UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2007
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
Amaru, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Nevada 88-0490089
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
112 Middle Road, #08-01 Midland House, Singapore 188970
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (011)(65) 6332 9287
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 Of the Exchange Act.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 Of the Exchange Act.
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 159,431,861 shares
----------------------------- ---------------------------------
(Class) (Outstanding at September 30, 2007)
AMARU, INC. AND SUBSIDARIES
2007 Quarterly Report on Form 10-Q
TABLE OF CONTENTS
PART 1: FINANCIAL INFORMATION
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income F-4,5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-23
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 1-8
AND RESULTS OF OPERATIONS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 9-10
ITEM 4: CONTROLS AND PROCEDURES 11
PART 2: OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS 12
ITEM 1A: RISK FACTORS 12 to 14
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS 15
SIGNATURES 16
F-1
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------ ------------
ASSETS (UNAUDITED) (AUDITED)
Current assets
Cash and cash equivalents $ 2,602,380 $ 2,294,984
Accounts receivable, net 4,616,353 2,106,647
Equity securities held for trading 5,934,000 --
Other current assets 4,250,964 539,604
Inventories 1,154,854 1,689,634
------------ ------------
Total current assets 18,558,551 6,630,869
Non-current assets
Property and equipment, net 1,570,200 1,215,744
Intangible assets, net 28,919,099 28,886,883
Associate 4,957,288 --
Available-for-sale of equity securities 9,105,413 12,158,351
------------ ------------
Total non-current assets 44,552,000 42,260,978
------------ ------------
Total assets $ 63,110,551 $ 48,891,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,367,116 $ 2,101,970
Other payables 157,100 --
Advance from related party 100,695 --
Finance lease liabilities 10,477 --
Income taxes payable 5,428 58,473
------------ ------------
Total current liabilities 2,640,816 2,160,443
Non-current liabilities
Deferred tax liabilities 2,718,624 1,684,158
Hire purchase creditor 58,498 --
------------ ------------
Total non-current liabilities 2,777,122 1,684,158
------------ ------------
Total liabilities 5,417,938 3,844,601
Minority interests 4,174,850 --
Commitments -- --
Stockholders' equity
Preferred stock (par value $0.001) 5,000,000 shares authorized;
0 shares issued and outstanding at September 30, 2007 and
December 31, 2006, respectively -- --
Common stock (par value $0.001) 200,000,000 shares authorized;
159,431,861 and 153,638,528 shares issued and outstanding at
September 30, 2007 and December 31, 2006, respectively 159,431 153,638
Additional paid-in capital 42,918,666 38,942,126
Subscribed common stock, 0 and 420,000 shares at September 30, 2007
and December 31, 2006, respectively -- 189,000
Retained earnings 6,747,032 2,084,908
Accumulated other comprehensive income 3,692,634 3,677,574
------------ ------------
Total stockholders' equity 53,517,763 45,047,246
------------ ------------
Total liabilities and stockholders' equity $ 63,110,551 $ 48,891,847
============ ============
See accompanying notes to consolidated financial statements
F-2
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
------------- ------------- ------------- -------------
Revenue:
Entertainment $ 15,036,991 $ 6,305,460 $ 2,302 $ 3,089,981
Digit gaming 16,481,642 17,310,828 6,021,851 6,216,485
Other income -- 9,794 -- 8,650
------------- ------------- ------------- -------------
Total revenue 31,518,633 23,626,082 6,024,153 9,315,116
Cost of services (17,553,771) (17,056,214) (6,261,636) (6,082,911)
------------- ------------- ------------- -------------
Gross profit (loss) 13,964,862 6,569,868 (237,483) 3,232,205
Distribution costs (677,357) (857,412) (171,704) (297,883)
Administrative expenses (5,152,899) (3,278,355) (1,631,683) (1,596,344)
------------- ------------- ------------- -------------
Total expenses (5,830,256) (4,135,767) (1,803,388) (1,894,227)
Income (loss) from operations 8,134,606 2,434,101 (2,040,871) 1,337,978
Other expenses:
Interest expenses (678) -- (507) --
Interest income 36,489 109,336 10,388 51,465
Loss on disposal of equipment (152) -- -- --
Gain on dilution of interest in subsidiary 2,483,871 -- -- --
Net change in fair value of financial assets
at fair value through Profit or Loss-held for trading (4,002,000) -- (8,322,000) --
Share of loss of associate (8,827) -- (6,397) --
------------- ------------- ------------- -------------
Income (loss) before income taxes 6,643,309 2,543,437 (10,346,745) 1,389,443
(Provision) Benefit for income taxes (902,464) (405,539) 683,968 (472,004)
------------- ------------- ------------- -------------
Net income (loss) $ 5,740,845 $ 2,137,898 $ (9,662,777) $ 917,439
============= ============= ============= =============
Attributable to:
Equity holders of the Company $ 4,662,124 $ 2,137,898 $ (7,966,020) $ 917,439
Minority interests 1,078,721 -- (1,696,757) --
------------- ------------- ------------- -------------
Net income (loss) $ 5,740,845 $ 2,137,898 $ (9,662,277) $ 917,439
============= ============= ============= =============
Net income per share
- basic and diluted $ 0.01 $ 0.01 $ (0.06) $ 0.01
============= ============= ============= =============
Weighted average number of common shares outstanding
- basic and diluted 155,577,356 146,563,354 158,794,180 153,605,863
============= ============= ============= =============
See accompanying notes to consolidated financial statements
F-3
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------
NUMBER PAR PAR ADDITIONAL SUBSCRIBED
OF VALUE NUMBER OF VALUE PAID-IN COMMON RETAINED
SHARES ($0.001) SHARES ($0.001) CAPITAL STOCK EARNINGS
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31,
2005 -- -- 125,591,120 $ 125,591 $14,642,550 $ 4,256,880 $ 834,379
Common stock
issued for
cash -- -- 15,339,568 15,339 11,255,404 -- --
Common stock
issued for
services -- -- 40,000 40 59,960 -- --
Subscribed
common stock
issued -- -- 5,675,840 5,676 4,251,204 (4,256,880) --
Common stock
issued in
exchange for
acquisition
of film library -- -- 6,992,000 6,992 8,733,008 -- --
Common stock
subscribed
for services
(420,000 shares) -- -- -- -- -- 189,000 --
Net income -- -- -- -- -- -- 1,250,529
Change in
fair value
of available
for-sale-equity
securities
net of tax -- -- -- -- -- -- --
Comprehensive
income -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31,
2006 -- -- 153,638,528 $ 153,638 $38,942,126 $ 189,000 $ 2,084,908
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-4a
continued below:
continued from above
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE MINORITY SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
----------- ----------- ----------- -----------
Balance at
December 31,
2005 $ 12,927 $ -- $ -- $19,872,327
Common stock
issued for
cash -- -- -- 11,270,743
Common stock
issued for
services -- -- -- 60,000
Subscribed
common stock
issued -- -- -- --
Common stock
issued in
exchange for
acquisition
of film library -- -- -- 8,740,000
Common stock
subscribed
for services
(420,000 shares) -- -- -- 189,000
Net income -- -- -- 1,250,529
Change in
fair value
of available
for-sale-equity
securities
net of tax -- 3,664,647 -- 3,664,647
-----------
Comprehensive
income -- -- -- 4,915,176
----------- ----------- ----------- -----------
Balance at
December 31,
2006 $ 12,927 $ 3,664,647 $ -- $45,047,246
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-4b
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
PREFERRED STOCK COMMON STOCK
-------------------------- --------------------------
NUMBER PAR PAR ADDITIONAL SUBSCRIBED
OF VALUE NUMBER OF VALUE PAID-IN COMMON RETAINED
SHARES ($0.001) SHARES ($0.001) CAPITAL STOCK EARNINGS
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31,
2006 -- -- 153,638,528 $ 153,638 $ 38,942,126 $ 189,000 $ 2,084,908
Subscribed common
Stock issued -- -- 420,000 420 188,580 (189,000) --
Common stock issued
for services -- -- 40,000 40 59,960 -- --
Common stock issued
In exchange for
Prepayment of investment -- -- 5,333,333 5,333 3,728,000 -- --
Contribution from
minority interest -- -- -- -- -- -- --
Gain on dilution of
interest in
subsidiary -- -- -- -- -- -- --
Net income -- -- -- -- -- -- 4,662,124
Change in fair value
of available-for-sale
equity securities
net of tax -- -- -- -- -- -- --
Comprehensive
income -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, -- -- 159,431,861 $ 159,431 $ 42,918,666 -- $ 6,747,032
2007 ============ ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5a
continued below
continued from above
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE MINORITY STOCKHOLDERS'
RESERVE RESERVE INTEREST EQUITY
------------ ------------ ------------ ------------
Balance at
December 31,
2006 $ 12,927 $ 3,664,647 $ -- $ 45,047,246
Subscribed common
Stock issued -- -- -- --
Common stock issued
for services -- -- -- 60,000
Common stock issued
In exchange for
Prepayment of investment -- -- -- 3,733,333
Contribution from
minority interest -- -- 5,580,000 5,580,000
Gain on dilution of
interest in
subsidiary -- -- (2,483,871) (2,483,871)
Net income -- -- 1,078,721 5,740,845
Change in fair value
of available-for-sale
equity securities
net of tax -- 15,060 -- 15,060
------------
Comprehensive
income -- -- -- 5,755,905
------------ ------------ ------------ ------------
Balance at
September 30, $ 12,927 $ 3,679,707 $ 4,174,850 $ 57,692,613
2007 ============ ========== =========== ============
See accompanying notes to consolidated financial statements
F-5b
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,740,845 $ 2,137,898
Adjustments for:
Amortization 2,308,179 716,125
Depreciation 406,141 147,781
Loss on disposal of equipment 152 --
Acquisition of investment in exchange for account receivable (11,636,000) (3,000,000)
Gain on dilution of interest in a subsidiary (2,483,871) --
Net change in fair value of financial assets at fair value
through Profit or Loss-held for trading 4,002,000 --
Common stock issued for services 60,000 60,000
Common stock issued in exchange for prepayment of investment 3,733,333 --
Deferred tax 902,464 --
Share of loss of associate 8,827 --
Changes in operation assets and liabilities
Accounts receivable (2,509,706) 441,791
Inventories 534,780 (695,352)
Other current assets (3,711,360) (879,421)
Accounts payable and accrued expenses 265,146 158,202
Other payables 157,100 --
Income taxes payable (53,045) 405,539
------------ ------------
Net cash used in operating activities (2,275,015) (507,437)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment 691 --
Acquisition of equipment (761,440) (708,393)
Acquisition of associate (66,115) --
Acquisition of investments -- (638,458)
Acquisition of intangible assets (2,340,395) (8,521,180)
Deposit paid for an investment -- (2,153,196)
------------ ------------
Net cash used in investing activities (3,167,259) (12,021,227)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of balances due to related party -- (58,392)
Proceeds from related party 100,695 --
Proceeds from hire purchase creditor 68,975 --
Proceeds from issuance of common stock -- 11,272,630
Capital contributed by minority shareholders 5,580,000 --
------------ ------------
Net cash provided by financing activities 5,749,670 11,214,238
Effect of exchange rate changes on cash and cash equivalents -- --
------------ ------------
Cash flows from all activities 307,396 (1,314,426)
Cash and cash equivalents at beginning of period 2,294,984 4,776,819
------------ ------------
Cash and cash equivalents at end of period $ 2,602,380 $ 3,462,393
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Acquisition of investments (1) $ 11,636,000 --
============ ============
Common stock in exchange for acquisition of film library $ -- $ 8,740,000
============ ============
Common stock in exchange for prepayment of investment 3,733,333 --
============ ============
Subscribed common stock issued $ -- $ 4,256,880
============ ============
(1) On February 15, 2007, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd
subscribed for additional 4% interest in an investment for $1.7 million in exchange for
the settlement of an accounts receivables from the investee company.
On June 27, 2007, M2B World Holdings Limited, a wholly owned subsidiary of M2B World Asia
Pacific Pte. Ltd, received $2.7 million in quoted equity securities in exchange for
accounts receivable from a company, as part of the sales and purchase agreement with the
company. Subsequent to June 27, 2007, the remaining shares were received.
(2) On July 11, 2007, Tremax International Limited, a wholly owned subsidiary of Amaru Inc,
issued 5,333,333 shares of common stock in exchange for an investment in a company, as
part of the sales and purchase agreement with the company.
See accompanying notes to consolidated financial statements
F-6
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
1. BASIS OF PRESENTATION
1.1 Description of Business
Amaru, Inc. (the Company) through its subsidiaries under the M2B
brand is in the Broadband Media Entertainment business, and a
provider of interactive Entertainment-on-demand, Education-on-demand
and E-commerce streaming over Broadband channels, Internet portals
and Third-Generation (3G) devices globally. It has launched multiple
Broadband TV and integrated shopping websites with multiple channels
of content designed and programmed to target specific viewer
profiles and lifestyles of local and international audiences. The
Company controls substantial content libraries for aggregation,
distribution and syndication on Broadband and other media, sourced
from Hollywood and major content providers around the world.
The Company's business strategy is to be a diversified media company
specializing in the interactive media industry, using the latest
broadband, E-Commerce and communications technologies and access to
international content and programming.
The Company's goal is to provide on-line entertainment and education
on-demand on Broadband channels, Internet portals and 3G devices
across the globe; for specific and identified viewer lifestyles,
demographics and interests; and to tie the viewing experience to an
on-line shopping experience. This is to enable two leisure
activities to be rolled into one for the ultimate convenience and
reaching out to a global viewing audience.
1.2 Basis of Presentation
The financial statements included herein are unaudited. However,
such information reflects all adjustments (consisting solely of
normal occurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the
interim periods. The results of operations for the nine months ended
September 30, 2007, are not necessarily indicative of the results to
be expected for the full year.
The accompanying financial statements do not include footnote and
certain financial presentation normally required under generally
accepted accounting principles, and, therefore, should be read in
conjunction with the company's Annual report on Form 10-KSB for the
year ended December 31, 2006.
F-7
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
1.3 Recent Accounting Standards and Pronouncements
In 2006, the FASB issued Interpretation No. 48 (FIN 48), "
Accounting for Uncertainty in Income Taxes - an Interpretation of
FASB Statement No. 109 Accounting for Income Taxes." FIN 48
clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with SFAS 109.
FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48
provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN 48 as of January 1, 2007, as required.
The current Company policy classifies any interest recognized on an
underpayment of income taxes as interest expense and classifies any
statutory penalties recognized on a tax position taken as selling,
general and administrative expense. There were no interest or
selling, general and administrative expenses accrued or recognized
related to income taxes for the nine months ended September 30,
2007. The Company has not taken a tax position that would have a
material effect on September 30, 2007 or during the prior three
years applicable under FIN 48. It is determined not to be reasonably
possible for the amounts of unrecognized tax benefits to
significantly increase or decrease within 12 months of the adoption
of FIN 48. The Company is currently subject to a three year statute
of limitations by major tax jurisdictions.
F-8
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Principles of Consolidation
The consolidated financial statements include the financial
statements of Amaru, Inc. and its majority owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. In addition, the Company evaluates its
relationships with other entities to identify whether they are
variable interest entities as defined by FASB Interpretation No. 46
(R) Consolidation of Variable Interest Entities ("FIN 46R") and to
assess whether it is the primary beneficiary of such entities. If
the determination is made that the Company is the primary
beneficiary, then that entity is included in the consolidated
financial statements in accordance with FIN 46(R).
2.2 Use of Estimates
The preparation of the consolidated financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the period. Significant items subject to such
estimates and assumptions include carrying amount of property and
equipment, intangibles, valuation allowances of receivables and
inventories. Actual results could differ from those estimates.
Management has not made any subjective or complex judgments the
application of which would result in any material differences in
reported results.
2.3 Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand, demand
deposits and short-term, highly liquid investments readily
convertible to cash and subject to insignificant risk of changes in
value.
Cash in banks and short-term deposits are held to maturity and are
carried at cost. For the purposes of the consolidated statements of
cash flows, cash and cash equivalents consist of cash on hand and
deposits in banks, net of outstanding bank overdrafts.
The Company monitors its liquidity risk and maintains a level of
cash and cash equivalents deemed adequate by management to finance
the Company's operations and to mitigate the effects of fluctuations
in cash flows.
F-9
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2.4 Trade Accounts Receivable
Trade accounts receivable, which generally have 30 to 90 days terms,
are recorded at the invoiced amount less an allowance for any
uncollectible amounts (if any) and do not bear interest. Amounts
collected on trade accounts receivable are included in net cash
provided by operating activities in the consolidated statements of
cash flows. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. Account balances are charged
off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. Bad
debts are written off as incurred. The Company does not have any
off-balance sheet credit exposure related to its customers.
The Company's primary exposure to credit risk arises through its
trade accounts receivable. The credit risk on liquid funds is
limited because the counterparties are banks with high credit
ratings assigned by international credit-rating agencies.
Entertainment revenues were concentrated with one customer totaling
99.8% of these related revenues for the nine months ended September
30, 2007 and four customers totaling 96.7% of these related revenues
for the nine months ended September 30, 2006.
The Company's operations are conducted over the world wide web and
some purchases are made from locations outside of Singapore.
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
------------ ----------- ------------ ------------
Sales outside of the U.S. $31,518,290 $23,626,082 $ 6,024,096 $ 9,315,116
Services purchased outside $ 17,449,405 $17,056,214 $ 6,189,248 $ 6,082,911
of the U.S.
2.5 Inventories
Inventories are carried at the lower of cost and net realizable
value. Cost is calculated using first-in, first-out ("FIFO") method
and comprises all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location
and condition. Inventories comprised primarily of finished products
used in the Company's IPTV service.
2.6 Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets for financial reporting purposes. Expenditures for major
renewals and betterments that extend the useful lives are
capitalized. Expenditures for normal maintenance and repairs are
expensed as incurred. The cost of assets sold or abandoned and the
related accumulated depreciation are eliminated from the accounts
and any gains or losses are reflected in the accompanying
consolidated statement of income of the respective period. The
estimated useful lives of the assets range from 3 to 5 years.
F-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2.7 Intangible Assets
Intangible assets consist of film library, gaming and software
license and product development costs. Intangible assets which were
purchased and have indefinite lives are stated at cost less
impairment losses and are tested for impairment at least annually
in accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible Assets.
Intangible assets which were purchased for a specific period are
stated at cost less accumulated amortization and impairment losses.
Such intangible assets are reviewed for impairment in accordance
with FASB Statement No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets. Such intangible assets are amortized over the
period of the contract, which is two to 18 years.
Included in the gaming license are the rights to a digit games
license in Cambodia. The license is for a minimum period of 18 years
commencing from September 1, 2005, with an option to extend for a
further 5 years or such other period as may be mutually agreed.
The Company capitalized the development and building cost related to
the broad-band sites and infrastructure for the streaming system,
most of which was developed in 2002 as product development costs.
The Company projects that these development costs will be useful for
up to five years before additional significant development needs to
be done.
2.8 Associate
An associate is an entity over which the Company has significant
influence and that is neither a subsidiary nor an interest in a
joint venture. Significant influence is the power to participate in
the financial and operating policy decisions of the investee but is
not control or joint control over those policies.
The results and assets and liabilities of associates are
incorporated in these financial statements using the equity method
of accounting. Under the equity method, investments in associates
are carried in the consolidated balance sheet at cost as adjusted
for post-acquisition changes in the Company's share of the net
assets of the associate, less any impairment in the value of
individual investments. Losses of an associate in excess of the
group's interest in that associate (which includes any long-term
interests that, in substance, form part of the Company's net
investment in the associate) are not recognised, unless the group
has incurred legal or constructive obligations or made payments on
behalf of the associate.
Any excess of the cost of acquisition over the Company's share of
the net fair value of the identifiable assets, liabilities and
contingent liabilities of the associate recognised at the date of
acquisition is recognised as goodwill. The goodwill is included
within the carrying amount of the investment and is assessed for
impairment as part of the investment. Any excess of the Company's
share of the net fair value of the identifiable assets, liabilities
and contingent liabilities over the cost of acquisition, after
reassessment, is recognised immediately in the consolidated profit
and loss statement.
Where a group entity transacts with an associate of the group,
profits and losses are eliminated to the extent of the group's
interest in the relevant associate.
F-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2.9 Investments
The Company classifies its investments in marketable equity and debt
securities as "available-for-sale", "held to maturity" or "trading"
at the time of purchase in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115").
Available-for-sale securities are carried at fair value with
unrealized gains and losses, net of related tax, if any, reported as
a component of other comprehensive income (loss) until realized.
Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis. A
decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary will result in an
impairment, which is charged to earnings.
Available-for-sale securities that are not publicly traded or have
resale restrictions greater than one year are accounted for at cost.
The Company's cost method investments include companies involved in
the broadband and entertainment industry. The Company uses available
qualitative and quantitative information to evaluate all cost method
investment impairments at least annually.
F-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2.10 Valuation of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets to be
held and used, other than intangible assets with indefinite lives,
when events or circumstances warrant such a review. No impairment
losses were recorded for the nine months ended September 30, 2007
and the three months ended September 30, 2007.
2.11 Investments at fair value through profit or loss
An instrument is classified as at fair value through profit or loss
if it is held for trading or is designated as such upon initial
recognition. Financial instruments are designated as fair value
through profit or loss if the Company manages such investments and
makes purchase and sales decisions based on their fair value. Upon
initial recognition, attributable transaction costs are recognised
in the income statement when incurred. Financial instruments at fair
value through profit or loss are measured at fair value, and changes
therein are recognized in the income statement.
2.12 Advances from Related Party
Advances from related party are unsecured, non-interest bearing and
payable on demand.
2.13 Leases
Leased assets in which the Company assumes substantially all the
risks and rewards of ownership are classified as finance leases.
Upon initial recognition, property, plant and equipment acquired
through finance leases are capitalized at the lower of its fair
value and the present value of the minimum lease payments.
Subsequent to recognition, the asset is accounted for in accordance
with the accounting policy applicable to that asset. Leased assets
are depreciated over the shorter of the lease term and their useful
lives. Lease payments are apportioned between finance expense and
reduction of the lease liability. The finance expense is allocated
to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability.
Contingent lease payments are accounted for by revising the minimum
lease payments over the remaining term of the lease when the lease
adjustment is confirmed.
2.14 Foreign Currency Translation
Transactions in foreign currencies are translated at foreign
exchange rates ruling at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies at the
balance sheet date are translated into US dollars at foreign
exchange rate ruling at that date. Non-monetary assets and
liabilities measured at cost in a foreign currency are translated
using exchange rates at the date of the transaction. Foreign
currency transaction gains and losses are included in determining
net income and were not significant.
2.15 Revenues
Subscription and related services revenues are recognized over the
period that services are provided. Advertising and sponsorship
revenues are recognized as the services are performed or when the
goods are delivered. Licensing and content syndication revenue is
recognized when the license period begins, and the contents are
available for exploitation by customer, pursuant to the terms of the
license agreement. Gaming revenue is recognized as earned net of
winnings. E-commerce commissions are recognized as received.
Broadband consulting services and on-line turnkey solutions revenue
are recognized as earned.
2.16 Costs of Services
The cost of services pertaining to advertising and sponsorship
revenue and subscription and related services are cost of bandwidth
charges, channel design and alteration, copyright licensing, and
hardware hosting and maintenance costs. The cost of services
pertaining to E-commerce revenue is channel design and alteration,
and hardware hosting and maintenance costs. The cost of services
pertaining to gaming is for managing and operating the operations
and gaming centers. All these costs are accounted for in the period
it was incurred.
F-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2.17 Income Taxes
Deferred income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income taxes are measured using enacted tax rates
expected to apply to taxable income in years in which such temporary
differences are expected to be recovered or settled. The effect on
deferred income taxes of a change in tax rates is recognized in the
statement of income of the period that includes the enactment date.
In addition, a valuation allowance is established to reduce any
deferred tax asset for which it is determined that it is more likely
than not that some portion of the deferred tax asset will not be
realized.
2.18 Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued FAS No. 128 "Earnings Per Share" which requires the Company
to present basic and diluted earnings per share, for all periods
presented. The computation of earnings per common share (basic and
diluted) is based on the weighted average number of shares actually
outstanding during the period. The Company has no common stock
equivalents, which would dilute earnings per share.
2.19 Financial Instruments
The carrying amounts for the Company's cash, other current assets,
accounts payable, accrued expenses and other liabilities approximate
their fair value.
2.20 Advertising
The cost of advertising is expensed as incurred. For the nine
months ended September 30, 2007 and 2006, the Company incurred
advertising expenses of $408,857 and $629,573 respectively. For
the three months ended September 30, 2007 and 2006, the Company
incurred advertising expenses of $91,420 and $207,742 respectively.
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
2.21 Reclassifications
Certain amounts in the previous periods presented have been
reclassified to conform to the current year financial statement
presentation.
3. EQUITY SECURITIES HELD FOR TRADING INVESTMENT
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------ ------------
Quoted equity security, at fair value $ 5,934,000 $ --
============ ============
The fair value of quoted security is based on the quoted closing market
price on the date of Sale and Purchase agreement. The investment in quoted
equity security at fair value includes an impairment loss of US$4 million.
The investments in quoted equity securities comprised of 69,000,000 common
shares of PT Agis at the market value of $0.086 per share.
The Company's equity securities held for trading investment is denominated
in Indonesian Ruppiah.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Prepayments $ 202,076 177,278
Prepayment for investment 3,733,333 --
Deposits 193,483 172,882
Other receivables 122,072 189,444
------------- ------------
$ 4,250,964 539,604
============= ============
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Office equipment $ 781,254 721,085
Motor vehicle 112,563 11,000
Furniture, fixture and fittings 589,773 556,069
Set-top boxes 830,828 265,681
------------- ------------
2,314,418 1,553,835
Accumulated depreciation (744,218) (338,091)
------------- ------------
$ 1,570,200 $ 1,215,744
============= ============
Depreciation expense was $406,141 for the nine months ended September 30,
2007 and $147,781 for nine months ended September 30, 2006.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
INDEFINITE LIVES
Film library $ 17,729,172 $ 17,674,378
Software license 2,420,227 2,420,227
------------- ------------
20,149,399 20,094,605
DEFINITE USEFUL LIVES
Film library 5,224,078 2,947,564
Gaming license 7,090,000 7,090,000
Product development expenditures 678,616 669,529
------------- ------------
12,992,694 10,707,093
Accumulated amortization (4,222,994) (1,914,815)
------------- ------------
8,769,700 8,792,278
------------- ------------
$ 28,919,099 $ 28,886,883
============= ============
Intangible assets purchased and have indefinite lives are stated at cost
less impairment losses are tested for impairment at least annually in
accordance with the provisions of FASB Statement No. 142, Goodwill and
Other Intangible Assets.
FILM LIBRARY WITH INDEFINITE LIVES
Intangible assets of the Company which have been classified as having
indefinite useful lives relate to film library rights acquired for
perpetuity by the Company.
Film costs are stated at the lower of estimated net realizable value
determined on an individual film basis, or cost. Film costs represent the
acquisition of film rights for cash.
The Company maintains distribution rights to these films for which it has
no financial obligations to third parties.
The Company is currently directing all its time and efforts towards
building its broadband business.
The Company evaluates the recoverability of its long lived assets in
accordance with the provisions of Statement of Financial Accounting
Standards No. 142 "Goodwill and the Intangible Assets," in which
intangible assets purchased and which have indefinite lives are stated at
cost less impairment losses and are tested for impairment at least
annually.
Recoverable amount is the higher of fair value less costs to sell and
value in use. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the
risks specific to the asset. The use of a discounted cash flow model often
involves the use of significant estimates and assumptions. Estimates are
based upon assumptions about future demand and market conditions and can
vary significantly. When necessary, the Company uses internal cash flow
estimates, quoted market prices or appraisals, as appropriate, to
determine fair value. If the recoverable amount of an asset is estimated
to be less than its carrying amount, the carrying amount of the asset is
reduced to its recoverable amount. An impairment loss is recognized
immediately in the profit and loss statement, unless the relevant asset is
carried at a revalued amount, in which case the impairment loss is treated
as a revaluation decrease.
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
The estimation of fair value is in accordance with AICPA Statement of
Position 00-2, Accounting by Producers and Distributors of Film. Actual
results may differ from estimates and as a result the estimation of fair
values may be adjusted in the future.
Valuations were performed for the assessments of impairment of the
Company's 100% ownership of the film library, which reflected a higher
value from its cost. The methods of valuation used by the Company
consisted of a discounted cash flow model, as well as sales transactions
comparison method and market earnings/multiples method. Based on careful
analysis of information available, the estimation for the investment value
of the film library currently ranges from $400 million to $663 million.
ASSETS WITH DEFINITE USEFUL LIVES
Intangible assets which were purchased for a specific period are stated at
cost less accumulated amortization and impairment losses. Such intangible
assets are reviewed for impairment in accordance with FASB Statement No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. Such
intangible assets are amortized over the period of the contract, which is
two to 18 years.
Included in the gaming license are the rights to a digit games license in
Cambodia. The license is for a minimum period of 18 years commencing from
June 1, 2005, with an option to extend for a further 5 years or such other
period as may be mutually agreed. The Company capitalized the development
and building cost related to the broad-band sites and infrastructure for
the streaming system, most of which was developed in 2002 as product
development costs. The Company projects that these developments costs will
be useful for up to five years before additional significant development
needs to be done.
Amortization expense was $2,308,179 for the nine months ended September
30, 2007 and $716,125 for the nine months ended September 30, 2006.
7. ASSOCIATE
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Fair value of investment in associate $ 3,693,650 $ --
Goodwill 1,272,465 --
Share of post-acquisition loss (8,827) --
------------- ------------
$ 4,957,288 $ --
============= ============
Details of the Company's associate at September 30, 2007 are as follows:
Name of Business: 121 View Corporation (SEA) Ltd
Place of Incorporation: British Virgin Islands
Principle of Activity: Digital signage solutions
Proportion of : SEPTEMBER 30, 2007 DECEMBER 31, 2006
Ownership Interest ------------------ -----------------
30.1% 25.0%
One of the directors of the Company has interests in the associated
company and one of the directors of the Company is also a director in the
associated company.
On April 20, 2007, M2B World Asia Pacific Pte. Ltd subscribed for
additional 0.2% interest in the investee company, for an investment of
$66,115.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
Summarised financial information in respect of the Company's associate is
set out below:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Total assets $ 9,658,949 $ --
Total liabilities (297,502) --
------------- ------------
Net assets $ 9,361,447 $ --
============= ============
Company's share of associate's net assets $ 2,817,796 --
============= ============
Revenue $ 152,684 --
============= ============
Loss for the period $ (27,537) --
============= ============
Company's share of associate's loss for
the period $ (8,827) --
============= ============
8. AVAILABLE-FOR-SALE EQUITY SECURITIES
Available-for-sale equity securities consist of the following:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Quoted equity securities $ 5,823,136 $ 5,676,074
Unquoted equity securities 3,282,277 6,482,277
------------- ------------
$ 9,105,413 $ 12,158,351
============= ============
The investments in quoted equity securities comprised of 36,428,571 common
shares of Auston International Group Ltd (Auston). As of September 3,
0007, the market value of the Auston shares was $0.16 per share.
The unquoted equity securities classified as available-for-sale, with a
carrying value of $3,282,277 and $6,482,277 as of September 30, 2007 and
December 31, 2006, respectively, are measured at cost less impairment
losses as there is no quoted market price in an active market and other
methods of determining fair value do not result in a reasonable estimate.
The Company explores other alternatives and considers using other
valuation techniques to establish the fair value. Valuation techniques
include using recent arm's length market transactions between
knowledgeable and willing parties. However, as the key investments held by
the Company operate in Singapore, there are no established markets in
Singapore for similar investments for the Company to obtain comparables
and observable data to carry out a reliable fair valuation.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
9. COMMITMENTS
As of the balance sheet date, the Company has the following capital
commitments:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 4,294,375 $ 4,254,372
Set-top boxes 2,567,340 2,562,000
Other equipments 499,863 --
------------- ------------
$ 7,361,578 $ 6,816,372
============= =============
The Company has several noncancelable operating leases, primarily for
office spaces, that expire over the next five years.
As of September 30, 2007, the Company has commitments for future minimum
lease payments under non-cancellable operating leases (with initial or
remaining lease terms in excess of one year) as follows:
OPERATING
LEASES
-----------
Year ending December 31,
2007 111,149
2008 463,796
2009 189,729
-----------
Total minimum lease payments $ 764,674
===========
Rent expense totaled $252,585 for the nine months ended September 30, 2007
and 150,723 for the nine months ended September 30, 2006.
10. CAPITAL STOCK
(a) Common stock issued for services
On March 19, 2007, the Company issued 40,000 shares of common stock
in a private placement at a price of $1.50 per share for a total
amount of $60,000 for services rendered to the Company.
(b) Common stock issued to employees
On December 20, 2006, 420,000 shares of common stock were approved
for issuance at a price of $0.45 a share to its employees. These
shares were issued on March 2, 2007 to the employees for their
services to the Company pursuant to the Company's 2004 Equity
Compensation Plan (the "Plan"). The shares of common stock issued to
the employees pursuant to the Plan have been registered on the
registration statement on Form S-8.
(c) Common stock issued for acquisition of investment
On July 11, 2007, 5,333,333 shares of common stock of the Company
were approved for issuance for the acquisition of an equity
investment in a company. The market value of the Company's shares at
July 11, 2007 was $0.70 per share.
F-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
11. INCOME TAXES
The Company files separate tax returns for Singapore and the United
States of America.
The Company had available approximately $5,234,949 of unused U.S. net
operating loss carry-forwards at September 30, 2007, that may be applied
against future taxable income. These net operating loss carry-forwards
expire for U.S. income tax purposes beginning in 2026. There is no
assurance the Company will realize the benefit of the net operating loss
carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. As of September 30, 2007 the Company maintained a valuation
allowance for the U.S. deferred tax asset due to uncertainties as to the
amount of the taxable income from U.S. operations that will be realized.
The Company had available approximately $nil of unused Singapore capital
allowance carry-forwards at September 30, 2007, that may be applied
against future Singapore taxable income indefinitely provided the company
satisfies the shareholdings test for carry-forward of tax losses and
capital allowances.
12. SEGMENT REPORTING
The Company classifies its business into reportable segments. The segments
consists principally of entertainment and digit gaming. Information as to
the operations of the Company in each of its business segments is set
forth below based on the nature of the products and services offered.
The Company has provided a summary of operating income by segment. The
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies in Note 2.
2007
Entertainment Digit Gaming Other Total
------------ ------------ ------------ ------------
Revenues from external customers $ 15,036,991 $ 16,481,642 $ -- $ 31,518,633
Interest revenue $ 36,489 $ -- $ -- $ 36,489
Interest expenses $ 678 $ -- $ -- $ 678
Depreciation and amortization $ 2,490,403 $ 223,917 $ -- $ 2,714,320
Segment profit $ 8,135,309 $ 320,323 $ -- $ 8,455,632
Segment assets $ 53,361,216 $ 7,325,817 $ 2,423,518 $ 63,110,551
Expenditures for segment assets $ 3,101,835 $ -- $ -- $ 3,101,835
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
Reconciliation :-
REVENUES
Total revenues for reportable segments $ 31,518,633
Other revenue $ --
-------------
Total consolidated revenues $ 31,518,633
-------------
INTEREST REVENUE
Total interest revenue for reportable segments $ 36,459
Corporate interest revenue $ 30
-------------
Total consolidated interest revenue $ 36,489
-------------
INTEREST EXPENSES
Total interest expenses for reportable segments $ 678
Corporate interest expenses $ --
-------------
Total consolidated interest revenue $ 678
-------------
PROFIT OR LOSS
Total loss for reportable segments $ 8,455,632
Corporate expenses $ (285,367)
Gain on dilution of interest in subsidiary $ 2,483,871
Loss on valuation for held for trade investment $ (4,002,000)
Share of loss of associate $ (8,827)
-------------
Income before income tax $ 6,643,309
-------------
ASSETS
Total assets for reportable segments $ 60,687,033
Other assets $ 2,423,518
-------------
Total consolidated assets $ 63,110,551
-------------
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 3,101,835
-------------
F-21
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
12. SEGMENT REPORTING (Cont'd)
2006
Entertainment Digit Gaming Other Total
------------ ------------ ------------ ------------
Revenues from external customers $ 6,305,460 $ 17,310,828 $ 9,794 $ 23,626,082
Interest revenue $ 40,022 $ -- $ -- $ 40,022
Interest expense $ -- $ -- $ -- $ --
Depreciation and amortization $ 639,986 $ 223,920 $ -- $ 863,906
Segment profit $ 2,765,175 $ 193,651 $ 9,974 $ 2,968,620
Segment assets $ 29,445,518 $ 9,530,692 $ 4,484,626 $ 43,460,836
Expenditures for segment assets $ 17,969,573 $ -- $ -- $ 17,969,573
Reconciliation :-
REVENUES
Total revenues for reportable segments $ 23,616,288
Other revenue $ 9,794
-------------
Total consolidated revenues $ 23,626,082
-------------
INTEREST REVENUE
Total interest revenue for reportable segments $ 40,022
Corporate interest revenue $ 69,314
-------------
Total consolidated interest revenue $ 109,336
-------------
PROFIT OR LOSS
Total profit for reportable segments $ 2,968,620
Corporate expenses $ (425,183)
-------------
Income before income tax $ 2,543,437
-------------
ASSETS
Total assets for reportable segments $ 38,976,210
Other assets $ 4,484,626
-------------
Total consolidated assets $ 43,460,836
-------------
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 17,969,573
-------------
Following table presents revenues earned from customers located in
different geographic areas. Property and equipment is grouped by its
location.
2007 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 31,518,290 $ 343 $ -- $ 31,518,633
Property and equipment, net $ 1,244,145 $ 230,655 $ 95,400 $ 1,570,200
2006 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 23,625,998 $ 84 $ -- $ 23,626,082
Property and equipment, net $ 738,611 $ 174,199 $ 85,000 $ 997,810
F-22
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
13. RELATED PARTY TRANSACTIONS
Related parties are entities with common direct or indirect shareholders
and/or directors. Parties are considered to be related if one party has
the ability to control the other party or exercise significant influence
over the other party in making financial and operating decisions.
Some of the Company's transactions and arrangements are with the related
party and the effect of these on the basis determined between the party is
reflected in these financial statements. The balances are unsecured,
interest-free and repayable on demand unless otherwise stated.
During the period, the Company entered into the following transactions
with the associate:
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
------------- ------------- ------------- -------------
Marketing $ 110,537 $ -- $ 28,088 $ --
============= ============= ============= =============
14. SUBSEQUENT EVENTS
On November 1, 2007, the Company sub-leased the office premises of M2B
World Inc, a wholly owned subsidiary of the Company in Los Angeles,
California as part of its efforts to streamline its operations and reduce
operating costs. The staffing of M2B World Inc was also reduced from 9
staff to 1 staff as of October 31, 2007.
F-23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
The Company is in the business of broadband entertainment and
education-on-demand, streaming via computers, television sets, PDAs (Personal
Digital Assistant) and the provision of broadband services. Its business
includes channel and program sponsorship (advertising and branding); online
subscriptions, channel/portal development (digital programming services);
content aggregation and syndication, broadband consulting services, broadband
hosting and streaming services and E-commerce.
The Company is also in the business of digit gaming (lottery). The Company has
an 18 year license to conduct nation wide lottery in Cambodia. The Company
through its subsidiary, M2B Commerce Limited, signed an agreement with Allsports
Limited, a British Virgin Islands company to operate and conduct digit games in
Cambodia and to manage the digit games activities in Cambodia.
The following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
OVERVIEW
The key business focus of the Company is to establish itself as the leading
provider and creator of a new generation Of Entertainment-on-Demand and
E-Commerce Channels on Broadband, and 3G (Third Generation) devices.
For the broadband, the Company delivers both wire and wireless solutions,
streaming via computers, TV sets, PDAs and 3G hand phones.
At the same time the Company launches e-commerce channels (portals) that provide
on-line shopping but with a difference, merging two leisure activities of
shopping and entertainment. The entertainment channels are designed to drive and
promote the shopping portals, and vice versa.
The Company's business model in the area of broadband entertainment includes
both education on-demand and e-services, which would provide the Company with
multiple streams of revenue. Such revenues would be derived from advertising and
branding (channel and program sponsorship); on-line subscriptions; online games
micro-payments; channel/portal development (digital programming services);
content aggregation and syndication; broadband consulting services; on-line
shopping turnkey solutions; broadband hosting and streaming services; E-commerce
commissions and on-line dealerships; and digit games operations.
1
Business Operations
-------------------
Our principal operations are carried out through the following three segments of
our business:
1. Entertainment Services - Video on-Demand services such as for
entertainment and education, providing the Company with advertising,
subscriptions, online games and e-commerce ( B2B and B2C) revenues
2. Digit Games
3. E-Travel Services - Online Travel Portal
1. Entertainment Services
----------------------
The Company provides online entertainment on-demand on Broadband channels,
Internet portals and 3G devices across the globe, for specific and
identified viewer lifestyles, demographics and interests. Entertainment
and web visit experience is maintained throughout from the initial viewing
experience to on-line shopping and payment checkout experience.
The Company uses Broadband technology to provide its services. Broadband
technology is defined as high speed, high-bandwidth, two-way data, voice
and video communications, delivered at high transmission rates.
SERVICES: Broadband technology allows us to deliver the following
services::
o Video-on-demand (VOD) services that enable individuals to select
videos from a Central Server, on-demand 24 hours a day, 7 days a
week, for viewing on:
o Television screens (Set top Box Technology)
o PCs (Digital Subscriber Line (DSL) Technology)
o Personal Digital Assistants(PDA), 3G hand phones (Wireless
Technology)
o E-Commerce or online shopping - linked interactively to the
VOD platforms on broadband. Consumers choose to buy products
online as they watch the videos.
The Company applies broadband technologies to facilitate its growth in the
broadband sector. Its main competitive advantage is derived from its
ownership of rights for various territories on broadband for its contents
i.e. movies and programs on lifestyles, education, business and glamour.
The Company has built and installed its broadband streaming system
complete with firewalls, load balancing, bandwidth and consumer monitoring
systems, which include video streaming, video storage and web servers in
Singapore and the U.S. The Company has also developed its streaming
applications to stream into television sets, via a set top box.
The Company has developed a capability to stream wireless broadband and
have its own digitized entertainment sites for wireless broadband
applications.
M2B offers consumers personalized entertainment through its wide range of
broadband streaming channels available at www.m2bworld.com.
2
PRODUCTS: We offer the following products on the VOD platform:
o Entertainment - Consumers access movies, music, glamour and fashion,
lifestyle (hobbies, cooking, and personalities), documentaries,
sports, health and fitness and others. They can choose from a large
number of different channels depending on their interests or
lifestyle preferences.
o E-Commerce - Consumers can purchase products online, view product
videos and make payments online.
With this strategy, the Company generates diversified sources of revenue
from:
1. Advertising i.e. program and channel sponsorship
2. Online subscriptions
3. Channel/portal development i.e. digital programming services
4. Content aggregation and syndication
5. Broadband consulting services and online shopping turnkey solutions
6. E-commerce services
7. Online games micro-payments
Currently, the Company is in the process of revamping it's Broadband
websites. The current Broadband websites and products, which may change
from time to time are highlighted below.
WOWtv - Web TV service
WOWtv, a broadband entertainment web TV service, has embarked on launching
its site across the Asia Pacific, streaming more than 50 channels of
Hollywood and Asian entertainment via video on-demand, providing
E-commerce services and an original online games platform. Its video
on-demand content covers diverse genres such as movies, television dramas,
variety shows, documentaries, fashion, lifestyle, sports, edutainment and
more.
Beginning with Singapore and Indonesia, WOWtv is set to launch across the
Asia Pacific, expanding its growing presence to an additional 5
territories, namely Australia, China, Japan, Taiwan and Malaysia within
the next 12 months. No assurance can be given that such plans will
materialize as planned.
Leveraging on the Strengths of WOWtv
WOWtv is a cutting-edge, innovative platform that will establish a first
mover advantage to become the first Pan-Asian broadband entertainment
services provider. Its strengths and competitive advantages include:
Content Aggregation, Distribution and Syndication - with the technology
and expertise to stream with high clarity and also manage operations and
costs well.
Premium Content Portfolio - with a vast library of worldwide broadband
rights of film and content, copyright ownership and exclusivity on the
majority of broadband titles.
The content portfolio is also wide, with a classic library of 5,000 titles
over more than 50 channels.
Strong relationships in Asia and Hollywood - with good connections to
enable it to make further in-roads to content acquisition.
Broadband Distribution Deals - with secured major broadband distribution
deals with major media companies.
Experience in Online Games - with exclusive licenses to several Korean
game titles for several Asian markets.
Marketing Strategy of WOWtv
WOWtv's marketing strategy is to offer viewers a plethora of video
on-demand entertainment over three segments on its website, where
consumers will get a chance to sample its products and services in
different tiers - FREE, BASIC and VALUE.
To date, WOWtv has more than 15,000 registered subscribers - since its
soft launch in August 2007.
3
M2Btv - Global Broadband TV (IPTV) Service
The Company offers multiple TV channels, delivered live over the Internet,
to television sets in homes that have a high-speed internet connection and
IP set top boxes.
The service has been in operation in Singapore Since the second half of
2006 and more than 50 channels are made available to customers. Anyone
subscribing for a broadband access with local Internet service provider is
able to tune in to the service on a subscription basis. Subscribers are
provided with a set-top box that connects to their broadband modems
instead of the cable TV point at home. They are able to watch the programs
on their television sets.
BROADBAND SERVICES
The Company has an automated Content Management System ("CMS") to enhance
its advertising service offered to clients and to provide a new revenue
source for the Company. The system allows for the programming of video,
animation, streaming and flash content to multiple destinations.
Linked by broadband networks and wireless set-top boxes to push content
and scheduled advertising at physical premises, the CMS allows businesses
the option of presenting targeted content on selected video displays in
multiple locations, such as on different levels of a shopping mall, in
various spots within a restaurant or club or on separate elevators in the
same building.
4
In store video panels can also carry individualized messages together with
customized content to reach consumers and target audiences within the
premises. This is another method by which M2B is continuing to meet the
consumer shift toward on-demand and personalized media experiences whether
at home or work and now additionally on video screens in stores,
restaurants, clubs and other business or leisure outlets.
DIGIT GAMES
The Company has an 18-year license to conduct nation wide lottery in
Cambodia. The Company also signed an agreement with Allsports Limited, a
British Virgin Islands company, to operate, administer, and manage the
lottery digit games activities in Cambodia.
E-TRAVEL SERVICES
The Company's subsidiary, M2B World Travel Limited., signed a global
agreement with Amadeus Global Travel Distribution, SA, a Spanish
corporation. Through the agreement, M2B continues to offer direct access
to the extensive range of travel options available through the Amadeus
network to their viewers around the world. The agreement extends M2B's
reach through its broadband streaming entertainment into the worldwide
travel arena.
The M2B World Travel Website aims to provide competitive rates through its
direct connection to the Amadeus System using the Elleipsis TravelTalk(TM)
integration platform, which allows M2B to access not only the major travel
providers, but an expanded roster of additional suppliers such as low-cost
carriers, cruise lines, and widened hotel distribution channels all
through one single, easy-to-use platform.
The video e-travel portal brings an extensive range of travel options to
our viewers and gives the Company an entry into the travel and tourism
market; it directly aggregates travel solutions from 500 airlines, 58,000
hotel properties, some 42 car rental companies serving over 30,000
locations, as well as widespread air, ferry, rail, cruise, and tour
operators with proprietary video content, allowing customers to the site
to view their travel destination, thus influencing their purchasing
decision.
The Company plans to launch the M2B travel site in 2007, and the service
is subject to the Company completing the set up of its server farm to host
the travel platform. No assurances can be made that such plan will
materialize as planned.
5
RESULTS OF OPERATIONS
---------------------
For the nine months and three months ended September 30, 2007 compared with the
nine months and three months ended September 30, 2006, respectively.
Financial Statement
- Revenue for the quarter ended September 30, 2007 was $6,024,153 compared with
$9,315,116 for the same period in 2006.
- Net loss for the quarter ended September 30, 2007 was $9,662,777 compared with
net income of $917,439 for the same period in 2006.
- The Company's cash balance was $2,602,380 at September 30, 2007 compared with
$2,294,984 at December 31 2006.
Revenue
Revenue for the nine months ended September 30, 2007 increased by $7,892,551
(33.41%), from $23,626,082 for the nine months ended September 30, 2006 to
$31,518,633 for the nine months ended September 30, 2007. The revenue for the
three months ended September 30, 2007 decreased by $3,290,963 (35.33%), from
$9,315,116 to $6,024,153 for the three months ended September 30, 2006 and 2007,
respectively.
This increase in revenue for the nine months ended September 30, 2007 was mainly
contributed by the entertainment segment which included the completion and
delivery of the IPTV platform in Indonesia. This resulted in a revenue of $15
million in the nine months ended September 30, 2007. The completion and delivery
of the IPTV platform in Indonesia comprised of the hardware, software and
middleware, and supply and programming of content.
The digit games in Cambodia incurred a decrease in revenue of $829,186 (a drop
of 4.79%) for the nine months ended September 30, 2007 from $17,310,828 in
September 30, 2006 to $16,481,642 in September 30, 2007, mainly due to more
holidays and increased competition from new digit games players in the market in
the first nine months of 2007 as compared to the same period in 2006.
The decrease in the revenue for the three months ended September 30, 2007 was
mainly due to the decrease in the entertainment segment as compared to the three
months ended September 30, 2006, revenue by the entertainment segment reduced by
$3,096,329(99.93%) from $3,098,631 in the three months ended September 30, 2006
as compared to $2,302 in the three months ended September 30, 2007. The Company
was unable to secure any new advertising or content syndication contracts for
the three months ended September 2007 as it had done in the same three months
ended September 2006.
Cost of Sales
Cost of sales for the nine months ended September 30, 2007 was $17,553,771 which
increased by $497,557 (2.92%) from $17,056,214 for the nine months ended
September 30, 2006.
Cost of sales for the three months ended September 30, 2007 was $6,261,636 which
increased by $178,725 (2.94%) from $6,082,911 for the three months ended
September 30, 2006.
Increase in cost of sales of $497,557 and $178,725 for the nine months and three
months ended September 30, 2007 respectively was mainly attributed to the
delivery of the IPTV platform in Indonesia, which included the hardware,
software and middleware, and supply and programming of content, and the launch
of the new web TV service (called WOWtv) in Singapore.
As a proportion of revenue, the cost of sales for the nine months ended
September 30, 2007 was 56% as compared to 72% for the nine months ended
September 30, 2006. This was due to an increase in the entertainment segment
revenue resulting from the delivery of the IPTV platform in Indonesia.
As a proportion of revenue, the cost of sales for the three months ended
September 30, 2007 was 104% as compared to 65% for the three months ended
September 30, 2006. This was due to the decrease in the entertainment segment
revenue for the three months ended September 30, 2007.
Distribution Expenses
Distribution expenses for the nine months ended September 30, 2007 at $677,357
were lower by $180,055 (21%) as compared to the amount of $857,412 incurred for
the nine months ended September 30, 2006.
The lower distribution expenses were attributed to decreased spending for
marketing and promotions which decreased by $220,716 (35%), from $629,573 for
the nine months ended September 30, 2006 to $408,857 for the nine months ended
September 30, 2007.
Distribution expenses for the three months ended September 30, 2007 at $171,704
were lower by $126,179 (72.36%) as compared to the amount of $297,883 for the
three months ended September 30, 2006.
The lower amount spent for the three months ended September 30, 2007 was
attributed to the lower expenditure on advertising and marketing, which
decreased by $116,322, (56%) from $207,742 to $91,420 for the three months ended
September 30, 2006 and 2007, respectively.
6
General And Administrative Expenses
Administration expenses for the nine months ended September 30, 2007 at
$5,152,899 were higher by $1,874,544 (57.18%) as compared to the amount of
$3,278,355 incurred for the nine months ended September 30, 2006.
Administration expenses for the three months ended September 30, 2007 at
$1,631,684 were higher by $35,340 (2.21%) as compared to the amount of
$1,596,344 incurred for the three months ended September 30, 2006.
The increase in administrative expenses for the nine months and three months
ended September 30, 2007 was attributed mainly to increases in:
o Depreciation and license amortization had increased by $1,850,414 (214%),
from $863,906 for the nine months ended September 30, 2006 to $2,714,320
for the nine months ended September 30, 2007. For the three months ended
September 30, 2007, depreciation and licensing cost had increased by
$358,901 (78%) from $459,718 to $818,619 for the three months ended
September 30, 2006 and 2007 respectively. The increase was mainly
attributed to the increase in license amortization of the movies content
which have a definite life and which were acquired for the newly launch
Broadband TV service.
o Staff costs. Staff costs had increased by $296,928 (33%) from $886,668 for
the nine months ended September 30, 2006 to $1,183,596 for the nine months
ended September 30, 2007. For the three months ended September 30, 2007,
staff cost had decreased by $13,492 (3.3%) from $408,642 to $395,150 for
the three months ended September 30, 2006 and 2007 respectively. The
overall increase in staff cost for the nine months period ended September
30, 2007 resulted from the increase in the number of professional
employees hired. Staff costs were however trimmed and lowered in the third
quarter for the three months ended September 30, 2007 in order to maintain
cost efficient operations.
Income From Operations
The Company reported an income from operations of $8,134,606 for the nine months
ended September 30, 2007 as compared to the income from operations of $2,434,101
for the nine months ended September 30, 2006. For the three months ended
September 30, 2007, the loss from operations was $2,040,871 as compared to the
gain of $1,337,978 for the three months ended September 30, 2006. The
significant increase in the income from operations for the nine months ended
September 30, 2007 was due to the significant increase in the entertainment
segment revenue for the nine months ended September 30, 2007. However there was
a drop in the entertainment segment revenue for the three months ended September
30, 2007 as compared to the three months ended September 30, 2006.
Net Income
For the nine months ended September 30, 2007, net income was $5,740,845 which
increased by $3,602,947 (169%) from $2,137,898 for the nine months ended
September 30, 2006. For the three months ended September 30, 2007, net loss was
$9,662,777 which decreased by $10,580,216 (1,153%) from net income of $917,439
for the three months ended September 30, 2006.
The significant increase in net income for the nine months ended September 30,
2007 was mainly attributed to increase in the entertainment segment revenue. The
increase was partly attributed to the gain on dilution of the Company's interest
in a subsidiary, M2B World Asia Pacific Pte. Ltd. by issuing shares to the
private investors at a premium. The increase in net income was partly offset by
the loss of the fair value of an investment (equity securities) held for
trading, due to a drop in the market value of the shares.
The decrease for the three months ended June 30, 2007 was mainly attributed to
the net loss of the fair value of an investment (equity securities) which
resulted in a loss of $8,322,000 in the fair value of the investment, due to a
drop in the market value of the shares.
7
Liquidity And Capital Resources
The Company had cash of $2,602,380 at September 30, 2007 as compared to cash of
$2,294,984 at December 31, 2006.
The Company does not finance its operations through short-term bank credit nor
long-term bank loans as it believes that cash generated from its operations will
be able to cover its daily running cost and overheads.
During the three months ended September 30, 2007, the Company had not entered
into any transactions using derivative financial instruments or derivative
commodity instruments. Accordingly the Company believes its exposure to market
interest rate risk is not material.
Cash generated from operations will not be able to cover the Company's intended
growth and expansion. The Company has plans in 2007 to expand its broadband
coverage by launching new broadband sites in Asia Pacific region and Australia.
No assurances can be made that such plans will be carried out in a timely
manner.
The Company intends to raise additional funds, to fund its business expansion,
however no assurances can be made that the Company will raise sufficient funds
as planned.
NEW CONTRACTS
On January 3, 2007, M2B World Asia Pacific Pte Ltd, issued 7,778,014 shares of
common stock through a private placement at a price of $0.77 a share for a total
amount of $6,000,000. This had effectively reduced the Company's effective
equity interest in M2B World Asia Pacific Pte. Ltd. from 100% to 81.7%.
On January 15, 2007, the Company through its subsidiary, Amaru Holdings Limited
(Amaru Holdings), a British Virgin Islands corporation, entered into a sale and
purchase agreement together with other sellers (the "Agreement") with Auston
International Group Ltd., a Singapore company (Auston) to sell to Auston its
majority owned subsidiary, M2B World Asia Pacific Pte Ltd., together with its
subsidiary, M2B World Holdings Limited (collectively, M2B Asia). Auston is a
company trading on the Singapore Stock Exchange. The Agreement provides for the
sale of 42,459,978 shares of M2B World Asia Pacific Pte. Ltd., its total issued
and outstanding capital. As the consideration for M2B World Asia Pacific Pte.
Ltd. shares, Auston agreed to issue a total of 660 million new ordinary shares
of Auston to M2B World Asia Pacific Pte. Ltd. shareholders. The Auston shares
are valued at S$0.25 per share.
The Agreement is subject to certain conditions precedent, including, but not
limited to the shareholder approval of the transaction by Auston shareholders,
the approval of the Singapore Stock Exchange and other related regulatory
approvals of both parties.
Amaru Holdings is required to deliver a valuation report by an independent
auditor to Auston confirming that the value of the assets of M2B World Asia
Pacific Pte. Ltd. is no less than that of the amount of consideration to be paid
by Auston.
On April 23, 2007, M2B World Holdings Limited ("M2B World"), a British Virgin
Islands corporation entered into a sale and purchase agreement (the "Agreement")
with P T Agis TBK, a company incorporated in Indonesia ("Agis") to sell to Agis
certain assets, including the domain name under which the IPTV business will
operate in Indonesia and the transfer and license of IPTV platform
(collectively, the "Assets"). M2B World is a wholly-owned subsidiary of M2B
World Asia Pacific Pte Ltd. which is a 81.7% owned by Amaru Holdings Limited.
Amaru Holdings Limited is a wholly-owned subsidiary of Amaru Inc., a Nevada
corporation (the "Company"). Agis is trading on the Indonesia Stock Exchange.
The Agreement provides for the consideration of US$15 million for the sale of
the Assets based on the mutually agreed valuation of such Assets. Such
consideration is to be provided through the issuance of 75 million of Agis
shares at an agreed price of IDR 1300 per share, and such number of shares of a
to be formed investment holding wholly-owned subsidiary of Agis that shall equal
to 50% of beneficial holdings of such subsidiary. The sale had been completed by
September 30, 2007.
On July 10, 2007, the Company together with one of the subsidiaries of the
Company, Tremax International Limited entered into a sale and purchase agreement
(the "Agreement") with Domaine Group Limited, a British Virgin Islands
corporation (the "Vendor"), for the acquisition of CBBN Holdings Limited ("CBBN
Holdings"). CBBN Holdings is a 80% beneficial owner of Cosmactive Broadband
Networks Co. Ltd ("CBN"), which is a broadband service provider incorporated in
Taiwan. The purchase consideration shall be satisfied in full by the issuance
of 5,333,333 of common stock of the Company.
8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ABILITY TO EXPAND CUSTOMER BASE
The Company's future operating results depend on our ability to expand our
customer base for broadband services and e-commerce portals. An increase
in total revenue depends on our ability to increase the number of
broadband and e-commerce portals, in the US, Europe and Asia. The degree
of success of this depends on
o our efforts to establish independent broadband sites in countries
where conditions are suitable.
o our ability to expand our offerings of content in entertainment and
education, to include more niche channels and offerings.
o our ability to provide content beyond just personal computers but to
encompass television, wireless application devices and 3G hand
phones.
ABILITY TO ACQUIRE NEW MEDIA CONTENTS
The continued ability of the Company to acquire rights to new media
contents, at competitive rates, is crucial to grow and sustain the
Company's business.
AVAILABILITY OF TECHNOLOGICALLY RELIABLE NEW GENERATION OF BROADBAND
DEVICES
The growth of demand for broadband services is dependent on the wide
availability of technologically reliable new generation of broadband
devices, at affordable prices to prospective customers of broadband
services. The early and widespread availability and market adoption of new
generation broadband devices, will significantly impact demand for
broadband services and the growth of the Company's business.
CAPITAL INVESTMENT IN BROADBAND INFRASTRUCTURE BY GOVERNMENT AND TELCOS
The growth of demand for broadband services is dependent on the capital
investment in broadband infrastructure by governments and Telcos. A
significant source of demand for the Company's broadband services could be
from homes and enterprises with access to high-speed broadband
connections. The ability of countries to invest in public broadband
infrastructure to offer public accessibility is subject to countries'
economic health. The Company's prospects for business growth in Asia
especially would be impacted by overall economic conditions in the
territories that we seek to expand into.
COMPETITION FROM BROADBAND CABLE AND TV NETWORKS OPERATORS
The competition of services provided by broadband cable network operators
and TV networks. As traditional TV networks and cable TV operators provide
alternate supply of entertainment and on-demand broadband services, they
are in competition with the Company, for market share. The Company,
nevertheless, will continue to leverage on its advantage of ownership
rights to its own portfolio of media content and its ability to provide
broadband services over both the cable and wireless networks, at
competitive rates.
The Company's business is reliant on complex information technology
systems and networks. Any significant system or network disruption could
have a material adverse impact on our operations and operating results.
The Company's nature of business is highly dependent on the efficient and
uninterrupted operation of complex information technology systems
networks, may they, either be that of ours, or our Telco/ ISP partners.
All information technology systems are potentially vulnerable to damage or
interruption from a variety of sources, including but not limited to
computer viruses, security breach, energy blackouts, natural disasters and
terrorism, war and telecommunication failures.
System or network disruptions may arise if new systems or upgrades are
defective or are not installed properly. The Company has implemented
various measures to manage our risks related to system and network
disruptions, but a system failure or security breach could negatively
impact our operations and financial results.
LAW AND REGULATIONS GOVERNING INTERNET
Increased regulation of the Internet or differing application of existing
laws might slow the growth of the use of the Internet and online services,
which could decrease demand for our services. The added complexity of the
law may lead to higher compliance costs resulting in higher costs of doing
business.
9
UNAUTHORIZED USE OF PROPRIETARY RIGHTS
Our copyrights, patents, trademarks, including our rights to certain
domain names are very important to M2B's brand and success. While we make
every effort to protect and stop unauthorized use of our proprietary
rights, it may still be possible for third parties to obtain and use the
intellectual property without authorization. The validity, enforceability
and scope of protection of intellectual property in Internet-related
industries remain uncertain and still evolving. Litigation may be
necessary in future to enforce these intellectual property rights. This
will result in substantial costs and diversion of the Company's resources
and could disrupt its business, as well as have a material adverse effect
on its business.
LAW AND REGULATIONS GOVERNING BUSINESS
As the Company continues to expand its business internationally across
different geographical locations there are risks inherent including:
1) Trade barriers and changes in trade regulations
2) Local labor laws and regulations
3) Currency exchange rate fluctuations
4) Political, social or economic unrest
5) Potential adverse tax regulation
6) Changes in governmental regulations
OUTBREAK OF BIRD FLU PANDEMIC OR SIMILAR PUBLIC HEALTH DEVELOPMENTS
Any future outbreak of the bird flu pandemic or similar adverse public
health developments may have a material adverse effect on the Company's
business operations, financial condition and results of operations.
10
ITEM 4: CONTROLS AND PROCEDURES
The Company's management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
An evaluation was conducted under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedure were effective as of September 30, 2007. There has been no change in
the Company's internal control over financial reporting that occurred during the
quarter ended September 30, 2007, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
The Company's annual report on Form 10-KSB for the year ended December 31, 2006
did not include (nor does this quarterly report on Form 10-Q include) an
attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report in the annual
report was not subject to attestation by the Company's registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that
permit the Company to provide only management's report in the annual report.
11
PART 2: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 23, 2007, a company which provided public relations services filed a
lawsuit against M2B World, Inc. for breach of contract for an amount of $72,649.
In the opinion of Management, the outcome of this legal proceeding will not
have a material effect on the Company's consolidated financial statements.
ITEM 1A: RISK FACTORS
An investment in the Company's common stock involves a high degree of risk. One
should carefully consider the following risk factors in evaluating an investment
in the Company's common stock. If any of the following risks actually occurs,
the Company's business, financial condition, results of operations or cash flow
could be materially and adversely affected. In such case, the trading price of
the Company's common stock could decline, and one could lose all or part of
one's investment. One should also refer to the other information set forth in
this report, including the Company's consolidated financial statements and the
related notes.
THE COMPANY CONTINUES TO USE SIGNIFICANT AMOUNTS OF CASH FOR ITS BUSINESS
OPERATIONS, WHICH COULD RESULT IN US HAVING INSUFFICIENT CASH TO FUND THE
COMPANY'S OPERATIONS AND EXPENSES UNDER OUR CURRENT BUSINESS PLAN. THE COMPANY
IS ALSO HOLDING A CONSIDERABLE AMOUNT OF QUOTED EQUITY SECURITIES THAT IS
AVAILABLE-FOR-SALE OR HELD FOR TRADING.
The Company's liquidity and capital resources remain limited. There can be no
assurance that the Company's liquidity or capital resource position would allow
us to continue to pursue its current business strategy. The Company's quoted
equity securities held as assets are dependent on the market value. Any
fluctuations or downturn in the securities market could adversely affect the
value of these equity securities held. As a result, without achieving growth in
its business along the lines it has projected, it would have to alter its
business plan or further augment its cash flow position through cost reduction
measures, sales of assets, additional financings or a combination of these
actions. One or more of these actions would likely substantially diminish the
value of its common stock .
THE MARKET MAY NOT BROADLY ACCEPT THE COMPANY'S BROADBAND WEBSITES AND SERVICES,
WHICH WOULD PREVENT THE COMPANY FROM OPERATING PROFITABLY.
The Company must be able to achieve broad market acceptance for its Broadband
websites and services, at a price that provides an acceptable rate of return
relative to the Company-wide costs in order to operate profitably. There is no
assurance that the market will develop sufficiently to enable the Company to
operate its Broadband business profitably. Furthermore, there is no assurance
that any of the Company's services will become generally accepted, nor is there
any assurance that enough paying users and advertisers will ultimately be
obtained to enable us to operate these business profitably.
BROADBAND USERS MAY FAIL TO ADOPT THE COMPANY'S BROADBAND SERVICES.
The Company's Broadband services are targeted to the growing market of Broadband
users worldwide to deliver content and E-commerce in an efficient, economical
manner over the Broadband networks. The challenge is to make the Company's
business attractive to consumers, and ultimately, profitable. To do so has
required, and will require, the Company to invest significant amounts of cash
and other resources. There is no assurance that enough paying users and
advertisers will ultimately be obtained to enable the Company to operate the
business profitably.
FAILURE TO SIGNIFICANTLY INCREASE THE COMPANY'S USERS AND ADVERTISERS MAY RESULT
IN FAILURE TO ACHIEVE CRITICAL MASS AND REVENUE TO BUILD A SUCCESSFUL BUSINESS.
The Company incurs significant up-front costs in connection with the acquisition
of content, and bandwidth and network charges. The plan is to obtain recurring
revenues in the form of subscription and advertising fees to use the Broadband
services, either paid by the users or advertisers.
There is no assurance as to whether the Company will be able to maintain, or
whether and how quickly the Company will be able to increase its user base, or
whether the Company will be able to generate recurring subscription and
advertising fees to such a level that would enable this line of business to
continue to operate profitably. If the Company is not successful in these
endeavors, the Company could be required to revise its business model, exit or
reduce the scale of the business, or raise additional capital.
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COMPETITION IN THE BROADBAND BUSINESS IS EXPECTED TO INCREASE, WHICH COULD CAUSE
THE BUSINESS TO FAIL.
The Company's Broadband services are targeted to the end user market. As the
Broadband penetration rates increase globally, an increasing number of
well-funded competitors have entered the market. Companies that compete with the
Company's business include telecommunications, cable, content management and
network delivery companies.
The Company may face increased competition as these competitors partner with
others or develop new Broadband websites and service offerings to expand the
functionality that they can offer to their customers. These competitors may,
over time, develop new technologies and acquire content that are perceived as
being more secure, effective or cost efficient than the Company. These
competitors could successfully garner a significant share of the market, to the
exclusion of the Company. Furthermore, increased competition could result in
pricing pressures, reduced margins, or the failure of the business to achieve or
maintain market acceptance, any one of which could harm the business.
THE INABILITY TO SUCCESSFULLY EXECUTE TIMELY DEVELOPMENT AND INTRODUCTION OF NEW
AND RELATED SERVICES AND TO IMPLEMENT TECHNOLOGICAL CHANGES COULD HARM THE
BUSINESS.
The evolving nature of the Broadband business requires the Company to
continually develop and introduce new and related services and to improve the
performance, features, and reliability of the existing services, particularly in
response to competitive offerings.
The Company has under development new features and services for its businesses.
The Company may also introduce new services. The success of new or enhanced
features and services depends on several factors - primarily market acceptance.
The Company may not succeed in developing and marketing new or enhanced features
and services that respond to competitive and technological developments and
changing customer needs. This could harm the business.
CAPACITY LIMITS ON THE COMPANY'S TECHNOLOGY AND NETWORK HARDWARE AND SOFTWARE
MAY BE DIFFICULT TO PROJECT, AND THE COMPANY MAY NOT BE ABLE TO EXPAND AND/OR
UPGRADE ITS SYSTEMS TO MEET INCREASED USE, WHICH WOULD RESULT IN REDUCED
REVENUES.
While the Company has ample through-put capacity to handle its customers'
requirements for the medium term, at some point it may be required to materially
expand and/or upgrade its technology and network hardware and software. The
Company may not be able to accurately project the rate of increase in usage of
its network. In addition, it may not be able to expand and/or upgrade its
systems and network hardware and software capabilities in a timely manner to
accommodate increased traffic on its network. If the Company does not
appropriately expand and/or upgrade our systems and network hardware and
software in a timely fashion, it may lose customers and revenues.
INTERRUPTIONS TO THE DATA CENTERS AND BROADBAND NETWORKS COULD DISRUPT BUSINESS,
AND NEGATIVELY IMPACT CUSTOMER DEMAND FOR THE COMPANY.
The Company's business depends on the uninterrupted operation at the data
centers and the broadband networks run by the various service providers. The
data centers may suffer for loss, damage, or interruption caused by fire, power
loss, telecommunications failure, or other events beyond the Company. Any damage
or failure that causes interruptions in the Company's operations could
materially harm business, financial conditions, and results of operations.
In addition, the Company's services depends on the efficient operation of the
Internet connections between customers and the data centers. The Company depends
on Internet service providers efficiently operating these connections. These
providers have experienced periodic operational problems or outages in the past.
Any of these problems or outages could adversely affect customer satisfaction
and customers could be reluctant to use our Internet related services.
THE COMPANY MAY NOT BE ABLE TO ACQUIRE NEW CONTENT, OR MAY HAVE TO DEFEND ITS
RIGHTS IN INTELLECTUAL PROPERTY OF THE CONTENT THAT IS USED FOR ITS SERVICES
WHICH COULD BE DISRUPTIVE AND EXPENSIVE TO ITS BUSINESS.
The Company may not be able to acquire new content, or may have to defend its
intellectual property rights or defend against claims that it is infringing the
rights of others, where its content rights are concerned. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us to develop non-infringing services or enter onto royalty or
licensing arrangements. Royalty or licensing arrangements, if required, may not
be obtainable on terms acceptable to the Company. The business could be
significantly harmed if the Company is not able to develop or license new
content. Furthermore, it is possible that others may license substantially
equivalent content, thus enabling them to effectively compete against us.
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THE COMPANY DEPENDS ON KEY PERSONNEL.
The Company depends on the performance of its senior management team. Its
success depends on its ability to attract, retain, and motivate these
individuals. There are no binding agreements with any of its employees that
prevent them from leaving the Company at any time. There is competition for
these people. The loss of the services of any of the key employees or failure to
attract, retain, and motivate key employees could harm the business.
THE COMPANY RELIES ON THIRD PARTIES.
If critical services and products that the Company sources from third parties,
such as content and network services were to no longer be made available to the
Company or at a considerably higher price than it currently pays for them, and
suitable alternatives could not be found, the business could be harmed.
THE COMPANY COULD BE AFFECTED BY GOVERNMENT REGULATION.
The list of countries to which our solutions and services could not be exported
could be revised in the future. Furthermore, some countries may in future impose
restrictions on streaming of broadband contents and related services. Failure to
obtain the required governmental approvals would preclude the sale or use of
services in international markets and therefore, harm the Company's ability to
grow sales through expansion into international markets.
While regulations in almost all countries in which our business currently
operates generally permit the broadband services, such regulations in future may
not be as favorable and may impede our ability to develop business.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 19, 2007, the Company issued 40,000 shares of common stock through its
private placement of shares of common stock at a purchase price of $1.50 per
share for a total amount of $60,000 to "accredited investors", as that term is
defined in Regulation D of the Securities Act of 1933.
On July 11, 2007, the Company issued 5,333,333 million shares of common stock at
a market value of $0.70 per share for a total amount of $3,733,333. The shares
were issued to Domaine Group Limited, a company incorporated in the British
Virgin Islands and is the legal and beneficial owner of the 100% of the entire
issued and paid up capital of CBBN Holdings Limited, which the Company intends
to acquire.
The shares of the Company's common stock were issued and sold in reliance upon
the exemption provided by Section 4(2) and/or Regulation D/Regulation S of the
Securities Act of 1933.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS:
A - Exhibits:
Exhibit 31 CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT
Exhibit 32 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
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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.
Amaru, Inc.
---------------------------------------
(Registrant)
October 31, 2007 /s/ Colin Binny
---------------- ---------------------------------------
Date President, CEO & CFO
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