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, 2010
o 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: 000-49933
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.) |
| | |
2005 De La Cruz Blvd. Suite 235 Santa Clara, CA (Address of principal executive offices) | 95050 (Zip Code) |
Registrant’s telephone number, including area code (408) 350-7340
(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 22, 2010, there were 4,955,022 shares of common stock, par value $0.001, issued and outstanding .
POLLEX, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | Page |
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| ITEM 1 | Financial Statements | 4 |
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| ITEM 2 | Managements Discussion and Analysis of Financial Condition and Results of Operations. | 9 |
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| ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk | 13 |
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| ITEM 4 | Controls and Procedures | 13 |
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| PART II – OTHER INFORMATION | |
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| ITEM 1 | Legal Proceedings | 14 |
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| ITEM 1A | Risk Factors | 14 |
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| ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 14 |
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| ITEM 3 | Defaults Upon Senior Securities | 14 |
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| ITEM 4 | Removed and Reserved | 14 |
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| ITEM 5 | Other Information | 14 |
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| ITEM 6 | Exhibits | 14 |
PART I – FINANCIAL INFORMATION
This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.
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 | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash | | $ | 13,651 | | | $ | 5,257 | |
| Account receivable | | | 44,155 | | | | - | |
| | | | | | | | | |
| Total current assets | | | 57,806 | | | | 5,257 | |
| | | | | | | | | |
| Property and equipment, net of accumulated | | | | | | | | |
| depreciation of $872 and $0, respectively | | | 5,330 | | | | - | |
| | | | | | | | | |
| Other assets | | | | | | | | |
| Due from affiliated company | | | 12,931 | | | | - | |
| License agreements | | | 120,500 | | | | - | |
| Prepaid royalties | | | 30,000 | | | | - | |
| Deposits | | | 6,000 | | | | - | |
| Assets of discontinued operations | | | - | | | | 6,558 | |
| | | | | | | | | |
| Total other assets | | | 169,431 | | | | 6,558 | |
| | | | | | | | | |
| Total Assets | | $ | 232,567 | | | $ | 11,815 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accrued expenses and accounts payable | | $ | 976,998 | | | $ | 743,514 | |
| Due to affiliate | | | 194,056 | | | | 194,056 | |
| Loans payable | | | 951,583 | | | | 608,652 | |
| | | | | | | | | |
| Total Current Liabilities | | | 2,122,637 | | | | 1,546,222 | |
| | | | | | | | | |
| Stockholders' Deficit | | | | | | | | |
| Common stock, authorized 300,000,000 shares; | | | | | | | | |
| par value $0.001; 4,955,022 and 5,121,689 issued | | | | | | | | |
| and outstanding, respectively | | | 4,953 | | | | 5,120 | |
| Additional paid-in capital | | | 134,771,695 | | | | 116,024,861 | |
| Accumulated deficit | | | (136,666,718 | ) | | | (117,564,388 | ) |
| | | | | | | | | |
| Total Stockholders’ Deficit | | | (1,890,070 | ) | | | (1,534,407 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholders’ Deficit | | $ | 232,567 | | | $ | 11,815 | |
| | | | | | | | | |
| See accompanying notes to consolidated financial statements. |
| POLLEX, INC. |
| | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | |
| | | For the three months ended | | | For the nine months ended | |
| | | September 30, | | | September 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | |
| REVENUES | | $ | 44,596 | | | $ | - | | | $ | 44,596 | | | $ | 60,000 | |
| | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES | | | | | | | | | | | | | | | | |
| Cost of goods sold | | | - | | | | - | | | | - | | | | 54,000 | |
| Selling, general and administrative | | | 6,352,677 | | | | 6,393,804 | | | | 19,037,493 | | | | 18,968,808 | |
| Depreciation and amortization | | | 390 | | | | - | | | | 872 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total Costs and Expenses | | | 6,353,067 | | | | 6,393,804 | | | | 19,038,365 | | | | 19,022,808 | |
| | | | | | | | | | | | | | | | | |
| OPERATING LOSS | | | (6,308,471 | ) | | | (6,393,804 | ) | | | (18,993,769 | ) | | | (18,962,808 | ) |
| | | | | | | | | | | | | | | | | |
| OTHER EXPENSE | | | | | | | | | | | | | | | | |
| Interest expense | | | (9,271 | ) | | | - | | | | (30,786 | ) | | | - | |
| | | | | | | | | | | | | | | | | |
| Total Other Expense | | | (9,271 | ) | | | - | | | | (30,786 | ) | | | - | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | | | (6,317,742 | ) | | | (6,393,804 | ) | | | (19,024,555 | ) | | | (18,962,808 | ) |
| | | | | | | | | | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM CONTINUING OPERATIONS | | | (6,317,742 | ) | | | (6,393,804 | ) | | | (19,024,555 | ) | | | (18,962,808 | ) |
| | | | | | | | | | | | | | | | | |
| DISCONTINUED OPERATIONS | | | | | | | | | | | | | | | | |
| Loss on disposal of discontinued operations, net of tax | | | (19,099 | ) | | | - | | | | (19,099 | ) | | | - | |
| Loss from discontinued operations, net of tax | | | - | | | | (191,004 | ) | | | (58,676 | ) | | | (601,904 | ) |
| Loss from discontinued operations | | | (19,099 | ) | | | (191,004 | ) | | | (77,775 | ) | | | (601,904 | ) |
| | | | | | | | | | | | | | | | | |
| NET LOSS | | | (6,336,841 | ) | | | (6,584,808 | ) | | | (19,102,330 | ) | | | (19,564,712 | ) |
| | | | | | | | | | | | | | | | | |
| NET LOSS PER COMMON SHARE (Basic and Diluted) | | | | | | | | | | | | | | | | |
| Continuing Operations | | $ | (1.26 | ) | | $ | (1.25 | ) | | $ | (3.74 | ) | | $ | (3.70 | ) |
| Discontinued Operations | | | - | | | | (0.04 | ) | | | (0.02 | ) | | | (0.12 | ) |
| | | $ | (1.26 | ) | | $ | (1.29 | ) | | $ | (3.76 | ) | | $ | (3.82 | ) |
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) | | | 5,030,114 | | | | 5,121,689 | | | | 5,090,052 | | | | 5,121,689 | |
See accompanying notes to consolidated financial statements.
| POLLEX, INC. |
| | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | For the nine months ended | |
| | | September 30 | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (19,102,330 | ) | | $ | (19,564,712 | ) |
| Loss from discontinued operations | | | 77,775 | | | | 601,904 | |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 872 | | | | - | |
| Stock based compensation | | | 18,750,000 | | | | 18,750,000 | |
| Changes in assets and liabilities: | | | | | | | | |
| Increase in accounts receivable | | | (44,155 | ) | | | - | |
| Increase in prepaid royalties | | | (15,000 | ) | | | - | |
| Increase in receivable from affiliate | | | (12,931 | ) | | | (6,500 | ) |
| Increase in deposits | | | (1,000 | ) | | | - | |
| Increase in accounts payable and accrued expenses | | | 151,734 | | | | 136,605 | |
| | | | | | | | | |
| Net cash used in continuing operating activities | | | (195,035 | ) | | | (82,703 | ) |
| Net cash used in discontinued operating activities | | | (74,550 | ) | | | (132,458 | ) |
| Net cash used in operating activities | | | (269,585 | ) | | | (215,161 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Purchase of property and equipment | | | (6,202 | ) | | | - | |
| Acquisition of license agreements | | | (58,750 | ) | | | - | |
| | | | | | | | | |
| Net cash used in investing activities | | | (64,952 | ) | | | - | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Loan proceeds | | | 401,400 | | | | 222,542 | |
| Repayment of loan | | | (58,469 | ) | | | (15,000 | ) |
| | | | | | | | | |
| Net cash provided by financing activities | | | 342,931 | | | | 207,542 | |
| | | | | | | | | |
| Net decrease in cash | | | 8,394 | | | | (7,619 | ) |
| | | | | | | | | |
| CASH AT BEGINNING OF PERIOD | | | 5,257 | | | | 8,659 | |
| | | | | | | | | |
| CASH AT END OF PERIOD | | $ | 13,651 | | | $ | 1,040 | |
| | | | | | | | | |
| SUPPLEMENTAL CASH FLOW DISCLOSURES | | | | | | | | |
| | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | |
| | | | | | | | | |
| Cash paid for taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| | | | | | | | | |
| See accompanying notes to consolidated financial statements. | |
POLLEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2010
NOTE A – BASIS OF PRESENTATION
The accompanying 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. 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, 2009.
NOTE B – GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company incurred net losses of $19,102,330 and $19,564,712 for the nine months ended September 30, 2010 and September 30, 2009, respectively, and has an accumulated deficit of $130,329,877 at September 30, 2010. 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 – LICENSE AGREEMENTS
During the nine months ended September 30, 2010, the Company acquired license agreements for 16 online games for use in South Korea. These agreements called for a total of $120,500 in license fees, $30,000 in nonrefundable royalty prepayments on two of the licenses and a $5,000 non refundable deposit on one of the licenses. The Company paid $73,750 of these fees during the nine months ended September 30, 2010 and will pay the remaining fees of $81,750 when the games are launched commercially. Each license also has a royalty fee which varies for each license. Future royalties will be offset against the $30,000 prepayment. The licenses have terms of 2 to 3 years, beginning when they are launched commercially.
The Company began operating the online game The Great Merchant in open beta testing in January 2010. During the three months ended September 30, 2010, the Company generated revenues of $44,596 from this beta testing. The game will be opened for full commercial service in the 1st Quarter of 2011.
NOTE D – LOANS PAYABLE
The loans payable consists of borrowings from three notes which bear interest at 6% per annum. During the six months ended September 30, 2010, the Company received proceeds of $401,400 from these borrowings and repaid $58,469 of these borrowings.
POLLEX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2010
NOTE E – WARRANTS
The following summarizes warrant activity for the three months ended September 30, 2010:
| | | Shares | | | Weighted Average Grant Date Fair Value | |
| Outstanding, January 1, 2010 | | | 946,667 | | | $ | 41.46 | |
| Granted | | | - | | | | - | |
| Forfeited | | | - | | | | - | |
| Expired | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Outstanding, September 30, 2010 | | | 946,667 | | | $ | 41.46 | |
NOTE F- DISSOLUTION OF JOYTOTO TECHNOLOGIES, INC.
On June 24, 2010, the Company dissolved its sub-subsidiary, Joytoto Technologies Inc. (“JTI”). The Company filed a certificate of dissolution with the Secretary of State of Nevada on June 24, 2010. JTI was mostly inactive during 2009 and 2010. In relation to the dissolution, the Company assumed $365,871 in liabilities of JTI.
NOTE G- SALE OF JOYTOTO AMERICA, INC.
On August 11, 2010, the Company, along with its wholly owned subsidiary, Joyon Entertainment, Inc. (“JEI”) entered into a stock purchase agreement with Joytoto Co., Ltd. (“Joytoto Korea”), effective as of June 30, 2010. JEI owns 100% of the issued and outstanding common stock of Joytoto America, Inc. (“JAI”). Pursuant to the terms of the Agreement, the Company and JEI sold 100% of the issued and outstanding common stock of JAI to Joytoto Korea in consideration for the return and cancellation of 166,667 shares of the Company’s common stock held by Joytoto Korea.
At June 30, 2010, JAI had assets of $6,546 and liabilities of $205,296.
As a result of the sale, the operations of JAI are classified as discontinued operations in the Company's consolidated statement of operations and all assets and liabilities are presented separately o the consolidated balance sheets. All prior period information has been reclassified to be consistent with the current period presentation. The cancelled share formerly held by Joytoto Korea were recorded as a reduction of the Company's common stock.
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; busines s 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, as Web Views Corporation.
We are a majority owned subsidiary of Joytoto Co., Ltd. (“Joytoto Korea”). We have one wholly-owned subsidiary, Joyon Entertainment, Inc. (“JEI”), and had two sub-subsidiaries, Joytoto Technologies, Inc., a Nevada corporation (“JTI”) and Joytoto America, Inc., a California corporation (“JAI”), both of which were wholly-owned subsidiaries of JEI. Effective June 30, 2010, we, along with JEI, sold 100% of the issued and outstanding common stock of JAI to Joytoto Korea in exchange for the return and cancellation to us of 166,667 shares of our common stock held by Joytoto Korea. Effictive DATE, JEI was dissolved. The Company is determined to focus on its Online Games business by acquiring new game licenses to provide commercial service of such games in South Korea and t he United States.
Our operations were originally organized into two business segments: Consumer Electronics and Online Games. On June 24, 2010, we dissolved JTI due to inactivity of the distributor contracts and lack of revenues generated in the Consumer Electronics business segment of the Company. The Company will focus on its Online Games segment.
Products and Services
Our operations are focused on Online Games. The Company has acquired licenses from various online game developers to use in South Korea. Our Online Games business segment has generated $44,155 as of September 30, 2009 while in its open beta testing..
The major online game business that is held is The Great Merchant. The online game is operating at its website http://www.thegreatmerchant.com. The website operated in open beta testing on January 2010. The game will be opened for full commercial service in the 1st Quarter of 2011.
Online Games
As of September 30, 2010, the Company has acquired license agreements for 16 games for use in South Korea. These agreements allow the Company to release and service these games in South Korea. The Company will be launching three of these games commercially in South Korea beginning 1st Quarter of 2011. The rest of the games will be launched in consecutive succession soon afterward in each Quarter following.
Three months ended September 30, 2010 compared to three months ended September 30, 2009
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, 2010 and for the three months ended September 30, 2009 are as follows:
| | | Three Months Ended September 30, 2010 | | | Three Months Ended September 30, 2009 | |
| | | | | | | |
| Revenue | | $ | 44,596 | | | $ | - | |
| | | | | | | | | |
| Cost of goods sold | | | - | | | | - | |
| Selling, general and administrative | | | 6,352,677 | | | | 6,393,804 | |
| Depreciation and amortization | | | 390 | | | | - | |
| Total costs and expenses | | | (6,353,067 | ) | | | (6,393,804 | ) |
| Other expense - interest expense | | | (9,271) | | | | - | |
| Loss on disposal of discontinued operations, net of tax | | | (19.099) | | | | - | |
| Loss from discontinued operations, net of tax | | | - | | | | (191,004 | ) |
| Net Loss | | $ | (6,336,841 | ) | | $ | (6,584,808 | ) |
For the three months ended September 30, 2010, we had $44,596 in revenue compared to $0 for the three months ended September 30, 2009. This was generated by revenues from our online games business for The Great Merchant title. For the three months ended September 30, 2010, our selling, general and administrative expenses of $6,352,677 consisted of primarily of $6,250,000 in stock based compensation due to the shares granted to our executive officers under their employment agreements, $37,016 of professional fees, and $32,100 of rent expense. For the three months ended September 30, 2009, our selling, general and administrative expenses of $6,393,804 consisted of primarily of $6,250,000 in stock based compensation due to the shares granted to our executive officers under their employment agreements. For the three months ended September 30, 2010, our loss from discontinued operations was $19,099. For the three months ended September 30, 2009, our loss from discontinued operations was $191,004. Depreciation is of computers and other office furniture and equipment.
Net Loss
Our Net Loss for the three months ended September 30, 2010 was $6,336,841 compared to $6,584,808 for the three months ended September 30, 2009. The decrease of $247,967 or 3.8% was primarily due to less cost in selling general and administrative costs.
Nine months ended September 30, 2010 compared to nine months ended September 30, 2009
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, 2010 and for the nine months ended September 30, 2009 are as follows:
| | | Nine months Ended September 30, 2010 | | | Nine months Ended September 30, 2009 | |
| | | | | | | |
| Revenue | | $ | 44,596 | | | $ | 60,000 | |
| | | | | | | | | |
| Cost of goods sold | | | - | | | | 54,000 | |
| Selling, general and administrative | | | 19,037,493 | | | | 18,968,808 | |
| Depreciation and amortization | | | 872 | | | | - | |
| Total costs and expenses | | | 19,038,365 | | | | 19,022,808 | |
| Other expense - interest expense | | | 30,768 | | | | - | |
| Loss on disposal of discontinued operations, net of tax | | | (19,099 | ) | | | - | |
| Loss from discontinued operations, net of tax | | | (58,676 | ) | | | (601,904 | ) |
| | | $ | (19,102,330 | ) | | $ | (19,564,712 | ) |
For the nine months ended September 30, 2010, we had $44,596 in revenue compared to $60,000 for the nine months ended September 30, 2009. The decrease of $15,404 or 26% was primarily due to opening of the online game the great merchant and the drop revenues from our consumer electronics business. For the nine months ended September 30, 2010, our selling, general and administrative expenses of $19,037,493 consisted of primarily of $18,750,000 in stock based compensation due to the shares granted to our executive officers under their employment agreements. For the nine months ended September 30, 2009, our selling, general and administrative expenses of $18,968,808 consisted of primarily of $18,750,000 in stock based compensation due to the shares granted to our executive officers under their employment agreements. For the nine months ended September 30, 2010, our loss from discontinued operations was $77,775. For the nine months ended September 30, 2009, our loss from discontinued operations was $601,904. Depreciation is of computers and other office furniture and equipment.
Net Loss
Our Net Loss for the nine months ended September 30, 2010 was $19,102,330 compared to $19,564,712 for the nine months ended September 30, 2009. The decrease of $462,382 or 2.3% was primarily due to an increase in game license revenue.
Liquidity and Capital Resources
Introduction
Our primary assets are the two online game license agreements, the Exclusive Distributorship Agreement, and the 16 game license agreements for use in South Korea.
As of September 30, 2010, we have begun to generate revenue from The Great Merchant agreement by testing the game with users from during the open beta testing stage.
Our cash requirements have been relatively small up to this point, but 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, 2010 | | | As of December 31, 2009 | | | Change | |
| Cash | | | 13,651 | | | $ | 5,257 | | | $ | 8,394 | |
| Account Receivable | | | 44,155 | | | | - | | | | 44,155 | |
| Total current assets | | | 57,806 | | | | 5,257 | | | | 52,549 | |
| Property and equipment, net of accumulated depreciation of $872 and $0 | | | 5,330 | | | | - | | | | 5,330 | |
| Due from Gameforyou | | | 12,931 | | | | - | | | | 12,931 | |
| License Agreements | | | 120,500 | | | | - | | | | 120,500 | |
| Prepaid Royalties | | | 30,000 | | | | - | | | | 3,000 | |
| Deposits | | | 6,000 | | | | 3,090 | | | | 6,000 | |
| Assets of discontinued operations | | | - | | | | 6,558 | | | | (6,558) | |
| Total assets | | | 232,567 | | | | 11,815 | | | | 220,752 | |
| Accrued expenses and accounts payable | | $ | 976,998 | | | | 743,514 | | | | (233,484) | |
| Due to affiliate | | | 194,056 | | | | 194,056 | | | | 0 | |
| Loans payable | | $ | 951,583 | | | | 608,652 | | | | 342,931 | |
| Total Current Liabilities | | $ | 2,122,637 | | | | 1,546,222 | | | | 576,415 | |
Cash Requirements
As stated above, we anticipate that our cash requirements will increase substantially as we begin to increase operations to generate revenue from our license agreements.
Sources and Uses of Cash
Operations
For the three months ended September 30, 2010, we had a net loss of $6,336,841 compared to $6,584,808 for the three months ended September 30, 2009. This was offset by depreciation and amortization of $390, stock based compensation of $6,250,000, an increase in prepaid royalties of $15,000 and an increase in accrued expenses of $37,427, for total cash used in our operating activities of $97,656.
For the nine months ended September 30, 2010, we had a net loss of $19,102,330 compared to $19,564,712 for the nine months ended September 30, 2009. This was offset by depreciation and amortization of $872, stock based compensation of $18,750,000, an increase in prepaid royalties of $15,000, and an increase in accrued expenses of $151,734, for total cash used in our operating activities of $269,585.
Investments
We had $1,844 invested in cash used in investment activities for the three months ended September 30, 2010, which relates the purchase of property and equipment of $1,844.
We had $64,952 invested in cash used in investment activities for the nine months ended September 30, 2010, which relates the purchase of property and equipment of $6,202 and the acquisition of license agreements of $58,750.
Financing
Our cash flows from financing activities totaled $342,931, from $401,400 in loan proceeds offset by $58,469 from repayment of our loan.
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 Accounting Standards Codification (“ASC”) 350, “Intangibles- Goodwill and Other.” Under ASC 350, 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. The Company reviewed its license agreements for impairment again at December 31, 2009 and determined that the license agreements were completely impaired and should be reduced to zero. Accordingly, the Company recognized an impairment loss of $4,227,975 in 2009. The Company reached this conclusion due to its’ inability to generate the revenues originally anticipated as well the difficulty in raising the necessary funds to develop and utilize the licenses due to the current difficult credit environment.
D. During the nine months ended September 30, 2010, the Company acquired license agreements for 16 online games for use in South Korea. These agreements total $120,500 in license fees. $30,000 in nonrefundable royalty prepayments on two of the licenses and a $5,000 nonrefundable deposit on one of the licenses. The Company paid $73,750 of these fees during the six months ended June 30, 2010 and will pay the remaining fees of $81,750 when the games are launched commercially. Each license also has a royalty fee which varies with each license. Future royalties will be offset against the $30,000 prepayment. The licenses have terms of 2 to 3 years, beginning when they are launched commercially.
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.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2010 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financi al officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level 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, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level:
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
Except as noted above, 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
None.
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
There were no unregistered, or any other, sales of equity securities by us during the three month period ended June 30, 2010.
ITEM 3 Defaults Upon Senior Securities
There have been no events that are required to be reported under this Item.
ITEM 4 Removed and Reserved.
ITEM 5 Other Information
On October 13, 2010, Doo Ho Choi resigned from his position as Chief Operating Officer and director of the Company. Mr. Choi had no disagreements with the Company.
| 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. |
| | | |
| 99.1 | | Resignation of Doo Ho Choi |
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. | |
| | | |
| Dated: November 22, 2010 | /s/ Seong Yong Cho | |
| | By: Seong Yong Cho | |
| | Its: President | |
| | | |
| | | |
| | /s/ Seong Sam Cho | |
| | By: Seong Sam Cho | |
| | Its: Chief Financial Officer | |
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