UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2015

 

OR

 

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________to _________

 

Commission file number: 000-55423

 

GRAND PERFECTA, INC.
(Exact name of Registrant as Specified in its Charter)

 

Nevada	46-1779352
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

 

21^st Floor, South Tower, New Pier Takeshiba
1-16-1, Kaigan, Minato-ku, Tokyo, Japan
(Address of Principal Executive Offices including Zip Code)

 

+81-3-3436-4577
(Registrant's Telephone Number, Including Area Code)

 

          N/A         
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
YES    ¨       NO    x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  x    NO  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨

Accelerated filer    ¨

Non-accelerated filer    ¨ (Do not check if a smaller reporting company)

Smaller reporting company    x

 

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

 

As of June 15, 2015, 30,500,000 shares of the issuer's common stock, par value of $0.001 per share, were outstanding.

 

 

Explanatory Note

 

  The purpose of this Amendment No 1 to the Quarterly Report of Grand Perfecta, Inc. on Form 10-Q for the quarterly period ended April 30, 2015, filed with the Securities and Exchange Commission on June 15, 2015, is to amend the numbers as of April 30, 2015, and for the three and nine months ended April 30, 2015 and 2014, to reflect the impact of recognizing an unrecorded note payable owed by the Company based on its guarantee of the loan obligation of a vendor that occurred in a prior accounting period and was the subject of the Form 8-K filed by the Company on November 2, 2015. The restatement also reflects the related deferred tax impact of recognizing the note payable.

 

Concurrently with the filing of this Amendment, the Company is filing an amendment to its registration statement on Form 10.

 

Except for the events described above and in the footnotes to the financial statements presented in this report, this report has not been updated to reflect any events that have occurred after the original Form 10-Q was filed or to modify or update disclosures affected by other subsequent events, except where required by GAAP. Accordingly, forward-looking statements included in this Amendment represent management’s views as of the original Form 10-Q filing date and should not be assumed to be accurate as of any date thereafter. This amended report should be read in conjunction with the Company’s other filings with the SEC, together with any amendments to those filings.

 

 

 

GRAND PERFECTA, INC.

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION	2
ITEM 1 - FINANCIAL STATEMENTS	2
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4 - CONTROLS AND PROCEDURES	21
PART II - OTHER INFORMATION	22
ITEM 6 – EXHIBITS	22
SIGNATURES	23

 

 

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

Consolidated Balance Sheets at April 30, 2015 (Unaudited) and July 31, 2014

 

Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended April 30, 2015 and 2014

 

Consolidated Statements of Comprehensive Income (Unaudited) — Three and Nine Months Ended April 30, 2015 and 2014

 

Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended April 30, 2015 and 2014

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED BALANCE SHEETS

 

		2015				2014
		Restated
		(Unaudted)
Assets
Current assets
Cash		$	186,988			$	1,882,272
Accounts receivable, net			868,563				634,455
Current portion due from related parties			418,991				1,481,811
Current portion of notes receivable			1,555,058				1,682,327
Deferred tax assets, current portion			890,990				1,039,489
Prepaid expenses and other current assets			79,714				66,659
Total current assets			4,000,304				6,787,013
Property and equipment, net			282,932				376,055
Other assets
Long-term notes receivables, net of current portion			558,795				632,124
Long-term portion due from related parties, net of current portion			1,526,448				–
Deferred tax assets, long-term portion			199,506				232,757
Goodwill			6,485,169				7,549,434
Other assets			538,003				617,413
Total other assets			9,307,921				9,031,728
Total assets		$	13,591,157			$	16,194,796
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses		$	1,614,546			$	2,617,037
Deferred revenues			1,162,181				1,390,210
Current portion of notes payable			3,668,300				9,113,727
Notes payable to related parties			1,030,730				–
Convertible note payable			1,680,000				–
Taxes payable			1,081,763				755,867
Total current liabilities			10,237,520				13,876,841
Long-term portion of notes payable, net of current portion			1,436,568				728,846
Total liabilities			11,674,088				14,605,687
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 100,000 shares issued and outstanding as of April 31, 2015 (unaudited) and July 31, 2014			100				100
Common stock, $0.001 par value, 500,000,000 shares authorized, 30,500,000 shares issued and outstanding as of April 30, 2015 (unaudited) and July 31, 2014			30,500				30,500
Additional paid-in capital			4,121,034				4,121,034
Other comprehensive income			499,982				736,356
Accumulated deficit			(2,961,907	)			(3,564,512	)
Total GPI stockholders' equity (deficit)			1,689,709				1,323,478
Noncontrolling interest			227,360				265,631
Total stockholders' equity (deficit)			1,917,069				1,589,109
Total liabilities and stockholders' equity		$	13,591,157			$	16,194,796

 

See accompanying notes to consolidated financial statements

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended								For the Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
		2015				2014				2015				2014
		Restated				Restated				Restated				Restated
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net sales		$	4,305,535			$	4,881,671			$	13,817,621			$	16,651,792
Total revenues			4,305,535				4,881,671				13,817,621				16,651,792
Operating expenses:
Cost of sales			1,047,822				1,611,285				3,510,942				4,672,498
Depreciation expense			26,435				57,387				83,080				175,238
Advertising			181,612				668,096				635,456				1,354,486
Rent expense			195,368				211,884				612,026				621,986
Salaries and wages			1,435,301				1,137,313				4,195,584				3,740,776
Other general and administrative expenses			1,037,592				1,078,385				3,032,870				3,116,863
Total operating expenses			3,924,130				4,764,350				12,069,958				13,681,847
Income from operations			381,405				117,321				1,747,663				2,969,945
Other income (expense):
Other income (loss)			21,941				14,766				62,021				(5,355	)
Gain (loss) on exchange			6,872				6,364				31,462				24,635
Interest income			2,932				4,076				9,954				13,808
Interest expense			(187,053	)			(283,124	)			(643,440	)			(891,269	)
Total other income (expense)			(155,308	)			(257,918	)			(540,003	)			(858,181	)
Net income (loss) before provision for income taxes			226,097				(140,597	)			1,207,660				2,111,764
Provision for (benefit from) income taxes			114,597				(108,211	)			605,379				1,017,123
Net income (loss)			111,500				(32,386	)			602,281				1,094,641
Less: net loss attributable to noncontrolling interest			(324	)			–				(324	)			–
Net income (loss) attributable to GPI		$	111,824			$	(32,386	)		$	602,605			$	1,094,641
Net income (loss) per share, basic and diluted		$	0.00			$	(0.00	)		$	0.02			$	0.04
Weighted average number of common shares outstanding, basic and diluted			30,500,000				27,500,000				30,500,000				27,500,000

 

 

See accompanying notes to consolidated financial statements

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

 

		For the Three Months Ended								For the Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
		2015				2014				2015				2014
		Restated				Restated				Restated				Restated
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income (loss)		$	111,500			$	(32,386	)		$	602,281			$	1,094,641
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			(77,692	)			51,622				(236,374	)			126,752
Total other comprehensive income (loss), net of tax			(77,692	)			51,622				(236,374	)			126,752
Comprehensive income (loss)			33,808				19,236				365,907				1,221,393
Comprehensive income (loss) attributable to noncontrolling interest			(2,710	)			(2,441	)			(37,947	)			(13,553	)
Comprehensive income (loss) attributable to GPI stockholders		$	31,098			$	16,795			$	327,960			$	1,207,840

 

See accompanying notes to consolidated financial statements

 

 

GRAND PERFECTA, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

		For the Nine Months Ended
		April 30,				April 30,
		2015				2014
		Restated				Restated
		(Unaudited)				(Unaudited)
Cash flows from operating activities
Net income		$	602,281			$	1,094,641
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			83,080				175,238
Loss (gain) on sale of property and equipment			–				22,531
Changes in operating assets and liabilities:
Accounts receivable			(340,175	)			(306,094	)
Prepaid expenses and other current assets			(23,237	)			9,083
Other assets			(8,882	)			(101,159	)
Accounts payable and accrued expenses			(699,263	)			(753,928	)
Deferred revenue			(30,829	)			170,012
Taxes payable			454,537				860,302
Net cash provided by (used in) operating activities			37,512				1,170,626
Cash flows from investing activities
Purchase of property and equipment			(41,802	)			(76,027	)
Proceeds (payments) for lending to related parties, net			372,339				(215,603	)
Proceeds from collection of notes receivables			835,350				72,907
Payments for notes receivable lending			(971,580	)			(222,253	)
Net cash provided by (used in) investing activities			194,307				(440,976	)
Cash flows from financing activities
Proceeds from notes payable			1,391				181
Proceeds from convertible notes payable			1,760,000				–
Payments on note payable			(3,491,663	)			(794,068	)
Net cash provided by (used in) financing activities			(1,730,272	)			(793,887	)
Effect of exchange rate fluctuations on cash			(196,831	)			(6,211	)
Net change in cash			(1,695,284	)			(70,448	)
Cash, beginning of the period			1,882,272				168,223
Cash, end of the period		$	186,988			$	97,775
Supplemental disclosure of cash flow information:
Interest paid		$	643,440			$	891,269
Income taxes paid		$	150,841			$	156,822

 

See accompanying notes to consolidated financial statements

 

 

GRAND PERFECTA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.  DESCRIPTION OF BUSINESS

 

Organization

 

Grand Perfecta, Inc. (“Grand Perfecta”) was incorporated in the State of Nevada on March 25, 2002, as STI Holdings, Inc. (“STI”). On May 12, 2012, the Company completed an Agreement and Plan of Reorganization whereby it acquired 100% of the issued and outstanding shares of Link Bit Consulting Co, Ltd. (“LinkBit” or the “Company”), 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, the Company issued 272,668 shares in exchange for 100% of the issued and outstanding shares of Umajin Hong Kong Ltd. (“Umajin HK”), a Hong Kong corporation that maintains an office in Hong Kong. The operations of Grand Perfecta, LinkBit and Umajin HK are collectively referred to as the “Company.”

 

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.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

  

The accompanying unaudited consolidated financial statements of the Company as of April 30, 2015, and for the three and nine months ended April 30, 2015 and 2014, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information includes all adjustments considered necessary for a fair presentation of the Company's financial position at such date and the operating results and cash flows for such periods. Operating results for the interim period ended April 30, 2015 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, 2014 and 2013 included in the Company's Form 10 filed on April 15, 2015, and amended by Amendment No. 3 thereto filed with the Securities and Exchange Commission on November 10, 2015.

 

Principals of Consolidation

 

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 and Umajin HK. 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 net loss from these variable interest entities as a component of noncontrolling interest. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Amounts could materially change in the future.

  

Foreign Exchange

 

The Company’s primary operations are conducted in Japan and performed by its wholly owned subsidiaries LinkBit and Umajin HK. LinkBit’s functional currency is the Japanese Yen and Umajin HK’s functional currency is the Hong Kong Dollar.

 

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 and Umajin HK into USD at the following balance sheet dates.

 

		Balance Sheet Dates
		April 30,				July 31,
		2015				2014
Japanese Yen to USD			0.0084				0.0098
Hong Kong Dollars to USD			0.1290				0.1290

 

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

 

		For the Nine Months Ended
		April 30,				April 30,
		2015				2014
Japanese Yen to USD			0.0088				0.0099
Hong Kong Dollars to USD			0.1290				0.1289

 

Cash and Cash Equivalents

 

The Company considers all highly liquid holdings with maturities of three months or less at the time of purchase to be cash equivalents. The Company had no cash equivalents as of April 30, 2015 (unaudited) or July 31, 2014.

 

Accounts Receivable

 

Accounts receivable are carried at net realizable value, representing the outstanding balance less an allowance for doubtful accounts based on a review of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering each customer's financial condition and credit history, as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. The Company had no allowance for doubtful accounts as of April 30, 2015 (unaudited) and July 31, 2014.

 

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

 

Intangible Assets

 

The Company’s intangible assets include goodwill, which 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 using the Company. As of July 31, 2014, the assessment for impairment found that there is no impairment of goodwill. The Company has no accumulated impairment losses on goodwill.

 

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 assets identified during the year ended July 31, 2014 or during the nine months ended April 30, 2015 (unaudited).

 

 

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 April 30, 2015 (unaudited) and July 31, 2014 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 and Hong Kong in financial institutions with high credit ratings. Substantially all of the Company’s revenues are generated from customers in Japan. The Company conducts periodic reviews of the financial condition and payment practices of its customers and note receivable holders. The Company has not experienced significant losses relating to these concentrations in the past.

 

Revenue Recognition

 

The Company’s revenue consists primarily of sales of comprehensive and informative horse racing literature subscriptions through multiple websites focusing on all aspects of the horse racing industry in Japan. Publication of horse racing digital magazines, providing support for print publications, and participating in other public events and media programs related to the horse racing industry do not generate significant revenue directly. These activities are undertaken for the purpose of increasing the number of horse racing fans and driving potential customers to our websites so as to hopefully eventually convert them to paying customers.

 

The Company recognizes revenue on arrangements in accordance with ASC 605, Revenue Recognition. Revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The majority of the Company’s revenue is generated by per-item sales. For all users, payment is received at the time of purchase. The Company recognizes revenue for per-item sales when the requested information is supplied to the user. For subscriptions that span a period of time, the Company recognizes revenue over the term of the subscription. Revenues are presented net of refunds, credits and known and estimated credit card chargebacks. The Company reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Rights to content purchased by customers in advance of the content being provided are recorded as deferred revenue.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

 

Basic and Diluted Earnings Per Share

 

In accordance with ASC 260, Earnings Per Share, the basic income per common share is computed by dividing the net income available to common stockholders after preferred stock dividends, 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. The Company had no common stock equivalents outstanding that were included in the diluted earnings per share during the three or nine months ended April 30, 2015 or 2014 (unaudited). As a result, the basic and diluted earnings per share were the same for each of the periods presented.

 

Recent Accounting Pronouncements 

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the ASC Topic 606 and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early application is not permitted. Management is in the process of assessing the impact of ASU 2014-09 on the Company’s financial statements.

 

3.  PROPERTY AND EQUIPMENT, NET

 

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

 

		April 30,				July 31,
		2015				2014
		(Unaudited)
Buildings and fixtures		$	240,478			$	272,079
Autos and trucks			305,421				356,324
Tools and equipment			523,023				569,152
Computer software			1,337,372				1,560,267
Construction in progress			12,736				–
Horses			20,160				41,347
			2,439,190				2,799,169
Less: accumulated depreciation			(2,156,258	)			(2,423,114	)
		$	282,932			$	376,055

 

4.  DUE FROM RELATED PARTIES

 

The Company made short-term revolving advances to related parties, including officers, directors and other related parties. All loans are unsecured and due within one year of the issuance date, and earn interest at rates ranging from 0% to 3% per annum. The total amounts outstanding from related parties amounted to $1,945,439 (unaudited) and $1,481,811 as of April 30, 2015 and July 31, 2014, respectively.

 

Of the total related party receivables, the amounts outstanding directly from officers and directors amounted to $0 (unaudited) and $1,144,647 as of April 30, 2015 and July 31, 2014, respectively. Subsequent to the year ended July 31, 2014, the Company settled the amounts due directly from officers of the Company in full.

 

 

The remaining outstanding receivables amounting to $1,945,439 (unaudited) and $337,164 as of April 30, 2015 and July 31, 2014, respectively, represented amounts outstanding from a related party entity owned by one of the directors of the Company. Of the amount outstanding from this related party as of April 30, 2015, $1,526,448 of the outstanding balance bears interest at 0.48% and is due in full on February 28, 2018. The remaining portion of $418,991 is non-interest bearing and due on demand.

 

Management considers all of these outstanding advances to be fully collectible and has determined that no allowance is necessary. 

 

5.  NOTES RECEIVABLE

 

The Company’s outstanding notes receivable consist of unsecured advances, including interest ranging from 0% to 8% per annum, payable in full on dates extending through 2039. As of April 30, 2015 and July 31, 2014, the Company had total outstanding notes receivable of $2,113,853 (unaudited) and $2,314,451, respectively. The portion of these outstanding notes receivables that were either due on demand or had scheduled due dates within one year amounted to $1,555,058 (unaudited) and $1,682,327 as of April 30, 2015 and July 31, 2014, respectively.

 

The future scheduled maturities of outstanding notes receivables as of April 30, 2015 based on contractual due dates are as follows.

 

		Period ended
		April 30, 2015
2015 (remainder of)		$	1,555,058
2016			–
2017			–
2018			–
2019			9,493
Thereafter			549,302
Total		$	2,113,853

 

6.  GOODWILL

 

The Company has 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 nine months ended April 30, 2015 (unaudited):

 

Balance as of July 31, 2014		$	7,549,434
Foreign currency translation adjustment			(1,064,265	)
Balance as of April 30, 2015 (unaudited)		$	6,485,169

 

 

7.  NOTES PAYABLE

 

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

 

		April 30,				July 31,
		2015				2014
		(Unaudited)
Unsecured notes payable originally issued on September 30, 2009 and November 30, 2010, due in full on November 30, 2015, bearing interest at 3.5% per annum due monthly.		$	72,223			$	205,134
Unsecured note payable issued on March 26, 2012, due on demand, bearing interest at 1% per annum due monthly.			840,000				980,000
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1% per annum due monthly.			420,000				490,000
Unsecured note payable issued on July 23, 2013, due on August 5, 2016, bearing interest at 1.2% per annum due monthly.			176,568				327,712
Unsecured note payable issued on September 30, 2013, due on September 30, 2014, bearing interest at 15% per annum due monthly.			–				784,000
Unsecured note payable issued on December 20, 2011, due on December 20, 2014, bearing interest at 15% per annum due monthly.			1,596,000				2,058,000
Unsecured note payable issued on June 28, 2013, due on October 31, 2015, bearing interest at 15% per annum due monthly.			168,000				196,000
Unsecured note payable issued on August 2, 2010, due on July 31, 2015, bearing interest at 12% per annum due monthly.			–				1,715,000
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.			1,092,000				1,960,000
Unsecured note payable resulting from the Company co-signing for debt of a vendor in 2010. The Company is obligated to repay the debt in monthly installments, bearing interest at 18% per annum due monthly, through November 2016.			436,800				774,200
Unsecured note payable issued on July 20, 2011, due on July 20, 2015, bearing interest at 12% per annum due monthly.			252,000				294,000
Unsecured notes payable, non-interest bearing, due on demand			51,277				58,527
Total notes payable			5,104,868				9,842,573
Less: current portion of notes payable			3,668,300				9,113,727
Long-term portion of notes payable		$	1,436,568			$	728,846

 

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

 

		Year Ended
		July 31,
2015 (remainder of)		$	3,596,077
2016			240,223
2017			1,268,568
Total		$	5,104,868

 

 

8.  NOTES PAYABLE FROM RELATED PARTIES

 

As of April 30, 2015, the Company had an outstanding note payable balance due to its Chairman and CEO amounting to $862,730 and an outstanding note payable balance due to its President amounting to $168,000. The note payable balances are non-interest bearing and are due on demand.

 

9.  CONVERTIBLE NOTE PAYABLE

 

On March 5, 2015, the Company entered into a convertible note agreement for total principal borrowings of $1,680,000. The amounts are due one year after the issuance of the note on March 5, 2015, 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 $1.10 of outstanding principal and accrued interest.

 

10.  STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue up to 100,000,000 shares of preferred stock with a par value of $0.001, with 100,000 shares designated as Series A Preferred Stock. The Series A Preferred Stock receive a 10 to 1 voting preference over common stock. Accordingly, for every share of Series A Preferred Stock held, the holder receives the voting rights equal to 10 shares of common stock. As such, the holders of the Series A Preferred Stock have the equivalent voting capability of 1,000,000 shares of common stock. The Series A Preferred Stock also has a $0.05 per share liquidation preference over common stock, and can be redeemed by the Company at any time, upon thirty days’ notice, for $0.05 per share.

 

The Company had 100,000 shares of Series A Preferred Stock issued and outstanding as of April 30, 2015 and July 31, 2014.

 

Common Stock Transactions

 

The Company had no common stock issuances during the nine months ended April 30, 2015 or 2014.  

 

11.  RESTATEMENT

 

The accompanying consolidated financial statements as of April 30, 2015 (unaudited) and for the three and nine months ended April 30, 2015 and 2014 (unaudited), have been restated. The restatement reflects the impact of recognizing an unrecorded note payable owed by the Company based on its guarantee of the loan obligation of a vendor that occurred in a prior accounting period and was the subject of the Form 8-K filed by the Company on November 2, 2015. The restatement also reflects the related deferred tax impact of recognizing the note payable.

 

The Company has also made additional adjustments for consolidating two variable interest entities in which the Company is the primary beneficiary that were not consolidated in the reported periods. The impact of the consolidation is not significant in relation to the Company’s financial condition or results of operations for the reported periods.

 

 

The following is the impact of the restatements on the consolidated balance sheet as of April 30, 2015.

 

		As Originally
		Reported				As Restated
		April 30,				April 30,				Restatement
		2015				2015				Adjustments
Assets
Current assets
Cash		$	183,834			$	186,988			$	3,154
Accounts receivable, net			869,698				868,563				(1,135	)
Current portion due from related parties			418,991				418,991				–
Current portion of notes receivable			1,555,058				1,555,058				–
Deferred tax assets, current portion			644,729				890,990				246,261
Prepaid expenses and other current assets			79,714				79,714				–
Total current assets			3,752,024				4,000,304				248,280
Property and equipment, net			281,391				282,932				1,541
Other assets
Long-term notes receivables, net of current portion			558,795				558,795				–
Long-term portion due from related parties, net of current portion			1,526,448				1,526,448				–
Deferred tax assets, long-term portion			199,506				199,506				–
Goodwill			6,485,169				6,485,169				–
Other assets			531,703				538,003				6,300
Total other assets			9,301,621				9,307,921				6,300
Total assets		$	13,335,036			$	13,591,157			$	256,121
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses		$	1,605,339			$	1,614,546			$	9,207
Deferred revenues			1,162,181				1,162,181				–
Current portion of notes payable			3,231,500				3,668,300				436,800
Notes payable to related parties			1,030,730				1,030,730				–
Convertible note payable			1,680,000				1,680,000				–
Taxes payable			965,503				1,081,763				116,260
Total current liabilities			9,675,253				10,237,520				562,267
Long-term portion of notes payable, net of current portion			1,436,568				1,436,568				–
Total liabilities			11,111,821				11,674,088				562,267
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 100,000 shares issued and outstanding as of April 31, 2015 (unaudited) and July 31, 2014			100				100				–
Common stock, $0.001 par value, 500,000,000 shares authorized, 30,500,000 shares issued and outstanding as of April 30, 2015 (unaudited) and July 31, 2014			30,500				30,500				–
Additional paid-in capital			4,121,034				4,121,034				–
Other comprehensive income			125,602				499,982				374,380
Accumulated deficit			(2,092,381	)			(2,961,907	)			(869,526	)
Total GPI stockholders' equity (deficit)			2,184,855				1,689,709				(495,146	)
Noncontrolling interest			38,360				227,360				189,000
Total stockholders' equity (deficit)			2,223,215				1,917,069				(306,146	)
Total liabilities and stockholders' equity		$	13,335,036			$	13,591,157			$	256,121

 

The following is the impact of the restatements on the consolidated statement of operations for the three and nine months ended April 30, 2015.

 

		For the Three Months Ended												For the Nine Months Ended
		April 30,				April 30,				Restatement				April 30,				April 30,				Restatement
		2015				2015				Adjustments				2015				2015				Adjustments
		As Originally				As Restated								As Originally				As Restated
		Reported												Reported
Net sales		$	4,305,535			$	4,305,535			$	–			$	13,817,621			$	13,817,621			$	–
Total revenues			4,305,535				4,305,535				–				13,817,621				13,817,621				–
Operating expenses:
Cost of sales			1,047,822				1,047,822				–				3,510,942				3,510,942				–
Depreciation expense			26,435				26,435				–				83,080				83,080				–
Advertising			181,612				181,612				–				635,456				635,456				–
Rent expense			195,368				195,368				–				612,026				612,026				–
Salaries and wages			1,435,301				1,435,301				–				4,195,584				4,195,584				–
Other general and administrative expenses			1,039,991				1,037,592				(2,399	)			3,035,267				3,032,870				(2,397	)
Total operating expenses			3,926,529				3,924,130				(2,399	)			12,072,355				12,069,958				(2,397	)
Income from operations			379,006				381,405				2,399				1,745,266				1,747,663				2,397
Other income (expense):
Other income (loss)			21,941				21,941				–				62,021				62,021				–
Gain (loss) on exchange			6,872				6,872				–				31,462				31,462				–
Interest income			2,932				2,932				–				9,954				9,954				–
Interest expense			(262,653	)			(187,053	)			75,600				(881,040	)			(643,440	)			237,600
Total other income (expense)			(230,908	)			(155,308	)			75,600				(777,603	)			(540,003	)			237,600
Net income (loss) before provision for income taxes			148,098				226,097				77,999				967,663				1,207,660				239,997
Provision for (benefit from) income taxes			114,597				114,597				–				483,832				605,379				121,547
Net income (loss)			33,501				111,500				77,999				483,831				602,281				118,450
Less: net loss attributable to noncontrolling interest			(324	)			(324	)			–				(324	)			(324	)			–
Net income (loss) attributable to GPI		$	33,825			$	111,824			$	77,999			$	484,155			$	602,605			$	118,450
Net income (loss) per share, basic and diluted		$	0.00			$	0.00			$	0.00			$	0.02			$	0.02			$	0.00
Weighted average number of common
shares outstanding, basic and diluted			30,500,000				30,500,000								30,500,000				30,500,000

 

The following is the impact of the restatements on the consolidated statement of operations for the three and nine months ended April 30, 2014.

 

		For the Three Months Ended												For the Nine Months Ended
		April 30,				April 30,				Restatement				April 30,				April 30,				Restatement
		2014				2014				Adjustments				2014				2014				Adjustments
		As Originally				As Restated								As Originally				As Restated
		Reported												Reported
Net sales		$	4,881,671			$	4,881,671			$	–			$	16,651,792			$	16,651,792			$	–
Total revenues			4,881,671				4,881,671				–				16,651,792				16,651,792				–
Operating expenses:
Cost of sales			1,611,285				1,611,285				–				4,672,498				4,672,498				–
Depreciation expense			57,387				57,387				–				175,238				175,238				–
Advertising			668,096				668,096				–				1,354,486				1,354,486				–
Rent expense			211,884				211,884				–				621,986				621,986				–
Salaries and wages			1,137,313				1,137,313				–				3,740,776				3,740,776				–
Other general and administrative expenses			1,081,282				1,078,385				(2,897	)			3,119,754				3,116,863				(2,891	)
Total operating expenses			4,767,247				4,764,350				(2,897	)			13,684,738				13,681,847				(2,891	)
Income from operations			114,424				117,321				2,897				2,967,054				2,969,945				2,891
Other income (expense):
Other income (loss)			14,766				14,766				–				(5,355	)			(5,355	)			–
Gain (loss) on exchange			6,364				6,364				–				24,635				24,635				–
Interest income			4,076				4,076				–				13,808				13,808				–
Interest expense			(371,924	)			(283,124	)			88,800				(1,010,069	)			(891,269	)			118,800
Total other income (expense)			(346,718	)			(257,918	)			88,800				(976,981	)			(858,181	)			118,800
Net income (loss) before provision for income taxes			(232,294	)			(140,597	)			91,697				1,990,073				2,111,764				121,691
Provision for (benefit from) income taxes			(108,211	)			(108,211	)			–				1,017,123				1,017,123				–
Net income (loss)			(124,083	)			(32,386	)			91,697				972,950				1,094,641				121,691
Less: net loss attributable to noncontrolling interest			–				–				–				–				–				–
Net income (loss) attributable to GPI		$	(124,083	)		$	(32,386	)		$	91,697			$	972,950			$	1,094,641			$	121,691
Net income (loss) per share, basic and diluted		$	(0.00	)		$	(0.00	)		$	0.00			$	0.04			$	0.04			$	0.00
Weighted average number of common
shares outstanding, basic and diluted			27,500,000				27,500,000								27,500,000				27,500,000

 

 

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited July 31, 2014 Consolidated Financial Statements and notes thereto, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our registration statement on Form 10, filed separately with the Securities and Exchange Commission.

 

This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including such things as expansion and growth of our operations and other such matters are forward-looking statements. Any one or a combination of factors could materially affect our operations and financial condition. These factors include competitive pressures, success or failure of marketing programs, changes in pricing and availability of services and products offered to customers, availability of capital, and conditions in the capital markets. Forward-looking statements made by us are based on knowledge of our business and the environment in which we operate as of the date of this report. Because of the factors discussed in our Form 10 registration statement and factors disclosed in subsequent reports filed with the Securities and Exchange Commission, actual results may differ from those in the forward-looking statements.

 

As used in this "Management's Discussion and Analysis of Financial Condition and Results of Operation," except where the context otherwise requires, the term "we," "us," or "our" refers to the business of Grand Perfecta, Inc., and its wholly owned subsidiaries of LinkBit Consulting Co, Ltd. (“LinkBit”) and Umajin Hong Kong Ltd. (“Umajin HK”).

 

Organization

 

In May 2012 Grand Perfecta completed an Agreement and Plan of Reorganization whereby it acquired 100% of the issued and outstanding shares of LinkBit for 25,000,000 common shares in a transaction accounted for as a recapitalization of LinkBit. In May 2013 the Company issued 272,668 shares in exchange for 100% of the issued and outstanding shares of Umajin HK.

 

Nature of Business

 

The Company is engaged in the business of transmitting and providing horse racing information via various types of media, including the various websites owned and operated by the wholly owned subsidiaries of LinkBit and Umajin HK.

 

Critical Accounting Policies

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period.  On an ongoing basis, management evaluates its estimates, including those related to collection of receivables, impairment of goodwill, contingencies, litigation and income taxes. Management bases its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in material differences from the estimated amounts in the financial statements. 

 

For a summary of our critical accounting policies, refer to Note 2 of our unaudited consolidated financial statements included under Item 1 – Financial Statements in this Form 10-Q.

 

 

Results of Operations for the Three Months Ended April 30, 2015 and 2014

 

The following are the results of our operations for the three months ended April 30, 2015 as compared to the three months ended April 30, 2014:

 

		For the Three Months Ended
		April 30,				April 30,
		2015				2014				$ Change
		(Unaudited)				(Unaudited)
Net sales		$	4,305,535			$	4,881,671			$	(576,136	)
Total revenue			4,305,535				4,881,671				(576,136	)
Operating Expenses:
Cost of sales			1,047,822				1,611,285				(563,463	)
Depreciation expense			26,435				57,387				(30,952	)
Advertising			181,612				668,096				(486,484	)
Rent expense			195,368				211,884				(16,516	)
Salaries and wages			1,435,301				1,137,313				297,988
Other general and administrative expenses			1,037,592				1,078,385				(40,793	)
Total operating expenses			3,924,130				4,764,350				(840,220	)
Income from operations			381,405				117,321				264,084
Other Income (Expense):
Other income (loss)			21,941				14,766				7,175
Gain on exchange			6,872				6,364				508
Interest income			2,932				4,076				(1,144	)
Interest expense			(187,053	)			(283,124	)			96,071
Total other income (expense)			(155,308	)			(257,918	)			102,610
Net income (loss) before provision for income taxes			226,097				(140,597	)			366,694
Provision for (benefit from) income taxes			114,597				(108,211	)			222,808
Net income (loss)			111,500				(32,386	)			143,886
Less: net loss attributable to noncontrolling interest			(324	)			–				(324	)
Net income (loss) attributable to GPI		$	111,824			$	(32,386	)		$	144,210

 

Net Sales

 

Our net sales consist primarily of information and other content relating to the horse racing industry in Japan sold to customers through our websites. Overall, our net sales decreased during the three months ended April 30, 2015 as compared to the same period in 2014 due primarily to a decline in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 14%. The decrease in our net sales relating to the decline in the exchange rate for the three months ended April 30, 2015 as compared to the same period in 2014 amounted to approximately $650,000. Net sales also decreased in part due to an increase in the consumption tax rate, which increased from 5% to 8% in April 2014. We did not raise the prices for our service to correspond to this increase in the consumption tax. As a result, our sales, net of the consumption tax, decreased during three months ended April 30, 2015 as compared to the same period in 2014.

 

These decreases were partially offset by an increase in sales due to the start of a new service in February 2015, originally planned to start in late 2014. The service, or brand, offers customers physiological information and analysis from a well-known consultant with respect to race horses. We expect this service to generate increased sales during future quarters.

 

Operating Expenses

 

Total operating expenses for the three months ended April 30, 2015 were $3,924,130, which represented a decrease of $840,220 as compared to the same period in 2014. Our operating expenses decreased during the three months ended April 30, 2015 as compared to the same period in 2014 in part due to a decline in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 14%. The total decrease in our operating expenses relating to the decline in the exchange rate for the three months ended April 30, 2015 as compared to the same period in 2014 amounted to approximately $550,000. In addition, our operating expenses also decreased due to a decrease in cost of sales from higher spending in the prior year due to content curation, as well as advertising costs resulting from a reduction in print advertising due to lower than expected response rates. These decreases were partially offset by an increase in salaries and wages expenses due to hiring of additional staff to manage expected increases in volume.

 

 

Other Income/ (Expenses)

 

Total other expense for the three months ended April 30, 2015 amounted to $155,308, which decreased by $102,610 as compared to the same period in 2014. The decrease in other expenses is primarily due to a decrease in interest expense of $96,071 due to a reduction of the outstanding notes payable during the period.

 

Results of Operations for the Nine Months Ended April 30, 2015 and 2014

 

The following are the results of our operations for the nine months ended April 30, 2015 compared to the nine months ended April 30, 2014:

 

		For the Nine Months Ended
		April 30,				April 30,
		2015				2014				$ Change
Net sales		$	13,817,621			$	16,651,792			$	(2,834,171	)
Total revenue			13,817,621				16,651,792				(2,834,171	)
Operating Expenses:
Cost of sales			3,510,942				4,672,498				(1,161,556	)
Depreciation expense			83,080				175,238				(92,158	)
Advertising			635,456				1,354,486				(719,030	)
Rent expense			612,026				621,986				(9,960	)
Salaries and wages			4,195,584				3,740,776				454,808
Other general and administrative expenses			3,032,870				3,116,863				(83,993	)
Total operating expenses			12,069,958				13,681,847				(1,611,889	)
Income from operations			1,747,663				2,969,945				(1,222,282	)
Other Income (Expense):
Other income (loss)			62,021				(5,355	)			67,376
Gain (loss) on exchange			31,462				24,635				6,827
Interest income			9,954				13,808				(3,854	)
Interest expense			(643,440	)			(891,269	)			247,829
Total other income (expense)			(540,003	)			(858,181	)			318,178
Net income before provision for income taxes			1,207,660				2,111,764				(904,104	)
Provision for income taxes			605,379				1,017,123				(411,744	)
Net income			602,281				1,094,641				(492,360	)
Less: net loss attributable to noncontrolling interest			(324	)			–				(324	)
Net income attributable to GPI stockholders		$	602,605			$	1,094,641			$	(492,036	)

 

Net Sales

 

Our net sales consist primarily of information and other content relating to the horse racing industry in Japan sold to customers through our websites. Overall, our net sales decreased during the nine months ended April 30, 2015 as compared to the same period in 2014 in part due to a decline in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 11%. The decrease in our net sales relating to the decline in the exchange rate for the nine months ended April 30, 2015 as compared to the same period in 2014 amounted to approximately $1.8 million. Net sales also decreased in part due to an increase in the consumption tax rate, which increased from 5% to 8% in April 2014. We did not raise the prices for our service to correspond to this increase in the consumption tax. As a result, our sales, net of the consumption tax, decreased during nine months ended April 30, 2015 as compared to the same period in 2014.

 

These decreases were partially offset by an increase in sales due to the start of a new service in February 2015, originally planned to start in late 2014. The service, or brand, offers customers physiological information and analysis from a well-known consultant with respect to race horses. We expect this service to generate increased sales during future quarters.

 

 

Operating Expenses

 

Total operating expenses for the nine months ended April 30, 2015 were $12,069,958, which represented a decrease of $1,611,889 as compared to the same period in the prior year. Overall, our operating expenses decreased during the nine months ended April 30, 2015 as compared to the same period in 2014 in part due to a decline in the average exchange rate in effect during these periods between the Japanese Yen and the U.S. Dollar of approximately 11%. The total decrease in our operating expenses relating to the decline in the exchange rate for the nine months ended April 30, 2015 as compared to the same period in 2014 amounted to approximately $1.5 million. In addition, our operating expenses also decreased due to a decrease in cost of sales from higher spending in the prior year due to content curation, as well as advertising costs resulting from a reduction in print advertising due to lower than expected response rates. These decreases were partially offset by an increase in salaries and wages expenses due to hiring of additional staff to manage expected increases in volume.

 

Other Income/ (Expenses)

 

Total other expense for the nine months ended April 30, 2015 amounted to $540,003, which decreased by $318,178 as compared to the same period in 2014. The decrease in other expenses is primarily due to a decrease in interest expense of $247,829 due to a reduction of the outstanding notes payable during the period.

 

Liquidity and Capital Resources

 

As of April 30, 2015, we had cash of $186,988 and a working capital deficit of $6,237,216 as compared to cash of $1,882,272 and a working capital deficit of $7,089,828 as at July 31, 2014. The decrease in cash as of April 30, 2015 was primarily the result of $2,940,000 in proceeds from sale of common stock received during the year ended July 31, 2014, of which a portion was used to fund the operating activities of the Company, as well as to pay down outstanding notes payable with higher interest rates during the nine months ended April 30, 2015.

 

In March 2015, we issued a convertible debenture in the face amount of Japanese JPY200,000,000 (approximately US$1,665,279). The debenture accrues simple interest at the rate of 1% per annum and is payable annually on the anniversary date of issuance. The principal and interest on the debenture is due March 5, 2016, and may be prepaid, in whole or in part, by Grand Perfecta at any time upon 10 days advance notice. The principal and accrued interest of the debenture is convertible at the election of the holder to common stock of Grand Perfecta at the rate of one common share for JPY130.9. We intend to continue to improve our balance sheet by reducing short term liabilities and invest in promoting and expanding our services. The funds obtained through the debenture placement have facilitated that effort.

 

The funding received in March 2015 notwithstanding, 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 subscription services and develop new subscription opportunities for potential users. At April 30, 2015, we had a working capital deficit of $6,237,216. 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, such as the recent debenture offering, 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 subscription services to prospective users and to develop new content, because a substantial portion of cash flow goes to reduce debt rather than to advance operating activities. There is no assurance that our plans for addressing our working capital shortages will be successful, and our failure to be reasonably successful should be expected to result in a significant contraction of our operations and potentially a failure of the business.

 

The following is a summary of our cash flows from operating, investing and financing activities for the nine months ended April 30, 2015 and 2014.

 

		Nine Months Ended
		April 30,				April 30,
		2015				2014
Cash flows provided by (used in) operating activities		$	37,512			$	1,170,626
Cash flows provided by (used in) investing activities		$	194,307			$	(440,976	)
Cash flows used in financing activities		$	(1,730,272	)		$	(793,887	)

 

Net cash flows used in operating activities for the nine months ended April 30, 2015 amounted to $37,512, compared to cash flows provided by operating activities of $1,170,626 for the nine months ended April 30, 2014. Net cash flows from operating activities were lower during the nine months ended April 30, 2015 due primarily to a lower net income of $602,281, compared to net income of $1,094,641 for the nine months ended April 30, 2014.

 

 

Net cash provided by investing activities amounted to $194,307 for the nine months ended April 30, 2015, compared to net cash used in investing activities of $440,976 for the nine months ended April 30, 2014. The increase in cash flows provided by investing activities during the nine months ended April 30, 2015 was due primarily to increased collections of notes receivables and amounts outstanding from related parties.

 

Net cash used in financing activities for the nine months ended April 30, 2015 amounted to $1,730,272, compared to $793,887 for the nine months ended April 30, 2014. During the nine months ended April 30, 2015, we paid down $3,491,663 of additional notes payable balances. The payments were offset by proceeds of $1,760,000 from a convertible note payable entered into in March 2015. During the nine months ended April 30, 2014, our cash used in financing activities represented payments made on notes payable.

 

Description of Indebtedness

 

The following is a summary of our outstanding notes payable as of April 30, 2015 and July 31, 2014.

 

		April 30,				July 31,
		2015				2014
		(Unaudited)
Unsecured notes payable originally issued on September 30, 2009 and November 30, 2010, due in full on November 30, 2015, bearing interest at 3.5% per annum due monthly.		$	72,223			$	205,134
Unsecured note payable issued on March 26, 2012, due on demand, bearing interest at 1% per annum due monthly.			840,000				980,000
Unsecured note payable issued on January 30, 2013, due on demand, bearing interest at 1% per annum due monthly.			420,000				490,000
Unsecured note payable issued on July 23, 2013, due on August 5, 2016, bearing interest at 1.2% per annum due monthly.			176,568				327,712
Unsecured note payable issued on September 30, 2013, due on September 30, 2014, bearing interest at 15% per annum due monthly.			–				784,000
Unsecured note payable issued on December 20, 2011, due on December 20, 2014, bearing interest at 15% per annum due monthly.			1,596,000				2,058,000
Unsecured note payable issued on June 28, 2013, due on October 31, 2015, bearing interest at 15% per annum due monthly.			168,000				196,000
Unsecured note payable issued on August 2, 2010, due on July 31, 2015, bearing interest at 12% per annum due monthly.			–				1,715,000
Unsecured note payable issued on January 20, 2011, due on June 30, 2017, bearing interest at 12% per annum due monthly.			1,092,000				1,960,000
Unsecured note payable resulting from the Company co-signing for debt of a vendor in 2010. The note is due on demand, bearing interest at 18% per annum due monthly.			436,800				774,200
Unsecured note payable issued on July 20, 2011, due on July 20, 2015, bearing interest at 12% per annum due monthly.			252,000				294,000
Unsecured notes payable, non-interest bearing, due on demand			51,277				58,527
Total notes payable			5,104,868				9,842,573
Less: current portion of notes payable			3,668,300				9,113,727
Long-term portion of notes payable		$	1,436,568			$	728,846

 

Of the total above listed debt outstanding as of April 30, 2015 of $5,104,868, $3,596,077 of the outstanding amounts are due within the next three months during the year ended July 31, 2015, $240,223 of the amounts are due during the year ended July 31, 2016, and $1,268,568 of the amounts are due during the year ended July 31, 2016.

 

As of April 30, 2015, we also had an outstanding note payable balance due to our Chairman and CEO amounting to $862,730 and an outstanding note payable balance due to our President amounting to $168,000. The note payable balances are non-interest bearing and are due on demand.

 

On March 5, 2015, we entered into a convertible note agreement for total principal borrowings of $1,680,000. The amounts are due one year after the issuance of the note on March 5, 2015, 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 $1.10 of outstanding principal and accrued interest.

 

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4 - CONTROLS AND PROCEDURES

 

This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

 

Background

 

In the process of completing and auditing the financial statements of the Company for the fiscal year ended July 31, 2015, an error was discovered that has a significant impact on our previously issued financial information contained in the Registration Statement on Form 10 (Amendment No. 2) filed with Securities and Exchange Commission (SEC) June 15, 2015 (the “Form 10”), and in the report on Form 10-Q for the interim period ended April 30, 2015, filed with the SEC on June 15, 2015 (the “Form 10-Q”). The erroneous financial statements included in these filings are the audited financial statements for the fiscal years ended July 31, 2014 and 2013, the unaudited financial statements for the interim periods ended January 31, 2015 and 2014, and the unaudited financial statements for the interim periods ended April 30, 2015 and 2014 (collectively the “Prior Financial Statements”).

 

The Board of Directors of the Company, in consultation with its outside advisors and management, concluded that the Prior Financial Statements should not be relied upon due to errors in the recording of a liability and payments arising from a guarantee obligation incurred for a third party.

 

In December 2009 LinkBit Consulting Co, Ltd. (“LBC”) entered into a verbal agreement to act as guarantor on a loan made by Sakura Corporation (“Sakura”) to T & M Inc. (“T&M”). T&M subsequently defaulted on its payment obligations under the loan, and LBC began making interest payments in 2011 and adopted a practice of expensing the payments as an interest expense in its statement of operations; it did not, however, record on its balance sheet the liability for the total amount of the guarantee obligation. All this occurred well before LBC became a wholly-owned subsidiary of the Company and before LBC became subject to generally accepted accounting principles in the United States (GAAP). This liability was not recorded by the Company and the payments on the obligation were not accounted for correctly on the Company’s consolidated statements of operations.

 

Internal Control over Financial Reporting

 

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. Based on the definition of “material weakness” in the Public Company Accounting Oversight Board’s Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements”, restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. As a result of management’s review of the errors described above and its internal evaluation, management concluded on October 30, 2015, that the Company had a significant control deficiency as of April 30, 2015, that constituted a material weakness in our internal control over financial reporting.

 

Management has determined that the Company’s lack of personnel on staff with significant understanding of GAAP and practical experience in the use and application of GAAP has resulted in failures to recognize, record, and otherwise account for financial events and relationships in accordance with GAAP.

 

The Company proposes to remediate the material weakness by pursuing a search effort to recruit and employ the accounting personnel that have the knowledge, experience, and training in GAAP that will improve the Company’s ability to avoid GAAP errors in recording and accounting for its financial transactions.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this amended Report, the Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of the restatement of previously issued financial statements and the identification of a material weakness in internal control over financial reporting described above, which we view as an integral part of our disclosure controls and procedures, our disclosure controls and procedures were not effective as of April 30, 2015. Nevertheless, based on a number of factors, including the management’s internal review of our processes and procedures, assistance of consultants on financial controls and reporting processes, and the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated condensed financial statements in this Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented.

 

 

PART II - OTHER INFORMATION

 

ITEM 6 – EXHIBITS

 

The following exhibits are filed as part of this Report:

 

Exhibit No.		Description
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	GRAND PERFECTA, INC.
November 10 , 2015	By:	/s/ Shuya Watanabe
		Shuya Watanabe
		Chief Executive Officer, (Principal Executive Officer)

 

November 10 , 2015	By:	/s/ Masashi Takegaki
		Masashi Takegaki
		Chief Financial Officer (Principal Financial Officer)