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 March 31, 2008
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 (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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated Accelerated filer |X| Non-accelerated filer |_|
filer |_| (Do not check if a smaller
reporting company
Smaller reporting company |_|
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 March 31, 2008)
AMARU, INC. AND SUBSIDARIES
2008 Quarterly Report on Form 10-Q
Table of Contents
PART I: FINANCIAL INFORMATION
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statement of Stockholders' Equity and
Comprehensive Income F-4 to F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-29
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 1
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 6
ITEM 4: CONTROLS AND PROCEDURES 8
PART II: OTHER INFORMATION
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ITEM 1: LEGAL PROCEEDINGS 10
ITEM 1A: RISK FACTORS 10
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 13
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS 13
ITEM 5: OTHER INFORMATION 13
ITEM 6: EXHIBITS 13
SIGNATURES
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2008 2007
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,874,739 $ 2,322,541
Accounts receivable, net of allowance of
$108,815 and $54,154 at March 31, 2008 and
December 31, 2007 respectively 10,023,590 10,244,589
Equity securities held for trading 2,924,000 2,924,000
Other current assets 4,174,503 4,246,947
Inventories 1,148,415 1,157,248
Investments available for sale 2,402,613 2,402,613
----------- -----------
Total current assets 22,547,860 23,297,938
----------- -----------
Non-current assets
Property and equipment, net 1,625,344 1,797,146
Intangible assets, net 25,443,895 25,693,066
Associate 4,932,915 4,942,283
Investments available for sale 2,373,934 4,911,345
----------- -----------
Total non-current assets 34,376,088 37,343,840
----------- -----------
Total assets $56,923,948 $60,641,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,561,063 $ 3,068,613
Others payable 140,002 100,005
Advances from related parties 167,203 155,313
Finance lease liabilities 11,237 10,746
Income taxes payable 5,428 5,428
----------- -----------
Total current liabilities 2,884,933 3,340,105
----------- -----------
Deferred tax liabilities 1,199,068 1,672,801
Hire purchase creditor 57,117 57,306
----------- -----------
Total non-current liabilities 1,256,185 1,730,107
----------- -----------
Total liabilities 4,141,118 5,070,212
Minority interest 4,435,398 4,619,381
Commitments -- --
Stockholders' equity
Preferred stock (par value $0.001) 5,000,000
shares authorized; 0 shares authorized;
0 shares issued and outstanding at March
31, 2008 and December 31, 2007, respectively -- --
Common stock (par value $0.001) 200,000,000
shares authorized;159,431,861 and 159,431,861
shares issued and outstanding at March 31,
2008 and December 31, 2007, respectively 159,431 159,431
Additional paid-in capital 42,918,666 42,918,666
Retained earnings 4,328,030 5,650,447
Accumulated other comprehensive income 941,305 2,223,641
----------- -----------
Total stockholders' equity 52,782,830 55,571,566
----------- -----------
Total liabilities and shareholders' equity $56,923,948 $60,641,778
=========== ===========
See accompanying notes to consolidated financial statements
F-2
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2008 2007
------------- -------------
Revenue:
Entertainment $ 34,993 $ 10,249
Digit gaming 5,593,754 5,476,826
------------- -------------
Total revenue 5,628,747 5,487,075
Cost of services (5,588,380) (5,423,501)
------------- -------------
Gross profit 40,367 63,574
Distribution costs (124,930) (309,647)
Administrative expenses (1,038,502) (1,672,296)
------------- -------------
Total expenses (1,163,432) (1,981,943)
------------- -------------
(Loss) Income from operations (1,123,065) (1,918,369)
Other expenses (income)
Interest expenses 543 --
Interest income (5,443) (13,682)
Gain on disposal of equipment (1,888) --
Loss on disposal of investment available for sales 397,755 --
Gain on dilution of interest in subsidiary -- (2,483,871)
Share of loss (profit) of associate 9,368 (7,539)
------------- -------------
(Loss) Income before income taxes (1,523,400) 586,723
Benefit for income taxes 17,000 163,513
------------- -------------
Net (loss) income (1,506,400) $ 750,236
============= =============
Attributable to:
Equity holders of the company (1,322,417) 830,250
Minority interest (183,983) (80,014)
------------- -------------
Net (loss) income (1,506,400) 750,236
============= =============
Earnings per share
- basic and diluted $ (0.009) $ 0.005
============= =============
Weighted average number of common shares outstanding
- basic and diluted 159,431,861 153,784,306
============= =============
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,
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 -- -- -- -- -- -- 3,565,539
Change in fair value
of available for-sale-
equity securities,
net of tax -- -- -- -- -- -- --
Comprehensive
income
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31,
2007 -- -- 159,431,861 $ 159,431 $42,918,666 -- $ 5,650,447
=========== =========== =========== =========== =========== =========== ===========
(CONTINUED ON NEXT PAGE)
F-4
(CONTINUED FROM PREVIOUS PAGE)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
---------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE MINORITY SHAREHOLDERS'
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 -- -- (2,483,872) (2,483,872)
Net income -- -- 1,523,253 5,088,792
Change in fair value
of available for-sale-
equity securities,
net of tax -- (1,453,933) -- (1,453,933)
------------
Comprehensive
income 3,634,859
------------ ------------ ------------ ------------
Balance at
December 31,
2007 $ 12,927 $ 2,210,714 $ 4,619,381 $ 55,571,566
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-4A
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,
2007 -- -- 159,431,861 $ 159,431 $42,918,666 $ -- $ 5,650,447
Net loss -- -- -- -- -- -- (1,322,417)
Change in
fair value
of available
for-sale- equity
securities,
net of tax -- -- -- -- -- -- --
Comprehensive
income
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March
31, 2008 -- -- 159,431,861 $ 159,431 $42,918,666 $ -- $ 4,328,030
=========== =========== =========== =========== =========== =========== ===========
(CONTINUED BELOW)
(CONTINUED FROM ABOVE)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
----------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE MINORITY SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
------------ ------------ ------------ ------------
Balance at
December 31,
2007 $ 12,927 $ 2,210,714 $ 4,619,381 $ 55,571,566
Net loss -- -- (183,983) (1,506,400)
Change in
fair value
of available
for-sale- equity
securities,
net of tax -- (1,282,336) -- (1,282,336)
------------
Comprehensive
income (2,788,736)
------------ ------------ ------------ ------------
Balance at March
31, 2008 $ 12,927 $ 928,378 $ 4,435,398 $ 52,782,830
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
--------------------------
March 31, 2008 March 31, 2007
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,506,400) $ 750,236
Share of loss (profit) of associate 9,368 (7,539)
Adjustments to reconcile net income to cash and cash
equivalents used or provided by operations:
Amortization 298,135 803,881
Depreciation 170,699 113,655
Gain on disposal of equipment (1,888) --
Loss on disposal of investment available for sales 397,755 --
Defer tax (17,000) (163,513)
Acquisition of investment in exchange for account receivable -- (1,700,000)
Gain on dilution of interest in subsidiary -- (2,483,871)
Common stock issued for services -- 60,000
Changes in operation assets and liabilities
Accounts receivables 220,999 (1,693,403)
Inventories 8,833 71,672
Other receivables -- 30,841
Others current assets 72,444 (17,707)
Accounts payable and accrued expenses (507,550) (191,455)
Other payables 39,997 105,784
----------- -----------
Net cash used in operating activities (814,608) (934,613)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment -- (164,531)
Proceeds from disposal of equipment 2,991 --
Acquisition of software and film library (48,964) --
Acquisition of intangible assets -- (1,018,033)
Proceeds from disposal of investment available for sale 400,587 --
----------- -----------
Net cash generated from (used in) investing activities 354,614 (1,182,564)
----------- -----------
CASH PROVIDED FROM FINANCING ACTIVITIES
Advance from related parties 11,890 --
Repayments of obligations under finance leases (2,723) --
Capital contributed by minority shareholders -- 5,580,000
----------- -----------
Net cash provided by financing activities 9,167 5,580,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 3,025 --
----------- -----------
Cash flows from all activities (447,802) 3,462,823
Cash and cash equivalents at beginning of period 2,322,541 2,294,984
----------- -----------
Cash and cash equivalents at end of period $ 1,874,739 $ 5,757,807
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Acquisition of investments (1) $ -- $ 1,700,000
=========== ===========
(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 investment for $1.7
million in exchange for the settlement of an accounts receivable from the
investee company.
See accompanying notes to consolidated financial statements
F-6
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
1. BASIS OF PRESENTATION AND REORGANIZATION
1.1 Description of Business
Amaru, Inc. (the Company) through its subsidiaries under the M2B and New
WOWtv brand is in the Broadband Media Entertainment business, and a
provider of interactive Entertainment-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 over 100 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-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 Recent Accounting Standards and Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, Accounting for Income Taxes
("FIN 48"), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company adopted FIN 48 on January 1, 2007. The adoption of
FIN 48 did not have an impact on the Company's opening retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157").
SFAS No. 157 clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. In February 2008, the FASB issued two Staff Positions
that amend SFAS No. 157. The first FASB Staff Position (FSP), No. FAS
157-1, excludes from the scope of SFAS No. 157 accounting pronouncements
that address fair value measurements for purposes of lease classification
and measurement. The second FSP, No. FAS 157-2, delays the effective date
of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). SFAS 157
is effective for the Company on January 1, 2008, except for nonfinancial
assets and nonfinancial liabilities
F-7
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
that are not recognized or disclosed at fair value on a recurring basis
for which its effective date is January 1, 2009. The adoption of this
statement did not have a material impact on its Consolidated Financial
Statements.
Financial assets recorded at fair value on the Consolidated Balance
Sheets are categorized as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical
assets or liabilities, as applicable, that the reporting
entity has the ability to access at the measurement date.
Level 2: Quoted prices in markets, other than quoted prices
included in Level 1, that are not active or inputs that
are observable either directly or indirectly for
substantially the full term of the asset or liability, as
applicable, Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in
active markets;
b) Quoted prices for identical or similar assets or
liabilities in non-active markets;
c) Inputs other than quoted market prices which are
observable for the asset or liability; and
d) Inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
Level 3: Prices or valuation techniques that require inputs which
are both unobservable and significant to the overall fair
value measurement of the asset or liability, as applicable.
They may reflect management's own assumptions about the
assumptions a market participant would use in pricing the
asset or liability.
The following table shows how our investments are categorized.
FAIR VALUE MEASUREMENT AT MARCH 31, 2008 USING:
---------------------------------------------------------------
FAIR VALUE QUOTED PRICES IN
MEASUREMENTS AT ACTIVE MARKETS PRICES OR VALUATION
MARCH 31, 2008 (LEVEL 1) TECHNIQUES (LEVEL 3)
DESCRIPTION ($) ($) ($)
----------------------------------------------------------------
Equity Securities Held for
Trading 2,924,000 2,924,000 --
Investments Available for Sale 3,896,883 1,494,270 2,402,613
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits entities to choose to measure
many financial assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been
elected are reported in net income. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007 and interim periods within those
fiscal years. Upon adoption of this Statement, the Company did not elect
SFAS No. 159 option for existing financial assets and liabilities and
therefore adoption of SFAS No. 159 did not have any impact on its
Consolidated Financial Statements.
F-8
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R").
SFAS 141R established principles and requirements for how an acquiring
company recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest if the acquired company and the goodwill acquired. SFAS 141R
also established disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS 141R is
effective for fiscal periods beginning after December 15, 2008. The
Company is currently evaluating the impact that SFAS 141R will have on
its financial position and results of operations.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of Accounting Research Bulletin No. 51 ("SFAS .
160"). SFAS 160 establishes accounting and reporting standards of
ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parent's ownership
interest and the valuation of retained noncontrolling equity investments
when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests
of the parent and the interests of the noncontrolling owners. SFAS 160 is
effective for fiscal periods beginning after December 15, 2008. The
Company is currently evaluating the impact that SFAS 160 will have on its
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities -- an amendment of FASB
Statement No. 133". This statement amends SFAS No. 133 by requiring
enhanced disclosures about an entity's derivative instruments and hedging
activities, but does not change SFAS No. 133's scope or accounting. SFAS
No. 161 requires increased qualitative, quantitative and credit-risk
disclosures about the entity's derivative instruments and hedging
activities. SFAS 161 is effective for fiscal years, and interim periods
within those fiscal years, beginning after November 15, 2008, with
earlier adoption permitted. The Company is currently evaluating the
impact that SFAS 161 will have on its financial position and results of
operations.
F-9
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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.
F-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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.
2.4 Trade Accounts Receivable
Trade accounts receivable, which generally have 30 to 90 day 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.
F-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
The Company's operations are conducted over the world wide web and some
purchases are made from locations outside of Singapore.
FOR THE THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
2008 2007
----------- -----------
Sales outside of the U.S. $ 5,628,747 $ 5,487,030
Services purchased outside of the U.S. $ 5,588,380 $ 5,393,399
2.5 Inventories
Inventories are carried at the lower of cost or 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-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
2.7 Intangible Assets
Intangible assets consist of film library, gaming and software licence
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 2 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 development costs will be useful for up to 5 years
before additional significant development needs to be done.
2.8 Associate
An associate is an entity over which the group 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 group'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.
F-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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.
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"). Equity
securities held for trading as of March 31, 2008 and December 31, 2007
totaled $2,924,000.
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-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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 three months ended March 31, 2008 and the year ended
December 31, 2007.
2.11 Investments at fair value through profit and 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.
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.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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 its was incurred.
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.
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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 three months
ended March 31, 2008 and 2007, the Company incurred advertising expenses
of $32,281 and $205,429 respectively.
2.21 Reclassifications
Certain amounts in the previous periods presented have been reclassified
to conform to the current year financial statement presentation.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
3. EQUITY SECURITIES HELD FOR TRADING
March 31, December 31,
2008 2007
----------- -----------
Quoted equity security, at fair value $ 2,924,000 $ 2,924,000
=========== ===========
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$0.48 million.
The investments in quoted equity securities comprised of 34,000,000
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:
MARCH 31, DECEMBER 31,
2008 2007
---------- ----------
Prepayments $ 110,833 $ 169,641
Prepayments for investment 3,733,333 3,733,333
Deposits 170,460 171,095
Other receivables 159,877 172,878
---------- ----------
$4,174,503 $4,246,947
========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2008 2007
----------- -----------
Office equipment $ 1,141,039 $ 1,148,013
Motor vehicle 112,563 112,563
Furniture, fixture and fittings 602,655 596,790
Set-top boxes 842,437 842,494
----------- -----------
2,698,694 2,699,860
Accumulated depreciation (1,073,350) (902,714)
----------- -----------
$ 1,625,344 $ 1,797,146
=========== ===========
Depreciation expense was $170,699 for the three months ended March 31,
2008 and $113,655 for the three months ended March 31, 2007.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
MARCH 31, DECEMBER 31,
2008 2007
------------ ------------
INDEFINITE LIVES
Film library $ 17,761,052 $ 17,759,080
------------ ------------
17,761,052 17,759,080
------------ ------------
DEFINITE USEFUL LIVES
Film library 5,377,464 5,331,930
Gaming license 7,090,000 7,090,000
Product development expenditures 720,679 719,220
Software license 12,649 12,649
------------ ------------
13,200,792 13,153,799
Accumulated amortization (5,517,949) (5,219,813)
------------ ------------
7,682,843 7,933,986
------------ ------------
$ 25,443,895 $ 25,693,066
============ ============
Amortization expense was $298,135 for the three months ended March 31,
2008 and $803,881 for the three months ended March 31, 2007.
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.
F-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
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.
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 on January 4, 2007 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 2 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.
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
7. ASSOCIATE
MARCH 31, DECEMBER 31,
2008 2007
----------- -----------
Fair value of investment in associate $ 3,693,650 $ 3,693,650
Goodwill 1,272,465 1,272,465
Share of post-acquisition loss (33,200) (23,832)
----------- -----------
$ 4,932,915 $ 4,942,283
=========== ===========
Details of the Company's associate as at March 31, 2008 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 MARCH 31, 2008 DECEMBER 31, 2007
Ownership Interest: ---------------- -----------------
30.1% 30.1%
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.
F-21
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
Summarised financial information in respect of the Company's associate is set
out below:
MARCH 31, DECEMBER 31,
2008 2007
----------- -----------
Total assets $ 9,332,844 $ 9,353,100
Total liabilities (26,055) (23,562)
----------- -----------
Net assets $ 9,306,789 $ 9,329,538
=========== ===========
Company's share of associate's net assets $ 2,801,343 $ 2,808,191
=========== ===========
Revenue $ 1,080 $ 163,574
=========== ===========
Loss for the period $ (21,806) $ (77,735)
=========== ===========
Company's share of associate's loss for the period $ (9,368) $ (23,832)
=========== ===========
F-22
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
8. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale consist of the following:
MARCH 31, DECEMBER 31,
2008 2007
---------- ----------
Non Current :
Quoted equity securities $1,494,270 $4,031,681
Unquoted equity securities 879,664 879,664
---------- ----------
$2,373,934 $4,911,345
Current :
Unquoted equity securities 2,402,613 2,402,613
---------- ----------
4,776,547 $7,313,958
========== ==========
The investments in quoted equity securities comprised of 29,428,571 common
shares of Auston International Group Ltd (Auston). As of March 31, 2008, the
market value of the Auston shares was S$0.07 (2007: S$0.16) per share.
The unquoted equity securities classified as available-for-sale, with a carrying
value of $879,664 as of March 31, 2008 and December 31, 2007, 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-23
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
9. COMMITMENTS
As of the balance sheet date, the Group has the following capital
commitments:
MARCH 31, DECEMBER 31,
2008 2007
---------- ----------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 121,605 $ 118,073
Set-top boxes $2,074,825 2,074,825
---------- ----------
$2,196,430 $2,192,898
========== ==========
The Company has several noncancelable operating leases, primarily for
office spaces, that expire over the next five years.
As of March 31, 2008, 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,
2008 $ 250,469
2009 147,573
2010 19,157
-----------
Total minimum lease payments $ 417,199
===========
Rent expense totaled $75,465 for the three months ended March 31, 2008
and $71,379 for the three months ended March 31, 2007.
F-24
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
10. INCOME TAXES
The Company files separate tax returns for Singapore and the United
States of America.
The Company had available approximately $5,910,356 of unused U.S. net
operating loss carry-forwards at March 31, 2008, 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 March 31, 2008 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 $4,561,391 of unused Singapore
tax losses and capital allowance carry-forwards at March 31, 2008, 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.
11. 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.
2008 ENTERTAINMENT DIGIT GAMING OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 34,993 $ 5,593,754 $ -- $ 5,628,747
Interest revenue $ 5,443 $ -- $ -- $ 5,443
Interest expenses $ 543 $ -- $ -- $ 543
Depreciation and amortization $ 394,195 $ 74,639 $ -- $ 468,834
Segment profit (loss) $ (1,155,500) $ 89,312 $ -- $ (1,066,188)
Segment assets $ 49,447,894 $ 7,425,125 $ 50,929 $ 56,923,948
Expenditures for segment assets $ 48,964 $ -- $ -- $ 48,964
F-25
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
Reconciliation:-
REVENUES
Total revenues for reportable segments $ 5,628,747
Other revenue $ --
------------
Total consolidated revenues $ 5,628,747
============
INTEREST REVENUE
Total interest revenue for reportable segments $ 5,443
Corporate interest revenue $ --
------------
Total consolidated interest revenue $ 5,443
============
INTEREST EXPENSES
Total interest revenue for reportable segments $ 543
Corporate interest revenue $ --
------------
Total consolidated interest expenses $ 543
============
PROFIT OR LOSS
Total (loss) for reportable segments $ (1,066,188)
Corporate loss $ (50,089)
Loss on disposal of investment available for sale $ (397,755)
Share of loss of associate $ (9,368)
------------
Loss before income tax $ (1,523,400)
============
ASSETS
Total assets for reportable segments $ 56,873,019
Other assets $ 50,929
------------
Total consolidated assets $ 56,923,948
============
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 48,964
============
2007 ENTERTAINMENT DIGIT GAMING OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 10,249 $ 5,476,826 $ -- $ 5,487,075
Interest revenue $ 13,682 $ -- $ -- $ 13,682
Depreciation and amortization $ 842,897 $ 74,639 $ -- $ 917,536
Segment profit (loss) $ (1,842,101) $ 64,275 $ -- $ (1,777,826)
Segment assets $ 45,544,336 $ 7,361,956 $ 2,482,251 $ 55,388,543
Expenditures for segment assets $ 1,182,564 $ -- $ -- $ 1,182,564
F-26
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
Reconciliation:-
REVENUES
Total revenues for reportable segments $ 5,487,075
Other revenue --
------------
Total consolidated revenues $ 5,487,075
============
INTEREST REVENUE
Total interest revenues for reportable segments $ 13,658
Corporate interest revenue 24
------------
Total consolidated interest revenue $ 13,682
============
PROFIT OR LOSS
Total loss for reportable segments $ (1,777,826)
Corporate expenses $ (126,861)
Gain on dilution of interest in subsidiary $ 2,483,871
Share of loss of associate $ 7,539
------------
Profit before income tax $ 586,723
------------
ASSETS
Total assets for reportable segments $ 52,906,292
Other assets $ 2,482,251
------------
Total consolidated assets $ 55,388,543
============
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 1,182,564
============
F-27
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
Following table presents revenues earned from customers located in
different geographic areas. Property and equipment is grouped by its
location.
2008 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 5,628,747 $ -- $ -- $ 5,628,747
Property and equipment, net $ 1,347,942 $ 182,002 $ 95,400 $ 1,625,344
2007 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 5,487,030 $ 45 $ -- $ 5,487,075
Property and equipment, net $ 893,249 $ 277,971 $ 95,400 $ 1,266,620
F-28
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2008 AND 2007
12. 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 Group entered into the following transactions with
the associate:
MARCH 31, MARCH 31,
2008 2007
------------ ------------
Associate :
Marketing $ -- $ 42,216
============ ============
13. SUBSEQUENT EVENTS
On April 9, 2008, the Company disposed 5,000,000 common shares of Auston
International Group Ltd (Auston) at S$ 0.072 per share.
On April 10, 2008, the Company disposed a further of 5,000,000 common
shares of Auston at S$ 0.07 per share.
F-29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 0F 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.
1
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, Education-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.
In fiscal 2007, the business was reorganized under the following entities
to spearhead the expansion of the Company's business and focus on
specific growth areas and territories.
M2B WORLD PTE. LTD.
M2B World Pte. Ltd. was incorporated on April 3, 2003. This subsidiary
used to oversee the management and operation of the Company as a whole
and oversees the Asian business. With effect from September 1, 2006, the
Company's Asian business was overseen by another subsidiary, M2B World
Asia Pacific Pte. Ltd.
The Company took an investment on May 16, 2005 for a 9.1% equity position
with a company called Activ Lifestyle Pte Ltd in Singapore to help
facilitate Amaru Inc.'s diversification into the health and wellness
market. On September 27, 2005, the Company raised its investment in Activ
Lifestyle Pte Ltd to 12.6%. This was further increased to 17.4% as of
December 31, 2006.
In December 2005, M2B World Pte. Ltd. sold 81% equity interests of its
wholly-owned subsidiary, M2B Game World Pte. Ltd. to Auston International
Group Ltd (Auston), a public listed company in Singapore, in exchange for
27% equity interest in Auston. On March 13 and 14, 2007, the Company
disposed off 7,000,000 common shares of Auston International Group Ltd
(Auston) at S$0.08 per share. As of December 31, 2007, the Company's
equity interest in Auston was at 10.40%. As of this date of this report,
the Company's equity interest in Auston shares stands at 4.73%
Subsequent to March 31, 2008, the Company disposed 5,000,000 common
shares of Auston International Group Ltd at S$0.072 per share and a
further 5,000,000 common shares of Auston at S$0.07 per share.
M2B WORLD, INC.
M2B World, Inc., a California corporation, was incorporated on January
24, 2005. This subsidiary handles and oversees the Company's business in
the U.S. The Company has leased a new office on Sunset Boulevard, West
Hollywood that came into effect in August 2006. In October 2007, M2B
World Inc reduced its staffing and in November 2007 sub-leased its
premise as part of the Company's cost reduction measures.
This subsidiary oversees the new global Broadband TV (IPTV) service. A
new server farm was set up in the U.S. in San Jose California in December
2005 to expand the broadband streaming infrastructure; in order to handle
the business in North America and also the global IPTV service.
2
On May 27, 2005, M2B World, Inc. entered into an agreement with Indie
Vision Films, Inc., a California corporation, to purchase 20% of the
beneficial ownership of Indie Vision Films, Inc. The investment will
allow M2B World, Inc. to access the library of programs of Indie Vision
Films, Inc. The Company is currently into negotiations with Indie Vision
Films, Inc to convert its investment into content rights, thereby giving
up its 20% share of beneficial ownership in lieu of library rights that
the Company could exploit commercially for international use.
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. The company is in the process of
consolidating the server farm with the Singapore server farm to, optimize
bandwidth and support cost.
M2B WORLD ASIA PACIFIC PTE. LTD.
M2B World Asia Pacific Pte Ltd was incorporated in the Republic of
Singapore on 1 August 2006 for the purposes of handling all the business
operations of the Company in the Asia Pacific region. This company had
taken over the Asian business operations as well as the assets and
liabilities of M2B World Pte. Ltd. with effect from September 1, 2006.
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 81.6%.
M2B COMMERCE LIMITED
M2B Commerce Limited, a company incorporated in the British Virgin
Islands on July 25, 2002, focuses on e-commerce and digit gaming, with a
branch in Cambodia that oversees the digit gaming operation in Cambodia.
The Company has an agreement with Allsports Limited, a British Virgin
Islands company to operate, administer, and manage the lottery digit
games activities in Cambodia, as an extension of the Company's
entertainment operations.
The company had entered into an investment agreement on January 12, 2006,
with Khoo Kim Leng, the beneficial owner of Dai Long Co., Ltd, which
holds a valid casino license and freehold land and intends to develop and
operate an integrated resort in the Kingdom of Cambodia. The resort will
feature a hotel, guest house, shopping arcade, entertainment and
amusement center and some gaming tables. As of December 31, 2006, the
company had invested $2,402,613 in relation to this investment. The
resort was completed and is in operation subsequent to the balance sheet
date. The Company however intends to divest its stake in the resort, and
has already put up its investment for sale in the market, as the
investment is not related to the Company's core business.
M2B ENTERTAINMENT, INC.
M2B Entertainment, Inc. was incorporated on October 27, 2005. This
subsidiary will oversee the Company's Canadian market. As of December 31,
2007, this subsidiary is dormant.
M2B AUSTRALIA PTY LTD
M2B Australia Pty Ltd was incorporated on June 15, 2005. This subsidiary
handles and oversees the Company's business in Australia. As of December
31, 2007, this subsidiary is dormant.
M2B WORLD TRAVEL SINGAPORE PTE. LTD.
M2B World Travel Singapore Pte Ltd was incorporated in the Republic of
Singapore on March 7, 2006. This subsidiary of M2B World Travel Limited
launches a global online travel platform which offers global e-travel
services.
The Company has completed the development of an online travel engine and
travel web applications for integration with suppliers of travel
information and travel services; and incorporating travel features with
current media operations under the M2B brand name.
M2B World Travel Limited signed a global agreement with Amadeus Global
Travel Distribution, SA, a Spanish corporation. Through the agreement,
the company will be able to offer direct access to the extensive range of
travel options available through the Amadeus network to viewers around
the world.
The launch and operations of the travel service is subject to funding
considerations and the set up of the server farm to host the system.
3
AMARU HOLDINGS LIMITED AND M2B WORLD HOLDINGS LIMITED
Amaru Holdings Limited and M2B World Holdings Limited are incorporated in
the British Virgin Islands on February 21, 2005 and June 15, 2006,
respectively. Amaru Holdings Limited focuses on content syndication and
distribution in areas other than Asia Pacific region. M2B World Holdings
Limited focuses on content syndication and distribution in Asia Pacific
region and is a subsidiary of M2B World Asia Pacific Pte. Ltd.
TREMAX INTERNATIONAL LIMITED AND M2B WORLD TRAVEL LIMITED
Tremax International Limited and M2B World Travel Limited are both
incorporated in the British Virgin Islands on June 8, 2006 and May 3,
2005 respectively. Both companies are investment holdings companies.
On July 10, 2007, 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 is satisfied in full by the issuance of 5,333,333 of common
stock of the Company.
CBN is a company registered in Taiwan, the Republic of China. CBN is an
internet cum broadband access provider to major residential buildings in
Taiwan. The Company believes that acquisition of CBN will be beneficial
to the Company, because CBN has a subscriber base of about 20,000 homes
and should be able to provide the Company with a ready subscriber base to
roll out its services. In 2006, CBN had a revenue of $2.5 millions and
fixed assets of $1.8 millions in network and systems to enable services
to the homes.
The investment is pending the approval of the regulatory authorities in
Taiwan, which is a requirement for foreign investments in Taiwan.
RESULTS OF OPERATIONS
REVENUE
Financial Statement
- Revenue for the three months ended March 31, 2008 was $5,628,747
compared with $5,487,075 for the same period in 2007.
- The Company's cash balance was $1,874,739 at March 31, 2008
compared with $5,757,807 at March 31, 2007.
Revenue
Revenue for the three months ended March 31, 2008 at $5,628,747 was
higher than revenue of $5,487,075 for the three months ended March 31,
2007 by $141, 672 (2.58%).
Digit gaming revenue for the three months ended March 31, 2008 at
$5,593,754 was higher than $5,476,826 at March 31, 2007 by $116,928
(2.13%) mainly due to increase in lottery sales.
Entertainment revenue for the three months ended March 31, 2008 at
$34,993 was higher than entertainment revenue of $10,249 for the three
months ended March 31, 2007. The increase in entertainment of $24,744
(241.43%) was insignificant mainly due to no new advertising or content
syndication contracts being secured.
Cost of Services
Cost of services for the three months ended March 31, 2008 was $5,588,380
which increased by $164,879 (3.04%) from $5,423,501 for the three months
ended March 31, 2007.
As a proportion of revenue the cost of the services for the three months
ended March 31, 2008 was 99.3% (cost of sales at $5,588,380 and revenue
of $ 5,628,747) as compared to 98.8% (cost of sales at $5,423,501 and
revenue of $5,487,075) for the three months ended March 31, 2007.
The increase in cost of services of $164,879 (3.04%) was not significant
and was attributed to the cost of managing and operating the
entertainment segment.
4
DISTRIBUTION EXPENSES
Distribution expenses for the three months ended March 31, 2008 at
$124,930 were lower by $184,717 (59.65%) as compared to the amount of
$309,647 incurred for the three months ended March 31, 2007.
The lower distribution expenses were attributed to decreased spending on
marketing and promoting the WOWtv and M2Btv services which decreased by
$173,148 (84.3%) from $145,429 for the three months ended March 31, 2007
to $32,281 for the three months ended March 31, 2008.
GENERAL AND ADMINISTRATIVE EXPENSES
Administration expenses for the three months ended March 31, 2008 at
$1,038,502 were lowered by $633,794 (37.9%) as compared to the amount of
$1,672,296 incurred for the three months ended March 31, 2007.
The decrease in administrative expenses for the period ended March 31,
2008 was attributed mainly to the decrease in:
o Amortization. License amortization had decreased by $505,746
(62.91%), from $803,881 for the three months ended March 31, 2007
to $298,135 for the period ended March 31, 2008. The decrease was
mainly due to most of the intangible assets being fully
depreciated during end of December 31, 2007.
o Staff costs. Staff costs had decreased by $146,434 (37.80%), from
$387,435 for the three months ended March 31, 2007 to $241,001 for
the three months ended March 31, 2008. The decrease was mainly due
as a result of costs reduction measures to reduce operating costs
(LOSS) INCOME FROM OPERATIONS
The Company incurred a loss from operations of $1,123,065 for the three
months ended March 31, 2008 as compared to the loss from operations of
$1,918,369 for the three months ended March 31, 2007 due to the
significant decrease in the general and administrative expenses for the
period.
NET (LOSS) INCOME
Net loss for the three months ended March 31, 2008, was $1,506,400 which
decreased by $2,256,636 (300.79%) from net income of $750,236 for the
three months ended March 31, 2007.
The decrease was mainly attributed to the gain of $2,483,871 as of March
31, 2007 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. On January 3, 2007, M2B World Asia Pacific Pte. Ltd., issued
7,778,014 shares of common stock through 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%. The decrease was further attributed to the
loss of $397,755 as of March 31, 2008 on the disposal of investments
available for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at $1,874,739 at March 31, 2008 as compared to cash
of $5,757,807 at March 31, 2007.
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 March 31, 2008, 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.
5
Cash generated from operations will not be able to cover the Company's
intended growth and expansion. The Company has plans in 2008 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve
principal while concurrently maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities
that we may invest in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was
issued with a fixed interest rate at the then-prevailing rate and the
prevailing interest rate later rises, the current value of the principal
amount of our investment will decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial
paper, money market funds, high-grade corporate bonds, government and
non- government debt securities and certificates of deposit. In general,
money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate. The
Company held $7,700,547 and $10,237,958 in marketable securities as of
March 31, 2008 and December 31, 2007 respectively.
The Company does not believe that it faces material market risk with
respect to its cash and cash equivalents which totaled $1,874,739 and
$2,322,541 at March 31, 2008 and December 31, 2007, respectively.
The Company has no long-term obligations or hedging activities.
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.
6
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.
7
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.
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.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
A system of disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended [the
"Exchange Act"]) are controls and other procedures that are designed to
provide reasonable assurance that the information that the Company is
required to disclose in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives, and
management necessarily is required to use its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. In
addition, the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Moreover, over time,
controls may become inadequate because of changes in conditions, or the
degree of compliance with policies or procedures may deteriorate. Because
of the inherent limitations in a control system, misstatements due to
error or fraud may occur and not be detected.
8
Notwithstanding the issues described below, the current management has
concluded that the consolidated financial statements for the periods
covered by and included in the Quarterly Report on Form 10-Q for the
period ended March 31, 2008 are fairly stated in all material respects in
accordance with generally accepted accounting principles in the United
States for each of the periods presented herein.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management
document and test the Company's internal control over financial reporting
and include in the Quarterly Report on Form 10-Q for the period ended
March 31, 2008 a report on management's assessment of the effectiveness
of our internal control over financial reporting.
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). Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with United
States of America generally accepted accounting principles. A Company's
internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the Company
are being made only in accordance with authorization of management and
directors of the Company and (iii) provide reasonable assurance regarding
the prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on
our consolidated financial statements.
In connection with the preparation of the Quarterly Report on Form 10-Q
for the period ended March 31, 2008 to evaluate the effectiveness of the
design and operation of our disclosure controls and procedures as of
March 31, 2008, the Company's management did not complete the assessment
of the effectiveness of the Company's internal control over financial
reporting, implementing the criteria set forth by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission in "Internal
Control-Integrated Framework". Management has concluded as a result that
its disclosure controls and procedures may not be effective at the
reasonable assurance level as of March 31, 2008. Specifically, its
control environment possibly may not sufficiently promote effective
internal control over financial reporting through the management
structure to prevent a material misstatement.
The Company needs to complete implementing the internal controls based on
the criteria established in Internal Control -- Integrated Framework
issued by the COSO. The management is fully committed to implement the
internal controls based on these criteria in 2008 and the management
believes that it is taking the steps that will properly address any
issue.
Subsequent to March 31, 2008, the Company plans to hire a Chief Financial
Officer and is utilizing several full time accounting contractors serving
in senior and staff level accounting positions. The Company is actively
recruiting high-level competent accounting personnel.
While we are taking immediate steps and dedicating substantial resources
to implement the internal controls based on the criteria established in
Internal Control - Integrated Framework issued by the COSO, they will not
be considered fully implemented until the new and improved internal
controls operate for a period of time, are tested and are found to be
operating effectively.
The Company's registered public accountant has not conducted an audit of
the Company's controls and procedures regarding internal control over
financial reporting. Consequently, the registered public accounting firm
expresses no opinion with regards to the effectiveness or implementation
of the Company's controls and procedures with regards to internal control
over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over
financial reporting during the most recently completed fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
9
PART II: 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, which has been further amended to include Amaru, Inc.
as a co-defendant. The lawsuit was settled by the parties in April, 2008.
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.
10
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 depend 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.
11
THE COMPANY DID NOT COMPLETE THE ASSESSMENT OF THE EFFECTIVENESS OF THE
COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING, SET FORTH BY THE
COMMITTEE OF SPONSORING ORGANIZATIONS (COSO) OF THE TREADWAY COMMISSION
IN "INTERNAL CONTROL-INTEGRATED FRAMEWORK".
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management
document and test the Company's internal control over financial reporting
and include in the Annual Report on Form 10-K and this Quarterly Report
on Form 10-Q report on management's assessment of the effectiveness of
our internal control over financial reporting.
In connection with the preparation of the Annual Report on Form 10K and
this Quarterly Report on Form 10-Q, to evaluate the effectiveness of the
design and operation of our disclosure controls and procedures as of
March 31, 2008, the Company's management did not complete the assessment
of the effectiveness of the Company's internal control over financial
reporting, implementing the criteria set forth by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission in "Internal
Control-Integrated Framework".
While the Company is taking immediate steps and dedicating substantial
resources to implement the internal controls based on the criteria
established in Internal Control - Integrated Framework issued by the
COSO, they will not be considered fully implemented until the new and
improved internal controls operate for a period of time, are tested and
are found to be operating effectively.
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.
12
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS:
Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT
Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT
13
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)
May 7, 2008 /s/ Colin Binny
---------------- ---------------------------------------
Date President, Chief Executive Officer and
Chief Financial Officer