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 June 30, 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
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(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 reporting |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
(Do not check if a 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 July 31, 2008)
AMARU, INC. AND SUBSIDARIES
2008 Quarterly Report on Form 10-Q
Table of Contents
PART I: FINANCIAL INFORMATION
------------------------------
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 7
ITEM 4: CONTROLS AND PROCEDURES 9
PART II: OTHER INFORMATION
---------------------------
ITEM 1: LEGAL PROCEEDINGS 11
ITEM 1A: RISK FACTORS 11
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 14
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS 14
ITEM 5: OTHER INFORMATION
14
ITEM 6: EXHIBITS 14
SIGNATURES
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, DECEMBER 31,
2008 2007
----------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 2,062,908 $ 2,322,541
Accounts receivable, net of allowance of
$109,430 and $54,154 at June 30, 2008 and
December 31, 2007 respectively 534,564 744,589
Prepayment on purchase 3,733,333 3,733,333
Account receivable from sale of IPTV Platform 9,500,000 9,500,000
Equity securities held for trading 1,539,000 2,924,000
Other current assets 471,179 513,614
Inventories 1,147,404 1,157,248
Investments available for sale 2,402,613 2,402,613
----------- -----------
Total current assets 21,391,001 23,297,938
----------- -----------
Non-current assets
Property and equipment, net 1,463,540 1,797,146
Intangible assets, net 25,158,149 25,693,066
Equity Method Investment 4,929,737 4,942,283
Investments available for sale 1,259,612 4,911,345
----------- -----------
Total non-current assets 32,811,038 37,343,840
----------- -----------
Total assets $54,202,039 $60,641,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,368,666 $ 3,068,613
Other payables 40,000 100,005
Advances from related parties 123,793 155,313
Capital lease payable - short term 11,364 10,746
Income taxes payable 5,428 5,428
----------- -----------
Total current liabilities 2,549,251 3,340,105
----------- -----------
Deferred tax liabilities 68,391 1,672,801
Capital lease payable - long term 54,919 57,306
----------- -----------
Total non-current liabilities 123,310 1,730,107
----------- -----------
Total liabilities 2,672,561 5,070,212
Minority interest 4,212,716 4,619,381
Stockholders' equity
Preferred stock (par value $0.001)
5,000,000 shares authorized;
0 shares issued
and outstanding at June 30,
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
June 30, 2008 and December 31,
2007, respectively 159,431 159,431
Additional paid-in capital 42,918,666 42,918,666
Retained earnings 3,187,628 5,650,447
Accumulated other comprehensive income 1,051,037 2,223,641
----------- -----------
Total stockholders' equity 51,529,478 55,571,566
----------- -----------
Total liabilities and shareholders' equity $54,202,039 $60,641,778
=========== ===========
See accompanying notes to consolidated financial statements
F-2
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------------- --------------------------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
------------- ------------- ------------- -------------
Revenue:
Entertainment:
Advertising/Subscription $ 48,169 $ 34,689 $ 13,176 $ 24,440
Syndication and e-services -- 15,000,000 -- 15,000,000
------------- ------------- ------------- -------------
Total Entertainment 48,169 15,034,689 13,176 15,024,440
Digit gaming 11,457,693 10,459,791 5,863,939 4,982,965
------------- ------------- ------------- -------------
Total revenue 11,505,862 25,494,480 5,877,115 20,007,405
Cost of services (11,345,549) (11,292,135) (5,757,169) (5,868,634)
------------- ------------- ------------- -------------
Gross profit 160,313 14,202,345 119,946 14,138,771
Distribution costs (205,900) (505,653) (80,970) (196,006)
Administrative expenses (1,941,146) (3,521,215) (902,644) (1,848,919)
------------- ------------- ------------- -------------
Total expenses (2,147,046) (4,026,868) (983,614) (2,044,925)
------------- ------------- ------------- -------------
(Loss) Income from operations (1,986,733) 10,175,477 (863,668) 12,093,846
Other (expenses) income
Interest expense (1,111) (171) (568) (171)
Interest income 8,970 26,101 3,527 12,419
Gain on disposal of equipment 1,888 -- -- --
Gain on dilution of interest in subsidiary -- 2,483,871 -- --
Loss on disposal of investment available for sale (442,051) -- (44,296) --
Net change in fair value of financial
assets held for trading (1,385,000) 4,320,000 (1,385,000) 4,320,000
Share of (loss) profit of equity method investment (12,546) (15,224) (3,178) (22,763)
------------- ------------- ------------- -------------
(Loss) Income before income taxes (3,816,583) 16,990,054 (2,293,183) 16,403,331
(Provision) benefit for income taxes 947,099 (1,586,432) 826,000 (1,749,945)
------------- ------------- ------------- -------------
Net income (loss) $ (2,869,484) $ 15,403,622 $ (1,467,183) $ 14,653,386
============= ============= ============= =============
Attribute to:
Equity holders of the company $ (2,462,819) $ 12,628,144 $ (1,225,451) $ 11,797,894
Minority interests (406,665) 2,775,478 (241,732) 2,855,492
------------- ------------- ------------- -------------
Net income (loss) $ (2,869,484) $ 15,403,622 $ (1,467,183) $ 14,653,386
============= ============= ============= =============
Net income per share
- Basic and diluted $ (0.02) $ 0.10 $ (0.01) $ 0.10
============= ============= ============= =============
Weighted average number of common
shares outstanding
- Basic 159,431,861 153,942,285 159,431,861 154,098,528
============= ============= ============= =============
- Diluted 159,431,861 153,942,285 159,431,861 154,098,528
============= ============= ============= =============
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 -- -- -- -- -- -- (2,462,819)
Change in
fair value
of available -- -- -- -- -- -- --
for-sale-equity
securities,
net of tax
Comprehensive -- -- -- -- -- -- --
income
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at June
30, 2008 -- -- 159,431,861 $ 159,431 $42,918,666 -- $ 3,187,628
=========== =========== =========== =========== =========== =========== ============
(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 -- -- (406,665) (2,869,484)
Change in
fair value
of available
for-sale-equity
securities,
net of tax -- (1,172,604) -- (1,172,604)
------------
Comprehensive
loss -- -- -- (4,042,088)
------------ ------------ ------------ ------------
Balance at June
30, 2008 $ 12,927 $ 1,038,110 $ 4,212,716 $ 51,529,478
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
-------------------------------
June 30, 2008 June 30, 2007
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,869,484) $ 15,403,622
Adjustments to reconcile net income to cash and cash
equivalents used or provided by operations:
Amortization 585,042 1,625,493
Depreciation 340,450 270,208
Acquisition of investment in exchange for account receivable -- (4,400,000)
Gain on disposal of equipment (1,888) --
Loss on disposal of investment available for sale 442,051 --
Gain on dilution of interest in subsidiary -- (2,483,871)
Loss(Gain)in fair value of financial assets at fair value
through Profit or Loss-held for trading 1,385,000 (4,320,000)
Common stock issued for services -- 60,000
Deferred taxes (947,099) 1,586,432
Share of loss (profit) of Equity Method Investment 12,546 15,224
Changes in operation assets and liabilities
Accounts receivables 210,025 (10,316,268)
Inventories 9,844 520,955
Others current assets 42,435 57,856
Accounts payable and accrued expenses (699,947) (10,198)
Other payables (60,005) 105,000
Income taxes payable -- (13,228)
------------ ------------
Net cash used in operating activities (1,551,030) (1,898,775)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment 2,684 --
Proceeds from disposal of investment available for sale 1,379,767 --
Acquisition of equipment (7,640) (710,846)
Acquisition of Equity Method Investment -- (66,115)
Acquisition of intangible assets (50,125) (1,069,195)
------------ ------------
Net cash generated from (used in) investing activities 1,324,686 (1,846,156)
------------ ------------
CASH PROVIDED FROM FINANCING ACTIVITIES
Repayments of obligations under capital leases (1,769) --
Repayment of related parties (31,520) --
Proceeds from Capital lease payable -- 70,025
Proceeds from issuance of common stock -- --
Capital contributed by minority shareholders -- 5,580,000
------------ ------------
Net cash provided used in by financing activities (33,289) 5,650,025
------------ ------------
Effect of exchange rate changes on cash and cash equivalents -- --
------------ ------------
Cash flows from all activities (259,633) 1,905,094
Cash and cash equivalents at beginning of period 2,322,541 2,294,984
------------ ------------
Cash and cash equivalents at end of period $ 2,062,908 $ 4,200,078
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Acquisition of investments (1) $ -- $ 4,400,000
============ ============
(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.
On June 27, 2007, M2B World Holdings Limited, a wholly owned subsidiary of M2B World Asia
Pacific Pte. Ltd received $2.7 million in quoted equity securities in exchange for accounts
receivable from a company, as part of the sales and purchase agreement with the company.
See accompanying notes to consolidated financial statements
F-6
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
1. BASIS OF PRESENTATION AND REORGANIZATION
1.1 Description of Business
Amaru, Inc. (the "Company") is in the business of broadband
entertainment-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 a nation wide lottery in
Cambodia. The Company through its subsidiary, M2B Commerce Limited,
signed an agreement with Allsports Limited, a British Virgin Islands
company to operate and conduct digit games in Cambodia and to manage
the digit games activities in Cambodia.
The key business focus of the Company is to establish itself as the
leading provider and creator of a new generation of
Entertainment-on-Demand and E-Commerce Channels on Broadband, and 3G
(Third Generation) devices.
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 and pay per view services 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 e-services, which would provide the Company with multiple
streams of revenue. Such revenues would be derived from advertising and
branding (channel and program sponsorship); on-line subscriptions;
online games micro-payments; channel/portal development (digital
programming services); content aggregation and syndication; broadband
consulting services; on-line shopping turnkey solutions; broadband
hosting and streaming services; E-commerce commissions and on-line
dealerships; and digit games operations.
1.2 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.
F-7
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
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 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.
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-8
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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 in the
United States of America 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-9
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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 SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Sales outside of the U.S. $11,505,862 $25,494,480 $ 5,877,115 $20,007,405
Services purchased outside of the U.S. $11,322,553 $11,260,156 $ 5,734,173 $ 5,866,757
2.5 Inventories
Inventories are carried at the lower of cost or 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-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
2.7 Intangible Assets
Intangible assets consist of film library, gaming and software
licences 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 Equity Method Investment
An Equity Method Investment 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 the Equity Method
Investment are incorporated in these financial statements using the
equity method of accounting. Under the equity method, investments
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 Equity Method Investment, less any impairment in the value of
individual investments. Losses of an Equity Method Investment in
excess of the group's interest in that Equity Method Investment
(which includes any long-term interests that, in substance, form
part of the Company's net investment in the Equity Method
Investment) are not recognised, unless the group has incurred legal
or constructive obligations or made payments on behalf of the Equity
Method Investment.
F-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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 Equity Method Investment recognized at
the date of acquisition is recognized 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 recognized immediately in the consolidated
profit and loss statement.
Where a group entity transacts with an Equity Method Investment 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 June 30,
2008 totaled $1,539,000 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-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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 June 30, 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.
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 June 30, 2008 using:
----------------------------------------------------------
Prices or
Fair Value Quoted Prices in Valuation
Measurements at Active Markets Techniques
June 30, 2008 (Level 1) (Level 3)
Description ($) ($) ($)
-----------------------------------------------------------------------------------------------------------
Equity Securities Held for Trading 1,539,000 1,539,000 --
Investments Available for Sale - Current 2,782,561 -- 2,402,613
Investments Available for Sale - Non Current -- -- 1,259,612
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
The table below sets forth a summary of changes in the fair value of
the Company's Level 3 financial assets (Investments Available for Sale)
for the six months ended June 30, 2008.
Six Months Ended
June 30, 2008
-----------
Balance at the beginning of the period $ 7,313,958
Change in fair value of Investments
Available for Sale - unrealized (1,829,915)
Loss on disposal of Investments
Available for Sale - realized (442,051)
Proceeds from sale of Investments
Available for Sale (1,379,767)
-----------
Balance at the end of the period $ 3,662,225
===========
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. The Company elected not
to adopt SFAS No. 159's option for valuing financial assets and
liabilities. Therefore adoption of SFAS No. 159 did not have any
impact on its Consolidated Financial Statements.
2.12 Advances from Related Party
Advances from related party are unsecured, non-interest bearing and
payable on demand.
2.13 Leases
The Company is the lessee of equipment under a capital lease
expiring in 2014. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are amortized
over the lower of their related lease terms or their estimated
productive lives. Amortization of assets under capital leases is
included in depreciation expense for the quarter ended June 30, 2008
and 2007.
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.
2.14 Foreign Currency Translation
Transactions in foreign currencies are measured and recorded in the
functional currency U.S. dollars, using the Company's prevailing
month exchange rate. The Company's reporting currency is also in
U.S. dollars. At the balance sheet date, recorded monetary balances
that are denominated in a foreign currency are adjusted to reflect
the rate at the balance sheet date and the income statement accounts
using the average exchange rates throughout the period. Translation
gains and losses are recorded in stockholders' equity as other
Comprehensive income and realized gains and losses from foreign
currency transactions are reflected in operations.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
2.15 Revenues
Subscription and related services revenues are recognized over the
period that services are provided. Advertising and sponsorship
revenues are recognized as the services are performed or when the
goods are delivered. Licensing and content syndication revenue is
recognized when the license period begins, and the contents are
available for exploitation by customer, pursuant to the terms of the
license agreement. Gaming revenue is recognized as earned net of
winnings. E-commerce commissions are recognized as received.
Broadband consulting services and on-line turnkey solutions revenue
are recognized as earned.
2.16 Costs of Services
The cost of services pertaining to advertising and sponsorship
revenue and subscription and related services are cost of bandwidth
charges, channel design and alteration, copyright licensing, and
hardware hosting and maintenance costs. The cost of services
pertaining to E-commerce revenue is channel design and alteration,
and hardware hosting and maintenance costs. The cost of services
pertaining to gaming is for managing and operating the operations
and gaming centers. All these costs are accounted for in the period
it was incurred.
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 SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
During the year ended December 31, 2007, the Company adopted
Financial Accounting Standards Board (FASB) Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" (FIN 48), which
supplements SFAS No. 109, "Accounting for Income Taxes," by defining
the confidence level that a tax position must meet in order to be
recognized in the financial statements. The Interpretation requires
that the tax effects of a position be recognized only if it is
"more-likely-than-not" to be sustained based solely on its technical
merits as of the reporting date. The more-likely-than-not threshold
represents a positive assertion by management that a company is
entitled to the economic benefits of a tax position. If a tax
position is not considered more-likely-than-not to be sustained
based solely on its technical merits, no benefits of the tax
position are to be recognized. Moreover, the more-likely-than-not
threshold must continue to be met in each reporting period to
support continued recognition of a benefit. With the adoption of FIN
48, companies are required to adjust their financial statements to
reflect only those tax positions that are more-likely-than-not to be
sustained. Any necessary adjustment would be recorded directly to
retained earnings and reported as a change in accounting principle.
Upon adoption of FIN 48 as of January 1, 2007, the Company had no
gross unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in future periods. At December
31, 2007 the amount of gross unrecognized tax benefits before
valuation allowances and the amount that would favorably affect the
effective income tax rate in future periods after valuation
allowances were $0. These amounts consider the guidance in FIN
48-1, "Definition of Settlement in FASB Interpretation No. 48".The
Company has not accrued any additional interest or penalties as a
result of the adoption of FIN 48.
The Company files income tax returns in the United States federal
jurisdiction and certain states in the United States and certain
other foreign jurisdictions. With a few exceptions, the Company is
no longer subject to U. S. federal, state or foreign income tax
examination by tax authorities on income tax returns filed before
December 31, 2004. U. S. federal. State and foreign income returns
filed for years after December 31, 2004 are considered open tax
years as of the date of these consolidated financial statements. No
income tax returns are currently under examination by any tax
authorities.
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 six months
ended June 30, 2008 and 2007, the Company incurred advertising
expenses of $43,112 and $317,437 respectively. For the three months
ended June 30, 2008 and 2007, the Company incurred advertising
expenses of $10,831 and $112,008 respectively.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
2.21 Reclassifications
Certain amounts in the previous periods presented have been
reclassified to conform to the current year financial statement
presentation.
3. EQUITY SECURITIES HELD FOR TRADING
June 30, December 31,
2008 2007
---------- ----------
Quoted equity security, at fair value $1,539,000 $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$1,861,000.
The investments in quoted equity securities comprised of 34,000,000
common shares of PT Agis at the market value of US$0.0453 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:
JUNE 30, DECEMBER 31,
2008 2007
---------- ----------
Prepayments $ 140,946 $ 169,641
Deposits 170,428 171,095
Other receivables 159,805 172,878
---------- ----------
$ 471,179 $ 513,614
========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, DECEMBER 31,
2008 2007
----------- -----------
Office equipment $ 1,148,984 $ 1,148,013
Motor vehicle 112,563 112,563
Furniture, fixture and fitting 602,655 596,790
Set-top boxes 842,437 842,494
----------- -----------
2,706,639 2,699,860
Accumulated depreciation (1,243,099) (902,714)
----------- -----------
$ 1,463,540 $ 1,797,146
=========== ===========
Depreciation expense was $340,450 for the six months ended June 30,
2008 and $270,208 for the six months ended June 30, 2007.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
JUNE 30, DECEMBER 31,
2008 2007
------------ ------------
INDEFINITE LIVES
Film library $ 17,759,316 $ 17,759,080
------------ ------------
17,759,316 17,759,080
------------ ------------
DEFINITE USEFUL LIVES
Film library 5,380,361 5,331,930
Gaming license 7,090,000 7,090,000
Product development expenditures 721,680 719,220
Software license 12,649 12,649
------------ ------------
13,204,690 13,153,799
Accumulated amortization (5,805,857) (5,219,813)
------------ ------------
7,398,833 7,933,986
------------ ------------
$ 25,158,149 $ 25,693,066
============ ============
Amortization expense was $585,042 for the six months ended June 30,
2008 and $1,625,493 for the six months ended June 30, 2007
Intangible assets which have indefinite lives and 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 SIX MONTHS ENDED
JUNE 30, 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 SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
7. EQUITY METHOD INVESTMENT
JUNE 30, DECEMBER 31,
2008 2007
----------- -----------
Fair value of investment in Equity $ 3,693,650 $ 3,693,650
Method investment
Goodwill 1,272,465 1,272,465
Share of post-acquisition loss (36,378) (23,832)
----------- -----------
$ 4,929,737 $ 4,942,283
=========== ===========
Details of the Company's Equity Method Investment as at June 30, 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 : JUNE 30, 2008 DECEMBER 31, 2007
Ownership Interest ---------------- ----------------
30.1% 30.1%
One of the directors of the Company has an interest in the Equity Method
Investment Company. One of the directors of the Company is also a director
in the Equity Method Investment.
F-21
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
Summarised financial information in respect of the Company's Equity
Method Investment is set out below:
JUNE 30, DECEMBER 31,
2008 2007
----------- -----------
Total assets $ 9,337,719 $ 9,353,100
Total liabilities (36,561) (23,562)
----------- -----------
Net assets $ 9,301,158 $ 9,329,538
=========== ===========
Company's share of Equity Method
Investment's net assets $ 2,799,649 $ 2,808,191
=========== ===========
Revenue $ 1,430 $ 163,574
=========== ===========
Loss for the period $ (9,222) $ (77,735)
=========== ===========
Company's share of Equity Method
Investment's loss for the period $ (3,178) $ (23,832)
=========== ===========
F-22
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
8. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale consist of the following:
JUNE 30, DECEMBER 31,
2008 2007
---------- ----------
Non Current :
Quoted equity securities $ 379,948 $4,031,681
Unquoted equity securities 879,664 879,664
---------- ----------
1,259,612 4,911,345
Current :
Unquoted equity securities 2,402,613 2,402,613
---------- ----------
$3,662,225 $7,313,958
========== ==========
The investments in quoted equity securities comprised of 9,400,571
common shares of Auston International Group Ltd (Auston). As of June
30, 2008, the market value of the Auston shares was S$0.055 (2007:
S$0.07) per share.
The unquoted equity securities classified as available-for-sale, with a
carrying value of $879,664 as of June 30, 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 SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
9. COMMITMENTS
As of the balance sheet date, the Group has the following capital
commitments:
JUNE 30, DECEMBER 31,
2008 2007
---------- ----------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 181,808 $ 118,073
Set-top boxes $2,074,825 $2,074,825
---------- ----------
$2,256,633 $2,192,898
========== ==========
Capital Leases
The following summarizes the Company's capital lease obligations at
June 30, 2008:
2008 2007
-------- --------
Future minimum lease payments $ 79,507 $ 81,628
Less: amounts representing interest (13,224) (13,576)
-------- --------
Present value of net minimum lease payments 66,283 68,052
Less: current portion (11,364) (10,746)
-------- --------
$ 54,919 $ 57,306
======== ========
The Company is the lessee of equipment under capital leases expiring in
various years through 2014. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are amortized
over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is
included in depreciation expense for 2008 and 2007. Interest rates on
capitalized leases is fixed at 2.85%.
F-24
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
Operating Leases
The Company leases facilities and equipment under operating leases
expiring through 2010. Total rental expense on operating leases for the
quarters ended June 30, 2008 and 2007 was $124,382 and $171,914,
respectively. As of June 30, 2008, the future minimum lease payments
are as follows:
For the Quarter Ended June 30, Operating Capital
------------------------------ --------- -------
2008 $173,069 $ 11,364
2009 224,898 11,364
2010 19,205 11,364
2011 -- 11,364
2012 -- 11,364
2013 and thereafter -- 9,462
-------- --------
$417,172 $ 66,282
======== ========
10. INCOME TAXES
The Company files separate tax returns for Singapore and the United
States of America.
The Company had available approximately $6,102,600 of unused U.S. net
operating loss carry-forwards at June 30, 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 $4,871,000 of unused Singapore
tax losses and capital allowance carry-forwards at June 30, 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.
F-25
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
For the six months ENTERTAINMENT DIGIT GAMING OTHER TOTAL
ended June 30, 2008 -------------- ------------- ------------ --------------
Revenues from external customers $ 48,169 $ 11,457,693 $ -- $ 11,505,862
Interest revenue $ 8,970 $ -- $ -- $ 8,970
Interest expenses $ 1,111 $ -- $ -- $ 1,111
Depreciation and amortization $ 776,214 $ 149,278 $ -- $ 925,492
Segment profit (loss) $ (2,082,652) $ 216,254 $ -- $ (1,866,398)
Segment assets $ 46,599,948 $ 7,570,622 $ 31,469 $ 54,202,039
Expenditures for segment assets $ 57,765 $ -- $ -- $ 57,765
Reconciliation:-
REVENUES
Total revenues for reportable segments $ 11,505,862
Other revenue $ --
------------
Total consolidated revenues $ 11,505,862
============
INTEREST REVENUE
Total interest revenue for reportable segments $ 8,970
Corporate interest revenue $ --
------------
Total consolidated interest revenue $ 8,970
============
INTEREST EXPENSES
Total interest revenue for reportable segments $ 1,111
Corporate interest revenue $ --
------------
Total consolidated interest expenses $ 1,111
============
PROFIT OR LOSS
Total (loss) for reportable segments $ (1,866,398)
Corporate loss $ (110,588)
Loss on disposal of investment available for sale $ (442,051)
Loss on valuation of held for trading investment $ (1,385,000)
Share of loss of equity method investment $ (12,546)
------------
Loss before income tax $ (3,816,583)
============
ASSETS
Total assets for reportable segments $ 54,170,570
Other assets $ 31,469
------------
Total consolidated assets $ 54,202,039
============
F-26
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 57,765
===========
For the six months ENTERTAINMENT DIGIT GAMING OTHER TOTAL
ended June 30, 2007 -------------- ------------- ------------ --------------
Revenues from external customers $15,034,689 $10,459,791 $ -- $25,494,480
Interest revenue $ 26,101 $ -- $ -- $ 26,101
Interest expenses $ 171 $ -- $ -- $ 171
Depreciation and amortization $ 1,746,423 $ 149,278 $ -- $ 1,895,701
Segment profit $10,229,860 $ 161,906 $ -- $10,391,766
Segment assets $62,111,786 $ 7,163,454 $ 2,452,603 $71,727,843
Expenditures for segment assets $ 1,780,041 $ -- $ -- $ 1,780,041
Reconciliation:
REVENUES
Total revenues for reportable segments $ 25,494,480
Other revenue --
------------
Total consolidated revenues $ 25,494,480
============
INTEREST REVENUE
Total interest revenues for reportable segments $ 26,071
Corporate interest revenue 30
------------
Total consolidated interest revenue $ 26,101
============
INTEREST EXPENSES
Total interest revenues for reportable segments $ 171
Corporate interest revenue --
------------
Total consolidated interest expenses $ 171
============
PROFIT OR LOSS
Total profit for reportable segments $ 10,391,766
Corporate expenses $ (190,359)
Gain on dilution of interest in subsidiary $ 2,483,871
Gain on valuation of held for trading investment $ 4,320,000
Share of loss of equity method investment $ (15,224)
------------
Profit before income tax $ 16,990,054
------------
ASSETS
Total assets for reportable segments $ 69,275,240
Other assets
$ 2,452,603
------------
Total consolidated assets $ 71,727,843
============
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 1,780,041
============
F-27
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
Following table presents revenues earned from customers located in different
geographic areas. Property and equipment is grouped by its location.
For the six months ended ASIA PACIFIC UNITED STATES OTHER TOTAL
June 30, 2008 ------------ ------------- ----------- -----------
Revenues from external customers $11,505,862 $ -- $ -- $11,505,862
Property and equipment, net $ 1,210,464 $ 157,676 $ 95,400 $ 1,463,540
For the six months ended ASIA PACIFIC UNITED STATES OTHER TOTAL
June 30, 2007 ------------ ------------ ----------- -----------
Revenues from external customers $25,494,193 $ 287 $ -- $25,494,480
Property and equipment, net $ 1,306,001 $ 254,981 $ 95,400 $ 1,656,382
F-28
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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 related party:
For the six months ended
--------------------------
JUNE 30, JUNE 30,
2008 2007
--------- -------
Marketing $ -- $82,449
========= =======
13. SALE OF IPTV PLATFORM
In April 2007 the Company through its subsidiary M2B World Holdings
Limited entered into an agreement to sell its IPTV platform to a
company in Indonesia (buyer) for $15,000,000. The total amount of the
consideration was to be received in shares of the buyer and a 50% share
of a newly incorporated investment holding entity in the British Virgin
Islands. The Company has received $5,000,000 in cash and
publicly-traded securities. The balance outstanding receivable of
$9,500,000 is included as "Receivable from sale of IPTV platform" at
June 30, 2008 and December 31, 2007, respectively, which comprises of
two portions: the first portion of $2 million to be settled fully in
publicly-traded shares of the buyer and the other portion of $7,500,000
million will be reinvested in the form of joint venture with the buyer
as stated in the terms of the sale agreement. Management is in the
process of completing this transaction and has determined that the
entire amount of $9,500,000 is recoverable and no allowances are
necessary.
14. PURCHASE OF CBBN HOLDINGS LIMITED
The Company through its wholly owned subsidiary, Tremax International
Limited, entered into a sale and purchase agreement dated July 10, 2007
with Domaine Group Limited. Per the agreement the Company through its
wholly owned subsidiary, Tremax International Limited would transfer
5,333,333 shares of the Company valued at $3,733,333 which is included
as "Prepayment on purchase" at June 30, 2008 and December 31, 2007,
respectively, in exchange for Domaine Group Limited transferring its
100% shares in CBBN Holdings Limited, a company incorporated in the
British Virgin Islands. The transaction has not been consummated and
the management of the Company is in the process of weighing its options
under this deal and possibly restructuring it.
15. SUBSEQUENT EVENTS
As of July 7, 2008 the Company disposed of a further 3,400,000 common
shares of Auston International Group Ltd at S$0.045 per share for
2,400,000 shares and of S$0.05 per share for 1,000,000 shares for a
total of S$158,000 purchase price. The proceeds of the sale were
deposited into the Company's Singapore Currency bank account.
As at July 10, 2008 the Company disposed a further 85,000 common shares
of Auston International Group Ltd at S$0.05 per share for a total
purchase price of $4,250.
On July 8, 2008, M2B World Asia Pacific Pte Ltd entered into a
convertible loan agreement with a company for $2,500,000 over a two
year period. The loan bears an interest rate of 5% per annum, and the
Company has the option to convert the loan into shares of M2B World
Asia Pacific Pte Ltd, of an issue price of $0.942 cents per share at
the end of the two year period.
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.
The following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
1
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 2.13%.
Subsequent to June 30, 2008, the Company disposed 2,400,000 common
shares of Auston International Group Ltd at S$0.045 per share and a
further 1,000,000 common shares of Auston International Group Ltd at
S$0.05 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 has
transferred its server farm to 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 June 30,
2008, 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 June 30, 2008 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.
3
The company has entered into an agreement with Elleipsis, Inc to host
the travel site and the travel software platform in the US with effect
from June 30, 2008, The Company plans to have the travel service and
the site operational before the end of the year. The launch and
operations of the travel service is subject to funding considerations,
and there can be no guarantee that the service can be operational as
planned.
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 quarter ended June 30, 2008 was $5,877,115
compared with $20,007,405 for the same period in 2007.
- The Company's cash balance was $2,062,908 at June 30, 2008
compared with $2,322,541 at 31 December, 2007.
REVENUE
Revenue for the six months ended June 30, 2008 at $11,505,862 was lower
than revenue of $25,494,480 for the six months ended June 30, 2007 by
$13,988,618 (55%). The revenue for the three months ended June 30, 2008
decreased by $14,130,290 (71%), from $20,007,405 to $5,877,115 for the
three months ended June 30, 2007 and 2008 respectively.
Digit gaming revenue for the six months ended June 30, 2008 at
$11,457,693 was higher than $10,459,791 at June 30, 2007 by $997,902
(10%). Digit gaming revenue for the three months ended June 30, 2008 at
$5,863,939 was higher than $4,982,965 at June 30, 2007 by $880,974
(18%). This was mainly due to increase in lottery sales.
Entertainment revenue for the six months ended June 30, 2008 at $48,169
was lower than entertainment revenue of $15,034,689 for the six months
ended June 30, 2007 by $14,986,520 (99%). Entertainment revenue for the
three months ended June 30, 2008 at $13,176 was lower than
entertainment revenue of $15,024,440 for the three months ended June
30, 2007 by $15,011,264 (99%). The decrease in entertainment was
significant and is further explained below.
4
For the six months and three months ended June 30, 2007, the
entertainment revenue was attributed to a one-off syndication and
e-services project which resulted in revenue of $15,000,000. The
project involved the completion and delivery of an IPTV platform to a
company in Indonesia. The completion and delivery of the IPTV platform
comprised of the hardware, software and middleware, and supply and
programming of content.
For the six months and three months ended June 30, 2008, the Company
was involved in the redevelopment of WOWtv, the Company's broadband
entertainment web TV service. The redevelopment was done to incorporate
a new social networking service, and a user generated content service.
These new services, combined with the video streaming services on
WOWtv, was needed to upgrade the site to attract and sustain higher
viewership. This in turn would provide the Company with a bigger
potential for attracting advertising and syndication revenues to WOWtv.
The new WOWtv is expected to be initially launched in July, 2008, with
full operation expected by year end.
The Company's current site was designed with a heavy bias to
subscription and pay per view services. The current design was not
optimised for free content supported by advertising revenues. The
viewership also needed to be expanded in terms of unique visitors, page
views and hits to attract advertising. The Company focused its efforts
on redeveloping WOWtv to overcome these setbacks, and to provide it
with a better potential in the future to attract advertisers. The
Company felt that it would be a sound business strategy to launch the
newly designed WOWtv first, and then to focus on obtaining advertising
revenues in the next six months of the year. The Company was not able
to secure any significant advertising, content syndication or
e-services contracts for its broadband entertainment service in the
first six months and three months ended June 30, 2008.
Cost of Services
Cost of services for the six months ended June 30, 2008 was $11,345,549
which increased by $53,414 (1%) from $11,292,135 for the six months
ended June 30, 2007. Cost of services for three months ended June 30,
2008 was $5,757,169 which decreased by $111,465 (2%) from $5,868,634
for the three months ended June 30, 2007.
As a proportion of revenue, the cost of services for the six months
ended June 30, 2008 was 99% (cost of sales at $11,345,549 and revenue
of $11,505,862) as compared to 44% (cost of sales at $11,292,135 and
revenue of $25,494,480) for the six months ended June 30, 2007. It was
98% (cost of sales at $5,757,169 and revenue $5,877,115) as compared to
29% (cost of sale at $5,868,634 and revenue $20,007,405) for the three
months ended June 30, 2008 and 2007 respectively.
The decrease in the cost of services was attributed to the cost cutting
measures in managing and operating the entertainment segment.
DISTRIBUTION EXPENSES
Distribution expenses for the six months ended June 30, 2008 at
$205,900 were lower by $299,753 (59%) as compared to the amount of
$505,653 incurred for the six months ended June 30, 2007. Distribution
expenses for the three months ended June 30, 2007 was $196,006 which
decreased by $115,036 (59%) from $80,970 for the three months ended
June 30, 2008.
The lower distribution expenses were attributed to decreased spending
for marketing and promotions which decreased by $274,325 (86%), from
$317,437 for the six months ended June 30, 2007 to $43,112 for the six
months ended June 30, 2008. Distribution expenses decreased by $101,177
(90%) from $112,008 for the three months ended June 30, 2007 to $10,831
for the three months ended June 30, 2008 due to the same reason.
GENERAL AND ADMINISTRATIVE EXPENSES
Administration expenses for the six months ended June 30, 2008 at
$1,941,146 were lower by $1,580,069 (45%) as compared to the amount of
$3,521,215 incurred for the six months ended June 30, 2007.
Administration expenses for the three months ended June 30, 2008 at
$902,644 were lower by $946,275 (51%) as compared to the amount of
$1,848,919 incurred for the three months ended June 30, 2007.
5
The decrease in administrative expenses for the period ended June 30,
2008 was attributed mainly to the decrease in:
o Amortization. License amortization had decreased by $1,040,452
(64%), from $1,625,494 for the six months ended June 30, 2007
to $585,042 for the six months ended March 31, 2008. It
decreased by $534,706 (65%) from $821,613 for the three months
ended June 30, 2007 to $286,907 for the three months ended
June 30, 2008.The decrease was mainly due to most of the
intangible assets being fully depreciated by end of December
31, 2007.
o Staff costs. Staff costs had decreased by $263,200 (33%), from
$788,446 for the six months ended June 30, 2007 to $525,246
for the six months ended June 30, 2008. It decreased by
$126,158 (33%) from $381,008 for the three months ended June
30, 2007 to $254,850 for the three months ended June 30,
2008.The decrease was mainly due as a result of cost reduction
measures to reduce operating costs
(LOSS) INCOME FROM OPERATIONS
The Company incurred a loss from operations of $1,986,773 for the six
months ended June 30, 2008 as compared to the income from operations of
$10,175,477 for the six months ended June 30, 2007. For the three
months ended June 30, 2008, the Company incurred a loss from operations
of $863,668 as compared to the income from operations of $12,093,846
for the three months ended June 30, 2007. This was due to the
significant decrease in the entertainment revenue. This is further
explained under the revenue segment in the results of operations.
NET (LOSS) INCOME
Net loss for the six months ended June 30, 2008, was $2,869,484 which
decreased by $18,273,106 (119%) from net income of $15,403,622 for the
six months ended June 30, 2007.
Net loss for the three months ended June 30, 2008, was $1,467,183 which
decreased by $16,120,569 (110%) from net income of $14,653,386 for the
three months ended June 30, 2007.
The significant decrease in net income for the six months and three
months ended June 30, 2008 was mainly attributed to the decrease in the
entertainment business. The decrease was partly attributed to the net
gain of $4,320,000 as of June 30, 2007 in the fair value of an
investment (equity securities) held for trading, offset by the net loss
of $1,385,000 as of June 30, 2008 in the same investment.
The decrease was also party attributed to the net 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%.
This net gain was offset by the net loss of $442,051 as of June 30,
2008 on the disposal of investments available for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at $2,062,908 at June 30, 2008 as compared to cash
of $2,322,541 at December 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 June 30, 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.
6
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
$5,201,225 and $10,237,958 in marketable securities as of June 30, 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 $2,062,908 and
$2,322,541 at June 30, 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.
7
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.
8
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.
9
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 June 30, 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 June 30, 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 June 30, 2008 to evaluate the effectiveness
of the design and operation of our disclosure controls and procedures
as of June 30, 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 June 30,
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 June 30, 2008, the Company is in the process of hiring
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.
.
10
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.
11
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.
12
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 June 30, 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.
13
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
Based upon the Company's review of its aggregate worldwide market value
of the voting and non-voting common equity held by non-affiliates of the Company
which is less than $50 million as of the last business day of the second fiscal
quarter ended June 30, 2008, the Company has made a determination that it is
exiting an accelerated filer status and becomes a smaller reporting company,
filer as defined in the Securities Act of 1933 and the Securities Exchange Act
of 1934. The Company chooses to reflect this determination beginning with its
first quarter report on Form 10-Q following this determination pursuant to Rule
12b-2(4)(i) of the Securities Exchange Act of 1934.
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
14
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)
August 11, 2008 /s/ Colin Binny
---------------- ---------------------------------------
Date President, Chief Executive Officer and
Chief Financial Officer