NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. DESCRIPTION OF BUSINESS
Organization
Grand Perfecta, Inc. (“Grand Perfecta”) was incorporated
in the State of Nevada on March 25, 2002, as STI Holdings, Inc. (“STI”). On May 12, 2012, Grand Perfecta completed
an Agreement and Plan of Reorganization whereby it acquired 100% of the issued and outstanding shares of Link Bit Consulting Co,
Ltd. (“LinkBit”), a Japanese corporation, for 25,000,000 common shares in a transaction accounted for as a recapitalization
of LinkBit. Effective March 29, 2013, STI amended its Articles of Incorporation to change its name to Grand Perfecta, Inc. On
May 27, 2013, Grand Perfecta issued 272,668 shares in exchange for 100% of the issued and outstanding shares of Umajin Hong Kong
Ltd. (“Umajin HK”), a Hong Kong corporation. In August 2015, Grand Perfecta formed Sports Perfecta, Inc. (“Sports
Perfecta”), as a California subsidiary to pursue development of a fantasy sports offering to horse racing fans. The operations
of Grand Perfecta, LinkBit, Umajin HK, and Sports Perfecta are collectively referred to as the “Company.”
On December 16, 2015, LinkBit acquired 100% of the outstanding
shares of Basougu Shokuninkai Co., Ltd. (“Basougu”), a Japanese corporation. On January 7, 2016, Sports Perfecta acquired
100% of the outstanding stock of Just Mobile Sdn. Bhd. (“Just Mobile”), a Malaysian company. On January 20, 2016,
Just Mobile changed its name to Sports Perfecta Technologies Sdn Bhd (“SPT”). The operations of Just Mobile are referred
to as SPT after the acquisition date of January 7, 2016.
Nature of Business
The Company is engaged in the business of transmitting and
providing horse racing information via various types of media, including multiple websites owned and operated by the wholly owned
subsidiaries of LinkBit and Umajin HK. LinkBit currently operates 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.
Going Concern
Based on operating losses and negative cash from operations,
substantial doubt exists about the Company’s ability to continue as a going concern. Management’s plan in this regard
is to improve sales and further reduce costs, including the shift of its broadcast program from satellite television to web TV.
To finance operations while it improves operating results, it has sold $1,630,000 of common stock during the year ended July 31,
2017 and if necessary will continue financing activity such as taking loans, issuing new stock and asking existing creditors to
convert their loans to shares of the Company’s common stock.
We continue to have a significant working capital deficit that
adversely affects our business by limiting the resources we have available to pursue the promotion of our information services
and develop new service opportunities for potential customers. Historically, we have relied on extensions of note payment due
dates and new debt financing to repay note obligations as they came due in order to continue operations. Going forward we will
continue to use extensions and new debt financing to address note obligations that come due, endeavor to gradually reduce obligations
with cash flow provided by operations, and pursue over the next 12 months equity financing that we can apply to debt reduction
and business development. Nevertheless, the shortage of working capital adversely affects our ability to develop, sponsor, or
participate in activities that promote our information services to prospective customers and to develop new content, because a
substantial portion of cash flow goes to reduce debt rather than to advance operating activities. There is no assurance that our
plans for addressing our working capital shortages will be successful, and our failure to be reasonably successful should be expected
to result in a significant contraction of our operations and potentially a failure of the business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements
of the Company as of October 31, 2017, and for the three months ended October 31, 2017 and 2016, have been prepared in accordance
with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information
and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information
includes all adjustments considered necessary for a fair presentation of the Company's financial position at such date and the
operating results and cash flows for such periods. Operating results for the interim period ended October 31, 2017 are not necessarily
indicative of the results that may be expected for the entire year.
Certain information and footnote disclosure normally included
in financial statements in accordance with GAAP have been omitted pursuant to the rules of the United States Securities and Exchange
Commission ("SEC"). These unaudited financial statements should be read in conjunction with our audited financial statements
and accompanying notes for the years ended July 31, 2017 and 2016 included in the Company's Form 10-K filed on November 2, 2017.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Grand Perfecta and its wholly-owned subsidiaries LinkBit, Umajin HK, and Sports Perfecta. All intercompany balances
and transactions have been eliminated in consolidation. The Company has determined that two affiliated entities, Space Cultivation
Mobile and Japan Horse Circle, which LinkBit conducts business with are variable interest entities and that the Company is the
primary beneficiary of each entity. As a result, the Company has consolidated the accounts of these variable interest entities
into the accompanying consolidated financial statements. As the Company does not have any ownership interest in these variable
interest entities, the Company has allocated the contributed capital in these variable interest entities as a component of noncontrolling
interest. All intercompany balances and transactions have been eliminated in consolidation.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified
in these consolidated financial statements to conform to current period classifications.
Use of Estimates
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Amounts could materially change in the future.
Foreign Exchange
The Company’s primary operations are conducted in Japan
and performed by its wholly owned subsidiary LinkBit. A wholly owned subsidiary, Umajin HK, had been delivering information on
horse racing to its users through its website similar to LinkBit, however it terminated its service at the end of June 2017. The
Company also conducts operations through Sports Perfecta, and its Malaysian subsidiary SPT. LinkBit’s functional currency
is the Japanese Yen and Umajin HK’s functional currency is the Hong Kong Dollar. SPT’s functional currency is the
Malaysian Ringgit.
The financial statements of each entity are prepared using
the applicable functional currencies, and have been translated into U.S. dollars (“USD”). Assets and liabilities are
translated into USD at the applicable exchange rates at period-end. Stockholders’ deficit is translated using historical
exchange rates. Revenue and expenses are translated at the average exchange rates for the period. Any translation adjustments
are included as foreign currency translation adjustments in accumulated other comprehensive income in the Company’s stockholders’
deficit.
The following rates were used to translate the accounts of
LinkBit, Umajin HK and SPT into USD at the following balance sheet dates.
|
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Balance Sheet Dates
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October 31,
|
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July 31,
|
|
|
|
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2017
|
|
|
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2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Japanese Yen to USD
|
|
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0.0088
|
|
|
|
0.0091
|
|
Hong Kong Dollars to USD
|
|
|
0.1282
|
|
|
|
0.1280
|
|
Malaysian Ringgit to USD
|
|
|
0.2362
|
|
|
|
0.2335
|
|
The following rates were used to translate the accounts of
LinkBit, Umajin HK and SPT into USD for the following operating periods.
|
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For the Three Months Ended
|
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October 31,
|
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October 31,
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2017
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2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Japanese Yen to USD
|
|
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0.0090
|
|
|
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0.0098
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|
Hong Kong Dollars to USD
|
|
|
0.1280
|
|
|
|
0.1289
|
|
Malaysian Ringgit to USD
|
|
|
0.2356
|
|
|
|
0.2438
|
|
Cash and Cash Equivalents
The Company considers all highly liquid holdings with maturities
of three months or less at the time of purchase to be cash equivalents. The Company had no cash equivalents as of October 31,
2017 (unaudited) or July 31, 2017.
Accounts Receivable
Accounts receivable are carried at net realizable value, representing
the outstanding balance less an allowance for doubtful accounts based on a review of all outstanding amounts. Management determines
the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer's financial
condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible.
Recoveries of accounts receivable previously written off are recorded when received. The Company had no allowance for doubtful
accounts as of October 31, 2017 (unaudited) or July 31, 2017.
Property and Equipment
Property and equipment are recorded at historical cost and
depreciated on a straight-line basis over their estimated useful lives once the individual assets are placed in service. Estimated
useful lives for the assets are as follows.
Buildings and fixtures
|
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8 - 43 years
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Autos and trucks
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2 - 6 years
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Tools and equipment
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4 - 10 years
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Computer software
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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. There was no impairment recorded during the three months ended October 31, 2017
or 2016.
Long-Lived Assets
In accordance with ASC 360-10, the Company evaluates long-lived
assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When
such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related
asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based
on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows,
of those assets and is recorded in the period in which the determination is made. There was no impairment of long-lived assets
identified during the three months ended October 31, 2017 or 2016.
Fair Value of Financial Instruments
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific
asset or liability.
GAAP provides for a three-level hierarchy
of inputs to valuation techniques used to measure fair value, defined as follows:
•
|
Level 1 — Inputs that
are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
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•
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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:
|
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–
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Quoted prices for similar
assets or liabilities in active markets
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–
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Quoted prices for identical or similar assets
or liabilities in markets that are not active
|
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–
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Inputs other than quoted prices that are observable
for the asset or liability
|
|
–
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Inputs that are derived principally from or
corroborated by observable market data by correlation or other means
|
•
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Level 3 — Inputs that
are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing
the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions
surrounding the timing and amount of expected cash flows).
|
The Company has determined that the book value of its outstanding
financial instruments as of October 31, 2017 (unaudited) and July 31, 2017 approximates the fair value.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk include cash, accounts receivable, notes receivable, and amounts due from related parties. The Company
maintains its cash in banks located in Japan, Hong Kong, Malaysia and the United States in financial institutions with high credit
ratings. Substantially all of the Company’s revenues are generated from customers in Japan. The Company conducts periodic
reviews of the financial condition and payment practices of its customers and note receivable holders. The Company had no losses
relating to the write off of notes receivables during the three months ended October 31, 2017 or 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.
Basic and Diluted Earnings Per Share
In accordance with ASC 260, Earnings Per Share, the basic income
(loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted average
common shares outstanding during the period. Diluted income (loss) per share reflect per share amounts that would have resulted
if diluted potential common stock had been converted to common stock. No dilutive potential common shares were included in the
computation of diluted net income (loss) per share because their impact was anti-dilutive. During the three months ended October
31, 2017 and 2016, the Company had total options of 3,000,000 which were excluded from the computation of net loss per share because
they are anti-dilutive. During the three months ended October 31, 2016, the Company had convertible notes convertible into 259,091
shares of common stock which were excluded from the computation because they are anti-dilutive. There were no convertible notes
payable outstanding during the three months ended October 31, 2017. As a result, the basic and diluted loss per share were the
same for each of the periods presented.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the ASC Topic 606 and establishes
a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point
in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition,
ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to
provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer
that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public entities for annual reporting
periods beginning after December 15, 2017, including interim periods therein. Early application is not permitted. 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.
3. PROPERTY AND EQUIPMENT,
NET
The Company’s property and equipment consisted of the
following.
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October 31,
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and fixtures
|
|
$
|
99,148
|
|
|
$
|
102,528
|
|
Autos and trucks
|
|
|
266,707
|
|
|
|
275,799
|
|
Tools and equipment
|
|
|
413,784
|
|
|
|
423,632
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|
Computer software
|
|
|
1,395,190
|
|
|
|
1,442,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,174,829
|
|
|
|
2,244,712
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(2,008,887
|
)
|
|
|
(2,070,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
165,942
|
|
|
$
|
174,311
|
|
Depreciation expense amounted to $6,894 (unaudited) and $14,804
(unaudited) for the three months ended October 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
October 31, 2017 and July 31, 2017, the Company had total outstanding notes receivable of $2,620,099 (unaudited) and $2,662,700,
respectively. The portion of these outstanding notes receivables that were either due on demand or had scheduled due dates within
one year amounted to $2,045,609 (unaudited) and $2,057,251 as of October 31, 2017 and July 31, 2017, respectively.
The future scheduled maturities of outstanding notes receivables
as of October 31, 2017 based on contractual due dates are as follows.
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Year Ended
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|
|
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July 31,
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|
|
|
|
|
|
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2018 (remainder of)
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|
$
|
2,038,602
|
|
|
2019
|
|
|
|
7,006
|
|
|
2020
|
|
|
|
9,657
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|
|
2021
|
|
|
|
–
|
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|
2022
|
|
|
|
28,597
|
|
|
Thereafter
|
|
|
|
536,237
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|
|
Total
|
|
|
$
|
2,620,099
|
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5. GOODWILL
The Company has recorded goodwill relating to the purchase
of Media 21, Inc.’s operations in 2011. The following is a summary of the activity relating to goodwill for the three months
ended October 31, 2017.
Balance as of July 31, 2017
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|
$
|
6,917,722
|
|
Foreign currency translation adjustment
|
|
|
(228,057
|
)
|
Balance as of October 31, 2017 (unaudited)
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|
$
|
6,689,665
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6. NOTES PAYABLE
A summary of the Company’s outstanding notes payable
is as follows:
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October 31,
|
|
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July 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable issued on June 15, 2016, due on December 15, 2016, bearing
interest at 15% per annum (21.9% per annum after the maturity date) due monthly. The Company is currently in default under
the terms of the note.
|
|
$
|
880,000
|
|
|
$
|
910,000
|
|
Unsecured note payable issued on December 20, 2011, due on December 31, 2016, bearing interest
at 15% per annum (18% per annum after the maturity date) due monthly. The Company is currently in default under the terms of
the note.
|
|
|
1,848,000
|
|
|
|
1,911,000
|
|
Unsecured note payable issued on October 20, 2017, due in 10 monthly installments through August 20, 2018, bearing interest at 12% per annum due monthly.
|
|
|
176,000
|
|
|
|
–
|
|
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.
|
|
|
704,000
|
|
|
|
864,500
|
|
Unsecured note payable issued on February 5, 2016, due in 23 installments of JPY 3,000,000 beginning in February 2017 and a final installment of JPY 31,000,000 in January 2019, bearing interest at 12% per annum due monthly.
|
|
|
642,400
|
|
|
|
746,200
|
|
Unsecured note payable issued on June 28, 2017, payable in full on June 30, 2018, bearing interest at 12% per annum due monthly.
|
|
|
299,200
|
|
|
|
418,600
|
|
Unsecured note payable issued on July 20, 2011, due on July 20, 2018, bearing interest at 12% per annum due monthly.
|
|
|
264,000
|
|
|
|
273,000
|
|
Unsecured notes payable, non-interest bearing, due on demand
|
|
|
39,973
|
|
|
|
41,336
|
|
Total notes payable
|
|
|
4,853,573
|
|
|
|
5,164,636
|
|
Less: current portion of notes payable
|
|
|
4,351,973
|
|
|
|
4,427,536
|
|
Long-term portion of notes payable
|
|
$
|
501,600
|
|
|
$
|
737,100
|
|
Substantially all of the above outstanding notes payable are
personally guaranteed by the Company’s Chief Executive Officer.
Future scheduled maturities of long-term debt are as follows:
|
|
|
Year Ended
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
2018 (remainder of)
|
|
|
$
|
4,123,173
|
|
|
2019
|
|
|
|
730,400
|
|
|
Total
|
|
|
$
|
4,853,573
|
|
7. NOTES PAYABLE TO RELATED PARTIES
A summary of the Company’s outstanding notes payable
to related parties is as follows:
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable issued on March 26, 2012, due on demand, bearing
interest at 1% per annum due monthly. The balance is due to a related party entity which is owned by one of the directors of
the Company.
|
|
$
|
880,000
|
|
|
$
|
910,000
|
|
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1%
per annum due monthly. The balance is due to a related party entity which is owned by one of the directors of the
Company.
|
|
|
440,000
|
|
|
|
455,000
|
|
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.
|
|
|
264,000
|
|
|
|
273,000
|
|
Unsecured short-term borrowing on April 25, 2017, non-interest bearing and due on demand.
The balance is due to a related party entity which is owned by one of the directors of the Company
|
|
|
422,400
|
|
|
|
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.
|
|
|
264,000
|
|
|
|
273,000
|
|
Unsecured note payable due to the Company's Chairman and CEO, non-interest bearing and due on demand.
|
|
|
968,492
|
|
|
|
1,001,509
|
|
Total notes payable to related parties
|
|
|
3,238,892
|
|
|
|
3,258,309
|
|
Discount on notes payable to related parties
|
|
|
–
|
|
|
|
16,515
|
|
Notes payable to related parties, net
|
|
$
|
3,238,892
|
|
|
$
|
3,241,794
|
|
The Company imputed interest on the above notes payable received
on June 14, 2016 and September 21, 2016 using the effective interest rate of 12%, which approximated the Company’s incremental
borrowing rate. The total cumulative interest imputed as of October 31, 2017 amounted to $78,628. 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 $16,333 and $12,437 during the three months ended October 31, 2017
and 2016, respectively.
8. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue up to 100,000,000 shares
of preferred stock with a par value of $0.001, with 100,000 shares designated as Series A Preferred Stock. The Series A Preferred
Stock receive a 10 to 1 voting preference over common stock. Accordingly, for every share of Series A Preferred Stock held, the
holder receives the voting rights equal to 10 shares of common stock. As such, the holders of the Series A Preferred Stock have
the equivalent voting capability of 1,000,000 shares of common stock. The Series A Preferred Stock also has a $0.05 per share
liquidation preference over common stock, and can be redeemed by the Company at any time, upon thirty days’ notice, for
$0.05 per share.
The Company had 100,000 shares of Series A Preferred Stock
issued and outstanding as of October 31, 2017 and July 31, 2017.
Stock Options
In connection with the sale of stock on June 11, 2014, the
Company granted an option to the buyer to purchase an additional 3,000,000 shares of common stock for a purchase price of $3 million
at any time prior to June 11, 2019. The options are outstanding as of October 31, 2017.
9. RELATED PARTY TRANSACTIONS
As of October 31, 2017 and July 31, 2017, the Company had $3,238,892
(unaudited) and $3,241,794, respectively of notes payable due to related parties (see Note 7).
The Company and Umajin Japan, a related party company owned
by one of its directors, revised a service agreement between them effective November 1, 2015, to set the monthly fee payable by
the Company to Umajin Japan for providing horserace information at 16 million Yen per month (inclusive of consumption tax), and
to set the monthly fee payable for providing a horseracing related email magazine and web page content at 7 million Yen per month
(inclusive of consumption tax) for a total of 23 million Yen per month. The Company and Umajin Japan agreed to reduce the monthly
fees from 23 million Yen to 11 million Yen subsequent to October 2016. Subsequent to February 2017, the Company and Umajin Japan
agreed to reduce the fee to 8 million Yen per month through October 2017.
Total fees paid to Umajin Japan for the three months ended
October 31, 2017 and 2016 amounted to $216,029 and $558,600, respectively. The fees paid to Umajin Japan are included in cost
of sales in the accompanying consolidated statements of operations. As of October 31, 2017 and July 31, 2017, the Company had
$123,830 (unaudited) and $108,604 due to Umajin Japan, respectively, which is reflected in accounts payable to related party in
the accompanying consolidated balance sheets.
During the three months ended October 31, 2017 and 2016, the
Company received consulting services from Cheval Attache Co., Ltd., a related party entity owned by one of its directors, of approximately
$29,160 and $31,752, respectively, which are included in cost of sales in the accompanying consolidated statements 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 three months ended October 31,
2017 and 2016 amounted to $948 and $0, respectively, and are reflected as part of cost of sales. As of October 31, 2017 and July
31, 2017, the Company had $1,212 (unaudited) and $1,209 due to G-Liberta, respectively, which is reflected in accounts payable
to related party in the accompanying consolidated balance sheets
On October 17, 2016, the Company entered into an agreement
with Clara Ltd., a related party entity owned by one of its directors, allowing Clara Ltd. access to the Company’s database
containing certain horse racing information owned by the Company for an indefinite period. As compensation, the Company received
a total of 30,000,000 Yen, payable in 10 monthly installments starting in November 2016. The revenue related to this transaction
of $294,000 is reflected as net sales on the accompanying statement of operations for the three months ended October 31, 2016.
As of October 31, 2017 and July 31, 2017, the amount due under this agreement was $0 (unaudited) and $27,300 and is included in
accounts receivable – related party on the accompanying consolidated balance sheets.
10. SUBSEQUENT EVENTS
In
accordance with ASC 855, Subsequent Events, the Company has evaluated subsequent events through the date of this filing, and
has determined that there are no subsequent events that require disclosure.