GALA INCORPORATED : Notice of Determination of Number of New Shares to be Issued Through Third-Party Allotment

2014/1/10
Gala Inc.
Representative Director and Group CEO Satoru Kikugawa
(JASDAQ?Code 4777)
Contact: Koji Fujita, General Manager, Domestic subsidiaries' administrative affairs

?TEL [phone]?

Notice of Determination of Number of New Shares to be Issued Through Third-Party

Allotment

The Company announced that the Board resolution was passed on January 10, 2014 on the third-party allotment ("Third-Party Allotment").

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??Outline of Offering

???Payment Date	Monday, January 27, 2014
???Number of Shares to be Newly Issued	416,000 shares
???Issue Price	JPY240 per share
???Amount of Funds to be Raised	JPY99,840,000
???Method of Offering or Allotment (Party to Which Shares will be Allotted)	Third-Party Allotment to Representative Director Satoru Kikugawa for 416,000 shares
???Other	Above-mentioned items will be conditional to effectiveness of Securities Written Notification based on Financial Instruments and Exchange Act that has been filed related to this Third-Party Allotment.

??Purpose and Reason for the Issuance of New Shares Through Third-Party Allotment

As mentioned in "Notice of Determination of Number of New Shares to be Issued Through Third-Party Allotment" dated August 30, 2013, Gala Inc.'s ("The Company") Group structure has significantly changed in FY2013 March. As of FY2014 March Consolidated Cumulative Second Quarter (April 1, 2013 to September 30, 2013), sales were JPY424 million (minus 68.1% relative to the same cumulative quarter of last fiscal year), operating loss of JPY182 million (same cumulative quarter of last fiscal year was operating loss of JPY406 million), ordinary
loss of JPY144 million (same cumulative quarter of last fiscal year of ordinary loss was JPY361 million), and net operating loss of JPY188 million (same cumulative quarter of net operating loss of last fiscal year was JPY213 million). As a result, the Company has going-concern and the Company continues to face difficult time.
The Group's cash and cash equivalent as of end of Q2 (September 30, 2013) is JPY109 million
which decreased by JPY206 million as of the end of last fiscal year. The funds was used mainly for cash flow from operating activities. On September 17th, 2013, JPY88 million was financed to
the Company by third-party allotment which was expected to secure working capital for the

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time being. However, the funds were spent as prior investment in FY2014Q3 (October 1, 2012 to December 31, 2013) in smartphone apps division since the release date of apps was delayed from FY2014 Q2 due to development. A part of service was released on December 11th, 2013 and development including updates continues. Also, from stock transfer transaction of Gala-Net Inc. (U.S.) to Webzen Inc. (Korea), part of stock transfer amount in the total of USD100 million has been reserved in foreign currency pledged account. The pledge in the amount of USD500,000 has been cancelled in August 2013; however, it is taking time such that the amount cannot be counted as cash and cash equivalent yet.
Due to going-conern analysis upon the Company, it is difficult to newly borrow from financial
institution. Plus, the consolidated subsidiary in Korea, Gala Lab Corp. is insolvent which makes the Company's loan continuously from financial institution to be difficult. Furthermore, smartphone game apps development and service provision has been delayed. The Company and the consolidated subsidiary Gala Lab Corp.'s smarptphone apps working capital will be in shortage and short-term financing is necessary.
In order to secure the Company's working capital and the consolidated subsidiary Gala Lab
Corp.'s (Korea) working capital, prioritizing financing in a reliable method, the Company has carefully considered the fastest financing method. As a result, the best method was third-party allotment considering the Group's operating result and financial situation since selecting direct financing with equity instruments, speedy financing was necessary, and public offering and shareholder allotment that take time was decided not to be appropriate. In July 2013, Representative Director Satoru Kikugawa proposed to invest his personal funds in order to carry out his responsibility as management and strive for fast recovery on the Company's performance during Group's severe financial shortage. With this in consideration, Satoru Kikugawa was the most appropriate allotment since there was no other appropriate allotment party. Also, the total amount of funds is the amount that is possible to be allotted by Satoru Kikugawa at this point.
Due to this third-party allotment, Q4's Company's working capital and consolidated
subsidiary Gala Lab Corp.'s smartphone apps division working capital can be secured, short-term cash management will be resolved, and the Group will focus on smartphone apps development. Royalty Revenue will start to be booked from regions where smartphone apps have been released, foreign currency pledged account will be cancelled in Q4, and the Company concludes that the cash stability is achieved. On the other hand, apps development, service provision timing, and cash stability from royalty revenue is uncertain and considering these uncertainties, the Company will continue to pursue financing after conducting this third-party allotment.
As mentioned above, when the Company reviews on financing method, from long-term
stability of capital on perspective regarding financing method, there was no other method than third-party allotment by the amount possible for Satoru Kikugawa to be allotted.

??Amount, Use, and Scheduled Timing of Expenditures of Funds to be Raised

???Amount to be Raised

?Aggregate Amount to be Paid	JPY99 Hundred
?Estimated costs of issuance	JPY1 Hundred
?Estimated net proceeds	JPY98 Hundred

???Details on Expenditure of Funds

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Details of Expenditure	Amount (Million JPY)	Paid-out Timing
? The Company's business fund ? The Consolidated Subsidiary's business fund (Gala Lab Corp.?	58 40	Jan. 2014 to Apr. 2014 Jan. 2014

? Until the above amount is paid out, the money will remain deposited at the bank account.

??Rationale for the Use of Funds

As stated in 3. (2), our business fund is mainly HR, office rent, and expense related being a listed company.
The expenditure related to our consolidated subsidiary Gala Lab Corp. is HR and promotional activity related to development of smartphone apps business in which the Compaany will additionally invest or loan.
The above is necessary in order to maintain the business. The Company's financing from third-party allotment conducted on September 17, 2013 was expected to complete the smartphone apps development and start service provision; however, delay in development led to necessity of securing finance. Therefore, this third-party allotment would lead to securing the funds to continue smartphone apps' development and earlier release of the smartphone apps will lead to enhancement of corporate value as well as shareholder value. The Company decides that the above use of funds is reasonable.

??Rationale for Conditions of Issuance

???Basis of Calcualtion of the Amount to be Paid and Details Thereof

The amount to be paid was determined to be JPY240, the closing price of the Tokyo Stock Exchange JASDAQ Standard on the business day immediately preceding the date of the resolution of the board of directors with respect to the Third-Party Allotment (2014/1/9) per discussion and agreement with the third-party in which the shares are allotted to.
The above price has been determined to be reasonable based on recent stock price following
Japan Securities Dealers Association's "Guideline of Treatment of Third-Party Allotment (April 1, 2010)," in which determination of stock price is strictly based upon the date preceding Board resolution date (if there is no trading on preceding date, it shall be dated back to the most recent trading date). Thus, the closing price has become the preceding business day of the Board resolution date regarding this third-party allotment.
Also, this issuance price is the average price of the closing prices for the regular trading shares of common stock of the Company for the one-month period until the business day immediately preceding the date of the resolution of the board of directors which is JPY
260.89 (any amount less than the third decimal place is rounded off) that is the 8.01% of
discount rate, the average closing price of the recent 3-month is JPY198.05 (any amount less than the third decimal place is rounded off) which is 21.18% of premium, the average closing price of the recent 6-month is JPY186.64 (any amount less than the third decimal place is rounded off. Stock price has been adjusted to the stock split of 1:100 effective October 1,
2013). Comparing with Japan Securities Dealers Association's "Guideline of Treatment of
Third-Party Allotment "as well as Business Law Article 199 Section 3, the Company concludes that it is not a favorable price. Also, full-time Auditor that does not receive the allotment also states that the above payment price complies with "Guidance Concerning
Handling of Capital Increase, Etc. Through a Third-Party Allotment" and the value is based

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objectively using the price of the stock market; therefore, considering financial situation and operating results of the Company, the above price is exact and reasonable.

???Rationales for the Judgment that the Number of Shares to be Issued and the Level of Dilution of

Shares are Reasonable
The total number of shares to be newly issued through the Third-Party Allotment is 416,000 shares (hereinafter referred to as " the total shares issued") (voting rights 4,160) which is
3.72% as of January 10, 2014 (Board Resolution date) ( voting rights 3.72%, any amount less
than the third decimal place is rounded off) of the total number of shares issued which is
11,173,300 shares (voting rights 111,733). The total shares issued plus the issued shares of
550,000 shares on September 17, 2013 by third-party allotment is 966,000 shares (voting rights 9,660) is 9.09% (9.09 % of voting rights, any amount less than the third decimal place is rounded off) against the total number of share issued on August 30, 2013, 10,623,000 shares (voting rights 106,230).
The Company intends to use the money from the Third-Party Allotment as the Company's
working capital and the consolidated subsidiary's investment to smartphone apps business. The Company concludes that it would lead to strengthening of the capital and financial stability, continue on smartphone apps development, and quicken service provision that would lead to the Group's recovery that ultimately enhances company value and shareholder value.
Therefore, the news share issuance and dilution of shares related to the Third-Party
Allotment is reasonable.

??Reason for Selecting Satoru Kikugawa

???Outline of Satoru Kikugawa

?	N a m e	Satoru Kikugawa
?	A d d r e s s	Minato-ku, Tokyo
?	P o s i t i o n	Company Board Member
?	R e l a t i o n s h i p b e t w e e n S a t o r u Kikugawa and the C o m p a n y	Representative Director and the largest shareholder Owns 3,503,200 shares. Ownership Ratio of 31.35% The transaction with Satoru Kikugawa as of FY2013 March was as follows: (1) Loan JPY43,000 thousand (2) Loan Repayment JPY 43,000 thousand (3) Interest Expense JPY 1,797 thousand On September 17th, JPY88,550 thousand (550,000 shares) have been allotted to Satoru Kikugawa.

? As for Satoru Kikugawa, The Company has requested third-party credit reporting agency

D-Quest Inc. (Chiyodaku, Tokyo Founder and President Daisuke Wakiyama) on investigation and confirmed that he has no relationship with the antisocial forces. The report has been
submitted to the Tokyo Stock Exchange Inc.

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???Reason for Selection

Satoru Kikugawa is a Founder and Group CEO of the Company.
The Company has begun smartphone apps development from FY2015 Marc h, financed by third-party allotment, and proceeded on smartphone apps development. A part of the service has begun since December 11, 2013; however, it has not aacomplished recovery and sufficient finance.
In July 2013, Represemtative Director Satoru Kikugawa proposed to invest his personal
funds in order to carry out his responsibility as management and strive for fast recovery on the Company's performance during Group's severe financial shortage. The Board members considered the Company's situation; in order to accomplish financing and considering allotted party, all Directors decided without Satoru Kikugawa who is a person of special interest, all Directors other than Satoru Kikugawa who is a person of special interest agreed, and resolution was passed on third-party allotment.

???Policy of Holding Shares of the Company

Satoru Kikugawa has confirmed that he intends to hold the new shares long-term.
The Company will report selling of any new shares related to this third-party allotment within 2 years in written confirmation which will also be reported to the Tokyo Stock Exchange. He will consent to the substance of such report being made available for public inspection in written confirmation.

???Details of the Confirmation of the Payment Capacity

The Company has confirmed the copy of the bank statement of Satoru Kikugawa as well as interview with Satoru Kikugawa.

??Major Shareholders and Their Shareholding Ratio of the Company

Before Issuance?January 10, 2014?		After Issuance
Satoru Kikugawa	31.35?	Satoru Kikugawa	33.82?
Shusanji Religious Corp.	2.81?	Shusanji Religious Corp.	2.71?
Japan Securities Finance Co.	1.51?	Japan Securities Finance Co.	1.46?
Tadashi Kikugawa	1.07?	Tadashi Kikugawa	1.04?
Nomura Securities Co., Ltd.	0.87?	Nomura Securities Co., Ltd.	0.84?
Nomura Securities Co., Ltd. Net and Call	0.63?	Nomura Securities Co., Ltd. Net and Call	0.61?
Ichiro Kobayashi	0.63?	Ichiro Kobayashi	0.61?
Makoto Ito	0.53?	Makoto Ito		0.51?
Jinkichi Sudo	0.40?	Jinkichi Sudo	0.39?
Vector Inc.	0.39?	Vector Inc.		0.37?

(Footnote)1. In relations to number of shares owned, it has been calculated by using the number shown in

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the shareholders' list as of September 30, 2013 and stock split of 1:100 conducted as of October 1, 2013, and show ownership share as of January 10, 2014.
2. As of January 10, 2014, total number of shares issued is 11,173,300 shares.
3. Any amount less than the third decimal place is rounded off regarding ownership ratio.

??Future Prospects

This Third-Party Allotment does not have significant impact on the FY2014 March
Financial Statement.
(Matters Concerning Procedures in the Code of Corporate Conduct)

? Matters Concerning Procedures in the Code of Corporate Conduct

This Third-Party Alllotment 1. Has the dilution rate of less than 25% 2. Does not involve any change in the controlling shareholder(s) (although all stock options may be fully exercised and/or acquisition rights to stock options to be fully exercised . The Company is not required to obtain the opinion of an independent third-party or the confirm the consent of its shareholders concerning the Third-Party Allotment as provided for in Article 432 of the Securities Listing Regulations by the Tokyo Stock Exchange Inc.

??Business Results and Equity Finance Executed in the Last Three Years

???Consolidated Business Results for the Last Three Years (Unit: One Million JPY)

	FY2011 March	FY2012 March	FY2013 March
O p e r a t i n g r e v e n u e	4,559	4,266	2,169
O p e r a t i n g i n c o m e	41	?100	?820
O r d i n a r y i n c o m e	3	?85	?865
N e t i n c o m e	?271	?512	?2,268
Net income per share (JPY)	?25.51	?48.28	?213.55
Dividend per share (JPY)	?	?	?
Net assts per share (JPY)	266.92	204.50	8.95

*1:100 Stock split has been conducted effective October 1, 2013 in which Board resolution was paased on May 15, 2013. The above net income per share and net assets per share are shown assuming that the stock split has occurred.

???Total Number of Issued Shares and Dilutive Shares

Type	Number of Shares	R a t i o o f I s s u e d S h a r e s
To ta l N u m b e r of I ssue d S h a r e s	11,173,300 shares	100?
Number of Dilutive Shares as of current conversion p r i c e ( e x e r c i s e p r i c e )	?share	??
Number of Dilutive Shares a s o f l o w e s t c o n v e r s i o n p r i c e ( e x e r c i s e p r i c e )	?share	??
Number of Dilutive Shares as of highest conversion p r i c e ( e x e r c i s e p r i c e )	?share	??

???Recent Stock Prices

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?Stock Prices for the Last Three Years

	FY2011 March	FY2012 March	FY2013 March
Opening	JPY51,100	JPY23,250	JPY18,370
High	JPY73,500	JPY38,700	JPY28,480
Low	JPY17,500	JPY16,500	JPY7,400
Closing	JPY23,450	JPY18,030	JPY14,740

? Stock Prices of the Last Six Months

	Jul	Aug	Sep	Oct	Nov	Dec
Opening	JPY12,750	JPY17,420	JPY166	JPY170	JPY154	JPY157
High	JPY23,940	JPY19,790	JPY223	JPY182	JPY178	JPY331
Low	JPY12,520	JPY14,200	JPY164	JPY144	JPY150	JPY157
Closing	JPY17,410	JPY16,410	JPY169	JPY161	JPY157	JPY256

(Footnote) As of October 1, 2013, 1:100 stock split has been conducted based on Board resolution on May 15,
2013. The trading unit has been changed to 100 since September 26, 2013; stock price after stock-split is shown since September.

? Stock Price on the Business Day Immediately Preceding the Date of the Resolution Authorizing the

Issuance

	January 9, 2014
Opening	240JPY
High	245JPY
Low	240JPY
Closing	240JPY

???Equity Finance in the Last Three Years

?Third-Party Allotment

P a y m e n t D a t e	2013/9/17
A m o u n t F i n a n c e d	JPY 87,650,000?Estimated?
I s s u e P r i c e	JPY161
N u m b e r o f s h a r e s i s s u e d p e r s u b s c r i p t i o n	10,623,000
N u m b e r o f s h a r e s i s s u e d i n t h i s a l l o t m e n t	550,000
N u m b e r o f s h a r e s a f t e r a l l o t m e n t	11,173,000
A l l o t t e d t o	Satoru Kikugawa
Purpose of Financial U s e u p o n i s s u a n c e	the Company's working capital and smartphone business fund for Gala Lab Corp.
U s a g e P e r i o d	September 2013 to November 2013
A c t u a l U s a g e	the Company's working capital and smartphone business fund for Gala Lab Corp.

(Footnote) As of October 1, 2013, 1:100 stock split has been conducted based on Board resolution on May
15, 2013. The above shows assuming stock split has been already conducted.

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10?Terms and Conditions of Issuance
1) Type of Shares to be Newly Issued: 416,000 shares of common stock
2) Amount to Be Paid: JPY240 per share
3) Agrregate Amount to Be Paid: JPY99,840,000
4) Amount of Increase in Stated Capital: JPY120 per share
Amount of Increase in APIC: JPY120 per share
5) Subscription Date: Janaury 27, 2014
6) Payment Date: Janaury 27, 2014
7) Party to Which Shares Will Be Allotted and Number of Shares to Be Allotted: Representative Director Satoru Kikugawa, 416,000 shares
8) Location of Deposit: SMBC Ebisu Branch
9) Allotment Date: Janaury 27, 2014
10) Any other issue related to new share issuance will be decided at the BOD Meeting.

Disclaimer: This summarized translation is provided for convenience only. In the event of any discrepancy with the Japanese original, the original shall prevail.

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