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, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-50065
PPOL, Inc.
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(Exact name of registrant as specified in its charter.)
California 95-4436774
---------- ----------
(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 [ ] No [X]
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 205,428.75
----------------------------- ---------------------------------
(Class) (Outstanding at March 31, 2007.)
PPOL, Inc.
2006 Quarterly Report on Form 10-Q
Table of Contents
PART 1: 3
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS 3
Consolidated Balance Sheets as of December 31, 2006(unaudited)
and March 31, 2006 3
Consolidated Statements of Operations and Comprehensive (Loss)
Income for the three months ended
December 31, 2006 and 2005 (unaudited) 4
Consolidated Statements of Operations and Comprehensive (Loss)
Income for the nine months ended
December 31, 2006 and 2005 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 2006 and 2005 (unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4T: CONTROLS AND PROCEDURES 23
PART 2: 24
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ITEM 1: LEGAL PROCEEDINGS 24
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5: OTHER INFORMATION 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 25
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EXHIBITS: 26
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Exhibit 31.1 - CEO Certification 26
Exhibit 31.2 - CFO Certification 27
Exhibit 32.1 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 28
2
PART 1:
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PPOL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, March 31,
2006 2006
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,865,564 $ 6,616,877
Trade accounts receivable 316,313 387,592
Inventories 317,388 2,108,211
Deferred costs, current 26,299,678 38,972,218
Deferred income taxes, current -- 6,506,531
Prepaid expenses and other current assets 390,855 1,221,656
------------- -------------
Total current assets 34,189,798 55,813,085
Restricted cash 20,844,862 21,124,979
Property and equipment, net 275,302 447,914
Software, net 4,200,448 6,171,046
Deferred costs, non-current 5,879,364 24,126,665
Deferred income taxes, non-current -- 3,990,423
Lease deposits 128,505 442,820
Other assets 927,076 987,191
------------- -------------
$ 66,445,355 $ 113,104,123
============= =============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,264,891 $ 4,057,276
Advances received 33,834 41,978
Deferred revenue, current 37,326,580 53,439,556
Income taxes payable 10,685 31,431
Other current liabilities 689,746 839,018
------------- -------------
Total current liabilities 41,325,736 58,409,259
Advances received, Cube 20,844,862 21,124,979
Deferred revenue, non-current 7,364,802 31,092,345
------------- -------------
TOTAL LIABILITES 69,535,400 110,626,583
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' (DEFICIT) EQUITY:
Common Stock; $0.001 par value;
100,000,000 shares authorized;
205,428.75 shares issued
and outstanding 20,543 20,543
Additional paid-in capital 14,501,798 14,501,798
Total other comprehensive income 2,042,924 2,071,108
Accumulated deficit (19,655,310) (14,115,909)
------------- -------------
Total shareholders' (deficit) equity (3,090,045) 2,477,540
------------- -------------
$ 66,445,355 $ 113,104,123
============= =============
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,
2006 2005
------------- -------------
(Unaudited) (Unaudited)
(Restated)
NET REVENUE:
Product Sales $ 12,181,413 $ 18,116,000
Service Fee Income 4,123,235 6,953,610
------------- -------------
Total 16,304,648 25,069,610
------------- -------------
COSTS AND EXPENSES:
Cost of sales - Goods 1,662,829 5,041,340
Cost of sales - Services 3,105,685 2,299,885
Distributor incentives 7,088,656 11,360,244
Selling, general and administrative expenses 2,423,748 4,997,566
------------- -------------
Total costs and expenses 14,280,918 23,699,035
------------- -------------
OPERATING INCOME 2,023,730 1,370,575
OTHER INCOME, net
Interest income, net 75 (10,504)
Other income, net 36,896 25,274
------------- -------------
Total other income, net 36,971 14,770
INCOME BEFORE INCOME TAXES 2,060,701 1,385,345
------------- -------------
INCOME TAXES EXPENSE (BENEFIT):
Current 617 (465,617)
Deferred -- 1,715,324
------------- -------------
Total income taxes 617 1,249,707
------------- -------------
NET INCOME 2,060,084 135,638
OTHER COMPREHENSIVE GAIN
Foreign currency translation 22,526 409,066
------------- -------------
COMPREHENSIVE INCOME $ 2,082,610 $ 544,704
============= =============
NET INCOME (LOSS) PER COMMON SHARE,
Basic $ 10.03 $ 0.66
============= =============
Diluted $ 10.03 $ 0.66
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 205,428.75 205,428.81
============= =============
Diluted 205,428.75 205,428.81
============= =============
NOTE: The effect of options is anti-dilutive and has been omitted from
calculation of diluted earnings per share.
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,
2006 2005
------------- -------------
(Unaudited) (Unaudited)
(Restated)
NET REVENUE:
Product sales $ 42,045,757 $ 61,273,411
Service revenues 12,740,757 22,836,061
------------- -------------
Total 54,786,514 84,109,472
------------- -------------
COSTS AND EXPENSES:
Cost of sales -- Goods 10,547,559 17,569,805
Cost of sales - Services 7,597,999 6,537,411
Distributor incentives 24,462,752 37,029,920
Selling, general and administrative expenses 7,189,886 25,135,527
------------- -------------
Total costs and expenses 49,798,196 86,272,663
------------- -------------
OPERATING INCOME (LOSS) 4,988,318 (2,163,191)
OTHER INCOME, net
Interest Expense (Income), net 316 (10,504)
Other income, net 176,273 37,830
------------- -------------
Total other income, net 176,589 27,326
INCOME (LOSS) BEFORE INCOME TAXES 5,164,907 (2,135,865)
------------- -------------
INCOME TAX EXPENSE:
Current 207,351 4,350
Deferred 10,496,954 1,942,281
------------- -------------
Total income taxes 10,704,305 1,946,631
------------- -------------
NET LOSS (5,539,398) (4,082,496)
OTHER COMPREHENSIVE (LOSS) GAIN
Foreign currency translation (28,184) 1,303,372
------------- -------------
COMPREHENSIVE LOSS $ (5,567,582) $ (2,779,124)
============= =============
NET LOSS PER COMMON SHARE,
Basic $ (26.97) $ (20.42)
============= =============
Diluted $ (26.97) $ (20.42)
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 205,428.75 199,939.81
============= =============
Diluted 205,428.75 199,939.81
============= =============
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,
2006 2005
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (5,539,398) $ (4,082,496)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,959,038 2,756,565
Loss on disposal of property and equipment 42,022 1,102,504
Loss on disposition and sale of software 67,792
Gain from sale of telephone rights (2,066)
Deferred income taxes 10,496,071 1,942,281
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Restricted cash 10,260 (2,493,138)
Trade accounts receivable 68,015 1,141,137
Inventories 1,834,401 (1,087,761)
Advance payments 0 1,012,713
Deferred costs 30,881,234 3,856,643
Prepaid expenses and other 830,839 76,988
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (759,308) (7,014,014)
Advances received (7,801) (2,017,807)
Advances received - Cube (10,260) 2,493,138
Deferred revenue (39,748,444) (6,947,850)
Income taxes payable (20,863) (962,199)
Other current liabilities (116,082) (626,785)
------------- -------------
Total adjustments 5,524,848 (6,767,585)
------------- -------------
Net cash used for operating activities (14,550) (10,850,081)
------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (40,875) (262,675)
Additions to Guarantee Deposits (71,236) (123,138)
Receipt on sale of PP&E 52,537
Acquisition of K.K. U Service 0 (1,555,330)
Cash of acquired entity - K.K. U Service 0 760,812
Receipt on sale of software 5,101
Additions to software 0 (21,144)
Net Change in Lease deposits 316,528 713,229
Other assets 0 687,168
Other 0 1,945
------------- -------------
Net cash used for investing activities 262,055 200,867
------------- -------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Repayment of loan from majority shareholder -- (1,115,760)
Issuance of common stock -- 10,196,516
Return of capital to Green Capital -- (1,967,092)
------------- -------------
Net cash provided by financing activities -- 7,113,664
------------- -------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,182 (892,293)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 248,687 (4,427,843)
CASH AND CASH EQUIVALENTS, beginning of period 6,616,877 12,007,537
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 6,865,564 $ 7,579,694
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 32,175 $ 985,403
============= =============
Interest paid $ 0 $ 11,721
============= =============
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" or "we") (Formerly Diversified
Strategies, Inc.), incorporated on May 19, 1993 in California, is
primarily engaged in sales of multi-functional telecommunications
equipment called SF-70 and U-Phone. The Company operates in one
operating segment.
Using SF-70 and U-Phone, the Company provides original
telecommunication services called "UU Online," including SF-70 and
U-Phone bulletin board and mail services. The Company also provides
various other on-line services through UU Online such as sales of
products and services.
BASIS OF PRESENTATION:
The unaudited consolidated financial statements have been prepared by
PPOL, Inc. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to
such rules and regulations. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and
adjustments), which are, in the opinion of management, necessary to
fairly present the operating results for the prospective periods.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes for
the years ended March 31, 2006 and 2005 included in the Company's Form
10-K. The results of the three and nine months ended December 31, 2006
are not necessarily indicative of the results to be expected for the
full year ending March 31, 2007.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period
consolidated financial statements in order to conform to the current
period presentation.
During the fourth quarter of 2006, PPOL reclassified the presentation
of revenues and related cost of sales to Product sales and Service fee
income as line items in the statement of operations. Product sales
include revenues we derive from the sale of tangible products, net of
discounts, returns, and allowances, while Service fee income
represents revenues from services the Company has performed. This
reclassification conforms with requirements of SEC's Regulation S-X
Rule 5-03(b)(1) and (2). Previously our revenues were classified as
Product Sales and Network Services and Other-Online Products as line
items in the statement of operations. Both line items in each previous
classification include both sales of tangible products and revenues
from services.
In addition, during the fourth quarter of 2006, PPOL reclassified the
presentation of income derived from our handling of transactions
involving products in which title was transferred to us, but we did
not have the risk of carrying inventory. Previously, income from such
transactions were reflected as sales and cost of sales. Prior year
information has been reclassified to conform with current year
presentation. The impact of such reclassification was to reduce both
sales and cost of sales by $785,791, for the three months ended June
30, 2005.
These reclassifications, which did not have any effect on previously
reported net income or shareholders' deficit, are summarized below:
7
As reported As reported Effect of
in prior year herein reclassification
Three months ended December 31, 2005:
Product Sales and Network Service $20,285,161 -- $(20,285,161)
Other On-Line Services 5,939,440 -- (5,939,440)
Product sales -- $18,116,000 18,116,000
Service fee income -- 6,953,610 6,953,610
----------- ----------- ------------
Total revenues 26,224,601 25,069,610 (1,154,991)
----------- ----------- ------------
Coat of sales 8,496,216 -- (8,496,216)
Cost of sales - goods -- 5,041,340 5,041,340
Cost of sales - services -- 2,299,885 2,299,885
----------- ----------- ------------
Total cost of sales 8,496,216 7,341,225 (1,154,991)
----------- ----------- ------------
Gross profit $17,728,385 $17,728,385 --
=========== =========== ============
Nine months ended December 31, 2005:
Product Sales and Network Service $68,116,611 -- $(68,116,611)
Other On-Line Services 18,714,646 -- (18,714,646)
Product sales -- $61,273,411 61,273,411
Service fee income -- 22,836,061 22,836,061
Consulting revenues 30,630 -- (30,630)
----------- ----------- ------------
Total revenues 86,861,887 84,109,472 (2,752,415)
----------- ----------- ------------
Coat of sales 26,859,631 -- (26,859,631)
Cost of sales - goods 17,569,805 17,569,805
Cost of sales - services -- 6,537,411 6,537,411
----------- ----------- ------------
Total cost of sales 26,859,631 24,107,216 (2,752,415)
----------- ----------- ------------
Gross profit $60,002,256 $60,002,256 --
=========== =========== ============
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.
Effective, April 1, 2006, the Company has adopted the provisions of
SFAS 123 (revised 2004), "Share Based Payment" ("SFAS123R"). This
Statement requires a public entity to measure the cost of employee
Services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service
period (usually the vesting period). No compensation cost is
recognized for equity instruments for which employees do not render
the requisite service.
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.
As PPOL has not granted any options during the three and nine months
ended December 31, 2006, the average risk free interest rate; average
volatility factor of the expected market price of the Company's common
stock; and an expected life of the options are not presented herein.
Prior to April 1, 2006, the Company adopted only the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
It applied APB 25 and related interpretations in accounting for its
Stock Option Plan and did not recognize compensation expense for its
Stock Option Plan other than for restricted stock and options issued
to outside third parties.
Pro forma information using the Black-Scholes method at the date of
grant was based on the following assumptions in 2005: average risk
free interest rate of 4.34%; dividend yield of 0.0%; average
volatility factor of the expected market price of the Company's common
stock of 251%; and an expected life of the options of 10 years.
8
Had compensation cost for the Company's four stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of FASB Statement
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below for the nine months
ended December 31, 2005:
Net income (loss) as reported (in thousands $) $ (4,082)
Stock compensation calculated under APB25 (in thousands $) -
Stock compensation calculated under SFAS 123 (in thousands $) (761)
---------
Pro forma (in thousands $) $ (4,843)
=========
Primary earnings per share as reported $ (20.42)
Pro forma $ (24.22)
Fully diluted earnings per share as reported $ (20.42)
Pro forma $ (24.22)
(2) EARNINGS PER SHARE
Three months ended
December 31,
------------
Components of Basic and Diluted Earnings per Share 2006 2005
---- ----
Numerator - Net income (in thousands $) $ 2,060 $ 136
Denominator
Basic EPS - weighted average shares outstanding 205,428.75 205,428.81
Diluted effect of assumed conversion of stock-based awards 0 0
Diluted EPS adjusted weighted -average shares outstanding 205,428.75 205,428.81
Earnings per share
Basic EPS $10.03 $ 0.66
Diluted EPS $10.03 $ 0.66
Nine months ended
December 31,
------------
Components of Basic and Diluted Earnings per Share 2006 2005
---- ----
Numerator - Net loss (in thousands $) $(5,539) $(4,082)
Denominator
Basic EPS - weighted average shares outstanding 205,428.75 199,939.81
Diluted effect of assumed conversion of stock-based awards 0 0
Diluted EPS adjusted weighted -average shares outstanding 205,428.75 199,939.81
Earnings per share
Basic EPS $(26.97) $(20.42)
Diluted EPS $(26.97) $(20.42)
For the three and nine month periods ending on December 31, 2006 and 2005, we
did not include stock options to purchase 13,000 shares of common stock in both
periods' calculations of diluted earnings per share because their inclusion
would be anti-dilutive.
(3) NEW ACCOUNTING PRONOUCEMENTS
INCOME TAXES
In June 2006, the FASB issued an interpretation of SFAS No. 109,
Accounting for Income Taxes ("FIN 48"). The interpretation prescribes
a consistent recognition threshold and measurement attribute, as well
as criteria for subsequently recognizing, derecognizing and measuring
such tax positions for financial statement purposes. The
interpretation also requires expanded disclosure with respect to the
uncertainty in income taxes. The interpretation is effective for
fiscal year commencing on April 1, 2007 for PPOL. There is no impact
of this interpretation on our Consolidated Financial Statements.
9
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for the fiscal year
commencing on April 1, 2008, for PPOL. There is no impact of SFAS 157
on our Consolidated Financial Statements.
ACCOUNTING CHANGES AND ERROR CORRECTIONS
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections ("SFAS 154"), changes the requirements for the
accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This
Statement carries forward without change the guidance contained in
Opinion 20 for reporting the correction of an error in previously
issued financial statements, change in accounting estimate, and
justification of a change in accounting principle on the basis of
preferability.
EFFECTS OF PRIOR YEAR MISSTATEMENTS
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bullet in No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 is effective as of the end of our
current fiscal year ending March 31,2007, allowing a one-time
transitional cumulative effect adjustment to beginning retained
earnings as of April 1, 2006, for errors that were not previously
deemed material, but are material under the guidance in SAB 108.
Nothing has come to our attention, to date, that the adoption of SAB
108 will have a material impact on our Consolidated Financial
Statements.
(4) RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
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 (JPY3800,000). Seller is the majority owner in Foster
Strategic Management Partnership, a Singapore partnership, which in
turn owns 10,547,594 shares of the Company's common stock,
representing approximately 58.62% 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 $ 899,000
Deposits 1,455,000
Intangibles 84,000
----------
Total assets acquired 2,438,000
Current liabilities assumed (883,000)
----------
Net assets acquired $1,555,000
==========
In the 10-Q for the quarter ended December 31, 2005, we reported the
excess of purchase price over net assets, $1,967,092, in the 10-Q for
the quarter ended December 31, 2005) as Goodwill.
In the 10-K for the year ended March 31, 2006, we reported the Company
made a subsequent discovery, during the fourth quarter, of facts that
existed at the time of our acquisition of USC. By virtue of the
Seller's relationship with FSIP, it has been determined that PPOL and
USC are de facto entities under common control. Accordingly, we must
account for the acquisition of USC in a manner that is similar to the
pooling method to comply with paragraph 11 of SFAS No. 141, "Business
Combinations." For accounting purposes, the excess of purchase price
over the net assets of USC must be treated as a return of capital to
Green Capital. This accounting treatment also required us to
consolidate the results of operations of USC as if the acquisition had
occurred at April 1, 2005 rather than the actual acquisition date of
May 30, 2005 we used in the aforementioned 10-K.
10
The impact of these restatements is as follows:
Balance Sheet
-------------
Additional
Comprehensive Paid In Accumulated
Goodwill Income Capital Deficit
-------- ------ ------- -------
As stated in 12/2005 10-Q $ 1,800,408 $ (1,836,626) $(16,468,890) $(15,605,986)
As restated in 3/2006 10-K (2,003,310) (14,501,798)
------------ ------------ ------------
Impact $ (1,800,408) $ (166,684) (1,967,092)
============ ============ ============
As restated in 3/2006 10-K (2,003,310)
As restated herein (2,209,191) (15,811,867)
------------ ------------
Impact $ (205,881) $ (205,881)
============ ============
Statement of Operations and Comprehensive (Loss) Income (3 months)
------------------------------------------------------------------
Other
Comprehensive Selling, General Net loss Net loss
Gain - Foreign & Administrative per share per share
Currency Translation Expenses Net income Basic Diluted
-------------------- -------- ---------- ----- -------
As stated in 12/2005 10-Q $ (453,455) $5,066,862 $ 65,911 $ 0.32 $ 0.32
As restated in 3/2006 10-K (414,258)
-----------
Impact $ 39,197
===========
As restated in 3/2006 10-K (414,258)
As restated herein (453,455) 4,997,566 135,638 0.66 0.66
----------- ---------- -------- ------- -------
Impact $ (39,197) $ (69,296) $ 69,727 $ 0.34 $ 0.34
=========== ========== ======== ======= =======
Statement of Operations and Comprehensive (Loss) Income (9 months)
------------------------------------------------------------------
Other
Comprehensive Selling, General Net loss Net loss
Gain - Foreign & Administrative per share per share
Currency Translation Expenses Net loss Basic Diluted
-------------------- -------- -------- ----- -------
As stated in 12/2005 10-Q $ (930,807) $24,929,646 $(3,876,615) $(19.39) $(19.39)
As restated in 3/2006 10-K (1,097,491)
-----------
Impact $ (166,684)
===========
As restated in 3/2006 10-K (1,097,491)
As restated herein (1,303,372) 25,135,527 (4,082,496) (20.42) (20.42)
----------- ----------- ----------- ------- -------
Impact $ 205,881 $ 205,881 $ (205,881) $ (1.03) $ (1.03)
=========== =========== =========== =========== =======
(5) RELATED PARTY TRANSACTIONS
ADVANCED COMMUNICATIONS
During the quarter and year-to-date ended December 31, 2006, PPOL
entered into the following transactions with Advanced Communications
K.K., a Japanese corporation that is 79.55% owned by Green Capital:
Quarter Year-to-date
------- ------------
Information technology services $ 1,957,503 $ 5,703,315
Inventory purchases 50,250 115,676
Other, net (55,677) (151,989)
----------- ------------
$ 1,952,076 $ 5,667,002
=========== ============
At December 31, 2006, PPOL's accounts payable Advanced Communications
were $1,056,323.
11
SEAGULL
During the quarter and year-to-date ended December 31, 2006, PPOL paid
K.K. Seagull (Seagull), a Japanese corporation and shareholder of
9,270 shares the Company's common stock $3,715 and $19,672,
respectively, for sales promotion activities performed for PPOL.
U-WORLD
During the quarter and year-to-date ended December 31, 2006, PPOL
entered into the following transactions with U-World, a Japanese
corporation, which is a wholly-owned subsidiary of Seagull and its CEO
is Yoshiyuki Aota, a Director of PPOL:
Quarter Year-to-date
------- ------------
Service fee income $ 163,948 $ 430,084
Administrative expenses, net (291,647) (483,347)
----------- ------------
$ (127,699) $ (53,263)
=========== ============
At December 31, 2006, PPOL's accounts payable to U-World, net of
accounts receivable of $7,934 was $235,493.
(6) 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, 2006 $ 38,972,218 $ 24,126,665 $ 53,439,556 $ 31,092,345
Additional deferrals 520,316 -- 3,764,677 --
Released amounts (13,005,113) (18,396,438) (19,587,974) (23,925,146)
Exchange rate effect (187,743) 149,137 (289,679) 197,603
------------- ------------- ------------- -------------
Ending balance, December 31, 2006 $ 26,299,678 $ 5,879,364 $ 37,326,580 $ 7,364,802
============= ============= ============= =============
(7) 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 summary of the Company's stock option
plan activity is presented below:
Weighted Average Aggregate
Options Exercise Price Intrinsic Value
------- -------------- ---------------
Outstanding at March 31, 2006 13,000 $400 --
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
Expired -- -- --
------ ---- ------
Outstanding at December 31, 2006 13,000 $400 --
====== ==== ======
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 2006:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Fiscal Average Weighted Weighted
Year Range of Remaining Average Average
Options Exercise Contractual Exercise Exercise
Granted Prices Options Life Price Options Price
------- ------ ------- ---- ----- ------- -----
2004 $4.00 12,200 7.25 $400 12,200 $400
2005 $4.00 800 7.50 $400 800 $400
2006 -- -- -- -- -- --
2007 -- -- -- -- -- --
------ ---- ---- ------ ----
Total 13,000 7.27 $400 13,000 $400
====== ==== ==== ====== ====
12
As of December 31, 2006, there was no unrecognized compensation cost
related to stock options outstanding. We recognize expense on stock
options using a graded vesting method, which recognizes the associated
expense based on the timing of option vesting dates.
(8) COMMITMENTS & CONTINGENCIES:
As of December 31, 2006 the Company had various professional
consulting service contracts and operating leases in effect which
collectively will require payments of $77,384, and none in the 12
months ending December 31, 2007, and thereafter, respectively.
On 17 October, 2005, PPOL's ultimate majority shareholder, Green
Capital, filed an action against Capital Aid, Inc., a Japan
corporation, and Messrs. Hiroshi Shibakawa, Kenji Nakamura, Yoshiyuki
Okamura, Yoshiteru Sazanami, Hiroshi Matsuo, Tokuji Koga and Chizuko
Koga (the "Ide Group"), in Tokyo District Court (case no. (wa)
2005-20878) to recover PPOL common share stock certificates (the "PPOL
Certificates") registered in the name of Foster Strategic Investment
Partnership ("FSIP"), and beneficially owned by Green Capital. The Ide
Group maintains physical possession of the PPOL Certificates. Green
Capital has alleged in its lawsuit that 1) the Ide Group purchased the
PPOL Certificates from a person who was not the owner therefore (or
has any right or interest therein); and 2) did not constitute a bona
fide purchaser thereof, as such is provided under the Article 131-2 of
the Commercial Code of Japan, Green Capital is entitled to the remedy
of repossession of the PPOL Certificates at issue. The Ide Group, in
turn, has countersued Green Capital, Green Capital's then-CEO, PPOL,
PPOL's and AJOL's directors, PPOL's operating subsidiary, AJOL, and
Nobuo Takada, a former director and CEO of PPOL, for $9.2 million
(1.056 billion yen) plus interest. In its countersuit, the Ide Group
alleges Takada had tricked them into buying the PPOL Certificates and
borrowing money from them, using the PPOL Certificates as collateral.
The Ide Group has alleged in its countersuit that each named
counter-defendant conspired with Takada in a series of alleged
unlawful and improper transactions resulting in the Ide Group's
purchase of the PPOL Certificates and loan to Takada. At the time of
the alleged series of transactions, Takada was neither a director nor
officer of PPOL or AJOL. Green Capital has also contacted the Tokyo
Metropolitan Police Department and has filed a criminal complaint
against Nobuo Takada for alleged embezzlement of the PPOL Certificates
registered in the name of FSIP and beneficially owned by Green
Capital. Green Capital, Green Capital's then-CEO, PPOL, PPOL's and
AJOL'S directors, and PPOL's operating subsidiary, AJOL have all
denied knowledge of any of the alleged transactions and any improper
conduct associated with such alleged transactions. Based, in part, on
the advice of counsel, PPOL believes the ultimate resolution of this
litigation will not have a material impact on the financial position,
results of operations or cash flows of PPOL, and its subsidiary.
In accordance with SFAS No. 5, "Accounting for Contingencies," PPOL
reserves for a legal liability when it is both probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. At least quarterly PPOL reviews and adjusts
these reserves to reflect the impacts of negotiations, settlements,
rulings, advice of legal counsel and other information and events
pertaining to a particular case. The ultimate outcome of such matters
cannot presently be determined or estimated. PPOL's management
believes that PPOL has sufficiently reserved for legal matters and
that the ultimate resolution of pending matters will not have a
material adverse impact on PPOL's consolidated financial position,
operating results or cash flows. However, the results of legal
proceedings cannot be predicted with certainty. Should PPOL fail to
prevail in current legal matters or should one or more of these legal
matters be resolved against PPOL, PPOL could be required to pay
substantial monetary damages and, its financial position, operating
results and cash flows could be materially adversely affected.
13
(9) SUBSEQUENT EVENTS:
As announced on March 30, 2007, the Board, on February 16, 2007,
unanimously voted to authorize a one (1) for one hundred (100) reverse
stock split (the "Reverse Split") of the Company's issued and
outstanding shares of common stock, and the payment of cash in lieu of
fractionalized shares otherwise issuable in connection with the
Reverse Split. The Reverse Split provided shareholders owning less
than one hundred (100) shares of common stock of the Company (the
"Odd-Lot Holders") the benefit of liquidating their relatively small
odd-lot holdings for market value without brokers' commissions. This
is particularly beneficial to the Odd-Lot Holders given the limited
market for and trading in the Company's common stock. The Odd-Lot
Holders own less than one percent (1%) of the Company's outstanding
common stock. The Reverse Split will allow the Company to purchase and
acquire the common stock of approximately 1,088 holders of record of
the Company, all of whom reside in the United States and each of whom
owns less than one hundred (100) shares of common stock in the
Company. The Reverse Split will also save the Company administrative
and related costs of sending proxy statements, annual reports,
quarterly reports and other communications to the Company's affected
shareholders. The Company also believes that the Reverse Split will
facilitate and allow for the benefits of the spin-off discussed below.
The Reverse Split was effective on April 23, 2007.
The consolidated financial statements of the Company reflect the
effect of the reverse stock split retroactively.
On February 16, 2007, the Board of Directors unanimously approved a
transaction involving the separation of the Company's wholly-owned
subsidiary, AJOL, by authorizing the issuance of shares of common
stock of AJOL owned by the Company to the stockholders of the Company
in proportion to each stockholder's percentage ownership in the
Company (the "spin-off"). In authorizing the foregoing, the Board
considered that the Company's business is operated exclusively in
Japan through AJOL, and that there is relatively little or no interest
in the Company and its common stock and AJOL in the United States. The
Board also considered that a majority of the Company's shareholders
reside in Japan. The Board also believes that shareholders of the
Company could maximize the value of their shares in the Company by
directly holding shares in AJOL, in addition to continuing holding
shares in the Company. The Board also considered that AJOL would be in
a position to seek and obtain private issuer status in the United
States following the Spin-Off, thereby allowing AJOL to seek
suspension of any Commission reporting obligations to which it would
be subject following the Spin-Off. The Board also concluded that the
Spin-Off will allow AJOL to more effectively and efficiently focus on
its business in Japan. Based on the foregoing, the Board authorized
the transaction whereby the Company will seek divestiture of and
Spin-Off AJOL to the stockholders of the Company, pro rata. Following
the Spin-Off, the stockholders of the Company will continue to own the
same number of shares in the Company that they held pre Spin Off, and
will in addition own AJOL shares in proportion to their percentage
ownership in the Company. Following the Spin-Off, the Company will
acquire the status of a public shell corporation with no operating
business, and will seek merger, acquisition or other business
opportunities. The effective date of the Spin-Off and the record date
for stockholders to be eligible to receive AJOL shares in the Spin-Off
will be determined by the Board, as appropriate, and will be subject
to the filing and effectiveness of a registration statement with the
SEC, registering the AJOL shares. The Board can provide no assurance
that a public market or any market for the AJOL shares or the
Company's shares, either in Japan or the United States, will develop
or exist or at what price following the Spin-Off.
As of the filing date of this report, the Spin-Off was not completed.
Accordingly, the financial information included herein does not treat
AJOL as a discontinued operation. Since the current shareholders of
PPOL will be shareholders of AJOL after the spin-off, we believe the
treatment of AJOL as a continuing operation to be the most appropriate
accounting recognition under the given circumstances. It will also
provide the reader with more comparable yearto year performance
information.
Additionally, on February 16, 2007, the Board unanimously voted to
authorize an amendment to the Company's By-laws to provide for
certificateless/electronic book entry ownership of stock in the
Company, such that the Company will not issue stock certificates to
evidence the ownership thereof, but that information sufficient to
identify ownership in the Company will be entered in electronic form
in the books of the Company maintained by its transfer agent. The
Company will adopt a system of issuance, recordation and transfer of
its shares by electronic or other means not involving any issuance of
certificates. The conversion to certificateless ownership will be
facilitated by the Company's stock transfer agent. The Company is
currently in the process of collecting the physical certificates from
shareholders to convert them to electronic book entry.
14
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
this could cause actual results to differ materially from those anticipated as
of the date of this Report. Shareholders, potential investors and other readers
are urged to consider these factors in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included herein are only made as of
the date of this Report and PPOL undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances,
except as required under applicable laws.
OVERVIEW
PPOL, Inc., a California corporation, conducts its business primarily through
its wholly owned Japanese subsidiary, AJOL, Ltd. ("AJOL"), a Japanese
corporation. At the present time, the Company has administrative functions
occurring in California, but does not otherwise have any major business in the
United States. As disclosed in Note 9 - Subsequent Events, of the financial
statements, PPOL will spin-off its sole operating subsidiary, AJOL. Following
the Spin-Off, the Company will acquire the status of a public shell corporation
with no operating business, and will seek merger, acquisition or other business
opportunities. The discussion below should be read with such planned spin-off
taken into consideration.
PPOL's revenues are generated primarily through its one hundred percent (100%)
ownership of AJOL, which derives its revenues through the use of a direct
marketing and distribution system throughout Japan to sell: (1) its SF-70 and
U-Phones hardware (MOJICO), multi-functional facsimile based machines with
telephone and networking capabilities, (2) subscriptions to our co-proprietary
UU Online interactive database that can be accessed through our SF-70 and
U-Phones hardware, (3) various consumer products that primarily utilize AJOL's
U-Brand, and (4) service fees and commissions.
Some of the key developments during the quarter year ended December 31, 2006
include:
INVOLVEMENT OF MR. AOTA
As disclosed in the 10-K for the year ended March 31, 2006, we are highly
dependent upon our Director, 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.
As further disclosed in the aforementioned 10-K, Mr. Aota has become the CEO of
U-World, a direct competitor of the Company which uses a network sales model. As
such, the amount of time he can devote to PPOL business has diminished. Our
business and future prospects have been materially and adversely affected. If
Mr. Aota's services cease completely, PPOL's current business has a strong
likelihood of becoming unviable. This is, in part, due to Mr. Aota's strong
personal ties to the leaders of our distribution network.
Our revenues have declined approximately 35% in the quarter ended December 31,
2006 from the comparable period of the prior year. We believe that Mr. Aota's
involvement in U-World has been a significant factor in this decline.
LONG TERM OUTLOOK
Notwithstanding our return to profitability before income taxes, the long term
outlook for the Company is bleak without the active involvement of Mr. Aota.
While AJOL, our sole operating subsidiary in Japan, is projected to have income
under US generally accepted accounting principles in the near term future, it is
projected to have losses consistently for Japanese tax reporting purposes. This
means the deferred tax assets will not provide future economic benefits. Thus we
established a 100% valuation allowance for the remaining deferred tax assets in
the first quarter. This resulted in an income tax expense of $10.7 million
although our income before income taxes were approximately $5.2 million.
The majority of the income before income taxes is attributable to the
recognition of deferred revenue and related costs to that were recognized as
income and expense for financial accounting purposes. Deferred revenues and
related costs are attributable to (1) shipments of our MOJICO units primarily in
prior periods, and (2) on-line service fee subscriptions and renewals. As such
recognition of deferred revenues and the related costs in the current period do
not necessarily indicate current performance.
In the current period, shipments of MOJICO units were negligible although
renewals have been stable. As such we had made a conscientious effort to reduce
our selling, general and administrative costs. A more detailed discussion
follows immediately.
15
GOING CONCERN
The financial statements have been prepared on the basis of PPOL continuing as a
"going concern" despite declining sales, losses incurred, working capital and
shareholders' deficit and decline in cash as (1) management has been able to
adjust PPOL's organizational structure to substantially reduce selling, general
and administrative costs, subsequent to March 31, 2006, and (2) working capital
deficit has been reduced from a high of $13.9 million at March 31, 2005 to $7.1
million at December 31, 2006. In addition the liquidation of deferred costs and
deferred revenues will not consume or provide any cash. At December 31, 2006,
current assets other than deferred costs exceeded current liabilities other than
deferred revenues by approximately $3,900,000. Our unrestricted cash balance
alone exceeded our cash consuming current liabilities by approximately $2.9
million, remaining constant from September 30, 2006 and representing a $0.6
million increase from June 30, 2006.
See Note 1, Organization and Summary of Significant Accounting Policies, in our
notes to the consolidated financial statements for the years ended March 31,
2006 and 2005 included in the aforementioned Form 10-K, for a detailed
discussion of the application of these and other accounting policies.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 2005
Product Sales. For the three months ended December 31, 2006 revenues of this
category have decreased by $5,934,587 or 32.8% in comparison to the same period
of the prior year. The decrease is primarily due to the reduced amount of time
Mr. Aota has been able to devote to PPOL business and continued work at
U-World.
Service Fee Income. For the three months ended December 31, 2006, revenues
decreased by $2,830,375 or 40.7 % over the comparable period of the prior year
due to changes in Japanese regulations that prohibited us from providing
administrative services for insurance policies, which, until the fourth quarter
of the year ended March 31, 2006, was our primary source of service fee income.
Cost of Sales - Goods. Cost of sales, expressed as a percentage of sales
declined to 13.65% during the three months ended December 31, 2006 from 27.8% in
the prior year due to lower costs and sales of certain products at prices higher
than anticipated by write downs in prior quarters.
Cost of Sales - Services. For the three months ended December 31, 2006, the cost
of sales, expressed as a percentage of sales increased to 75.3% for the quarter
ended December 31, 2006 from 33.1% in the comparable period of the prior year
due to fixed overhead costs and growing reduction in the profit margins in the
type of services we provide.
Distributor Incentives. For the three months ended December 31, 2006,
distributor incentives decreased by approximately $4.3 million or 37.6% in
comparison to the 35.0% decline in revenues due to lower overall distributor
incentive rates in the current period, including products that we do not pay any
distributor incentives on.
Selling, General and Administrative Expense. For the three months ended December
31, 2006, selling, general and administrative expenses decreased by
approximately $2.6 million or 52.2% in comparison to the same period of the
prior year. The decreases were due to fewer employees, and consequently, lower
salaries expense for the three months ended December 31, 2006.
Income Tax Expense. For the three months ended December 31, 2006, income tax
expense was negligible even though the Company had pretax income of $2,060,702
as the Company's operating subsidiary had a loss for tax reporting purposes and
the related deferred tax asset was previously written off in the first quarter
of the current year as no future economic benefit is anticipated.
Deferred Costs. For the nine months ended December 31, 2006, short term
deferred costs decreased by approximately 32.5% from $38,972,218 in March 31,
2006 to $26,299,678. Long term deferred costs decreased by 75.6% from
$24,126,665 to $5,879,364. When the company discontinued the network marketing
systems it ceased to generate both long and short term deferred costs from
product sales. As a result, both accounts declined as the costs are amortized
over the estimated customer relationship period.
Deferred Revenues. For the nine months ended June 30, 2006, short term deferred
revenues decreased by approximately 30.2% to $37,326,580 compared to $53,439,556
in March 31, 2006. Similarly, long term deferred costs decreased by 76.31% to
$7,364,802 from $31,092,345, When the company discontinued the network marketing
systems it ceased to generate both long and short term deferred revenues from
product sales. As a result, both accounts declined as the revenues are
recognized over the estimated customer relationship period.
16
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 2005
Product Sales. For the nine months ended December 31, 2006 revenues of this
category have decreased by $19,227,654 or 31.4% in comparison to the same period
of the prior year. The decrease is primarily due to the reduced amount of time
Mr. Aota has been able to devote to PPOL business.
Service Fee Income. For the nine months ended December 31, 2006, revenues
decreased by $10,095,304 or 44.2% over the comparable period of the prior year
due to changes in Japanese regulations that prohibited us from providing
administrative services for insurance policies, which, until the fourth quarter
of the year ending March 31, 2006, was our primary source of service fee income.
Cost of Sales - Goods. Cost of sales, expressed as a percentage of sales
declined to 25.1% during the nine months ended December 31, 2006 from 28.7% in
the prior year due to lower costs resulting from change in product mix ratio to
higher gross margin items.
Cost of Sales - Services. For the nine months ended December 31, 2006, the cost
of sales, expressed as a percentage of sales increased to 59.6% for the same
period of the prior year's 28.6% due to fixed overhead costs that could not be
eliminated upon the elimination of administrative services for insurance
policies as a source of service fee income. In addition, growing reduction in
the profit margins in the type of services we provide contributed to the
increase.
Distributor Incentives. For the nine months ended December 31, 2006, distributor
incentives, as a percentage of sales, 44.7%, versus 44.0% for the comparable
period of the prior year. While this indicates higher overall incentive rates,
we are starting to experience lower overall rates as indicated by third quarter
results noted above.
Selling, General and Administrative Expense. For the nine months ended December
31, 2006, selling, general and administrative expenses decreased by
approximately $17.9 million, or 71.4%, in comparison to the same period of the
prior year. The decline was due to fewer employees, and consequently, lower
salaries expense for the nine months ended December 31, 2006. Also, the selling,
general, and administrative expense for nine months ended December 31, 2005
included office relocation expenses that did not recur in 2006.
Income Tax Expense. For the nine months ended December 31, 2006, income tax
expense was approximately 207% of pretax income primarily due to the write off
deferred tax assets that we had determined will not have future economic
benefit.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal needs for funds have been for operating expenses
including distributor incentives, working capital (principally inventory
purchases), capital expenditures and the development of operations throughout
Japan. We have generally relied on cash flow from operations and short-term debt
from our majority shareholder to meet our cash needs and business objectives
without relying on long-term debt to fund operating activities.
During the nine months ended December 31, 2006, our cash position had a net
increase of $248,687, or 3.8%. Cash used by operating activities comprised
$14,550, Such uses were offset by cash generated from investing activities
associated with the net return of $245,000 from lease deposits. The impact of
foreign currency exchange was minimal. Management believes that cash flow from
operations and the revolving credit facility will adequately meet the working
capital needs for the foreseeable future. Further comments on cash is on page
15 under "Going Concern."
CONTRACTUAL OBLIGATIONS
The Company projects that it will need to satisfy at least $78,156 of lease and
contract obligations within the twelve months following December 31, 2006, and
none thereafter.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the US requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the period reported.
We believe the critical accounting policies and estimates disclosed in the Form
10-K, Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 2006, continue to be applicable.
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.
17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to other information contained in the aforementioned 10-K, the
following factors could affect our future business, results of operations, cash
flows or financial position, and could cause future results to differ materially
from those expressed in any of the forward-looking statements contained in this
Annual Report.
DEPENDENCE ON MR. AOTA
We are highly dependent upon our Director, 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
continuing our investigate, but have not obtained, "Key Executive Insurance"
with respect to Mr. Aota.
Mr. Aota has become the CEO of U-World, a direct competitor of the Company,
which uses a network sales model. As such, the amount of time he can devote to
PPOL business has diminished. Our business and future prospects have been
materially and adversely affected. If Mr. Aota's services cease completely,
PPOL's current business has a strong likelihood of becoming unviable. This is,
in part, due to Mr. Aota's strong personal ties to the leaders of our
distribution network. We do not have an employment agreement with Mr. Aota. We
are currently considering terms to secure Mr. Aota's services.
DEPENDENCE ON NEW SUBSCRIBERS
Historically, our operating results have depended on revenues received from
sales of the SF-70 and U-Phone products. SF-70 and U-Phone sales have accounted
for a majority of our annual revenue. SF-70 and U-Phone 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 SF-70 and U-Phones hardware and UU
Online services. We have been unable to generate new subscribers at the rate
that we have been able to in the past. As a result, there can be no assurances
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 RENEWALS
As a result of our inability to generate new subscribers at the rate that we
have been able to in the past, we will need to rely more heavily on renewals.
There can be no assurances that we will be able to generate sufficient renewals
to remain profitable. We do not have any substantial historical basis for
predicting the rate of renewal increase in our subscriber base.
LACK OF PROFITABLE OPERATIONS
The Company recorded net losses for fiscal years ending March 31, 2006 and
2005 of $2,386,538 and $2,740,733, respectively, and an accumulated deficit
of $14,115,909, at March 31, 2006. The Company's ability to continue in
business and maintain its financing arrangements would be adversely affected
by a continued lack of profitability. During the quarter ended December 31,
2006, we had net income of $2,060,087. However, our performance during
this quarter does not assure future profitability.
WORKING CAPITAL DEFICIT
At December 31, 2006, PPOL current liabilities exceeded current assets by
$7,135,938. See discussion on working capital deficit in Liquidity and Capital
Resources section on page 17.
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 SF-70
and U-Phone hardware and U-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.
18
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 of Japanese and non-Japanese revenue,
changes in foreign currency exchange rates, the mix of products and services
sold by us and the channels through which those products and services are sold,
general economic conditions, and specific economic conditions in Internet and
related industries. Additionally, in response to evolving competitive
conditions, we may elect from time to time to make certain pricing, service,
marketing or acquisition decisions that could have a material adverse affect on
its financial performance.
FOREIGN CURRENCY (YEN) FLUCTUATIONS
Substantially all of our revenue and expenses are received and incurred in
Japanese Yen. Variation in foreign exchange rates may substantially affect our
revenue, expenses, and net income in U.S. dollar terms. In preparing our
financial statements, we translate revenue and expenses from Japanese Yen into
U.S. dollars using weighted average exchange rates. If the U.S. dollar
strengthens relative to the Yen, our reported revenue, gross profits and net
income will likely be reduced. The Company's future 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 slowly improving in recent years but may
decline again. 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 our 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 SUBSCRIBERS FOR CONTENT OF NETWORK
The information transmitted to our subscribers via our information network UU
Online is primarily generated by other of our 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
generated by our subscribers. We may be exposed to liability with respect to
this content. Our insurance may not cover claims of these types or may not be
adequate to indemnify us for all liability that may be imposed. Our liability
coverage limit is 100,000,000 Japanese yen, approximately $860,000 at current
exchange rates, per occurrence. There is a risk that a single claim or multiple
claims, if successfully asserted against us, could exceed the total of our
coverage limits. There is also a risk that a single claim or multiple claims
asserted against us may not qualify for coverage under our insurance policies as
a result of coverage exclusions that are contained within these policies. Any
imposition of liability, particularly liability that is not covered by insurance
or is in excess of insurance coverage, could have a material adverse affect on
our reputation, financial condition, and operating results.
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RELIANCE ON EXISTING DISTRIBUTORS AND NEED TO RECRUIT ADDITIONAL DISTRIBUTORS
We depend on subscriber distributors to generate a majority of our revenues. To
increase our revenue, we must increase the number of and/or the productivity of
our distributors.
Our distributors may terminate their status as a distributor at any time. The
number of distributors may not increase and could decline in the future. We
cannot accurately predict how the number and productivity of distributors may
fluctuate because we rely upon our existing distributors to recruit, train and
motivate new distributors. Our operating results could be harmed if our existing
and new business opportunities and products do not generate sufficient interest
to retain existing distributors and attract new distributors.
The loss of a group of high-level distributors, or a group of leading
distributors in the distributor's network of lower level distributors, whether
by their own choice or through disciplinary actions for violations of our
policies and procedures could negatively impact the growth of distributors and
our revenue. There is no leading distributor whose departure, alone, will have a
material impact on the financial position or results of operations.
In addition, our operations in Japan face significant competition from existing
and new competitors. Our operations would also be harmed if our planned growth
initiatives fail to generate continued interest and enthusiasm among our
distributors in this market and fail to attract new distributors.
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.
RELIANCE ON ONLINE SALES
We expect online sales of U-Brand products and other services through UU Online
will have a growing level of significance in our overall sales in the future. If
our members should reduce or stop their online purchases, this could harm our
results of operations.
LOSING SOURCES OF U-BRAND PRODUCTS
The loss of any of our sources of U-Brand products, or the failure of sources to
meet our needs, could restrict our ability to distribute U-Brand products and
harm our revenue as a result. Further, our inability to obtain new sources of
U-Brand 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 SF-70 and U-Phone 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 providing interactive telecommunications products and
services. This may put us at a substantial competitive disadvantage with present
and/or future competitors.
INTERNET USAGE RATES AND LONG DISTANCE TELEPHONE RATES
Our subscribers obtain access to AJOL's network via either the Internet or
telephone service. The costs that subscribers incur in obtaining access to our
network via these channels are beyond the control of AJOL. Any increase in long
distance telephone rates or rates for accessing the Internet could materially
and adversely affect demand for our products and services.
RELIANCE ON INTERNET AS TRANSMISSION MEDIUM
Our future success will depend upon our ability to route our customers' traffic
through the Internet and through other data transmission media. Our success is
largely dependent upon the viability of the Internet as a medium for the
transmission of subscriber related data. There can be no assurance that the
Internet will prove to be a viable communications media, that document
transmission will be reliable, or that capacity constraints which inhibit
efficient document transmission will not develop. The Internet may not prove to
be a viable avenue to transmit communications for a number of reasons, including
lack of acceptable security technologies, lack of access and ease of use,
traffic congestion, inconsistent quality or speed of service, potentially
inadequate development of the necessary infrastructure, excessive governmental
regulation, uncertainty regarding intellectual property ownership or lack of
timely development and commercialization of performance improvements.
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TECHNOLOGICAL CHANGES OF THE MESSAGING AND COMMUNICATIONS INDUSTRY
The messaging and communications industry is characterized by rapid
technological change, 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 PROTECTION
Our success depends to a significant degree upon our proprietary technology. We
rely on a combination of patent, trademark, trade secret and copyright law and
contractual restrictions to protect our proprietary technology. However, these
measures provide only limited protection, and the Company may not be able to
detect unauthorized use or take appropriate steps to enforce our intellectual
property rights. In addition, we may face challenges to the validity and
enforceability of our proprietary rights and may not prevail in any litigation
regarding those rights. Any litigation to enforce our intellectual property
rights would be expensive and time-consuming, would divert management resources
and may not be adequate to protect our business.
POSSIBLE INFRINGEMENT CLAIMS
We could be subject to claims that we have infringed the intellectual property
rights of others. In addition, we may be required to indemnify our distributors
and users for similar claims made against them. Any claims against us could
require us to spend significant time and money in litigation, pay damages,
develop new intellectual property or acquire licenses to intellectual property
that is the subject of the infringement claims. These licenses, if required, may
not be available at all or on acceptable terms. As a result, intellectual
property claims against us could have a material adverse effect on our business,
prospects, financial conditions and results of operations.
POSSIBLE SYSTEM FAILURE OR BREACH OF NETWORK SECURITY
Our operations are dependent on our ability to protect our network from
interruption by damage from fire, earthquake, power loss, telecommunications
failure, unauthorized entry, computer viruses or other events beyond our
control. As precautions, we utilize distributed processing systems, back-up
systems, Internet firewalls, 24/7 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.
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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 previously operated through a network marketing
strategy which is subject to government regulation concerning consumer
protection. Changes in these regulations could affect compliance with these
regulations and jurisdictions where we carry on our business.
DEPENDENCE ON VENDOR
The SF-70 and U-Phone machines are produced by an unrelated Original Equipment
Manufacturer (OEM). Should this OEM become incapable or unwilling to produce the
SF-70 and U-Phone for any reason, we could face a temporary decline in SF-70 and
U-Phone sales until another electronics manufacturer is sourced and ready to
produce the machines.
MINORITY SHAREHOLDER STATUS
Foster Strategic Investment Partnership and Leo Global Fund hold 51.34% and
15.28%, respectively, of PPOL's common stock. Acting alone, Foster Strategic
Investment Partnership, as a majority shareholder, has significant influence on
PPOL's policies. Foster Strategic Investment Partnership and Leo Global Fund,
collectively, control 66.62% of PPOL's outstanding shares and voting power. As a
result, Foster Strategic Investment Partnership and Leo Global Fund, acting
together, 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 management and affairs.
NO LOCK-UP AGREEMENT BETWEEN FOSTER STRATEGIC INVESTMENT PARTNERSHIP AND LEO
GLOBAL FUND
To date, PPOL has not entered into a separate lock-up arrangement with Foster
Strategic Investment Partnership and Leo Global Fund 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 and/or Leo Global Fund may be eligible to sell
a large volume of shares, which could cause the price of PPOL's shares to
decline.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS AND STOCK PRICE.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required
to furnish a report on our internal control over financial reporting. In order
to achieve compliance with Section 404 of Sarbanes-Oxley within the prescribed
period, we will need to engage in a process to document and evaluate our
internal control over financial reporting, which will be both costly and
difficult. There is a risk that neither we nor our independent auditors will be
able to conclude that our internal controls over financial reporting are
effective as required by Section 404 of Sarbanes-Oxley.
In addition, during the course of our testing, we may identify deficiencies that
we may not be able to remediate in time to meet the deadline imposed by
Sarbanes-Oxley for compliance with the requirements of Section 404. Furthermore,
if we fail to achieve and maintain the adequacy of our internal controls, as
such standards are modified, supplemented, or amended from time to time, we may
not be able to ensure that we can conclude on an ongoing basis that we have
effective internal controls over financial reporting in accordance with Section
404 of Sarbanes-Oxley. Effective internal controls are necessary for us to
produce reliable financial reports and are important to helping prevent
financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and results of operations could be harmed, investors could
lose confidence in our reported financial information, and the trading price of
our stock could drop significantly.
22
ITEM 4T: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain a system of
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that we file or submit to the SEC under the Exchange Act, is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules, regulations and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the SEC under the Exchange Act is accumulated and communicated to our
management, including our principal executive officer and our principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Masao
Yamamoto, our Chief Executive Officer, and Richard Izumi, our Chief Financial
Officer, have evaluated the design and operating effectiveness of our disclosure
controls and procedures as of December 31, 2006. Based upon their evaluation,
these executive officers have concluded that our disclosure controls and
procedures were not effective as of December 31, 2006.
Specifically, we have identified the following material weaknesses in
our internal control over financial reporting: (i) we had not effectively
implemented comprehensive entity-level internal controls; (ii) we did not have a
sufficient complement of personnel with appropriate training and experience in
U.S. generally accepted accounting principals; (iii) we did not adequately
segregate the duties of different personnel within our accounting group due to
an insufficient complement of staff; (iv) we did not perform adequate oversight
of certain accounting functions and maintained inadequate documentation of
management review and approval of accounting transactions and financial
reporting processes; and (v) we had not fully implemented certain control
activities and capabilities in the design of our internal control over financial
reporting.
The Board of Directors has concluded that the delay in submitting this
10-Q filing was initially a result of determining the impact of restatements and
reclassifications required to financial statements issued in the quarter ended
June 30, 2005. This required management to take the time to obtain relevant
facts to make the appropriate restatements and reclassifications. In addition
there were significant communication delays in obtaining information from our
operating subsidiary, AJOL, in Japan in order to complete our consolidated
financial statements. To ensure 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, the Board of Directors has
directed management of the Company to prepare reports requiring significant
information from its Japanese operating subsidiary should be prepared in Japan.
During this initial delay, the NASD informed the Company that its securities
will be removed effective September 6, 2006, from the OTC Bulletin Board
("OTCBB"). Further, as a result of the Company's significant budgetary
constraints that prevented it from retaining additional personnel to resolve the
issues described in the foregoing paragraphs, and the fact that the majority of
our shareholders reside in Japan and are unable to trade our stock, the Board of
Directors have further concluded that the costs of remaining a US public
company, in its present form, far exceed the benefits to its existing
shareholder base. Thus, as more fully described in Note 9 - Subsequent Events,
to the consolidated financial statements, included herein, the Board of
Directors unanimously approved a transaction involving the separation of the
Company's wholly-owned Japanese subsidiary, AJOL, by authorizing the issuance of
shares of common stock of AJOL owned by the Company to the stockholders of the
Company in proportion to each stockholder's percentage ownership in the Company
(the "spin-off"). In authorizing the foregoing, the Board of Directors
considered that the Company's business is operated exclusively in Japan through
AJOL, and that there is relatively little or no interest in the Company and its
common stock and AJOL in the United States. The Board of Directors also
considered that over 75% of the Company's shareholders, who hold over 98% of its
outstanding shares, are residents of Japan. The Board of Directors also believes
that shareholders of the Company could maximize the value of their shares in the
Company by directly holding shares in AJOL, in addition to continuing holding
shares in the Company. The Board of Directors also considered that AJOL would be
in a position to seek and obtain private issuer status in the United States
following the Spin-Off, thereby allowing AJOL to seek suspension of any
Commission reporting obligations to which it would be subject following the
Spin-Off.
Accordingly, we are in the process of preparing and filing all
currently required SEC filings in order to allow us to achieve our goals
discussed in the preceding paragraph.
Internal Control Over Financial Reporting. We also maintain internal
control over financial reporting. The term "internal control over financial
reporting," as defined by regulations of the SEC, means a process designed by,
or under the supervision of, our principal executive and principal financial
officers, or persons performing similar functions, and effected by the our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the U.S. ("GAAP"), and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
our assets;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and directors; and
23
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our consolidated
financial statements.
The Company has initiated planning for the implementation of Section
404 of the Sarbanes-Oxley Act. However, the Company has not yet hired an outside
firm to assist in the implementation to start its evaluation process. The
implementation of Section 404 may involve significant costs and commitments in
terms of the Company's financial and personnel resources, and based on the
Company's plans to spin off its operating subsidiary, AJOL, and seek and obtain
foreign private issuer status in the United States, it is unlikely that the
Company will complete its Section 404 compliance responsibilities by the
established deadline.
PART 2:
ITEM 1: LEGAL PROCEEDINGS
On 17 October, 2005, PPOL's ultimate majority shareholder, Green
Capital, filed an action against Capital Aid, Inc., a Japan corporation, and
Messrs. Hiroshi Shibakawa, Kenji Nakamura, Yoshiyuki Okamura, Yoshiteru
Sazanami, Hiroshi Matsuo, Tokuji Koga and Chizuko Koga (the "Ide Group"), in
Tokyo District Court (case no. (wa) 2005-20878) to recover PPOL common share
stock certificates (the "PPOL Certificates") registered in the name of Foster
Strategic Investment Partnership ("FSIP"), and beneficially owned by Green
Capital. The Ide Group maintains physical possession of the PPOL Certificates.
Green Capital has alleged in its lawsuit that 1) the Ide Group purchased the
PPOL Certificates from a person who was not the owner therefore (or has any
right or interest therein); and 2) did not constitute a bona fide purchaser
thereof, as such is provided under the Article 131-2 of the Commercial Code of
Japan, Green Capital is entitled to the remedy of repossession of the PPOL
Certificates at issue. The Ide Group, in turn, has countersued Green Capital,
Green Capital's then-CEO, PPOL, PPOL's and AJOL's directors, PPOL's operating
subsidiary, AJOL, and Nobuo Takada, a former director and CEO of PPOL, for $9.2
million (1.056 billion yen) plus interest. In its countersuit, the Ide Group
alleges Takada had tricked them into buying the PPOL Certificates and borrowing
money from them, using the PPOL Certificates as collateral. The Ide Group has
alleged in its countersuit that each named counter-defendant conspired with
Takada in a series of alleged unlawful and improper transactions resulting in
the Ide Group's purchase of the PPOL Certificates and loan to Takada. At the
time of the alleged series of transactions, Takada was neither a director nor
officer of PPOL or AJOL. Green Capital has also contacted the Tokyo Metropolitan
Police Department and has filed a criminal complaint against Nobuo Takada for
alleged embezzlement of the PPOL Certificates registered in the name of FSIP and
beneficially owned by Green Capital. Green Capital, Green Capital's then-CEO,
PPOL, PPOL's and AJOL'S directors, and PPOL's operating subsidiary, AJOL have
all denied knowledge of any of the alleged transactions and any improper conduct
associated with such alleged transactions. Based, in part, on the advice of
counsel, PPOL believes the ultimate resolution of this litigation will not have
a material impact on the financial position, results of operations or cash flows
of PPOL, and its subsidiary.
In accordance with SFAS No. 5, "Accounting for Contingencies," PPOL
reserves for a legal liability when it is both probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. At least
quarterly PPOL reviews and adjusts these reserves to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular case. The ultimate outcome of
such matters cannot presently be determined or estimated. PPOL's management
believes that PPOL has sufficiently reserved for legal matters and that the
ultimate resolution of pending matters will not have a material adverse impact
on PPOL's consolidated financial position, operating results or cash flows.
However, the results of legal proceedings cannot be predicted with certainty.
Should PPOL fail to prevail in current legal matters or should one or more of
these legal matters be resolved against PPOL, PPOL could be required to pay
substantial monetary damages and, its financial position, operating results and
cash flows could be materially adversely affected.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
A - Exhibits:
Exhibit 3.1 Articles of Incorporation and Amendments thereto (1)
Exhibit 3.2 Bylaws (1)
Exhibit 10.5 Purchase Agreement between PPOL, Inc. and Forval Corporation
for shares of Gatefor, Inc. and Object Innovation. (2)
Exhibit 10.15 Purchase Agreement, dated as of May 30, 2005, by and
between PPOL, Inc., a California corporation, K.K. Green
Capital, a Japan corporation, and K.K. U Service, a Japan
corporation. (4)
Exhibit 10.16 Stock Purchase Agreement, dated as of May 30, 2005, between
PPOL, Inc., a California corporation, and K.K. Contents
Provider Tokyo, a Japan corporation. (4)
Exhibit 10.17 Stock Purchase Agreement, dated as of May 30, 2005, between
PPOL, Inc., a California corporation, and K.K. Seagull, a
Japan corporation. (4)
Exhibit 10.18 Stock Purchase Agreement, dated as of May 30, 2005, between
PPOL, Inc., a California corporation, and K.K. H.I.
Consultants, a Japan corporation. (4)
Exhibit 10.19 Stock Purchase Agreement, dated as of May 30, 2005, between
PPOL, Inc., a California corporation, and K.K. System
Partners, a Japan corporation. (4)
Exhibit 10.20 Registration Rights Agreement, dated May 30, 2005, between
PPOL, Inc., a California corporation and the INVESTORS (as
defined). (4)
Exhibit 31.1 Chief Executive Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (3)
Exhibit 31.2 Chief Financial Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (3)
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.(3)
Exhibit 99.1 Stock Purchase Agreement denoting change in control of
registrant. (1)
(1) Previously filed with the SEC as an exhibit to SC 13D, filed on April 15,
2005, and is incorporated herein by reference.
(2) Previously filed with the SEC an exhibit to the Company's 8-k filed on April
4, 2005, and is incorporated herein by reference.
(3) Filed herewith.
(4) Previously filed with the SEC an exhibit to the Company's 8-k filed on June
3, 2005, and is incorporated herein by reference.
B - Reports on Form 8-K
1) None.
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 3, 2008 /s/ Masao Yamamoto
---------------- ---------------------------------------
Date Masao Yamamoto, Chief Executive Officer
March 3, 2008 /s/ Richard Izumi
---------------- ---------------------------------------
Date Richard Izumi, Chief Financial Officer
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