UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Pollex, Inc.
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) | 95-4886472 (I.R.S. Employer Identification No.) |
| | |
3000 Scott Boulevard, Suite 204 Santa Clara, CA (Address of principal executive offices) | 95054 (Zip Code) |
Registrant’s telephone number, including area code (408) 970-8050
(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 such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). □ Yes □ No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o | Accelerated filer o |
| | |
Non-accelerated filer o | Smaller reporting company x |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 16, 2009, there were 5,120,417 shares of common stock, par value $0.001, issued and outstanding.
TABLE OF CONTENTS
| 3 |
| | | |
| ITEM 1 | Financial Statements | 4 |
| | | |
| ITEM 2 | Managements’ Discussion and Analysis of Financial Condition and Results of Operations. | 10 |
| | | |
| ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk | 13 |
| | | |
| ITEM 4 | Controls and Procedures | 13 |
| | | |
| ITEM 4T | Controls and Procedures | 13 |
| | | |
| PART II – OTHER INFORMATION | |
| | | |
| ITEM 1 | Legal Proceedings | 15 |
| | | |
| ITEM 1A | Risk Factors | 15 |
| | | |
| ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
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| ITEM 3 | Defaults Upon Senior Securities | 15 |
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| ITEM 4 | Submission of Matters to a Vote of Security Holders | 15 |
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| ITEM 5 | Other Information | 16 |
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| ITEM 6 | Exhibits | 16 |
PART I - FINANCIAL INFORMATION
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
ITEM 1 Financial Statements
| POLLEX, INC. AND SUBSIDIARY |
| | | | | | | |
| CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| | | | | | | |
| | | September 30 | | | December 31 | |
| | | 2009 | | | 2008 | |
| | | (Unaudited) | | | | |
| ASSETS | |
| | | | | | | |
| CURRENT ASSET | | | | | | |
| Cash | | | 1,040 | | | | 8,659 | |
| | | | | | | | | |
| Total current asset | | | 1,040 | | | | 8,659 | |
| | | | | | | | | |
| Property and equipment, net of accumulated | | | | | | | | |
| depreciation of $21,465 and $15,233 | | | 5,363 | | | | 11,595 | |
| | | | | | | | | |
| Other assets | | | | | | | | |
| License Agreements, net of accumulated | | | | | | | | |
| amortization of $3,005,392 and $2,542,178 | | | 4,382,382 | | | | 4,845,596 | |
| Goodwill | | | 52,912 | | | | 52,912 | |
| Other receivable | | | 6,500 | | | | - | |
| Deposits | | | 3,090 | | | | 3,090 | |
| | | | | | | | | |
| Total other assets | | | 4,444,884 | | | | 4,901,598 | |
| | | | | | | | | |
| Total Assets | | | 4,451,287 | | | | 4,921,852 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accrued expenses and accounts payable | | | 661,556 | | | | 524,951 | |
| Due to affiliate | | | 194,056 | | | | 194,056 | |
| Loans payable | | | 503,942 | | | | 296,400 | |
| | | | | | | | | |
| Total Current Liabilities | | | 1,359,554 | | | | 1,015,407 | |
| | | | | | | | | |
| Stockholders' Equity | | | | | | | | |
| Common stock, authorized 300,000,000 shares; | | | | | | | | |
| par value $0.001; 5,120,417 issued and outstanding | | | | | | | | |
| at September 30, 2009 and December 31,2008, respectively | | | 5,120 | | | | 5,120 | |
| Additional paid-in-capital | | | 109,774,861 | | | | 91,024,861 | |
| Accumulated deficit | | | (106,688,248 | ) | | | (87,123,536 | ) |
| | | | | | | | | |
| Total Stockholders’ Equity | | | 3,091,733 | | | | 3,906,445 | |
| | | | | | | | | |
| Total Liabilities and Stockholders’ Equity | | | 4,451,287 | | | | 4,921,852 | |
| | | | | | | | | |
| See accompanying notes to consolidated financial statements. | |
| POLLEX, INC. AND SUBSIDIARY |
| | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | For the three months ended | | | For the nine months ended | |
| | | September 30, | | | September 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| REVENUES | | $ | - | | | $ | - | | | $ | 60,000 | | | $ | 732,239 | |
| | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES | | | | | | | | | | | | | | | | |
| Cost of goods sold | | | - | | | | | | | | 54,000 | | | | 667,142 | |
| Selling, general and administrative | | | 6,428,326 | | | | 6,331,509 | | | | 19,101,266 | | | | 19,071,920 | |
| Impairment of license agreements | | | - | | | | 9,095,227 | | | | - | | | | 9,095,227 | |
| Depreciation | | | 2,078 | | | | 2,078 | | | | 6,232 | | | | 6,232 | |
| Amortization | | | 154,404 | | | | 435,408 | | | | 463,214 | | | | 1,306,225 | |
| | | | | | | | | | | | | | | | | |
| Total Costs and Expenses | | | 6,584,808 | | | | 15,864,222 | | | | 19,624,712 | | | | 30,146,746 | |
| | | | | | | | | | | | | | | | | |
| NET LOSS | | $ | (6,584,808 | ) | | $ | (15,864,222 | ) | | $ | (19,564,712 | ) | | $ | (29,414,507 | ) |
| | | | | | | | | | | | | | | | | |
| NET LOSS PER COMMON | | | | | | | | | | | | | | | | |
| SHARE (Basic and Diluted) | | $ | (1.29 | ) | | $ | (3.10 | ) | | $ | (3.82 | ) | | $ | (5.74 | ) |
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE SHARES | | | | | | | | | | | | | |
| OUTSTANDING | | | 5,120,417 | | | | 5,120,417 | | | | 5,120,417 | | | | 5,120,417 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| See accompanying notes to consolidated financial statements. | |
| POLLEX, INC. AND SUBSIDIARY |
| | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | For the nine months ended | | |
| | | | September 30, | | |
| | | | 2009 | | 2008 | | |
| | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
| Net loss | | | $ (19,564,712) | | $ (29,414,507) | | |
| Adjustments to reconcile net loss to net cash | | | | | | | |
| (used in) provided by operating activities: | | | | | | | |
| Depreciation and amortization | | | 469,446 | | 1,312,457 | | |
| Stock based compensation | | | 18,750,000 | | 18,750,000 | | |
| Impairment of license agreements | | | - | | 9,095,227 | | |
| Changes in assets and liabilities: | | | | | | | |
| (Increase) decrease in prepaid expenses | | | - | | (3,310) | | |
| (Increase) decrease in other receivable | | | (6,500) | | - | | |
| (Increase) decrease in deposits | | | - | | (200,018) | | |
| Increase (decrease) in accrued expenses | | | 136,605 | | 366,768 | | |
| Increase (decrease) in other payable | | | - | | 5,200 | | |
| Increase (decrease) in due to affiliate | | | - | | 88,995 | | |
| | | | | | | | |
| Net cash provided by (used in) operating activities | | | (215,161) | | 812 | | |
| | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
| Cash acquired in acquisition | | | - | | - | | |
| | | | | | | | |
| Net cash provided by investing activities | | | - | | - | | |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
| Loan proceeds | | | 222,542 | | 58,400 | | |
| Repayment of loan | | | (15,000) | | (50,000) | | |
| Bank overdraft | | | - | | (1,695) | | |
| | | | | | | | |
| Net cash provided by financing activities | | | 207,542 | | 6,705 | | |
| | | | | | | | |
| Net increase in cash | | | (7,619) | | 7,517 | | |
| | | | | | | | |
| CASH AT BEGINNING OF PERIOD | | | 8,659 | | - | | |
| | | | | | | | |
| CASH AT END OF PERIOD | | | $ 1,040 | | $ 7,517 | | |
| | | | | | | | |
| | | | | | | | |
| See accompanying notes to consolidated financial statements. | | |
POLLEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2009
NOTE A – BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the consolidated financial statements not misleading have been included. Results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Pollex, Inc. annual report on Form 10-K for the year ended December 31, 2008.
NOTE B – GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company incurred net losses of $19,564,712 and $29,414,507 for the nine months ended September 30, 2009 and 2008, respectively, and has an accumulated deficit of $106,688,248 as of September 30, 2009. Management’s plans include raising capital through the equity markets to fund future operations and generating revenue through its license agreements. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE C – RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental generally accepted accounting principles (“GAAP”). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.
POLLEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2009
NOTE C – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements and Disclosures" ("SFAS No. 157") and on February 12, 2008 issued FSP FAS 157-2, "Effective Date of FASB Statement No. 157", which are now codified as FASB Accounting Standards Codification (“ASC”) Topic 820. This guidance established a common definition for fair value to be applied to U.S. GAAP guidance requiring the use of fair value, establishes a framework for measuring fair value, and expands the disclosure about such fair value measurements. On January 1, 2008, The Company adopted this guidance for financial assets and liabilities and on January 1, 2009, the Company adopted this guidance for non-financial assets and non-financial liabilities that are recognized and disclosed at fair value on a nonrecurring basis. The adoption of the provisions of ASC 820 did not have a material impact on the Company’s results of operations, cash flows or financial position.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instrument, codified under ASC Topic 820. This guidance updated the requirements for an entity to provide disclosures about fair value of financial instruments in interim financial information. This guidance was to be applied prospectively and was effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of these provisions did not have a material impact on the Company’s results of operations, cash flows or financial position.
In April 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), codified under ASC Topic 820, which provides additional guidance for estimating fair value in accordance with SFAS No. 157. This guidance is effective for the quarter ending June 30, 2009. The adoption of these provisions did not have an impact on the Company’s results of operations, cash flows or financial position.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”, codified under ASC Topic 805. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This guidance is effective for us for acquisitions made after January 1, 2009. Adoption of these provisions of ASC 805 did not have a material impact on the Company results of operations, cash flows or financial position.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, codified under ASC Topic 805. This guidance amended the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R). This guidance carried forward the requirements in SFAS No. 141 for acquired contingencies, thereby requiring that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. Otherwise, entities would typically account for the acquired contingencies in accordance with SFAS No. 5, Accounting for Contingencies. This guidance had the same effective date as SFAS No. 141(R), and was therefore adopted January 1, 2009. Adoption of these provisions did not have a material impact on the Company results of operations, cash flows or financial position.
POLLEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2009
NOTE C – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, codified under ASC Topic 810. This guidance outlines the accounting and reporting for ownership interest in a subsidiary held by parties other than the parent. The Company adopted these provisions on January 1, 2009. Adoption of these provisions did not have a material impact on the Company results of operations, cash flows or financial position.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which will be included under ASC Topic 810. This guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This guidance is effective for the Company’s fiscal year beginning on January 1, 2010. The Company is currently evaluating the impact of the implementation of these provisions on its consolidated financial position, results of operations and cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, codified under ASC Topic 855. SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The disclosure requirements were effective for the Company’s interim reporting period ended on June 30, 2009. The adoption of these provisions did not have an impact on the Company’s results of operations, cash flows or financial position.
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
Pollex, Inc., formerly Joytoto USA, Inc., formerly BioStem, Inc. (the “Company,” “we,” and “us”) was incorporated on November 2, 2001, in the State of Nevada.
We are a majority owned subsidiary of Joytoto Korea. We have one wholly-owned subsidiary, JEI, and two sub-subsidiaries, Joytoto Technologies, Inc., a Nevada corporation (“JTI”) and Joytoto America, Inc., a California corporation (“JAI”), both of which are wholly-owned subsidiaries of JEI.
On October 31, 2007, we divested our two subsidiaries and acquired JEI., and its two wholly-owned subsidiaries, JAI and JTI The discussion below concerns the business operations of our new subsidiaries, which are engaged in the business of providing online gaming services and MP3 and other technical products. Our business is conducted through our two wholly-owned subsidiaries, JTI and JAI.
On February 20, 2008, we entered into an Agreement to Manufacture, Supply and Market with Hyundai RFmon Corp. (“Hyundai”), a United States distributor of electronic products. Pursuant to this agreement, upon receipt of an initial purchase order from Hyundai of a minimum of $10 million, the Company will manufacture, market and supply to Hyundai various electronic and digital products, including, but not limited to, ATM machines, DVD download dispensers and smart teller machines. This agreement will remain in effect until December 31, 2012.
Through our sub-subsidiary, JTI, we are a virtual, original equipment manufacturer (“OEM”) of consumer electronics for retailers located throughout the world. JTI is the exclusive worldwide distributor of Joytoto Korea’s MP3 products and other consumer electronic devices.
Our operations are organized into two business segments: Consumer Electronics and Online Games. Neither of our business segments has generated any revenues.
Consumer Electronics
Through our sub-subsidiary, JTI, we are a virtual, original equipment manufacturer (“OEM”) of consumer electronics for retailers located throughout the world. Effective on June 11, 2007, JTI entered into an Exclusive Distributorship Agreement with Joytoto Korea, whereby JTI was appointed as the exclusive worldwide distributor of Joytoto Korea’s MP3 products and other consumer electronic devices. Joytoto Korea has completed all purchase orders existing or pending as of the date of the Exclusive Distributorship Agreement. In addition, JTI has fulfilled additional purchase orders. We have entered into direct contractual relationships with Joytoto Korea’s primary customers.
Online Games
Through our sub-subsidiary, JAI, we plan to operate an online game service in North America.
On April 18, 2007, JAI entered into a Master License Agreement with Joytoto Korea, and Joyon Entertainment Co., Ltd., a Korean company (collectively, the “Licensors”), whereby JAI acquired an exclusive license to operate an online game service, using four online games developed by the Licensors, in the United States, for a period of ten years . In addition, JAI has the option to enter into an exclusive license to provide an additional twenty online games through its online game service. A national appraisal firm, valued the online game license at more than $36,000,000.
Of the Licensors games, JAI is licensed to operate the MMORPG (Massively Multiplayer Online Role-Playing Game), “The Great Merchant” in the United States. The game's website is currently open and is planning to be in open beta service by the fourth quarter of 2009.
Results of Operations for the Three Months Ended September 30, 2009 and 2008
Introduction
Revenues, Expenses and Loss from Operations
Our revenues, selling, general and administrative expenses, depreciation, amortization, total costs and expenses, and net loss for the three months ended September 30, 2009 and for the three months ended September 30, 2008 are as follows:
| | | Three Months Ended September 30, 2008 | | | Three Months Ended September 30 2009 | |
| | | | | | | |
| Revenue | | $ | - | | | $ | - | |
| Cost of goods sold | | | - | | | | - | |
| Net profit | �� | | - | | | | - | |
| Selling, general and administrative | | | 6,331,509 | | | | 6,428,326 | |
| Depreciation | | | 2,078 | | | | 2,078 | |
| Impairment of license agreements | | | 9,095,227 | | | | - | |
| Amortization | | | 435,408 | | | | 154,404 | |
| Total costs and expenses | | | 15,864,222 | | | | 6,584,808 | |
| | | | | | | | | |
| Net Loss | | $ | (15,864,222) | | | | (6,584,808) | |
For the three months ended September 30, 2009 and 2008 there was no revenue generated. For the three months ended September 30, 2009, our selling, general and administrative expenses were $6,428,326, consisting mostly of stock based compensation of $6,250,000. For the three months ended September 30, 2008 our general and administrative expenses were $6,331,509, consisting mostly of stock based compensation of $6,250,000. Selling, general and administrative expenses primarily consist of stock based compensation due to the shares granted to our executive officers under their employment agreements. Depreciation for the three months ended September 30, 2009 was $2,078 compared to $2,078 for the three months ended September 30, 2008. During the three months ended September 30, 2008, the Company recognized an impairment loss of $9,095,227 on it’s license agreements. The Company did not have any further impairment losses on it’s licenses in 2009. Amortization for the three months ended September 30, 2009 was $154,404 compared to $435,408 for the three months ended September 30, 2008. The decrease in amortization is due to reduced amortization in 2009 due to the previous impairment. Total costs and expenses for the three months ended September 30, 2009 was $6,584,808 compared to $15,864,222 for the three months ended September 30, 2008. The decrease of $9,279,414 was primarily due to impairment of the license agreements recognized in 2008.
Nine months ended September 30, 2009 compared to nine months ended September 30, 2008
Revenues, Expenses and Loss from Operations
Our revenues, selling, general and administrative expenses, depreciation, amortization, total costs and expenses, and net loss for the nine months ended September 30, 2009 and for the nine months ended September 30, 2008 are as follows:
| | | Nine Months Ended September 30, 2008 | | | Nine Months Ended September 30, 2009 | |
| | | | | | | |
| Revenue | | $ | 732,239 | | | $ | 60,000 | |
| Cost of goods sold | | | 667,142 | | | | 54,000 | |
| Net profit | | | 65,097 | | | | 6,000 | |
| Selling, general and administrative | | | 19,071,920 | | | | 19,101,266 | |
| Depreciation | | | 6,232 | | | | 6,232 | |
| Impairment of license agreements | | | 9,095,227 | | | | - | |
| Amortization | | | 1,306,225 | | | | 463,214 | |
| Total costs and expenses | | | 30,146,746 | | | | 19,624,712 | |
| | | | | | | | | |
| Net Loss | | $ | (29,414,507) | | | $ | (19,624,712) | |
For the nine months ended September 30, 2009 we had revenue in the amount of $60,000. For the nine months ended September 30, 2008, we had revenue in the amount of $732,239. The decrease of $672,239 or 91% was primarily due to decrease of MP3 sales through our license. For the nine months ended September 30, 2009, our selling, general and administrative expenses were $19,071,920. For the nine months ended September 30, 2008 our selling, general and administrative expenses was $19,101,266. Selling, General and Administrative expenses primarily consist of stock based compensation of $18,750,000 for the nine months ended September 30, 2009 and 2008 due to the shares granted to our executive officers under their employment agreements. Depreciation for the nine months ended September 30, 2009 was $6,232 compared to $6,232 for the nine months ended September 30, 2008. During the nine months ended September 30, 2008, the Company recognized an impairment loss of $9,095,227 on it’s license agreements. The Company did not have any further impairment losses on it’s licenses in 2009. Amortization for the nine months ended September 30, 2009 was $463,214 compared to $1,306,225 for the nine months ended September 30, 2008. The decrease in amortization is due to reduced amortization in 2009 due to the previous impairment. Total costs and expenses for the nine months ended September 30, 2009 was $19,624,712 compared to $30,146,746 for the nine months ended September 30, 2008. The decrease of $9,849,795 was primarily due to the impairment of the license agreements recognized in 2008.
Net Loss
Our Net Loss for the nine months ended September 30, 2009 was $19,564,712 compared to $29,414,507 for the nine months ended September 30, 2008. The increase of $9,849,795 or 33% was primarily due to the impairment of the license agreements recognized in 2008..
Liquidity
Our primary assets are the two online game license agreements and the Exclusive Distributorship Agreement. As of September 30, 2009, we have not begun to generate revenue from these agreements, and as a result we have very few current assets. Our cash requirements have been relatively small up to this point, but as a result of the acquisition of JEI and the fact that we are now a public, reporting company, we anticipate that our cash needs will increase dramatically. We anticipate satisfying these cash needs through the sale of our common stock until we not only begin to generate revenue, but until we can generate enough revenue to sustain our operations.
| | | As of September 30, 2009 | | | As of December 31, 2008 | | | Change | |
| Cash | | | 1,040 | | | $ | 8,659 | | | $ | (7,619) | |
| Total current asset | | | 1,040 | | | | 8,659 | | | | (7,619) | |
| Property and equipment, net of accumulated depreciation of $21,465 and $15,233 | | | 5,363 | | | | 11,595 | | | | (6,232) | |
License Agreements, net of accumulated amortization of $3,005,392 and $2,387,773 | | | 4,382,382 | | | | 4,845,596 | | | | (463,214) | |
| Goodwill | | | 52,912 | | | | 52,912 | | | | 0 | |
| Other receivable | | | 6,500 | | | | 0 | | | | 6,500 | |
| Deposits | | | 3,090 | | | | 3,090 | | | | 0 | |
| Total assets | | | 4,451,287 | | | | 4,921,852 | | | | (470,565) | |
| Accrued expenses and accounts payable | | | 661,556 | | | | 524,951 | | | | 136,605 | |
| Due to affiliate | | | 194,056 | | | | 194,056 | | | | 0 | |
| Loans payable | | | 503,942 | | | | 296,400 | | | | 207,542 | |
| Total Current Liabilities | | | 1,359,554 | | | | 1,015,407 | | | | 344,147 | |
Cash Requirements
As stated above, we anticipate that our cash requirements will increase substantially as a result of the fact that we are now a public, reporting company and as we begin to increase operations to generate revenue from our license and distributorship agreements.
Sources and Uses of Cash
Operations
For the nine months ended September 30, 2009, we had a net loss from operations of $19,624,712 compared to $29,414,507 for the nine months ended September 30, 2008. This was offset by depreciation and amortization of $469,446, stock based compensation of $18,750,000, an increase in other receivables of $6,500 and an increase in accrued expenses of $136,605, for total cash used in our operating activities of $215,161.
Investments
We had no cash provided by investments for the nine months ended September 30, 2009.
Financing
Our cash flows from financing activities totaled $207,542.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with its Board of Directors, we have identified the following accounting policies that we believe are key to an understanding of our financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.
Valuation of License Agreements
We account for goodwill and license agreements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and other Intangible Assets.” Under SFAS 142, goodwill and intangibles with indefinite lives are not amortized; rather they are tested for impairment at least annually. Intangible assets and license agreements, other than goodwill, with definite lives will be amortized over their useful lives ranging from 3 to 10 years. We periodically evaluate the reasonableness of the useful lives of these intangible assets. The license agreements were valued on our balance sheet as follows:
A. Upon execution of the Master License Agreement we issued Joyon Korea thirty million (30,000,000) common shares as consideration. Prior to the acquisition of the Master License Agreement we had an independent business valuation performed whereby our enterprise value was calculated to be $0.1799 per share. Accordingly, the shares issued for the license were valued at $0.1799 per share.
B. Prior to the acquisition of the Exclusive Distributorship Agreement we had an independent business valuation performed whereby our enterprise value was calculated to be $0.3562 per share. Accordingly, the shares issued for the license agreement were valued at $0.3562 per share.
C. License agreements are comprised of the following:
| | | September 30, 2009 | | Estimated Useful Life |
| | | | | |
| Pang Pang License | | $ | 279,375 | | 3 years |
| North American Master License | | | 2,419,444 | | 10 years |
| Exclusive Distributorship | | | 4,688,955 | | 10 years |
| | | | 7,387,774 | | |
| Less: accumulated amortization | | | (3,005,392 | ) | |
| | | | | | |
| | | $ | 4,382,382 | | |
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 4T Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the nine months ended September 30, 2009. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2009, our disclosure controls and procedures were not effective due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses which have caused management to conclude that, as of September 30, 2009, our disclosure controls and procedures were not effective:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
3. We had a significant number of audit adjustments last fiscal year. Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information. The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls. Management evaluated the impact of our significant number of audit adjustments last year and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
To remediate the material weaknesses in our disclosure controls and procedures identified above, we have continued to refine our internal procedures to begin to implement segregation of duties and to reduce the number of audit adjustments.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Consumer Protection Corporation v. Neo-Tech News, a fictitiously named Defendant whose true legal identity is not known by Plaintiff, Pollex, Inc. f/k/a Joytoto USA, Inc., ABC Defendants 1-50, United States District Court for the District of Arizona, Case No. 08-1953-PHX-JAT
Plaintiff commenced this action on or about September 24, 2008, by the filing of a Complaint. Plaintiff asserts claims arising from an alleged unsolicited facsimile concerning the Company. Plaintiff alleges that the Company paid Neo-Tech News to broadcast the facsimile to Plaintiff as well as other members of the proposed class. Based upon these allegations, Plaintiff asserts claims for violations of the Telephone Consumer Protection Act, declaratory judgment, civil conspiracy, and aiding and abetting. Plaintiff seeks class certification, injunctive relief, damages in accordance with the Telephone Consumer Protection Act, costs, attorneys’ fees, and costs.
On December 8, 2008, the Company filed a motion to dismiss the Complaint. On January 5, 2009, Plaintiff filed its response in opposition to the motion to dismiss. On January 14, 2009, the Company filed its reply to the response. The court denied the Company’s motion to dismiss and on July 27, 2009, the Company filed its Answer. The Company denies the material allegations in the Complaint and intends to vigorously defend this action.
ITEM 1A Risk Factors
There are no material changes to the risk factors in our most recent Annual Report on Form 10-K.
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3 Defaults Upon Senior Securities
ITEM 4 Submission of Matters to a Vote of Security Holders
None.
ITEM 5 Other Information
None.
ITEM 6 Exhibits
| | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
| | |
| 32.1 | Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2 | Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
| | | Pollex, Inc. | |
| | | | |
| Date: November 16, 2009 | | /s/ Seong Yong Cho | |
| | | By: Seong Yong Cho | |
| | | Its: President | |
| | | | |
