UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2005
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 000-50065
PPOL, Inc.
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(Exact name of registrant as specified in its charter.)
California 95-4436774
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(State of Incorporation) (IRS Employer Identification No.)
1 City Boulevard West, Suite 820, Orange, California 92868
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 937-3211
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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 [ ]
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 20,542,881
- ----------------------------- -----------------------------------
(Class) (Outstanding at November 07, 2005.)
PPOL, Inc.
2005 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of September 30, 2005 and March 31, 2005 3
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
Three Months Ended September 30, 2005 and 2004 4
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
Six Months Ended September 30, 2005 and 2004 5
Consolidated Statements of Cash Flows for the six months ended September 30, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4: CONTROLS AND PROCEDURES 23
PART 2: 24
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ITEM 1: LEGAL PROCEEDINGS 24
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5: OTHER INFORMATION 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
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EXHIBITS: 27
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Exhibit 31.1 - CEO Certification 27
Exhibit 31.2 - CFO Certification 28
Exhibit 32.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 29
2
PART 1:
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, March 31,
2005 2005
------------- -------------
CURRENT ASSETS: Unaudited
Cash and cash equivalents $ 15,282,063 $ 12,007,537
Trade accounts receivable 145,384 1,321,755
Inventories 2,456,687 1,064,082
Advance payments -- 1,054,393
Deferred costs, current 49,492,243 49,130,889
Deferred income taxes, current 7,957,058 8,358,713
Prepaid expenses and other current assets 753,351 515,905
------------- -------------
Total current assets 76,086,786 73,453,274
Restricted cash 21,852,752 20,686,915
Property and equipment, net 571,766 905,703
Software, net 7,716,673 10,131,128
Deferred costs, non-current 42,412,608 36,999,841
Deferred income taxes, non-current 5,489,944 5,315,246
Lease deposits 706,706 742,583
Deposits 4,157,960 4,240,842
Goodwill 1,761,211 --
Other assets 85,938 112,778
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$ 160,842,344 $ 152,588,310
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 11,180,878 $ 12,665,017
Advances received 316,045 2,234,253
Loans payable -- 1,115,760
Deferred revenue, current 67,963,271 68,075,963
Income taxes payable 483,105 1,025,126
Other current liabilities 1,916,005 2,209,746
------------- -------------
Total current liabilities 81,859,304 87,325,865
Advances received, Cube 21,852,752 20,686,915
Deferred revenue, non-current 54,994,116 49,106,165
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TOTAL LIABILITIES 158,706,172 157,118,945
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COMMITMENTS (NOTE 7)
SHAREHOLDERS' EQUITY (DEFICIT):
Common Stock; $0.001 par value;
100,000,000 shares authorized;
20,542,881 and 17,993,752 shares issued
and outstanding as of September 30,
2005 and March 31, 2005, respectively 20,543 17,994
Additional paid-in capital 16,468,890 6,274,923
Total other comprehensive income 1,383,171 905,819
Accumulated deficit (15,736,432) (11,729,371)
------------- -------------
Total shareholders' equity (deficit) 2,136,172 (4,530,635)
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$ 160,842,344 $ 152,588,310
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Three months Three months
ended ended
September 30, September 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 20,832,620 $ 26,851,737
Other on-line services 7,143,820 5,556,924
Consulting services 30,630 --
------------ ------------
Total 28,007,070 32,408,661
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COSTS AND EXPENSES:
Cost of sales 8,747,036 9,403,238
Distributor incentives 11,265,491 15,684,705
Selling, general and administrative expenses 8,544,909 6,683,613
------------ ------------
Total costs and expenses 28,557,436 31,771,556
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OPERATING (LOSS) INCOME (550,366) 637,105
OTHER INCOME (EXPENSE), net 25,114 (119,527)
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(LOSS) INCOME BEFORE INCOME TAX PROVISION (525,252) 517,578
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INCOME TAXES (EXPENSE)BENEFIT:
Current 951,967 (542,714)
Deferred (1,616,932) (408,977)
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Total income taxes (664,965) (951,691)
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NET LOSS (1,190,217) (434,113)
OTHER COMPREHENSIVE GAIN
Foreign currency translation 233,948 441,555
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COMPREHENSIVE (LOSS) INCOME $ (956,269) $ 7,442
============ ============
NET LOSS PER COMMON SHARE,
Basic $ (0.06) $ (0.02)
============ ============
Diluted $ (0.06) $ (0.02)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 20,542,881 17,993,752
============ ============
Diluted 20,542,881 17,993,752
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Six months Six months
ended ended
September 30, September 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 47,831,450 $ 53,340,901
Other on-line services 12,775,206 11,080,452
Consulting revenue 30,630 --
------------ ------------
Total 60,637,286 64,421,353
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COSTS AND EXPENSES:
Cost of sales 18,363,415 17,104,352
Distributor incentives 25,669,676 31,538,651
Selling, general and administrative expenses 19,926,888 14,237,374
------------ ------------
Total costs and expenses 63,959,979 62,880,377
------------ ------------
OPERATING (LOSS) INCOME (3,322,693) 1,540,976
OTHER INCOME (EXPENSE), net 12,556 3,425
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(LOSS) INCOME BEFORE INCOME TAX PROVISION (3,310,137) 1,544,401
------------ ------------
INCOME TAXES EXPENSE:
Current (469,967) (576,132)
Deferred (226,957) (1,877,710)
------------ ------------
Total income taxes (696,924) (2,453,842)
------------ ------------
NET LOSS (4,007,061) (909,441)
OTHER COMPREHENSIVE GAIN
Foreign currency translation 477,352 1,207,546
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COMPREHENSIVE (LOSS) INCOME $ (3,529,709) $ 298,105
============ ============
NET LOSS PER COMMON SHARE,
Basic $ (0.20) $ (0.05)
============ ============
Diluted $ (0.20) $ (0.05)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 19,716,515 17,993,752
============ ============
Diluted 19,716,515 17,993,752
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Six months
ended ended
September 30, September 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Net loss $ 4,007,061 $ 909,441
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 2,089,778 2,004,642
Loss on sales/disposal of property, equipment and software 1,130,081 21,520
Deferred income taxes 226,957 1,877,710
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash (2,222,946) (2,763,219)
Trade accounts receivable 1,141,903 (1,506,314)
Merchandise inventories (1,399,321) 685,898
Advance payments 1,030,160 --
Deferred costs (10,199,919) 9,442,704
Prepaid expenses and other (112,045) (569,612)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued liabilities (1,688,053) 3,040,604
Advances received (1,858,444) (227,690)
Advances received - Cube 2,222,946 2,763,219
Deferred revenue 11,741,246 (11,679,758)
Income taxes payable (505,601) (455,541)
Other current liabilities (272,714) (301,988)
------------ ------------
Total adjustments 1,324,028 2,332,175
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Net cash (used for) provided by operating activities (2,683,033) 1,422,734
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CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (207,851) (287,604)
Proceeds on sale of fixed assets 1,977 --
Software and software CIP (21,509) (4,457,039)
Guaranteed Deposits (125,260) --
Purchase of subsidiary (3,522,422) --
Investment in software company (300,000)
Cash of acquired entity - K.K. U Service 760,812 --
Other assets 724,476 --
------------ ------------
Net cash used for investing activities (2,389,775) (5,0444,643)
------------ ------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan from majority shareholder -- 811,394
Repayment of loan from majority shareholder (1,115,760) --
Issuance of common stock 10,196,516 --
------------ ------------
Net cash provided by financing activities 9,080,756 811,394
------------ ------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH & CASH EQUIVALENTS (733,420) (827,635)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,274,526 (3,638,150)
CASH AND CASH EQUIVALENTS, beginning of period 12,007,537 12,083,556
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 15,282,063 $ 8,445,406
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 992,367 $ 1,175,535
============ ============
Interest paid $ 5,675 $ 19,964
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
6
PPOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
PPOL, Inc. ("PPOL" or "the Company") incorporated on May 19,
1993 in California. On August 15, 2002, the Company amended
its articles of incorporation to increase its authorized
shares of common stock from 10,000,000 to 100,000,000, change
its name to PPOL, Inc. and effected a 1 for 7 reverse stock
split. All share data presented in these consolidated
financial statements reflect the reverse stock split.
Effective April 1, 2002, AJOL Co., Ltd. ("AJOL") was acquired
by PPOL in a transaction accounted for as a reverse merger.
The Company, upon closing of the transaction on August 15,
2002, issued 899,746 shares (post split) of its common stock
for all of the issued and outstanding common stock of AJOL.
For legal purposes, PPOL is the acquirer. For accounting
purposes, AJOL has been treated as the acquirer and
accordingly, AJOL is presented as the continuing entity, and
the historical financial statements are those of AJOL. Prior
to the reverse merger PPOL had no business activity, thus
pro-forma information as though PPOL and AJOL had been
combined for all periods has not been provided.
AJOL is primarily engaged in sales of multi-functional
telecommunications equipment called MOJICO. AJOL distributes
MOJICO throughout Japan through a network marketing system of
registered distributors located throughout Japan that
introduces purchasers to AJOL. Using MOJICO, AJOL provides
original telecommunication services called "Pan Pacific
Online," including MOJICO bulletin board and mail services.
AJOL also provides various other on-line services through Pan
Pacific Online such as ticket and mail-order services. These
sales and services are provided in Japan.
On May 30, 2005, the Company completed the acquisition of K.K.
U Service, a Japanese corporation ("USC") based in Tokyo,
Japan. Pursuant to the Purchase Agreement dated May 30, 2005,
by and between the Company, USC and K.K. Green Capital, a
Japan corporation (the "Seller"), the Company purchased from
the Seller all of the issued and outstanding shares of USC in
exchange for an amount equal to $3,522,422 (JP(Y)380,000,000).
USC is a development stage company that is expected to
commence revenue generating operations in the second half of
the fiscal year ending March 31, 2006. It is expected to be
involved in the business of planning, development, sales and
marketing, and import/export of telephones, fax machines,
copiers, computer and peripheral equipment.
BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been
prepared by PPOL, Inc. (the "Company"), pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally present
in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in
the United States of America have been omitted pursuant to
such rules and regulations. The information furnished herein
reflects all adjustments (consisting of normal recurring
accruals and adjustments), which are, in the opinion of
management, necessary to fairly present the operating results
for the prospective periods. These consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the years
ended March 31, 2005 and 2004 included in the Company's Form
10-K. The results of the six months ended September 30, 2005
are not necessarily indicative of the results to be expected
for the full year ending March 31, 2006.
7
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include accounts of
PPOL, Inc. and its wholly owned subsidiaries, AJOL, Ltd. and
K.K. U Service. All significant intercompany balances and
transactions have been eliminated upon consolidation.
NET (LOSS) INCOME PER SHARE:
The Company reports both basic net income per share, which is
based on the weighted average number of common shares
outstanding, and diluted net income per share, which is based
on weighted average number of common shares outstanding and
dilutive potential common shares. Diluted earnings (loss) per
share is computed similar to basic earnings (loss) per share
except that the numerator is increased by the amount of
interest expense attributable to any convertible notes payable
and the denominator is increased to include the number of
additional common shares that would have been outstanding if
the potential common shares had been issued and if the
additional common shares were dilutive. For the three months
ended September 30, 2005, all of the 1,300,000 issued and
outstanding common stock options have also been excluded as
they would have an antidilutive effect.
STOCK BASED COMPENSATION:
The Company grants stock options with an exercise price equal
to at least the fair value of the stock at the date of grant.
The Company has elected to continue to account for its
employee stock-based compensation plans using an intrinsic
value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) and related Interpretations. Under APB
25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is
recognized.
The Company has adopted only the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." It applies APB 25
and related interpretations in accounting for its Stock Option
Plan and does not recognize compensation expense for its Stock
Option Plan other than for restricted stock and options issued
to outside third parties.
The Company uses the Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of
employee stock options.
Pro forma information using the Black-Scholes method at the
date of grant was based on the following assumptions: average
risk free interest rate of 4.34% for 2005 and 2004; dividend
yield of 0.0% for each of the years 2005 and 2004; average
volatility factor of the expected market price of the
Company's common stock of 251% for 2005 and 216% 2004; and an
expected life of the options of 9 years for 2005 and 10 years
for 2004.
8
Had compensation cost for the Company's four stock-based
compensation plans been determined based on the fair value at
the grant dates for awards under those plans consistent with
the method of FASB Statement 123, the Company's net income and
earnings per share would have been reduced to the pro forma
amounts indicated below:
Six months ended
September 30:
2005 2004
-------- ------
Net income (loss) as reported (in thousands $) (4,007) (909)
Stock compensation calculated under APB25 (in thousands $) -- --
Stock compensation calculated under SFAS 123 (in thousands $) (258) --
-------- ------
Pro forma (in thousands $) (4,265) (909)
======== ======
Primary earnings per share as reported (0.20) (0.05)
Pro forma (0.22) (0.05)
Fully diluted earnings per share as reported (0.20) (0.05)
Pro forma (0.22) (0.05)
SOFTWARE:
Research and development costs are charged to expense as
incurred. However, the costs incurred for the development of
computer software that will be sold, leased or otherwise
marketed are capitalized when technological feasibility has
been established. These capitalized costs are subject to an
ongoing assessment of recoverability.
Amortization of capitalized software development costs begins
when the product is available for general release.
Amortization is provided on a product-by-product basis on
either the straight-line method or the sales ratio method.
Unamortized capitalized software development costs determined
to be in excess of net realizable value of the product are
expensed immediately.
During the six months ended September 30, 2005, it was decided
that the best course of action was to integrate the operations
of USC and AJOL rather than have two separately run
organizations. Within this framework, it was determined that
we should abandon certain software projects that were being
undertaken by USC. Accordingly, approximately $0.7 million in
software was expensed during the six months ended September
30, 2005.
RECLASSIFICATIONS
Reclassifications have been made to the financial statements
for the six months ended September 30, 2004 to conform to
presentation for the six months ended September 30, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS:
On May 2005, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 154, "Accounting Changes and Error
Corrections-A Replacement of APB Opinion No. 20 and FASB
Statement No. 3." SFAS No. 154 applies to all voluntary
changes in accounting principle and requires retrospective
application to prior periods' financial statements of changes
in accounting principle, unless it is impracticable. SFAS No.
154 requires that a change in depreciation, amortization or
depletion method for long-lived, non-financial assets be
accounted for as a change of estimate affected by a change in
accounting principle. SFAS No. 154 also carries forward
without change the guidance in APB Opinion No. 20 with respect
to accounting for changes in accounting estimates, changes in
the reporting unit and correction of an error in previously
issued financial statements. The Company is required to adopt
SFAS No. 154 for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The
adoption of SFAS No. 154 is not expected to have a material
effect on the Company's consolidated financial position or
results of operations.
9
On June 29, 2005, the FASB ratified the Emerging Issues Task
Force's ("EITF's") Issue No. 05-06, "Determining the
Amortization Period for Leasehold Improvements." Issue No.
05-06 provides that the amortization period used for leasehold
improvements acquired in a business combination or purchased
after the inception of a lease be the shorter of (a) the
useful life of the assets or (b) a term that includes required
lease periods and renewals that are reasonably assured upon
the acquisition or the purchase. The provisions of Issue No.
05-06 are effective on a prospective basis for leasehold
improvements purchased or acquired in reporting periods
beginning after June 29, 2005. Early application of the
consensus is permitted in periods for which financial
statements have not been issued. We do not believe the
adoption of Issue No. 05-06 will have a material effect on our
consolidated financial position, results of operations or cash
flows.
(2) RELATED PARTY TRANSACTIONS:
On May 30, 2005, the Company completed the acquisition of USC.
Pursuant to the Purchase Agreement dated May 30, 2005, by and
between the Company, USC and K.K. Green Capital, a Japan
corporation (the "Seller"), the Company purchased from the
Seller all of the issued and outstanding shares of USC in
exchange for an amount equal to $3,522,422 (JPY380,000,000).
Seller is the majority owner in Foster Strategic Management
Partnership, a Singapore partnership, which in turn owns
approximately 10,547,594 shares of the Company's common stock,
representing approximately 51.32% of the Company's issued and
outstanding stock.
The following summarizes the unaudited assets acquired and
liabilities assumed in connection with the acquisition
described in the preceding paragraph:
Current assets $ 899,446
Deposits 1,455,014
Intangibles, including goodwill 2,051,438
----------
Total assets acquired 4,405,898
Current liabilities assumed (883,476)
----------
Net assets acquired $3,522,422
==========
The purchase price represented a significant premium over the
recorded net worth of USC's assets. In determining to pay this
premium, we considered various factors, including the
opportunities that USC offers to enhance our future growth
opportunities, synergies with our present operations, cost and
time advantages of establishing a comparable company on our
own, contacts with prospective vendors and elimination of a
potential competitor.
The Company has considered whether the acquisition included
various identifiable intangible assets. As USC is in the
development stage with no revenues, at this time, we believe
no value can be ascribed to the trade names, trademarks,
customers, and workforce. Accordingly, the Company has
estimated that the entire premium of $1,761,211 over the
recorded net worth to be attributable to Goodwill.
In conjunction with the acquisition of USC, we are currently
reviewing the qualifications of valuation firms to assist us
in the determination of what portion of the purchase price
should be allocated to identifiable intangible assets. We
believe the valuation of any identifiable intangible assets
will be concluded by March 31, 2006 and could result in a
portion of Goodwill, which may be reclassified to identifiable
intangible assets. Nevertheless, the Company does not believe
changes, if any, will be material to its financial position or
results of operations.
10
These consolidated financial statements include the results of
operations of USC from May 31, 2005 through September 30,
2005. The following (unaudited) pro forma consolidated results
of operations have been prepared as if the acquisition of USC
had occurred at April 1, 2005:
3 months ended 6 months ended
September 30, 2005
Sales $ 28,007,070 $ 60,637,286
Net loss (1,190,217) (4,226,241)
Net loss per share - Basic (0.06) (0.21)
Net loss per share - Diluted (0.06) (0.21)
The pro forma information is presented for informational
purposes only and is not necessarily indicative of the results
of operations that would have been achieved had the
acquisition been consummated at that time, nor is it intended
to be a projection of future results. Pro forma results are
not provided for the three months and six months ended
September 30, 2004 as USC was not in existence at that time.
AJOL entered into a consulting contract with K.K. Seagull, a
Japanese corporation and shareholder of 926,956 shares the
Company's common stock. Under the consulting contract, K.K.
Seagull is to provide information technology services to AJOL
for a term of 12 months beginning on April 1, 2005 through
March, 31, 2006 at approximately $20,000 per month.
(3) COMMON STOCK OFFERING:
On May 30, 2005, the Company sold to four purchasers a total
of 2,549,129 shares of its common stock, $0.001 par value per
share ("Common Stock") for an aggregate consideration of
JPY1,100,000,000 (US $10,196,516) at $4 per share.
The Company entered into separate Stock Purchase Agreements
("Stock Purchase Agreements"), each dated as of May 30, 2005,
with (i) K.K. Contents Provider Tokyo, a Japan corporation,
which paid JPY400,0000,000 (US$3,707,824); (ii) K.K. Seagull,
a Japan corporation, which paid JPY400,000,000 (US$3,707,824);
(iii) K.K. H.I. Consultants, a Japan corporation, which paid
JPY200,000,000 (US$1,853,912); and (iv) K.K. System Partners,
a Japan corporation, which paid JPY100,000,000 (US$926,956)
(collectively, the "Investors"). The Company issued the Common
Stock in a private placement without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance on
one or more exemptions from the registration requirements
under the Act, including Regulation D.
Pursuant to the Stock Purchase Agreements, the Company entered
into a Registration Rights Agreement ("Registration Rights
Agreement"), dated May 30, 2005, with each of the four
Investors, which granted "piggy-back" registration rights to
the Investors. Pursuant to the Registration Rights Agreement,
if the Company at any time files a registration statement
(other than a Form S-4 or Form S-8 registration statement)
with the Securities and Exchange Commission under the Act,
Registrant agrees to use its best efforts to include in such
registration statement such shares of the Investors' Common
Stock as the Investors may request, subject to the terms and
conditions of the Registration Rights Agreement.
The Company used the proceeds from the above noted sale of
equity securities to purchase 100% of the issued and
outstanding common stock of K.K. U Service, a Japanese
corporation.
The CEO of PPOL is also the Representative Director of K.K.
H.I. Consultants.
11
(4) STOCK OPTIONS:
The Company established a stock option plan in March 2004 (the
"2004 Plan"). In accordance with the 2004 Plan, the Company is
authorized to issue incentive stock options and non-qualified
stock options for up to 2,000,000 shares of the Company's
common stock to employees, directors and consultants.
A total of 1,220,000 options were granted to employees on
March 25, 2004 which will vest 100% on March 25, 2006 (options
will cliff vest two years after the grant date) and expire on
March 25, 2014 (ten years after the grant date). An additional
80,000 options were granted to two directors on July 1, 2004
which did vest 100% on July 1, 2005. A summary of the
Company's stock option plan activity is presented below:
Weighted Average
Options Exercise Price
Outstanding at March 31, 2005 1,300,000 $ 4.00
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
--------- --------
Outstanding at September 30, 2005 1,300,000 $ 4.00
========= ========
The following table summarizes information about the stock
options outstanding and exercisable at September 30, 2005:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted Weighted
Fiscal Year Range of Average Average Weighted
Options Exercise Number of Remaining Exercise Number of Average
Granted Prices Options Contractual Life Price Options Exercise Price
- ------------- ------------ ---------- ----------------- -------------- ----------- ---------------
2004 $4.00 1,220,000 8.50 $4.00 - -
2005 $4.00 80,000 8.75 $4.00 80,000 $4.00
2006 - - - - - -
----------- ------ ------- ----------- ---------------
1,300,000 8.51 $4.00 80,000 $4.00
(5) DEFERRED REVENUES AND DEFERRED COSTS:
Activity for deferred revenues and deferred costs are
contained in the table below:
Deferred Costs Deferred Revenues
---------------------------- ----------------------------
Current Non-current Current Non-current
------------ ------------ ------------ ------------
Beginning balance, March 31, 2005 $ 49,130,889 $ 36,999,841 $ 68,075,963 $ 49,106,165
Additional deferrals 15,180,029 22,909,953 21,757,733 29,073,568
Released amounts (12,372,151) (15,517,912) (18,496,837) (20,593,218)
Exchange rate effect (2,446,524) (1,979,274) (3,373,588) (2,592,399)
------------ ------------ ------------ ------------
Ending balance, September 30, 2005 $ 49,492,243 $ 42,412,608 $ 67,963,271 $ 54,994,116
============ ============ ============ ============
(6) INCOME TAXES
Income taxes are provided based on the asset and liability
method of accounting pursuant to SFAS No. 109, "Accounting for
Income Taxes". Deferred income taxes are recorded to reflect
the tax consequences on future years of differences between
the tax basis of assets and liabilities and their financial
reporting amounts at year-end. These deferred taxes are
measured by applying currently enacted tax laws. 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.
PPOL files stand-alone tax returns in the US as it is not
permitted to file consolidated tax returns with its Japanese
subsidiaries. AJOL and USC. In Japan, AJOL and USC each files
its own separate tax returns. Income taxes imposed by the
national, prefecture and municipal governments of Japan. The
deferred tax assets result primarily from the recognition of
revenues and costs for Japanese tax reporting purposes that
are deferred for US financial reporting purposes.
PPOL, on a stand-alone basis, does not conduct revenue
generating activities. Its primary source of income has been
and will continue to be dividends from AJOL for the
foreseeable future. Thus, PPOL on a stand-alone basis is not
expected to have any taxable income unless it receives
dividends from its operating subsidiaries. At March 31, 2005,
PPOL had net operating loss carry forwards of approximately
$1.2 million and $2.5 million for federal and California
reporting purposes, respectively, expiring through March 31,
2025. For the six months ended September 30, 2005, PPOL's
stand-alone loss of $1.0 million resulted in an increase of
the NOL by that amount and approximately a $0.4 million
addition to the deferred tax asset. A 100% valuation allowance
on such loss carryforwards continues to be provided at
September 30, 2005 as it is not likely that the Company will
utilize such losses to offset income in the future.
(7) COMMITMENTS & CONTINGENCIES:
As of September 30, 2005 the Company had various professional
consulting service contracts and operating leases in effect
which collectively will require payments of $1.2 million in
the 12 months ending September 30, 2006.
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special Note Regarding Forward-Looking Statements:
- --------------------------------------------------
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbor from
liability provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as PPOL "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe PPOL's future plans, objectives or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated as
of the date of this Report. Shareholders, potential investors and other readers
are urged to consider these factors in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included herein are only made as of
the date of this Report and PPOL undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances,
except as required under applicable laws.
Overview
- --------
PPOL, Inc., a California corporation, conducts its business primarily through
its wholly owned Japanese subsidiaries, AJOL, Ltd. ("AJOL"), a Japanese
corporation, and Gatefor, Inc. ("Gatefor"), a Japanese corporation. At the
present time, the Company has administrative functions occurring in California,
but does not otherwise have any major business in the United States.
The Company's revenues are currently derived from network communication sales by
AJOL of (1) its "MOJICO" hardware, a multifunctional facsimile based machine
with networking capabilities, (2) subscriptions to PPOL's proprietary "Pan
Pacific Online" interactive database that can only be accessed through its
MOJICO hardware and (3) various consumer products that utilize the Company's
"Kamome" brand.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2004
PRODUCT SALES AND NETWORK SERVICES. For the three months ended September 30,
2005, revenues of this category have decreased by approximately 22.4% in
comparison to the same period of the prior year. The decrease is primarily due
to a decline in aggregate shipments during the three year period ended September
30, 2005 in comparison to the three year period ended September 30, 2004 due
principally to economic conditions in Japan. For further information, see
Revenue Recognition under Critical Accounting Policies and Estimates below.
OTHER ONLINE SERVICES REVENUE. For the three months ended September 30, 2005,
revenues of this category have increased by approximately 28.6% over the
comparable period of the prior year. This is a result of the Company's
continuing efforts to expand the on-line service business which is a continuing
corporate objective.
COST OF SALES. For the three months ended September 30, 2005, the cost of sales
expressed as a percentage of sales increased to 31.2% from 29.0% in the
comparable period of the prior year due to an increase in the cost of our
flagship SF-70 MOJICO machines.
DISTRIBUTOR INCENTIVES. For the three months ended September 30, 2005,
distributor incentives decreased by approximately $4.4 million or 28.2% in
comparison to the same period of the prior year. The overall decrease in
distributor incentives is primarily due to the decline of product sales and
network services of 22.4% and change in the product mix to lower incentive rate
goods and services, particularly in the area of insurance commissions.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
September 30, 2005, selling, general and administrative expenses have increased
by approximately $1.9 million or 27.8% in comparison to the same period of the
prior year. The increase was primarily due to an increase in printing and
postage costs associated with increased mailings and loss on retirement of
certain fixed assets and software. Additionally, the Company's new subsidiary,
USC, incurred approximately $980,000 in system development expense.
CURRENT INCOME TAX EXPENSE. For the three months ended September 30, 2005,
current income tax expense decreased by approximately $1.5 million from the same
period of the prior year. The difference in the current quarter's loss,
calculated under Japanese tax laws, and the income of the comparable period of
the prior year was approximately $2.6 million.
DEFERRED INCOME TAX EXPENSE. For the three months ended September 30, 2005,
deferred income tax expense increased approximately $1.2 million over the same
period of the prior year. The increase was primarily the result of the increase
experienced in deferred costs and deferred revenues associated with the sales of
the Company's MOJICO hardware and related Pan Pacific On-line subscription
services in addition to other timing differences.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO THE
SIX MONTHS ENDED SEPTEMBER 30, 2004
PRODUCT SALES AND NETWORK SERVICES. For the six months ended September 30, 2005,
revenues of this category have decreased by approximately 10.3% in comparison to
the same period of the prior year. The decrease is primarily due to a decline in
aggregate shipments during the three year period ended September 30, 2005 in
comparison to the three year period ended September 30, 2004 due principally to
economic conditions in Japan. For further information, see Revenue Recognition
under Critical Accounting Policies and Estimates below.
OTHER ONLINE SERVICES REVENUE. For the six months ended September 30, 2005,
revenues increased by approximately 15.3% over the comparable period of the
prior year, particularly in the area of mail order sales of Kamome branded
goods. This is a result of the Company's continuing efforts to expand the
on-line service business which is a continuing corporate objective.
COST OF SALES. For the six months ended September 30, 2005, the cost of sales
expressed as a percentage of sales increased to 30.3% from 26.6% in the
comparable period of the prior year due to increase in the cost of our flagship
MOJICO machines, and monthly accrual for a promotional program to increase the
number of members who join a mutual heath insurance plan administered by AJOL.
Under this program, new members will receive a refund of $94 (Japanese Yen
(JPY)10,000) of their insurance premiums if they do not make any claims in their
first year.
DISTRIBUTOR INCENTIVES. For the six months ended September 30, 2005, distributor
incentives decreased by approximately $5.9 million or 18.6% in comparison to the
same period of the prior year. The overall decrease in distributor incentives is
primarily due to the decline of product sales and network services of 10.3% and
a change in the product mix to lower incentive rate goods and services,
particularly in the areas of insurance and mail order commissions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the six months ended September
30, 2005, selling, general and administrative expenses have increased by
approximately $5.7 million or 40.0% in comparison to the same period of the
prior year. The increase was primarily due to research and inspection costs to
develop a voice recognition engine, an on-line shopping cart function and a
gateway function. Additionally, the Company's new subsidiary, K.K. U Service,
incurred approximately $2.2 million in new general and administrative items.
CURRENT INCOME TAX EXPENSE. For the six months ended September 30, 2005, current
income tax expense compared to the same period of the prior year was relatively
unchanged even though there was a $4.8 million difference between this year's
pretax loss and the pretax income of the comparable period of the prior year.
This was a result of taxable income, calculated under Japanese tax laws, being
relatively comparable at approximately $1.5 million in both years.
DEFERRED INCOME TAX EXPENSE. For the six months ended September 30, 2005,
deferred income tax expense decreased approximately $1.7 million or 87.9% over
the same period of the prior year. The decrease was primarily the result of the
decline experienced in deferred costs and deferred revenues associated with the
sales of the Company's MOJICO hardware and related Pan Pacific On-line
subscription services in addition to other timing differences such as accrued
vacation, depreciation and director bonuses.
14
Liquidity and Capital Resources
- -------------------------------
Since inception, we have funded our operations primarily through equity
investments and short-term borrowings. On May 30, 2005, we sold 2,549,129 shares
of our Common Stock for an aggregate consideration of $10.2 million at $4 per
share to four investors. The Company issued the Common Stock in a private
placement without registration under the Securities Act of 1933, as amended (the
"Act"), in reliance on one or more exemptions from the registration requirements
under the Act, including Regulation D.
Pursuant to the Stock Purchase Agreements, the Company entered into a
Registration Rights Agreement ("Registration Rights Agreement"), dated May 30,
2005, with each of the four Investors, which granted "piggy-back" registration
rights to the Investors. Pursuant to the Registration Rights Agreement, if the
Company at any time files a registration statement (other than a Form S-4 or
Form S-8 registration statement) with the Securities and Exchange Commission
under the Act, we agreed to use its best efforts to include in such registration
statement such shares of the Investors' Common Stock as the Investors may
request, subject to the terms and conditions of the Registration Rights
Agreement.
The Company used the proceeds from the above noted sale of equity securities to
purchase 100% of the issued and outstanding common stock of USC. The CEO of PPOL
is also the Representative Director of one of the investors, which purchased
463,478 shares for $1.9 million.
Our operating activities consumed $2.7 million and provided $1.4 million of cash
during the six months ended September 30, 2005 and 2004, respectively. Cash
consumed in 2005 consisted of primarily of $4 million in net loss, adjusted by
depreciation ($2.1 million), loss on sales/disposal of property, equipment and
software ($1.1 million), and a net change in assets and liabilities of -$2.1
million. Cash provided in 2004 consisted primarily of $0.9 million in net loss,
adjusted by depreciation ($2.0 million), deferred income taxes ($1.9 million),
and a net change in assets and liabilities--$1.4 million.
Investing activities consumed $2.4 million and $5.0 million of cash during the
six months ended September 30, 2005 and 2004, respectively. Cash consumed in
2005 consisted primarily of the purchase of USC, noted above, of $3.5 million,
offset by $0.8 million cash held by USC at acquisition date and $0.7 million
reduction in other assets. Cash used in 2004 was primarily related to the
purchase of software of $4.4 million and $300,000 investment in a software
company.
Financing activities provided $9.1 million and $0.8 million of cash during the
six months ended September 30, 2005 and 2004, respectively. Cash provided in
2005 consisted of $10.2 million equity financing, noted above, and repayment of
$1.1 million in loans from our majority shareholder. offset the purchase of USC,
noted above, of $3.5 million, offset by $0.8 million cash held by USC at
acquisition date and $0.7 million reduction in other assets. Cash provided in
2004 was entirely from majority shareholder.
As of September 30, 2005, our cash of $15.3 million was $8.7 million less than
our cash balance at June 30, 2005 of $24 million. This was primarily a result of
the net loss for three months ended September 30, 2005 of $1.2 million, adjusted
by depreciation of $0.7 million, changes in our deferred income taxes of $2.0
million and net reduction in our current liabilities of $10.8 million and
negative effect of exchange rate of $0.5 million.
While we believe that our current cash on hand, together with cash we expect to
generate from future operations will be sufficient to satisfy our anticipated
cash requirements and capital expenditures for the next 12 months, we will
consider additional sources of financing if is deemed to be in the best
interests of the Company.
15
Contractual Obligations
The Company's operating lease & purchase obligations as of September 30, 2005
are as follows:
Payments due by period
---------------------------------------------------------------------------------------
Less than More than
Contractual obligations Total 1 year 2-3 years 4-5 years 5 years
--------------------------- -------------- ------------ ------------ ----------- ------------
Operating Lease Obligations $ 428,989 $ 428,989 - - -
Service Provider Contracts 782,056 782,056 - - -
---------------- --------------- -------------- ------------- -------------
Total $ 1,211,045 $ 1,211,045 $ - $ - $ -
================ =============== ============== ============= =============
The Company projects that it will need to satisfy at least $1.2 million of lease
and contract obligations within the twelve months following September 30, 2005.
Critical Accounting Policies and Estimates
- ------------------------------------------
PPOL's significant accounting policies are discussed in Note 1, Organization and
Summary of Significant Accounting Policies, in our notes to the consolidated
financial statements for the (1) years ended March 31, 2005 and 2004 included in
our Form 10-K, and (2) six months ended September 30, 2005 included in this
document. The application of certain of those policies requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the period reported.
The following accounting policies involve a "critical accounting estimate"
because they are particularly dependent on estimates and assumptions made by
management about matters that are highly uncertain at the time the accounting
estimates are made. In addition, while we have used our best estimates based on
facts and circumstances available to us at the time, different estimates
reasonably could have been used in the current period, and changes in the
accounting estimates we used are reasonably likely to occur from period to
period which may have a material impact on the presentation of our financial
condition and results of operations. We review these estimates and assumptions
periodically and reflect the effects of revisions in the period that they are
determined to be necessary.
Revenue Recognition:
Revenue from MOJICO product sales is recognized over the weighted average
customer relationship period of three years. Revenue from sales of annual online
subscription services to Pan Pacific Online is recognized over one year. The
revenue and associated costs deferred for revenue recognition purposes are
recorded as deferred revenue and deferred costs, respectively. Deferred costs
are comprised of costs of the MOJICO hardware and distributors incentive
commissions. Deferred costs are directly related to defered revenues. Deferred
costs are amortized into income over the weighted average customer relationship
period of three years or the online subscription period of one year, as
applicable.
The weighted average customer relationship period will increase if we are
successful in increasing the length of time a customer maintains their
relationship with us. This translates into a longer period over which we would
recognize revenues from the sales of the MOJICO resulting in lower quarterly
revenues unless we are able to make up for the reduction by an increase in our
current MOJICO shipments and other revenues where deferred revenue recognition
is not required. Our other revenues where deferred revenue recognition is not
required is dependent, in part, on the length of our average customer
relationship period as this implies a broader base of customers from whom we can
derive revenues from. Conversely, if our average customer relationship period
declined, this would have the direct opposite effect of what was heretofore
discussed in this paragraph.
16
Software
The Company follows the guidance in Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires that entities capitalize certain internal-use
software costs once certain criteria are met. Under SOP 98-1, overhead, general
and administrative and training costs are not capitalized. Capitalized software
costs are being amortized on a straight-line basis principally over 5 years.
Our computer software is also subject to review for impairment as events or
changes in circumstances occur indicating that the amount of the asset reflected
in the Company's balance sheet may not be recoverable.
Goodwill
The acquisition of USC was at a premium over the net recorded net worth of $1.8
million. In determining to pay this premium, we considered various factors,
including the opportunities that USC offers to enhance our future growth
opportunities, synergies with our present operations, cost and time advantages
of establishing a comparable company on our own, contacts with prospective
vendors and elimination of a potential competitor.
In its determination of the amount to be ascribed to Goodwill, the Company has
considered whether the acquisition included various identifiable intangible
assets. As USC is in the development stage with no revenues, at this time, we
believe no value can be ascribed to the trade names, trademarks, customers, and
workforce. Accordingly, the Company has estimated that the entire premium to be
attributable to Goodwill.
In conjunction with the acquisition of USC, we are currently reviewing the
qualifications of valuation firms to assist us in the determination of what
portion of the purchase price should be allocated to identifiable intangible
assets. We believe the valuation of any identifiable intangible assets will be
concluded by March 31, 2006 and could result in a portion of Goodwill, which may
be reclassified to identifiable intangible assets. Nevertheless, the Company
does not believe changes, if any, will be material to its financial position or
results of operations.
On a go forward basis, we will evaluate Goodwill for possible impairment using
the guidance in SFAS No. 142, "Goodwill and Other Intangible Assets" on at least
an annual basis. The review for impairment requires the use of significant
judgments about the future performance of the PPOL's operating subsidiaries.
Income Taxes:
Income taxes are provided based on the asset and liability method of accounting
pursuant to SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes
are recorded to reflect the tax consequences on future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at year-end. These deferred taxes are measured by applying currently
enacted tax laws. 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.
17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Limited Operating History
- -------------------------
We have a limited operating history in Japan upon which we can be evaluated. Any
investment in us must be considered in light of the risks, expenses and
difficulties encountered by companies in the early stage of development in new
and rapidly evolving markets, including the risks described herein. There can be
no assurances that we will be successful in addressing these risks.
Unproven Business Model
- -----------------------
We cannot predict whether or not we will be successful because our business
model is unproven and its market is developing. It is too early to reliably
ascertain market penetration for our products and services. If future demand for
AJOL's products and services, including, but not limited to demand for the
MOJICO hardware and Kamome brand products is lower than anticipated, or the
costs of attracting subscribers is higher than anticipated, then our financial
condition and results from operations will be materially and adversely affected.
Fluctuations In Operating Results
- ---------------------------------
Our operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. These factors
include the demand for the telecommunications products and services offered by
us, introduction of new products or services by us or our competitors, delays in
the introduction or enhancement of products and services by us or our
competitors, changes in our pricing policies or those of our competitors, our
ability to anticipate and effectively adapt to developing markets and rapidly
changing technologies, changes in the mix or Japanese vs. non-Japanese revenue,
changes in foreign currency exchange rates, the mix of products and services
sold by us and the channels through which those products and services are sold,
general economic conditions, and specific economic conditions in Internet and
related industries. Additionally, in response to evolving competitive
conditions, we may elect from time to time to make certain pricing, service,
marketing or acquisition decisions that could have a material adverse affect on
its financial performance.
Foreign Currency (Yen) Fluctuations
- -----------------------------------
Substantially all of our revenue and expenses are received and incurred in
Japanese Yen. Variation in foreign exchange rates may substantially affect our
revenue, expenses, and net income in U.S. dollar terms. In preparing our
financial statements, we translate revenue and expenses from Japanese Yen into
U.S. dollars using weighted average exchange rates. If the U.S. dollar
strengthens relative to the Yen, our reported revenue, gross profits and net
income will likely be reduced. For example, in 2001, the Japanese Yen
significantly weakened, which reduced our operating results on a U.S. dollar
reported basis. The Company's fiscal 2006 operating results could be similarly
harmed if the Japanese Yen weakens from current levels. Given the
unpredictability of exchange rate fluctuations, we cannot estimate the effect
these fluctuations may have upon future reported results, product pricing or our
overall financial condition.
Poor Japanese Economic Conditions
- ---------------------------------
Economic conditions in Japan have been poor in recent years and may worsen or
not improve. Continued or worsening economic and political conditions in Japan
could further reduce our revenue and net income.
18
Reliance On Handwritten Moji Characters As Preferred Method Of Written
- ----------------------------------------------------------------------
Communications
- --------------
We rely on the desire of subscribers and potential subscribers to use
handwritten Moji (characters) as their preferred method of written communication
as an underlying material assumption for the continuing success of its business.
A subscriber's or potential subscriber's desire to use handwritten Moji
(characters) is a matter of personal preference, which is unpredictable. Any
negative changes in perception by subscribers and potential subscribers as to
their desire to use handwritten Moji characters as their preferred method of
written communication, for any reason, including the emergence of new,
different, or alternative forms of written communications, could have a
materially adverse affect on us and our business.
Dependence On New Subscribers
- -----------------------------
Our operating results generally depend on revenues received from sales of the
MOJICO product. In previous years, MOJICO sales have accounted for up to 78% of
our annual revenue. MOJICO sales are primarily made to our new customers. As a
result, future revenues are primarily dependent on our ability to generate new
customers for our MOJICO hardware and Pan Pacific Online services. There can be
no assurances that we will be able to continue to generate new subscribers at
the rate that we have been able to in the past, nor that we will be able to
generate sufficient new subscribers to remain profitable. We do not have any
substantial historical basis for predicting the rate of increase in our
subscriber base.
Dependence On Subscribers For Content Of Network
- ------------------------------------------------
The information transmitted to our subscribers via our information network Pan
Pacific Online is primarily generated by other subscribers. There can be no
assurances that our subscribers will continue to generate information that other
subscribers will find sufficiently entertaining, useful, or desirable so as to
allow us to profitably market the products and services that provide access to
our network.
Liability For Content Of Network
- --------------------------------
As a provider of messaging and communications services, we may incur liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials transmitted via
our information network. To minimize our liability, we use a centralized hub to
manually process and screen hard copies for adult themes, slander,
patent/copyright infringement and objectionable material. However, there can be
no assurances that we will be able to effectively screen all of the content. We
have no insurance to cover claims of these types. Any imposition of liability
could have a material adverse affect on our reputation, financial condition, and
operating results.
Reliance On Existing Distributors And Need To Recruit Additional Distributors
- -----------------------------------------------------------------------------
We depend on subscriber distributors to generate substantially all of our
revenues. To increase our revenue, we must increase the number of and/or the
productivity of our distributors. Our distributors may terminate their status as
a distributor at any time. The number of distributors may not increase and could
decline in the future. We cannot accurately predict how the number and
productivity of distributors may fluctuate because we rely upon our existing
distributors to recruit, train and motivate new distributors. Our operating
results could be harmed if our existing and new business opportunities and
products do not generate sufficient interest to retain existing distributors and
attract new distributors.
The loss of a group of high-level distributors, or a group of leading
distributors in the distributor's network of lower level distributors, whether
by their own choice or through disciplinary actions for violations of our
policies and procedures could negatively impact the growth of distributors and
our revenue. There is no leading distributor whose departure, alone, will have a
material impact on the financial position or results of operations. In addition,
our operations in Japan face significant competition from existing and new
competitors. Our operations would also be harmed if our planned growth
initiatives fail to generate continued interest and enthusiasm among our
distributors in this market and fail to attract new distributors.
19
Dependence on Mr. Aota
- ----------------------
We are also highly dependent upon AJOL's Honorary Chairman, Yoshihiro Aota, to
recruit and retain subscribers. Mr. Aota represents the personification of AJOL.
Mr. Aota's talents, efforts, personality and leadership have been, and continue
to be, critical to us and our success. The diminution or loss of the services of
Mr. Aota, and any negative market or industry perception arising from that
diminution or loss, would have a material adverse affect on our business. We are
investigating, but have not obtained "Key Executive Insurance" with respect to
Mr. Aota.
Also, if Mr. Aota's services become unavailable, our business and prospects
could be materially adversely affected. We do not have an employment agreement
with Mr. Aota. If we lose Mr. Aota's services, for any reason, including as a
result of Mr. Aota's voluntary resignation or retirement, our business could be
materially and adversely affected.
Failure Of New Products And Services To Gain Market Acceptance
- --------------------------------------------------------------
A critical component of our business is our ability to develop new products and
services that create enthusiasm among our distributor force. If any new product
or service fails to gain market acceptance, for any reason including quality
problems, this could harm our results of operations.
Losing Sources Of Kamome Products
- ---------------------------------
The loss of any of our sources of Kamome products, or the failure of sources to
meet our needs, could restrict our ability to distribute Kamome products and
harm our revenue as a result. Further, our inability to obtain new sources of
Kamome products at prices and on terms acceptable to us could harm our results
of operations.
Competition With Technically Superior Products And Services
- -----------------------------------------------------------
Our products and services utilize the facsimile-like MOJICO hardware and rely on
human personnel to screen and process information for our database. Our products
and services are much less technically sophisticated than those offered by other
companies offering interactive telecommunications products and services. This
may put us at a substantial competitive disadvantage with present and/or future
competitors.
Internet Usage Rates And Long Distance Telephone Rates
- ------------------------------------------------------
Our subscribers obtain access to AJOL's network via either the Internet or
telephone service. The costs that subscribers incur in obtaining access to our
network via these channels are beyond the control of AJOL. Any increase in long
distance telephone rates or rates for accessing the Internet could materially
and adversely affect demand for our products and services.
Reliance On Internet As Transmission Medium
- -------------------------------------------
Our future success will depend upon our ability to route our customers' traffic
through the Internet and through other data transmission media. Our success is
largely dependent upon the viability of the Internet as a medium for the
transmission of subscriber related data. There can be no assurance that the
Internet will prove to be a viable communications media, that document
transmission will be reliable, or that capacity constraints which inhibit
efficient document transmission will not develop. The Internet may not prove to
be a viable avenue to transmit communications for a number of reasons, including
lack of acceptable security technologies, lack of access and ease of use,
traffic congestion, inconsistent quality or speed of service, potentially
inadequate development of the necessary infrastructure, excessive governmental
regulation, uncertainty regarding intellectual property ownership or lack of
timely development and commercialization of performance improvements.
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Technological Changes Of The Messaging And Communications Industry
- ------------------------------------------------------------------
The messaging and communications industry is characterized by rapid
technological changes, changes in user and customer requirements and
preferences, and the emergence of new industry standards and practices that
could render our existing services, proprietary technology and systems obsolete.
Our success depends, in part, on our ability to develop new services,
functionality and technology that address the needs of existing and prospective
subscribers. If we do not properly identify the feature preferences of
subscribers and prospective subscribers, or if we fail to deliver features that
meet their standards, our ability to market our products and services
successfully and to increase revenues could be impaired. The development of
proprietary technology and necessary service enhancements entail significant
technical and business risks and require substantial expenditures and lead-time.
We may not be able to keep pace with the latest technological developments. We
may also be unable to use new technologies effectively or adapt services to
customer requirements or emerging industry standards.
We must accurately forecast the features and functionality required by
subscribers and prospective subscribers. In addition, we must design and
implement service enhancements that meet subscriber requirements in a timely and
efficient manner. We may not successfully determine subscriber and prospective
subscriber requirements and may be unable to satisfy their demands. Furthermore,
we may not be able to design and implement a service incorporating desired
features in a timely and efficient manner. In addition, if subscribers do not
favorably receive any new service offered by us, our reputation could be
damaged. If we fail to accurately determine desired feature requirements or
service enhancements or to market services containing such features or
enhancements in a timely and efficient manner, our business and operating
results could suffer materially.
Possible Inadequate Intellectual Property Protections
- -----------------------------------------------------
Our success depends to a significant degree upon our proprietary technology. We
rely on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our proprietary technology. However, these
measures provide only limited protection, and the Company may not be able to
detect unauthorized use or take appropriate steps to enforce our intellectual
property rights. In addition, we may face challenges to the validity and
enforceability of our proprietary rights and may not prevail in any litigation
regarding those rights. Any litigation to enforce our intellectual property
rights would be expensive and time-consuming, would divert management resources
and may not be adequate to protect our business.
Possible Infringement Claims
- ----------------------------
We could be subject to claims that we have infringed the intellectual property
rights of others. In addition, we may be required to indemnify our distributors
and users for similar claims made against them. Any claims against us could
require us to spend significant time and money in litigation, pay damages,
develop new intellectual property or acquire licenses to intellectual property
that is the subject of the infringement claims. These licenses, if required, may
not be available at all or on acceptable terms. As a result, intellectual
property claims against us could have a material adverse effect on our business,
prospects, financial conditions and results of operations.
Possible System Failure Or Breach Of Network Security
- -----------------------------------------------------
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. As precautions, we utilize distributed processing systems, back-up
systems, Internet firewalls, nonstop, 24 hour, continuous installation
environment surveillance, and private power generators as backup. There can be
no assurance that our existing and planned precautions of backup systems,
regular data backups and other procedures will be adequate to prevent
significant damage, system failure or data loss.
21
Despite the implementation of security measures, our infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems.
Persistent problems continue to affect public and private data networks,
including computer break-ins and the misappropriation of confidential
information. Computer break-ins and other disruptions may jeopardize the
security of information stored in and transmitted through the computer systems
of the individuals and businesses utilizing our services, which may result in
significant liability to us and also may deter current and potential subscribers
from using our services. Any damage, failure or security breach that causes
interruptions or data loss in our operations or in the computer systems of our
customers could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Reliance On Third Party Access For Telecommunications
- -----------------------------------------------------
We rely on third parties to provide our subscribers with access to the Internet.
There can be no assurance that a third party's current pricing structure for
access to and use of the Internet will not change unfavorably and, if the
pricing structure changes unfavorably, our business, prospects, financial
condition and results of operations could be materially and adversely affected.
Effect Of Government Regulations
- --------------------------------
We provide access to our database and services through data transmissions over
public telephone lines and other facilities provided by telecommunications
companies. These transmissions are subject to regulatory government agencies.
These regulations affect the prices that subscribers must pay for transmission
services, the competition we face from telecommunications services and other
aspects of our market. There can be no assurance that existing or future laws,
governmental action or rulings will not materially and adversely affect our
operations. Additionally, we operate through a network marketing strategy which
is subject to government regulation concerning consumer protection. Changes in
these regulations could affect compliance with these regulations and
jurisdictions where we carry on our business.
Dependence On Vendor
- --------------------
The MOJICO machine is produced by an unrelated third party. Should this third
party become incapable or unwilling to produce the MOJICO for any reason, we
could face a temporary decline in MOJICO sales until another electronics
manufacturer is sourced and ready to produce the machines.
Minority Shareholder Status
- ---------------------------
Foster Strategic Investment Partnership ("Foster") holds 51.3% of PPOL's common
stock. Acting alone, Foster, as a majority shareholder, has significant
influence on PPOL's policies. As a result, Foster will have the ability to
control the outcome of all matters requiring stockholder approval, including the
election and removal of PPOL's entire Board of Directors, any merger,
consolidation or sale of all or substantially all of PPOL's assets, and the
ability to control PPOL's and our management and affairs.
No Lock-up Agreement Between Foster Strategic Investment Partnership
- --------------------------------------------------------------------
To date, PPOL has not entered into a separate lock-up arrangement with Foster
Strategic Investment Partnership pursuant to which these shareholders would
agree to be subject to volume and sale restrictions that will limit their
ability to sell shares in addition to the restrictions set forth under Rule 144.
If a suitable lock-up agreement is not in effect, then Foster Strategic
Investment Partnership may be eligible to sell a large volume of shares, which
could cause the price of PPOL's shares to decline.
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No History As Reporting Company
- -------------------------------
Prior to the effective date of the PPOL's filing of Form 10, PPOL has never been
a public company, subject to the reporting requirements of the Securities and
Exchange Act of 1934, as amended, and PPOL expects that the obligations of being
a public company, including substantial public reporting and investor relations
obligations, will require significant continuing additional expenditures, place
additional demands on our management and may require the hiring of additional
personnel. We may need to implement additional systems in order to adequately
function as a reporting public company. Such expenditures could adversely affect
our financial condition and results of operations.
ITEM 4: CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures and conclude
these controls/procedures are effective based on our evaluation as of the
"Evaluation Date," which is as of the end of the period covered in the filing of
this 10-Q. There were no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
The Company intends to initiate planning for the implementation of Section 404
of the Sarbanes-Oxley Act. However, the Company has not yet hired an outside
firm to assist in the implementation to start its evaluation process. The
implementation of Section 404 will involve significant costs and commitments in
terms of the Company's financial and personnel resources, and there is a
possibility that the Company may not complete its Section 404 compliance
responsibilities by the established deadline.
23
PART 2:
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
A - Exhibits:
Exhibit 31.1 - Chief Executive Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Chief Financial Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to Rule 13a-14(b) of
the Exchange Act and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
B - Reports on Form 8-K
1) On July 13, 2005 the Company filed a Current Report on Form
8-K under item 8.01, "Other Events," which reported the
anticipated delay in filing the Company's Form 10-K beyond
the extended due date of July 14, 2005.
2) On July 26, 2005 the Company filed a Current Report on Form
8-K under item 8.01, "Other Events," which reported the
sale of the Company's stock sold by a shareholder and
affiliate of the Company to Japanese purchasers.
3) On August 23, 2005 the Company filed a Current Report on
Form 8-K under item 3.01, "Notice of Delisting or Failure
to Satisfy a Continued Listing Rule or Standard; Transfer
Listing," which reported that the Company had initiated a
hearing with the OTC Bulletin Board Filing Department of
the National Association of Securities Dealers to discuss
the Company's SEC reporting status.
4) On September 9, 2005 the Company filed a Current Report on
Form 8-K under item 4.01, "Changes in Registrant's
Certifying Accountant," which reported that the Company's
auditors, Stonefield Josephson, Inc., had declined to stand
for reelection as the Company's auditors. Additionally,
concerns raised by Stonefield Josephson, Inc. were noted in
this filing.
5) On September 22, 2005 the Company filed a Current Report on
Form 8-K under item 4.01 "Changes in Registrant's Certifying
Accountant," which reported that the Company's relationship
with its auditor, Stonefield Josephson, Inc., would cease
and that the Company's Board of Directors had engaged Windes
and McClaughry Accountancy Corporation for the quarter ended
June 30, 2005. The Company also reported under item 3.01,
"Notice of Delisting or Failure to Satisfy a Continued
Listing Rule or Standard; Transfer Listing," which noted
that it was delinquent in filing its first quarter Form 10-Q
and that it had scheduled a hearing with the OTCBB Filings
Department regarding its SEC reporting status.
6) On September 22, 2005 the Company filed a Current Report on
Form 8-K/A under item 4.01, "Changes in Registrant's
Certifying Accountant," which reported that the Company's
auditors, Stonefield Josephson, Inc., had declined to stand
for reelection as the Company's auditors. Additionally,
concerns raised by Stonefield Josephson, Inc. were noted in
this filing. As an exhibit to this filing was Stonefield
Josephson's letter addressed to the SEC regarding the
Company's filing on September 9, 2005.
7) On September 26, 2005 the Company filed a Current Report on
Form 8-K/A under item 4.01, "Changes in Registrant's
Certifying Accountant," which reported that the Company's
auditors would be changing from Stonefield Josephson, Inc.
to Windes and McClaughry Accountancy Corporation.
Additionally, concerns raised by Stonefield Josephson, Inc.
were noted in this filing.
25
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.
PPOL, Inc.
--------------------------------------
(Registrant)
November 14, 2005 /s/ Hisao Inoue
----------------- --------------------------------------
Date Hisao Inoue, Chief Executive Officer
November 14, 2005 /s/ Richard Izumi
----------------- --------------------------------------
Date Richard Izumi, Chief Financial Officer
26