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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

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, 2017

 

OR

 

o 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 46-5732930
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification Number)

 

Koyo Building, 2F, 2-36-10 Minamisuna
Koto-ku, Tokyo 136-0076 Japan
(Address of Principal Executive Offices including Zip Code)

 

+81-3-5632-7251
(Registrant's Telephone Number, Including Area Code)

 

21st Floor, South Tower, New Pier Takeshiba
1-16-1, Kaigan, Minato-ku, Tokyo, Japan
(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 x    NO o

 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

 

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

 

As of June 13, 2017, 31,800,000 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 18
   
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
   
ITEM 4 – CONTROLS AND PROCEDURES 23
   
PART II – OTHER INFORMATION 24
   
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 24
   
ITEM 5– OTHER INFORMATION 24
   
ITEM 6 – EXHIBITS 24
   
SIGNATURES 25

 

 

 

 

 

 

 

 

 2 
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

Consolidated Balance Sheets at April 30, 2017 (Unaudited) and July 31, 2016

 

Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended April 30, 2017 and 2016

 

Consolidated Statements of Comprehensive Income (Unaudited) — Three and Nine Months Ended April 30, 2017 and 2016

 

Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended April 30, 2017 and 2016

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 3 
 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

   April 30,   July 31, 
   2017   2016 
   (Unaudited)     
Assets          
Current assets          
Cash  $53,746   $83,295 
Accounts receivable, net   1,299,922    738,924 
Accounts receivable - related party   108,000     
Current portion of notes receivable   2,184,041    2,457,846 
Deferred tax assets, current portion   102,864    112,008 
Prepaid expenses and other current assets   11,861    12,660 
Total current assets   3,760,434    3,404,733 
           
Property and equipment, net   182,147    242,749 
           
Other assets          
Long-term notes receivables, net of current portion   613,218    644,543 
Deferred tax assets, long-term portion   569,706    620,347 
Goodwill   6,841,703    7,449,853 
Intangible assets, net   91,554    126,447 
Other assets   556,784    675,382 
Total other assets   8,672,965    9,516,572 
Total assets  $12,615,546   $13,164,054 
           
Liabilities and Stockholders' Deficit          
           
Current liabilities          
Accounts payable and accrued expenses  $3,208,576   $2,665,190 
Accounts payable to related party   124,034    278,977 
Deferred revenues   951,816    1,424,008 
Current portion of notes payable   3,694,882    3,797,916 
Notes payable to related parties, net of discount   3,005,125    2,777,069 
Convertible note payable   270,000    1,078,000 
Taxes payable   165,674    310,229 
Total current liabilities   11,420,107    12,331,389 
Long-term portion of notes payable, net of current portion   1,215,000    2,077,600 
Total liabilities   12,635,107    14,408,989 
           
Commitments and contingencies          
           
Stockholders' deficit          
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 100,000 shares issued and outstanding as of April 30, 2017 (unaudited) and July 31, 2016   100    100 
Common stock, $0.001 par value, 500,000,000 shares authorized, 31,800,000 (unaudited) and 30,100,000 shares issued and outstanding as of April 30, 2017 and July 31, 2016, respectively   31,800    30,100 
Additional paid-in capital   5,730,768    4,062,308 
Accumulated other comprehensive income   331,295    297,999 
Accumulated deficit   (6,316,024)   (5,855,880)
Total GPI stockholders' deficit   (222,061)   (1,465,373)
Noncontrolling interest   202,500    220,438 
Total stockholders' deficit   (19,561)   (1,244,935)
Total liabilities and stockholders' deficit  $12,615,546   $13,164,054 

 

 

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, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Net sales  $2,977,714   $3,557,795   $9,700,382   $10,805,970 
Total revenues   2,977,714    3,557,795    9,700,382    10,805,970 
                     
Operating expenses:                    
Cost of sales   748,942    1,397,181    2,839,543    3,768,863 
Depreciation and amortization expense   21,959    27,093    67,451    65,658 
Advertising   39,862    35,806    96,612    133,951 
Rent expense   207,321    227,656    607,395    650,469 
Salaries and wages   1,010,713    1,222,401    3,324,561    3,706,432 
Other general and administrative expenses   823,962    1,236,321    3,044,370    3,357,834 
Total operating expenses   2,852,759    4,146,458    9,979,932    11,683,207 
                     
Income (loss) from operations   124,955    (588,663)   (279,550)   (877,237)
                     
Other income (expense):                    
Loss on settlement of note receivable               (1,312,276)
Other income (loss)   121,564    17,761    125,026    30,892 
Gain on exchange   1,508    1,564    17,912    8,642 
Interest income   2,100    1,223    8,118    8,471 
Interest expense   (207,516)   (180,908)   (638,347)   (479,679)
Total other income (expense)   (82,344)   (160,360)   (487,291)   (1,743,950)
                     
Income (loss) before provision for income taxes   42,611    (749,023)   (766,841)   (2,621,187)
Provision for (benefit from) income taxes   17,084    (374,512)   (306,697)   (654,456)
Net income (loss)   25,527    (374,511)   (460,144)   (1,966,731)
Less: net income (loss) attributable to noncontrolling interest       (24)       (39)
Net income (loss) attributable to GPI  $25,527   $(374,487)  $(460,144)  $(1,966,692)
                     
Net income (loss) per share, basic and diluted  $0.00   $(0.01)  $(0.01)  $(0.07)
Weighted average number of common shares outstanding, basic and diluted   31,257,303    30,011,111    31,067,033    29,879,562 

 

 

See accompanying notes to consolidated financial statements

 

 5 
 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   For the Three Months Ended   For the Nine Months Ended 
   April 30,   April 30,   April 30,   April 30, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Net income (loss)  $25,527   $(374,511)  $(460,144)  $(1,966,731)
Other comprehensive income (loss), net of tax:                    
Foreign currency translation adjustments   (14,570)   (18,353)   33,296    50,887 
Total other comprehensive income (loss), net of tax   (14,570)   (18,353)   33,296    50,887 
Comprehensive income (loss)   10,957    (392,864)   (426,848)   (1,915,844)
Comprehensive income (loss) attributable to noncontrolling interest   4,500    29,665    (17,938)   34,678 
Comprehensive income (loss) attributable to GPI stockholders  $15,457   $(363,199)  $(444,786)  $(1,881,166)

 

 

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, 
   2017   2016 
   (Unaudited)   (Unaudited) 
Cash flows from operating activities          
Net loss  $(460,144)  $(1,966,731)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   67,451    65,658 
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)
Loss on write-off of notes receivables   23,000     
Share-based compensation       64,822 
Amortization of debt discount   41,521     
           
Changes in operating assets and liabilities:          
Accounts receivable   (634,993)   (550,007)
Accounts receivable - related party   (110,400)    
Prepaid expenses and other current assets   (143)   (154,884)
Other assets   65,051    (38,231)
Accounts payable and accrued expenses   714,894    1,071,758 
Accounts payable to related party   (135,106)    
Deferred revenue   (363,857)   (53,982)
Taxes payable   (121,880)   (642,329)
           
Net cash used in operating activities   (914,606)   (909,783)
           
Cash flows from investing activities          
Purchase of property and equipment       (67,561)
Proceeds from sale of property and equipment       31,692 
Proceeds from collection of related party receivables, net       534,256 
Proceeds from collection of notes receivables   460,918    234,966 
Acquisition of subsidiaries, net of cash acquired       (175,925)
Payments for notes receivable lending   (430,891)   (390,464)
Net cash provided by investing activities   30,027    166,964 
           
Cash flows from financing activities          
Proceeds from notes payable   506,000    1,700,447 
Payments on notes payable   (1,002,800)   (746,790)
Payments on convertible note payable   (736,000)   (255,000)
Proceeds from related party notes payable   920,000     
Payments on related party notes payable   (456,780)    
Proceeds from sale of common stock   1,630,000     
           
Net cash provided by financing activities   860,420    698,657 
           
Effect of exchange rate fluctuations on cash   (5,390)   5,864 
           
Net change in cash   (29,549)   (38,298)
Cash, beginning of the period   83,295    75,778 
Cash, end of the period  $53,746   $37,480 
           
Supplemental disclosure of cash flow information:          
Interest paid  $596,826   $458,444 
Income taxes paid  $   $550,014 
           
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)
Increase in additional paid in capital and debt discount for imputed interest  $40,160   $ 

 

See accompanying notes to consolidated financial statements

 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, Grand Perfecta completed an Agreement and Plan of Reorganization whereby it acquired 100% of the issued and outstanding shares of Link Bit Consulting Co, Ltd. (“LinkBit”), 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, Grand Perfecta 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. On January 7, 2016, Sports Perfecta acquired 100% of the outstanding stock of Just Mobile Sdn. Bhd. (“Just Mobile”), a Malaysian company. On January 20, 2016, Just Mobile changed its name to Sports Perfecta Technologies Sdn Bhd (“SPT”). The operations of Just Mobile are referred to as SPT after the acquisition date of January 7, 2016 (see Note 6).

 

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. LinkBit currently operates 7 websites through its various subsidiaries, which generate substantially all of the Company’s revenue.

 

Going Concern

 

As a result of continuing operating losses and negative cash from operations, substantial doubt exists about the Company’s ability to continue as a going concern. Management’s plan is to improve sales through the introduction of new contents and products and further reduce costs, including a shift of its broadcast program from satellite television to web TV.  To finance operations while it improves operating results, the Company sold $1 million of common stock in August 2016 and $630,000 in April 2017. If necessary, the Company will continue financing activity such as taking loans and asking existing creditors to convert their loans to shares of the Company’s common stock.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

  

The accompanying unaudited consolidated financial statements of the Company as of April 30, 2017, and for the three and nine months ended April 30, 2017 and 2016, 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, 2017 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, 2016 and 2015 included in the Company's Form 10-K filed on November 8, 2016.

 

 

 

 

 8 
 

 

Principles of Consolidation

 

The accompanying 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.

 

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’ deficit 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’ deficit.

 

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, 
   2017   2016 
         
Japanese Yen to USD   0.0090    0.0098 
Hong Kong Dollars to USD   0.1285    0.1289 
Malaysian Ringgit to USD   0.2302    0.2485 

 

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, 
   2017   2016 
         
Japanese Yen to USD   0.0092    0.0085 
Hong Kong Dollars to USD   0.1289    0.1289 
Malaysian Ringgit to USD   0.2318    0.2392 

 

 

 

 

 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, 2017 (unaudited) or July 31, 2016.

 

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, 2017 (unaudited) or July 31, 2016.

 

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. As of July 31, 2016, the assessment for impairment found that the goodwill recorded for the acquisition of Umajin HK was impaired due to the ongoing and projected future losses of Umajin HK. As a result, an impairment charge of $99,502 was recorded during the year ended July 31, 2016. There was no impairment recorded during the three or nine months ended April 30, 2017 or 2016.

 

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 long-lived assets identified during the three or nine months ended April 30, 2017 or 2016.

 

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.

 

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).

 

 

 

 

 10 
 

 

The Company has determined that the book value of its outstanding financial instruments as of April 30, 2017 (unaudited) and July 31, 2016 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, Hong Kong, Malaysia and the United States 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 11).

 

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, 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 the 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. 

 

Basic and Diluted Earnings Per Share

 

In accordance with ASC 260, Earnings Per Share, the basic income (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted average common shares outstanding during the period. Diluted income (loss) 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 (loss) per share because their impact was anti-dilutive. During the nine months ended April 30, 2017 and 2016, the Company had total options of 3,000,000 which were excluded from the computation of net income (loss) per share because they are anti-dilutive. During the nine months ended April 30, 2017 and 2016, the Company had convertible notes convertible into 245,455 and 1,452,727, respectively, shares of common stock which were excluded from the computation because they are anti-dilutive. As a result, the basic and diluted loss per share were the same for each of the periods presented.

 

 

 

 

 11 
 

  

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 consolidated 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 the Company’s 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 the Company’s consolidated financial statements.

 

3.  PROPERTY AND EQUIPMENT, NET

 

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

 

   April 30,   July 31, 
   2017   2016 
   (Unaudited)     
         
Buildings and fixtures  $291,251   $317,140 
Autos and trucks   272,768    297,014 
Tools and equipment   494,294    538,231 
Computer software   1,426,898    1,553,734 
           
    2,485,211    2,706,119 
           
Less: accumulated depreciation   (2,303,064)   (2,463,370)
           
   $182,147   $242,749 

 

Depreciation expense amounted to $13,595 (unaudited) and $18,149 (unaudited) for the three months ended April 30, 2017 and 2016, respectively. Depreciation expense amounted to $41,692 (unaudited) and $54,467 (unaudited) for the nine months ended April 30, 2017 and 2016, respectively.

 

4.  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, 2017 and July 31, 2016, the Company had total outstanding notes receivable of $2,797,259 (unaudited) and $3,102,389, respectively. The portion of these outstanding notes receivables that were either due on demand or had scheduled due dates within one year amounted to $2,184,041 (unaudited) and $2,457,846 as of April 30, 2017 and July 31, 2016, respectively.

 

 

 

 12 
 

 

The future scheduled maturities of outstanding notes receivables as of April 30, 2017 based on contractual due dates are as follows.

 

   Year Ended 
   July 31, 
     
2017 (remainder of)  $2,184,041 
2018    
2019   4,491 
2020   11,870 
2021   13,500 
Thereafter   583,357 
Total  $2,797,259 

 

5.  GOODWILL

 

The Company has recorded goodwill relating to the purchase of Media 21, Inc. in 2011. The following is a summary of the activity relating to goodwill for the nine months ended April 30, 2017.

 

Balance as of July 31, 2016  $7,449,853 
Foreign currency translation adjustment   (608,150)
Balance as of April 30, 2017 (unaudited)  $6,841,703 

 

6.  ACQUISITIONS

 

On January 7, 2016, Sports Perfecta entered into a Share Purchase Agreement to acquire 100% of the outstanding shares of SPT. The total aggregate purchase price for the outstanding shares of SPT amounted to $200,000.

 

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)
Total Purchase Price  $200,000 

 

Intangible assets acquired represent developed technology which has an estimated useful life of 4 years. Amortization expense for intangible assets for three months ended April 30, 2017 and 2016 amounted to $8,364 and $8,944, respectively. Amortization expense for intangible assets for the nine months ended April 30, 2017 and 2016 amounted to $25,759 and $11,191, respectively. Estimated future expected amortization of intangible assets as of April 30, 2017 is as follows.

 

   Year Ended 
   July 31, 
     
2017 (remainder of)  $8,527 
2018   34,108 
2019   34,108 
2020   14,811 
Total  $91,554 

 

 

 

 

 13 
 

 

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.

 

7.  NOTES PAYABLE

 

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

 

   April 30,   July 31, 
   2017   2016 
   (Unaudited)     
         
Unsecured note payable issued on June 15, 2016, due on June 30, 2017, bearing interest at 15% per annum due monthly.  $900,000   $980,000 
Unsecured note payable issued on December 20, 2011, due on December 31, 2017, bearing interest at 15% per annum due monthly.   1,710,000    1,862,000 
Unsecured note payable issued on June 28, 2013, due on December 31, 2017, bearing interest at 15% per annum due monthly.   180,000    196,000 
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.   90,000    539,000 
Unsecured note payable issued on December 18, 2015, due in 20 monthly installments from July 31, 2017 through February 29, 2019, bearing interest at 12% per annum due monthly.   900,000    980,000 
Unsecured note payable issued on February 5, 2016, due in 23 installments of JPY 3,000,000 beginning in February 2017 and a final installment of JPY 31,000,000 in January 2019, bearing interest at 12% per annum due monthly.   819,000    980,000 
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.   270,000    294,000 
Unsecured notes payable, non-interest bearing, due on demand   40,882    44,516 
Total notes payable   4,909,882    5,875,516 
Less: current portion of notes payable   3,694,882    3,797,916 
Long-term portion of notes payable  $1,215,000   $2,077,600 

 

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

 

Future scheduled maturities of long-term debt are as follows:

 

   Year Ended 
   July 31, 
     
2017 (remainder of)  $1,156,882 
2018   3,024,000 
2019   729,000 
Total  $4,909,882 

 

 

 

 

 14 
 

 

8.  NOTES PAYABLE TO RELATED PARTIES

 

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

 

   April 30,   July 31, 
   2017   2016 
   (Unaudited)     
         
Unsecured note payable issued on March 26, 2012, due on demand, bearing interest at 1% per annum due monthly. The balance is due to a related party entity which is owned by one of the directors of the Company.  $900,000   $980,000 
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1% per annum due monthly. The balance is due to a related party entity which is owned by one of the directors of the Company.   450,000    490,000 
Unsecured note payable issued on June 14, 2016, non-interest bearing and due on June 30, 2017 discounted using an effective interest rate of 12%. The balance is due to a related party entity which is owned by one of the directors of the Company.   270,000    294,000 
Unsecured note payable issued on September 21, 2016, due on June 30, 2017 discounted using an effective interest rate of 12%. The balance is due to a related party entity which is owned by one of the directors of the Company.   270,000     
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.   1,125,503    830,118 
Unsecured note payable due to the Company's President, non-interest bearing and due on demand.       196,000 
Total notes payable to related parties   3,015,503    2,790,118 
Discount on notes payable to related parties   10,378    13,049 
Notes payable to related parties, net  $3,005,125   $2,777,069 

 

The Company imputed interest on the above notes payable received on June 14, 2016 and September 21, 2016 using the effective interest rate of 12%, which approximated the Company’s incremental borrowing rate. The total interest imputed amounted to $57,034, including $16,874 during the year ended July 31, 2016 and $40,160 during the nine months ended April 30, 2017. The imputed interest was recorded as a discount to the note payable and an increase to additional paid-in capital. The amounts are being amortized as interest expense through the maturity dates of the notes, which amounted to $15,196 and $41,521 during the three and nine months ended April 30, 2017, respectively.

 

9.  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 were originally 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. During the year ended July 31, 2016, we made payments of $783,000 on the outstanding principal of the convertible note payable, and the debt holder agreed to extend the maturity date for an additional 6 months until September 5, 2016 and then through December 31, 2016. During the nine months ended April 30, 2017, the debt holder agreed to further extend the due date until June 30, 2017. As of April 30, 2017, the remaining outstanding balance amounted to JPY 30,000,000 ($270,000 at April 30, 2017).

 

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, 2017 and 2016 were as follows.

 

   Nine Months Ended 
   April 30,   April 30, 
   2017   2016 
   (Unaudited)   (Unaudited) 
         
Expected life in years   0.17    0.35 
Stock price volatility   30.2%    32.4% 
Risk-free interest rate   0.24%    0.22% 
Expected dividends   None    None 
Forfeiture rate   NA    NA 

 

 

 

 

 15 
 

 

10.  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, 2017 and July 31, 2016.

 

Common Stock Transactions

 

On August 23, 2016, the Company entered into an Offshore Securities Purchase Agreement with an investor whereby the Company sold 1,000,000 shares of common stock for a purchase price of JPY100,000,000 (US $1,000,000 as of August 23, 2016).

 

On April 10, 2017, the Company entered into an Offshore Securities Purchase Agreement with an investor whereby the Company sold 700,000 shares of common stock for a purchase price of JPY70,000,000 (US $630,000 as of April 10, 2017).

 

Stock Options

 

In connection with the sale of stock on June 11, 2014, the Company granted an option to the buyer to purchase an additional 3,000,000 shares of common stock for a purchase price of $3 million at any time prior to June 11, 2019. The options are outstanding as of April 30, 2017.

 

11.  RELATED PARTY TRANSACTIONS

 

As of April 30, 2017 and July 31, 2016, the Company had $3,015,503 (unaudited) and $2,790,118, respectively of notes payable due to related parties (see Note 8).

 

The Company and Umajin Japan, a related party company owned by one of its directors, revised a 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) for a total of 23 million Yen per month. The Company and Umajin Japan agreed to reduce the monthly fees from 23 million Yen to 11 million Yen subsequent to October 2016. Subsequent to February 2017, the Company and Umajin Japan agreed to reduce the fee to 8 million Yen per month through July 2017.

 

Total fees paid to Umajin Japan for the three months ended April 30, 2017 and 2016 amounted to $220,800 and $543,056, respectively. Total fees paid to Umajin Japan for the nine months ended April 30, 2017 and 2016 amounted to $1,058,619 and $1,373,056, respectively. The fees paid to Umajin Japan are included in cost of sales in the accompanying consolidated statements of operations. As of April 30, 2017 and July 31, 2016, the Company had $124,034 (unaudited) and $278,977 due to Umajin Japan, respectively, which is reflected in accounts payable to related party in the accompanying consolidated balance sheets.

 

During the three months ended April 30, 2017 and 2016, the Company received consulting services from Cheval Attache Co., Ltd., a related party entity owned by one of its directors, of approximately $29,808 and $25,500, respectively, which are included in cost of sales in the accompanying consolidated statements of operations. During the nine months ended April 30, 2017 and 2016, the Company received consulting services from Cheval Attache Co., Ltd. of $90,072 and $76,500, respectively.

 

On October 17, 2016, the Company entered into an agreement with Clara Ltd., a related party entity owned by one of its directors, allowing Clara Ltd. access to the Company’s database containing certain horse racing information owned by the Company for an indefinite period. As compensation, the Company will receive a total of 30,000,000 Yen, payable in 10 monthly installments starting in November 2016. The amount due under this agreement of $108,000 is included in accounts receivable – related party on the accompanying consolidated balance sheet as of April 30, 2017. The revenue related to this transaction of $276,000 is reflected as net sales on the accompanying consolidated statement of operations for the nine months ended April 30, 2017.

 

 

 

 

 

 16 
 

 

Effective November 2, 2015, the Company entered into a Note Payable and Satisfaction Agreement (the “Satisfaction Agreement”) with Umajin Japan in order to settle an outstanding receivable balance. 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.

 

12.  CONTINGENCIES

 

The Company has received notices from the Internal Revenue Service of potential penalties resulting from the failure to file certain returns for the calendar years December 31, 2013 through 2015. The total maximum potential losses resulting from these penalties amount to approximately $490,000. Management believes it is reasonably possible the Company will incur losses related to these penalties, but does not believe it is probable. As a result, the Company has not reflected any expense or accrual related to these penalties in the accompanying consolidated financial statements as of April 30, 2017 or July 31, 2016.

 

 

 

 

 

 17 
 

 

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, 2016 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, 2016, 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”).

 

Organization

 

In May 2012 Grand Perfecta completed an Agreement and Plan of Reorganization whereby it acquired 100% of the issued and outstanding shares of LinkBit for 25,000,000 common shares in a transaction accounted for as a recapitalization of LinkBit. In May 2013 the Company issued 272,668 shares in exchange for 100% of the issued and outstanding shares of Umajin HK. In August 2015, Grand Perfecta formed 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. On January 7, 2016, Sports Perfecta acquired 100% of the outstanding stock of Just Mobile Sdn Bhd (“Just Mobile”), a Malaysian company. 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 the various websites owned and operated by the wholly owned subsidiaries of LinkBit, Umajin HK and Sports Perfecta. LinkBit currently operates 7 websites through its various subsidiaries, which generate substantially all of the Company’s revenue.

 

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.

 

 

 

 

 18 
 

 

Results of Operations for the Three Months Ended April 30, 2017 and 2016

 

The following are the results of our operations for the three months ended April 30, 2017 as compared to the three months ended April 30, 2016:

 

   For the Three Months Ended     
   April 30,   April 30,     
   2017   2016   $ Change 
             
Net sales  $2,977,714   $3,557,795   $(580,081)
Total revenue   2,977,714    3,557,795    (580,081)
                
Operating Expenses:               
Cost of sales   748,942    1,397,181    (648,239)
Depreciation expense   21,959    27,093    (5,134)
Advertising   39,862    35,806    4,056 
Rent expense   207,321    227,656    (20,335)
Salaries and wages   1,010,713    1,222,401    (211,688)
Other general and administrative expenses   823,962    1,236,321    (412,359)
Total operating expenses   2,852,759    4,146,458    (1,293,699)
                
Invoice (loss) from operations   124,955    (588,663)   713,618 
                
Other Income (Expense):               
Loss on settlement of note receivable            
Other income (loss)   121,564    17,761    103,803 
Gain (loss) on exchange   1,508    1,564    (56)
Interest income   2,100    1,223    877 
Interest expense   (207,516)   (180,908)   (26,608)
Total other income (expense)   (82,344)   (160,360)   78,016 
                
Net income (loss) before provision for income taxes   42,611    (749,023)   791,634 
Provision for (benefit from) income taxes   17,084    (374,512)   391,596 
Net income (loss)   25,527    (374,511)   400,038 
Less: net loss attributable to noncontrolling interest       (24)   24 
Net income (loss) attributable to GPI  $25,527   $(374,487)  $400,014 

 

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, 2017 as compared to the same period in 2016 due primarily to the content and platforms in certain of our service lines requiring new materials or methods to fulfill our customers’ needs. 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. The decrease in net sales was partially offset by an increase in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 8%.

 

Operating Expenses

 

Total operating expenses for the three months ended April 30, 2017 were $2,852,759, which represented a decrease of $1,293,699 as compared to the same period in 2016. Our operating expenses decreased due primarily to lower cost of sales from a reduction in sales volume, as well as from lower monthly service fees paid to Umajin Japan and lower television production costs. We also had lower salaries from a reduction in headcount as well as decreased salaries from officers and directors. Our general and administrative expenses were also lower due to higher professional costs in the prior year associated with our public filings, as well as with the establishment and operation of Sports Perfecta. The decrease in operating expenses was also partially offset by an increase in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 8%.

 

 

 

 

 19 
 

 

Other Income/ (Expenses)

 

Total other expense for the three months ended April 30, 2017 amounted to $82,344, which decreased by $78,016 as compared to the same period in 2016. The decrease in other expenses is primarily due to an increase in other income due to a reimbursement received from the cancelation of certain insurance policies. This decrease was offset partially by an increase in interest expense due to an increase in the outstanding notes payable during the period.

 

Results of Operations for the Nine Months Ended April 30, 2017 and 2016

 

The following are the results of our operations for the nine months ended April 30, 2017 as compared to the nine months ended April 30, 2016:

 

   For the Nine Months Ended     
   April 30,   April 30,     
   2017   2016   $ Change 
             
             
Net sales  $9,700,382   $10,805,970   $(1,105,588)
Total revenue   9,700,382    10,805,970    (1,105,588)
                
Operating Expenses:               
Cost of sales   2,839,543    3,768,863    (929,320)
Depreciation expense   67,451    65,658    1,793 
Advertising   96,612    133,951    (37,339)
Rent expense   607,395    650,469    (43,074)
Salaries and wages   3,324,561    3,706,432    (381,871)
Other general and administrative expenses   3,044,370    3,357,834    (313,464)
Total operating expenses   9,979,932    11,683,207    (1,703,275)
                
Loss from operations   (279,550)   (877,237)   597,687 
                
Other Income (Expense):               
Loss on settlement of note receivable       (1,312,276)   1,312,276 
Other income (loss)   125,026    30,892    94,134 
Gain (loss) on exchange   17,912    8,642    9,270 
Interest income   8,118    8,471    (353)
Interest expense   (638,347)   (479,679)   (158,668)
Total other income (expense)   (487,291)   (1,743,950)   1,256,659 
                
Net loss before provision for income taxes   (766,841)   (2,621,187)   1,854,346 
Benefit from income taxes   (306,697)   (654,456)   347,759 
Net loss   (460,144)   (1,966,731)   1,506,587 
Less: net loss attributable to noncontrolling interest       (39)   39 
Net loss attributable to GPI  $(460,144)  $(1,966,692)  $1,506,548 

 

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, 2017 as compared to the same period in 2016 due primarily to the content and platforms in certain of our service lines requiring new materials or methods to fulfill our customers’ needs. 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. The decrease in net sales was partially offset by an increase in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 8%.

 

Operating Expenses

 

Total operating expenses for the nine months ended April 30, 2017 were $9,979,932, which represented a decrease of $1,703,275 as compared to the same period in 2016. Our operating expenses decreased due primarily to lower cost of sales from a reduction in sales volume, as well as from lower monthly service fees paid to Umajin Japan and lower television production costs. We also had lower salaries from a reduction in headcount as well as decreased salaries from officers and directors. Our general and administrative expenses were also lower due to higher professional costs in the prior year associated with our public filings, as well as with the establishment and operation of Sports Perfecta. The decrease in operating expenses was also partially offset by an increase in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 8%.

 

 

 

 

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Other Income/ (Expenses)

 

Total other expense for the nine months ended April 30, 2017 amounted to $487,291, which decreased by $1,256,659 as compared to the same period in 2016. The decrease in other expenses is primarily due to a loss on the settlement of a note receivable of $1,312,276 from Umajin Japan during 2016, a related party entity owned by one of our directors. This decrease was offset partially by an increase in interest expense due to an increase in the outstanding notes payable during the period. Our other income was higher during the nine months ended April 30, 2017 primarily due to reimbursements received on certain insurance policies during the current quarter.

 

Going Concern and Capital Resources 

 

As of April 30, 2017, we had cash of $53,746 and a working capital deficit of $7,659,673 as compared to cash of $83,295 and a working capital deficit of $8,926,656 as at July 31, 2016. The decrease in cash as of April 30, 2017 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 the sale of common stock, as well as additional note payable borrowing during the period.

 

Based on operating losses and negative cash from operations, substantial doubt exists about the Company’s ability to continue as a going concern. Management’s plan in this regard is to improve sales and further reduce costs, including the shift of its broadcast program from satellite television to web TV. To finance operations while it improves operating results, it has sold $1 million of common stock in August 2016 and $630,000 of common stock in April 2017, and if necessary will continue financing activity such as taking loans, issuing new stock and asking existing creditors to convert their loans to shares of the Company’s common stock.

 

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, 2017 and 2016.

 

   For the Nine Months Ended 
   April 30,   April 30, 
   2017   2016 
Cash flows used in operating activities  $(914,606)  $(909,783)
Cash flows provided by investing activities  $30,027   $166,964 
Cash flows provided by financing activities  $860,420   $698,657 

 

Net cash flows used in operating activities for the nine months ended April 30, 2017 amounted to $914,606, compared to cash flows used in operating activities of $909,783 for the nine months ended April 30, 2016. Net cash flows used in operating activities during the nine months ended April 30, 2017 were consistent with the cash used in operations during the same period in 2016. Our net loss was $460,144 during the nine months ended April 30, 2017, as compared to a net loss of $1,966,731 for the same period in 2016. However, our net loss in 2016 included non-cash expenses of $1,312,276 for the loss on settlement of a note receivable from Umajin Japan. After factoring in the adjustments for non-cash expenses, our net loss during the nine months ending April 30, 2016 was comparable with our net loss during the current year.

 

Net cash provided by investing activities amounted to $30,027 for the nine months ended April 30, 2017, compared to net cash provided by investing activities of $166,964 for the nine months ended April 30, 2016. The decrease in cash flows provided by investing activities during the nine months ended April 30, 2017 was due primarily to lower amounts collected from the repayment of notes receivables and amounts outstanding from related parties during the current year.

 

 

 

 

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Net cash provided by financing activities for the nine months ended April 30, 2017 amounted to $860,420, compared to net cash provided by financing activities of $698,657 for the nine months ended April 30, 2016. The cash provided by financing activities during the nine months ended April 30, 2017 was the result of proceeds of $1,630,000 for the sale of common stock, as well as $506,000 in additional note payable borrowing and $920,000 in borrowing from related parties. These amounts were offset by payments of $1,002,800 for repayments of notes payable, $736,000 for the repayment of a convertible note payable and $456,780 for the repayment of related party notes payable. During the nine months ended April 30, 2016, the cash provided by financing activities was the result of proceeds from additional borrowing of $1,700,447, offset by repayments of outstanding notes payable of $746,790 and repayments of $255,000 of convertible notes payable.

 

Description of Indebtedness

 

The following is a summary of our outstanding notes payable as of April 30, 2017 and July 31, 2016.

 

   April 30,   July 31, 
   2017   2016 
   (Unaudited)     
         
Unsecured note payable issued on June 15, 2016, due on June 30, 2017, bearing interest at 15% per annum due monthly.  $900,000   $980,000 
Unsecured note payable issued on December 20, 2011, due on December 31, 2017, bearing interest at 15% per annum due monthly.   1,710,000    1,862,000 
Unsecured note payable issued on June 28, 2013, due on December 31, 2017, bearing interest at 15% per annum due monthly.   180,000    196,000 
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.   90,000    539,000 
Unsecured note payable issued on December 18, 2015, due in 20 monthly installments from July 31, 2017 through February 29, 2019, bearing interest at 12% per annum due monthly.   900,000    980,000 
Unsecured note payable issued on February 5, 2016, due in 23 installments of JPY 3,000,000 beginning in February 2017 and a final installment of JPY 31,000,000 in January 2019, bearing interest at 12% per annum due monthly.   819,000    980,000 
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.   270,000    294,000 
Unsecured notes payable, non-interest bearing, due on demand   40,882    44,516 
Total notes payable   4,909,882    5,875,516 
Less: current portion of notes payable   3,694,882    3,797,916 
Long-term portion of notes payable  $1,215,000   $2,077,600 

 

Of the $4,909,882 of total debt outstanding as of April 30, 2017, $1,156,882 is either due on demand or will become due during the remainder of the year ended July 31, 2017, $3,024,000 will become due during the year ended July 31, 2018, and $729,000 will become due during the year ended July 31, 2019.

 

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 were originally 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 our common stock at a conversion rate equal to one share per JPY130.90 or $1.10 of outstanding principal and accrued interest. During the year ended July 31, 2016, we made payments of $783,000 on the outstanding principal of the convertible note payable, and the debt holder agreed to extend the maturity date for an additional 6 months until September 5, 2016 and then through December 31, 2016. During the nine months ended April 30, 2017, the debt holder agreed to further extend the due date until June 30, 2017. As of April 30, 2017, the remaining outstanding balance amounted to JPY 30,000,000 ($270,000 at April 30, 2017).

 

 

 

 

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We also have notes payable outstanding from related parties, all of which are either due on demand or due during the year ended July 31, 2017. The following is a summary of our outstanding balances due to related parties as of April 30, 2017 and July 31, 2016.

 

   April 30,   July 31, 
   2017   2016 
   (Unaudited)     
         
Unsecured note payable issued on March 26, 2012, due on demand, bearing interest at 1% per annum due monthly. The balance is due to a related party entity which is owned by one of the directors of the Company.  $900,000   $980,000 
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1% per annum due monthly. The balance is due to a related party entity which is owned by one of the directors of the Company.   450,000    490,000 
Unsecured note payable issued on June 14, 2016, non-interest bearing and due on June 30, 2017 discounted using an effective interest rate of 12%. The balance is due to a related party entity which is owned by one of the directors of the Company.   270,000    294,000 
Unsecured note payable issued on September 21, 2016, due on June 30, 2017 discounted using an effective interest rate of 12%. The balance is due to a related party entity which is owned by one of the directors of the Company.   270,000     
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.   1,125,503    830,118 
Unsecured note payable due to the Company's President, non-interest bearing and due on demand.       196,000 
Total notes payable to related parties   3,015,503    2,790,118 
Discount on notes payable to related parties   10,378    13,049 
Notes payable to related parties, net  $3,005,125   $2,777,069 

 

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.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our interim principal executive officer and our interim principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We carried out an evaluation under the supervision and with the participation of our management of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, we concluded that our disclosure controls and procedures were effective as of April 30, 2017.

 

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, 2017 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 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On April 10, 2017, the Company entered into an Offshore Securities Purchase Agreement with an investor whereby the Company sold 700,000 shares of common stock for a purchase price of JPY70,000,000 (US $630,000 as of April 10, 2017). The shares were sold in reliance on Regulation S adopted under the Securities Act of 1933.

 

ITEM 5 – OTHER INFORMATION

 

None.

 

ITEM 6 – EXHIBITS

 

The following exhibits are filed as part of this Report:

 

Exhibit No.   Description
     
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 13, 2017 By: /s/ Shuya Watanabe  
    Shuya Watanabe  
    Chief Executive Officer,
(Principal Executive Officer)
 
       
       
June 13, 2017 By: /s/ Masashi Takegaki  
    Masashi Takegaki  
    Chief Financial Officer
(Principal Financial Officer)
 

 

 

 

 

 

 

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