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 June 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
California 95-4436774
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
1 City Boulevard West, Suite 870, Orange, California 92868
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 937-3211
--------------
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 August 19, 2005.)
PPOL, Inc.
2005 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
--------------------------------------------------------------------------------
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of June 30, 2005(unaudited) and March 31, 2005 3
Consolidated Statements of Operations and Comprehensive (Loss) Income for
the three months ended June 30, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
June 30, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4: CONTROLS AND PROCEDURES 20
PART 2: 21
--------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS 21
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5: OTHER INFORMATION 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
--------------------------------------------------------------------------------
EXHIBITS: 24
--------------------------------------------------------------------------------
Exhibit 31.1 - CEO Certification 24
Exhibit 31.2 - CFO Certification 25
Exhibit 32.1 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 26
2
PART 1:
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, March 31,
2005 2005
------------- -------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 24,007,675 $ 12,007,537
Trade accounts receivable 643,878 1,321,755
Inventories 1,155,258 1,064,082
Advance payments 1,845,903 1,054,393
Deferred costs, current 50,913,307 49,130,889
Deferred income taxes, current 8,757,959 8,358,713
Prepaid expenses and other current assets 637,603 515,905
------------- -------------
Total current assets 87,961,583 73,453,274
Restricted cash 21,573,928 20,686,915
Property and equipment, net 624,737 905,703
Software, net 8,556,179 10,131,128
Deferred costs, non-current 43,730,780 36,999,841
Deferred income taxes, non-current 6,305,975 5,315,246
Lease deposits 722,235 742,583
Deposits 4,248,718 4,240,842
Goodwill 1,761,211 --
OTHER ASSETS 97,528 112,778
------------- -------------
$ 175,582,874 $ 152,588,310
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 15,451,818 $ 12,665,017
Advances received 2,005,826 2,234,253
Loans payable -- 1,115,760
Deferred revenue, current 70,724,047 68,075,963
Income taxes payable 1,406,991 1,025,126
Other current liabilities 3,097,003 2,209,746
------------- -------------
Total current liabilities 92,685,685 87,325,865
Advances received, Cube 21,573,928 20,686,915
Deferred revenue, non-current 58,237,056 49,106,165
------------- -------------
TOTAL LIABILITES 172,496,669 157,118,945
------------- -------------
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 June 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 1,149,223 905,819
Accumulated deficit (14,552,451) (11,729,371)
------------- -------------
Total shareholders' equity (deficit) 3,086,205 (4,530,635)
------------- -------------
$ 175,582,974 $ 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
June 30, 2005 June 30, 2004
------------- -------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 26,998,830 $ 26,485,853
Other on-line services 5,631,386 5,522,895
------------- -------------
Total 32,630,216 32,008,748
------------- -------------
COSTS AND EXPENSES:
Cost of sales 9,616,379 7,697,965
Distributor incentives 14,404,185 15,852,493
Selling, general and administrative expenses 11,387,987 7,396,202
------------- -------------
Total costs and expenses 35,408,551 30,946,660
------------- -------------
OPERATING (LOSS) INCOME (2,778,335) 1,062,088
OTHER EXPENSE, net (12,786) (33,065)
------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES (2,791,121) 1,029,023
------------- -------------
INCOME TAXES (EXPENSE) BENEFIT:
Current (1,421,934) (35,356)
Deferred 1,389,975 (1,468,733)
------------- -------------
Total income taxes (31,959) (1,504,089)
------------- -------------
NET LOSS (2,823,080) (475,066)
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation 243,404 765,991
------------- -------------
COMPREHENSIVE (LOSS) INCOME $ (2,579,676) $ 290,925
------------- =============
NET LOSS PER COMMON SHARE,
Basic $ (0.15) $ (0.03)
============= =============
Diluted $ (0.15) $ (0.03)
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 18,871,785 17,993,752
============= =============
Diluted 18,871,785 17,993,752
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months
ended ended
June 30, 2005 June 30, 2004
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (2,823,080) $ (475,066)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,410,470 846,603
Loss on sales/disposal of property and equipment 1,132,092 2,351
Deferred income taxes (1,815,214) 1,468,733
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash (1,495,510) (17,473,584)
Trade accounts receivable 663,657 (66,377)
Inventories (105,343) (1,697,146)
Advance payments (843,907) --
Deferred costs (11,184,958) 9,267,108
Prepaid expenses and other 9,627 (307,817)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 2,446,638 (230,627)
Advances received (174,148) 17,473,584
Advances received - Cube 1,495,510 (14,599,581)
Deferred revenue 15,419,357 (12,204,165)
Income taxes payable 421,700 (1,013,165)
Other current liabilities 872,474 153,769
------------- -------------
Total adjustments 8,252,445 (18,380,314)
------------- -------------
Net cash provided by (used for) operating activities 5,429,365 (18,855,380)
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (144,927) (156,954)
Software and software CIP (8,080) (2,366,738)
Purchase of subsidiary (3,522,422) (300,000)
Cash of acquired entity - K.K. U Service 760,812 --
Other assets 588,271 (260,529)
------------- -------------
Net cash used for investing activities (2,326,346) (3,084,221)
------------- -------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan from majority shareholder -- 830,412
Repayment of loan from majority shareholder (1,115,760) --
Issuance of common stock 10,196,516 --
Proceeds from short term debt -- 2,736,935
------------- -------------
Net cash provided by financing activities 9,080,756 3,567,347
------------- -------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (183,637) (1,333,034)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,000,138 (19,705,288)
CASH AND CASH EQUIVALENTS, beginning of period 12,007,537 28,334,777
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 24,007,675 $ 8,629,489
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 1,026,403 $ 1,048,522
============= =============
Interest paid $ -- $ 5,997
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
5
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 and has a network
of registered distributors located throughout Japan that introduce
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 100% 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 (JPY380,000,000). 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, 2004 and 2003 included in the Company's Form
10-K. The results of the three months ended June 30, 2005 are not
necessarily indicative of the results to be expected for the full year
ending March 31, 2006.
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.
6
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 June 30, 2005 and
2004, 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 SFAS No.
123, "Accounting for Stock-Based Compensation." It applies Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," 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 2.70% 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 216% for 2005
and 2004; and an expected life of the options of 10 years
for both 2005 and 2004.
7
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:
Three months ended
June 30,
-----------------------
2005 2004
--------- ---------
Net income (loss) as reported (in thousands $) $ (2,823) $ (475)
Stock compensation calculated under APB25 (in thousands $) - -
Stock compensation calculated under SFAS 123 (in thousands $) - -
--------- ---------
Pro forma (in thousands $) $ (2,823) $ (475)
========= =========
Primary earnings per share as reported $ (0.15) $ (0.03)
Pro forma $ (0.15) $ (0.03)
Fully diluted earnings per share as reported $ (0.15) $ (0.03)
Pro forma $ (0.15) $ (0.03)
COMPUTER 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.
RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2005, the 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.
(2) RELATED PARTY TRANSACTIONS:
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 (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 58.62% of the Company's issued and
outstanding stock.
8
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.
These consolidated financial statements include the results of
operations of USC from May 31, 2005 through June 30, 2005. The
following (unaudited) pro forma consolidated results of operations
have been prepared as if the acquisition of K.K. U Service had
occurred at April 1, 2005:
3 months ended
June 30, 2005
Sales $ 32,630,216
Net loss (3,042,260)
Net loss per share - Basic (0.16)
Net loss per share - Diluted (0.16)
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 to the three months ended June 30
2004 as K.K.U Service 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.
(4) 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.
9
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.
(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 10,009,027 16,603,077 14,834,279 22,264,995
Released amounts (6,790,736) (8,636,410) (10,191,532) (11,488,385)
Exchange rate effect (1,435,873) (1,235,728) (1,994,663) (1,645,719)
------------- ------------- ------------- -------------
Ending balance, June 30, 2005 $ 50,913,307 $ 43,730,780 $ 70,724,047 $ 58,237,056
============= ============= ============= =============
(6) 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). 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 June 30, 2005 1,300,000 $4.00
=========== =======
10
The following table summarizes information about the stock options outstanding
and exercisable at June 30, 2005:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Fiscal Average Weighted Weighted
Year Range of Remaining Average Average
Options Exercise Contractual Exercise Exercise
Granted Prices Options Life Price Options Price
------- ------ ------- ---- ----- ------- -----
2004 $4.00 1,220,000 8.75 $4.00 -- --
2005 $4.00 80,000 9.00 $4.00 -- --
2006 -- -- -- -- -- --
---------- ------ ------- ------- ------
Total 1,300,000 8.76 $4.00 -- --
========== ====== ======= ======= ======
(7) COMMITMENTS:
As of June 30, 2005 the Company had various professional consulting
service contracts and operating leases in effect which collectively
will require payments of $2.0 million in the 12 months ending June 30,
2006.
11
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 subsidiary, AJOL, Ltd. ("AJOL"), a Japanese
corporation. Another wholly owned subsidiary, K.K. U Service ("USC"), a Japanese
corporation, 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. 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 JUNE 30, 2005 AS COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2004
Product Sales And Network Services. For the three months ended June 30, 2005,
revenues of this category have increased by approximately 1.9% in comparison to
the same period of the prior year. The increase is primarily due to an increase
in MOJICO unit sales and corresponding new members and initial Pan Pacific
Online subscription fees. Underlying the change was a substantial increase in
current sales bookings, the majority of which was deferred to future periods for
accounting principles generally accepted in the US which was offset by
amortization of deferred revenues generated in prior periods.
Other Online Services Revenue. For the three months ended June 30, 2005,
revenues increased by approximately 2.0% 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 June 30, 2005, the cost of sales
expressed as a percentage of sales increased to 29.5% of sales from 24.0% of
sales for the comparable period of the prior year. The increase in the
percentage is primarily due to a 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 three months ended June 30, 2005, distributor
incentives decreased by approximately $1.5 million or 9.1% in comparison to the
same period of the prior year. The overall decrease in distributor incentives is
primarily due to change in the product mix to lower incentive rate goods and
services. The sum of cost of sales and distributor incentives expressed as a
percentage of sales has remained stable at 73.6%.
12
Selling, General And Administrative Expense. For the three months ended June 30,
2005, selling, general and administrative expenses have increased by
approximately $3.9 million or 54.0% 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.
Current Income Tax Expense. For the three months ended June 30, 2005, current
income tax expense increased approximately $1.4 million from the same period of
the prior year. Current taxes are calculated under Japanese tax law wherein
current income from ordinary operations was approximately JPY300,000,000
compared to approximately JPY18,000,000 in the prior year.
Deferred Income Tax Expense. For the three months ended June 30, 2005, deferred
income tax expense decreased approximately $2.9 million 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.
Liquidity and Capital Resources
-------------------------------
Historically, our principal needs for funds have been for operating expenses
including distributor incentives, working capital (principally inventory
purchases), capital expenditures and the development of operations throughout
Japan. We have generally relied on cash flow from operations and short-term debt
from our majority shareholder to meet our cash needs and business objectives
without relying on long-term debt to fund operating activities. However,
during the quarter ended June 30, 2005, our cash position had a net increase
of $12,000,138, primarily from a common stock offering that netted the Company
$10,196,516.
Cash and cash equivalents totaled $24,007,675 at June 30, 2005. Cash (used for)
provided from operations for the three months ended June 30, 2005 and 2004 was
$5,429,467 and $(18,380,314), respectively. Cash used for investing activities
for the three months ended June 30, 2005 and 2004 was $2,326,346 and $3,084,221,
respectively. Cash of $9,080,756 and $3,567,347 was provided from financing
activities for the three months ended June 30, 2005 and 2004. Management
believes that cash flow from operations and the revolving credit facility will
adequately meet the working capital needs for the foreseeable future.
Contractual Obligations
The Company's operating lease & purchase obligations as of June 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 $ 791,064 $ 791,064 - - -
Service Provider Contracts 1,242,167 1,242,167 - - -
----------- ----------- ----------- ----------- -----------
Total $ 2,033,231 $ 2,033,231 $ - $ - $ -
=========== =========== =========== =========== ===========
The Company projects that it will need to satisfy at least $2.0 million of lease
and contract obligations within the twelve months following June 30, 2005.
13
Critical Accounting Policies and Estimates
------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the US 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.
See Note 1, Organization and Summary of Significant Accounting Policies, in our
notes to the consolidated financial statements for the years ended March 31,
2005 and 2004 included in our Form 10-K, for a detailed discussion of the
application of these and other accounting policies.
Financial Instruments:
The carrying amounts of the Company's financial instruments, which include cash
and cash equivalents, trade accounts receivable, accounts payable, and advance
payments approximate their fair values as of June 30 and March 31, 2005.
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 SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," 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.
Computer 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. The
Company reviews the carrying value of Computer Software on a quarterly basis or
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable.
14
Advances received:
Advances received represent the balance of customer receipts prior to shipment.
Upon shipment, the balances transfer to deferred revenue where it then is
amortized into revenue in accordance with the Company's revenue recognition
policy.
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 deferred 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.
Product Warranty Costs:
AJOL, the Company's wholly owned subsidiary, sells MOJICO units to customers
along with a repair or replacement warranty for one full year from the date of
purchase. Warranty costs are expensed as incurred due to their immaterial nature
to financial statements taken as a whole.
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.
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.
15
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 (Japanese Yen) Fluctuations
--------------------------------------------
Substantially all of our revenue and expenses are received and incurred in
Japanese Yen (JPY). 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 JPY into U.S.
dollars using weighted average exchange rates. If the U.S. dollar strengthens
relative to the JPY, our reported revenue, gross profits and net income will
likely be reduced. For example, in 2001, the JPY 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 JPY 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.
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.
16
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.
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.
17
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.
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.
18
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, 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.
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.
19
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.
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.
20
PART 2:
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 30, 2005, the Company sold to four (4) 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 under the Act.
Pursuant to the Stock Purchase Agreements, the Company entered into a
Registration Rights Agreement ("Registration Rights Agreement"), dated as of 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 K.K. U Service.
The CEO of PPOL is also the Representative Director of K.K. H.I. Consultants.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
21
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) None.
22
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)
October 19, 2005 /s/ Hisao Inoue
---------------- --------------------------------------
Date Hisao Inoue, Chief Executive Officer
October 19, 2005 /s/ Richard Izumi
---------------- --------------------------------------
Date Richard Izumi, Chief Financial Officer
23