UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2009
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 000-32695
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.)
62 Cecil Street, #06-00, TPI Building, Singapore 049710
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (65) 6332 9287
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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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated Accelerated filer |_| Non-accelerated filer |_| Smaller reporting
filer |_| (Do not check if a smaller company |X|
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 163,356,168 shares
----------------------------- ---------------------------------
(Class) (Outstanding at September 30, 2009)
AMARU, INC. AND SUBSIDARIES
2009 Quarterly Report on Form 10-Q
Table of Contents
PART I: FINANCIAL INFORMATION
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statement of Stockholders' Equity and
Comprehensive Income F-4 to F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-27
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
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ITEM 1: LEGAL PROCEEDINGS 11
ITEM 1A: RISK FACTORS 12
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS 15
SIGNATURES
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2009 2008
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 512,748 $ 1,484,945
Accounts receivable, net of allowance
of $9,750,322 and $1,055,855 at September 30, 2009 1,223 134,710
and December 31, 2008 respectively
Accounts receivable from sale of IPTV Platform -- 9,500,000
Equity securities held for trading 452,626 179,620
Other current assets 230,941 230,293
Inventories 642,268 644,153
Investments available for sale 2,602,613 2,402,613
------------ ------------
Total current assets 4,442,419 14,576,334
------------ ------------
Non-current assets
Property and equipment, net 734,020 1,033,506
Intangible assets, net 20,373,107 20,872,056
Investments available for sale 616,136 616,136
------------ ------------
Total non-current assets 21,723,263 22,521,698
------------ ------------
Total assets $ 26,165,682 $ 37,098,032
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 928,176 $ 1,319,897
Others payable -- 5,458
Advances from related parties -- 48,681
Capital lease payable - short term 10,952 10,809
Income taxes payable 5,428 5,428
------------ ------------
Total current liabilities 944,556 1,390,273
------------ ------------
Convertible term loan 2,401,546 2,307,796
Capital lease payable - long term 39,241 46,831
------------ ------------
Total non-current liabilities 2,440,787 2,354,627
------------ ------------
Total liabilities 3,385,343 3,744,900
Commitments -- --
Stockholders' equity
Preferred stock (par value $0.001) -- --
5,000,000 shares authorized;
0 shares issued and outstanding at June 30,
2009 and December 31, 2008, respectively
Common stock (par value $0.001) 200,000,000 163,356 154,098
shares authorized;163,356,168 shares issued
and outstanding at September 30, 2009 and
December 31, 2008, respectively
Additional paid-in capital 40,107,172 39,190,666
Accumulated Deficit (19,214,260) (9,726,413)
Accumulated other comprehensive income 968,406 968,406
------------ ------------
Total Amaru, Inc stockholders' equity 22,024,674 30,586,757
Noncontrolling interest 755,665 2,766,375
------------ ------------
Total stockholders' equity 22,780,339 33,353,132
------------ ------------
Total liabilities and stockholders' equity $ 26,165,682 $ 37,098,032
============ ============
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,
2009 2008 2009 2008
------------- ------------- ------------- -------------
Revenue:
Entertainment $ 39,900 $ 55,568 $ 9,080 $ 7,399
Digit gaming -- -- -- --
------------- ------------- ------------- -------------
Total revenue 39,900 55,568 9,080 7,399
Cost of services (170,578) (344,318) (59,435) (79,310)
------------- ------------- ------------- -------------
Gross loss (130,678) (288,750) (50,355) (71,911)
Distribution cost (214,513) (1,181,518) (117,391) (114,432)
Selling, general and Administrative expenses (1,678,634) (2,828,519) (506,987) (941,481)
Bad debt expense (9,635,918) (54,108) (9,635,919) --
------------- ------------- ------------- -------------
Total expenses (11,529,066) (4,064,145) (10,260,297) (1,055,913)
------------- ------------- ------------- -------------
Loss from operations (11,659,744) (4,352,895) (10,310,652) (1,127,824)
Other (expenses) income
Interest expense (95,332) (28,218) (31,787) (27,107)
Interest income 120 12,368 16 3,398
Gain on disposal of equipment -- 2,939 -- 1,051
Equipment written off (16,607) -- (16,607) --
Loss on disposal of investment available for sale -- (465,888) -- (23,837)
Unrealized loss (gain) on trading securities 273,006 (1,825,000) (10,794) (440,000)
Share of loss of associate -- (18,173) -- (5,627)
------------- ------------- ------------- -------------
Loss before income taxes (11,498,557) (6,674,867) (10,369,824) (1,619,946)
Benefit for income taxes -- 958,050 -- 10,951
------------- ------------- ------------- -------------
Net income (loss) $ (11,498,557) $ (5,716,817) $ (10,369,824) $ (1,608,995)
============= ============= ============= =============
Attribute to:
Equity holders of Amaru, Inc $ (9,487,847) $ (5,089,581) $ (8,513,959) $ (1,388,424)
Noncontrolling interests (2,010,710) (627,236) (1,855,865) (220,571)
------------- ------------- ------------- -------------
Earnings per share attributable to:
- Amaru, Inc, Basic and diluted $ (0.07) $ (0.04) $ (0.06) $ (0.01)
============= ============= ============= =============
Weighted average number of common
shares outstanding
- basic and diluted 160,253,369 159,431,861 161,869,595 159,431,861
============= ============= ============= =============
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 NUMBER PAR SUBSCRIBED
OF VALUE OF VALUE ADDITIONAL PAID- COMMON RETAINED
SHARES ($0.001) SHARES ($0.001) IN CAPITAL STOCK EARNINGS
------------ ------------ ------------ ------------ -------------- ------------ ------------
Balance at December
31, 2007 -- -- 159,431,861 $ 159,431 $ 42,918,666 $ -- $ 5,650,447
Net loss -- -- -- -- -- -- (15,376,860)
Change in fair value
of available
for-sale-equity
securities, net
of tax -- -- -- -- -- -- --
Common stock received in
Cancellation of exchange for
Repayment of investment -- -- (5,333,333) (5,333) ( 3,728,000) -- --
Comprehensive
income -- -- -- -- -- -- --
------------ ------------ ------------ ------------ -------------- ------------ ------------
Balance at December
31, 2008 -- -- 154,098,528 $ 154,098 $ 39,190,666 $ -- $ (9,726,413)
============ ============ ============ ============ ============== ============ ============
(CONTINUED)
See accompanying notes to consolidated financial statements
F-4
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 -- -- (1,853,006) (17,229,866)
Change in fair value
of available
for-sale-equity
securities, net
of tax -- (1,255,235) -- (1,255,235)
Common stock received in
Cancellation of exchange for
Repayment of investment -- -- -- (3,733,333)
------------
Comprehensive
loss -- -- -- (22,218,434)
------------ ------------ ------------ ------------
Balance at December
31, 2008 $ 12,927 $ 955,479 $ 2,766,375 $ 33,353,132
============ ============ ============ ============
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 NUMBER PAR SUBSCRIBED
OF VALUE OF VALUE ADDITIONAL PAID- COMMON RETAINED
SHARES ($0.001) SHARES ($0.001) IN CAPITAL STOCK EARNINGS
------------ ------------ ------------ ------------ -------------- ------------ ------------
Balance at December
31, 2008 -- -- 154,098,528 $ 154,098 $ 39,190,666 $ -- $ (9,726,413)
Subscribed common
Stock issued -- -- 9,257,640 9,258 916,506 -- --
Net loss -- -- -- -- -- -- (9,487,847)
Comprehensive
income -- -- -- -- -- -- --
------------ ------------ ------------ ------------ -------------- ------------ ------------
Balance at September
30, 2009 -- -- 163,356,168 $ 163,356 $ 40,107,172 $ -- $ (19,214,260)
============ ============ ============ ============ ============== ============ ============
(CONTINUED)
See accompanying notes to consolidated financial statements
F-5
ACCUMULATED OTHER
COMPREHENSIVE INCOME
---------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE NONCONTROLLING SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
------------ ------------ ------------ ------------
Balance at December
31, 2008 $ 12,927 $ 955,479 $ 2,766,375 $ 33,353,132
Subscribed commom
Stock issue -- -- -- 925,764
Net loss -- -- (2,010,710) (11,498,557)
------------
Comprehensive
loss -- -- -- (10,572,793)
------------ ------------ ------------ ------------
Balance at September
30, 2009 $ 12,927 $ 955,479 $ 755,665 $ 22,780,339
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5a
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
-------------------------------
September 30 September 30,
2009 2008
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) including noncontrolling interest $(11,498,557) $ (5,716,817)
Adjustments to reconcile net income to cash and cash
equivalents used or provided by operations:
Amortization 602,406 872,105
Depreciation 356,566 504,813
Equipment written off 16,607 --
Allowance for doubtful debts 9,635,919 --
Gain on disposal of equipment -- (2,939)
Loss on disposal of investment available for sale -- 465,888
Deffered taxes -- (947,099)
Net change in fair value of financial assets at fair value
Through profit or loss-held for trading (273,006) 1,825,000
Share of loss of Equity Method Investment -- 18,173
Changes in operation assets and liabilities
Accounts receivables (2,432) 587,781
Inventories 1,885 11,352
Others current assets (648) 126,088
Accounts payable and accrued expenses (391,721) (1,219,758)
Other payables (5,458) (100,005)
------------ ------------
Net cash used in operating activities (1,558,439) (3,575,418)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (73,687) (15,557)
Proceeds from disposal of equipment -- 18,696
Acquisition of intangible assets (9,707) (73,196)
Proceeds from disposal of investment available for sale -- 1,505,230
Acquisition of investment available for sale (200,000) --
------------ ------------
Net cash provided by (used in) investing activities (283,394) 1,435,173
------------ ------------
CASH PROVIDED FROM FINANCING ACTIVITIES
Repayment of related parties (48,681) (76,937)
Repayments of obligations under capital leases (7,447) (6,573)
Receipts from convertible term loan -- 2,276,546
Receipts from common stock issued 925,764 --
------------ ------------
Net cash provided by (used in) financing activities 869,636 2,193,036
------------ ------------
Effect of exchange rate changes on cash and cash equivalents -- --
------------ ------------
Cash flows from all activities (972,197) 52,791
Cash and cash equivalents at beginning of period 1,484,945 2,322,541
------------ ------------
Cash and cash equivalents at end of period $ 512,748 $ 2,375,332
============ ============
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, 2009 AND 2008
1. BASIS OF PRESENTATION AND REORGANIZATION
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 15.
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.
1.2 Recent Accounting Pronouncements
With the exception of those stated below, there have been no recent
accounting pronouncements or changes in accounting pronouncements during
the nine months ended September 30, 2009, as compared to the recent
accounting pronouncements described in the Annual Report that are of
material significance, or have potential material significance, to the
Company.
Effective July 1, 2009, the Company adopted the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC")
105-10, GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - OVERALL ("ASC
105-10"). ASC 105-10 establishes the FASB ACCOUNTING STANDARDS
CODIFICATION (the "Codification") as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. All guidance contained in
the Codification carries an equal level of authority. The Codification
superseded all existing non-SEC accounting and reporting standards. All
other non-grandfathered, non-SEC accounting literature not included in
the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates ("ASUs"). The FASB will not consider ASUs as authoritative in
their own right. ASUs will serve only to update the Codification,
provide background information about the guidance and provide the basis
for conclusions on the change(s) in the Codification. References made to
FASB guidance throughout this document have been updated for the
Codification.
Effective January 1, 2008, the Company adopted FASB ASC 820-10, FAIR
VALUE MEASUREMENTS AND DISCLOSURES - OVERALL ("ASC 820-10") with respect
to its financial assets and liabilities. In February 2008, the FASB
issued updated guidance related to fair value measurements, which is
included in the Codification in ASC 820-10-55, FAIR VALUE MEASUREMENTS
AND DISCLOSURES - OVERALL - IMPLEMENTATION GUIDANCE AND ILLUSTRATIONS.
The updated guidance provided a one year deferral of the effective date
of ASC 820-10 for non-financial assets and non-financial liabilities,
except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, the Company
adopted the provisions of ASC 820-10 for non-financial assets and
non-financial liabilities effective January 1, 2009, and such adoption
did not have a material impact on the Company's results of operations or
financial condition.
F-7
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
Effective April 1, 2009, the Company adopted FASB ASC 820-10-65, FAIR
VALUE MEASUREMENTS AND DISCLOSURES - OVERALL - TRANSITION AND OPEN
EFFECTIVE DATE INFORMATION ("ASC 820-10-65"). ASC 820-10-65 provides
additional guidance for estimating fair value in accordance with ASC
820-10 when the volume and level of activity for an asset or liability
have significantly decreased. ASC 820-10-65 also includes guidance on
identifying circumstances that indicate a transaction is not orderly.
The adoption of ASC 820-10-65 did not have an impact on the Company's
results of operations or financial condition.
Effective April 1, 2009, the Company adopted FASB ASC 825-10-65,
FINANCIAL INSTRUMENTS - OVERALL - TRANSITION AND OPEN EFFECTIVE DATE
INFORMATION ("ASC 825-10-65"). ASC 825-10-65 amends ASC 825-10 to
require disclosures about fair value of financial instruments in interim
financial statements as well as in annual financial statements and also
amends ASC 270-10 to require those disclosures in all interim financial
statements. The adoption of ASC 825-10-65 did not have a material impact
on the Company's results of operations or financial condition.
Effective January 1, 2008, the Company adopted FASB ASC 820-10,
FAIR VALUE MEASUREMENTS AND DISCLOSURES - OVERALL ("ASC 820-10") with
respect to its financial assets and liabilities. In February 2008, the
FASB issued updated guidance related to fair value measurements, which
is included in the Codification in ASC 820-10-55, FAIR VALUE
MEASUREMENTS AND DISCLOSURES - OVERALL - IMPLEMENTATION GUIDANCE AND
ILLUSTRATIONS. The updated guidance provided a one year deferral of the
effective date of ASC 820-10 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the
Company adopted the provisions of ASC 820-10 for non-financial assets
and non-financial liabilities effective January 1, 2009, and such
adoption did not have a material impact on the Company's results of
operations or financial condition.
Effective April 1, 2009, the Company adopted FASB ASC 820-10-65,
FAIR VALUE MEASUREMENTS AND DISCLOSURES - OVERALL - TRANSITION AND OPEN
EFFECTIVE DATE INFORMATION ("ASC 820-10-65"). ASC 820-10-65 provides
additional guidance for estimating fair value in accordance with ASC
820-10 when the volume and level of activity for an asset or liability
have significantly decreased. ASC 820-10-65 also includes guidance on
identifying circumstances that indicate a transaction is not orderly.
The adoption of ASC 820-10-65 did not have an impact on the Company's
results of operations or financial condition.
Effective April 1, 2009, the Company adopted FASB ASC 825-10-65,
FINANCIAL INSTRUMENTS - OVERALL - TRANSITION AND OPEN EFFECTIVE DATE
INFORMATION ("ASC 825-10-65"). ASC 825-10-65 amends ASC 825-10 to
require disclosures about fair value of financial instruments in interim
financial statements as well as in annual financial statements and also
amends ASC 270-10 to require those disclosures in all interim financial
statements. The adoption of ASC 825-10-65 did not have a material impact
on the Company's results of operations or financial condition.
Effective April 1, 2009, the Company adopted FASB ASC 855-10, SUBSEQUENT
EVENTS - OVERALL ("ASC 855-10"). ASC 855-10 establishes general
standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that
date - that is, whether that date represents the date the financial
statements were issued or were available to be issued. This disclosure
should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial
statements being presented. Adoption of ASC 855-10 did not have a
material impact on the Company's consolidated results of operations or
financial condition. The Company has evaluated subsequent events through
September 30, 2009, to the date the financial statements were issued.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, FAIR
VALUE MEASUREMENTS AND DISCLOSURES (TOPIC 820) ("ASU 2009-05"). ASU
2009-05 provided amendments to ASC 820-10, FAIR VALUE MEASUREMENTS AND
DISCLOSURES - OVERALL, for the fair value measurement of liabilities.
ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using
certain techniques. ASU 2009-05 also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to include
a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of a liability. ASU 2009-05
also clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1
fair value measurements. Adoption of ASU 2009-05 did not have a material
impact on the Company's results of operations or financial condition.
F-8
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
In October 2009, the FASB issued ASU 2009-13, MULTIPLE-DELIVERABLE
REVENUE ARRANGEMENTS, (amendments to FASB ASC Topic 605, REVENUE
RECOGNITION) ("ASU 2009-13") and ASU 2009-14, CERTAIN ARRANGEMENTS THAT
INCLUDE SOFTWARE ELEMENTS,(amendments to FASB ASC Topic 985, SOFTWARE)
("ASU 2009-14"). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and
services based on a selling price hierarchy. The amendments eliminate
the residual method of revenue allocation and require revenue to be
allocated using the relative selling price method. ASU 2009-14 removes
tangible products from the scope of software revenue guidance and
provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of
the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010,
with early adoption permitted. The Company does not expect adoption of
ASU 2009-13 or ASU 2009-14 to have a material impact on the Company's
results of operations or financial condition.
FASB ASC 855, Subsequent Events ("ASC 855" and formerly referred to as
FAS-165), modified the subsequent event guidance. The three
modifications to the subsequent events guidance are: 1) To name the two
types of subsequent events either as recognized or non-recognized
subsequent events, 2) To modify the definition of subsequent events to
refer to events or transactions that occur after the balance sheet date,
but before the financial statement are issued or available to be issued
and 3) To require entities to disclose the date through which an entity
has evaluated subsequent events and the basis for that date, i.e.
whether that date represents the date the financial statements were
issued or were available to be issued. This guidance is effective for
interim or annual financial periods ending after June 15, 2009, and
should be applied prospectively.
FASB ASC 105, Generally Accepted Accounting Principles ("ASC 105" and
formerly referred to as FAS 168) establishes the FASB Accounting
Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. ASC 105 is effective
for financial statements issued for interim and annual periods ending
after September 15, 2009.
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 ASC 860 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, 2009 AND 2008
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.
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. As at September 30,, 2009, the net
inventories amount is $642,268 after written off of $457,500 during the
year ended December 31, 2008.
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.
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.
F-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
2.8 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 ASC 320. Equity
securities held for trading as of September 30, 2009 totaled $452,626
and December 31, 2008 totaled $179,620. The changes relate to fair
value adjustments of $273,006 for the nine months ended September 30,
2009 and $2,744,380 for the year ended December 31, 2008.
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.
2.9 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 years ended December 31, 2008 and 2007.
2.10 Fair Value
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.
F-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
The following table shows how our investments are categorized.
Fair Value Measurement at September 30, 2009 using:
--------------------------------------------------
Prices or Fair Value Quoted Prices in Valuation
Measurements at Active Markets Techniques
September 30, 2009 (Level 1) (Level 3)
Description ($) ($) ($)
-----------------------------------------------------------------------------------------------------------
Equity Securities Held for Trading $ 452,626 $452,626 $ --
Investments Available for Sale - Current 2,602,613 -- 2,602,613
Investments Available for Sale - Non Current 616,136 -- 616,136
----------- -------- ----------
$ 3,671,375 $452,626 $3,218,749
=========== ======== ==========
The Company's cash and cash equivalents is classified within Level 1 of the fair
value hierarchy because it is valued using quoted market prices. The cash
instrument is included in current assets in the accompanying consolidated
balance sheets.
The Company's equity securities held for trading consists primarily of shares
held for sale and is classified within Level 1 of the fair value hierarchy
because it is valued using quoted market prices. The cash instrument is included
in current assets in the accompanying consolidated balance sheets.
The Company's investments available for sale are valued using pricing models and
the Company generally uses similar models to value similar instruments. Where
possible, the Company verifies the values produced by its pricing models to
market prices. Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit spreads, measures of
volatility and correlations of such inputs. These financial liabilities do not
trade in liquid markets, and as such, model inputs cannot generally be verified
and do involve significant management judgment. Such instruments are typically
classified within Level 3 of the fair value hierarchy.
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 period ended September 30, 2009.
For the nine
months ended
September 30, 2009
------------------
Balance at the beginning of the period $ 3,018,749
Addition acquisition costs 200,000
---------
Balance at the end of the period 3,218,749
---------
The Company adopted the provisions of ASC 825-10 prospectively
effective as of the beginning of Fiscal 2008. For financial assets and
liabilities included within the scope of ASC 825-10, the Company will
be required to adopt the provisions of ASC 825-10 prospectively as of
the beginning of Fiscal 2009. The adoption of ASC 825-10 did not have a
material impact onour consolidated financial position of results of
operations.
2.11 Advances from Related Party
Advances from director and related party of $48,681 at December 31,
2008 are unsecured, non-interest bearing and payable on demand. As at
September 30, 2009, the amount is NIL.
F-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
2.12 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, 2009 and 2008.
On November 1, 2007, the Company sub-leased the office premises of M2B
World Inc, a wholly owned subsidiary of the Company in Los Angeles,
California as part of its efforts to streamline its operations and
reduce operating costs.
2.13 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.
2.14 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.
Revenue comprises the fiar value of the consideration received or
receivable for the sale of goods and rendering of services in the
ordinary course of the Company's activities. Revenue is recognized to
the extent that it is probable that the economic benefits will flow to
the Company and the revenue can be reliably measured.
Revenue from broadband consulting services and on-line turnkey
solutions is recognized over the period in which the services are
rendered, by reference to completion of the specific transaction
assessed on the basis of the actual service provided as a proportion of
the total services to be performed. It is generally recognized from the
date of acceptance and fulfillment of obligations under the sale and
purchase agreement.
Gaming revenue from our digit games recognized and reported is
generally defined as the win from the digit games activities, that is,
the difference between gaming wins and losses, not the total amount
wagered. Gaming revenue is recognized net of winnings. There were no
digit gaming revenues recognized for the nine months ended September
30, 2009. The digit game operations has been suspended. See note 15.
2.15 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. The
license and operations has been suspended. See Note 15.
F-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
2.16 Income Taxes
Deferred income taxes are determined using the liability method in
accordance with ASC740, 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.
The Company adopted ASC 740, "Accounting for Uncertainty in Income
Taxes." ASC 740 defines 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 ASC 740,
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 ASC 740, 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 ASC 740, "Definition of Settlement in ASC
740.The Company has not accrued any additional interest or penalties as
a result of the adoption of ASC 740.
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.
2.17 Earnings (Loss) Per Share
The Company has adopted Accounting Standards Codfication subpart 260-10
"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.
2.18 Financial Instruments
The carrying amounts for the Company's cash, other current assets,
accounts payable, accrued expenses and other liabilities approximate
their fair value.
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
2.19 Advertising
The cost of advertising is expensed as incurred. For the nine months
ended September 30, 2009 and 2008, the Company incurred advertising
expenses of $145,809 and $67,863 respectively.
3. EQUITY SECURITIES HELD FOR TRADING
September 30, December 31,
2009 2008
------------ -------------
Quoted equity security, at fair value $ 452,626 $ 179,620
============ ============
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 unrealized gain of
US$273,006.
The investments in quoted equity securities comprised of 34,000,000
common shares of PT Agis at the market value of US$ 0.013312 per share
as of September 30, 2009 and 34,000,000 common shares of PT Agis at the
market value of US$ 0.00528 per share as of December 31, 2008.
The Company's equity securities held for trading investment is
denominated in Indonesian Rupiah.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
-------- --------
Prepayments $ 47,578 $ 70,108
Deposits 144,220 69,995
Other receivables 39,143 90,190
-------- --------
$230,941 $230,293
======== ========
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
----------- -----------
Office equipment $ 1,023,788 $ 1,004,504
Motor vehicle 91,190 91,190
Furniture, fixture and fittings 87,082 313,208
Pony set-top boxes 843,946 843,946
----------- -----------
2,046,006 2,252,848
Accumulated depreciation (1,311,986) (1,219,342)
----------- -----------
$ 734,020 $ 1,033,506
=========== ===========
Depreciation expense was $356,566 for the nine months ended September
30, 2009 and $504,813 for the nine months ended September 30, 2008.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
------------ ------------
INDEFINITE LIVES
Film library $ 17,765,818 $ 17,763,716
------------ ------------
17,765,818 17,763,716
------------ ------------
DEFINITE USEFUL LIVES
Film library 5,408,015 5,400,410
Gaming license 7,090,000 7,090,000
Product development expenditures 719,220 719,220
Software license 12,649 12,649
------------ ------------
13,229,884 13,222,279
Accumulated amortization (6,859,818) (6,351,162)
------------ ------------
6,370,066 6,871,117
------------ ------------
$ 24,135,884 $ 24,634,833
Impairment loss (3,762,777) (3,762,777)
------------ ------------
$ 20,373,107 $ 20,872,056
============ ============
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
Amortization expense was $508,656 for the nine months ended September
30, 2009 and $872,105 for the nine months ended September 30, 2008.
Intangible assets purchased and have indefinite lives are stated at
cost less impairment losses are tested for impairment at least annually
in accordance with the provisions of FASB Statement No. 142, Goodwill
and Other Intangible Assets.
FILM LIBRARY WITH INDEFINITE LIVES
Intangible assets of the Company which have been classified as having
indefinite useful lives relate to film library rights acquired for
perpetuity by the Company.
Film costs are stated at the lower of estimated net realizable value
determined on an individual film basis, or cost. Film costs represent
the acquisition of film rights for cash.
The Company maintains distribution rights to these films for which it
has no financial obligations to third parties.
The Company is currently directing all its time and efforts towards
building its broadband business.
The Company evaluates the recoverability of its long lived assets in
accordance with the provisions of ASC 350 "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 ASC 926, 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.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
Valuations were performed on May 15, 2009 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 $203 million to $340 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 ASC
350, Accounting for Impairment or Disposal of Long-Lived Assets. Such
intangible assets are amortized over the period of the contract, which
is 2 to 18 years.
Included in the gaming license are the rights to a digit games license
in Cambodia. The license is for a minimum period of 18 years commencing
from June 1, 2005, with an option to extend for a further 5 years or
such other period as may be mutually agreed. The license and operations
has been suspended. See Note 15.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
7. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale consist of the following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
---------- ----------
Non Current :
Quoted equity securities $ -- $ --
Unquoted equity securities 616,136 616,136
---------- ----------
$ 616,136 $ 616,136
Current :
Unquoted equity securities 2,602,613 2,402,613
---------- ----------
$3,218,749 $3,018,749
========== ==========
The unquoted equity securities classified as available-for-sale, with a
carrying value of $3,218,749 as of September 30, 2009 and $3,018,749 as
of December 31, 2008, 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-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
8. COMMITMENTS
As of the balance sheet date, the Group has the following capital
commitments:
SEPTEMBER 30, DECEMBER 31,
2009 2008
---------- ----------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 108,000 $ 111,687
Set-top boxes 2,074,825 2,074,825
Contents -- 110,171
---------- ----------
$2,182,825 $2,296,683
========== ==========
Capital Leases
The following summarizes the Company's capital lease obligations at
September 30, 2009:
2009 2008
-------- --------
Future minimum lease payments $ 60,207 $ 69,140
Less: amounts representing interest (10,014) (11,500)
-------- --------
Present value of net minimum lease payments 50,193 57,640
Less: current portion (10,952) (10,809)
-------- --------
$ 39,241 $ 46,831
======== ========
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 2009 and 2008. Interest rates on capitalized leases is fixed
at 2.85%.
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
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, 2009 and 2008 was $65,504 and $196,412,
respectively. As of September 30, 2009, the future minimum lease
payments are as follows:
For the Quarter Ended
September 30, Operating Capital
--------------------- --------- -----------
2009 25,712 10,952
2010 103,427 10,952
2011 99,648 10,952
2012 58,023 17,337
-------- --------
286,810 50,193
======== ========
9. LOAN AND BORROWINGS
SEPTEMBER 30, DECEMBER 31,
2009 2008
------------- -----------
Non-current
Convertible loan $2,500,000 $2,500,000
Less: Future interest charges $ (98,454) $ (192,204)
---------- ----------
$2,401,546 $2,307,796
========== ==========
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 commences in July 2008 and
will mature in June 2010.
10. INCOME TAXES
The Company files separate tax returns for Singapore and the United
States of America.
The Company had available approximately $7,066,322 of unused U.S. net
operating loss carry-forwards at September 30, 2009, 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 June 30, 2009 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 $6,130,125 of unused Singapore
tax losses and capital allowance carry-forwards at September 30, 2009,
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.
F-21
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
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.
2009 ENTERTAINMENT DIGIT GAMING OTHER TOTAL
-----------------------------------------------------------------------
Revenues from external customers $ 39,900 $ -- $ -- $ 39,900
Interest revenue $ 120 $ -- $ -- $ 120
Interest expenses $ 95,332 $ -- $ -- $ 95,332
Depreciation and amortization $ 865,222 $ -- $ -- $ 865,222
Segment loss $(11,482,513) $ (24,109) $ -- $(11,506,622)
Segment assets $ 23,280,210 $ 2,609,244 $ 276,228 $ 26,165,682
Expenditures for segment
assets $ 83,394 $ -- $ -- $ 83,394
Reconciliation:-
REVENUES
Total revenues for reportable segments $ 39,900
Other revenue --
------------
Total consolidated revenues $ 39,900
============
INTEREST REVENUE
Total interest revenue for reportable segments $ 120
Corporate interest revenue --
------------
Total consolidated interest revenue $ 120
============
INTEREST EXPENSES
Total interest revenue for reportable segments $ 95,332
Corporate interest revenue --
------------
Total consolidated interest expenses $ 95,332
============
PROFIT OR LOSS
Total (loss) for reportable segments $(11,506,622)
Corporate loss (264,941)
Gain on valuation of held for trading investment 273,006
------------
Loss before income tax $(11,498,557)
============
F-22
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
ASSETS
Total assets for reportable segments $25,889,454
Other assets $ 276,228
-----------
Total consolidated assets $26,165,682
===========
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 83,394
===========
2008 ENTERTAINMENT DIGIT GAMING OTHER TOTAL
-----------------------------------------------------------------------
Revenues from external customers $ 55,568 $ -- $ -- $ 55,568
Interest revenue $ 12,368 $ -- $ -- $ 12,368
Interest expenses $ 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
Reconciliation:-
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)
===========
F-23
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
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
===========
Following table presents revenues earned from customers located in
different geographic areas. Property and equipment is grouped by its
location.
2009 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------- -------- --------
Revenues from external customers $ 39,900 $ -- $ -- $ 39,900
Property and equipment, net $627,714 $ 10,906 $ 95,400 $734,020
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
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
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2009 2008
-------- --------
Sales outside of the U.S. $ 39,900 $ 55,568
Services purchased outside of the U.S. $170,578 $311,282
F-24
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
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:
SEPTEMBER 30, SEPTEMBER 30,
2009 2008
------------ -------------
Associate:
Marketing $ -- $ --
============ =============
Professional fee $ 1,548 $ --
============ =============
13. SALE OF IPTV PLATFORM
In April 2007 the Company through its subsidiary M2B World Holdings
Limited entered into an agreement to sell its IPTV platform to a
company in Indonesia (buyer) for $14,500,000. The total amount of the
consideration was to be received in shares of the buyer and a 50% share
of a newly incorporated entity. To date the Company has received
$5,000,000 comprising of $1,000,000 in cash, and $4,000,000 in
publicly-traded securities. The balance outstanding receivable of
$9,500,000 is included as "Receivable from sale of IPTV platform" at
June 30, 2009 and December 31, 2008, respectively, which comprises of
two portions: the first portion of $2 million to be settled fully in
cash of the buyer, and the other portion of $7,500,000 to be invested
in the form of joint venture with the buyer as stated in the sale
agreement.
On December 15, 2008, M2B World Holdings entered into a further
agreement with PT Agis TBK ("Agis") to set up a Joint Venture Company
to launch WOWtv in Indonesia. The agreement with Agis would give M2B
World Holdings a 49 percent equity stake in the Joint Venture Company
called PT WOW Television The Joint Venture Company, PT WOW Television
has been incorporated in Indonesia. The WOWtv site targeting Indonesia
audience is currently being implemented. In accordance with the
agreement, the JV company is expected to be capitalized and go into
operations by July 2009.
Up to the second quarter, we were confident of resolving the matter of
the investment and the receivables. In our reply to the SEC on October
13, 2009, we indicated that the matter could be resolved by mid
November 2009. We had discussions with Agis management in July 2009 to
complete the transaction. We were informed by Agis Management that the
issue of the payment and the shares would require a valuation for the
Indonesian Authorities. Agis indicated that in the absence of any
valuation, the JV Company would not be able to show proof to the
government of the content value to be injected as capital.
While we are moving forward with the transaction, we are unable to
complete the valuation in November 2009. While negotiations are
ongoing, there is the possibility that we would not be able to collect
the receivables in the coming months. We think that the transaction may
completed in six to nine months, which by that time, we will seek to
recognize the receivables in our accounts as a recovery. Therefore
management has decided to allow for the total outstanding receivable of
$9,500,000 which was included in the "Receivable from sale of IPTV
platform" as of September 30, 2009.
F-25
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
14. PURCHASE OF CBBN HOLDINGS LIMITED
The Company through its wholly owned subsidiary, Tremax International
Limited, entered into a sale and purchase agreement dated July 10, 2007
with Domaine Group Limited 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. The
transaction has not been consummated and the agreement had expired and
was not extended. The Management of the Company had decided not to
proceed with this agreement.
On January 22, 2009, the Company approved the termination and
rescission of the Agreement where 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.
15. IMPAIRMENT OF DIGIT GAMES LICENSE
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 no revenues
were received as of 31 March, 2009 since the Company's recognition
criteria related to the associated revenues were not met.
F-26
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND 2008
16. 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 and calling for the termination of the
Performance and Maintenance Agreement.
On December 4, 2008, M2B Commerce Limited filed two further lawsuits in
the Kingdom of Cambodia against the owners of Allsports International
Ltd, in support of its earlier suit of September 15, 2008 against
Allsports International Ltd for breach of the Performance and
Maintenance Agreement dated May 20, 2005. One lawsuit was against the
four principal officers of Allsports International Ltd for breach of
trust of the total amount of $794,189 owing to M2B Commerce Limited.
The other lawsuit was to get Allsports International Ltd to transfer
the shares of the Lottery Company to M2B Commerce Limited, in lieu of
the earlier lawsuit of September 15, 2008 which called for the
termination of the Performance and Maintenance Agreement.
On November 7, 2008, M2B World Asia Pacific Pte. Ltd was served a
summons in Singapore by M2B Game World Pte. Ltd, a company owned 81% by
Auston International Group Limited and 19% by M2B World Pte. Ltd,
claiming a sum of US$153,744 (S$235,229) in unpaid invoices in 2006.
Following this, M2B World Asia Pacific Pte. Ltd filed a counter claim
to strike off this summons on the basis that the invoices were
non-existent and that M2B World Asia Pacific Pte. Ltd was not yet
incorporated as a company as of the date of the invoices produced by
M2B Game World Pte. Ltd.
On February 23, 2009, M2B World Pte Ltd was served a summons in
Singapore by Auston International Group Limited, claiming a sum of
US$496,765 (S$760,050) to be paid as shortfall in Guaranteed Profit to
M2B Game World Pte. Ltd for financial years 2006 and 2007, as part of
the agreement for the acquisition of M2B Game World in December 20,
2005 between M2B World Pte Ltd and Auston International Group Limited.
On March 20, 2009 in response to this summons, M2B World Pte. Ltd filed
a counter-claim against Auston International Group Limited to claim
damages amounting to US$1,568,172 and other damages as a result of
material breaches on the part of Auston International Group Limited to
the agreement of December 20, 2005 for the acquisition of M2B Game
World Pte Ltd.
17. CAPITAL STOCK
Common stock issued for cash
From August 20, 2009 to September 18, 2009, the Company issued
9,257,640 shares of common stock through a private placement at a price
of $0.10 per share for a total amount of $925,764.
18. SUBSEQUENT EVENTS
The Company commenced a private placement to accredited investors
pursuant to the Regulation D as promulgated under the Securities Act of
1933 up to $100,000, and that the closing of the placement was on or
about November 6, 2009. The total amount sold at the time of filing of
this Form 10-Q is $100,000 for 1,000,000 shares. The price per share in
the offering is at USD 0.10.
On October 16, 2009, the Company signed an agreement with Admax Network
Holdings Limited "Admax") for the display of advertising banners on
WOWtv websites. The revenue share arrangement with Admax allows the
Company to have 60% share of the advertising revenue and provide new
revenue sources in Asia.
On November 2, 2009, the Company entered into an agreement with
Cyberventures Sdn Bhd, ("Cyberventures"), and MOL Media Sdn Bhd.,("MOL
Media"), both companies incorporated in Malaysia to launch the WOWtv
services and content in Malaysia. M2B shall assign the rights of the
content library for Malaysia on a non-exclusive basis for use on the
IPTV, web and mobile platforms to MOL Media for use in Malaysia and the
Friendster Community, for a fee of USD 4.5 million payable in the
shares of MOL Media. M2B intends to carry out an independent valuation
of the content library assigned to MOL Media on an annual basis. The
Agreement further provides that MOL Media and M2B shall endeavor to
raise USD 500,000 in new offering for MOL Media to develop the business
on the IPTV, mobile and web platforms in Malaysia. This new funding
shall be raised at at the same rate as the new shares to be issued to
M2B. This fund raising shall precede the issue of the new shares to
M2B, which makes it a condition that has to be met before M2B receives
the new shares. The Company expects that the agreement with MOL Media
should grow the Company's brand and its content, and contribute to the
Company's revenues.
F-27
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 years 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. 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 following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
-1-
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
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, 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.
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.
-2-
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. The note was
obtained from a company in which a board of director is the Joint Company
Secretary of the lender.
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 game activities in
Cambodia, as an extension of the Company's entertainment operations. On March
25, 2009, the Company was notified that the digit game 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 game 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 September 30 , 2009, 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 September 30, 2009 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.
-3-
M2B World Travel Limited signed a global agreement with Amadeus Global Travel
Distribution, SA, a Spanish corporation. Through the agreement, the company will
be able to offer direct access to the extensive range of travel options
available through the Amadeus network to viewers around the world.
The 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 launch and operations of the travel service is subject to funding
considerations, and there can be no guarantee that the service can be
operational.
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.
-4-
RESULTS OF OPERATIONS
REVENUE
Financial Statements
- Revenue for the nine months ended September 30, 2009 was $39,900
compared with $55,568 for the same period in 2008.
- The Company's cash balance was $512,748 at September 30, 2009 compared
with $1,484,945 at December 31, 2008.
Revenue
Revenue from entertainment for the nine months ended September 30, 2009 at
$39,900 was lower than revenue of $55,568 for the nine months ended September
30, 2008 by $15,668 (28%). The lower revenues were mainly due to no new
advertising or content syndication contracts being secured.
Cost of Services
Cost of services for the nine months ended September 30, 2009 was $170,578 which
decreased by $173,740 (50%) from $344,318 for the nine months ended September
30, 2008.
As a proportion of revenue the cost of the services for the nine months ended
September 30, 2009 was 428% (cost of sales at $170,578 and revenue of $39,900)
as compared to 619% (cost of sales at $344,318 and revenue of $55,568) for the
nine months ended September 30, 2008.
The decrease in cost of services of $173,740 (50%) was significant and was
attributed to cost reduction measures to reduce operating costs.
DISTRIBUTION EXPENSES
Distribution expenses for the nine months ended September 30, 2009 at $9,850,432
were higher by $8,668,914 (734%) as compared to the amount of $1,181,518
incurred for the nine months ended September 30, 2008.
The higher distribution expenses were attributed to the write off of the
outstanding balance of $9,500,000 receivables from sale of IPTV platform for the
nine months ended September 30, 2009.
GENERAL AND ADMINISTRATIVE EXPENSES
Administration expenses for the nine months ended September 30, 2009 at
$1,678,634 were lower by $1,203,993 (42 %) as compared to the amount of
$2,882,627 incurred for the nine months ended September 30, 2008.
The decrease in administrative expenses for the nine months ended September 30,
2009 was attributed mainly to the decrease in:
o Depreciation and amortization. Equipment depreciation and license
amortization had decreased by $511,696 (37 %), from $1,376,918 for the
nine months ended September 30, 2008 to $ 865,222 for the nine months
ended September 30, 2009. The decrease was mainly due to most of the
intangible assets and equipment being fully amortized and written off
during end of December 31, 2008.
o Legal and professional fees. Fees had decreased by $76,104 (30%), from
$251,851 for the nine months ended June 30, 2008 to $175,747 for the
nine months ended September 30, 2009. The decrease was mainly due as a
result of costs reduction measures to reduce operating costs
o Staff costs. Staff costs had decreased by $399,986 (59%%), from
$681,187 for the nine months ended September 30, 2008 to $281,201 for
the nine months ended September 30, 2009. The decrease was mainly due
as a result of costs reduction measures to reduce operating costs
-5-
LOSS (INCOME) FROM OPERATIONS
The Company incurred a loss from operations of $11,659,744 for the nine months
ended September 30, 2009 as compared to the loss from operations of $4,352,895
for the nine months ended September 30, 2008 mainly due to the write off of the
outstanding balance $9,500,000 receivables from sale of IPTV platform for the
nine months ended September 30, 2009.
NET LOSS
Net loss for the nine months ended September 30, 2009, was $11,498,557 which
increased by $5,781,740 (101%) from net loss of $5,716,817 for the nine months
ended September 30, 2008. The increase was mainly due to the write off of the
outstanding balance of $9,500,000 receivables from the sale of IPTV platform for
the nine months ended September 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at $512,748 at September 30, 2009 as compared to cash of
$1,484,945 at December 31, 2008.
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 nine months ended September 30, 2009, the Company had not entered
into any transactions using derivative financial instruments or derivative
comodity instruments. Accordingly the Company believes its exposure to market
interest rate risk is not material.
The Company's intention in fiscal year 2009 is to raise additional funds through
new equity placements with investors to fund its business, and the intended
growth plans. To date, the Company has raised $1,025,764 in new funding. This
new funding coupled with its cash as at December 31, 2008 should be able to
cover operating expenses for the fiscal year 2009, and the Company is confident
of raising additional funding for the next fiscal year.
The Company has taken steps in 2009 to contain its operating expenses through
various cost reductions measures which include reductions in staff costs, legal
and professional fees and cost of services.
The Company has entered into agreements with partners in China, Indonesia and
Malaysia, for the rollout of WOWtv sites in these territories, and plans to
enter into new agreements for other territories in the coming months. The
Company plans in 2009 to expand its broadband coverage by launching new
broadband sites in the Asia Pacific region. No assurance can be made that such
plans will be carried out in a timely manner.
We expect that the broadband business segment would be able to generate
sufficient cash to cover its operations by the middle of Year 2010 or earlier.
Cash generated from operations meanwhile will not be able to cover the Company's
intended growth and expansion. The Company intends to raise additional funds to
fund its business expansion until its revenue generation is self sufficient to
fund the business. However no assurances can be made that the Company will raise
sufficient funds as planned.
NEW CONTRACTS
o On March 31, 2009, the Company signed an agreement with Beijing Baidu
Network Science and Technology Co Ltd ("Baidu") to launch the WOWtv
platform in China. The agreement was a strategic partnership with Baidu
to provide content services to Baidu.com users.
o On April 17,2009, the Company signed a strategic cooperation agreement
with LTDnetwork Inc. who owns the brand name and music site called
QTRAX. QTRAX is the world's first free and legal peer-to-peer music
service. Both parties agreed to look into areas to promote each other's
site to increase internet traffic and to exploit each other's content.
-6-
o On August 1, 2009, the Company signed an agreement with MOL
AccessPortal Berhad ("MOL") to launch the WOWtv content and services
through MOL's distribution network and implement MOLepoints as the
exclusive third party online micropayment solution for WOWtv content
and services globally. The revenue share agreement with MOL allows the
Company to have a 65% share of all payments for WOWtv's pay-per-view
content transacted via the MOL distribution network and micropayment
system.
o On October 16, 2009, the Company signed an agreement with Admax Network
Holdings Limited("Admax"), one of the leading online advertising
networks in South East Asia to include the Company's WOWtv sites in
their advertising networks. Admax will pay the Company sixty percent
(60%) of the amount due Admax Networks from advertisers for
advertisements.
o On November 2, 2009, the Company entered into an agreement with
Cyberventures Sdn Bhd, ("Cyberventures"), and MOL Media Sdn Bhd., ("MOL
Media"), both companies incorporated in Malaysia to launch the WOWtv
services and content in Malaysia. M2B shall assign the rights of the
content library for Malaysia on a non-exclusive basis for use on the
IPTV, web and mobile platforms to MOL Media for use in Malaysia and the
Friendster Community, for a fee of USD 4.5 million payable in the
shares of MOL Media. M2B intends to carry out an independent valuation
of the content library assigned to MOL Media on an annual basis. The
Agreement further provides that MOL Media and M2B shall endeavor to
raise USD 500,000/- in new offering for MOL Media to develop the
business on the IPTV, mobile and web platforms in Malaysia. This new
funding shall be raised at at the same rate as the new shares to be
issued to M2B. This fund raising shall precede the issue of the new
shares to M2B, which makes it a condition that has to be met before M2B
receives the new shares. The Company expects that the agreement with
MOL Media should grow the Company's brand and its content, and
contribute to the Company's revenues.
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 $2,055,239 and $2,582,233 in
marketable securities as of September 30, 2009 and December 31, 2008
respectively.
The Company does not believe that it faces material market risk with respect to
its cash and cash equivalents which totaled $512,748 and $1,484,945 at September
30, 2009 and December 31, 2008, 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. 8
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 N1H1 VIRUS FLU PANDEMIC OR SIMILAR PUBLIC HEALTH DEVELOPMENTS
Any future outbreak of the N1H1 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) and
15d-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,
2009 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
The Company's management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with United States of America generally
accepted accounting principles. A Company's internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the Company are
being made only in accordance with authorization of management and directors of
the Company and (iii) provide reasonable assurance regarding the prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on our consolidated financial
statements.
In connection with the preparation of this Quarterly Report on Form 10Q, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of internal control over financial reporting based on
criteria established in the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"), as supplemented by the COSO publication Internal Control over
Financial Reporting - Guidance for Smaller Public Companies. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our internal control over financial reporting was effective as of September
30, 2009, based on these criteria. Management is aware that there is a lack of
segregation of duties at the Company due to the fact that there are only four
people dealing with financial and accounting matters. However, at this time,
management has decided that considering the experience and abilities of the
employees involved and the low quantity of transactions processed, the risks
associated with such lack of segregation are low and the potential benefits of
adding employees to clearly segregate duties do not justify the substantial
expenses associated with such increases. Management will periodically reevaluate
this situation.
Notwithstanding the above regarding the lack of segregation of duties,
management, including our Chief Executive Officer and Chief Financial Officer,
believes that the consolidated financial statements included in this annual
report present fairly, in all material respects, our financial condition,
results of operations and cash flows for the periods presented. This annual
report does not include an attestation report of our registered independent
auditors regarding internal control over financial reporting. Management's
report was not subject to attestation by our registered independent auditors
pursuant to temporary rules of the SEC that permit us to provide only
management's report in this annual report.
-10-
Changes in Internal Control Over Financial Reporting During the quarter ended
September 30, 2009, there were no changes in our internal controls that have
materially affected or are reasonably likely to have materially affected our
internal control over financial reporting. Our management, including the Chief
Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected.
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 30, 2009, that the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) and
15d-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
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.
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 and calling
for the termination of the Performance and Maintenance Agreement.
On December 4, 2008, M2B Commerce Limited filed two further lawsuits in the
Kingdom of Cambodia against the owners of Allsports International Ltd, in
support of its earlier suit of September 15, 2008 against Allsports
International Ltd for breach of the Performance and Maintenance Agreement dated
May 20, 2005. One lawsuit was against the four principal officers of Allsports
International Ltd for breach of trust of the total amount of $794,189 owing to
M2B Commerce Limited. The other lawsuit was to get Allsports International Ltd
to transfer the shares of the Lottery Company to M2B Commerce Limited, in lieu
of the earlier lawsuit of September 15, 2008 which called for the termination of
the Performance and Maintenance Agreement.
On November 7, 2008, M2B World Asia Pacific Pte. Ltd was served a summons in
Singapore by M2B Game World Pte. Ltd, a company owned 81% by Auston
International Group Limited and 19% by M2B World Pte. Ltd, claiming a sum of
US$153,744 (S$235,229) in unpaid invoices in 2006. Following this, M2B World
Asia Pacific Pte. Ltd filed a counter claim to strike off this summons on the
basis that the invoices were non-existent and that M2B World Asia Pacific Pte.
Ltd was not yet incorporated as a company as of the date of the invoices
produced by M2B Game World Pte. Ltd.
-11-
On February 23, 2009, M2B World Pte Ltd was served a summons in Singapore by
Auston International Group Limited, claiming a sum of US$496,765 (S$760,050) to
be paid as shortfall in Guaranteed Profit to M2B Game World Pte. Ltd for
financial years 2006 and 2007, as part of the agreement for the acquisition of
M2B Game World in December 20, 2005 between M2B World Pte Ltd and Auston
International Group Limited. On March 20, 2009 in response to this summons, M2B
World Pte. Ltd filed a counter-claim against Auston International Group Limited
to claim damages amounting to US$1,568,172 and other damages as a result of
material breaches on the part of Auston International Group Limited to the
agreement of December 20, 2005 for the acquisition of M2B Game World Pte Ltd.
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. 12
-12-
COMPETITION IN THE BROADBAND BUSINESS IS EXPECTED TO INCREASE, WHICH COULD CAUSE
THE BUSINESS TO FAIL.
The Company's Broadband services are targeted to the end user market. As the
Broadband penetration rates increase globally, an increasing number of
well-funded competitors have entered the market. Companies that compete with the
Company's business include telecommunications, cable, content management and
network delivery companies.
The Company may face increased competition as these competitors partner with
others or develop new Broadband websites and service offerings to expand the
functionality that they can offer to their customers. These competitors may,
over time, develop new technologies and acquire content that are perceived as
being more secure, effective or cost efficient than the Company. These
competitors could successfully garner a significant share of the market, to the
exclusion of the Company. Furthermore, increased competition could result in
pricing pressures, reduced margins, or the failure of the business to achieve or
maintain market acceptance, any one of which could harm the business.
THE INABILITY TO SUCCESSFULLY EXECUTE TIMELY DEVELOPMENT AND INTRODUCTION OF NEW
AND RELATED SERVICES AND TO IMPLEMENT TECHNOLOGICAL CHANGES COULD HARM THE
BUSINESS.
The evolving nature of the Broadband business requires the Company to
continually develop and introduce new and related services and to improve the
performance, features, and reliability of the existing services, particularly in
response to competitive offerings.
The Company has under development new features and services for its businesses.
The Company may also introduce new services. The success of new or enhanced
features and services depends on several factors - primarily market acceptance.
The Company may not succeed in developing and marketing new or enhanced features
and services that respond to competitive and technological developments and
changing customer needs. This could harm the business.
CAPACITY LIMITS ON THE COMPANY'S TECHNOLOGY AND NETWORK HARDWARE AND SOFTWARE
MAY BE DIFFICULT TO PROJECT, AND THE COMPANY MAY NOT BE ABLE TO EXPAND AND/OR
UPGRADE ITS SYSTEMS TO MEET INCREASED USE, WHICH WOULD RESULT IN REDUCED
REVENUES.
While the Company has ample through-put capacity to handle its customers'
requirements for the medium term, at some point it may be required to materially
expand and/or upgrade its technology and network hardware and software. The
Company may not be able to accurately project the rate of increase in usage of
its network. In addition, it may not be able to expand and/or upgrade its
systems and network hardware and software capabilities in a timely manner to
accommodate increased traffic on its network. If the Company does not
appropriately expand and/or upgrade our systems and network hardware and
software in a timely fashion, it may lose customers and revenues.
INTERRUPTIONS TO THE DATA CENTERS AND BROADBAND NETWORKS COULD DISRUPT BUSINESS,
AND NEGATIVELY IMPACT CUSTOMER DEMAND FOR THE COMPANY.
The Company's business depends on the uninterrupted operation at the data
centers and the broadband networks run by the various service providers. The
data centers may suffer for loss, damage, or interruption caused by fire, power
loss, telecommunications failure, or other events beyond the Company. Any damage
or failure that causes interruptions in the Company's operations could
materially harm business, financial conditions, and results of operations.
In addition, the Company's services depend on the efficient operation of the
Internet connections between customers and the data centers. The Company depends
on Internet service providers efficiently operating these connections. These
providers have experienced periodic operational problems or outages in the past.
Any of these problems or outages could adversely affect customer satisfaction
and customers could be reluctant to use our Internet related services.
THE COMPANY MAY NOT BE ABLE TO ACQUIRE NEW CONTENT, OR MAY HAVE TO DEFEND ITS
RIGHTS IN INTELLECTUAL PROPERTY OF THE CONTENT THAT IS USED FOR ITS SERVICES
WHICH COULD BE DISRUPTIVE AND EXPENSIVE TO ITS BUSINESS.
The Company may not be able to acquire new content, or may have to defend its
intellectual property rights or defend against claims that it is infringing the
rights of others, where its content rights are concerned. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us to develop non-infringing services or enter onto royalty or
licensing arrangements. Royalty or licensing arrangements, if required, may not
be obtainable on terms acceptable to the Company. The business could be
significantly harmed if the Company is not able to develop or license new
content. Furthermore, it is possible that others may license substantially
equivalent content, thus enabling them to effectively compete against us.
-13-
THE COMPANY DEPENDS ON KEY PERSONNEL.
The Company depends on the performance of its senior management team. Its
success depends on its ability to attract, retain, and motivate these
individuals. There are no binding agreements with any of its employees that
prevent them from leaving the Company at any time. There is competition for
these people. The loss of the services of any of the key employees or failure to
attract, retain, and motivate key employees could harm the business.
THE COMPANY RELIES ON THIRD PARTIES.
If critical services and products that the Company sources from third parties,
such as content and network services were to no longer be made available to the
Company or at a considerably higher price than it currently pays for them, and
suitable alternatives could not be found, the business could be harmed.
THE COMPANY COULD BE AFFECTED BY GOVERNMENT REGULATION.
The list of countries to which our solutions and services could not be exported
could be revised in the future. Furthermore, some countries may in future impose
restrictions on streaming of broadband contents and related services. Failure to
obtain the required governmental approvals would preclude the sale or use of
services in international markets and therefore, harm the Company's ability to
grow sales through expansion into international markets. While regulations in
almost all countries in which our business currently operates generally permit
the broadband services, such regulations in future may not be as favorable and
may impede our ability to develop business.
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.
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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August and September, 2009, the Company issued a total of 9,257,600 shares of
common stock through its private placement of shares of common stock at a
purchase price of $0.10 per share for a total amount of $925,764.00 to
"accredited investors" as that term is defined inRegulation D of the Securities
Act of 1933. Also as of November 6, 2009, the Company issued a total of
1,000,000 shares of common stock through its private placement of shares of
common stock at a purchase price of $0.10 per share for a total amount of
$100,000, to an "accredited investor", as that term is defined in Regulation D
of theSecurities Act of 1933.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS:
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.
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(Registrant)
November 16, 2009 /s/ Colin Binny
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Date President, Chief Executive Officer and
Chief Financial Officer
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