Consolidated Balance Sheets at October 31, 2016 (Unaudited) and
July 31, 2016
Consolidated Statements of Operations (Unaudited) — Three
Months Ended October 31, 2016 and 2015
Consolidated Statements of Comprehensive Income (Unaudited) —
Three Months Ended October 31, 2016 and 2015
Consolidated Statements of Cash Flows (Unaudited) — Three
Months Ended October 31, 2016 and 2015
Notes to Consolidated Financial Statements (Unaudited)
GRAND PERFECTA, INC.
CONSOLIDATED BALANCE SHEETS
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
43,698
|
|
|
$
|
83,295
|
|
Accounts receivable, net
|
|
|
688,229
|
|
|
|
738,924
|
|
Accounts receivable - related party
|
|
|
285,000
|
|
|
|
–
|
|
Current portion of notes receivable
|
|
|
2,322,975
|
|
|
|
2,457,846
|
|
Deferred tax assets, current portion
|
|
|
108,579
|
|
|
|
112,008
|
|
Prepaid expenses and other current assets
|
|
|
13,607
|
|
|
|
12,660
|
|
Total current assets
|
|
|
3,462,088
|
|
|
|
3,404,733
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
220,967
|
|
|
|
242,749
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Long-term notes receivables, net of current portion
|
|
|
620,467
|
|
|
|
644,543
|
|
Deferred tax assets, long-term portion
|
|
|
601,356
|
|
|
|
620,347
|
|
Goodwill
|
|
|
7,221,798
|
|
|
|
7,449,853
|
|
Intangible assets, net
|
|
|
112,288
|
|
|
|
126,447
|
|
Other assets
|
|
|
671,679
|
|
|
|
675,382
|
|
Total other assets
|
|
|
9,227,588
|
|
|
|
9,516,572
|
|
Total assets
|
|
$
|
12,910,643
|
|
|
$
|
13,164,054
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,471,422
|
|
|
$
|
2,665,190
|
|
Accounts payable to related party
|
|
|
206,324
|
|
|
|
278,977
|
|
Deferred revenues
|
|
|
1,024,081
|
|
|
|
1,424,008
|
|
Current portion of notes payable
|
|
|
3,909,653
|
|
|
|
3,797,916
|
|
Notes payable to related parties, net of discount
|
|
|
3,107,392
|
|
|
|
2,777,069
|
|
Convertible note payable
|
|
|
285,000
|
|
|
|
1,078,000
|
|
Taxes payable
|
|
|
352,988
|
|
|
|
310,229
|
|
Total current liabilities
|
|
|
11,356,860
|
|
|
|
12,331,389
|
|
Long-term portion of notes payable, net of current portion
|
|
|
1,928,500
|
|
|
|
2,077,600
|
|
Total liabilities
|
|
|
13,285,360
|
|
|
|
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 October 31, 2016 (unaudited) July 31, 2016
|
|
|
100
|
|
|
|
100
|
|
Common stock, $0.001 par value, 500,000,000 shares authorized, 31,100,000 (unaudited) and 30,100,000 shares issued and outstanding as of October 31, 2016 and July 31, 2016, respectively
|
|
|
31,100
|
|
|
|
30,100
|
|
Additional paid-in capital
|
|
|
5,086,294
|
|
|
|
4,062,308
|
|
Accumulated other comprehensive income
|
|
|
289,455
|
|
|
|
297,999
|
|
Accumulated deficit
|
|
|
(5,995,416
|
)
|
|
|
(5,855,880
|
)
|
Total GPI stockholders'deficit
|
|
|
(588,467
|
)
|
|
|
(1,465,373
|
)
|
Noncontrolling interest
|
|
|
213,750
|
|
|
|
220,438
|
|
Total stockholders' deficit
|
|
|
(374,717
|
)
|
|
|
(1,244,935
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
12,910,643
|
|
|
$
|
13,164,054
|
|
See accompanying notes to consolidated financial statements
GRAND PERFECTA, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
|
|
For the Three Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,724,502
|
|
|
$
|
3,576,312
|
|
Total revenues
|
|
|
3,724,502
|
|
|
|
3,576,312
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,119,938
|
|
|
|
1,090,786
|
|
Depreciation and amortization expense
|
|
|
23,835
|
|
|
|
19,870
|
|
Advertising
|
|
|
30,143
|
|
|
|
52,633
|
|
Rent expense
|
|
|
242,879
|
|
|
|
210,107
|
|
Salaries and wages
|
|
|
1,227,644
|
|
|
|
1,245,933
|
|
Other general and administrative expenses
|
|
|
1,124,548
|
|
|
|
1,003,750
|
|
Total operating expenses
|
|
|
3,768,987
|
|
|
|
3,623,079
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(44,485
|
)
|
|
|
(46,767
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3,648
|
|
|
|
2,467
|
|
Gain on exchange
|
|
|
5,859
|
|
|
|
1,086
|
|
Interest income
|
|
|
3,189
|
|
|
|
2,792
|
|
Interest expense
|
|
|
(200,771
|
)
|
|
|
(148,102
|
)
|
Total other income (expense)
|
|
|
(188,075
|
)
|
|
|
(141,757
|
)
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(232,560
|
)
|
|
|
(188,524
|
)
|
Provision for (benefit from) income taxes
|
|
|
(93,024
|
)
|
|
|
(94,262
|
)
|
Net loss
|
|
$
|
(139,536
|
)
|
|
$
|
(94,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Weighted average number of common shares outstanding, basic and
diluted
|
|
|
30,850,000
|
|
|
|
30,500,000
|
|
See accompanying notes to consolidated financial statements
GRAND PERFECTA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
For the Three Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(139,536
|
)
|
|
$
|
(94,262
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(8,544
|
)
|
|
|
52,822
|
|
Total other comprehensive income (loss), net of tax
|
|
|
(8,544
|
)
|
|
|
52,822
|
|
Comprehensive loss
|
|
|
(148,080
|
)
|
|
|
(41,440
|
)
|
Comprehensive income (loss) attributable to noncontrolling interest
|
|
|
(6,688
|
)
|
|
|
5,044
|
|
Comprehensive loss attributable to GPI stockholders
|
|
$
|
(154,768
|
)
|
|
$
|
(36,396
|
)
|
See accompanying notes to consolidated financial statements
GRAND PERFECTA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Three Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(139,536
|
)
|
|
$
|
(94,262
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
23,835
|
|
|
|
19,870
|
|
Amortization of debt discount
|
|
|
12,437
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
28,752
|
|
|
|
(765,743
|
)
|
Accounts receivable - related party
|
|
|
(294,000
|
)
|
|
|
–
|
|
Prepaid expenses and other current assets
|
|
|
(1,502
|
)
|
|
|
(47,774
|
)
|
Other assets
|
|
|
(17,439
|
)
|
|
|
(20,553
|
)
|
Accounts payable and accrued expenses
|
|
|
(141,527
|
)
|
|
|
675,263
|
|
Accounts payable to related party
|
|
|
(66,137
|
)
|
|
|
–
|
|
Deferred revenue
|
|
|
(367,588
|
)
|
|
|
(15,820
|
)
|
Taxes payable
|
|
|
53,907
|
|
|
|
(125,298
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(908,798
|
)
|
|
|
(374,317
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
–
|
|
|
|
(4,150
|
)
|
Proceeds from repayment of related party receivables, net
|
|
|
–
|
|
|
|
588,085
|
|
Proceeds from collection of notes receivables
|
|
|
272,968
|
|
|
|
139,416
|
|
Payments for notes receivable lending
|
|
|
(206,972
|
)
|
|
|
(124,351
|
)
|
Net cash provided by investing activities
|
|
|
65,996
|
|
|
|
599,000
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
539,000
|
|
|
|
436
|
|
Payments on notes payable
|
|
|
(392,000
|
)
|
|
|
(254,046
|
)
|
Payments on convertible note payable
|
|
|
(784,000
|
)
|
|
|
–
|
|
Proceeds from related party notes payable
|
|
|
686,000
|
|
|
|
–
|
|
Payments on related party notes payable
|
|
|
(245,000
|
)
|
|
|
–
|
|
Proceeds from sale of common stock
|
|
|
1,000,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
804,000
|
|
|
|
(253,610
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
(795
|
)
|
|
|
1,484
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(39,597
|
)
|
|
|
(27,443
|
)
|
Cash, beginning of the period
|
|
|
83,295
|
|
|
|
75,778
|
|
Cash, end of the period
|
|
$
|
43,698
|
|
|
$
|
48,335
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
188,334
|
|
|
$
|
137,171
|
|
Income taxes paid
|
|
$
|
–
|
|
|
$
|
31,036
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing information:
|
|
|
|
|
|
|
|
|
Increase in additional paid in capital and debt discount for imputed interest
|
|
$
|
24,986
|
|
|
$
|
–
|
|
See accompanying notes to consolidated financial statements
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 9 websites through its various subsidiaries, which generate
substantially all of the Company’s revenue.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of
the Company as of October 31, 2016, and for the three months ended October 31, 2016 and 2015, have been prepared in accordance
with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information
and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information
includes all adjustments considered necessary for a fair presentation of the Company's financial position at such date and the
operating results and cash flows for such periods. Operating results for the interim period ended October 31, 2016 are not necessarily
indicative of the results that may be expected for the entire year.
Certain information and footnote disclosure normally included in
financial statements in accordance with GAAP have been omitted pursuant to the rules of the United States Securities and Exchange
Commission ("SEC"). These unaudited financial statements should be read in conjunction with our audited financial statements
and accompanying notes for the years ended July 31, 2016 and 2015 included in the Company's Form 10-K filed on November 8, 2016.
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.
Liquidity
As of October 31, 2016, we had cash of $43,698 and a working capital
deficit of $7,894,772 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 October 31, 2016 was primarily the result of cash used in operations and to pay down outstanding notes payable during
the period, offset by an increase in cash due to the sale of common stock during the quarter, as well as additional note payable
borrowing.
Based on operating losses and negative cash from operations, there
is uncertainty 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 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.
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
|
|
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen to USD
|
|
|
0.0095
|
|
|
|
0.0098
|
|
Hong Kong Dollars to USD
|
|
|
0.1289
|
|
|
|
0.1289
|
|
Malaysian Ringgit to USD
|
|
|
0.2380
|
|
|
|
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 Three Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Japanese Yen to USD
|
|
|
0.0098
|
|
|
|
0.0083
|
|
Hong Kong Dollars to USD
|
|
|
0.1289
|
|
|
|
0.1290
|
|
Malaysian Ringgit to USD
|
|
|
0.2438
|
|
|
|
NA
|
|
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 October 31, 2016
(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 October 31, 2016 (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 months ended
October 31, 2016 or 2015.
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 months ended October 31, 2016 or 2015.
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 October 31, 2016 (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 during the three months ended October 31, 2016 or 2015.
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
per common share is computed by dividing the net income available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if diluted potential
common stock had been converted to common stock. No dilutive potential common shares were included in the computation of diluted
net income per share because their impact was anti-dilutive. During the three months ended October 31, 2016 and 2015, the Company
had total options of 3,000,000 which were excluded from the computation of net income per share because they are anti-dilutive.
During the three months ended October 31, 2016 and 2015, the Company had convertible notes convertible into 259,091 and 1,472,727,
respectively, shares of common stock which were excluded from the computation because they are anti-dilutive. As a result, the
basic and diluted earnings per share were the same for each of the periods presented.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the ASC Topic 606 and establishes
a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point
in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition,
ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to
provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer
that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public entities for annual reporting
periods beginning after December 15, 2016, including interim periods therein. Early application is not permitted. Management is
in the process of assessing the impact of ASU 2014-09 on the Company’s 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.
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and fixtures
|
|
$
|
307,432
|
|
|
$
|
317,140
|
|
Autos and trucks
|
|
|
287,922
|
|
|
|
297,014
|
|
Tools and equipment
|
|
|
521,754
|
|
|
|
538,231
|
|
Computer software
|
|
|
1,506,170
|
|
|
|
1,553,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,623,278
|
|
|
|
2,706,119
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(2,402,311
|
)
|
|
|
(2,463,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
220,967
|
|
|
$
|
242,749
|
|
Depreciation expense amounted to $14,804 (unaudited) and $19,870
(unaudited) for the three months ended October 31, 2016 and 2015, 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 October 31,
2016 and July 31, 2016, the Company had total outstanding notes receivable of $2,943,442 (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 $2,322,975 (unaudited) and $2,457,846 as of October 31, 2016 and July 31, 2016, respectively.
The future scheduled maturities of outstanding notes receivables
as of October 31, 2016 based on contractual due dates are as follows.
|
|
|
Year Ended
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
|
|
2017 (remainder of)
|
|
|
$
|
2,322,975
|
|
|
2018
|
|
|
|
–
|
|
|
2019
|
|
|
|
5,990
|
|
|
2020
|
|
|
|
14,604
|
|
|
2021
|
|
|
|
14,250
|
|
|
Thereafter
|
|
|
|
585,623
|
|
|
Total
|
|
|
$
|
2,943,442
|
|
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 three months ended October 31, 2016.
Balance as of July 31, 2016
|
|
$
|
7,449,853
|
|
Foreign currency translation adjustment
|
|
|
(228,055
|
)
|
Balance as of October 31, 2016 (unaudited)
|
|
$
|
7,221,798
|
|
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 October 31, 2016 and
2015 amounted to $9,031 and $0, respectively. Estimated future expected amortization of intangible assets as of October 31, 2016
is as follows.
|
|
|
Year Ended
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
|
|
2017 (remainder of)
|
|
|
$
|
26,448
|
|
|
2018
|
|
|
|
35,264
|
|
|
2019
|
|
|
|
35,264
|
|
|
2020
|
|
|
|
15,312
|
|
|
Total
|
|
|
$
|
112,288
|
|
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). 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:
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Unsecured note payable issued on June 15, 2016, due on December 15, 2016, bearing interest at 15% per annum due monthly.
|
|
$
|
950,000
|
|
|
$
|
980,000
|
|
Unsecured note payable issued on December 20, 2011, due on December 31, 2016, bearing interest at 15% per annum due monthly.
|
|
|
1,805,000
|
|
|
|
1,862,000
|
|
Unsecured note payable issued on June 28, 2013, due on December 31, 2016, bearing interest at 15% per annum due monthly.
|
|
|
190,000
|
|
|
|
196,000
|
|
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.
|
|
|
380,000
|
|
|
|
539,000
|
|
Unsecured note payable issued on December 18, 2015, due on February 29, 2019, bearing interest at 12% per annum due monthly.
|
|
|
950,000
|
|
|
|
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.
|
|
|
950,000
|
|
|
|
980,000
|
|
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.
|
|
|
285,000
|
|
|
|
294,000
|
|
Unsecured note payable issued on August 21, 2016, due on November 20, 2016, including interest
of JPY 1,000,000. The amount has been repaid in full during November 2016
|
|
|
285,000
|
|
|
|
–
|
|
Unsecured notes payable, non-interest bearing, due on demand
|
|
|
43,153
|
|
|
|
44,516
|
|
Total notes payable
|
|
|
5,838,153
|
|
|
|
5,875,516
|
|
Less: current portion of notes payable
|
|
|
3,909,653
|
|
|
|
3,797,916
|
|
Long-term portion of notes payable
|
|
$
|
1,928,500
|
|
|
$
|
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)
|
|
|
$
|
3,824,153
|
|
|
2018
|
|
|
|
627,000
|
|
|
2019
|
|
|
|
1,387,000
|
|
|
Total
|
|
|
$
|
5,838,153
|
|
8. NOTES PAYABLE TO RELATED
PARTIES
A summary of the Company’s outstanding notes payable is as
follows:
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2016
|
|
|
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.
|
|
$
|
950,000
|
|
|
$
|
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.
|
|
|
475,000
|
|
|
|
490,000
|
|
Unsecured note payable issued on June 14, 2016, non-interest bearing and due on December 13, 2016 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.
|
|
|
285,000
|
|
|
|
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.
|
|
|
285,000
|
|
|
|
–
|
|
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.
|
|
|
1,137,207
|
|
|
|
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
|
|
|
3,132,207
|
|
|
|
2,790,118
|
|
Discount on notes payable to related parties
|
|
|
24,815
|
|
|
|
13,049
|
|
Notes payable to related parties, net
|
|
$
|
3,107,392
|
|
|
$
|
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 $41,860, including $16,874 during the year ended July 31, 2016 and $24,986
during the three months ended October 31, 2016. 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 $12,437 during the three months ended October 31, 2016.
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. During the three months ended October 31, 2016, the debt
holder agreed to further extend the due date until December 31, 2016. As of October 31, 2016, the remaining outstanding balance
amounted to JPY 30,000,000 ($285,000 at October 31, 2016).
The conversion feature associated with the convertible note payable
created a derivative liability as of April 14, 2015, the date in which the note became convertible. The Company valued the derivative
as of each subsequent reporting period using the Black-Scholes pricing model. The value at each of these dates amounted to $0.
The assumptions used in the Black-Scholes model during the three months ended October 31, 2016 and 2015 were as follows.
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
0.17
|
|
|
|
0.35
|
|
Stock price volatility
|
|
|
27.0%
|
|
|
|
40.4%
|
|
Risk-free interest rate
|
|
|
0.24%
|
|
|
|
0.23%
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
Forfeiture rate
|
|
|
NA
|
|
|
|
NA
|
|
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 October 31, 2016 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).
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 October 31, 2016.
11. RELATED PARTY TRANSACTIONS
As of October 31, 2016 and July 31, 2016, the Company had $3,132,207
(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. During the three months ended October 31, 2016, the Company and Umajin
Japan agreed to reduce the monthly fees from 23 million Yen to 11 million Yen for October 2016 through December 2016.
Total fees paid to Umajin Japan for the three months ended October
31, 2016 and 2015 amounted to $558,600 and $303,540, respectively. The fees paid to Umajin Japan are included in cost of sales
in the accompanying consolidated statements of operations. As of October 31, 2016 and July 31, 2016, the Company had $206,324 (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 October 31, 2016 and 2015, the Company
received consulting services from Cheval Attache Co., Ltd., a related party entity owned by one of its directors, of approximately
$31,752 and $24,900, respectively, which are included in cost of sales in the accompanying consolidated statements of operations.
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 $285,000
is included in accounts receivable – related party on the accompanying consolidated balance sheet as of October 31, 2016.
The revenue related to this transaction of $294,000 is reflected as net sales on the accompanying statement of operations for the
three months ended October 31, 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 October 31, 2016 or July 31, 2016.