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.
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.
¨
The aggregate market value of voting stock held by non-affiliates
on January 29, 2017, based on the average bid and asked prices on that day was $676,363. As of October 15, 2017, the Registrant
had outstanding 31,800,000 shares of common stock, par value $0.001.
This annual report on Form 10-K may contain certain “forward-looking”
statements as such term is defined by the Securities and Exchange Commission in its rules, regulations and releases, which represent
the Company’s expectations or beliefs, including but not limited to, statements concerning the Company’s operations,
economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this
purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intent,” “could,” “estimate,” “might,” “plan,”
“predict” or “continue” or the negative or other variations thereof or comparable terminology are intended
to identify forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements.
This annual report contains forward-looking statements, many
of which relate to, or are based upon, (a) our plans for developing or participating in the development of new markets for our
horse racing and sports content, (b) our opportunities for implementing horse racing related fantasy sports offerings, (c) our
growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, and (f) our anticipated need for working
capital. These statements may be found under Item 1. “Business,” “Item 2. Properties” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this annual report
generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various
factors and matters described in this annual report. In light of these risks and uncertainties, there can be no assurance that
the forward-looking statements contained in this annual report will in fact occur.
Unless the context otherwise requires or otherwise notes, references
in this Annual Report to “Grand Perfecta,” the “Company,” “we,” “our” or “us”
means Grand Perfecta, Inc., and our three wholly-owned subsidiaries: LinkBit Consulting Co, Ltd. (“LinkBit”), Umajin
Hong Kong Ltd. (“Umajin HK”), and Sports Perfecta, Inc. (“Sports Perfecta”).
PART I
Company Overview and History
Grand Perfecta, Inc., a Nevada corporation,
(the “Company”) is engaged in the business of gathering, publishing and disseminating horse racing information and
other content related to horse racing in Japan and the Japanese horse racing industry. Historically our operations have been conducted
in Japan through our wholly-owned subsidiary, LinkBit. LinkBit currently has six different websites that it owns and operates through
its various subsidiaries, which comprise substantially all of the Company’s revenue. In May 2013, we acquired Umajin HK in
Hong Kong as a wholly-owned subsidiary. Umajin HK delivered information on horse racing and soccer to its users until the end of
June 2017, when it terminated its service.
In August 2015, Grand Perfecta formed Sports
Perfecta to pursue development of a fantasy sports offering to horse racing fans and to offer more established fantasy sports opportunities
in other sports. On January 7, 2016, Sports Perfecta acquired 100% of the outstanding stock of Just Mobile Sdn Bhd, a Malaysian
company. On January 20, 2016, Just Mobile changed its name to Sports Perfecta Technologies Sdn Bhd, so references herein to Sports
Perfecta and its operations include this subsidiary. The total aggregate purchase price for the outstanding shares of Just Mobile
amounted to $200,000, of which $120,000 was paid on the closing date and the remaining $80,000 was paid in April 2016.
Asserting Claims against Management
Because all of our directors and executive
officers are either not U.S. citizens or reside outside the United States, it may be difficult, if not impossible, to acquire jurisdiction
over these persons in the event a lawsuit is initiated against Grand Perfecta or its officers and directors by a stockholder or
group of stockholders in the United States. Furthermore, because the assets of Grand Perfecta, as well as the assets of Grand Perfecta’s
officers and directors, are located outside of the U.S., it would also be very difficult to access those assets to satisfy an award
entered against Grand Perfecta in a U.S. court.
Voting Control by Management
Shuya Watanabe, who is a director and Chief
Executive Officer, owns Common Stock and Series A Convertible Preferred Stock of Grand Perfecta that represent approximately 46%
of the total voting power of shares entitled to vote on all matters submitted to the shareholders for a vote. Furthermore, our
officers and directors hold Common Stock and Series A Convertible Preferred Stock representing a total combined voting power of
approximately 71% of the total voting power of our outstanding capital stock. As a result, our officers and directors as a group,
are effectively able to control certain corporate governance matters requiring shareholders’ approval. Such matters include
transactions in which our officers and directors have an interest other than as a shareholder, the approval of significant corporate
transactions such as increasing the authorized number of our shares to complete acquisitions or raise capital, if necessary, and
any other transactions requiring a majority vote without seeking other shareholders’ approval. Furthermore, our officers
and directors as a group also have the ability to control other matters requiring shareholder approval including the election of
directors, which could result in the entrenchment of management.
Horse Racing in Japan
Horse racing in Japan is a popular equestrian
sport with approximately 16,000 horse races held each year, which are predominately flat and jump races. Horse racing is organized
and managed by the Japan Racing Association (JRA) and National Association of Racing (NAR), both of which are subject to the supervision
of the Ministry of Agriculture, Forestry and Fisheries. This system of government supervision and administration of horse racing
is unique to Japan and, we believe, one of the main reasons horse racing in Japan is considered by many the best in the world.
The JRA manages horse racing events at ten
major race courses in metropolitan areas that are called Chuo Keiba (meaning "central horse racing"). Chuo Keiba represents
some of the richest racing in the world, with 2017 purses for graded stakes races beginning at JPY55.6 million (about US$506,000).
The annual Japan Cup in November is 2,400 meter invitational turn race and Arima Kinen in December is a 2,500 meter season-end
Grand Prix. These two races are the richest turf races in Japan and one of the richest in the world with a 2017 purse of JPY570
million (about US $5 million each).
The NAR manages approximately 14 smaller
municipal race courses operated by local racing authorities, which is called Chihou Keiba (meaning "local horse racing").
Chihou Keiba consists primarily of dirt graded events, including the international Grade 1 race, Tokyo Daishōten.
In 2016, there were approximately 288 JRA
racing days and 1,290 NAR racing days. ‘Racing days’ means the total number of race days of all courses. Total prize
money of JRA and NAR races in 2016 was approximately JPY80 billion (about US$728 million). JRA and NAR 2017 figures are not yet
available.
On track pari-mutuel betting in 2016 was
JPY134 billion (about US$1.2 billion), and off-track betting was JPY 3.04 trillion (about US$27.7 billion). The number of spectators
attending JRA races in 2016 was approximately 6.3 million and attending NAR races was approximately 3.2 million.
The popularity and large fan following for
horse racing in Japan, which translates into a large volume of betting, creates a demand by racing enthusiasts for information
on breeding, race history of horses, jockeys, and other matters that may be factors in evaluating races and how to bet the horses.
Our business focuses on meeting that demand for information.
Our Business
Our primary business is the delivery through
the Internet and by phone to users and other consumers in Japan of information on horse racing and then convert those users to
paying customers for enhanced services. Revenue from service payments for the fiscal year ended July 31, 2017, was approximately
97% of total revenue. The remainder of our revenue comes from providing sales promotion services and advertisement insertion on
the horse racing information website Umajin.net, which is operated by LinkBit. Also, we receive a small portion of revenue selling
mailing labels derived from our user base to third parties involved in the horse racing industry, which is a service we provide
as a sideline to our core business.
Internet and Phone Services
We typically maintain 6-10 branded websites
which each have different concepts and which are operated to meet the respective preferences of horse racing fans who are our users
and customers. Every 3-5 years we redesign the websites or launch new services in response to trends and changes in preference
of horse racing fans and add a fresh dimension to the websites. The following is a list of our subsidiaries and the website owned
by each that is used to publish racing information for our users.
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·
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Turf Agent Co., Ltd., publishes information collected from racehorse owners on its website at http://turfagent.jp. In addition, Turf Agent provides current news about horse fairs, horse-breeding centers, etc. Turf Agent also publishes articles with tips and advice on how to evaluate and predict the racing performance of horses and how to identify (remarkable/promising) horses in specific races with the goal of fostering better appreciation and enjoyment of horse racing.
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Real Selector Co., Ltd., publishes information directed at beginners in the appreciation and betting of horse racing on its website at www.real-selector.jp.
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·
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Tau Project Co., Ltd., publishes analytics on horses and races known as “Next-generation betting ticket purchase theory” on its website at https://to-dai.jp/.
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G1 Project Co., Ltd., publishes integrated statistical information on a wide range of elements and factors pertaining to horses, jockeys, tracks, races, and other horse racing matters on its website at http://www.g1-pro.jp.
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·
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WRN Co., Ltd., which started its service in August 2016, publishes global horse racing information including upcoming races, race results, and detailed profiles of foreign jockeys who race in Japan at http://www.worldracenews.com.
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·
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LinkBit operates a website called “Yoso Ou” at http://keibagod.jp/ that publishes betting lines and provides other track tips, advice and comments to users. From time to time the website also publishes feature articles on upcoming races.
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·
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LinkBit also owns and operates Umajin.net at http://uma-jin.net/, which is a comprehensive source of general information related to horse racing, including current news, races and events, interviews, and race videos and pictures.
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All of the foregoing are subsidiaries of LinkBit.
Customers to our Internet and phone information
services pay access fees that ranges between $5 and $1,000, depending on the level of information access desired by the customer.
Customers access the information service purchased with a personal user name and password for Internet access and a personal PIN
for telephone access. Below is a chart setting forth specifics as to the service offering types and price ranges for each of our
major service offerings. We provide our customers with premium content consisting of single item services, such as information
on specific races or events or multiple races on the same day that the customer can access on a one-time or short term basis, package
items made up of a combination of single items with common features or trends in items that we identify in single item service
purchases, and term items that are published over a period of time and provide broader coverage of events or various aspects of
the horse racing industry. In the table below we identify for each service the price range and type of service offered.
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Service Name
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Price Range (USD)
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Service Type
(S = Single Item;
P = Package or Term Item)
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Turf Agent
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$100 - $1,000
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S,P
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Tau Project
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$10 - $100
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S
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G1 Project
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$100 - $1,000
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S,P
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Real Selector
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$100 - $1,000
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S,P
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Yoso ou
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$5 - $300
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S,P
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WRN
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$30 - $1,000
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S,P
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As of July 31, 2017, we had accumulated
approximately 1.43 million user identifications. Among these, approximately 93,700 have used our paid services. Our revenue represents
a large number of purchases across a large menu of potential options rather than a large number of purchases in a small number
of service offerings. In 2017, approximately 80% of our offered services are package items and approximately 20% are single service
items.
Selling our Services
The process of selling our horse racing
information services focuses on attracting users to our websites and offering to them free content as an inducement to purchase
access for more in-depth content. We solicit users to register themselves as a website or a phone user, free of charge, by advertising
in a variety of public media channels, including newspapers, magazines, internet, TV, and direct mail, including advertising in
our own media and holding events.
When users take advantage of our free content
we are effectively giving them a sample of what we offer for purchase through our websites. This free content also gives us the
opportunity to optimize content offerings to our users. When a user signs on to access our free content, we gather information
from the user’s usage that enables us to ascertain preferences and interests, which we use to make more focused service offerings
directly to the user. This process enables us to perform a continual sales process with our users to convert them to customers.
Historically, we have realized a conversion rate of approximately 6% of free content users making a decision to purchase one or
more services. Our sales effort focusses on increasing the number of users, improving and enhancing the users’ experience,
and improving our conversion rate to paying customers.
We also promote our services to potential
users by pursuing a variety of activities that we believe increases public interest in horse racing, develops new horse racing
fans, and exposes our websites and information offerings to potential new users. The following are examples of the activities we
have pursued in the past and may pursue in the future to advance public interest in horse racing and increase our potential user
base.
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·
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Annually we publish, in print media and on our website, magazines about upcoming racing seasons, and we also write articles for third party publications;
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·
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We collaborate with Umajin Japan in the production of an internet television program titled “Ba Kyun!” that airs on FRESH! By Abema TV, and in providing content for the magazine
Umajin
published by Umajin Japan;
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·
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We actively promote racing fan events, such as “Umaonaire,” which is a race prediction competition, and fan meetings with jockeys;
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From April 2008 through March 2010 we produced a weekly program aired on BS Fuji TV titled “Umajin;” and
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·
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We provide planning, website and consulting services to others involved in the horse racing industry with respect to their events and promotional activities, including, for example, assisting emerging jockeys with establishing an internet identity through blogging.
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Whenever we provide the foregoing services,
our website, Umajin.net, and participation is publicized as part of the publication, program, event, or support service. Furthermore,
in consideration of the services and content we provide in producing the internet television program Ba Kyun!, we are allowed to
provide the full version of the program simultaneously on our umajin.net website.
LinkBit previously published
Umajin
,
a horse racing magazine in Japan, but transferred that business to Umajin Co. Ltd. (referred to as Umajin Japan). We have continued
to collaborate with Umajin Japan in the production of articles and other content for the magazine, and we also co-sponsor with
Umagin Japan fan and spectator events of the type described above. We also collaborated with Umajin Japan in the production of
the television program by providing sources and content.
Content
Our ability to attract users and sell them
our fee-based services depends on the content we have to offer. We pursue a number of activities to generate content for our users.
We have a team that focuses on establishing
and maintaining relationships with horse owners, trainers, jockeys, and others, all of which are a primary source of current information
on what is going on at the track and in the horse racing industry. There are approximately 420 jockeys, 700 horse trainers, and
7,000 horse owners actively working today in Japan. We have connections with almost all of the jockeys and trainers, and with many
of the owners as well. In addition, we gather information from more than 60 people who were formerly employed or otherwise affiliated
with the horse racing industry, such as former jockeys and horse trainers. We also purchase horse racing information collected
by Umajin Japan.
Much of the information we collect is used
to produce articles, features, and on-going monthly reports that are the staples of our websites. We also use this information
to perform analytics on horses and races and to calculate what we determine to be the value and capability of race horses using
techniques we have developed by analyzing the previous10 years of horse racing data from Japan and nine years of horse racing data
from Hong Kong.
Umajin.net has obtained approximately 674,000
addresses, all of which are non-paying. The total number of downloaded Umajin smartphone apps was 275,000.
LinkBit also publishes information on Umajin.net
consisting of feature stories on noteworthy events, interviews with people in the horse racing industry, such as jockeys, trainers,
and others, horse racing predictions and analysis, and distributes magazines by email. In addition, LinkBit has overseen the production
and management of TV shows and events in the horse racing and sports industry. LinkBit collaborates with Umajin Japan on the production
of “Ba Kyun!” a program that airs on FRESH! By Abema TV, an internet television station run by a Japanese internet,
media, game and advertisement company, Cyber Agent, which has the benefit of publicizing our website, Umajin.net, to horse racing
fans.
Competition
We believe we are the leading provider of
horse racing information in Japan. With the popularity of horse racing in Japan and the high demand for information among enthusiasts,
there are a substantial number of publications and other information sources that we compete with. We compete with these other
publications and services on the basis of the quality of our content. We believe our focus on cultivating information sources allows
us to provide better information than our competitors can provide.
Specifically, we believe our competitive
advantage is based upon:
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·
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Our information-gathering ability (including the quantity and quality of information we gather);
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·
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Our relationships with affiliates and industry personnel on-site;
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·
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Our data analysis programs;
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·
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The techniques we use to present and distribute information and analysis in a manner that is highly usable by our customers;
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·
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The volume and quality of information we provide free of charge; and
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·
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Our integrated approach to providing horse racing information on a wide range of elements and factors pertaining to horses, jockeys, tracks, races, and other horse racing matters.
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Sports Perfecta
Sports Perfecta is the U.S. subsidiary of
Grand Perfecta, and a digital sports media company offering sport games, websites, iPhone and Android apps, Facebook apps as well
as Smart TV apps. Sports Perfecta has B2B (business to business) and B2C (business to consumer) platforms, which has two components
- namely FanXT and Fantasy4All for sports leagues around the world.
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·
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FANXT provides daily and weekly fantasy games for popular sports across the world such as NFL, NBA, MLB, soccer and motor racing via the web, mobile and Facebook apps. It launched a fantasy jockey product in the United States last year.
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·
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Fantasy4All is a white-label fantasy sport game that includes seasonal to daily fantasy sports running on the web, Facebook, iPhone/iPad and Android platforms, and covers a vast variety of sports from the NFL to soccer and lacrosse. White-label fantasy games embrace the strength of each platform, allowing users to share their achievements via Facebook. We are currently providing the B2B platform to the Australian grassroots soccer league.
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At the moment Sports Perfecta provides free
services aiming to increase visibility of its service to fantasy sports fans, and horse racing fans as well, so as to broaden the
base of customers and potential paying users.
Intellectual Property
We hold two Trademarks: UMAJIN, which was
registered in Japan under registration number 5319066 as of April 23, 2010, and WINDEX1, which was registered in Japan under registration
number 5876024 as of August 26, 2016.
Employees
Grand Perfecta has approximately 67 employees,
including seven management level employees and 7 part-time employees. Eight of the employees and two part-time employees work at
SPI’s subsidiary in Malaysia. The rest of the employees are in Japan.
Further Information and Reports
We are required to file with the SEC annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports of certain events on Form 8-K, and proxy and information
statements disseminated to stockholders in connection with meetings of stockholders and other stockholder actions. Copies of these
and any other materials we file with the Commission may be inspected without charge at the public reference facilities maintained
by the Commission in Room 1580 – 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of our filings may
be obtained from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, upon payment of the prescribed
fees. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
Company’s filings with the Commission are also available through its web site at http://www.sec.gov.
Disclosure under this item is not required
of a smaller reporting company.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
Our principal business office is located
at Koyo Building, 2F, 2-36-10 Minamisuna, Koto-ku, Tokyo 136-0076 Japan, which we lease for a monthly payment of JPY1,725,360 (approximately
US $15,700). Our office in Kuala Lumpur, Malaysia is located at 12-05, Tower A, The Vertical Office Suite, 8 Jalan Kerinchi, Bangsar
South, 59200 Kuala Lumpur, Malaysia, which has a monthly lease cost of MYR 5,668 (approximately US$1,300).
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ITEM 3.
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LEGAL PROCEEDINGS
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We are the subject of certain legal matters
that we consider incidental to our business activities. It is the opinion of management that the ultimate disposition of these
matters will not have a material impact on our financial position, liquidity or results of operations.
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|
ITEM 4.
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MINE SAFETY DISCLOSURES
|
The disclosure required by this Item 4 is
not applicable to the Company’s business.
PART II
|
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information
The common stock of Grand Perfecta trades
in the over-the-counter market under the symbol “GPIW.” The following table sets forth for the respective periods indicated
the prices of the common stock in the over-the-counter market, as reported and summarized on the OTC Marketplace. Such prices are
based on inter-dealer bid and ask prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
|
Calendar Quarter Ended
|
High Bid ($)
|
Low Bid ($)
|
|
|
|
|
|
October 31, 2015
|
$0.22
|
$0.14
|
|
January 31, 2016
|
$0.20
|
$0.12
|
|
April 30, 2016
|
$0.12
|
$0.07
|
|
July 31, 2016
|
$0.31
|
$0.07
|
|
|
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|
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October 31, 2016
|
$0.56
|
$0.10
|
|
January 31, 2017
|
$0.11
|
$0.04
|
|
April 30, 2017
|
$0.08
|
$0.06
|
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July 31, 2017
|
$0.07
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$0.04
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Unregistered Sales of Equity Securities
There are no unregistered sales of securities
that have not been reported, previously.
Dividends
We did not make any distributions to shareholders
in fiscal years 2016 or 2017. Our present intention is to retain any earnings for use in our business activities, so it is not
expected that any dividends on the common stock will be declared and paid in the foreseeable future.
Security Holders
At October 15, 2017, there were approximately
599 holders of record of our common stock.
Equity Compensation Plans
As of July 31, 2017, there were no equity
securities authorized for issuance under any Company compensation plans.
Repurchases of common stock
There were no repurchases of equity securities
by Grand Perfecta in the three-month period ended July 31, 2017.
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|
ITEM 6.
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SELECTED FINANCIAL DATA
|
Disclosure under this item is not required
of a smaller reporting company.
|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
You should read
the following discussion and analysis of our financial condition and results of operations together with our financial statements
and related notes appearing in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere
in this Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties. You should know that there are many factors, both within and outside
our control, that could cause actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis.
General
Grand Perfecta 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. It is also pursuing development of a fantasy sports offering for a number of different
sports, including horse racing, through its wholly-owned subsidiary, Sports Perfecta. 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 services
at the end of June 2017.
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. Our significant accounting policies are more fully described in the notes to our consolidated
financial statements.
Basis of Presentation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with principles generally accepted in the United States of America (“GAAP”)
and 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.
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.
As of July 31, 2017, we had cash of $102,954
and a working capital deficit of $9,117,835 as compared to cash of $83,295 and a working capital deficit of $8,926,656 at July
31, 2016.
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. The Company also conducts operations through Sports
Perfecta, and its Malaysian subsidiary SPT. 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. LinkBit’s
functional currency is the Japanese Yen and Umajin HK’s functional currency is the Hong Kong Dollar. SPT’s functional
currency is the Malaysian Ringgit.
The financial statements of each entity
are prepared using the applicable functional currencies, and have been translated into U.S. dollars (“USD”). Assets
and liabilities are translated into USD at the applicable exchange rates at period-end. Stockholders’ equity is translated
using historical exchange rates. Revenue and expenses are translated at the average exchange rates for the period. Any translation
adjustments are included as foreign currency translation adjustments in accumulated other comprehensive income in the Company’s
stockholders’ equity.
The following rates were used to translate
the accounts of LinkBit, Umajin HK and SPT into USD at the following balance sheet dates.
|
|
|
Balance Sheet Dates
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen to USD
|
|
|
0.0091
|
|
|
|
0.0098
|
|
|
Hong Kong Dollars to USD
|
|
|
0.1280
|
|
|
|
0.1289
|
|
|
Malaysian Ringgit to USD
|
|
|
0.2335
|
|
|
|
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 Year Ended
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen to USD
|
|
|
0.0091
|
|
|
|
0.0087
|
|
|
Hong Kong Dollars to USD
|
|
|
0.1287
|
|
|
|
0.1289
|
|
|
Malaysian Ringgit to USD
|
|
|
0.2321
|
|
|
|
0.2413
|
|
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 July 31, 2017 and 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 July 31, 2017 or 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
of goodwill during the year ended July 31, 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. The Company performed this
analysis at July 31, 2017 and determined that the sum of projected future cash flows over the remaining useful life of the intangible
assets were negative. Accordingly, the Company recorded an impairment charge of $83,712 during the year ended July 31, 2017. There
was no impairment of long-lived assets identified during the year ended July 31, 2016.
Fair Value of Financial Instruments
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for
the specific asset or liability.
GAAP provides for a
three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:
|
•
|
Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
|
|
•
|
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
|
|
|
–
|
Quoted prices for similar assets or liabilities in active markets
|
|
|
–
|
Quoted prices for identical or similar assets or liabilities in markets that are not active
|
|
|
–
|
Inputs other than quoted prices that are observable for the asset or liability
|
|
|
–
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means
|
|
•
|
Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
|
The Company has determined that the book
value of its outstanding financial instruments as of July 31, 2017 and 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 had losses related to the write off of notes receivable during the year ended July 31, 2017 and 2016 of $309,400
and $7,395, respectively, in addition to the $1,312,276 loss on settlement of note receivable that was recorded during the year
ended July 31, 2016.
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.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising costs incurred amounted to $241,623 and $172,983 for the years ended July 31, 2017 and 2016, respectively.
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. As of July 31, 2017 and 2016, 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. As
of July 31, 2016, the Company had convertible notes convertible into 980,000 shares of common stock which were excluded from the
computation because they are anti-dilutive. As of July 31, 2017, the Company did not have any convertible notes. 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, 2017, 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.
Results of Operations for the Year Ended July 31, 2017 and
2016
The following are the results of our operations
for the year ended July 31, 2017 as compared to the year ended July 31, 2016:
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
12,999,014
|
|
|
$
|
14,267,112
|
|
|
$
|
(1,268,098
|
)
|
|
Total revenue
|
|
|
12,999,014
|
|
|
|
14,267,112
|
|
|
|
(1,268,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,598,010
|
|
|
|
5,234,575
|
|
|
$
|
(1,636,565
|
)
|
|
Depreciation and amortization expense
|
|
|
88,443
|
|
|
|
91,757
|
|
|
|
(3,314
|
)
|
|
Impairment charge
|
|
|
83,712
|
|
|
|
99,502
|
|
|
|
(15,790
|
)
|
|
Advertising
|
|
|
241,623
|
|
|
|
172,983
|
|
|
|
68,640
|
|
|
Rent expense
|
|
|
720,140
|
|
|
|
898,360
|
|
|
|
(178,220
|
)
|
|
Salaries and wages
|
|
|
4,298,044
|
|
|
|
4,906,843
|
|
|
|
(608,799
|
)
|
|
Other general and administrative expenses
|
|
|
5,016,693
|
|
|
|
4,558,636
|
|
|
|
458,057
|
|
|
Total operating expenses
|
|
|
14,046,665
|
|
|
|
15,962,656
|
|
|
|
(1,915,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,047,651
|
)
|
|
|
(1,695,544
|
)
|
|
|
647,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on settlement of note receivable
|
|
|
–
|
|
|
|
(1,312,276
|
)
|
|
|
1,312,276
|
|
|
Other income (loss)
|
|
|
(8,389
|
)
|
|
|
375,708
|
|
|
|
(384,097
|
)
|
|
Gain on exchange
|
|
|
27,306
|
|
|
|
10,183
|
|
|
|
17,123
|
|
|
Interest income
|
|
|
9,662
|
|
|
|
11,501
|
|
|
|
(1,839
|
)
|
|
Interest expense
|
|
|
(927,351
|
)
|
|
|
(664,196
|
)
|
|
|
(263,155
|
)
|
|
Total other income (expense)
|
|
|
(898,772
|
)
|
|
|
(1,579,080
|
)
|
|
|
680,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
|
(1,946,423
|
)
|
|
|
(3,274,624
|
)
|
|
|
1,328,201
|
|
|
Benefit from income taxes
|
|
|
(96,616
|
)
|
|
|
(64,555
|
)
|
|
|
(32,061
|
)
|
|
Net loss
|
|
|
(1,849,807
|
)
|
|
|
(3,210,069
|
)
|
|
|
1,360,262
|
|
|
Less: net loss attributable to noncontrolling interest
|
|
|
–
|
|
|
|
(62
|
)
|
|
|
62
|
|
|
Net loss attributable to GPI stockholders
|
|
$
|
(1,849,807
|
)
|
|
$
|
(3,210,007
|
)
|
|
$
|
1,360,200
|
|
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 year ended July 31, 2017 as compared to the same period in 2016 due primarily to the content and platforms
in certain of our service lines requiring new materials or methods to fulfill our customers’ needs. We have been focusing
on creating a new digital media to coincide with the reduced popularity of traditional paper media and advertising. We believe
this will take time to penetrate our customer base and bring revenue growth. The decrease in net sales was partially offset by
an increase in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately
5%.
Operating Expenses
Total operating expenses for the year ended
July 31, 2017 were $14,046,665, which represented a decrease of $1,915,991 as compared to the same period in 2016. Our operating
expenses decreased due primarily to lower cost of sales from a reduction in sales volume, as well as from lower monthly service
fees paid to Umajin Japan and lower television production costs. We also had lower salaries from a reduction in headcount as well
as decreased salaries from officers and directors. Our general and administrative expenses were also lower due to higher professional
costs in the prior year associated with our public filings, as well as with the establishment and operation of Sports Perfecta.
The decrease in general and administrative expenses was offset partially by increased bad debt expense of $302,005 due to write
off uncollectible notes receivable, $600,000 of penalty expense related to failure to file tax returns, as well as additional expenses
of $182,000 relating to restoration costs to restore our previous office space to its original condition. We do not expect these
penalty and restoration costs to reoccur in the future. The decrease in operating expenses was also partially offset by an increase
in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 5%.
Other Income/ (Expenses)
Total other expense for the year ended July
31, 2017 amounted to $898,772, which decreased by $680,308 as compared to the same period in 2016. The decrease in other expenses
is primarily due to a loss on the settlement of a note receivable of $1,312,276 from Umajin Japan during 2016, a related party
entity owned by one of our directors. This decrease was offset partially by an increase in interest expense due to the interest
rates of the outstanding notes being higher than the prior period, including an additional $73,000 of default rate interest expense
charged on two notes in default. Our other expenses were also higher in 2017 due to a loss on disposal of property and equipment
of $132,746 associated with moving offices during the fourth quarter of fiscal year 2017.
Liquidity and Capital Resources
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.
As of July 31, 2017, we had cash of $102,954
and a working capital deficit of $9,117,835 as compared to cash of $83,295 and a working capital deficit of $8,926,656 at July
31, 2016.
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 years ended July 31, 2017 and 2016.
|
|
|
Year Ended
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash flows used in operating activities
|
|
$
|
(753,380
|
)
|
|
$
|
(809,503
|
)
|
|
Cash flows used in investing activities
|
|
$
|
(227,010
|
)
|
|
$
|
(207,157
|
)
|
|
Cash flows provided by financing activities
|
|
$
|
1,005,285
|
|
|
$
|
1,011,606
|
|
Net cash flows used in operating activities
for the year ended July 31, 2017 amounted to $753,380, compared to net cash used of $809,503 for the year ended July 31, 2016.
Net cash flows used in operating activities were lower during the year ended July 31, 2017 due primarily to our net loss of $1,849,807
for the year ended July 31, 2017 as compared with a net loss of $3,210,069 during the year ended July 31, 2016, offset by non-cash
charges in 2016 of $1,312,276 for the settlement of a note receivable, $120,000 in share-based compensation and an impairment charge
of $99,502.
Net cash used in investing activities amounted
to $227,010 for the year ended July 31, 2017, compared with net cash used of $207,157 for the year ended July 31, 2016. The cash
flows used in investing activities during the year ended July 31, 2017 was due primarily to purchases of property and equipment
of $135,700, payments for note receivable lending of $618,927, offset by $527,617 in proceeds from the collection of notes receivables.
Cash used in investing activities during the year ended July 31, 2016 of $207,157 was primarily the result of $89,091 in spending
relating to purchases of property and equipment, $687,935 of payments for note receivable lending, and $175,963 in payments for
the acquisition of subsidiaries, offset by $53,391 in proceeds from the sale of property and equipment, and $690,070 in proceeds
from the collection of notes receivables.
Net cash provided by financing activities
for the year ended July 31, 2017 amounted to $1,005,285, as compared to net cash provided by $1,011,606 for the year ended July
31, 2016. Our cash provided by financing activities during the year ended July 31, 2017 of $1,005,285 was primarily the result
of $1,630,000 in proceeds from the sale of stock, proceeds of $955,500 from notes payable borrowing, and proceeds of $667,485 from
related party notes payable borrowing, offset by $1,246,700 in payments made on outstanding notes payable and $1,001,000 in payments
made on our convertible note payable. During the year ended July 31, 2016, we had proceeds of $2,610,457 from new note payable
borrowings and net proceeds of $104,400 from related party notes payable, offset by payments on our outstanding notes payable of
$920,251 and payments of $783,000 on our convertible note payable.
Description of Indebtedness
The following is a summary of our outstanding
notes payable as of July 31, 2017 and July 31, 2016.
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
910,000
|
|
|
$
|
980,000
|
|
|
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.
|
|
|
1,911,000
|
|
|
|
2,058,000
|
|
|
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.
|
|
|
–
|
|
|
|
539,000
|
|
|
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.
|
|
|
864,500
|
|
|
|
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.
|
|
|
746,200
|
|
|
|
980,000
|
|
|
Unsecured note payable issued on June 28, 2017, payable in full on June 30, 2018, bearing interest at 12% per annum due monthly.
|
|
|
418,600
|
|
|
|
–
|
|
|
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.
|
|
|
273,000
|
|
|
|
294,000
|
|
|
Unsecured notes payable, non-interest bearing, due on demand
|
|
|
41,336
|
|
|
|
44,516
|
|
|
Total notes payable
|
|
|
5,164,636
|
|
|
|
5,875,516
|
|
|
Less: current portion of notes payable
|
|
|
4,427,536
|
|
|
|
3,797,916
|
|
|
Long-term portion of notes payable
|
|
$
|
737,100
|
|
|
$
|
2,077,600
|
|
Of the total outstanding debt listed above
as of July 31, 2017, $4,427,536 of the outstanding amounts are due during the year ended July 31, 2018 and $737,100 of the amounts
are due during the year ended July 31, 2019.
On March 5, 2015, we entered into a convertible
note agreement for total principal borrowings of JPY 200,000,000 ($1,620,000 at July 31, 2015). The amounts were originally due
on March 5, 2016 and bear interest at a rate of 1% per annum. At the option of the debt holder, beginning 40 days after the issuance
of the note, the debt holder may convert the outstanding balance of the note into shares of our common stock at a conversion rate
equal to one share per JPY130.90 or $1.10 of outstanding principal and accrued interest. During the year ended July 31, 2016, the
Company 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 year ended July 31, 2017, the debt holder agreed
to further extend the due date until June 30, 2017. The remaining balance of the convertible note payable was paid in full by the
maturity date. As of July 31, 2017, the outstanding balance amounted to $0.
We also have note 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 July 31, 2017 and 2016.
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
910,000
|
|
|
$
|
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.
|
|
|
455,000
|
|
|
|
490,000
|
|
|
Unsecured note payable issued on June 14, 2016, non-interest bearing and due on October 31, 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.
|
|
|
273,000
|
|
|
|
294,000
|
|
|
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
|
|
|
345,800
|
|
|
|
–
|
|
|
Unsecured note payable issued on September 21, 2016, due on October 31, 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.
|
|
|
273,000
|
|
|
|
–
|
|
|
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.
|
|
|
1,001,509
|
|
|
|
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
|
|
|
3,258,309
|
|
|
|
2,790,118
|
|
|
Discount on notes payable to related parties
|
|
|
16,515
|
|
|
|
13,049
|
|
|
Notes payable to related parties, net
|
|
$
|
3,241,794
|
|
|
$
|
2,777,069
|
|
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Disclosure under this item is not required
of a smaller reporting company.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Grand Perfecta’s financial statements
appear at the end of this report beginning with the Index to Financial Statements on page F-1, following page 27.
|
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) of the Exchange
Act, the Company's management, under the supervision of its Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e)
of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. The Company's disclosure controls
and procedures are designed to ensure that information required to be disclosed in reports that the Company files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and
forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives. Based upon such evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were not effective at July 31, 2017.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control
over financial reporting during the three-month period ended July 31, 2017.
Management’s Annual Report on Internal Control over
Financial Reporting
Management of the Company is responsible
for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f)
and 15d-15(f) of the Exchange Act). The Company's internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the Company's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations
of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Owing to its inherent limitations, any system
of internal control over financial reporting, no matter how well designed and operated, can provide only reasonable assurance with
respect to financial statement preparation and presentation. Accordingly, the Company's internal controls over financial reporting
was designed to provide reasonable assurance to its management and board of directors regarding the preparation and fair presentation
of the Company's published financial statements.
Management
assessed the effectiveness of the Company's internal control over financial reporting as of July 31, 2017, using the criteria
set forth in the
Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on such assessment, management concluded that the Company's internal control
over financial reporting was not effective as of July 31, 2017.
A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual
or interim financial statements will not be prevented or detected. As a result of management’s evaluation described above,
it concluded that the Company had a significant control deficiency as of July 31, 2017 that constituted a material weakness in
our internal control over financial reporting. Management has determined that the Company lacks the processes and procedures to
ensure all financial events and transactions are recorded in accordance with US GAAP. More specifically, the Company engages third
party service providers to assist with the preparation of its financial statements in accordance with US GAAP and to assist with
the preparation of its US income taxes, however, the Company lacks in-house personnel capable of reviewing and overseeing this
effort.
This Annual Report on form 10-K does not
include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to the rules of
the SEC that permit the company to provide only management's report in this Annual Report.
|
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors and officers
Set forth in the table below are the names,
ages and positions of our current directors and executive officers. None of our directors or executive officers has any family
relationship to any other director or executive officer.
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Shuya Watanabe
|
|
46
|
|
Chairman of the Board of Directors, Chief Executive Officer
|
|
Takashi Ozawa
|
|
45
|
|
President, Chief Operations Officer, Director
|
|
Masashi Takegaki
|
|
54
|
|
Chief Financial Officer, Secretary, Director
|
|
Motonori Okai
|
|
46
|
|
Director
|
|
Hideaki Takahashi
|
|
45
|
|
Director
|
|
Akira Tanabe
|
|
53
|
|
Director
|
|
Enrique Marchese
|
|
51
|
|
Director
|
All executive officers are elected by the
board and hold office until their successors are duly elected and qualified. Each director is elected by the stockholders and serves
until resignation or election of a successor by the stockholders.
Biographies
The following is information on the business
experience of each of the officers and directors.
Shuya Watanabe, Chairman of the Board
of Directors of the Company, Chief Executive Officer
. Mr. Watanabe has served as a representative director of LinkBit for over
the past 10 years, and became Chairman of the Board and Chief Executive Officer of Grand Perfecta at the time of the business reorganization
in May 2012. Mr. Watanabe has spent most of his business career in the horse racing industry and, as a result, has substantial
experience and industry contacts that are advantageous to the business of Grand Perfecta.
Takashi Ozawa, President, Chief Operations
Officer, Director
. Mr. Ozawa has served as a representative director of LinkBit for over the past 10 years, and became President,
Chief Operations Officer and a Director of Grand Perfecta at the time of the business reorganization in May 2012. Mr. Ozawa has
spent the last 20 years of his business career in the horse racing business working in the areas of racing media sales, product
planning and development, and customer relations management, all of which management believes are valuable to the business of Grand
Perfecta.
Masashi Takegaki, Chief Financial Officer,
Secretary, Director
. Mr. Takegaki has served as accounting section head and then accounting manager of LinkBit for over the
past five years, and became a director of LinkBit in September 2013. He became Chief Financial Officer, Secretary and a Director
of Grand Perfecta in February 2013. Mr. Takegaki has 20 years of experience in the areas of accounting and business tax in Japan,
which management believes qualifies him to provide the financial accounting Grand Perfecta requires.
Motonori Okai, Director
. Mr. Okai
was a director of LinkBit from March 2010 to March 2012, and he became a director of Grand Perfecta at the time of the business
reorganization in May 2012. Mr. Okai has served as a representative director of Umajin Japan since April 2012, of which he is also
the sole owner. Umajin Japan is engaged in the business of collecting and disseminating information about horse racing in Japan.
Mr. Okai attended and graduated from jockey school, which gave him the opportunity to develop many contacts and relationships in
the horse racing industry that he has continued to develop over the years. His network of personal connections with officials and
other figures in the horse racing industry is a significant resource that allows him to provide great insight on the service offerings
and future development of our business.
Hideaki Takahashi, Director
. Mr.
Takahashi became a director of LinkBit in March 2010, to provide Internet and web related marketing and promotional services. He
has served as the sole director of Umajin HK from June 2012 to the present. He became a director of Grand Perfecta at the time
of the business reorganization in May 2012. Mr. Takahashi has 20 years of experience in developing and operating Internet content
business enterprises, so his experience benefits Grand Perfecta with respect to promoting and delivering service to website customers.
Akira Tanabe, Director
. Mr. Tanabe
has served for over five years as the representative director of Clara Ltd., a company engaged in the restaurant business in Japan.
He became a director of Grand Perfecta at the time of the business reorganization in May 2012. In December 2013 he founded Cheval
Attache Co., Ltd., a company engaged in the business of offering computer content and application services. Mr. Tanabe has more
than 25 years of experience in business and management in multiple consumer industries, including the beauty industry and restaurant
industry, so he brings a broader business experience and operational acumen to management’s deliberations on developing Grand
Perfecta’s business.
Enrique Marchese, Director
. Mr. Marchese
is the founder and CEO of Lares Loreno Private Capital, a boutique merger and acquisition advisory firm that began operation in
2014. From 2009 to the formation of Lares Loreno, Mr. Marchese was an independent consultant on mergers, acquisitions, and financing.
Mr. Marchese began his investment banking career at Donaldson, Lufkin & Jenrette in 1996 and subsequently held positions at
Merrill Lynch and Deutsche Bank. Mr. Marchese graduated with an M.B.A. from the Booth School at the University of Chicago and holds
a B.S. from the United States Naval Academy. Mr. Marchese has substantial experience in the investment banking and finance industry
that is beneficial to management’s budgetary process and planning for financing opportunities.
Audit Committee; Financial Expert
The Board of directors has not established
an audit committee, so the entire Board of Directors performs the functions associated with an audit committee, including, evaluating
financial reporting matters, monitoring internal controls, compliance with internal financial policies, and engaging the registered
independent accounting firm to audit the financial statements of Grand Perfecta. At present Grand Perfecta does not have a financial
expert serving on the Board within the meaning of Item 407(d)(5)(ii) of Regulation S-K. The Board of Directors believes a financial
expert would be advantageous and expects it will pursue a process for recruiting a financial expert to serve on the Board.
Director Nominations
The Board of Directors has not made any
changes to the procedures by which security holders may recommend nominee’s to our Board of Directors.
Board Leadership Structure
Our Chairman of the Board also performs
the functions and duties normally associated with a principal executive officer. The Board of Directors does not have a lead independent
director. In light of the Company’s level of operations at present and its status as a smaller reporting company, the Board
believes the Company’s current leadership structure is appropriate. All of our Board members are engaged directly and regularly
in the operations of the Company, so we believe the Board is exposed to, or has the opportunity to discover and evaluate, all areas
of meaningful risk pertaining to the Company’s operations and to manage those risks at acceptable levels for the Company.
Code of Ethics
We adopted a Code of Ethics and Business
Conduct (the “Code of Conduct”) that applies to all of our officers and employees, including our principal executive
officer, principal financial officer and principal accounting officer. Our Code of Conduct establishes standards and guidelines
to assist our directors, officers, and employees in complying with both the Company’s corporate policies and with the law,
and is posted at our website: www.grandperfecta.com. Additionally, we will provide to any person, without charge, a copy of the
Code of Conduct upon written or oral request directed to: Corporate Secretary (Mr. Takegaki), Grand Perfecta, Inc., Koyo Building,
2F, 2-36-10 Minamisuna, Koto-ku, Tokyo 136-0076 Japan, telephone +81-3-5632-7251.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange
Act of 1934 requires executive officers and directors, and persons who beneficially own more than 10% of Grand Perfecta’s
common stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission.
Executive officers, directors and greater than 10% beneficial owners are required by Securities and Exchange Commission regulations
to furnish Grand Perfecta with copies of all Section 16(a) forms they file. Based solely on Grand Perfecta’s review of copies
of such reports and representations from Grand Perfecta’s executive officers and directors, and greater than ten-percent
beneficial owners, Grand Perfecta’s believes that its executive officers and directors complied with all Section 16(a) filing
requirements during the fiscal year ended July 31, 2017.
|
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
Executive Compensation
The following table sets forth the cash
and other compensation paid by the Company to our named executive officers for the years ended July 31, 2017 and 2016.
|
Name and Principal Position
|
Year
|
|
Salary ($)
|
|
Total ($)
|
|
|
|
|
|
|
|
|
Shuya Watanabe
Chief Executive Officer
|
2017
2016
|
|
491,400
674,250
|
|
491,400
674,250
|
|
|
|
|
|
|
|
|
Takashi Ozawa
Chief Operations Officer
|
2017
2016
|
|
491,400
613,350
|
|
491,400
613,350
|
|
|
|
|
|
|
|
|
Masashi Takegaki
Chief Financial Officer
|
2017
2016
|
|
120,120
125,280
|
|
120,120
125,280
|
Narrative Discussion of Compensation Table
The Board of Directors determines directors’
and officers’ salaries annually or as circumstances may otherwise warrant, usually in the month of October each year. Compensation
decisions are based on a number of considerations. Some of the relevant factors considered in any given year may include:
|
|
·
|
Risk associated with serving as an officer or director;
|
|
|
·
|
The budget for the next year and the portion of the budget allocated to compensation;
|
|
|
·
|
Performance of the Company in the prior year, and the contribution of an officer to Company success;
|
|
|
·
|
Company goals for the coming year and incentivizing officers with compensation; and
|
|
|
·
|
The level of compensation customary in Japan for executives performing similar functions in companies of similar size or in the same industry.
|
Employee Benefit and Incentive Plans
We do not have any benefit or incentive
plans for our executive officers.
Director Compensation
The following table sets forth the cash
and other compensation paid by the Company to our non-employee Directors for the years ended July 31, 2017 and 2016.
|
Name
|
Year
|
|
Cash Fees ($)
|
|
Total ($)
|
|
|
|
|
|
|
|
|
Motonori Okai
|
2017
2016
|
|
-0-
-0-
|
|
-0-
-0-
|
|
|
|
|
|
|
|
|
Hideaki Takahashi
(1)
|
2017
2016
|
|
109,200
104,400
|
|
109,200
104,400
|
|
|
|
|
|
|
|
|
Akira Tanabe
|
2017
2016
|
|
-0-
-0-
|
|
-0-
-0-
|
|
|
|
|
|
|
|
|
Enrique Marchese
(2)
|
2017
2016
|
|
30,000
30,000
|
|
30,000
30,000
|
(1) The amount paid
to Mr. Takahashi is compensation for his services as a director of LinkBit and the sole director of Umajin HK.
(2) Mr. Marchese is
paid an annual fee of $30,000 for his service as a director.
|
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Security Ownership of Management
The following table sets forth as of October
15, 2017, the number and percentage of the outstanding shares of common stock which, according to the information supplied to Grand
Perfecta, were beneficially owned by (i) each person who is currently a director, (ii) each executive officer, (iii) all current
directors and executive officers as a group, and (iv) each person who, to our knowledge, is the beneficial owner of more than 5%
of the outstanding common stock. As of that date the Company had 31,800,000 shares of its common stock and 100,000 shares of its
Series A Preferred Stock issued and outstanding. The Series A Preferred Stock is convertible into a total of 100,000 common shares.
|
5% Beneficial Owners (excluding officers
and directors)
|
Number of Shares Beneficially Owned
(1)
|
|
Percent of Class
(1)
|
|
|
|
|
|
|
Kazuaki Goto
(2)
34H One Legazpi Park
121 Rada st. Legazpi Village
Manila Philippines
|
6,000,000
|
|
17.24
|
|
|
|
|
|
|
Sakura Corporation Ltd.
(3)
7-12 Chifunemachi 2-chrome
Matsuyama-shi,
Ehime Prefecture, Japan
|
1,700,000
|
|
5.3
|
|
|
|
|
|
|
Heart Corporation Ltd.
(3)
7-12 Chifunemachi 2-chrome,
Matsuyama-shi,
Ehime Prefecture, Japan
|
1,700,000
|
|
5.3
|
|
|
|
|
|
|
Directors and Officers
|
|
|
|
|
|
|
|
|
|
Shuya Watanabe
(4)
|
14,100,000
|
|
45.73
|
|
Takashi Ozawa
|
6,600,000
|
|
20.75
|
|
Masashi Takegaki
|
-0-
|
|
-0-
|
|
Motonori Okai
|
-0-
|
|
-0-
|
|
Hideaki Takahashi
|
272,668
|
|
0.86
|
|
Akira Tanabe
|
1,250,000
|
|
3.93
|
|
Enrique Marchese
|
15,000
|
|
nil
|
|
|
|
|
|
|
All directors and named executive officers as a group (7 persons)
|
22,237,668
|
|
70.54
|
(1) The Company believes
that each stockholder has sole voting and investment power with respect to the shares of common stock listed, except as otherwise
noted. The number of shares beneficially owned by each stockholder is determined under rules of the SEC, and the information is
not necessarily indicative of ownership for any other purpose. Under these rules, beneficial ownership includes (i) any shares
as to which the person has sole or shared voting power or investment power, and (ii) any shares that the individual has the right
to acquire within 60 days through the exercise of any stock option, warrant, conversion of preferred stock or other right, but
such shares are deemed to be outstanding only for the purposes of computing the percentage ownership of the person that beneficially
owns such shares and not for any other person shown in the table. The inclusion herein of any shares of common stock deemed beneficially
owned does not constitute an admission by such stockholder of beneficial ownership of those shares of common stock. All percentage
calculations are based on 31,800,000 shares of common stock issued and outstanding on October 15, 2017.
(2) Mr. Goto holds
3,000,000 shares of common stock, and an option to purchase an additional 3,000,000 common shares at a price of $1,.00 per share
that expires June 11, 2019.
(3) Sakura Corporation
Ltd. (“Sakura”) owns 1,000,000 shares of common stock, and Heart Corporation (”Heart”) owns 700,000 shares
of common stock. Ms. Kaori Hanaoka is the Representative Director and controlling equity owner of Sakura and Heart. Consequently,
the shares owned directly by Sakura and by Heart may be deemed to be beneficially held by the other, and Ms. Kaori Hanaoka may
be deemed to be the indirect beneficial owner of the shares held by both Sakura and Heart.
(4) The 100,000 shares
of Series A Preferred Stock held by Mr. Watanabe are convertible to common stock at a rate of one share of common stock for one
share of Series A Preferred Stock, and vote with the common stock on all matters submitted to the stockholders. Each share of Series
A Preferred Stock has the voting power of 10 common shares. The percentage calculation is for the total voting power of Mr. Watanabe
without conversion of the Series A Preferred Stock.
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Certain Relationships and Related Transactions
Shuya Watanabe has made advances to LinkBit
in prior periods that totaled JPY84,705,904 (approximately US$771,000) at July 31, 2017. During the year ended July 31, 2017, Mr.
Watanabe made additional advances of JPY70,000,000 (approximately US$637,000) and received repayments of advances of JPY44,650,000
(approximately $406,315). As of July 31, 2017, total outstanding advances due to Mr. Watanabe amounted to JPY110,055,904 (US$1,001,509
as of July 31, 2017). There is no stated interest on the advances and no stated maturity date.
Motonori Okai is the responsible director
and sole owner of Umajin Japan. Grand Perfecta and Umajin Japan have an agreement pursuant to which Umajin Japan provides to Grand
Perfecta horserace information for a fee of 16 million yen per month (inclusive of consumption tax) and horseracing related email
magazine and web page content for a fee of 7 million yen per month (inclusive of consumption tax) for a total of 23 million Yen
per month. The Company and Umajn 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 October
2017. Payments to Umajin Japan were JPY127,777,786 (approximately US$1,163,000), including consumption tax payments of JPY10,222,214
(approximately US$93,000) in fiscal year 2017. We expect this same commercial relationship will continue for the fiscal year ending
July 31, 2018.
Mr. Ozawa had made an advance to LinkBit
in prior periods the amount of JPY20,000,000 (approximately US$196,000) as of July 31, 2016. During the year ended July 31, 2017,
this amount was repaid in full. There are no further advances outstanding to Mr. Ozawa. There was no stated interest on the advance.
Akira Tanabe is the representative director
of Clara Ltd., which has made advances to LinkBit that totaled JPY150,000,000 (approximately US$1,365,000 at July 31, 2017). The
interest rate on the advances is 1% per annum, and is due upon demand. On September 21, 2016, Clara Ltd. made an additional advance
totaling JPY30,000,000 (approximately $273,000). The interest rate on the advance is 1% per annum and is due on October 31, 2017.
At July 31, 2017, the aggregate principal balances of the advances outstanding were JPY180,000,000 (approximately US$1,638,000).
Interest payments to Clara Ltd. for fiscal year 2017 totaled JPY1,732,603 (approximately US$16,000).
Additionally, LinkBit entered into an agreement
with Clara Ltd. allowing them access to the LinkBit’s database containing certain horse racing information for an indefinite
period. As compensation, LinkBit will receive a total of JPY30,000,000, resulting in USD$273,000 of revenue for LinkBit in fiscal
year 2017. The fee under this agreement is payable in 10 monthly installments starting in November 2016. As of July 31, 2017, the
amount due under this agreement was JPY3,000,000 (USD$27,300).
Additionally, LinkBit is a party to a services
agreement with Cheval Attache Co., Ltd. (of which Mr. Tanabe is a representative director) dated August 2014. Cheval Attache delivers
services relating to content and application development. LinkBit pays a monthly fee of JPY1,000,000 (approximately US$9,000) to
Cheval Attache. During fiscal year 2017 a total of JPY12,960,000 (approximately US$118,000) in service fees was paid to Cheval
Attache. During fiscal year 2017, LinkBit also charged Cheval Attache JPY11,021,988 (approximately US$100,000) service fees related
to access it provided relating to horseracing contacts.
Cheval Attache also made advances totaling
JPY68,000,000 (approximately USD$618,800) at July 31, 2017. There is no stated interest on the advances and JPY30,000,000 (USD$273,000)
of the amounts are due on October 31, 2017, and remainder is due on demand.
Director Independence
Our common stock is not quoted or listed
on any national exchange or interdealer quotation system with a requirement that a majority of our board of directors be independent
and therefore, the Company is not subject to any director independence requirements. Under NASDAQ Rule 5605(a)(2)(A), a director
is not considered to be independent if he or she also is an executive officer or employee of the corporation or if there have been
certain transactions between the Company and the director or another company with which the director is affiliated. Under these
standards Enrique Marchese is the only director that the Board of Directors has determined is an independent director.
|
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The aggregate fees billed to the Company
by Mac Accounting Group, LLP, Haynie & Company, and by HJ & Associates for the years ended July 31, 2017 and 2016, for
professional fees are as follows:
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Audit fees
|
|
$
|
170,000
|
|
|
$
|
216,000
|
|
|
Audit related fees
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Total audit and related fees
|
|
|
170,000
|
|
|
|
216,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consulting fees
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Tax fees
|
|
|
-0-
|
|
|
|
30,000
|
|
|
Total fees
|
|
$
|
170,000
|
|
|
$
|
246,000
|
|
Audit Fees and audit related fees are amounts
billed for professional services that our independent public accounting firm provided for the audit of our annual financial statements,
review of the financial statements included in our reports on 10-Q, and other services typically provided by an accountant in connection
with statutory and regulatory filings or engagements for those fiscal years.
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. In August 2015, Grand Perfecta formed Sports Perfecta, Inc. (“Sports
Perfecta”), as a California subsidiary to pursue development of a fantasy sports offering to horse racing fans. The operations
of Grand Perfecta, LinkBit, Umajin HK, and Sports Perfecta are collectively referred to as the “Company.”
On December 16, 2015, LinkBit acquired 100% of the outstanding
shares of Basougu Shokuninkai Co., Ltd. (“Basougu”), a Japanese corporation (See Note 6). On January 7, 2016, Sports
Perfecta acquired 100% of the outstanding stock of Just Mobile Sdn. Bhd. (“Just Mobile”), a Malaysian company (see
Note 6). 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 6 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.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company
have been prepared in accordance with principles generally accepted in the United States of America (“GAAP”) and 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.
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.
As of July 31, 2017, we had cash of $102,954 and a working capital
deficit of $9,117,835 as compared to cash of $83,295 and a working capital deficit of $8,926,656 at July 31, 2016.
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. The Company also conducts operations through Sports Perfecta, and its Malaysian
subsidiary SPT. 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. LinkBit’s functional currency is the
Japanese Yen and Umajin HK’s functional currency is the Hong Kong Dollar. SPT’s functional currency is the Malaysian
Ringgit.
The financial statements of each entity are prepared using the
applicable functional currencies, and have been translated into U.S. dollars (“USD”). Assets and liabilities are translated
into USD at the applicable exchange rates at period-end. Stockholders’ equity is translated using historical exchange rates.
Revenue and expenses are translated at the average exchange rates for the period. Any translation adjustments are included as foreign
currency translation adjustments in accumulated other comprehensive income in the Company’s stockholders’ equity.
The following rates were used to translate the accounts of LinkBit,
Umajin HK and SPT into USD at the following balance sheet dates.
|
|
|
Balance Sheet Dates
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen to USD
|
|
|
0.0091
|
|
|
|
0.0098
|
|
|
Hong Kong Dollars to USD
|
|
|
0.1280
|
|
|
|
0.1289
|
|
|
Malaysian Ringgit to USD
|
|
|
0.2335
|
|
|
|
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 Year Ended
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen to USD
|
|
|
0.0091
|
|
|
|
0.0087
|
|
|
Hong Kong Dollars to USD
|
|
|
0.1287
|
|
|
|
0.1289
|
|
|
Malaysian Ringgit to USD
|
|
|
0.2321
|
|
|
|
0.2413
|
|
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 July 31, 2017
and 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 July 31, 2017 or 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 of goodwill during the year ended July
31, 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. The Company performed this analysis at July 31,
2017 and determined that the sum of projected future cash flows over the remaining useful life of the intangible assets were negative.
Accordingly, the Company recorded an impairment charge of $83,712 during the year ended July 31, 2017. There was no impairment
of long-lived assets identified during the year ended July 31, 2016.
Fair Value of Financial Instruments
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific
asset or liability.
GAAP provides for a three-level hierarchy
of inputs to valuation techniques used to measure fair value, defined as follows:
|
•
|
Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
|
|
•
|
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
|
|
|
–
|
Quoted prices for similar assets or liabilities in active markets
|
|
|
–
|
Quoted prices for identical or similar assets or liabilities in markets that are not active
|
|
|
–
|
Inputs other than quoted prices that are observable for the asset or liability
|
|
|
–
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means
|
|
•
|
Level 3 — Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
|
The Company has determined that the book value of its outstanding
financial instruments as of July 31, 2017 and 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
had losses related to the write off of notes receivable during the year ended July 31, 2017 and 2016 of $309,400 and $7,395, respectively,
in addition to the $1,312,276 loss on settlement of note receivable that was recorded during the year ended July 31, 2016 (see
Note 13).
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.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising
costs incurred amounted to $241,623 and $172,983 for the years ended July 31, 2017 and 2016, respectively.
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. As of July 31, 2017 and 2016, 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. As of July 31, 2016, the Company
had convertible notes convertible into 980,000 shares of common stock which were excluded from the computation because they are
anti-dilutive. As of July 31, 2017, the Company did not have any convertible notes. 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, 2017, 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.
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Buildings and fixtures
|
|
$
|
102,528
|
|
|
$
|
317,140
|
|
|
Autos and trucks
|
|
|
275,799
|
|
|
|
297,014
|
|
|
Tools and equipment
|
|
|
423,632
|
|
|
|
538,231
|
|
|
Computer software
|
|
|
1,442,753
|
|
|
|
1,553,734
|
|
|
|
|
|
2,244,712
|
|
|
|
2,706,119
|
|
|
Less: accumulated depreciation
|
|
|
(2,070,401
|
)
|
|
|
(2,463,370
|
)
|
|
|
|
$
|
174,311
|
|
|
$
|
242,749
|
|
Depreciation expense amounted to $54,053 and $71,530 for the
year ended July 31, 2017 and 2016, 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
July 31, 2017 and 2016, the Company had total outstanding notes receivable of $2,662,700 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 $2,057,251
and $2,457,846 as of July 31, 2017 and 2016, respectively.
The future scheduled maturities of outstanding notes receivables
as of July 31, 2017 based on contractual due dates are as follows.
|
|
|
Year Ended
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
2018
|
|
$
|
2,057,251
|
|
|
2019
|
|
|
7,486
|
|
|
2020
|
|
|
10,997
|
|
|
2021
|
|
|
–
|
|
|
2022
|
|
|
31,251
|
|
|
Thereafter
|
|
|
555,715
|
|
|
Total
|
|
$
|
2,662,700
|
|
5. GOODWILL
The Company had recorded goodwill relating to the purchase of
Media 21, Inc. in 2011, as well as the acquisition of Umajin HK on May 27, 2013. The following is a summary of the activity relating
to goodwill for the years ended July 31, 2016 and 2017. The impairment expense related to Umajin HK of $99,502 during the year
end July 31, 2016 has been the only impairment expense recognized.
|
Balance as of July 31, 2015
|
|
$
|
6,257,112
|
|
|
Impairment of Umajin HK goodwill
|
|
|
(99,502
|
)
|
|
Foreign currency translation adjustment
|
|
|
1,292,243
|
|
|
Balance as of July 31, 2016
|
|
$
|
7,449,853
|
|
|
Foreign currency translation adjustment
|
|
|
(532,131
|
)
|
|
Balance as of July 31, 2017
|
|
$
|
6,917,722
|
|
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, of which $120,000 was paid on the closing date and the remaining $80,000 was paid in April 2016.
Assets acquired and liabilities assumed were recorded at their
estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using
the income approach.
The purchase price was allocated as follows as of the acquisition
date:
|
Cash
|
|
$
|
38,908
|
|
|
Accounts receivable
|
|
|
20,960
|
|
|
Other current assets
|
|
|
6,751
|
|
|
Intangible assets
|
|
|
134,476
|
|
|
Current liabilities
|
|
|
(1,095
|
)
|
|
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 amounted to $34,390 and $20,227 for year ended
July 31, 2017 and 2016, respectively. As of July 31, 2017, the Company determined that the future projected cash flows over the
remaining useful life of the intangible assets were negative. As a result, the Company recorded an impairment charge during the
year ended July 31, 2017 of $83,712, representing the book value of the intangible assets at the time.
On December 16, 2015, the Company entered into a purchase agreement
to acquire 100% of the outstanding shares of Basougu. The total purchase price for the outstanding shares of Basougu amounted to
2 million Japanese Yen ($16,400 on the purchase date). The fair value of the net assets acquired from Basougu amounted to $95,980
as of the acquisition date. As the fair value of the net assets was greater than the purchase price, the Company recorded a gain
on the acquisition of Basougu of $79,580, which is reflected as a component of other income on the accompanying statements of operations
for the year ended July 31, 2016. There was no goodwill or other intangible assets acquired in connection with the purchase of
Basougu.
7. NOTES PAYABLE
A summary of the Company’s outstanding notes payable is
as follows:
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
910,000
|
|
|
$
|
980,000
|
|
|
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.
|
|
|
1,911,000
|
|
|
|
2,058,000
|
|
|
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.
|
|
|
–
|
|
|
|
539,000
|
|
|
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.
|
|
|
864,500
|
|
|
|
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.
|
|
|
746,200
|
|
|
|
980,000
|
|
|
Unsecured note payable issued on June 28, 2017, payable in full on June 30, 2018, bearing interest at 12% per annum due monthly.
|
|
|
418,600
|
|
|
|
–
|
|
|
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.
|
|
|
273,000
|
|
|
|
294,000
|
|
|
Unsecured notes payable, non-interest bearing, due on demand
|
|
|
41,336
|
|
|
|
44,516
|
|
|
Total notes payable
|
|
|
5,164,636
|
|
|
|
5,875,516
|
|
|
Less: current portion of notes payable
|
|
|
4,427,536
|
|
|
|
3,797,916
|
|
|
Long-term portion of notes payable
|
|
$
|
737,100
|
|
|
$
|
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,
|
|
|
|
|
|
|
|
2018
|
|
$
|
4,427,536
|
|
|
2019
|
|
|
737,100
|
|
|
Total
|
|
$
|
5,164,636
|
|
8. DEBT TO RELATED PARTIES
A summary of the Company’s outstanding debt to related
parties is as follows:
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
910,000
|
|
|
$
|
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.
|
|
|
455,000
|
|
|
|
490,000
|
|
|
Unsecured note payable issued on June 14, 2016, non-interest bearing and due on October 31, 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.
|
|
|
273,000
|
|
|
|
294,000
|
|
|
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
|
|
|
345,800
|
|
|
|
–
|
|
|
Unsecured note payable issued on September 21, 2016, due on October 31, 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.
|
|
|
273,000
|
|
|
|
–
|
|
|
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.
|
|
|
1,001,509
|
|
|
|
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
|
|
|
3,258,309
|
|
|
|
2,790,118
|
|
|
Discount on notes payable to related parties
|
|
|
16,515
|
|
|
|
13,049
|
|
|
Notes payable to related parties, net
|
|
$
|
3,241,794
|
|
|
$
|
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 $78,628, including $16,874 during the year ended July 31, 2016 and $61,754
during the year ended July 31, 2017. The imputed interest was recorded as a discount to the note payable and an increase to additional
paid-in capital. The amounts are being amortized as interest expense through the maturity dates of the notes, which amounted to
$57,128 and $4,033 during the year ended July 31, 2017 and 2016, respectively.
9. CONVERTIBLE NOTE PAYABLE
On March 5, 2015, the Company entered into a convertible note
agreement for total principal borrowings of JPY 200,000,000 ($1,620,000 at July 31, 2015). The amounts were originally due on March
5, 2016 and bear interest at a rate of 1% per annum. At the option of the debt holder, beginning 40 days after the issuance of
the note, the debt holder may convert the outstanding balance of the note into shares of the Company’s common stock at a
conversion rate equal to one share per JPY130.90 or $1.10 of outstanding principal and accrued interest. During the year ended
July 31, 2016, the Company 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 year ended July 31, 2017,
the debt holder agreed to further extend the due date until June 30, 2017. The remaining balance of the convertible note payable
was paid in full by the maturity date. As of July 31, 2017, the outstanding balance amounted to $0.
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 up until the principal amount was paid
in full during the year ended July 31, 2017, at which point the derivative no longer existed. The value at each of these dates
amounted to $0.
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 July 31, 2017 and 2016.
Common Stock Transactions
Pursuant to the Satisfaction Agreement effective November 2,
2015 (see Note 13), Umajin Japan agreed to sell 1,400,000 shares of the Company’s common stock back to the Company, and the
Company has agreed to release Umajin Japan from any further obligation due under the promissory note.
Effective January 25, 2016, the Company entered into a consulting
agreement with an investor relations firm for a term of six months. Per the terms of the agreement, as compensation for the services
to be provided, the Company issued 1,000,000 shares on February 8, 2016, which were fully vested on the date of the agreement.
The total value of the shares as of the agreement date amounted to $120,000, which has been reflected as general and administrative
expense during the year ended July 31, 2016.
On August 23, 2016, the Company entered into an Offshore Securities
Purchase Agreement with an investor whereby the Company sold 1,000,000 shares of common stock for a purchase price of JPY100,000,000
(US $1,000,000 as of August 23, 2016).
On April 10, 2017, the Company entered into an Offshore Securities
Purchase Agreement with an investor whereby the Company sold 700,000 shares of common stock for a purchase price of JPY70,000,000
(US $630,000 as of April 10, 2017).
Sale of Interest in Subsidiary
On July 29, 2016, the Company sold its 50% ownership interest
in Ripuran Co., Ltd. (“Ripuran”) for a total of JPY 350,000 (approximately $3,000). The gain on the sale of the interest
in Ripuran amounted to $35,462 and is included as a component of other income for the year ended July 31, 2016 in the accompanying
consolidated statements of operations.
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 July 31, 2017.
11. INCOME TAXES
The Company records its deferred taxes under the liability method,
whereby 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 and liabilities
are determined based on multi-national, multi-jurisdictional nature of the Company’s operations. 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.
Net deferred tax assets consisted of the following as of July
31, 2017 and 2016.
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Commission expenses
|
|
$
|
425,797
|
|
|
$
|
393,890
|
|
|
Loss carryforwards
|
|
|
172,145
|
|
|
|
273,144
|
|
|
Allowance for doubtful accounts
|
|
|
143,554
|
|
|
|
51,450
|
|
|
Other
|
|
|
84,564
|
|
|
|
70,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
–
|
|
|
|
(18,461
|
)
|
|
Others
|
|
|
(10,529
|
)
|
|
|
(9,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(26,209
|
)
|
|
|
(28,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
789,322
|
|
|
$
|
732,355
|
|
The income tax provision differs from the amount of income tax
determined by applying the applicable income tax rate to pretax income from continuing operations for the years ended July 31,
2017 and 2016 due to the following.
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Income tax expense (benefit) based on book income at Japanese statutory rate
|
|
$
|
(418,479
|
)
|
|
$
|
(649,395
|
)
|
|
IRS tax penalty
|
|
|
210,000
|
|
|
|
–
|
|
|
Loss on credit recorded
|
|
|
–
|
|
|
|
486,383
|
|
|
Entertainment expense
|
|
|
80,914
|
|
|
|
90,679
|
|
|
Additional taxes
|
|
|
3,966
|
|
|
|
5,988
|
|
|
Tax rate difference between current tax and deferred tax assets
|
|
|
3,539
|
|
|
|
(14,263
|
)
|
|
Others
|
|
|
23,444
|
|
|
|
16,053
|
|
|
Total income tax provision
|
|
$
|
(96,616
|
)
|
|
$
|
(64,555
|
)
|
The Company classifies income tax penalties and interest, if
any, as part of other general and administrative expenses in the accompanying consolidated statements of operations. The Company
had accrued penalties of $600,000 as of July 31, 2017 resulting from the failure to timely file required returns in the US from
2013 through 2016. There were no accrued penalties as of July 31, 2016.
The Company's tax years for its Federal and State US jurisdictions
which are currently open for examination are the years of 2013 - 2016. The Company’s tax years in Japanese jurisdictions
are open for examination are the years of 2012 – 2016.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its corporate headquarters and administrative
offices in Toyko Japan, as well as the administrative offices of SPT in Kuala Lumpur, Malaysia under non-cancelable operating leases
extending through April 15, 2019. The lease of the Umajin HK office ended on July 21, 2017. The Company also leases other office
space as needed on a month-to-month basis. The Company incurred rent expense of $720,140 and $898,360 for the years ended July
31, 2017 and 2016, respectively.
Future minimum lease payments under non-cancelable operating
leases are as follows.
|
Years ending July 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
197,618
|
|
|
2019
|
|
|
172,709
|
|
|
Total
|
|
$
|
370,327
|
|
Litigation
In the ordinary course of business, the Company may be or has
been involved in legal proceedings from time to time. As of the date of this annual report, there have been no material legal proceedings
relating to the Company.
13. RELATED PARTY TRANSACTIONS
As of July 31, 2017 and 2016, the Company had $3,258,309 and
$2,790,118, respectively of notes payable due to related parties (see Note 8).
The Company had made advances to Umajin Co., Ltd. (“Umajin
Japan”), a related party entity owned by one of the directors of the Company. Effective October 30, 2015, the Company entered
into a Receivables Transfer Agreement with Europlus International (“EI”), in which the Company transferred $499,898
(JPY 60,228,650) of outstanding receivables due from Umajin Japan to EI in exchange for a note receivable of $494,899 (JPY 59,626,363)
to be paid in three quarterly installments starting on January 31, 2016 and finishing on July 31, 2016. The amount was collected
in full by the Company on August 1, 2016.
Effective November 2, 2015, the Company entered into a Note
Payable and Satisfaction Agreement (the “Satisfaction Agreement”) with Umajin Japan in order to settle the remaining
receivable balance outstanding. The Company was the holder of a promissory note made by Umajin Japan in the principal amount of
JPY 181,720,000 ($1,508,276 as of November 2, 2015). The promissory note was secured by 1,400,000 shares of the Company’s
common stock, which were owned by Umajin Japan. Pursuant to the Satisfaction Agreement, Umajin Japan agreed to sell its shares
of common stock to the Company, and the Company has agreed to release Umajin Japan from any further obligation due under the promissory
note. The fair value of the common stock sold to the Company amounted to $196,000. The difference between the fair value of the
common stock and the outstanding balance of the note receivable amounted to $1,312,276, which was recorded as loss from settlement
of note receivable in the accompanying consolidated statement of operations for the year ended July 31, 2016. There were no outstanding
amounts due from Umajin Japan as of July 31, 2017 or 2016.
Concurrently with the Satisfaction Agreement, the Company and
Umajin Japan modified the service agreement between them effective November 1, 2015, to set the monthly fee payable by the Company
to Umajin Japan for providing horserace information at 16 million Yen per month (inclusive of consumption tax), and to set the
monthly fee payable for providing a horseracing related email magazine and web page content at 7 million Yen per month (inclusive
of consumption tax) for a total of 23 million Yen per month. The Company and Umajn 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 October 2017.
Total fees paid to Umajin Japan for the year ended July 31,
2017 and 2016 amounted to $1,255,800 and $2,149,709, respectively. The fees paid to Umajin Japan are included in cost of sales
in the accompanying consolidated statements of operations. The Company also subleased office space to Umajin Japan during the year
ended July 31, 2016. Total sublease income from Umajin Japan for the year ended July 31, 2016 amounted to $33,600, and is recorded
as a reduction of rent expense in the accompanying consolidated statements of operations. The Company also received payments of
$4,909 during the year ended July 31, 2016 from Umajin Japan as reimbursement of utility expenses under the sublease which have
been recorded as a reduction of other general and administrative expenses in the accompanying consolidated statements of operations.
There was no sublease activity during the year ended July 31, 2017. As of July 31, 2017 and 2016, the Company had $108,604 an $278,977,
respectively, due to Umajin Japan, which is reflected in accounts payable to related parties in the accompanying consolidated balance
sheets.
During the year ended July 31, 2016, the Company sold horses
to Cheval Attache Co., Ltd (“Cheval Attache”), a related party company owned by one its directors, for approximately
$50,000 for a gain of approximately $14,000. In addition, during the years ended July 31, 2017 and 2016, the Company received consulting
services from Cheval Attache (including amounts for consumption tax) of $117,938 and $112,752, respectively, which are included
in cost of sales in the accompanying consolidated statements of operations. During the year ended July 31, 2017, the Company also
charged Cheval Attache (including amounts for consumption tax) $100,300 of revenue related to information provided relating to
providing horseracing contacts, which is included in net sales in the accompanying consolidated statement of operations.
G-Liberta, a subsidiary of Cheval Attache, performs certain
advertising and research services for the Company. Total expenses related to G-Liberta during the year ended July 31, 2017 and
2016 amounted to $1,209 and $0, respectively, and are reflected as part of cost of sales and accounts payable to related parties
in the accompanying consolidated financial statements.
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 $27,300
is included in accounts receivable – related party on the accompanying consolidated balance sheet as of July 31, 2017. The
revenue related to this transaction of $273,000 is reflected as net sales on the accompanying consolidated statement of operations
for the year ended July 31, 2017.
14. 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.