Table of Contents

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 January 31, 2018

 

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)


NA
(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 March 14, 2018, 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

 

 

 

 

 

 

 

 

 

  i  

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

Consolidated Balance Sheets at January 31, 2018 (Unaudited) and July 31, 2017

 

Consolidated Statements of Operations (Unaudited) — Three and Six Months Ended January 31, 2018 and 2017

 

Consolidated Statements of Comprehensive Income (Unaudited) — Three and Six Months Ended January 31, 2018 and 2017

 

Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended January 31, 2018 and 2017

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

  ii  

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED BALANCE SHEETS

 

    January 31,     July 31,  
    2018     2017  
    (Unaudited)        
Assets                
                 
Current assets                
Cash   $ 134,321     $ 102,954  
Accounts receivable, net     1,311,746       1,085,276  
Accounts receivable - related party           27,300  
Current portion of notes receivable     2,142,643       2,057,251  
Deferred tax assets, current portion     208,536       206,270  
Prepaid expenses and other current assets     38,685       30,803  
Total current assets     3,835,931       3,509,854  
                 
Property and equipment, net     166,222       174,311  
                 
Other assets                
Long-term notes receivables, net of current portion     603,528       605,449  
Deferred tax assets, long-term portion     589,459       583,052  
Goodwill     6,993,741       6,917,722  
Other assets     189,425       183,590  
Total other assets     8,376,153       8,289,813  
Total assets   $ 12,378,306     $ 11,973,978  
                 
Liabilities and Stockholders' Equity (Deficit)                
                 
Current liabilities                
Accounts payable and accrued expenses   $ 3,585,075     $ 3,467,660  
Accounts payable to related party     127,812       109,813  
Deferred revenues     837,129       866,865  
Current portion of notes payable     4,641,790       4,427,536  
Debt to related parties, net of discount     3,297,794       3,241,794  
Taxes payable     945,032       514,021  
Total current liabilities     13,434,632       12,627,689  
Long-term portion of notes payable, net of current portion     46,000       737,100  
Total liabilities     13,480,632       13,364,789  
                 
Commitments and contingencies                
                 
Stockholders' equity (deficit)                
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 100,000 shares issued and outstanding as of January 31, 2018 (unaudited) and July 31, 2017     100       100  
Common stock, $0.001 par value, 500,000,000 shares authorized, 31,800,000 shares issued and outstanding as of January 31, 2018 (unaudited) and July 31, 2017, respectively     31,800       31,800  
Additional paid-in capital     5,752,362       5,752,362  
Accumulated other comprehensive income     318,479       325,864  
Accumulated deficit     (7,412,067 )     (7,705,687 )
Total GPI stockholders' equity (deficit)     (1,309,326 )     (1,595,561 )
Noncontrolling interest     207,000       204,750  
Total stockholders' equity (deficit)     (1,102,326 )     (1,390,811 )
Total liabilities and stockholders' equity (deficit)   $ 12,378,306     $ 11,973,978  

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

  3  

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    For the Three Months Ended     For the Six Months Ended  
    January 31,     January 31,     January 31,     January 31,  
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
                         
Net sales   $ 3,377,137     $ 2,998,166     $ 5,948,216     $ 6,722,668  
Total revenues     3,377,137       2,998,166       5,948,216       6,722,668  
                                 
Operating expenses:                                
Cost of sales     729,787       970,663       1,374,831       2,090,601  
Depreciation and amortization expense     7,105       21,657       13,999       45,492  
Advertising     33,325       26,607       70,384       56,750  
Rent expense     107,422       157,195       207,695       400,074  
Salaries and wages     812,485       1,086,204       1,691,405       2,313,848  
Other general and administrative expenses     803,095       1,095,860       1,695,450       2,220,408  
Total operating expenses     2,493,219       3,358,186       5,053,764       7,127,173  
                                 
Income (loss) from operations     883,918       (360,020 )     894,452       (404,505 )
                                 
Other income (expense):                                
Other income     38       (186 )     73       3,462  
Gain on exchange     3,508       10,545       10,414       16,404  
Interest income     1,651       2,829       3,254       6,018  
Interest expense     (215,186 )     (230,060 )     (456,470 )     (430,831 )
Total other income (expense)     (209,989 )     (216,872 )     (442,729 )     (404,947 )
                                 
Income (loss) before income taxes     673,929       (576,892 )     451,723       (809,452 )
Provision for (benefit from) income taxes     235,875       (230,757 )     158,103       (323,781 )
Net income (loss)   $ 438,054     $ (346,135 )   $ 293,620     $ (485,671 )
                                 
Net income (loss) per share, basic and diluted   $ 0.01     $ (0.01 )   $ 0.01     $ (0.02 )
                               
Weighted average number of common shares outstanding, basic and diluted     31,800,000       31,100,000       31,800,000       30,975,000  

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

  4  

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

    For the Three Months Ended     For the Six Months Ended  
    January 31,     January 31,     January 31,     January 31,  
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
                         
Net income (loss)   $ 438,054     $ (346,135 )   $ 293,620     $ (485,671 )
Other comprehensive income (loss), net of tax:                                
Foreign currency translation adjustments     (39,732 )     56,410       (7,385 )     47,866  
Total other comprehensive income (loss), net of tax     (39,732 )     56,410       (7,385 )     47,866  
Comprehensive income (loss)     398,322       (289,725 )     286,235       (437,805 )
Comprehensive income (loss) attributable to noncontrolling interest     9,000       (15,750 )     2,250       (22,438 )
Comprehensive income (loss) attributable to GPI stockholders   $ 407,322     $ (305,475 )   $ 288,485     $ (460,243 )

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

  5  

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Six Months Ended  
    January 31,     January 31,  
    2018     2017  
    (Unaudited)     (Unaudited)  
Cash flows from operating activities                
Net income (loss)   $ 293,620     $ (485,671 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Depreciation and amortization     13,999       45,492  
Loss on write-off of notes receivable           23,250  
Amortization of debt discount     16,333       26,325  
                 
Changes in operating assets and liabilities:                
Accounts receivable     (208,788 )     (202,438 )
Accounts receivable - related party     27,000       (195,300 )
Prepaid expenses and other current assets     (7,035 )     (853 )
Other assets     (3,710 )     (19,755 )
Accounts payable and accrued expenses     78,211       610,096  
Accounts payable to related party     16,427       (32,393 )
Deferred revenue     (38,409 )     (411,840 )
Taxes payable     416,115       (158,076 )
                 
Net cash provided by (used in) operating activities     603,763       (801,163 )
                 
Cash flows from investing activities                
Purchase of property and equipment     (4,212 )      
Proceeds from collection of notes receivables     169,562       388,920  
Payments for notes receivable lending     (222,594 )     (290,600 )
Net cash provided by (used in) investing activities     (57,244 )     98,320  
                 
Cash flows from financing activities                
Proceeds from notes payable     180,000       511,500  
Payments on notes payable     (702,000 )     (790,500 )
Payments on convertible note payable           (744,000 )
Proceeds from related party notes payable     90,000       930,000  
Payments on related party notes payable     (86,400 )     (269,700 )
Proceeds from sale of common stock           1,000,000  
                 
Net cash provided by (used in) financing activities     (518,400 )     637,300  
                 
Effect of exchange rate fluctuations on cash     3,248       (4,415 )
                 
Net change in cash     31,367       (69,958 )
Cash, beginning of the period     102,954       83,295  
Cash, end of the period   $ 134,321     $ 13,337  
                 
Supplemental disclosure of cash flow information:                
Interest paid   $ 379,583     $ 404,506  
Income taxes paid   $     $  
                 
Supplemental disclosure of non-cash investing and financing information:                
Increase in additional paid in capital and debt discount for imputed interest   $     $ 40,160  

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

  6  

 

 

GRAND PERFECTA, INC.

 

NOTES TO UNAUDITED 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. 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.

 

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 and Umajin HK. LinkBit currently operates six websites through its various subsidiaries, which generate substantially all of the Company’s revenue. Umajin HK had been delivering information on horse racing to its users through its website, however it terminated its service at the end of June 2017. The Company is pursuing development of a fantasy sports offering through Sports Perfecta, which has not yet generated any significant revenue.

 

Going Concern

 

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 $1,630,000 of common stock during the year ended July 31, 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.

 

 

 

 

  7  

 

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

   

The accompanying unaudited consolidated financial statements of the Company as of January 31, 2018, and for the three and six months ended January 31, 2018 and 2017, 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 January 31, 2018 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, 2017 and 2016 included in the Company's Form 10-K filed on November 2, 2017.

 

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 subsidiary LinkBit. A wholly owned subsidiary, Umajin HK, had been delivering information on horse racing to its users through its website similar to LinkBit, however it terminated its service at the end of June 2017. 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.

 

 

 

  8  

 

 

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  
      January 31,       July 31,  
      2018       2017  
                 
Japanese Yen to USD     0.0092       0.0091  
Hong Kong Dollars to USD     0.1279       0.1280  
Malaysian Ringgit to USD     0.2562       0.2335  

 

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

 

    For the Six Months Ended  
    January 31,     January 31,  
    2018     2017  
             
Japanese Yen to USD     0.0090       0.0093  
Hong Kong Dollars to USD     0.1280       0.1289  
Malaysian Ringgit to USD     0.2407       0.2348  

 

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 January 31, 2018 (unaudited) or July 31, 2017.

 

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 January 31, 2018 (unaudited) or July 31, 2017.

 

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

 

 

 

 

  9  

 

 

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. There was no impairment recorded during the six months ended January 31, 2018 or 2017.

 

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 six months ended January 31, 2018 or 2017.

 

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).

 

The Company has determined that the book value of its outstanding financial instruments as of January 31, 2018 (unaudited) and July 31, 2017 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 had losses relating to the write off of notes receivables during the six months ended January 31, 2018 and 2017 of $0 and $23,250, respectively.

 

 

 

 

  10  

 

 

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 certain users, payment is received at the time of purchase and for others it is received after purchase. In either case, the Company recognizes revenue for per-item sales when the requested information is supplied to the user and collection is reasonably assured. 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 six months ended January 31, 2018 and 2017, the Company had total options of 3,000,000 which were excluded from the computation of net loss per share because they are anti-dilutive. During the six months ended January 31, 2017, the Company had convertible notes convertible into 240,000 shares of common stock which were excluded from the computation because they are anti-dilutive. There were no convertible notes payable outstanding during the six months ended January 31, 2018. As a result, the basic and diluted loss 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, 2017, including interim periods therein. Early application is not permitted.

 

In August 2015, FASB ASU 2014-09 was further amended with FASB ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date . Under FASB ASU 2015-14, the effective dates of FASB ASU 2014-09 for all entities were deferred by one year. The Company has not yet determined the impact of the adoption of FASB ASU 2014-09 will have on the Company’s financial statements.

 

 

 

 

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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.

 

3.  PROPERTY AND EQUIPMENT, NET

 

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

 

    January 31,     July 31,  
    2018     2017  
      (Unaudited)          
                 
Buildings and fixtures   $ 103,655     $ 102,528  
Autos and trucks     278,830       275,799  
Tools and equipment     432,593       423,632  
Computer software     1,458,607       1,442,753  
                 
      2,273,685       2,244,712  
                 
Less: accumulated depreciation     (2,107,463 )     (2,070,401 )
                 
    $ 166,222     $ 174,311  

 

Depreciation expense amounted to $7,105 (unaudited) and $14,048 (unaudited) for the three months ended January 31, 2018 and 2017, respectively. Depreciation expense amounted to $13,999 (unaudited) and $28,097 (unaudited) for the six months ended January 31, 2018 and 2017, respectively.

 

4.  NOTES RECEIVABLE

 

The Company’s outstanding notes receivable consist of unsecured advances, including interest ranging from 0% to 3% per annum, payable in full on dates extending through 2039. As of January 31, 2018 and July 31, 2017, the Company had total outstanding notes receivable of $2,746,171 (unaudited) and $2,662,700, respectively. The portion of these outstanding notes receivables that were either due on demand or had scheduled due dates within one year amounted to $2,142,643 (unaudited) and $2,057,251 as of January 31, 2018 and July 31, 2017, respectively.

 

The future scheduled maturities of outstanding notes receivables as of January 31, 2018 based on contractual due dates are as follows.

 

      Year Ended  
      July 31,  
         
  2018 (remainder of)     $ 2,142,643  
  2019       6,883  
  2020       9,065  
  2021        
  2022       28,187  
  Thereafter       559,393  
  Total     $ 2,746,171  

 

 

 

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5.  GOODWILL

 

The Company has recorded goodwill relating to the purchase of Media 21, Inc.’s operations in 2011. The following is a summary of the activity relating to goodwill for the three months ended January 31, 2018.

 

Balance as of July 31, 2017   $ 6,917,722  
Foreign currency translation adjustment     76,019  
Balance as of January 31, 2018 (unaudited)   $ 6,993,741  

 

6.  NOTES PAYABLE

 

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

 

    January 31,     July 31,  
    2018     2017  
      (Unaudited)          
                 
Unsecured note payable issued on June 15, 2016, due on December 15, 2016, bearing interest at 15% per annum (21.9% per annum after the maturity date) due monthly. The Company is currently in default under the terms of the note.   $ 920,000     $ 910,000  
Unsecured note payable issued on December 20, 2011, due on December 31, 2016, bearing interest at 15% per annum (18% per annum after the maturity date) due monthly. The Company is currently in default under the terms of the note.     1,932,000       1,911,000  
Unsecured note payable issued on October 20, 2017, due in 10 monthly installments through August 20, 2018, bearing interest at 12% per annum due monthly.     128,800        
Unsecured note payable issued on December 18, 2015, due in 20 monthly installments from July 31, 2017 through February 28, 2019, bearing interest at 12% per annum due monthly.     598,000       864,500  
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.     588,800       746,200  
Unsecured note payable issued on June 28, 2017, payable in full on June 30, 2018, bearing interest at 12% per annum due monthly.     202,400       418,600  
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.     276,000       273,000  
Unsecured notes payable, non-interest bearing, due on demand     41,790       41,336  
Total notes payable     4,687,790       5,164,636  
Less: current portion of notes payable     4,641,790       4,427,536  
Long-term portion of notes payable   $ 46,000     $ 737,100  

 

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,  
         
  2018 (remainder of)     $ 3,924,190  
  2019       763,600  
  Total     $ 4,687,790  

 

 

 

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7.  NOTES PAYABLE TO RELATED PARTIES

 

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

 

    January 31,     July 31,  
    2018     2017  
      (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.   $ 920,000     $ 910,000  
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.     460,000       455,000  
Unsecured note payable issued on June 14, 2016, non-interest bearing with an initial due date on October 31, 2017 discounted using an effective interest rate of 12%. The note holder agreed to extend the due date of the note, however there is no defined due date. As a result, the note is being treated as due on demand. The balance is due to a related party entity which is owned by one of the directors of the Company.     276,000       273,000  
Unsecured short-term borrowing on April 25, 2017, non-interest bearing and due on demand. The balance is due to a related party entity which is owned by one of the directors of the Company     353,280       345,800  
Unsecured note payable issued on September 21, 2016, non-interest bearing with an initial due date on October 31, 2017 discounted using an effective interest rate of 12%. The note holder agreed to extend the due date of the note, however there is no defined due date. As a result, the note is being treated as due on demand. The balance is due to a related party entity which is owned by one of the directors of the Company.     276,000       273,000  
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.     1,012,514       1,001,509  
Total notes payable to related parties     3,297,794       3,258,309  
Discount on notes payable to related parties           16,515  
Notes payable to related parties, net   $ 3,297,794     $ 3,241,794  

 

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 cumulative interest imputed as of January 31, 2018 amounted to $0. 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 $0 and $14,523 during the three months ended January 31, 2018 and 2017, respectively. The amounts amortized as interest expense amounted to $16,333 and $26,325 during the six months ended January 31, 2018 and 2017, respectively.

 

8.  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.

 

 

 

 

  14  

 

 

The Company had 100,000 shares of Series A Preferred Stock issued and outstanding as of January 31, 2018 and July 31, 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 January 31, 2018.

 

9.  RELATED PARTY TRANSACTIONS

 

As of January 31, 2018 and July 31, 2017, the Company had $3,297,794 (unaudited) and $3,241,794, respectively of notes payable due to related parties (see Note 7).

 

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 April 2018.

 

Total fees paid to Umajin Japan for the three months ended January 31, 2018 and 2017 amounted to $217,505 and $307,719, respectively. Total fees paid to Umajin Japan for the six months ended January 31, 2018 and 2017 amounted to $433,534 and $837,819. The fees paid to Umajin Japan are included in cost of sales in the accompanying consolidated statements of operations. As of January 31, 2018 and July 31, 2017, the Company had $125,529 (unaudited) and $108,604 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 January 31, 2018 and 2017, the Company received consulting services from Cheval Attache Co., Ltd., a related party entity owned by one of its directors, of approximately $29,160 and $30,132, respectively, which are included in cost of sales in the accompanying consolidated statements of operations. During the six months ended January 31, 2018 and 2017, the Company received consulting services from Cheval Attache Co., Ltd. of $58,320 and $60,264, respectively.

 

G-Liberta, a subsidiary of Cheval Attache, performs certain advertising and research services for the Company. Total expenses related to G-Liberta during the three months ended January 31, 2018 and 2017 amounted to $365 and $0, respectively, and are reflected as part of cost of sales. Total expenses related to G-Liberta during the six months ended January 31, 2018 amounted to $1,312 and $0, respectively. As of January 31, 2018 and July 31, 2017, the Company had $745 (unaudited) and $1,209 due to G-Liberta, respectively, which is reflected in accounts payable to related party in the accompanying consolidated balance sheets.

 

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 received a total of 30,000,000 Yen, payable in 10 monthly installments starting in November 2016. The revenue related to this transaction of $294,000 is reflected as net sales on the accompanying statement of operations for the six months ended January 31, 2017. As of January 31, 2018 and July 31, 2017, the amount due under this agreement was $0 (unaudited) and $27,300 and is included in accounts receivable – related party on the accompanying consolidated balance sheets.

 

10.  SUBSEQUENT EVENTS

 

In accordance with ASC 855, Subsequent Events, the Company has evaluated subsequent events through the date of this filing, and has determined that there are no subsequent events that require disclosure.

 

 

 

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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, 2017 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, 2017, 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 multiple websites owned and operated by the wholly owned subsidiary LinkBit. LinkBit currently operates six websites through its various subsidiaries, which generate substantially all of the Company’s revenue. Umajin HK had been delivering information on horse racing to its users through its website, however it terminated its service at the end of June 2017. The Company is pursuing development of a fantasy sports offering through Sports Perfecta, which has not yet generated any significant 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. 

 

 

 

 

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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.

 

Results of Operations for the Three Months Ended January 31, 2018 and 2017

 

The following are the results of our operations for the three months ended January 31, 2018 as compared to the three months ended January 31, 2017:

 

    For the Three Months Ended        
    January 31,     January 31,        
    2018     2017     $ Change  
                   
Net sales   $ 3,377,137     $ 2,998,166     $ 378,971  
Total revenue     3,377,137       2,998,166       378,971  
                         
Operating Expenses:                        
Cost of sales     729,787       970,663       (240,876 )
Depreciation expense     7,105       21,657       (14,552 )
Advertising     33,325       26,607       6,718  
Rent expense     107,422       157,195       (49,773 )
Salaries and wages     812,485       1,086,204       (273,719 )
Other general and administrative expenses     803,095       1,095,860       (292,765 )
Total operating expenses     2,493,219       3,358,186       (864,967 )
                         
Income (loss) from operations     883,918       (360,020 )     1,243,938  
                         
Other Income (Expense):                        
Other income (loss)     38       (186 )     224  
Gain (loss) on exchange     3,508       10,545       (7,037 )
Interest income     1,651       2,829       (1,178 )
Interest expense     (215,186 )     (230,060 )     14,874  
Total other income (expense)     (209,989 )     (216,872 )     6,883  
                         
Net income (loss) before income taxes     673,929       (576,892 )     1,250,821  
Provision for (benefit from) income taxes     235,875       (230,757 )     466,632  
Net income (loss)   $ 438,054     $ (346,135 )   $ 784,189  

 

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. Our net sales increased during the three months ended January 31, 2018 as compared to the same period in 2017 due primarily to the new content and platforms which have been introduced over the past year which lead to an increase in paying users during the quarter. 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 consistent revenue growth.

 

Operating Expenses

 

Total operating expenses for the three months ended January 31, 2018 were $2,493,219, which represented a decrease of $864,967 as compared to the same period in 2017. Our operating expenses decreased due primarily to lower cost of sales from lower monthly service fees paid to Umajin Japan and lower television production costs. Our rent expense also decreased in 2018 due to our moving to new office headquarters during the fourth quarter of the year end July 31, 2017, which generated lower rent expense in the quarter ended January 31, 2018 as compared to 2017. Our salary and wages expense decreased in the current quarter due to a reduction in headcount as compared to the prior year quarter, as well as from salary decreases taken by directors and officers. Our general and administrative expenses were also lower primarily due to higher professional costs in the prior year associated with our public filings.

 

 

 

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Other Income/ (Expenses)

 

Total other expense for the three months ended January 31, 2018 amounted to $209,989, which decreased by $6,883 as compared to the same period in 2017. The decrease in other expenses is primarily due to a decrease in interest expense due to a decrease in interest bearing debt outstanding during the current quarter, offset by approximately $30,000 of default interest expense charged on two notes in default which did not exist in the prior year quarter.

 

Results of Operations for the Six Months Ended January 31, 2018 and 2017

 

The following are the results of our operations for the six months ended January 31, 2018 as compared to the six months ended January 31, 2017:

 

    For the Six Months Ended        
    January 31,     January 31,        
    2018     2017     $ Change  
                   
Net sales   $ 5,948,216     $ 6,722,668     $ (774,452 )
Total revenue     5,948,216       6,722,668       (774,452 )
                         
Operating Expenses:                        
Cost of sales     1,374,831       2,090,601       (715,770 )
Depreciation expense     13,999       45,492       (31,493 )
Advertising     70,384       56,750       13,634  
Rent expense     207,695       400,074       (192,379 )
Salaries and wages     1,691,405       2,313,848       (622,443 )
Other general and administrative expenses     1,695,450       2,220,408       (524,958 )
Total operating expenses     5,053,764       7,127,173       (2,073,409 )
                         
Income (loss) from operations     894,452       (404,505 )     1,298,957  
                         
Other Income (Expense):                        
Other income (loss)     73       3,462       (3,389 )
Gain (loss) on exchange     10,414       16,404       (5,990 )
Interest income     3,254       6,018       (2,764 )
Interest expense     (456,470 )     (430,831 )     (25,639 )
Total other income (expense)     (442,729 )     (404,947 )     (37,782 )
                         
Net income (loss) before income taxes     451,723       (809,452 )     1,261,175  
Provision for (benefit from) income taxes     158,103       (323,781 )     481,884  
Net income (loss)   $ 293,620     $ (485,671 )   $ 779,291  

 

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 six months ended January 31, 2018 as compared to the same period in 2017 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, which has resulted in improved revenue during the quarter ended January 31, 2018 as compared to the prior year. However, we believe this will take time to penetrate our customer base and bring consistent revenue growth.

 

 

 

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Operating Expenses

 

Total operating expenses for the six months ended January 31, 2018 were $5,053,764, which represented a decrease of $2,073,409 as compared to the same period in 2017. Our operating expenses decreased due primarily to lower monthly service fees paid to Umajin Japan and lower television production costs. Our rent expense also decreased in 2018 due to our moving to new office headquarters during the fourth quarter of the year end July 31, 2017, which generated lower rent expense for the six months ended January 31, 2018 as compared to 2017. Our salary and wages expense decreased for the six months ended January 31, 2018 due to a reduction in headcount as compared to the prior year period, as well as salary decreases taken by directors and officers. Our general and administrative expenses were also lower primarily due to higher professional costs in the prior year associated with our public filings.

 

Other Income/ (Expenses)

 

Total other expense for the six months ended January 31, 2018 amounted to $442,729, which increased by $37,782 as compared to the same period in 2017. The increase in other expenses is primarily due to an increase in interest expense resulting from approximately $60,000 of default interest expense charged on two notes in default during the current year that didn’t exist in the same period in the prior year. This increase was offset by a reduction in interest due to a reduction in interest bearing debt during the year.

 

Going Concern and Capital Resources  

 

As of January 31, 2018, we had cash of $134,321 and a working capital deficit of $9,598,701 as compared to cash of $102,954 and a working capital deficit of $9,117,835 as at July 31, 2017. The increase in cash as of January 31, 2018 was primarily the result of cash provided by operations during the period due to increased profitability, offset by the pay down outstanding notes payable 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 sold $1,630,000 of common stock during the year ended July 31, 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 six months ended January 31, 2018 and 2017.

 

    For the Six Months Ended  
    January 31,     January 31,  
    2018     2017  
Cash flows provided by (used in) operating activities   $ 603,763     $ (801,163 )
Cash flows provided by (used in) investing activities   $ (57,244 )   $ 98,320  
Cash flows provided by (used in) financing activities   $ (518,400 )   $ 637,300  

 

Net cash flows provided by operating activities for the six months ended January 31, 2018 amounted to $603,763, compared to cash flows used in operating activities of $(801,163) for the six months ended January 31, 2017. Our increased cash provided by operating activities during the six months ended January 31 2018 was primarily due to our net income during the period of $293,620, as compared to a net loss of $(485,671) during the prior year period. Our revenue increased during the quarter ended January 31, 2018, and our costs of sales and general and administrative expenses continued to be lower than the prior year due to various cost cutting measures.

 

 

 

  19  

 

 

Net cash used in investing activities during the six months ended January 31 2018 was $(57,244), compared to net cash provided by investing activities of $98,320 for the six months ended January 31, 2017. The cash flows provided by investing activities were higher during the six months ended January 31, 2017 primarily due to collections of notes receivables of $388,920 offset by payments of $290,600 for note receivable lending. During the six months ended January 31, 2018, we had proceeds of $169,562 from the collection of notes receivables, offset payments of $222,594 for note receivable lending and $4,212 of property and equipment purchases.

 

Net cash used in financing activities for the six months ended January 31, 2018 amounted to $(518,400), compared to net cash provided of $637,300 for the six months ended January 31, 2017. During the six months ended January 31, 2018, the cash used in financing activities was the result of payments of outstanding notes payable of $702,000 and payments on outstanding related party notes payable of $86,400, offset by proceeds of $180,000 from additional note payable borrowing and borrowings of $90,000 from related parties. The cash provided by financing activities during the six months ended January 31, 2017 was the result of proceeds of $1,000,000 for the sale of common stock, as well as $511,500 in additional note payable borrowing and $930,000 in borrowing from related parties. These amounts were offset by payments of $790,500 for repayments of notes payable, $744,000 for the repayment of a convertible note payable and $269,700 for the repayment of related party notes payable.

 

Description of Indebtedness

 

The following is a summary of our outstanding notes payable as of January 31, 2018 and July 31, 2017.

 

    January 31,     July 31,  
    2018     2017  
      (Unaudited)          
                 
Unsecured note payable issued on June 15, 2016, due on December 15, 2016, bearing interest at 15% per annum (21.9% per annum after the maturity date) due monthly. The Company is currently in default under the terms of the note.   $ 920,000     $ 910,000  
Unsecured note payable issued on December 20, 2011, due on December 31, 2016, bearing interest at 15% per annum (18% per annum after the maturity date) due monthly. The Company is currently in default under the terms of the note.     1,932,000       1,911,000  
Unsecured note payable issued on October 20, 2017, due in 10 monthly installments through August 20, 2018, bearing interest at 12% per annum due monthly.     128,800        
Unsecured note payable issued on December 18, 2015, due in 20 monthly installments from July 31, 2017 through February 28, 2019, bearing interest at 12% per annum due monthly.     598,000       864,500  
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.     588,800       746,200  
Unsecured note payable issued on June 28, 2017, payable in full on June 30, 2018, bearing interest at 12% per annum due monthly.     202,400       418,600  
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.     276,000       273,000  
Unsecured notes payable, non-interest bearing, due on demand     41,790       41,336  
Total notes payable     4,687,790       5,164,636  
Less: current portion of notes payable     4,641,790       4,427,536  
Long-term portion of notes payable   $ 46,000     $ 737,100  

 

Of the $4,687,790 of total debt outstanding as of January 31, 2018, $3,924,190 is either due on demand or will become due during the remainder of the year ended July 31, 2018 and $763,600 will become due during the year ended July 31, 2019.

 

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, 2018. The following is a summary of our outstanding balances due to related parties as of January 31, 2018 and July 31, 2017.

 

 

 

  20  

 

 

    January 31,     July 31,  
    2018     2017  
      (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.   $ 920,000     $ 910,000  
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.     460,000       455,000  
Unsecured note payable issued on June 14, 2016, non-interest bearing with an initial due date on October 31, 2017 discounted using an effective interest rate of 12%. The note holder agreed to extend the due date of the note, however there is no defined due date. As a result, the note is being treated as due on demand. The balance is due to a related party entity which is owned by one of the directors of the Company.     276,000       273,000  
Unsecured short-term borrowing on April 25, 2017, non-interest bearing and due on demand. The balance is due to a related party entity which is owned by one of the directors of the Company     353,280       345,800  
Unsecured note payable issued on September 21, 2016, non-interest bearing with an initial due date on October 31, 2017 discounted using an effective interest rate of 12%. The note holder agreed to extend the due date of the note, however there is no defined due date. As a result, the note is being treated as due on demand. The balance is due to a related party entity which is owned by one of the directors of the Company.     276,000       273,000  
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.     1,012,514       1,001,509  
Total notes payable to related parties     3,297,794       3,258,309  
Discount on notes payable to related parties           16,515  
Notes payable to related parties, net   $ 3,297,794     $ 3,241,794  

 

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 not effective as of January 31, 2018.

 

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 January 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

  21  

 

 

PART II – OTHER INFORMATION

 

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

 

 

 

 

 

 

 

 

 

 

  22  

 

 

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.  
       
       
March 14, 2018 By: /s/ Shuya Watanabe  
    Shuya Watanabe  
    Chief Executive Officer,
(Principal Executive Officer)
 
       
       
March 14, 2018 By: /s/ Masashi Takegaki  
    Masashi Takegaki  
    Chief Financial Officer
(Principal Financial Officer)
 

 

 

 

 

 

 

 

 

 

 

  23  

Exhibit 31.1

 

Certification

 

I, Shuya Watanabe, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Grand Perfecta, Inc., for the period ended January 31, 2018;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) of the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: March 14, 2018 By:   /s/ Shuya Watanabe                                  
    Shuya Watanabe, Chief Executive Officer  
    (Principal Executive Officer)  

Exhibit 31.2

 

Certification

 

I, Masashi Takegaki, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Grand Perfecta, Inc., for the period ended January 31, 2018;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) of the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: March 14, 2018 By: /s/ Masashi Takegaki  
    Masashi Takegaki, Chief Financial Officer  
    (Principal Financial and Accounting Officer)  

Exhibit 32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002.

 

In connection with the Quarterly Report of Grand Perfecta, Inc. (the “Company”) on Form 10-Q for the period ending January 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Shuya Watanabe, Principal Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: March 14, 2018 By: /s/ Shuya Watanabe  
    Shuya Watanabe, Chief Executive Officer  
    (Principal Executive Officer)  

 

In connection with the Quarterly Report of Grand Perfecta, Inc. (the “Company”) on Form 10-Q for the period ending January 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Masashi Takegaki, Principal Financial and Accounting Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: March 14, 2018 By: /s/ Masashi Takegaki  
    Masashi Takegaki, Chief Financial Officer  
    (Principal Financial and Accounting Officer)  

 

A signed original of this written statement required by Section 906 has been provided to Grand Perfecta, Inc. and will be retained by Grand Perfecta, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.