UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-2
Amendment No. 2 to Form 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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.
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(Exact name of registrant as specified in its charter.)
Nevada 88-0490089
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(State of Incorporation) (IRS Employer Identification No.)
112 Middle Road, #08-01 Midland House, Singapore 188970
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (65) 6332 9287
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(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 March 31, 2009)
AMARU, INC. AND SUBSIDARIES
2008 Quarterly Report on Form 10-Q/A-2
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-30
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 15
EXPLANATORY NOTE
This Amendment No. 2 on Form 10-Q, or this Form 10-Q/A-2, amends and restates in
its entirety Amaru, Inc.'s Quarterly Report on Form 10-Q, for the period ended
September 30, 2008, which was initially filed with the Securities and Exchange
Commission on November 13, 2008 as amended on November 14, 2008, or
collectively, the "Original Filing". This Quarterly Report restates and
supplements the disclosure provided in the Original Filing for Items 1, 2, 3,
and 4 under Part I in accordance with the previously made disclosure on Form 8-K
filed on March 31, 2009. This Quarterly Report includes the unaudited
consolidated financial statements and related notes, which have been restated
and changed from the information and disclosure reported in the Original Filing.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as
amended, new certifications of our principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, are filed as exhibits to Amendment No. 2.
Except as otherwise noted, this Quarterly Report does not include disclosure or
information reflecting any event that occurred subsequent to November 14, 2008,
the filing date of the Original Filing. Such events include, among others, the
events described in Amaru Inc.'s current reports on Form 8-K and quarterly
reports on Form 10-Q that were filed after the date of the Original Filing.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2008 2007
----------- -----------
Current assets
Cash and cash equivalents 2,375,332 $ 2,322,541
Accounts receivable, net of allowance of
$107,720 and $54,154 at September 30, 2008 and
December 31, 2007 respectively 156,808 744,589
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 1,099,000 2,924,000
Other current assets 387,526 513,614
Inventories 1,145,896 1,157,248
Investments available for sale 2,402,613 2,402,613
----------- -----------
Total current assets 20,800,508 23,297,938
----------- -----------
Non-current assets
Property and equipment, net 1,292,133 1,797,146
Intangible assets, net 24,894,157 25,693,066
Equity Method Investment 4,924,110 4,942,283
Investments available for sale 959,290 4,911,345
----------- -----------
Total non-current assets 32,069,690 37,343,840
----------- -----------
Total assets $52,870,198 $60,641,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,848,855 $ 3,068,613
Other payables -- 100,005
Advances from related parties 78,376 155,313
Capital lease payable - short term 11,012 10,746
Income taxes payable 5,428 5,428
----------- -----------
Total current liabilities 1,943,671 3,340,105
----------- -----------
Deferred tax liabilities 14,333 1,672,801
Convertible term loan 2,276,546 --
Capital lease payable - long termm 50,467 57,306
----------- -----------
Total non-current liabilities 2,341,346 1,730,107
----------- -----------
Total liabilities 4,285,017 5,070,212
Commitments -- --
Stockholders' equity
Preferred stock (par value $0.001) 5,000,000 shares authorized; 0 shares issued
and outstanding at September 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 September 30,
2008 and December 31, 2007, respectively 159,431 159,431
Additional paid-in capital 42,918,666 42,918,666
Retained earnings 560,866 5,650,447
Accumulated other comprehensive income 954,073 2,223,641
Minority interest 3,992,145 4,619,381
----------- -----------
Total stockholders' equity 48,585,181 55,571,566
----------- -----------
Total liabilities and shareholders' equity $52,870,198 $60,641,778
=========== ===========
See accompanying notes to consolidated financial statements
F-2
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
------------- ------------- ------------- -------------
Revenue:
Entertainment
Advertising/Subscription $ 55,568 $ 36,991 $ 7,399 $ 2,302
Syndication/e-services -- 15,000,000 -- --
------------- ------------- ------------- -------------
Total entertainment 55,568 15,036,991 7,399 2,302
Digit gaming -- 16,481,642 -- 6,021,851
------------- ------------- ------------- -------------
Total revenue 55,568 31,518,633 7,399 6,024,153
Cost of services (344,318) (17,553,771) ( 79,310) (6,261,636)
------------- ------------- ------------- -------------
Gross profit(loss) (288,750) 13,964,862 (71,911) (237,483)
Distribution costs (1,181,518) (677,357) (114,432) (171,704)
Administrative expenses (2,882,627) (5,152,899) (941,481) (1,631,683)
------------- ------------- ------------- -------------
Total expenses (4,064,145) (5,830,256) (1,055,913) (1,803,388)
------------- ------------- ------------- -------------
Income (loss) from operations (4,352,895) 8,134,606 (1,127,824) (2,040,871)
Other (expenses) income:
Interest expenses (28,218) (678) (27,107) (507)
Interest income 12,368 36,489 3,398 10,388
Gain (loss) on disposal of equipment 2,939 (152) 1,051 (152)
Gain on dilution of interest
in subsidiary -- 2,483,871 -- --
Loss on sale of investment securities (465,888) -- (23,837) --
Net change in fair value of financial
assets at fair value securities
for trading (1,825,000) (4,002,000) (440,000) (8,322,000)
Share of income/(loss) of associate (18,173) (8,827) (5,627) 6,397
------------- ------------- ------------- -------------
Income (Loss) before income taxes (6,674,867) 6,643,309 (1,619,946) (10,346,745)
(Provision) benefit for Income taxes 958,050 (902,464) 10,951 683,968
------------- ------------- ------------- -------------
Net income (loss) $ (5,716,817) $ 5,740,845 $ (1,608,995) $ (9,662,777)
============= ============= ============= =============
Attribute to:
Equity holders of the company $ (5,089,581) $ 4,662,124 $ (1,388,424) $ (7,966,020)
Minority interests (627,236) 1,078,721 (220,571) (1,696,757)
------------- ------------- ------------- -------------
Net income (loss) $ (5,716,817) $ 5,740,845 $ (1,608,995) $ (9,662,277)
============= ============= ============= =============
Net income per share
- Basic and diluted $ (0.04) $ 0.04 $ (0.01) $ (0.06)
============= ============= ============= =============
Weighted average number of common
shares outstanding
- Basic and diluted 159,431,861 155,577,356 159,431,861 158,794,180
============= ============= ============= =============
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)
See accompanying notes to consolidated financial statements
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 -- -- -- 3,733,333
of investment
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 -- -- -- -- -- -- (5,089,581)
Change in
fair value
of available
for-sale- equity
securities,
net of tax -- -- -- -- -- -- --
Comprehensive
income -- -- -- -- -- -- --
-------- ------ ----------- ----------- ----------- ------- -----------
Balance at
September 30, 2008 -- -- 159,431,861 $ 159,431 $42,918,666 -- $ 560,866
========= ====== =========== =========== =========== ======= ===========
(CONTINUED ON NEXT PAGE)
See accompanying notes to consolidated financial statements
F-5
(CONTINUED FROM PREVIOUS PAGE)
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 -- -- (627,236) (5,716,817)
Change in
fair value
of available
for-sale- equity
securities,
net of tax -- (1,269,568) -- (1,269,568)
-----------
Comprehensive
loss -- -- -- (6,986,385)
----------- ----------- --------- -----------
Balance at
September 30,
2008 $ 12,927 $ 941,146 $ 3,992,145 $48,585,181
=========== ========== ========== ===========
See accompanying notes to consolidated financial statements
F-5A
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, 2008 SEPTEMBER 30, 2007
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,716,817) $ 5,740,845
Adjustments for:
Amortization 872,105 2,308,179
Depreciation 504,813 406,141
(Gain) loss on disposal of equipment (2,939) 152
Acquisition of investment in exchange for account receivable -- (11,636,000)
Gain on dilution of interest in subsidiary -- (2,483,871)
Net change in fair value of financial assets at fair value
through Profit or Loss-held for trading 1,825,000 4,002,000
Common stock issued for services -- 60,000
Common stock issued in exchange for prepayment of investment -- 3,733,333
Deferred taxes (947,099) 902,464
Share of loss of associate 18,173 8,827
Loss on disposal of investment available for sale 465,888 --
Changes in operation assets and liabilities
Accounts receivables 587,781 (2,509,706)
Inventories 11,352 534,780
Others current assets 126,088 (3,711,360)
Accounts payable and accrued expenses (1,219,758) 265,146
Other payables (100,005) 157,100
Income taxes payable -- (53,045)
------------ ------------
Net cash used in operating activities (3,575,418) (2,275,015)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment 18,696 691
Acquisition of equipment (15,557) (761,440)
Acquisition of associate -- (66,115)
Acquisition of investments -- --
Acquisition of intangible assets (73,196) (2,340,395)
Proceeds from disposal of investment available for sale 1,505,230 --
------------ ------------
Net cash provided by (used in) investing activities 1,435,173 (3,167,259)
CASH FLOW FROM FINANCING ACTIVITIES
Repayments of balances due to related party (76,937) --
Proceeds from related party -- 100,695
Proceeds from hire purchase creditor -- 68,975
Repayment of obligation under capital lease (6,573) --
Capital contributed by minority shareholders -- 5,580,000
Receipts from convertible term loan 2,276,546 --
------------ ------------
Net cash provided by financing activities 2,193,036 5,749,670
Effect of exchange rate changes on cash and cash equivalents -- --
------------ ------------
Cash flows from all activities 52,791 307,396
Cash and cash equivalents at beginning of period 2,322,541 2,294,984
------------ ------------
Cash and cash equivalents at end of period $ 2,375,332 $ 2,602,380
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Acquisition of investments (1) $ -- $ 11,636,000
============ ============
Common stock in exchange for prepayment of investment (2) -- 3,733,333
============ ============
(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.
(2) On July 11, 2007, Tremax International Limited, a wholly owned
subsidiary of Amaru Inc, issued 5,333,333 shares of common stock in
exchange for an investment in a company, as part of the sales and
purchase agreement with the company.
See accompanying notes to consolidated financial statements
F-6
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 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 nation wide lottery in
Cambodia. The Company through its subsidiary, M2B Commerce Limited,
signed an agreement with Allsports International Ltd, a British Virgin
Islands company to operate and conduct digit games in Cambodia and to
manage the digit games activities in Cambodia. The digit game lottery
operations have been suspended by the government of Cambodia in March,
2009, and it cannot be determined at this time whether the suspension
of the digit games lottery is temporary or permanent., see Note 17.
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 game 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 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 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 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 Accounts Receivable
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 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
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 THREE AND NINE MONTHS ENDED
SEPTEMBER 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 NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
----------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Sales outside of the U.S. $ 55,568 $31,518,290 $ 7,399 $ 6,024,096
Services purchased outside of the U.S. $ 311,282 $17,449,405 $ 69,269 $ 6,189,248
2.5 Inventories
Inventories are carried at the lower of cost or and net realizable
value. Cost is calculated using first-in, first-out ("FIFO") method
and comprises all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location
and condition. Inventories comprised primarily of finished products
used in the Company's IPTV service.
2.6 Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets for financial reporting purposes. Expenditures for major
renewals and betterments that extend the useful lives are capitalized.
Expenditures for normal maintenance and repairs are expensed as
incurred. The cost of assets sold or abandoned and the related
accumulated depreciation are eliminated from the accounts and any
gains or losses are reflected in the accompanying consolidated
statement of income of the respective period. The estimated useful
lives of the assets range from 3 to 5 years.
F-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
2.7 Intangible Assets
Intangible assets consist of film library, gaming and software licence
and product development costs. Intangible assets which were purchased
and have indefinite lives are stated at cost less impairment losses
and are tested for impairment at least annually in accordance with the
provisions of FASB Statement No. 142, Goodwill and Other Intangible
Assets.
Intangible assets which were purchased for a specific period are
stated at cost less accumulated amortization and impairment losses.
Such intangible assets are reviewed for impairment in accordance with
FASB Statement No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. Such intangible assets are amortized over the
period of the contract, which is 2 to 18 years.
The film library, which are classified as indefinite lives, relate to
film library rights that are acquired for perpetuity by the Company.
The film library, which are classified as having definite lives,
relate to film library rights that are generally acquired for one to
ten years by the Company.
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 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 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 recognised as goodwill. The goodwill is included within
the carrying amount of the investment and is assessed for impairment
as part of the investment. Any excess of the Company's share of the
net fair value of the identifiable assets, liabilities and contingent
liabilities over the cost of acquisition, after reassessment, is
recognised immediately in the consolidated profit and loss statement.
Where a group entity transacts with an 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 September 30, 2008 totaled
$1,099,000 and December 31, 2007 totaled $2,924,000. The changes
relate to fair value adjustments of $1,825,000 for the nine months
ended September 30, 2008 and $476,000 for the year ended December 31,
2007.
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 THREE AND NINE MONTHS ENDED
SEPTEMBER 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 September 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 September 30, 2008 using:
--------------------------------------------------
Prices or Fair Value Quoted Prices in Valuation
Measurements at Active Markets Techniques
September 30, 2008 (Level 1) (Level 3)
Description ($) ($) ($)
-----------------------------------------------------------------------------------------------------------
Equity Securities Held for Trading 1,099,000 1,099,000 --
Investments Available for Sale - Current 2,482,239 -- 2,402,613
Investments Available for Sale - Non Current -- -- 959,290
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 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 nine months ended September 30, 2008.
Nine Months Ended
September 30, 2008
------------------
Balance at the beginning of the period $ 7,313,958
Change in fair value of Investments
Available for Sale - unrealized (1,980,937)
Loss on disposal of Investments
Available for Sale - realized (465,888)
Proceeds from sale of Investments
Available for Sale (1,505,230)
-----------
Balance at the end of the period $ 3,361,903
===========
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option
has been elected are reported in net income. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. Upon adoption of this Statement, the
Company did not elect SFAS No. 159 option for existing financial
assets and liabilities and therefore adoption of SFAS No. 159 did not
have any impact on its Consolidated Financial Statements.
2.12 Advances from Related Party
Advances from director and related party of $78,376 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 September 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.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
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.
2.15 Revenues
Subscription and related services revenues are recognized over the
period that services are provided. Advertising and sponsorship
revenues are recognized as the services are performed or when the
goods are delivered. Licensing and content syndication revenue is
recognized when the license period begins, and the contents are
available for exploitation by customer, pursuant to the terms of the
license agreement. Gaming revenue is recognized as earned net of
winnings. E-commerce commissions are recognized as received. Broadband
consulting services and on-line turnkey solutions revenue are
recognized as earned.
2.16 Costs of Services
The cost of services pertaining to advertising and sponsorship revenue
and subscription and related services are cost of bandwidth charges,
channel design and alteration, copyright licensing, and hardware
hosting and maintenance costs. The cost of services pertaining to
E-commerce revenue is channel design and alteration, and hardware
hosting and maintenance costs. The cost of services pertaining to
gaming is for managing and operating the operations and gaming
centers. All these costs are accounted for in the period its was
incurred.
2.17 Income Taxes
Deferred income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income taxes are measured using enacted tax rates
expected to apply to taxable income in years in which such temporary
differences are expected to be recovered or settled. The effect on
deferred income taxes of a change in tax rates is recognized in the
statement of income of the period that includes the enactment date. In
addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not
that some portion of the deferred tax asset will not be realized.
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 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 nine months
ended September 30, 2008 and 2007, the Company incurred advertising
expenses of $67,863 and $408,857 respectively. For the three months
ended September 30, 2008 and 2007, the Company incurred advertising
expenses of $24,751 and $91,420 respectively.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 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 INVESTMENT
September 30, December 31,
2008 2007
---------- ----------
Quoted equity security, at fair value $1,099,000 $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 $1,825,000 for the 9
months ended September 30, 2008 and $476,000 for the year ended December 31,
2007.
The investments in quoted equity securities comprised of 34,000,000 common
shares of PT Agis at the market value of approximately US$0.032 per share.
The Company's equity securities held for trading investment is denominated in
Indonesian Ruppiah.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2008 2007
---------- ----------
Prepayments $ 108,133 $ 169,641
Deposits 171,764 171,095
Other receivables 107,629 172,878
---------- ----------
$ 387,526 $ 513,614
========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2008 2007
----------- -----------
Office equipment $ 1,155,395 $ 1,148,013
Motor vehicle 91,190 112,563
Furniture, fixture and fittings 602,655 596,790
Set-top boxes 843,946 842,494
----------- -----------
2,693,186 2,699,860
Accumulated depreciation (1,401,053) (902,714)
----------- -----------
$ 1,292,133 $ 1,797,146
=========== ===========
Depreciation expense was $504,813 for the nine months ended September 30, 2008
and $406,141 for the nine months ended September 30, 2007.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
INDEFINITE LIVES
Film library $ 17,762,337 $ 17,759,080
------------ ------------
17,762,337 17,759,080
------------ ------------
DEFINITE USEFUL LIVES
Film library 5,400,410 5,331,930
Gaming license 7,090,000 7,090,000
Product development expenditures 719,220 719,220
Software license 12,649 12,649
------------ ------------
13,222,279 13,153,799
Accumulated amortization (6,090,459) (5,219,813)
------------ ------------
7,131,820 7,933,986
------------ ------------
$ 24,894,157 $ 25,693,066
============ ============
Amortization expense was $872,105 for the nine months ended September 30, 2008
and $2,308,179 for the nine months ended September 30, 2007
Intangible assets purchased and have indefinite lives are stated at cost less
impairment losses are tested for impairment at least annually in accordance with
the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets.
FILM LIBRARY WITH INDEFINITE LIVES
Intangible assets of the Company which have been classified as having indefinite
useful lives relate to film library rights acquired for perpetuity by the
Company.
Film costs are stated at the lower of estimated net realizable value determined
on an individual film basis, or cost. Film costs represent the acquisition of
film rights for cash.
The Company maintains distribution rights to these films for which it has no
financial obligations to third parties.
The Company is currently directing all its time and efforts towards building its
broadband business.
F-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 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.
The film library, which are classified as having definite lives, relate to film
library rights that are generally acquired for one to ten years by the Company.
Included in the gaming license are the rights to a digit games license in
Cambodia. The license is for a minimum period of 18 years commencing from June
1, 2005, with an option to extend for a further 5 years or such other period as
may be mutually agreed. The Company capitalized the development and building
cost related to the broad-band sites and infrastructure for the streaming
system, most of which was developed in 2002 as product development costs. The
Company projects that these developments costs will be useful for up to five
years before additional significant development needs to be done.
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
7. EQUITY METHOD INVESTMENT
SEPTEMBER 30, DECEMBER 31,
2008 2007
----------- -----------
Fair value of investment in associate $ 3,693,650 $ 3,693,650
Goodwill 1,272,465 1,272,465
Share of post-acquisition loss (42,005) (23,832)
----------- -----------
$ 4,924,110 $ 4,942,283
=========== ===========
Details of the Company's Equity Method Investment as at September 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
Ownership Interest: SEPTEMBER 30, 2008 DECEMBER 31, 2007
------------------ ----------------
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 THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
Summarised financial information in respect of the Company's Equity Method
Investment is set out below:
SEPTEMBER 30, DECEMBER 31,
2008 2007
----------- -----------
Total assets $ 9,334,802 $ 9,353,100
Total liabilities (53,739) (23,562)
----------- -----------
Net assets $ 9,281,063 $ 9,329,538
=========== ===========
Company's share of Equity Method
investment's net assets $ 2,793,600 $ 2,808,191
=========== ===========
Revenue $ -- $ 163,574
=========== ===========
Loss for the period $ (60,375) $ (77,735)
=========== ===========
Company's share of Equity Method Investment's
loss for the period $ (18,173) $ (23,832)
=========== ===========
F-22
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
8. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale consist of the following:
SEPTEMBER 30, DECEMBER 31,
2008 2007
---------- ----------
Non Current:
Quoted equity securities $ 79,626 $4,031,681
Unquoted equity securities 879,664 879,664
---------- ----------
959,290 4,911,345
Current:
Unquoted equity securities 2,402,613 2,402,613
---------- ----------
$3,361,903 $7,313,958
========== ==========
The investments in quoted equity securities comprised of 5,705,571 common shares
of Auston International Group Ltd (Auston). As of September 30, 2008, the market
value of the Auston shares was S$0.02 (2007: S$0.24) per share.
The Company had incurred losses of $465,888 during the nine months ended
September 30, 2008 after the disposal of 30,723,000 common shares of Auston
International Group Ltd (Auston).
The unquoted equity securities classified as available-for-sale, with a carrying
value of $879,664 as of September 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
9. COMMITMENTS
As of the balance sheet date, the Group has the following capital commitments:
SEPTEMBER 30, DECEMBER 31,
2008 2007
---------- ----------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 111,687 $ 118,073
Set-top boxes $2,074,825 $2,074,825
---------- ----------
$2,186,512 $2,192,898
========== ==========
Capital Leases
The following summarizes the Company's capital lease obligations at September
30, 2008:
2008 2007
-------- --------
Future minimum lease payments $ 73,744 $ 81,628
Less: amounts representing interest (12,265) (13,576)
-------- --------
Present value of net minimum lease payments 61,479 68,052
Less: current portion (11,012) (10,746)
-------- --------
$ 50,467 $ 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
Operating Leases
The Company leases facilities and equipment under operating leases expiring
through 2012. Total rental expense on operating leases for the nine months ended
September 30, 2008 and 2007 was $196,412 and $252,585, respectively. As of
September 30, 2008, the future minimum lease payments are as follows:
For the Quarter Ended
September 30, Operating Capital
--------------------- --------- --------
2008 $ 85,650 $ 2,753
2009 222,879 11,012
2010 19,205 11,012
2011 -- 11,012
2012 -- 25,690
-------- --------
$327,734 $ 61,479
======== ========
10. INCOME TAXES
The Company files separate tax returns for Singapore and the United States of
America.
The Company had available approximately $6,306,004 of unused U.S. net operating
loss carry-forwards at September 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 September 30, 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 $4,786,937 of unused Singapore tax
losses and capital allowance carry-forwards at September 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 THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
For the three and nine
months ended September 30, 2008 ENTERTAINMENT DIGIT GAMING OTHER TOTAL
------------- ------------ --------- ------------
Revenues from external customers $ 55,568 $ -- $ -- $ 55,568
Interest revenue $ 12,368 $ -- $ -- $ 12,368
Interest expense $ 28,218 $ -- $ -- $ 28,218
Depreciation and amortization
$ 1,153,001 $ 223,917 $ -- $ 1,376,918
Segment profit (loss) (3,002,843) $ (1,101,650) $ -- (4,104,493)
Segment assets $ 46,585,909 $ 6,281,959 $ 2,330 $ 52,870,198
Expenditures for segment
assets $ 88,753 $ -- $ -- $ 88,753
Reconcilliation: -
REVENUES
Total revenues for reportable segments $ 55,568
Other revenue $ --
------------
Total consolidated revenues $ 55,568
============
INTEREST REVENUE
Total interest revenue for reportable segments $ 12,368
Corporate interest revenue $ --
------------
Total consolidated interest revenue $ 12,368
============
INTEREST EXPENSES
Total interest revenue for reportable segments $ 28,218
Corporate interest revenue $ --
------------
Total consolidated interest expenses $ 28,218
============
PROFIT OR LOSS
Total (loss) for reportable segments $ (4,104,493)
Corporate loss $ (261,313)
Loss on disposal of investment available for sale $ (465,888)
Loss on valuation of held for trading investment $ (1,825,000)
Share of loss of associate $ (18,173)
------------
Loss before income tax $ (6,674,867)
============
ASSETS
Total assets for reportable segments $ 52,867,868
Other assets $ 2,330
------------
Total consolidated assets $ 52,870,198
============
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for
reportable segments $ 88,753
============
F-26
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
For the three and nine months
ended September 30, 2007 ENTERTAINMENT DIGIT GAMING OTHER TOTAL
------------ ------------ ------------ ------------
Revenues from external customers $ 15,036,991 $ 16,481,642 $ -- $ 31,518,633
Interest revenue $ 36,489 $ -- -- $ 36,489
Interest expenses $ 678 $ -- $ -- $ 678
Depreciation and amortization $ 2,490,403 $ 223,917 $ -- $ 2,714,320
Segment profit $ 8,135,309 $ 320,323 $ -- $ 8,455,632
Segment assets $ 53,361,216 $ 7,325,817 $ 2,423,518 $ 63,110,551
Expenditures for segment assets $ 3,101,835 $ -- $ -- $ 3,101,835
Reconciliation:
REVENUES
Total revenues for reportable segments $ 31,518,633
Other revenue $ --
------------
Total consolidated revenues $ 31,518,633
INTEREST REVENUE
Total interest revenue for reportable segments $ 36,459
Corporate interest revenue $ 30
------------
Total consolidated interest revenue $ 36,489
------------
INTEREST EXPENSES
Total interest expenses for reportable segments $ 678
Corporate interest expenses $ --
------------
Total consolidated interest revenue $ 678
------------
PROFIT OR LOSS
Total loss for reportable segments $ 8,455,632
Corporate expenses $ (285,367)
Gain on dilution of interest in subsidiary $ 2,483,871
Loss on valuation for held for trade investment $ (4,002,000)
Share of loss of associate $ (8,827)
------------
Income before income tax $ 6,643,309
------------
ASSETS
Total assets for reportable segments $ 60,687,033
Other assets $ 2,423,518
------------
Total consolidated assets $ 63,110,551
------------
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 3,101,835
============
F-27
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 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 three and nine months
ended September 30, 2008 ASIA PACIFIC UNITED STATES OTHER TOTAL
----------- ----------- ----------- -----------
Revenues from external customers $ 55,568 $ -- $ -- $ 55,568
Property and equipment, net $ 1,063,383 $ 133,350 $ 95,400 $ 1,292,133
For the three and nine months
ended September 30, 2007 ASIA PACIFIC UNITED STATES OTHER TOTAL
----------- ----------- ----------- -----------
Revenues from external customers $31,518,290 $ 343 $ -- $31,518,633
Property and equipment, net $ 1,244,145 $ 230,655 $ 95,400 $ 1,570,200
12. RELATED PARTY TRANSACTIONS
Related parties are entities with common direct or indirect shareholders and/or
directors. Parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the other party
in making financial and operating decisions.
Some of the company's transactions and arrangements are with the related party
and the effect of these on the basis determined between the party is reflected
in these financial statements. The balances are unsecured, interest-free and
repayable on demand unless otherwise stated.
During the period, the Group entered into the following transactions with the
associate:
For the nine months ended For the three months ended
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
-------------- -------- ------------ ----------
Associate:
Marketing $ -- $110,537 $ -- $ 28,088
============== ======== ============ ==========
F-28
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
13. RESTATEMENT OF BALANCES AT SEPTEMBER 30, 2008
The accompanying September 30, 2008 financial statements have been restated to
correct the effects of an error. This error relates to the incorrect revenue
recognition of $180,067,143 and cost of services of $17,408,102 relating to the
digit gaming. No revenue was ever recognized on this license agreement during
the nine months ended September 30, 2008.
The following financial statement line items for the quarter ended September 30,
2008 were affected by the correction:
As
Originally Effect of
Reported As Restated Change
----------- ----------- -----------
CONSOLIDATED BALANCE SHEETS:
---------------------------
Cash and cash equivalents $ 3,237,462 $ 2,375,332 $ (862,130)
=========== =========== ===========
Accounts receivable 814,564 156,808 (658,097
=========== =========== ===========
Total current assets 22,320,735 20,800,508 (1,520,227)
=========== =========== ===========
Total assets $54,390,425 $52,870,198 $(1,520,227)
=========== =========== ===========
Retained earnings 2,081,093 560,866 (1,520,227)
=========== =========== ===========
Total stockholders' equity 50,105,408 48,585,181 (1,520,227)
=========== =========== ===========
Total liabilities and stockholders'
Equity $54,390,425 $52,870,198 $(1,520,227)
=========== =========== ===========
As
Originally Effect of
Reported As Restated Change
----------- ----------- -----------
CONSOLIDATED
STATEMENT OF INCOME:
--------------------
FOR THE NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2008
-------------
Digit gaming 18,067,143 -- (18,067,143)
=========== =========== ===========
Total revenue 18,122,711 55,568 (18,067,143)
=========== =========== ===========
Cost of services (17,752,420) (344,318) 17,408,102
=========== =========== ===========
Gross profit (loss) 370,291 (288,750) (659,041)
=========== =========== ===========
Distribution costs (320,332) (1,181,518) (861,186)
=========== =========== ===========
Total expenses (3,202,959) (4,064,145) (861,186)
=========== =========== ===========
(Loss) Income from operations (2,832,668) (4,352,895) (1,520,227)
=========== =========== ===========
(Loss) Income before income taxes (5,154,640) (6,674,867) (1,520,227)
=========== =========== ===========
Net income (loss) $(4,196,590) $(5,716,817) $(1,520,227)
=========== =========== ===========
Equity holders of the company $(3,569,354) $(5,089,581) $(1,520,227)
=========== =========== ===========
F-29
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
Net income (loss) $(4,196,590) $(5,716,817) $(1,520,227)
=========== =========== ===========
Net income per share
- Basic and diluted $ (0.03) $ (0.04) $ (0.01)
=========== =========== ===========
FOR THE THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2008
-------------
Digit gaming 6,609,450 -- (6,609,450)
=========== =========== ===========
Total revenue 6,616,849 7,399 (6,609,450)
=========== =========== ===========
Cost of services (6,406,871) (79,310) 6,327,561
=========== =========== ===========
Gross profit (loss) 209,978 (71,911) (281,889)
=========== =========== ===========
(Loss) Income from operations (845,935) (1,127,824) (281,889)
=========== =========== ===========
(Loss) Income before income taxes (1,338,057) (1,619,946) (281,889)
=========== =========== ===========
Net income (loss) $(1,327,106) $(1,608,995) $ (281,889)
=========== =========== ===========
Equity holders of the company $(1,106,535) $(1,388,424) $ (281,889)
=========== =========== ===========
Net income (loss) $(1,327,106) $(1,608,995) $ (281,889)
=========== =========== ===========
As
Originally Effect of
Reported As Restated Change
----------- ----------- -----------
STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME:
----------------------------------------------------------
RETAINED EARNINGS
---------------------------------------
Net loss (3,569,354) (5,089,581) (1,520,227)
=========== =========== ===========
TOTAL SHAREHOLDERS' EQUITY
---------------------------------------
Net loss (4,196,590) (5,716,817) (1,520,227)
=========== =========== ===========
RETAINED EARNINGS
---------------------------------------
Balance at September, 2008 $(2,081,093) $ (560,866) $(1,520,227)
=========== =========== ===========
TOTAL SHAREHOLDERS' EQUITY
---------------------------------------
Comprehensive loss (5,466,158) (6,986,385) (1,520,227)
=========== =========== ===========
TOTAL SHAREHOLDERS' EQUITY
---------------------------------------
Balance at September, 2008 $(50,105,408) $(48,585,181) $(1,520,227)
=========== =========== ===========
F-30
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
As
Originally Effect of
Reported As Restated Change
----------- ----------- -----------
CONSOLIDATED STATEMENTS OF CASH FLOWS:
-------------------------------------
Net income (loss) $(4,196,590) $(5,716,817) $(1,520,227)
=========== =========== ===========
Changes in operation assets
and liabilities
Accounts receivable (70,316) 587,781 (658,097)
=========== =========== ===========
Net cash used in
operating activities (4,199,803) (3,575,418) (624,385)
=========== =========== ===========
Cash flows from all activities $ (571,594) $ 52,791 $ (624,385)
=========== =========== ===========
Cash and cash equivalents at
end of period $ 1,750,947 $ 2,375,332 $ (624,385)
=========== =========== ===========
14. 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 entity.
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 allowance are necessary.
15. 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 which has not yet been consummated. 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.
16. LOAN AND BORROWINGS
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------- -----------
Non-current
Convertible loan $ 2,500,000 --
Less: Future interest charges $ (223,454) --
---------- ----------
$2,276,546 --
Term loans held by the Company at balance sheet date are as follows:
(a) $2,500,000 represents a two years convertible loan drawn down by a
subsidiary company. It bears interest at a fixed rate of 5.0% per
annum. The loan allows the borrower the option to convert the loan into
shares of the subsidiary company at the issue price of $0.942 per share
at the end of the two years period. The loan commenced in July 2008 and
will mature in June 2010.
F-31
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
17. SUBSEQUENT EVENTS
On October 24, 2008, the Company disposed of 1,000,000 Common shares of Auston
International Group Ltd at S$0.015 per share for a total of Purchase price
$15,000.
On October 28, 2008, the Company disposed of 2,085,000 Common shares of Auston
International Group Ltd at S$0.015 per share for a total of Purchase price
$31,275.
On October 29, 2008, the Company disposed of 1,990,000 Common shares of Auston
International Group Ltd at S$0.015 per share for a total of Purchase price
$29,850.
On October 30, 2008, the Company disposed of 630,000 Common shares of Auston
International Group Ltd at S$0.015 per share for a total of Purchase price
$9,450.
On November 5, 2008, the Company disposed of the remaining 571 Common shares of
Auston International Group Ltd at S$0.015 per share for a total of Purchase
price $8.56.
The Management of the Company had decided not to proceed with sale and purchase
agreement of July 10, 2007 entered between Tremax International Limited, its
wholly owned subsidiary and Domaine Group Limited. The transaction has not been
consummated and the agreement had expired.
On March 25, 2009, the Company was officially notified that the digit games were
suspended by the Cambodia Government as part of the suspension of all lotteries
in Cambodia. It cannot be determined at this time whether the suspension of the
digit games is temporary or permanent, though the Government of Cambodia is
currently closing the gaming business by the order of its
Ministry of Economy and Finance. Due to the lack of access to the digit game
operations, the digit games lottery operations resulting from the holding of the
digit games lottery license were impaired as of December 31, 2008, and all
revenues for the year ended 2008 will have to be reversed since such revenues
did not meet the criteria for recording the revenues.
F-32
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-on-demand, streaming
via computers, television sets, and 3G (Third Generation) devices 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 digit game
lottery operations have been suspended by the government of Cambodia in March,
2009, and it cannot be determined at this time whether the suspension of the
digit games lottery is temporary or permanent, see Note 17.
The following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
Overview
The business focus of the Company is Entertainment-on-Demand and E-Commerce
Channels on Broadband, and 3G (Third Generation) devices.
For the broadband, the Company delivers both wire and wireless solutions,
streaming via computers, TV sets, PDAs and 3G hand phones. At the same time the
Company launches e-commerce channels (portals) that provide on-line shopping but
with a difference, merging two leisure activities of shopping and entertainment.
The entertainment channels are designed to drive and promote the shopping
portals, and vice versa.
The Company's business model in the area of broadband entertainment includes
focuses on 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 game operations.
In fiscal 2008, 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. As of December 31, 2007, the Company's equity interest in
Auston was at 10.40%. In 2008, the Company disposed all of its common shares in
Auston. As of the date of this report, the Company holds no shares in Auston.
1
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, which offices are currently being subleased (see
below). 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.
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. As of the date of this report, the Company had received
the list of content titles from Indie Vision Films, Inc for evaluation and
selection in order to convert its investment into content rights.
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, and remains as 1 staff as of the date of this report. 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%. On July
8, 2008, M2B World Asia Pacific Pte Ltd signed a two year convertible loan
agreement with a third party to raise $2,500,000 in funding. The loan allows the
borrower to convert the loan into shares of the Company at the issue price of
$0.942 per share at the end of the two years period. The loan bears an interest
rate of 5.0% per annum, and will mature in June 2010.
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. On March
25, 2009, the Company was notified that the digit games were suspended by the
Cambodia Government as part of the suspension of all lotteries in Cambodia. It
cannot be determined at this time whether the suspension of the digit games is
temporary or permanent, though the Government of Cambodia is currently closing
the gaming business by the order of its Ministry of Economy and Finance.
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.
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.
2
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.
On January 22, 2009, the Company approved the termination and recission of the
Agreement, because the seller failed to comply with the terms of the Agreement
and did not deliver to the Company or Purchaser the consideration for the
issuance of the Amaru Shares. The Company further approved the cancellation of
the Amaru Shares.
3
RESULTS OF OPERATIONS
REVENUE
Financial Statement
- Revenue for the quarter ended September 30, 2008 was $7,399 compared
with $6,024,153 for the same period in 2007.
- The Company's cash balance was $2,375,332 at September 30, 2008
compared with $2,322,541 at 31 December, 2007.
REVENUE
Revenue for the nine months ended September 30, 2008 at $55,568 was lower than
revenue of $31,518,633 for the nine months ended September 30, 2007 by
$31,463,065 (100%). The revenue for the three months ended September 30, 2008
decereased by $6,016,754 (100%), from $6,024,153 to $7,399 for the three months
ended September 30, 2007 and 2008 respectively.
Digit gaming revenue for the nine months ended September 30, 2008 at NIL was
lower than $16,481,642 at September 30, 2007 by $16,481,642 (100%). Digit gaming
revenue for the three months ended September 30, 2008 at NIL was lower than
$6,021,851 at September 30, 2007 by $6,021,851 (100%). This was mainly due to
the suspension of the digit game operations by the Cambodian Government
which resulted in all revenues for the period ended 2008 to be reversed since
such revenues did not meet the criteria for recognizing the revenues.
Entertainment revenue for the nine months ended September 30, 2008 at $55,568
was lower than entertainment revenue of $15,036,991 for the nine months ended
September 30, 2007 by $14,981,423 (99%). Entertainment revenue for the three
months ended September 30, 2008 at $7,399 was higher than entertainment revenue
of $2,302 for the three months ended September 30, 2007 by $5,097 (221%). The
decrease in entertainment for the nine months ended September was significant
and is further explained below.
4
For the nine months ended September 30, 2007, the entertainment revenue was
attributed to the completion and delivery of the IPTV platform in Indonesia. The
completion and delivery of the IPTV platform comprised of the hardware, software
and middleware, and supply and programming of content. Since the IPTV platform
was sold, the Company did not derive nor earn any further revenues from that
source. The Management is in the process of entering into a joint venture with
the buyer for the IPTV business in Indonesia.
For the nine months ended September 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, were 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 was 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 new
advertising or content syndication contracts for its broadband entertainment
service in the first nine months ended September 30, 2008.
Cost of Services
Cost of services for the nine months ended September 30, 2008 was $344,318 which
decreased by $17,209,453 (98%) from $17,553,771 for the nine months ended
September 30, 2007. Cost of services for three months ended September 30, 2008
was $79,310 which decreased by $6,182,326 (99%) from $6,261,636 for the three
months ended September 30, 2007.
As a proportion of revenue, the cost of services for the nine months ended
September 30, 2008 was 620% (cost of services at $344,318 and revenue of
$55,568) as compared to 56% (cost of services at $17,553,771 and revenue of
$31,518,633) for the nine months ended September 30, 2007. It was 1072% (cost of
services at $79,310 and revenue $7,399) as compared to 104% (cost of services at
$6,261,636 and revenue $6,024,153) for the three months ended September 30, 2008
and 2007 respectively.
The decrease in the cost of services was attributed to the reversal of the cost
in managing and operating of the digit games, resulting from the reversal of the
digit games revenue.
DISTRIBUTION EXPENSES
Distribution expenses for the nine months ended September 30, 2008 at $1,181,518
were higher by $504,161 (74%) as compared to the amount of $677,357 incurred for
the nine months ended September 30, 2007. Distribution expenses for the three
months ended September 30, 2008 was $114,432 which decreased by $57,272 (33%)
from $171,704 for the three months ended September 30, 2007.
The higher distribution expenses were attributed to the write off of digit games
working capital amounting to $861,186, offset by decreased spending for
marketing and promotions which decreased by $340,994 (83%), from $408,857 for
the nine months ended September 30, 2007 to $67,863 for the nine months ended
September 30, 2008. Marketing and promotion expenses decreased by $66,669 (73%)
from $91,420 for the three months ended September 30, 2007 to $24,751 for the
three months ended September 30, 2008 due to the same reason.
GENERAL AND ADMINISTRATIVE EXPENSES
Administration expenses for the nine months ended September 30, 2008 at
$2,882,627 were lower by $2,270,272 (44%) as compared to the amount of
$5,152,899 incurred for the nine months ended September 30, 2007.
Administration expenses for the three months ended September 30, 2008 at
$941,481 were lower by $690,203 (42%) as compared to the amount of $1,631,683
incurred for the three months ended September 30, 2007.
5
The decrease in administrative expenses for the period ended September 30, 2008
was attributed mainly to the decrease in:
o Amortization. License amortization had decreased by $1,436,074 (62%),
from $2,308,179 for the nine months ended September 30, 2007 to
$872,105 for the nine months ended September 30, 2008. It decreased by
$395,622 (58%) from $682,685 for the three months ended September 30,
2007 to $287,063 for the three months ended September 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 $502,409 (42%), from
$1,183,596 for the nine months ended September 30, 2007 to $681,187
for the nine months ended September 30, 2008. It decreased by $239,209
(61%) from $395,150 for the three months ended September 30, 2007 to
$155,941 for the three months ended September 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 $4,352,895 for the nine months
ended September 30, 2008 as compared to the income from operations of $8,134,606
for the nine months ended September 30, 2007. This was due to the significant
decrease in the the digit game and entertainment revenue for the nine months
ended September 30, 2008.
For the three months ended September 30, 2008, the Company incurred a loss from
operations of $1,127,824 as compared to the loss from operations of $2,040,871
for the three months ended September 30, 2007. The lower loss from operations
for the three months ended September 30, 2008 was due to higher digit games
revenue and lower administrative expenses. This is further explained under the
revenue and administrative expenses segments in the results of operations.
NET (LOSS) INCOME
Net loss for the nine months ended September 30, 2008, was $5,716,817 which
decreased by $11,457,662 (200%) from net income of $5,740,845 for the nine
months ended September 30, 2007.
The significant decrease in net income for the nine months ended September 30,
2008 was mainly attributed to the decrease in the digit game and entertainment
business. The decrease was partly attributed to the net loss of $1,825,000 as of
September 30, 2008 in the fair value of an investment (equity securities) held
for trading, offset by the net loss of $4,002,000 as of September 30, 2007 in
the same investment.
The decrease was also partly 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 $465,888 as of September 30, 2008 on the
disposal of investments available for sale.
Net loss for the three months ended September 30, 2008, was $1,608,995 which
decreased by $8,053,782 (83%) from net loss of $9,662,777 for the three months
ended September 30, 2007.
The decrease in the net loss for the three months ended September 30, 2008 was
due to the increase in the digit games revenue and lower administrative
expenses. The decrease was also due to the net loss of $8,322,000 for the three
months ended September 30, 2007 in the fair value of an investment (equity
securities) held for trading, offset by the net loss of $440,000 for the three
months ended September 30, 2008 in the same investment.
6
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at $2,375,332 at September 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 September 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.
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 $4,460,903 and $10,237,958
in marketable securities as of September 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 $2,375,332 and $2,322,541 at
September 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.
7
ABILITY TO ACQUIRE NEW MEDIA CONTENTS
The continued ability of the Company to acquire rights to new media contents, at
competitive rates, is crucial to grow and sustain the Company's business.
AVAILABILITY OF TECHNOLOGICALLY RELIABLE NEW GENERATION OF BROADBAND DEVICES
The growth of demand for broadband services is dependent on the wide
availability of technologically reliable new generation of broadband devices, at
affordable prices to prospective customers of broadband services. The early and
widespread availability and market adoption of new generation broadband devices,
will significantly impact demand for broadband services and the growth of the
Company's business.
CAPITAL INVESTMENT IN BROADBAND INFRASTRUCTURE BY GOVERNMENT AND TELCOS
The growth of demand for broadband services is dependent on the capital
investment in broadband infrastructure by governments and Telcos. A significant
source of demand for the Company's broadband services could be from homes and
enterprises with access to high-speed broadband connections. The ability of
countries to invest in public broadband infrastructure to offer public
accessibility is subject to countries' economic health. The Company's prospects
for business growth in Asia especially would be impacted by overall economic
conditions in the territories that we seek to expand into.
COMPETITION FROM BROADBAND CABLE AND TV NETWORKS OPERATORS
The competition of services provided by broadband cable network operators and TV
networks. As traditional TV networks and cable TV operators provide alternate
supply of entertainment and on-demand broadband services, they are in
competition with the Company, for market share. The Company, nevertheless, will
continue to leverage on its advantage of ownership rights to its own portfolio
of media content and its ability to provide broadband services over both the
cable and wireless networks, at competitive rates.
The Company's business is reliant on complex information technology systems and
networks. Any significant system or network disruption could have a material
adverse impact on our operations and operating results. The Company's nature of
business is highly dependent on the efficient and uninterrupted operation of
complex information technology systems networks, may they, either be that of
ours, or our Telco/ ISP partners.
All information technology systems are potentially vulnerable to damage or
interruption from a variety of sources, including but not limited to computer
viruses, security breach, energy blackouts, natural disasters and terrorism, war
and telecommunication failures.
System or network disruptions may arise if new systems or upgrades are defective
or are not installed properly. The Company has implemented various measures to
manage our risks related to system and network disruptions, but a system failure
or security breach could negatively impact our operations and financial results.
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 September 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, as amended, for the period ended September
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.
The Company's registered public accountant has not conducted an audit of the
Company's controls and procedures regarding internal control over financial
reporting during the reporting period when the Company was an accelerated filer.
Consequently, the registered public accounting firm expressed no opinion with
regards to the effectiveness or implementation of the Company's controls and
procedures with regards to internal control over financial reporting during that
period of time. The Company's registered public accountant has not conducted an
audit of the Company's controls and procedures regarding internal control over
financial reporting at this time since it is not yet required pursuant to the
timetable set up by the SEC for non-accelerated filers and smaller reporting
company filers.
Our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) has concluded, based on
their evaluation as of September, 2008, that the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended September 30,2008, 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 September 15, 2008, M2B Commerce Limited filed a lawsuit in the Kingdom of
Cambodia for breach of the Performance and Maintenance Agreement dated May 20,
2005 between M2B Commerce Limited and Allsports International Ltd, by Allsports
International Ltd seeking damages in the total amount of $794,189.
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.
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.
11
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.
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 prties,
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.
THE COMPANY COULD BE AFFECTED BY PIRACY IN ASIA.
The Company is in the process of expanding its services globally, and in
particular is entering specific countries in Asia with customized country sites.
These country sites are designated to suit viewership patterns and styles in the
countries they are launched in, and make use of the Company's content and
intellectual property rights to the content. The piracy of content is a
significant problem in many Asian countries, and it is not uncommon to see
movies and television dramas appearing on illegal internet sites, and sold as
pirated DVDs and VCDs. The extent of this piracy of content in the specific
countries that the Company is launching its sites will adversely affect to a
certain degree the amount of advertising and subscription revenues that the
Company intends to earn.
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COUNTRY RISK IN DIGIT GAME OPERATIONS
The Company operates a nation wide digit games (lottery) service in Cambodia.
There are inherent country risks in Cambodia, where its legal, financial and
corporate governance systems have yet to be fully established or matured. The
digit games operations could also be affected by governmental regulations and
approvals that could result in stoppages or suspension of operations.
THE COMPANY COULD BE AFFECTED BY THE GLOBAL ECONOMIC DOWNTURN.
The global economy is undergoing a massive downturn in 2009, which commenced in
the second half of 2008. Many countries are faced with negative growth rates..
Where the media industry is concerned, major corporations have began to reduce
their advertising expenditures or even to cut back substantially all advertising
and promotional expenditures towards the later half of 2008. The Company is
heavily reliant on advertising and syndication revenues and expects to be
significantly affected in 2008 and 2009 by the downsizing in advertising spent,
especially in countries where the WOWtv service is expected to roll out
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, which is its current report
on Form 10-Q for the period ended September 30, 2008.
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Amaru, Inc.
---------------------------------------
(Registrant)
April 30, 2009 /s/ Colin Binny
---------------- ---------------------------------------
Date President, Chief Executive Officer and
Chief Financial Officer
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