearson plc (PSO). While these larger competitors often boast diversified revenue streams, extensive brand recognition, and robust financial health, EXDW's strength lies in its agility and focused approach to digital content delivery. Its leaner operational model potentially offers better cost efficiency in specific digital segments, and its emphasis on user-friendly, Japan-centric platforms could foster stronger customer loyalty and engagement. However, EXDW's smaller scale and more concentrated offerings mean it often lags in overall market share and the financial resilience that comes with broader diversification. The company's strategic response to this competitive environment is to leverage its digital platforms for targeted market capture, particularly through new initiatives like the Connector Plan.

EXDW's technological differentiation is rooted in its proprietary platforms. The Force Club platform provides accessible e-learning content, a foundational offering that benefits from an established user base, though its MLM structure introduces unique operational dynamics. The newer "Game Business Connector Plan" represents a significant technological and strategic evolution. This platform generates revenue through membership fees and the sale of virtual points, which are consumable within EXDW's online games. The development of this Connector Plan is actively progressing into the application development stage, indicating a commitment to enhancing its features and user experience. For investors, the "so what" of this technological pivot is profound: the Connector Plan is not merely an incremental offering but a critical new growth engine designed to offset the decline in the legacy Force Club business. Its successful development and market adoption are paramount to EXDW's future competitive standing, potential for improved pricing power, and long-term growth strategy.

A Tale of Two Businesses: Performance Under Pressure

EXDW's recent financial performance paints a picture of a company in transition, marked by significant headwinds in its traditional business and a promising, albeit small, new venture. For the nine months ended June 30, 2025, total revenue plummeted by 61.46% to $7.53 million, a stark contrast to $19.54 million in the prior year period. This precipitous decline was overwhelmingly driven by the Force Club Membership Fee segment, which saw its revenue shrink by 70.77% to $5.55 million from $18.99 million. Management explicitly attributed this downturn to a "decrease in recruitment activities of premium Force Club members," highlighting a fundamental challenge in its core MLM-based e-learning model.

In sharp contrast, the "Game Business Connector Plan" emerged as a beacon of growth. Launched in June 2024, this segment generated $1.92 million in revenue for the nine months ended June 30, 2025, an explosive 1,968% increase from just $92,839 in the comparable prior-year period. However, the overall revenue decline had a severe impact on profitability. Gross profit fell to $3.88 million from $9.58 million, and the company swung from an operating loss of $606,856 to a much larger operating loss of $4.43 million. The net loss widened significantly to $4.41 million, compared to a net loss of $393,586 in the prior year, directly "attributed to a decrease in revenue."

Analyzing the latest trailing twelve months (TTM) financial ratios further illustrates these operational challenges. While EXDW's TTM gross profit margin of 53.97% is competitive, its TTM operating profit margin of -15.71% and TTM net profit margin of -21.34% reveal deep operational inefficiencies. This contrasts sharply with more established competitors like Recruit Holdings (6098.T), which boasts a TTM gross profit margin of 56% and a robust operating profit margin of 15%.

Liquidity has also seen a notable shift. Cash and cash equivalents decreased from $17.57 million as of September 30, 2024, to $9.25 million as of June 30, 2025.

Critically, cash flow from operations reversed from an inflow of $3.09 million for the nine months ended June 30, 2024, to an outflow of $6.14 million for the same period in 2025. This negative shift was primarily due to the increased net loss and decreases in accounts payable and deferred income. Despite this, management stated that the "cash balance is sufficient to fund our operations without the need for additional funding." The company's advertising expenses reflect a mixed strategy: a decrease for the three months ended June 30, 2025, due to "cost saving purpose," but an increase for the nine-month period, driven by "more promotion activities incurred during second quarter of fiscal year 2025" to attract customers. Research and development expenses decreased as the Connector Plan moved past its preliminary project stage, with development now focused on the application stage.

The Competitive Arena: EXDW's Position and Prowess

EXDW occupies a challenging position within the Japanese education and digital services market. Its competitive standing is best understood by comparing its operational and financial metrics against key rivals. As noted, EXDW's TTM gross profit margin of 53.97% is relatively strong, even surpassing Benesse Holdings (9783.T) (44%) and Gakken Holdings (9470.T) (27%), and aligning closely with Recruit Holdings (6098.T) (56%). This suggests efficiency in its core content delivery. However, this advantage does not translate to the bottom line, as EXDW's TTM operating profit margin of -15.71% and net profit margin of -21.34% are significantly weaker than all profiled competitors, which generally exhibit positive operating and net margins (e.g., Benesse (9783.T) at 5% operating, 2% net; Recruit (6098.T) at 15% operating, 11% net). This disparity highlights EXDW's struggle with overheads and administrative costs relative to its declining revenue base.

In terms of valuation, EXDW's TTM Price-to-Sales (P/S) ratio of 0.66 is lower than Recruit Holdings (6098.T) (3.24) but comparable to Benesse Holdings (9783.T) (0.61) and higher than Gakken Holdings (9470.T) (0.23). The negative TTM Price-to-Earnings (P/E) ratio of -3.10 underscores its current unprofitability. This suggests that while the market acknowledges its revenue-generating capabilities, significant concerns exist regarding its ability to convert sales into profit.

EXDW's competitive advantages, or moats, include its proprietary Force Club platform and its Japan-focused content, which can foster strong customer loyalty within its niche. The new Connector Plan, with its integrated gaming and recruitment features, also offers a unique value proposition that could differentiate it from more traditional e-learning providers. This agility in digital innovation could allow EXDW to capture specific market segments more effectively than larger, slower-moving competitors. For instance, its focused online tools might offer better user engagement in targeted demographics, potentially leading to improved pricing power in those segments.

However, EXDW also faces significant competitive disadvantages. Its limited scale compared to industry leaders like Benesse (9783.T) and Recruit (6098.T) translates to less financial firepower for extensive marketing, R&D, and market expansion. This vulnerability can lead to higher customer acquisition costs and lower margins, making it challenging to compete on a broader front. The company's dependence on digital infrastructure also exposes it to the technological advancements of rivals, particularly those with deep pockets for AI and platform development like Recruit (6098.T).

Barriers to entry in the e-learning sector, such as regulatory requirements and the need for specialized content development, offer some protection by limiting new entrants. These barriers tend to favor established players, including EXDW to some extent, but they also mean that larger, well-resourced competitors can more easily consolidate their positions. Industry trends, such as the surge in AI and data center development, could indirectly benefit EXDW by providing more robust and efficient platforms for e-learning. However, these trends also demand higher investment in technology, which could strain EXDW's profitability more than that of its larger, more financially stable competitors.

Strategic Outlook and Looming Risks

Looking ahead, EXDW's strategy over the next twelve months is centered on revitalizing its growth trajectory. Management plans to "continue to focus on expanding its sales network in order to strengthen its business activities" and to "provide benefits and incentives to premium members as value-added services, in addition to the standard compensation package." This indicates a dual focus on increasing reach and enhancing value for its existing Force Club members, while simultaneously nurturing the growth of the Connector Plan. The ongoing development of the Connector Plan into the application stage is a key operational priority, signaling the company's commitment to this new revenue stream. However, the absence of concrete quantitative guidance or specific financial targets for these initiatives makes it challenging for investors to gauge the expected pace and magnitude of recovery.

Despite these strategic intentions, EXDW faces several significant risks and challenges that could impede its transformation. Foremost among these are the "material weaknesses" identified in its internal controls as of June 30, 2025. These include "domination of management by a single individual without adequate compensating controls, lack of a majority of outside directors on board of directors, inadequate segregation of duties consistent with control objectives, lack of well-established procedures to identify, approve and report related party transactions and lack of an audit committee." These governance issues are critical, as they can undermine investor confidence, increase operational risks, and potentially lead to financial misstatements. The company also has significant "due to related parties" liabilities totaling $2.13 million and $741,248 "due to director" (Tomoo Yoshida), which are unsecured, due on demand, and bear no interest. Such related party transactions, particularly in the context of weak internal controls, raise questions about corporate governance and financial transparency.

Furthermore, EXDW is contending with ongoing legal proceedings. While six cases related to contract cancellations were settled for approximately $66,400 during the nine months ended June 30, 2025, two additional cases claiming damages of approximately $110,400 are pending. The company has accrued a probable settlement liability of $44,100 for these, indicating potential future financial outlays. The precipitous decline in its core Force Club revenue, coupled with the shift to negative operating cash flow, presents a substantial operational challenge. While the Connector Plan shows promise, its ability to scale rapidly enough to offset the legacy business's decline and return the company to overall profitability remains a high-stakes endeavor.

Conclusion

Exceed World, Inc. stands at a critical juncture, attempting a significant strategic pivot amidst a challenging financial backdrop. The sharp decline in its traditional Force Club e-learning business underscores the urgent need for successful execution of its new "Game Business Connector Plan." While the explosive growth of the Connector Plan offers a glimmer of hope and validates the company's foray into new digital avenues, its current scale is insufficient to offset the broader revenue contraction and the resulting unprofitability.

The core investment thesis for EXDW is therefore a high-risk, high-reward proposition centered on this transformation. Investors must weigh the potential of the Connector Plan to become a sustainable, profitable growth engine against the company's significant operational and governance hurdles. Addressing the material weaknesses in internal controls, enhancing transparency around related party transactions, and demonstrating a clear path to restoring overall profitability and positive cash flow are paramount. The company's ability to leverage its technological agility and niche market focus to scale its new gaming initiative, while simultaneously shoring up its foundational corporate governance, will ultimately determine its long-term viability and the success of this transformative bet.