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EX-32.1 - CERTIFICATION - Grand Perfecta, Inc.grand_10q-ex3201.htm
EX-31.2 - CERTIFICATION - Grand Perfecta, Inc.grand_10q-ex3102.htm
EX-31.1 - CERTIFICATION - Grand Perfecta, Inc.grand_10q-ex3101.htm
EX-10.1 - FIRST AMENDMENT TO CONVERTIBLE DEBENTURE EFFECTIVE MARCH 5, 2016 - Grand Perfecta, Inc.grand_10q-ex1001.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2016

 

OR

 

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________to _________

 

Commission file number: 000-55423

 

GRAND PERFECTA, INC.
(Exact name of Registrant as Specified in its Charter)

 

Nevada 46-1779352
(State or Other Jurisdiction of Incorporation or Organization)  (I.R.S. Employer Identification Number)

 

21st Floor, South Tower, New Pier Takeshiba
1-16-1, Kaigan, Minato-ku, Tokyo, Japan
(Address of Principal Executive Offices including Zip Code)

 

+81-3-3436-4577
(Registrant's Telephone Number, Including Area Code)

 

          N/A         
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
YES    o       NO    x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

YES    x      NO   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨ Accelerated filer    ¨ Non-accelerated filer    ¨
(Do not check if a smaller reporting company)
Smaller reporting company    x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES    ¨       NO    x

 

As of June 14, 2016, 30,100,000 shares of the issuer's common stock, par value of $0.001 per share, were outstanding.

 

   
 

 

GRAND PERFECTA, INC.

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 3
   
ITEM 1 - FINANCIAL STATEMENTS 3
   
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
   
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
   
ITEM 4 - CONTROLS AND PROCEDURES 21
   
PART II - OTHER INFORMATION 23
   
ITEM 5 – OTHER INFORMATION 23
   
ITEM 6 – EXHIBITS 23
   
SIGNATURES 24

  

 

 

 

 

 2 
 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

Consolidated Balance Sheets at April 30, 2016 (Unaudited) and July 31, 2015

 

Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended April 30, 2016 and 2015

 

Consolidated Statements of Comprehensive Income (Unaudited) — Three and Nine Months Ended April 30, 2016 and 2015

 

Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended April 30, 2016 and 2015

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 3 
 

 

GRAND PERFECTA, INC.

CONSOLIDATED BALANCE SHEETS

 

 

   April 30,   July 31, 
   2016   2015 
   (Unaudited)     
Assets          
           
Current assets          
Cash  $37,480   $75,778 
Accounts receivable, net   1,342,033    612,553 
Due from related parties       487,852 
Current portion of notes receivable   1,969,331    1,537,869 
Deferred tax assets, current portion   351,657    303,024 
Prepaid expenses and other current assets   661,645    360,825 
Total current assets   4,362,146    3,377,901 
           
Property and equipment, net   304,340    273,263 
           
Other assets          
Long-term notes receivables, net of current portion   622,541    547,372 
Long-term portion due from related parties, net of current portion       1,471,932 
Deferred tax assets, long-term portion   258,121    222,423 
Goodwill   7,245,281    6,257,112 
Other intangible assets, net   139,309     
Other assets   683,022    552,402 
Total other assets   8,948,274    9,051,241 
Total assets  $13,614,760   $12,702,405 
           
Liabilities and Stockholders' Equity          
           
Current liabilities          
Accounts payable and accrued expenses  $2,778,130   $1,402,227 
Deferred revenues   1,386,213    1,245,945 
Current portion of notes payable   3,731,823    3,489,541 
Notes payable to related parties   1,178,110    993,918 
Convertible note payable   1,598,000    1,620,000 
Taxes payable       612,102 
Total current liabilities   10,672,276    9,363,733 
Long-term portion of notes payable, net of current portion   2,735,400    1,174,500 
Total liabilities   13,407,676    10,538,233 
           
Commitments and contingencies          
           
Stockholders' equity          
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 100,000 shares issued and outstanding as of April 30, 2015 (unaudited) and July 31, 2015, respectively   100    100 
Common stock, $0.001 par value, 500,000,000 shares authorized, 30,100,000 and 30,500,000 shares issued and outstanding as of April 30, 2016 (unaudited) and July 31, 2015, respectively   30,100    30,500 
Additional paid-in capital   4,045,434    4,121,034 
Accumulated other comprehensive income   490,152    439,265 
Accumulated deficit   (4,612,565)   (2,645,873)
Total GPI stockholders' equity   (46,779)   1,945,026 
Noncontrolling interest   253,863    219,146 
Total stockholders' equity   207,084    2,164,172 
Total liabilities and stockholders' equity  $13,614,760   $12,702,405 

 

 

See accompanying notes to consolidated financial statements

 

 4 
 

 

GRAND PERFECTA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

   For the Three Months Ended   For the Nine Months Ended 
   April 30,   April 30,   April 30,   April 30, 
   2016   2015   2016   2015 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Net sales  $3,557,795   $4,305,535   $10,805,970   $13,817,621 
Total revenues   3,557,795    4,305,535    10,805,970    13,817,621 
                     
Operating expenses:                    
Cost of sales   1,397,181    1,047,822    3,768,863    3,510,942 
Depreciation and amortization expense   27,093    26,435    65,658    83,080 
Advertising   35,806    181,612    133,951    635,456 
Rent expense   227,656    195,368    650,469    612,026 
Salaries and wages   1,222,401    1,435,301    3,706,432    4,195,584 
Other general and administrative expenses   1,236,321    1,037,592    3,357,834    3,032,870 
Total operating expenses   4,146,458    3,924,130    11,683,207    12,069,958 
                     
Income (loss) from operations   (588,663)   381,405    (877,237)   1,747,663 
                     
Other income (expense):                    
Loss on settlement of note receivable           (1,312,276)    
Other income   17,761    21,941    30,892    62,021 
Gain on exchange   1,564    6,872    8,642    31,462 
Interest income   1,223    2,932    8,471    9,954 
Interest expense   (180,908)   (187,053)   (479,679)   (643,440)
Total other income (expense)   (160,360)   (155,308)   (1,743,950)   (540,003)
                     
Net income (loss) before provision for income taxes   (749,023)   226,097    (2,621,187)   1,207,660 
Provision for (benefit from) income taxes   (374,512)   114,597    (654,456)   605,379 
Net income (loss)   (374,511)   111,500    (1,966,731)   602,281 
Less: net loss attributable to noncontrolling interest   (24)   (324)   (39)   (324)
Net income (loss) attributable to GPI  $(374,487)  $111,824   $(1,966,692)  $602,605 
                     
Net income (loss) per share, basic and diluted  $(0.01)  $0.00   $(0.07)  $0.02 
                     
Weighted average number of common shares outstanding, basic and diluted   30,011,111    30,500,000    29,879,562    30,500,000 

 

 

See accompanying notes to consolidated financial statements

 

 

 

 5 
 

 

GRAND PERFECTA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   For the Three Months Ended   For the Nine Months Ended 
   April 30,   April 30,   April 30,   April 30, 
   2016   2015   2016   2015 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Net income (loss)  $(374,511)  $111,500   $(1,966,731)  $602,281 
Other comprehensive income (loss), net of tax:                    
Foreign currency translation adjustments   (18,353)   (77,692)   50,887    (236,374)
Total other comprehensive income (loss), net of tax   (18,353)   (77,692)   50,887    (236,374)
Comprehensive income (loss)   (392,864)   33,808    (1,915,844)   365,907 
Comprehensive income (loss) attributable to noncontrolling interest   29,665    (2,710)   34,678    (37,947)
Comprehensive income (loss) attributable to GPI stockholders  $(363,199)  $31,098   $(1,881,166)  $327,960 

  

 

See accompanying notes to consolidated financial statements

 

 6 
 

 

GRAND PERFECTA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Nine Months Ended 
   April 30,   April 30, 
   2016   2015 
   (Unaudited)   (Unaudited) 
Cash flows from operating activities          
Net income (loss)  $(1,966,731)  $602,281 
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   65,658    83,080 
Loss on settlement of note receivable   1,312,276     
Gain on bargain purchase of subsidiary   (11,091)    
Gain on sale of property and equipment   (7,042)    
Share-based compensation   64,822     
           
Changes in operating assets and liabilities:          
Accounts receivable   (550,007)   (340,175)
Prepaid expenses and other current assets   (154,884)   (23,237)
Other assets   (38,231)   (8,882)
Accounts payable and accrued expenses   1,071,758    (699,263)
Deferred revenue   (53,982)   (30,829)
Taxes payable   (642,329)   454,537 
           
Net cash provided by (used in) operating activities   (909,783)   37,512 
           
Cash flows from investing activities          
Purchase of property and equipment   (67,561)   (41,802)
Proceeds from sale of property and equipment   31,692     
Proceeds for lending to related parties, net   534,256    372,339 
Proceeds from collection of notes receivables   234,966    835,350 
Acquisition of subsidiaries, net of cash acquired   (175,925)    
Payments for notes receivable lending   (390,464)   (971,580)
Net cash provided by investing activities   166,964    194,307 
           
Cash flows from financing activities          
Proceeds from notes payable   1,700,447    1,391 
Proceeds from convertible notes payable       1,760,000 
Payments of convertible notes payable   (255,000)    
Payments of notes payable   (746,790)   (3,491,663)
           
Net cash provided by (used in) financing activities   698,657    (1,730,272)
           
Effect of exchange rate fluctuations on cash   5,864    (196,831)
           
Net change in cash   (38,298)   (1,695,284)
Cash, beginning of the period   75,778    1,882,272 
Cash, end of the period  $37,480   $186,988 
           
Supplemental disclosure of cash flow information:          
Interest paid  $458,444   $643,440 
Income taxes paid  $550,014   $150,841 
           
Supplemental disclosure of non-cash investing and financing information:          
Settlement of related party note receivable through exchange of stock  $(1,508,276)  $ 
Decrease in common stock, par value, from settlement of related party note receivable  $(1,400)  $ 
Decrease in additional paid-in capital from settlement of related party note receivable  $(194,600)  $ 

 

 7 
 

 

GRAND PERFECTA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.  DESCRIPTION OF BUSINESS

 

Organization

 

Grand Perfecta, Inc. (“Grand Perfecta”) was incorporated in the State of Nevada on March 25, 2002, as STI Holdings, Inc. (“STI”). On May 12, 2012, the Company completed an Agreement and Plan of Reorganization whereby it acquired 100% of the issued and outstanding shares of Link Bit Consulting Co, Ltd. (“LinkBit” or the “Company”), a Japanese corporation, for 25,000,000 common shares in a transaction accounted for as a recapitalization of LinkBit. Effective March 29, 2013, STI amended its Articles of Incorporation to change its name to Grand Perfecta, Inc. On May 27, 2013, the Company issued 272,668 shares in exchange for 100% of the issued and outstanding shares of Umajin Hong Kong Ltd. (“Umajin HK”), a Hong Kong corporation that maintains an office in Hong Kong. In August 2015, Grand Perfecta formed Sports Perfecta, Inc. (“Sports Perfecta”), as a California subsidiary to pursue development of a fantasy sports offering to horse racing fans. The operations of Grand Perfecta, LinkBit, Umajin HK, and Sports Perfecta are collectively referred to as the “Company.”

 

On December 16, 2015, LinkBit acquired 100% of the outstanding shares of Basougu Shokuninkai Co., Ltd. (“Basougu”), a Japanese corporation (See Note 7). On January 7, 2016, Sports Perfecta acquired 100% of the outstanding stock of Just Mobile Sdn. Bhd. (“Just Mobile”), a Malaysian company (see Note 7). On January 20, 2016, Just Mobile changed its name to Sports Perfecta Technologies Sbn Bhd (“SPT”). The operations of Just Mobile are referred to as SPT after the acquisition date of January 7, 2016.

 

Nature of Business

 

The Company is engaged in the business of transmitting and providing horse racing information via various types of media, including multiple websites owned and operated by the wholly owned subsidiaries of LinkBit, Umajin HK and Sports Perfecta.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

  

The accompanying unaudited consolidated financial statements of the Company as of April 30, 2016, and for the three and nine months ended April 30, 2016 and 2015, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information includes all adjustments considered necessary for a fair presentation of the Company's financial position at such date and the operating results and cash flows for such periods. Operating results for the interim period ended April 30, 2016 are not necessarily indicative of the results that may be expected for the entire year.

 

Certain information and footnote disclosure normally included in financial statements in accordance with GAAP have been omitted pursuant to the rules of the United States Securities and Exchange Commission ("SEC"). These unaudited financial statements should be read in conjunction with our audited financial statements and accompanying notes for the years ended July 31, 2015 and 2014 included in the Company's Form 10-K filed on November 13, 2015.

 

Principals of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Grand Perfecta and its wholly-owned subsidiaries LinkBit, Umajin HK, and Sports Perfecta. All intercompany balances and transactions have been eliminated in consolidation. The Company has determined that two affiliated entities, Space Cultivation Mobile and Japan Horse Circle, which LinkBit conducts business with are variable interest entities and that the Company is the primary beneficiary of each entity. As a result, the Company has consolidated the accounts of these variable interest entities into the accompanying consolidated financial statements. As the Company does not have any ownership interest in these variable interest entities, the Company has allocated the contributed capital in these variable interest entities as a component of noncontrolling interest. All intercompany balances and transactions have been eliminated in consolidation.

 

Financial Statement Reclassification

 

Certain account balances from prior periods have been reclassified in these consolidated financial statements to conform to current period classifications.

  

 8 
 

 

Liquidity and Capital Resources

 

As of April 30, 2016, we had cash of $37,480 and a working capital deficit of $6,310,130 as compared to cash of $75,778 and a working capital deficit of $5,985,832 as at July 31, 2015. The decrease in cash as of April 30, 2016 was primarily the result of cash used in operations and to pay down outstanding notes payable during the period, offset by an increase in cash due to collection of notes receivable and amounts due from related parties, as well as additional note payable borrowing.

 

We continue to have a significant working capital deficit that adversely affects our business by limiting the resources we have available to pursue the promotion of our information services and develop new service opportunities for potential customers. Historically we have relied on extensions of note payment due dates and new debt financing to repay note obligations as they came due in order to continue operations. Going forward we will continue to use extensions and new debt financing to address note obligations that come due, endeavor to gradually reduce obligations with cash flow provided by operations, and pursue over the next 12 months equity financing that we can apply to debt reduction and business development. Nevertheless, the shortage of working capital adversely affects our ability to develop, sponsor, or participate in activities that promote our information services to prospective customers and to develop new content, because a substantial portion of cash flow goes to reduce debt rather than to advance operating activities. There is no assurance that our plans for addressing our working capital shortages will be successful, and our failure to be reasonably successful should be expected to result in a significant contraction of our operations and potentially a failure of the business.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Amounts could materially change in the future.

 

Foreign Exchange

 

The Company’s primary operations are conducted in Japan and performed by its wholly owned subsidiaries LinkBit and Umajin HK. The Company also conducts operations through Sports Perfecta, and its Malaysian subsidiary SPT. LinkBit’s functional currency is the Japanese Yen and Umajin HK’s functional currency is the Hong Kong Dollar. SPT’s functional currency is the Malaysian Ringgit.

 

The financial statements of each entity are prepared using the applicable functional currencies, and have been translated into U.S. dollars (“USD”). Assets and liabilities are translated into USD at the applicable exchange rates at period-end. Stockholders’ equity is translated using historical exchange rates. Revenue and expenses are translated at the average exchange rates for the period. Any translation adjustments are included as foreign currency translation adjustments in accumulated other comprehensive income in the Company’s stockholders’ equity.

 

The following rates were used to translate the accounts of LinkBit, Umajin HK and SPT into USD at the following balance sheet dates.

 

   Balance Sheet Dates 
   April 30,   July 31, 
   2016   2015 
         
Japanese Yen to USD   0.0094    0.0081 
Hong Kong Dollars to USD   0.1289    0.1290 
Malaysian Ringgit to USD   0.2552     NA  

 

The following rates were used to translate the accounts of LinkBit, Umajin HK and SPT into USD for the following operating periods.

 

   For the Nine Months Ended 
   April 30,   April 30, 
   2016   2015 
         
Japanese Yen to USD   0.0085    0.0088 
Hong Kong Dollars to USD   0.1289    0.1290 
Malaysian Ringgit to USD   0.2392     NA  

 

 9 
 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid holdings with maturities of three months or less at the time of purchase to be cash equivalents. The Company had no cash equivalents as of April 30, 2016 (unaudited) or July 31, 2015.

 

Accounts Receivable

 

Accounts receivable are carried at net realizable value, representing the outstanding balance less an allowance for doubtful accounts based on a review of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer's financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The Company had no allowance for doubtful accounts as of April 30, 2016 (unaudited) and July 31, 2015.

 

Property and Equipment

 

Property and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives once the individual assets are placed in service. Estimated useful lives for the assets are as follows.

 

Buildings and fixtures   8 - 43 years
Autos and trucks   2 - 6 years
Tools and equipment   4 - 10 years
Computer software   5 years

  

Goodwill

 

The Company’s goodwill represents the excess of purchase price over tangible and intangible assets acquired, less liabilities assumed arising from business acquisitions. Goodwill is not amortized, but is reviewed for potential impairment on an annual basis at the reporting unit level. As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-20, the Company conducted an analysis of the goodwill on its single reporting unit using the Company. As of July 31, 2015, the assessment for impairment found that there is no impairment of goodwill. The Company has no accumulated impairment losses on goodwill.

 

Long-Lived Assets

 

In accordance with ASC 360-10, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. There was no impairment of assets identified during the year ended July 31, 2015 or during the nine months ended April 30, 2016 (unaudited).

 

Fair Value of Financial Instruments

 

Fair value is defined 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, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability.

 

 10 
 

 

GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:

 

Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:

 

  Quoted prices for similar assets or liabilities in active markets

 

  Quoted prices for identical or similar assets or liabilities in markets that are not active

 

  Inputs other than quoted prices that are observable for the asset or liability

 

  Inputs that are derived principally from or corroborated by observable market data by correlation or other means

 

Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).

 

The Company has determined that the book value of its outstanding financial instruments as of April 30, 2016 (unaudited) and July 31, 2015 approximates the fair value.

  

Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to concentration of credit risk include cash, accounts receivable, notes receivable, and amounts due from related parties. The Company maintains its cash in banks located in Japan and Hong Kong in financial institutions with high credit ratings. Substantially all of the Company’s revenues are generated from customers in Japan. The Company conducts periodic reviews of the financial condition and payment practices of its customers and note receivable holders. The Company has not experienced significant losses relating to these concentrations in the past, other than the $1,312,276 loss on settlement of note receivable that was recorded during the nine months ended April 30, 2016 (See Note 4).

 

Revenue Recognition

 

The Company’s revenue consists primarily of sales of comprehensive horse racing information through multiple websites focusing on all aspects of the horse racing industry in Japan. Publication of horse racing digital magazines, providing support for print publications, and participating in other public events and media programs related to the horse racing industry do not generate significant revenue directly. These activities are undertaken for the purpose of increasing the number of horse racing fans and driving potential customers to our websites so as to hopefully eventually convert them to paying customers.  

 

The Company recognizes revenue on arrangements in accordance with ASC 605, Revenue Recognition. Revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The majority of the Company’s revenue is generated by per-item sales. For all users, payment is received at the time of purchase. The Company recognizes revenue for per-item sales when the requested information is supplied to the user. For information packages that span a period of time, the Company recognizes revenue over the term of each package. Revenues are presented net of refunds, credits and known and estimated credit card chargebacks. The Company reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Rights to content purchased by customers in advance of the content being provided are recorded as deferred revenue.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

 11 
 

 

Basic and Diluted Earnings Per Share

 

In accordance with ASC 260, Earnings Per Share, the basic income per common share is computed by dividing the net income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock. No dilutive potential common shares were included in the computation of diluted net income per share because their impact was anti-dilutive. During the nine months ended April 30, 2016 and 2015, the Company had total options of 3,000,000, which were excluded from the computation of net income per share because they are anti-dilutive. During the nine months ended April 30, 2016 and 2015, the Company had convertible notes convertible into 1,452,727 shares of common stock, which were excluded from the computation because they are anti-dilutive. As a result, the basic and diluted earnings per share were the same for each of the periods presented.

 

Recent Accounting Pronouncements 

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the ASC Topic 606 and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early application is not permitted. Management is in the process of assessing the impact of ASU 2014-09 on the Company’s financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires that lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The standard will take effect for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 with earlier adoption permitted. The Company is assessing the impact of adopting ASU No. 2016-02 on our consolidated financial statements. 

 

In March 2016, the FASB issued ASU No. 2016-09 ("ASU 2016-09"), Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 with early adoption permitted.  The Company is assessing the impact of adopting ASU No. 2016-09 on our consolidated financial statements. ​

 

3.  PROPERTY AND EQUIPMENT, NET

 

The Company’s property and equipment consisted of the following.

 

   April 30,   July 31, 
   2016   2015 
   (Unaudited)     
         
Buildings and fixtures  $304,195   $262,126 
Autos and trucks   341,780    294,513 
Tools and equipment   513,158    427,469 
Computer software   1,490,316    1,284,209 
Contruction in progress   58,750     
Horses       24,454 
    2,708,199    2,292,771 
           
Less: accumulated depreciation   (2,403,859)   (2,019,508)
           
   $304,340   $273,263 

 

Depreciation expense amounted to $18,149 and $26,435 for the three months ended April 30, 2016 and 2015, respectively. Depreciation amounted to $54,467 and $83,080 for the nine months ended April 30, 2016 and 2015, respectively.  

 

 12 
 

 

4.  DUE FROM RELATED PARTIES

 

The total amounts due from related parties amounted to $0 (unaudited) and $1,959,784 as of April 30, 2016 and July 31, 2015, respectively, which represented borrowings made to Umajin Co., Ltd. (“Umajin Japan”), a related party entity owned by one of the directors of the Company. Effective October 30, 2015, the Company entered into a Receivables Transfer Agreement with Europlus International (“EI”), in which the Company transferred $499,898 (JPY 60,228,650) of outstanding receivables due from Umajin Japan to EI in exchange for an account receivable of $494,899 (JPY 59,626,363) to be paid in three quarterly installments starting on January 31, 2016 and finishing on July 31, 2016.

 

Effective November 2, 2015, the Company entered into a Note Payable and Satisfaction Agreement (the “Satisfaction Agreement”) with Umajin Japan in order to settle the remaining receivable balance outstanding. The Company was the holder of a promissory note made by Umajin Japan in the principal amount of JPY 181,720,000 ($1,508,276 as of November 2, 2015). The promissory note was secured by 1,400,000 shares of the Company’s common stock, which were owned by Umajin Japan. Pursuant to the Satisfaction Agreement, Umajin Japan agreed to sell its shares of common stock to the Company, and the Company has agreed to release Umajin Japan from any further obligation due under the promissory note.  The fair value of the common stock sold to the Company amounted to $196,000. The difference between the fair value of the common stock and the outstanding balance of the note receivable amounted to $1,312,276, which was recorded as loss from settlement of note receivable in the accompanying consolidated statement of operations for the nine months ended April 30, 2016.

 

5.  NOTES RECEIVABLE

 

The Company’s outstanding notes receivable consist of unsecured advances, including interest ranging from 0% to 8% per annum, payable in full on dates extending through 2039. As of April 30, 2016 and July 31, 2015, the Company had total outstanding notes receivable of $2,591,872 (unaudited) and $2,085,241, respectively. The portion of these outstanding notes receivables that were either due on demand or had scheduled due dates within one year amounted to $1,969,331 (unaudited) and $1,537,869 as of April 30, 2016 and July 31, 2015, respectively.

 

The future scheduled maturities of outstanding notes receivables as of April 30, 2016 based on contractual due dates are as follows.

 

   Year Ended 
   July 31, 
     
2016 (remainder of)  $1,969,331 
2017    
2018    
2019   7,516 
2020   16,471 
Thereafter   598,554 
Total  $2,591,872 

 

6.  GOODWILL

 

The Company has recorded goodwill relating to the purchase of Media 21, Inc. in 2011, as well as the acquisition of Umajin HK on May 27, 2013. The following is a summary of the activity relating to goodwill for the nine months ended April 30, 2016 (unaudited):

 

Balance as of July 31, 2015  $6,257,112 
Foreign currency translation adjustment   988,169 
Balance as of April 30, 2016 (unaudited)  $7,245,281 

 

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7.  ACQUISITIONS

 

On January 7, 2016, Sports Perfecta entered into a Share Purchase Agreement to acquire 100% of the outstanding shares of Just Mobile. The total aggregate purchase price for the outstanding shares of Just Mobile amounted to $200,000, of which $120,000 was paid on the closing date and the remaining $80,000 was paid in April 2016.

 

Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach.

 

The purchase price was allocated as follows as of the acquisition date:

 

Cash   $ 38,908  
Accounts receivable     20,960  
Other current assets     6,751  
Intangible assets     134,476  
Current liabilities     (1,095 )
    $ 200,000  

 

Intangible assets acquired represent developed technology which has an estimated useful life of 4 years. Amortization expense for intangible assets for the three and nine months ended April 30, 2016 amounted to $8,944 and $11,191, respectively. Estimated future amortization of intangible assets as of April 30, 2016 is as follows.

 

   Year Ended 
   July 31, 
     
2016 (remainder of)  $9,453 
2017   37,812 
2018   37,812 
2019   37,812 
2020   16,420 
Total  $139,309 

 

On December 16, 2015, the Company entered into a purchase agreement to acquire 100% of the outstanding shares of Basougu. The total purchase price for the outstanding shares of Basougu amounted to 2 million Japanese Yen ($16,400 on the purchase date). The fair value of the net assets acquired from Basougu amounted to $27,100 as of the acquisition date. As the fair value of the net assets was greater than the purchase price, the Company recorded a gain on the acquisition of Basougu of $10,700, which is reflected as a component of other income on the accompanying statements of operations for the nine months ended April 30, 2016. There was no goodwill or other intangible assets acquired in connection with the purchase of Basougu.

 

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8.  NOTES PAYABLE

 

A summary of the Company’s outstanding notes payable is as follows:

 

   April 30,   July 31, 
   2016   2015 
   (Unaudited)     
         
Unsecured notes payable originally issued on September 30, 2009 and November 30, 2010, due in full on November 30, 2015, bearing interest at 3.5% per annum due monthly.  $   $39,658 
Unsecured note payable issued on March 26, 2012, due on demand, bearing interest at 1% per annum due monthly.   940,000    810,000 
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1% per annum due monthly.   470,000    405,000 
Unsecured note payable issued on July 23, 2013, due on July 5, 2016, bearing interest at 1.2% per annum due monthly.   41,924    136,728 
Unsecured note payable issued on December 20, 2011, due on October 31, 2015, bearing interest at 15% per annum due monthly.   1,786,000    1,539,000 
Unsecured note payable issued on June 28, 2013, due on October 31, 2015, bearing interest at 15% per annum due monthly.   188,000    162,000 
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.   658,000    931,500 
Unsecured note payable issued on December 18, 2015, due on February 29, 2019, bearing interest at 12% per annum due monthly.   940,000     
Unsecured note payable issued on February 5, 2016, due in 23 installments of JPY 3,000,000 beginning in February 2016 and a final installment of JPY 31,000,000 in January 2019, bearing interest at 12% per annum due monthly.   940,000     
Unsecured note payable resulting from the Company co-signing for debt of a vendor in 2010.  The note is due on demand, bearing interest at 18% per annum due monthly.   178,600    348,300 
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.   282,000    243,000 
Unsecured notes payable, non-interest bearing, due on demand   42,699    48,855 
Total notes payable   6,467,223    4,664,041 
Less: current portion of notes payable   3,731,823    3,489,541 
Long-term portion of notes payable  $2,735,400   $1,174,500 

 

Substantially all of the above outstanding notes payable are personally guaranteed by the Company’s Chief Executive Officer.

 

Future scheduled maturities of notes payable are as follows:

 

   Year Ended 
   July 31, 
     
2016 (remainder of)  $3,647,223 
2017   827,200 
2018   620,400 
2019   1,372,400 
Total  $6,467,223 

 

 

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9.  NOTES PAYABLE TO RELATED PARTIES

 

As of April 30, 2016 and July 31, 2015, the Company had outstanding note payable balances due to its Chairman and CEO amounting to $984,235 and $831,918, respectively, and outstanding note payable balances due to its President amounting to $193,875 and $162,000, respectively. The note payable balances are non-interest bearing and are due on demand.

 

10.  CONVERTIBLE NOTE PAYABLE

 

On March 5, 2015, the Company entered into a convertible note agreement for total principal borrowings of JPY 200,000,000 ($1,620,000 at July 31, 2015). The amounts are due on March 5, 2016 and bear interest at a rate of 1% per annum. At the option of the debt holder, beginning 40 days after the issuance of the note, the debt holder may convert the outstanding balance of the note into shares of the Company’s common stock at a conversion rate equal to one share per JPY130.90 or $1.10 of outstanding principal and accrued interest. In February 2016, the Company made a payment of 30 million Yen (approximately $249,000) on the outstanding principal of the convertible note payable, and the holder has agreed to extend the maturity date for an additional 6 months. The revised maturity date is September 5, 2016. As of April 30, 2016, the remaining outstanding balance amounted to JPY 170,000,000 ($1,598,000 at April 30, 2016).  

 

The conversion feature associated with the convertible note payable created a derivative liability as of April 14, 2015, the date in which the note became convertible. The Company valued the derivative as of each subsequent reporting period using the Black-Scholes pricing model. The value at each of these dates amounted to $0. The assumptions used in the Black-Scholes model during the nine months ended April 30, 2016 were as follows.

 

    Nine Months Ended
    April 30,
    2016
     
Expected life in years   0.35
Stock price volatility   32.4%
Risk-free interest rate   0.22%
Expected dividends    None
Forfeiture rate   NA

 

11.  STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue up to 100,000,000 shares of preferred stock with a par value of $0.001, with 100,000 shares designated as Series A Preferred Stock. The Series A Preferred Stock receive a 10 to 1 voting preference over common stock. Accordingly, for every share of Series A Preferred Stock held, the holder receives the voting rights equal to 10 shares of common stock. As such, the holders of the Series A Preferred Stock have the equivalent voting capability of 1,000,000 shares of common stock. The Series A Preferred Stock also has a $0.05 per share liquidation preference over common stock, and can be redeemed by the Company at any time, upon thirty days’ notice, for $0.05 per share.

 

The Company had 100,000 shares of Series A Preferred Stock issued and outstanding as of April 30, 2016 and July 31, 2015.

 

Common Stock Transactions

 

Effective January 25, 2016, the Company entered into a consulting agreement with an investor relations firm for a term of six months. Per the terms of the agreement, as compensation for the services to be provided, the Company issued 1,000,000 shares on February 8, 2016, which were fully vested on the date of the agreement. The total value of the shares as of the agreement date amounted to $120,000, which has been recorded as a component of prepaid expenses and other current assets in the accompanying consolidated balance sheet and is being amortized over the life of the agreement.

 

12.  RELATED PARTY TRANSACTIONS

 

As of April 30, 2016 (unaudited) and July 31, 2015, the Company had $0 and $1,959,784, respectively, of notes receivable due from related parties (see Note 4).

 

As of April 30, 2016, the Company had an outstanding note payable balance due to its Chairman and CEO amounting to $984,235 and an outstanding note payable balance due to its President amounting to $193,875 (see Note 9).

 

Concurrently with the Satisfaction Agreement (see Note 4), the Company and Umajin Japan, a related party company owned by one of its directors, modified the service agreement between them effective November 1, 2015, to set the monthly fee payable by the Company to Umajin Japan for providing horserace information at 16 million Yen per month (inclusive of consumption tax), and to set the monthly fee payable for providing a horseracing related email magazine and web page content at 7 million Yen per month (inclusive of consumption tax).

 

The fee paid to Umajin Japan for the three months ended April 30, 2016 and 2015 amounted to $543,056 and $325,000, respectively. The fee paid to Umajin Japan for the nine months ended April 30, 2016 and 2015 amounted to $1,373,056 and $975,000, respectively. The fees paid to Umajin Japan are included in cost of sales in the accompanying consolidated statements of operations.

 

 16 
 

  

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited July 31, 2015, Consolidated Financial Statements and notes thereto, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended July 31, 2015, previously filed with the Securities and Exchange Commission.

 

This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including such things as expansion and growth of our operations and other such matters are forward-looking statements. Any one or a combination of factors could materially affect our operations and financial condition. These factors include competitive pressures, success or failure of marketing programs, changes in pricing and availability of services and products offered to customers, availability of capital, and conditions in the capital markets. Forward-looking statements made by us are based on knowledge of our business and the environment in which we operate as of the date of this report. Because of the factors discussed in our most recent report on Form 10-K and factors disclosed in subsequent reports filed with the Securities and Exchange Commission, actual results may differ from those in the forward-looking statements.

 

As used in this "Management's Discussion and Analysis of Financial Condition and Results of Operation," except where the context otherwise requires, the term "we," "us," or "our" refers to the business of Grand Perfecta, Inc., and its wholly owned subsidiaries, LinkBit Consulting Co, Ltd. (“LinkBit”), Umajin Hong Kong Ltd. (“Umajin HK”), and Sports Perfecta, Inc. (“Sports Perfecta”).

  

Nature of Business

 

The Company is engaged in the business of transmitting and providing horse racing information via various types of media, including the various websites owned and operated by the wholly owned subsidiaries of LinkBit and Umajin HK.

 

Critical Accounting Policies

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period.  On an ongoing basis, management evaluates its estimates, including those related to collection of receivables, impairment of goodwill, contingencies, litigation and income taxes. Management bases its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in material differences from the estimated amounts in the financial statements. 

 

For a summary of our critical accounting policies, refer to Note 2 of our unaudited consolidated financial statements included under Item 1 – Financial Statements in this Form 10-Q.

 

 17 
 

 

Results of Operations for the Three Months Ended April 30, 2016 and 2015

 

The following are the results of our operations for the three months ended April 30, 2016 as compared to the three months ended April 30, 2015:

 

   For the Three Months Ended     
   April 30,   April 30,     
   2016   2015   $ Change 
             
Net sales  $3,557,795   $4,305,535   $(747,740)
Total revenue   3,557,795    4,305,535    (747,740)
                
Operating Expenses:               
Cost of sales   1,397,181    1,047,822    349,359 
Depreciation and amortization expense   27,093    26,435    658 
Advertising   35,806    181,612    (145,806)
Rent expense   227,656    195,368    32,288 
Salaries and wages   1,222,401    1,435,301    (212,900)
Other general and administrative expenses   1,236,321    1,037,592    198,729 
Total operating expenses   4,146,458    3,924,130    222,328 
                
Income (loss) from operations   (588,663)   381,405    (970,068)
                
Other Income (Expense):               
Other income (loss)   17,761    21,941    (4,180)
Gain (loss) on exchange   1,564    6,872    (5,308)
Interest income   1,223    2,932    (1,709)
Interest expense   (180,908)   (187,053)   6,145 
Total other income (expense)   (160,360)   (155,308)   (5,052)
                
Net income (loss) before provision for income taxes   (749,023)   226,097    (975,120)
Provision for (benefit from) income taxes   (374,512)   114,597    (489,109)
Net income (loss)   (374,511)   111,500    (486,011)
Less: net loss attributable to noncontrolling interest   (24)   (324)   300 
Net income (loss) attributable to GPI  $(374,487)  $111,824   $(486,311)

 

Net Sales

 

Our net sales consist primarily of information and other content relating to the horse racing industry in Japan sold to customers through our websites. Overall, our net sales decreased during the three months ended April 30, 2016 as compared to the same period in 2015 due to a decrease in sales of five services, or brands, during the three months ended April 30, 2016 as compared to the same period last year. We have been focusing on creating a new digital media to coincide with the reduced popularity of traditional paper media and advertising. We believe this will take time to penetrate our customer base and bring revenue growth.

 

Operating Expenses

 

Total operating expenses for the three months ended April 30, 2016 were $4,146,458, which represented an increase of $222,328 as compared to the same period in 2015. Overall, our operating expenses increased due to increased cost of sales associated with increases in costs with acquiring new content, as well as increases in other general and administrative expenses associated with professional fees incurred with our public filings. The increases to our operating expenses were partially offset by decreases in advertising costs resulting from a reduction in print advertising, as well as a decrease in salary expenses.

 

Other Income/ (Expenses)

 

Total other expense for the three months ended April 30, 2016 amounted to $160,360, which increased by $5,052 as compared to the same period in 2015. Other expenses primarily consist of interest expense, which were consistent between the three months ended April 30, 2016 and 2015 due to the average outstanding debt balances during these periods being consistent.

 

 18 
 

 

Results of Operations for the Nine Months Ended April 30, 2016 and 2015

 

The following are the results of our operations for the nine months ended April 30, 2016 as compared to the nine months ended April 30, 2015:

 

   For the Nine Months Ended     
   April 30,   April 30,     
   2016   2015   $ Change 
             
Net sales  $10,805,970   $13,817,621   $(3,011,651)
Total revenue   10,805,970    13,817,621    (3,011,651)
                
Operating Expenses:               
Cost of sales   3,768,863    3,510,942    257,921 
Depreciation and amortization expense   65,658    83,080    (17,422)
Advertising   133,951    635,456    (501,505)
Rent expense   650,469    612,026    38,443 
Salaries and wages   3,706,432    4,195,584    (489,152)
Other general and administrative expenses   3,357,834    3,032,870    324,964 
Total operating expenses   11,683,207    12,069,958    (386,751)
                
Income (loss) from operations   (877,237)   1,747,663    (2,624,900)
                
Other Income (Expense):               
Loss on settlement of note receivable   (1,312,276)       (1,312,276)
Other income (loss)   30,892    62,021    (31,129)
Gain (loss) on exchange   8,642    31,462    (22,820)
Interest income   8,471    9,954    (1,483)
Interest expense   (479,679)   (643,440)   163,761 
Total other income (expense)   (1,743,950)   (540,003)   (1,203,947)
                
Net income (loss) before provision for income taxes   (2,621,187)   1,207,660    (3,828,847)
Provision for (benefit from) income taxes   (654,456)   605,379    (1,259,835)
Net income (loss)   (1,966,731)   602,281    (2,569,012)
Less: net loss attributable to noncontrolling interest   (39)   (324)   285 
Net income (loss) attributable to GPI  $(1,966,692)  $602,605   $(2,569,297)

 

Net Sales

 

Our net sales consist primarily of information and other content relating to the horse racing industry in Japan sold to customers through our websites. Overall, our net sales decreased during the nine months ended April 30, 2016 as compared to the same period in 2015 due to a decrease in sales of five services, or brands, during the nine months ended April 30, 2016 as compared to the same period last year. We have been focusing on creating a new digital media to coincide with the reduced popularity of traditional paper media and advertising. We believe this will take time to penetrate our customer base and bring revenue growth.

 

Operating Expenses

 

Total operating expenses for the nine months ended April 30, 2016 were $11,683,207, which represented a decrease of $386,751 as compared to the same period in 2015. Our operating expenses decreased due to a decrease in advertising costs resulting from a reduction in print advertising due to lower than expected response rates, as well as lower salary expenses. These decreases were partially offset by an increase to other general and administrative expenses for professional fees incurred in connection with our public filings, as well as increases in cost of sales from increased costs of acquiring new content.

 

Other Income/ (Expenses)

 

Total other expense for the nine months ended April 30, 2016 amounted to $1,743,950, which increased by $1,203,947 as compared to the same period in 2015. The increase in other expenses is primarily due to a loss on the settlement of a note receivable of $1,312,276 from Umajin Japan, a related party entity owned by one of our directors. The increase in other expenses was partially offset by a decrease in interest expense of $163,761 due to a reduction of the average outstanding notes payable during the nine months ended April 30, 2016 as compared to the prior year.

 

 19 
 

 

Liquidity and Capital Resources

 

As of April 30, 2016, we had cash of $37,480 and a working capital deficit of $6,310,130 as compared to cash of $75,778 and a working capital deficit of $5,985,832 as at July 31, 2015. The decrease in cash as of April 30, 2016 was primarily the result of cash used in operations and to pay down outstanding notes payable during the period, offset by an increase in cash due to collection of notes receivable and amounts due from related parties, as well as additional note payable borrowing.

 

We continue to have a significant working capital deficit that adversely affects our business by limiting the resources we have available to pursue the promotion of our information services and develop new service opportunities for potential customers. Historically we have relied on extensions of note payment due dates and new debt financing to repay note obligations as they came due in order to continue operations. Going forward we will continue to use extensions and new debt financing to address note obligations that come due, endeavor to gradually reduce obligations with cash flow provided by operations, and pursue over the next 12 months equity financing that we can apply to debt reduction and business development. Nevertheless, the shortage of working capital adversely affects our ability to develop, sponsor, or participate in activities that promote our information services to prospective customers and to develop new content, because a substantial portion of cash flow goes to reduce debt rather than to advance operating activities. There is no assurance that our plans for addressing our working capital shortages will be successful, and our failure to be reasonably successful should be expected to result in a significant contraction of our operations and potentially a failure of the business.

 

The following is a summary of our cash flows from operating, investing and financing activities for the nine months ended April 30, 2016 and 2015.

 

   For the Nine Months Ended 
   April 30,   April 30, 
   2016   2015 
Cash flows provided by (used in) operating activities  $(909,783)  $37,512 
Cash flows provided by investing activities  $166,964   $194,307 
Cash flows provided by (used in) financing activities  $698,657   $(1,730,272)

 

Net cash flows used in operating activities for the nine months ended April 30, 2016 amounted to $909,783, compared to cash flows provided by operating activities of $37,512 for the nine months ended April 30, 2015. Net cash flows used in operating activities for the nine months ended April 30, 2016 were higher primarily due to a net loss of $1,966,731, offset by non-cash expenses of $1,424,623. During the nine months ended April 30, 2015, we had a net income of $602,281.

 

Net cash provided by investing activities amounted to $166,964 for the nine months ended April 30, 2016, compared to net cash provided by investing activities of $194,307 for the nine months ended April 30, 2015. During the nine months ended April 30, 2016, our cash provided by investing activities was primarily due to collections of note receivables and amounts outstanding from related parties totaling $769,222, offset by payments for note receivable lending of $390,464, net cash used for the acquisition of subsidiaries of $175,925, and purchases of property and equipment of $67,561. During the nine months ended April 30, 2015, our cash provided by investing activities was the result of a total of $1,207,689 in proceeds from the collections of note receivables and amounts outstanding from related parties, offset by $971,580 in additional note receivable lending and $41,802 for the purchase of property and equipment.

 

Net cash provided by financing activities for the nine months ended April 30, 2016 amounted to $698,657, compared to cash used in financing activities of $1,730,272 for the nine months ended April 30, 2015. The cash provided from financing activities for the nine months ended April 30, 2016 was due to proceeds from additional notes payable borrowing of $1,700,447, offset by payments on outstanding notes payable of $1,001,790. During the nine months ended April 30, 2015, we had additional note payable borrowings of $1,761,391, offset by payments made on outstanding notes payable of $3,491,663.

 

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Description of Indebtedness

 

The following is a summary of our outstanding notes payable as of April 30, 2016 and July 31, 2015.

 

   April 30,   July 31, 
   2016   2015 
   (Unaudited)     
         
Unsecured notes payable originally issued on September 30, 2009 and November 30, 2010, due in full on November 30, 2015, bearing interest at 3.5% per annum due monthly.  $   $39,658 
Unsecured note payable issued on March 26, 2012, due on demand, bearing interest at 1% per annum due monthly.   940,000    810,000 
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1% per annum due monthly.   470,000    405,000 
Unsecured note payable issued on July 23, 2013, due on July 5, 2016, bearing interest at 1.2% per annum due monthly.   41,924    136,728 
Unsecured note payable issued on December 20, 2011, due on October 31, 2015, bearing interest at 15% per annum due monthly.   1,786,000    1,539,000 
Unsecured note payable issued on June 28, 2013, due on October 31, 2015, bearing interest at 15% per annum due monthly.   188,000    162,000 
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.   658,000    931,500 
Unsecured note payable issued on December 18, 2015, due on February 29, 2019, bearing interest at 12% per annum due monthly.   940,000     
Unsecured note payable issued on February 5, 2016, due in 23 installments of JPY 3,000,000 beginning in February 2016 and a final installment of JPY 31,000,000 in January 2019, bearing interest at 12% per annum due monthly.   940,000     
Unsecured note payable resulting from the Company co-signing for debt of a vendor in 2010.  The note is due on demand, bearing interest at 18% per annum due monthly.   178,600    348,300 
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.   282,000    243,000 
Unsecured notes payable, non-interest bearing, due on demand   42,699    48,855 
Total notes payable   6,467,223    4,664,041 
Less: current portion of notes payable   3,731,823    3,489,541 
Long-term portion of notes payable  $2,735,400   $1,174,500 

 

Of the $6,467,223 of total debt outstanding as of April 30, 2016, $3,647,223 is either due on demand or will become due during the year ended July 31, 2016, $827,200 will become due during the year ended July 31, 2017, $620,400 will become due during the year ended July 31, 2018, and $1,372,400 is due during the year ended July 31, 2019.

 

As of April 30, 2016, we also had an outstanding note payable balance due to our Chairman and CEO amounting to $984,235 and an outstanding note payable balance due to our President amounting to $193,875. The note payable balances are non-interest bearing and are due on demand.

 

On March 5, 2015, we entered into a convertible note agreement for total principal borrowings of JPY 200,000,000 ($1,620,000 at July 31, 2015). The amounts are due on March 5, 2016 and bear interest at a rate of 1% per annum. At the option of the debt holder, beginning 40 days after the issuance of the note, the debt holder may convert the outstanding balance of the note into shares of common stock at a conversion rate equal to one share per JPY130.90 or $1.10 of outstanding principal and accrued interest. In February 2016, we made a payment of 30 million Yen (approximately $249,000) on the outstanding principal of the convertible note payable, and the holder has agreed to extend the maturity date for an additional 6 months. The revised maturity date is September 5, 2016. As of April 30, 2016, the remaining outstanding balance amounted to JPY 170,000,000 ($1,598,000 at April 30, 2016).  

 

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

ITEM 4 - CONTROLS AND PROCEDURES

 

This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

 

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Internal Control over Financial Reporting

 

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management previously determined that the Company has a material weakness because of its lack of personnel on staff with significant understanding of GAAP and practical experience in the use and application of GAAP resulted in prior periods in failures to recognize, record, and otherwise account for financial events and relationships in accordance with GAAP. The Company proposes to remediate the material weakness by pursuing a search effort to recruit and employ the accounting personnel that have the knowledge, experience, and training in GAAP that will improve the Company’s ability to avoid GAAP errors in recording and accounting for its financial transactions, so the material weakness was not remediated as of April 30, 2016.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this Report, the Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of the identification of a material weakness in internal control over financial reporting described above, which we view as an integral part of our disclosure controls and procedures, our disclosure controls and procedures were not effective as of April 30, 2016. Nevertheless, based on a number of factors, including the management’s internal review of our processes and procedures, assistance of consultants on financial controls and reporting processes, and the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended April 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

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PART II - OTHER INFORMATION

 

ITEM 5 – OTHER INFORMATION 

 

None

 

 

ITEM 6 – EXHIBITS

 

The following exhibits are filed as part of this Report:

 

Exhibit No.   Description
     
10.1   First Amendment to Convertible Debenture effective March 5, 2016
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GRAND PERFECTA, INC.  
       
       
June 14, 2016 By:  /s/ Shuya Watanabe  
    Shuya Watanabe  
    Chief Executive Officer,
(Principal Executive Officer)
 
       
       
June 14, 2016 By:  /s/ Masashi Takegaki  
    Masashi Takegaki  
    Chief Financial Officer
(Principal Financial Officer)
 

 

 

 

 

 

 

 

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