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 December 31, 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 820, 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 February 14, 2006)
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 December 31, 2005 and March 31, 2005 3
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
Three Months Ended December 31, 2005 and 2004 4
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
Nine Months Ended December 31, 2005 and 2004 5
Consolidated Statements of Cash Flows for the nine months ended December 31, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4: CONTROLS AND PROCEDURES 25
PART 2: 26
----------------------------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS 26
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 5: OTHER INFORMATION 26
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 28
----------------------------------------------------------------------------------------------------
EXHIBITS: 29
----------------------------------------------------------------------------------------------------
Exhibit 31.1 - CEO Certification 29
Exhibit 31.2 - CFO Certification 30
Exhibit 32.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31
2
PART 1:
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, March 31,
2005 2005
------------- -------------
CURRENT ASSETS: Unaudited
Cash and cash equivalents $ 7,579,694 $ 12,007,537
Trade accounts receivable 121,953 1,321,755
Merchandise inventories 2,113,971 1,064,082
Advance payments -- 1,054,393
Deferred costs, current 42,969,655 49,130,889
Deferred income taxes, current 7,052,023 8,358,713
Prepaid expenses and other current assets 654,879 515,905
------------- -------------
Total current assets 60,492,175 73,453,274
Restricted cash 21,244,530 20,686,915
Property and equipment, net 525,351 905,703
Software, net 6,777,105 10,131,128
Deferred costs, non-current 31,957,441 36,999,841
Deferred income taxes, non-current 4,679,655 5,315,246
Lease deposits -- 742,583
Deposits 3,988,088 4,240,842
Goodwill 1,800,408 --
Other assets 73,097 112,778
------------- -------------
$ 131,537,850 $ 152,588,310
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 5,634,762 $ 12,665,017
Advances received 121,722 2,234,253
Loans payable -- 1,115,760
Deferred revenue, current 59,026,199 68,075,963
Income taxes payable 29,726 1,025,126
Other current liabilities 1,463,433 2,209,746
------------- -------------
Total current liabilities 66,275,842 87,325,865
Advances received, Cube 21,244,530 20,686,915
Deferred revenue, non-current 41,297,405 49,106,165
------------- -------------
TOTAL LIABILITIES 128,817,777 157,118,945
------------- -------------
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 December 31,
2005 and March 31, 2005, respectively 20,543 17,994
Additional paid-in capital 16,468,890 6,274,923
Total other comprehensive income 1,836,626 905,819
Accumulated deficit (15,605,986) (11,729,371)
------------- -------------
Total shareholders' equity (deficit) 2,720,073 (4,530,635)
------------- -------------
$ 131,537,850 $ 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
December 31, December 31,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 20,285.161 $ 25,906,504
Other on-line services 5,939,440 5,914,417
------------ ------------
Total 26,224,601 31,820,921
------------ ------------
COSTS AND EXPENSES:
Cost of sales 8,496,216 9,358,981
Distributor incentives 11,360,244 15,336,634
Selling, general and administrative expenses 5,066,862 7,333,691
------------ ------------
Total costs and expenses 24,923,322 32,029,306
------------ ------------
OPERATING (LOSS) INCOME 1,301,279 (208,385)
OTHER INCOME (EXPENSE), net 14,339 (245,822)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION 1,315,618 (454,207)
------------ ------------
INCOME TAXES (EXPENSE)BENEFIT:
Current 465,617 88,736
Deferred (1,715,324) 340,086
------------ ------------
Total income taxes (1,249,707) 428,822
------------ ------------
NET INCOME (LOSS) 65,911 (25,385)
OTHER COMPREHENSIVE GAIN
Foreign currency translation 453,455 1,259,464
------------ ------------
COMPREHENSIVE INCOME $ 519,366 $ 1,234,079
============ ============
NET INCOME (LOSS) PER COMMON SHARE,
Basic $ 0.00 $ (0.00)
============ ============
Diluted $ 0.00 $ (0.00)
============ ============
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
Nine months Nine months
ended ended
December 31, December 31,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
NET REVENUE:
Product sales and network services $ 68,116,611 $ 79,247,405
Other on-line services 18,714,646 16,994,869
Consulting revenue 30,630 --
------------ ------------
Total 86,861,887 96,242,274
------------ ------------
COSTS AND EXPENSES:
Cost of sales 26,859,631 26,463,333
Distributor incentives 37,029,920 46,875,285
Selling, general and administrative expenses 24,929,646 21,571,065
------------ ------------
Total costs and expenses 88,819,197 94,909,683
------------ ------------
OPERATING (LOSS) INCOME (1,957,310) 1,332,591
OTHER INCOME (EXPENSE), net 27,326 (242,397)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAX PROVISION (1,929,984) 1,090,194
------------ ------------
INCOME TAXES (EXPENSE):
Current (4,350) (487,396)
Deferred (1,942,281) (1,537,624)
------------ ------------
Total income taxes (1,946,631) (2,025,020)
------------ ------------
NET LOSS (3,876,615) (934,826)
OTHER COMPREHENSIVE GAIN (LOSS)
Foreign currency translation 930,807 (51,918)
------------ ------------
COMPREHENSIVE (LOSS) INCOME $ (2,945,808) $ (986,744)
============ ============
NET LOSS PER COMMON SHARE,
Basic $ (0.19) $ (0.05)
============ ============
Diluted $ (0.19) $ (0.05)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 19,993,981 17,993,752
============ ============
Diluted 19,993,981 17,993,752
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
PPOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
December 31, December 31,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (3,876,615) $ (934,826)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 2,756,565 3,040,118
Loss on sales/disposal of property, equipment and software 1,102,504 (20,835)
Deferred income taxes 1,942,281 1,537,624
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash (2,493,138) (4,019,876)
Trade accounts receivable 1,141,137 (929,701)
Merchandise inventories (1,087,761) 72,138
Advance payments 1,012,713 --
Deferred costs 3,856,643 15,095,110
Prepaid expenses and other 76,988 (1,139,721)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued liabilities (7,014,014) (673,645)
Advances received (2,017,807) 1,568,066
Advances received - Cube 2,493,138 4,019,876
Deferred revenue (6,947,850) (18,061,854)
Income taxes payable (962,199) (1,031,391)
Other current liabilities (626,785) (86,430)
------------ ------------
Total adjustments (6,767,585) (630,521)
------------ ------------
Net cash used for operating activities (10,644,200) (1,565,347)
------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (262,675) (371,645)
Proceeds on sale of fixed assets -- --
Software and software CIP (21,144) (5,704,779)
Proceeds from sales of property and equipment 1,945 338,824
Guaranteed Deposits (123,138) --
Lease deposits 713,229 --
Purchase of subsidiary (3,522,422) --
Cash of acquired entity - K.K. U Service 760,812 --
Other assets 687,168 309,763
------------ ------------
Net cash used for investing activities (1,766,225) (5,427,837)
------------ ------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan from majority shareholder -- 3,297,769
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 3,297,769
------------ ------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH & CASH EQUIVALENTS (1,098,174) (672,571)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,427,843) (4,367,986)
CASH AND CASH EQUIVALENTS, beginning of period 12,007,537 12,083,556
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,579,694 $ 7,715,570
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 985,403 $ 1,643,634
============ ============
Interest paid $ 11,721 $ 24,446
============ ============
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, to change its name to PPOL, Inc. and to
effect 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. It is also 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.
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). At the end of the third quarter, USC
was merged into AJOL.
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 ("SEC"). 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 nine months ended December 31,
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 subsidiary, AJOL. All significant intercompany
balances and transactions have been eliminated upon consolidation.
RESTATEMENT:
We have determined that Goodwill was understated by $205,991 at
acquisition of USC (Note 2) on May 30, 2005. The impact of the
understatement of Goodwill on the financial statements for the
quarters ended June 30, 2005 and September 30, 2005 were as follows:
Statement of income
-------------------------
Balance Sheet 3 months 6 months (YTD)
------------------------ ------------------------
Comprehensive Other comprehensive gain
June 30, 2005 Goodwill Income Foreign currency translation
------------- ---------- ---------- ---------- ------------
As stated in 10-Q $1,761,211 $1,149,223 $ 243,404 n/a
As restated $1,919,068 $1,307,080 $ 401,261 n/a
Impact $ 157,857 $ 157,857 $ 157,857 n/a
September 30, 2005
------------------
As stated in 10-Q $1,761,211 $1,383,171 $ 233,948 $ 477,352
As restated $1,877,803 $1,499,763 $ 192,683 $ 593,944
Impact $ 116,592 $ 116,592 $ (41,265) $ 116,592
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 December 31, 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 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
123R, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
Nine months ended
December 31:
2005 2004
-------- ------
Net income (loss) as reported (in thousands $) (3,877) (935)
Stock compensation calculated under APB25 (in thousands $) -- --
Stock compensation calculated under SFAS 123 (in thousands $) (815) (751)
-------- ------
Pro forma (in thousands $) (4,692) (1,686)
======== ======
Basic earnings per share as reported (0.19) (0.05)
Pro forma (0.23) (0.09)
Diluted earnings per share as reported (0.19) (0.05)
Pro forma (0.23) (0.09)
On December 16, 2004, the Financial Accounting Standards Board
("FASB") issued Statement No. 123 (revised 2004), "Share-Based
Payment," which is a revision of Statement 123. Statement 123(R)
supersedes Opinion 25, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is similar to
the approach described in SFAS No. 123. However, SFAS No. 123(R)
generally requires share-based payments to employees, including grants
of employee stock options and purchases under employee stock purchase
plans, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure of fair value recognition will no
longer be an alternative.
SFAS No. 123(R) permits public companies to adopt its requirements
using one of two methods:
o Modified prospective method: Compensation cost is recognized
beginning with the effective date of adoption (a) based on
the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date of adoption and
(b) based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of adoption
that remain unvested on the date of adoption.
o Modified retrospective method: Includes the requirements of
the modified prospective method described above, but also
permits restatement using amounts previously disclosed under
the pro forma provisions of SFAS No. 123 either for (a) all
prior periods presented or (b) prior interim periods of the
year of adoption.
In April 2005, the SEC announced that the effective transition date
for SFAS No. 123(R) would be extended to annual periods beginning
after June 15, 2005. We are required to adopt this new standard on
April 1, 2006, with early-adoption permitted.
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.
9
During the nine months ended December 31, 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 nine months ended
December 31, 2005.
RECLASSIFICATIONS
Reclassifications have been made to the financial statements for the
nine months ended December 31, 2004 to conform to presentation for the
nine months ended December 31, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS:
On May 2005, 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.
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 51.34% 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
==========
10
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 was in the development stage
with no revenues, 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 $1,967,092 over
the recorded net worth to be attributable to Goodwill.
In conjunction with the acquisition of USC, we have retained a
valuation firm 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 may result in a portion of
Goodwill to 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 December 31, 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 9 months ended
December 31, 2005
-------------------------------
Sales $ 26,224,601 $ 86,861,887
Net income (loss) 65,911 (4,082,496)
Net income (loss) per share - Basic 0.00 (0.20)
Net income (loss) per share - Diluted 0.00 (0.20)
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 nine months
ended December 31, 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.
11
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.
(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 December 31, 2005 1,300,000 $ 4.00
========= ========
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 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 8.25 $4.00 - -
2005 $4.00 80,000 8.50 $4.00 80,000 $4.00
2006 - - - - - -
----------- ------ ------- ----------- ---------------
1,300,000 8.27 $4.00 80,000 $4.00
12
(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 15,066,362 19,182,676 21,973,900 24,248,775
Released amounts (17,024,630) (21,081,052) (25,226,995) (27,943,531)
Exchange rate effect (4,202,966) (3,144,024) (5,796,669) (4,114,004)
------------ ------------ ------------ ------------
Ending balance, December 31, 2005 $ 42,969,655 $ 31,957,441 $ 59,026,199 $ 41,297,405
============ ============ ============ ============
(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 file their 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 nine months ended December 31,
2005, PPOL's stand-alone loss of $1.3 million resulted in an increase of
the NOL by that amount and approximately a $0.5 million addition to the
deferred tax asset. A 100% valuation allowance on such loss carryforwards
continues to be provided at December 31, 2005 as it is not likely that the
Company will utilize such losses to offset income in the future.
(7) COMMITMENTS & CONTINGENCIES:
As of December 31, 2005 the Company had various professional consulting
service contracts and operating leases in effect which collectively will
require payments of $0.6 million in the 12 months ending December 31, 2006.
13
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. At the present time, the Company has administrative functions
occurring in California, but does not otherwise have any major business in the
United States.
Commencing in January 2006, the Company's revenues will be derived from direct
marketing 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.
Acquisition of USC and its impact on direct marketing
-----------------------------------------------------
In response to the slowing of activity and declining membership in Acube, the
MOJICO users' organization, changing attitudes toward network marketing, and
recent changes in laws and regulations that network marketing is subject to in
Japan, we have begun a transition in sales focus from network marketing to
direct marketing. One of the primary reasons for the declining membership in
Acube is attributable to the high initial cost. We needed to reduce the
initial cost to a fraction of what we were able to offer our flagship product
under network marketing.
We have determined that the direct marketing method is the best suited to reduce
the initial cost and also not the subject of the recent changes in laws and
regulations affecting network marketing in Japan. In addition consumer surveys
have indicated more receptivity to direct marketing.
As discussed in Note 2 to the financial statements, we acquired USC in May 2005.
The acquisition of USC played a crucial role in our ability to transition from
network marketing to direct marketing much more quickly than would otherwise
have been possible. USC had the critical leadership personnel with experience in
setting up and running direct marketing operations.
For us to establish a direct marketing operation, we would have had to recruit
personnel with relevant experience. In the current environment, speed is a
critical element. We estimated it would have taken six to nine months longer to
start a direct marketing organization. By combining USC's experience and our
assembled workforce, we believe we will enhance our future growth opportunities.
14
With a delayed transition to direct marketing, there was also a high likelihood
that USC would become a formidable competitor. Moreover, prior to the
acquisition, we had learned that USC had been approaching our existing
manufacturer of the SF-70 to manufacture their products. If they successfully
consummated an arrangement with our existing manufacturer, this would have
reduced their ability to supply our products due to capacity constraints.
Two defining characteristics of direct marketing contribute to its appeal as a
sales system: the location of sales and the cost of sales. First, although the
actual sale may occur inside a retail location, the initiation of the sale
occurs outside of the place of business. We hope that this style of sales will
facilitate the widening of contacts for our members. Secondly, in contrast to
network marketing, direct marketing does not require the seller to assume the
responsibility for any specific costs related to the sale. While network
marketing has certain conditions for the receipt of income from the sale, direct
marketing does not have complicated eligibility procedures. The reduction of
sales costs and the overall simplification of income generation makes the direct
marketing process more attractive to prospective participants and current
members of Acube. Our decision to redefine our sales focus reflects our
continuing dedication to the constant development of our business and our
sensitivity to the concerns of our members. As part of our redirection of sales
focus we stopped accepting new distributor applications for network marketing
activities as of October, 2005. The anticipated effects of our new strategy on
profits and cost of sales are as follows:
-------------------------------------------
Network marketing Direct marketing
--------------------------
SF-70 U-Phone
----------------------------------------------------------------------------------------------------------------
Sales per unit $ 3,224 $ 726 $ 807
----------------------------------------------------------------------------------------------------------------
Monthly usage rate $ -- $ 23 $ 23
----------------------------------------------------------------------------------------------------------------
Projected revenues over three years $ 3,224 $ 1,569 $ 1,651
----------------------------------------------------------------------------------------------------------------
Revenues expressed as a % of network marketing sales 100.0% 48.7% 51.2%
----------------------------------------------------------------------------------------------------------------
Gross profit per unit $ 769 $ 369 $ 566
----------------------------------------------------------------------------------------------------------------
Gross profit expressed as a % of gross profit through network marketing 100.0% 48.0% 73.6%
----------------------------------------------------------------------------------------------------------------
Under the direct marketing structure, the sales price per unit is 22.5% and
25.0% for the SF-70 and U-Phone, respectively in comparison to the sales price
of the SF-70 under the former networking structure used through this quarter.
However, the projected revenues per unit utilizing the average customer
relationship period for the SF-70 under the network marketing structure
indicates such revenues to be 48.7% and 51.2% for the SF-70 and U-Phone,
respectively, of total revenues for the SF-70 over the average customer
relationship period under the network structure. In addition, while the gross
profit is lower per unit, we believe we can make up the difference through
increased unit sales as a result of the significantly lower sales price per
unit.
Since the direct marketing program is still in its formative phases, the gross
profit is significantly less than that for network marketing. We believe that
this allowance for a decline in gross profit is necessary and a temporary
condition for the future success of PPOL. In addition, similar sales strategies
such as mail order services targeting current Acube members are being explored
to augment our new direct marketing approach.
15
UNDERSTATEMENT OF GOODWILL AT JUNE 30, 2005 AND SPETEMBER 30, 2005
As disclosed in Note 1 to the financial statements, we have determined that
Goodwill was understated by $205,991 at acquisition of USC, discussed in the
preceding section, on May 30, 2005. This understatement did not effect income
from continuing operations, net income or related per share amounts. The impact
of the understatement of Goodwill on the financial statements for the quarters
ended June 30, 2005 and September 30, 2005 follows:
Statement of income
-------------------------
Balance Sheet 3 months 6 months (YTD)
------------------------ ------------------------
Comprehensive Other comprehensive gain
June 30, 2005 Goodwill Income Foreign currency translation
------------- ---------- ---------- ---------- ------------
As stated in 10-Q $1,761,211 $1,149,223 $ 243,404 n/a
As restated $1,919,068 $1,307,080 $ 401,261 n/a
Impact $ 157,857 $ 157,857 $ 157,857 n/a
September 30, 2005
------------------
As stated in 10-Q $1,761,211 $1,383,171 $ 233,948 $ 477,352
As restated $1,877,803 $1,499,763 $ 192,683 $ 593,944
Impact $ 116,592 $ 116,592 $ (41,265) $ 116,592
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 2004
PRODUCT SALES AND NETWORK SERVICES.
The three month period ended December 31, 2005 saw a decrease in product sales
and network services of 21.7% as a result of a change in sales focus. Starting
in October of the current year, the Company discontinued its solicitation of
agent applications for its network marketing activities. Instead, the Company
decided to concentrate its efforts on the development of direct marketing sales
and services. We believe this shift in focus to be in the best long term
interests of PPOL given the current economic environment and consumer attitudes
towards network marketing.
COST OF SALES. The cost of sales for the 3 month period ended December 31, 2005
declined 9.2% compared to the corresponding period of 2004, a smaller decline
than our sales decline. This is attributable to our fixed overhead remaining
comparable to the prior year while net sales declined in 2005. Thus the cost
(fixed overhead plus variable cost) per sale was greater in 2005.
DISTRIBUTOR INCENTIVES. The overall decrease in distributor incentives of 25.9%,
which is 4.2% more than the decline in sales, is primarily due to change in the
product mix to lower incentive rate goods and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In the three month period ended
December 31, 2005, selling, general and administrative expense decreased by
30.9% relative to the same period of 2004. The three month period ended
December 31, 2004 included start-up costs for the Gatefor subsidiary which did
not recur in 2005. Additionally, the costs for training and events were reduced
in 2005.
OTHER INCOME (EXPENSE), NET. This category represents non-recurring items. There
was a swing of $260,000 from other expenses, net of $246,000 in the comparable
period of the prior year to net other income of $14,000 in the current year's
three months ended December 31, 2005. The change was a primary result of
recognizing into income approximately $40,000 in expired gift certificates and
the absence of one time non-recurring expenses incurred in the prior year in the
current year.
INCOME TAXES. In the prior year's comparable quarter, we had an income tax
benefit of approximately $429,000 vs. an expense of close to $1,250,000 in the
quarter ended December 31, 2005. This is primarily a result of a pretax income
at AJOL, our Japanese operating subsidiary of approximately $1.65 million. As
consolidated returns cannot be filed in Japan, losses at PPOL, a California
entity, and USC, a Japanese entity that was merged into AJOL in December 2005,
could not be offset against AJOL income. The current year's tax provision also
includes a $490,000 addition resulting from an unfavorable exchange rate
conversion of our yen denominated tax accounts.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 2004
PRODUCT SALES AND NETWORK SERVICES. The nine month period ended December 31,
2005 declined by 14.0% ($11.1 million)from the prior year's comparable period.
This was primarily due to the current economic environment and consumer attitude
toward network marketing, which resulted in a $5.5 million reduction in revenues
for the six months ended September 30, 2005. As discussed above in the Overview
and three month results, we are evolving into a direct marketing organization.
This resulted in an additional $5.6 million reduction in revenues from the prior
year's comparable nine months.
OTHER ON-LINE SERVICES For the nine months ended December 31, 2005, increased by
10.1% over the comparable period of the prior year. This was especially
attributable to increases in the area of mail order sales of Kamome branded
goods and services provided by the Company.
COST OF SALES. The increase in cost of sales was 1.5% over the comparable nine
month period of the prior year even though total revenues declined by 9.75%.
This was a result of fixed overhead costs which could not be reduced in line
with the decline in sales. In addition, we had 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. This promotional program is
an investment in the future aimed at increasing the number of renewing members.
DISTRIBUTOR INCENTIVES. The increase in mail order sales for the nine month
period ended December 31, 2005 compared to equivalent period of the previous
year was comprised of the sale of lower-cost products which did not qualify
distributors for significant commissions. As a result, in the nine month period
ended December 31, 2005, the cost of distributor incentives decreased by 21.0%
relative to the corresponding period of the previous year.
16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended December
31, 2005, selling, general, and administrative expenses increased by 15.6%
relative to the corresponding period of the prior year. Three factors
contributed to this increase. First, the move to a new office resulted in two
rent expenses. Also associated with the change in office locations was the cost
of restoring the old office space to its original condition. Second, the cost of
system maintenance increased. Third, we incurred research and inspection costs
to develop a voice recognition engine, an on-line shopping cart function and a
gateway function. Finally, there were approximately $2.2 million in new general
and administrative items incurred by USC.
OTHER INCOME (EXPENSE), NET. This category represents non-recurring items. There
was a swing of $270,000 from other expenses, net of $242,000 in the comparable
period of the prior year to net other income of $27,000. The in the current
year's three months ended December 31, 2005. The change was a result of
recognizing into income approximately $40,000 in expired gift certificates and
the absence of one time non-recurring expenses incurred in the prior year in the
current year.
INCOME TAXES. Our income tax expense was comparable to the same period of the
prior year even though we had a pretax loss of $1,930,000 in comparison to a
pretax income of $1,090,000 in the prior year. Both years are impacted from
the income of our subsidiary AJOL, a Japanese corporation, being unable to be
consolidated with the losses incurred by PPOL, a California entity, and USC,
a Japanese corporation that was merged into AJOL in December 2005, this year
and the losses at PPOL and Gatefor, a Japanese corporation, which was disposed
of in March 2005 in the prior year. The pretax income of AJOL was $1,580,000
and $4,100,000 for the nine months ended December 31, 2005 and 2004,
respectively. The unfavorable exchange rate conversion of our yen denominated
tax accounts contributed to an additional expense of $1,160,000 this period..
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 former CEO
of PPOL, who had resigned in December 2005, is also the Representative Director
of one of the investors, which purchased 463,478 shares for $1.9 million.
Our operating activities consumed $10.6 million and $1.6 million of cash during
the nine months ended December 31, 2005 and 2004, respectively. Cash consumed in
2005 consisted of primarily of $3.9 million in net loss, adjusted by
depreciation ($2.8 million), loss on sales/disposal of property, equipment and
software ($1.1 million), deferred income taxes ($1.9 million), and a net change
in assets and liabilities of ($12.6 million). Cash provided in 2004 consisted
primarily of $0.9 million in net loss, adjusted by depreciation ($3.0 million),
deferred income taxes ($1.5 million), and a net change in assets and liabilities
($5.2 million). The change in cash used by operating activities is attributable
to the shift in our business focus to the development of direct marketing from
the previous use of network marketing. This was a major factor in the net change
in assets and liabilities of ($12.6 million).
17
Investing activities consumed $1.8 million and $5.4 million of cash during the
nine months ended December 31, 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 $5.7 million and $300,000 reduction in other assets.
Financing activities provided $9.1 million and $3.3 million of cash during the
nine months ended December 31, 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. Cash provided in 2004 was
entirely from majority shareholder.
As of December 31, 2005, our cash of $7.6 million was $4.4 million less than our
cash balance at March 31 2005 of $12.0 million. This was primarily a result of
the net loss for nine months ended December 31, 2005 of $3.9 million, adjusted
by cash used for operating activities $6.8 million, cash used for investing
activities of $1.8, negative impact of exchange rate changes on cash and cash
equivalents of $1.1 million, offset by $9.1 million provided by financing
activities.
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.
Contractual Obligations
The Company's operating lease & purchase obligations as of December 31, 2005 are
as follows:
Payments due by period
-----------------------------------------------------------------------
Less than More than
Contractual obligations Total 1 year 1 year
---------------------------- ---------- ---------- ----------
Operating Lease Obligations $ 203,340 $ 203,340 --
Service Provider Contracts 377,651 377,651 --
---------- ---------- ----------
Total $ 580,991 $ 580,991 $ --
========== ========== ==========
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) nine months ended December 31, 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.
18
Revenue Recognition:
The Company commenced sales of its MOJICO product utilizing the Direct Marketing
method ("Direct Method") in January 2006. Revenues derived from the Direct
Method are recognized when (a) products are shipped or services are provided,
(b) customer payment is fixed, (c) free of contingencies and significant
uncertainties, and (d) collection is probable. Under the Direct Method, our
customers may purchase only the deliverables they choose to purchase and are not
required to purchase multiple deliverables for one price. Accordingly, our
revenues and related profits will decline if our customers do not choose to
purchase the multiple deliverables they were previously required to purchase.
Revenue from MOJICO product sales sold under the Network Marketing method
("Network Method") is accounted for in accordance with guidelines established by
the Emerging Issues Task Force Issue of the Financial Accounting Standards Board
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables," or EITF 00-21. Under the Network Method, customers were required
to purchase multiple deliverables for one price.
Revenue from the Network Method 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.
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.
While we have terminated sales under the Network Method, in October 2005, we
continue to recognize revenues derived from the Network Method as required by
EITF 00-21.
The impact of termination of the Network Method is a systematic reduction of our
existing largest asset and liability on our balance sheet, deferred costs and
deferred revenues, respectively, over the course of the next three years.
Deferred revenues and costs will be recognized as revenues and cost of sales,
respectively. It is expected that the difference by which our existing deferred
revenues exceed deferred costs will be recognized as gross profit to the Company
over the next three years. Any changes in the average customer relationship
period will result in the recognition of such gross profit over a period shorter
or longer than three years. While the Company, at this time has no plans to
dispose of its AJOL subsidiary, such gross profit will only be partially
recognized if the Company were to dispose AJOL.
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.
19
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 have retained a 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 may
result in a portion of Goodwill to 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.
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.
20
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.
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.
21
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. 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.
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.
22
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.
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.
23
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.
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 various 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.
24
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
Evaluation of Disclosure Controls and Procedures. Under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Disclosure controls and procedures are the
controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that the aforementioned disclosure controls and procedures
were not effective as of December 31, 2005 and must be revised, as described in
the following paragraphs. There were no other significant changes made in our
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
Our independent registered public accounting firm, Windes & McClaughry, has
advised our audit committee and management that it considers the two matters to
be "material weaknesses" as that term is defined under standards established by
the Public Company Accounting Oversight Board (United States).
The first matter related to the fact that our independent registered public
accounting firm identified a material adjustment which was required to be made
to the financial statements for the nine months ended December 31, 2005. The
adjustment was to our provision for income taxes whereby we did not provide for
the tax benefit of an operating loss carryforward that was needed by AJOL, our
Japanese operating subsidiary. The adjustment has been reflected in the
financial statements included in this Form 10-Q. Had such adjustment not been
recorded, non-current deferred tax assets would have been understated by
$532,540 at December 31, 2005 and the net loss for the nine months ended
December 31, 2005, would have been overstated by $532,540.
The second matter was that during the course of our procedures, we determined
that Goodwill was understated by $205,991 for the acquisition of USC on May 30,
2005. The impact of the understatement of goodwill on the financial statements
is as follows:
Statement of income
-------------------------
Balance Sheet 3 months 6 months (YTD)
------------------------ ------------------------
Comprehensive Other comprehensive gain
June 30, 2005 Goodwill Income Foreign currency translation
------------- ---------- ---------- ---------- ------------
As stated in 10-Q $1,761,211 $1,149,223 $ 243,404 n/a
As restated $1,919,068 $1,307,080 $ 401,261 n/a
Impact $ 157,857 $ 157,857 $ 157,857 n/a
September 30, 2005
------------------
As stated in 10-Q $1,761,211 $1,383,171 $ 233,948 $ 477,352
As restated $1,877,803 $1,499,763 $ 192,683 $ 593,944
Impact $ 116,592 $ 116,592 $ (41,265) $ 116,592
The Board of Directors has concluded that the understatement of Goodwill, the
material adjustment to deferred taxes discovered by our independent registered
public accounting firm and the related delay in submitting this Form 10-Q were
the result of insufficient staffing and the lack of internal expertise in
international tax accounting. To ensure such adjustments and filing delays will
be avoided in the future, we have hired a full time assistant to the CFO and
retained the services of a consultant who was formerly a Director of
International Tax at a Big Four accounting firm with over 20 years of
experience. With the retention of the aforementioned staff and consultant, we
believe that the controls and procedures designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission as adequate.
We have initiated our planning for the implementation of Section 404 of the
Sarbanes-Oxley Act (Section 404). We have hired two full time individuals who
will be responsible for the implementation of Section 404 under the guidance of
the CFO. While they will report directly to the CFO on a day to day basis, they
have direct access to the Board of Directors. The implementation of Section 404
will involve significant costs and commitments in terms of our financial and
personnel resources, and there is a possibility that we may not complete our
Section 404 compliance responsibilities by the established deadline.
25
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.
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.
26
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.
8) On December 15, 2005 the Company filed a Current Report on Form 8-K under
item 5.02, "Departure of Directors or Principle Officers; Election of
Directors; Appointment of Principle Officers" reporting the resignation of
Mr. Hisao Inoue as Chief Executive Officer and Member of the Board of
Directors of PPOL, Inc., effective December 15, 2005. It was also reported
that in addition to fulfilling the responsibilities of his previous
position as the Chief Operating Officer of the Company, Mr. Masao Yamamoto
is scheduled to assume the position of Chief Executive Officer upon Mr.
Hisao Inoue's resignation.
9) On January 24, 2006 the Company filed a Current Report on Form 8-K/A under
item 4.01, "Changes in Registrants' Certifying Accountant" and item 9.01,
"Financial Statements and Exhibits" reporting the engagement of Windes and
McClaughry Accountancy Corporation as the Company's auditors. This report
also discussed the concerns of the Company's previous auditors, Stonefield
Josephson, Inc., and their resignation. A signed letter to the SEC from
Stonefield Josephson regarding item 4.01 of the Company's Form 8-K/A of
September 26, 2005 was included as an exhibit.
27
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)
March 23, 2006 /s/ Masao Yamamoto
----------------- --------------------------------------
Date Masao Yamamoto, Chief Executive Officer
March 23, 2006 /s/ Richard Izumi
----------------- --------------------------------------
Date Richard Izumi, Chief Financial Officer
28