UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-50065
Amaru, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Nevada 88-0490089
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
112 Middle Road, #08-01 Midland House, Singapore 188970
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (011)(65) 6332 9287
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 Of the Exchange Act.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 Of the Exchange Act.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 154,098,528 shares
----------------------------- ---------------------------------
(Class) (Outstanding at June 30,2007)
AMARU, INC. AND SUBSIDARIES
2007 Quarterly Report on Form 10-Q
Table of Contents
PART 1: FINANCIAL INFORMATION
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Income F-4,5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-22
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 1-8
AND RESULTS OF OPERATIONS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 9-10
ITEM 4: CONTROLS AND PROCEDURES 11
PART 2: OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS 12
ITEM 1A: RISK FACTORS 12 to 14
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS 15
SIGNATURES 16
F-1
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
ASSETS (UNAUDITED) (AUDITED)
Current assets
Cash and cash equivalents $ 4,200,078 $ 2,294,984
Accounts receivable, net 12,422,915 2,106,647
Equity securities held for trading 7,020,000 --
Other current assets 481,748 539,604
Inventories 1,168,679 1,689,634
------------ ------------
Total current assets 25,293,420 6,630,869
Non-current assets
Property and equipment, net 1,656,382 1,215,744
Intangible assets, net 28,330,585 28,886,883
Associate 4,950,891 --
Available-for-sale of equity securities 11,496,565 12,158,351
------------ ------------
Total non-current assets 46,434,423 42,260,978
------------ ------------
Total assets $ 71,727,843 $ 48,891,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,091,772 $ 2,101,970
Other payables 105,000 --
Finance lease liabilities 10,124 --
Income taxes payable 45,245 58,473
------------ ------------
Total current liabilities 2,252,141 2,160,443
Non-current liabilities
Deferred tax liabilities 3,833,000 1,684,158
Hire purchase creditor 59,901 --
------------ ------------
Total non-current liabilities 3,892,901 1,684,158
------------ ------------
Total liabilities 6,145,042 3,844,601
Minority interests 5,871,607 --
Commitments -- --
Stockholders' equity
Preferred stock (par value $0.001) 5,000,000 shares authorized;
0 shares issued and outstanding at June 30, 2007 and
December 31, 2006, respectively -- --
Common stock (par value $0.001) 200,000,000 shares authorized;
154,098,528 and 153,638,528 shares issued and outstanding at
June 30, 2007 and December 31, 2006, respectively 154,098 153,638
Additional paid-in capital 39,190,666 38,942,126
Subscribed common stock, 0 and 420,000 shares at June 30, 2007
and December 31, 2006, respectively -- 189,000
Retained earnings 14,713,052 2,084,908
Accumulated other comprehensive income 5,653,378 3,677,574
------------ ------------
Total stockholders' equity 59,711,194 45,047,246
------------ ------------
Total liabilities and stockholders' equity $ 71,727,843 $ 48,891,847
============ ============
See accompanying notes to consolidated financial statements
F-2
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------ --------------------------
JUNE 30, 2007 JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2006
------------- ------------- ------------- -------------
Revenue:
Entertainment $ 15,034,689 $ 3,215,479 $ 15,024,440 $ 2,212,822
Digit gaming 10,459,791 11,094,343 4,982,965 5,220,649
Other income -- 1,144 -- 358
------------- ------------- ------------- -------------
Total revenue 25,494,480 14,310,966 20,007,405 7,433,829
Cost of services (11,292,135) (10,973,303) (5,868,634) (5,184,910)
------------- ------------- ------------- -------------
Gross profit 14,202,345 3,337,663 14,138,771 2,248,919
Distribution costs (505,653) (559,529) (196,006) (312,095)
Administrative expenses (3,521,215) (1,682,011) (1,848,919) (1,048,334)
------------- ------------- ------------- -------------
Total expenses (4,026,868) (2,241,540) (2,044,925) (1,360,429)
Income from operations 10,175,477 1,096,123 12,093,846 888,490
Other expenses:
Interest expenses (171) -- (171) --
Interest income 26,101 57,871 12,419 40,289
Gain on dilution of interest in subsidiary 2,483,871 -- -- --
Net change in fair value of financial assets
at fair value through Profit or Loss-held for trading 4,320,000 -- 4,320,000 --
Share of loss of associate (15,224) -- (22,763) --
------------- ------------- ------------- -------------
Income before income taxes 16,990,054 1,153,994 16,403,331 928,779
(Provision) Benefit for income taxes (1,586,432) 66,465 (1,749,945) (8,576)
------------- ------------- ------------- -------------
Net income $ 15,403,622 $ 1,220,459 $ 14,653,386 $ 920,203
============= ============= ============= =============
Attributable to:
Equity holders of the Company $ 12,628,144 $ 1,220,459 $ 11,797,894 $ 920,203
Minority interests 2,775,478 -- 2,855,492 --
------------- ------------- ------------- -------------
Net income $ 15,403,622 $ 1,220,459 $ 14,653,386 $ 920,203
============= ============= ============= =============
Net income per share
- basic and diluted $ 0.10 $ 0.01 $ 0.10 $ 0.01
============= ============= ============= =============
Weighted average number of common shares outstanding
- basic and diluted 153,942,285 142,983,737 154,098,528 151,100,426
============= ============= ============= =============
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 ACCUMULATED OTHER
--------------- ------------------ COMPREHENSIVE INCOME
--------------------- TOTAL
NUMBER PAR PAR ADDITIONAL SUBSCRIBED CURRENCY SHARE-
OF VALUE NUMBER OF VALUE PAID-IN COMMON RETAINED TRANSLATION FAIR VALUE MINORITY HOLDERS'
SHARES ($0.001 SHARES ($0.001) CAPITAL STOCK EARNINGS RESERVE RESERVE INTEREST EQUITY
------ ------ ----------- --------- ----------- ----------- --------- --------- --------- -------- ------------
Balance at
December 31,
2005 -- -- 125,591,120 $125,591 $14,642,550 $ 4,256,880 $ 834,379 $12,927 $ -- $ -- $19,872,327
Common stock
issued for
cash -- -- 15,339,568 15,339 11,255,404 -- -- -- -- -- 11,270,743
Common stock
issued for
services -- -- 40,000 40 59,960 -- -- -- -- -- 60,000
Subscribed
common stock
issued -- -- 5,675,840 5,676 4,251,204 (4,256,880) -- -- -- -- --
Common stock
issued in
exchange for
acquisition
of film library -- -- 6,992,000 6,992 8,733,008 -- -- -- -- -- 8,740,000
Common stock
subscribed
for services
(420,000
shares) -- -- -- -- -- 189,000 -- -- -- -- 189,000
Net income -- -- -- -- -- -- 1,250,529 -- -- -- 1,250,529
Change in
fair value
of available
for-sale-equity
securities
net of tax -- -- -- -- -- -- -- -- 3,664,647 -- 3,664,647
----------
Comprehensive
income -- -- -- -- -- -- -- -- -- -- 4,915,176
------ ------ ----------- -------- ----------- ----------- ---------- ------- ----------- --------- -----------
Balance at
December 31,
2006 -- -- 153,638,528 $153,638 $38,942,126 $ 189,000 $2,084,908 $12,927 $3,664,647 $ -- $45,047,246
====== ====== =========== ======== =========== =========== ========== ======= ========== ========= ===========
See accompanying notes to consolidated financial statements
F-4
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
PREFERRED STOCK COMMON STOCK ACCUMULATED OTHER
--------------- ------------------ COMPREHENSIVE INCOME
--------------------- TOTAL
NUMBER PAR PAR ADDITIONAL SUBSCRIBED CURRENCY FAIR SHARE-
OF VALUE NUMBER OF VALUE PAID-IN COMMON RETAINED TRANSLATION VALUE MINORITY HOLDERS'
SHARES ($0.001 SHARES ($0.001) CAPITAL STOCK EARNINGS RESERVE RESERVE INTEREST EQUITY
------ ------ ----------- --------- ----------- ----------- --------- --------- --------- -------- ------------
Balance at
December 31,
2006 -- -- 153,638,528 $153,638 $38,942,126 $ 189,000 $ 2,084,908 $12,927 $3,664,647 $ -- $45,047,246
Subscribed
common
Stock issued -- -- 420,000 420 188,580 (189,000) -- -- -- -- --
Common stock
issued
for services -- -- 40,000 40 59,960 -- -- -- -- -- 60,000
Contribution
from
minority
interest -- -- -- -- -- -- -- -- -- 5,580,000 5,580,000
Gain on
dilution of
interest in
subsidiary -- -- -- -- -- -- -- -- -- (2,483,871) (2,483,871)
Net income -- -- -- -- -- -- 12,628,144 -- -- 2,775,478 15,403,622
Change in
fair value
of available-
for-sale
equity
securities
net of tax -- -- -- -- -- -- -- -- 1,975,804 -- 1,975,804
----------
Comprehensive
income -- -- -- -- -- -- -- -- -- -- 17,379,426
------ ------ ----------- -------- ----------- --------- ----------- ------- ---------- ----------- ----------
Balance at
June 30, -- -- 154,098,528 $154,098 $39,190,666 -- $14,713,052 $12,927 $5,640,451 $ 5,871,607 $65,582,801
2006 ====== ====== =========== ======== =========== ========= =========== ======= ========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
June 30, 2007 June 30, 2006
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 15,403,622 $ 1,220,459
Adjustments for :
Amortization 1,625,493 78,369
Depreciation 270,208 325,819
Acquisition of investment in exchange for account receivable (4,400,000) --
Gain on dilution of interest in a subsidiary (2,483,871) --
Net change in fair value of financial assets at fair value
through Profit or Loss-held for trading (4,320,000) --
Common stock issued for services 60,000 --
Deferred tax 1,586,432 --
Share of loss of associate 15,224 --
Changes in operation assets and liabilities
Accounts receivable (10,316,268) 356,307
Inventories 520,955 --
Other current assets 57,856 (3,510,588)
Accounts payable and accrued expenses (10,198) 494,078
Other payables 105,000 --
Income taxes payable (13,228) --
------------ ------------
Net cash used in operating activities (1,898,775) (1,035,556)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (710,846) (5,906,324)
Acquisition of associate (66,115)
Acquisition available-for-sale of equity securities -- (438,458)
Acquisition of intangible assets (1,069,195) (2,400,000)
------------ ------------
Net cash used in investing activities (1,846,156) (8,744,782)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of balances due to related party -- (58,392)
Proceeds from hire purchase creditor 70,025 --
Proceeds from issuance of common stock -- 11,110,860
Capital contributed by minority shareholders 5,580,000 --
------------ ------------
Net cash provided by financing activities 5,650,025 11,052,468
Effect of exchange rate changes on cash and cash equivalents -- --
------------ ------------
Cash flows from all activities 1,905,094 1,272,130
Cash and cash equivalents at beginning of period 2,294,984 4,776,819
------------ ------------
Cash and cash equivalents at end of period $ 4,200,078 $ 6,048,949
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Acquisition of investments (1) $ 4,400,000 $ --
============ ============
Common stock in exchange for acquisition of film library $ -- $ 8,740,000
============ ============
Subscribed common stock issued $ -- $ 4,256,880
============ ============
(1) On February 15, 2007, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd subscribed
for additional 4% interest in an investment for $1.7 million in exchange for the settlement of an
accounts receivables from the investee company.
On June 27, 2007, M2B World Holdings Limited, a wholly owned subsidiary of
M2B World Asia Pacific Pte. Ltd received $2.7 million in quoted equity securities in exchange for
accounts receivable from a company, as part of the sales and purchase agreement with the company.
See accompanying notes to consolidated financial statements
F-6
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
1. BASIS OF PRESENTATION
1.1 Description of Business
Amaru, Inc. (the Company) through its subsidiaries under the M2B
brand is in the Broadband Media Entertainment business, and a
provider of interactive Entertainment-on-demand, Education-on-demand
and E-commerce streaming over Broadband channels, Internet portals
and Third-Generation (3G) devices globally. It has launched multiple
Broadband TV and integrated shopping websites with multiple channels
of content designed and programmed to target specific viewer
profiles and lifestyles of local and international audiences. The
Company controls substantial content libraries for aggregation,
distribution and syndication on Broadband and other media, sourced
from Hollywood and major content providers around the world.
The Company's business strategy is to be a diversified media company
specializing in the interactive media industry, using the latest
broadband, E-Commerce and communications technologies and access to
international content and programming.
The Company's goal is to provide on-line entertainment and education
on-demand on Broadband channels, Internet portals and 3G devices
across the globe; for specific and identified viewer lifestyles,
demographics and interests; and to tie the viewing experience to an
on-line shopping experience. This is to enable two leisure
activities to be rolled into one for the ultimate convenience and
reaching out to a global viewing audience.
1.2 Basis of Presentation
The financial statements included herein are unaudited. However,
such information reflects all adjustments (consisting solely of
normal occurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the
interim periods. The results of operations for the six months
ended June 30, 2007, are not necessarily indicative of the results
to be expected for the full year.
The accompanying financial statements do not include footnote and
certain financial presentation normally required under generally
accepted accounting principles, and, therefore, should be read in
conjunction with the company's Annual report on Form 10-KSB for the
year ended December 31, 2006.
F-7
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
1.3 Recent Accounting Standards and Pronouncements
In 2006, the FASB issued Interpretation No. 48 (FIN 48), "
Accounting for Uncertainty in Income Taxes - an Interpretation of
FASB Statement No. 109 Accounting for Income Taxes." FIN 48
clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with SFAS 109.
FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48
provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN 48 as of January 1, 2007, as required.
The current Company policy classifies any interest recognized on an
underpayment of income taxes as interest expense and classifies any
statutory penalties recognized on a tax position taken as selling,
general and administrative expense. There were no interest or
selling, general and administrative expenses accrued or recognized
related to income taxes for the six months ended June 30, 2007.
The Company has not taken a tax position that would have a material
effect on 30 June, 2007 or during the prior three years applicable
under FIN 48. It is determined not to be reasonably possible for the
amounts of unrecognized tax benefits to significantly increase or
decrease within 12 months of the adoption of FIN 48. The Company is
currently subject to a three year statute of limitations by major
tax jurisdictions.
F-8
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Principles of Consolidation
The consolidated financial statements include the financial
statements of Amaru, Inc. and its majority owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. In addition, the Company evaluates its
relationships with other entities to identify whether they are
variable interest entities as defined by FASB Interpretation No. 46
(R) Consolidation of Variable Interest Entities ("FIN 46R") and to
assess whether it is the primary beneficiary of such entities. If
the determination is made that the Company is the primary
beneficiary, then that entity is included in the consolidated
financial statements in accordance with FIN 46(R).
2.2 Use of Estimates
The preparation of the consolidated financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the period. Significant items subject to such
estimates and assumptions include carrying amount of property and
equipment, intangibles, valuation allowances of receivables and
inventories. Actual results could differ from those estimates.
Management has not made any subjective or complex judgments the
application of which would result in any material differences in
reported results.
2.3 Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand, demand
deposits and short-term, highly liquid investments readily
convertible to cash and subject to insignificant risk of changes in
value.
Cash in banks and short-term deposits are held to maturity and are
carried at cost. For the purposes of the consolidated statements of
cash flows, cash and cash equivalents consist of cash on hand and
deposits in banks, net of outstanding bank overdrafts.
The Company monitors its liquidity risk and maintains a level of
cash and cash equivalents deemed adequate by management to finance
the Company's operations and to mitigate the effects of fluctuations
in cash flows.
F-9
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
2.4 Trade Accounts Receivable
Trade accounts receivable, which generally have 30 to 90 day terms,
are recorded at the invoiced amount less an allowance for any
uncollectible amounts (if any) and do not bear interest. Amounts
collected on trade accounts receivable are included in net cash
provided by operating activities in the consolidated statements of
cash flows. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. Account balances are charged
off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. Bad
debts are written off as incurred. The Company does not have any
off-balance sheet credit exposure related to its customers.
The Company's primary exposure to credit risk arises through its
trade accounts receivable. The credit risk on liquid funds is
limited because the counterparties are banks with high credit
ratings assigned by international credit-rating agencies.
Entertainment revenues were concentrated with one customer totalling
99.8% of these related revenues for the six months ended June 30,
2007 and four customers totaling 96.7 % of these related revenues
for the six months ended June 30, 2006.
The Company's operations are conducted over the world wide web and
some purchases are made from locations outside of Singapore.
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2007 2006 2007 2006
------------ ----------- ------------ ------------
Sales outside of the U.S. $ 25,494,193 $ 14,310,936 $ 20,007,163 $ 7,433,829
Services purchased outside $ 11,260,156 $ 10,957,064 $ 5,866,757 $ 5,183,218
of the U.S.
2.5 Inventories
Inventories are carried at the lower of cost and net realizable
value. Cost is calculated using first-in, first-out ("FIFO") method
and comprises all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location
and condition.
2.6 Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets for financial reporting purposes. Expenditures for major
renewals and betterments that extend the useful lives are
capitalized. Expenditures for normal maintenance and repairs are
expensed as incurred. The cost of assets sold or abandoned and the
related accumulated depreciation are eliminated from the accounts
and any gains or losses are reflected in the accompanying
consolidated statement of income of the respective period. The
estimated useful lives of the assets range from 3 to 5 years.
F-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
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 two to 18 years.
Included in the gaming license are the rights to a digit games
license in Cambodia. The license is for a minimum period of 18 years
commencing from June 1, 2005, with an option to extend for a further
5 years or such other period as may be mutually agreed.
The Company capitalized the development and building cost related to
the broad-band sites and infrastructure for the streaming system,
most of which was developed in 2002 as product development costs.
The Company projects that these development costs will be useful for
up to five years before additional significant development needs to
be done.
2.8 Associate
An associate is an entity over which the Company has significant
influence and that is neither a subsidiary nor an interest in a
joint venture. Significant influence is the power to participate in
the financial and operating policy decisions of the investee but is
not control or joint control over those policies.
The results and assets and liabilities of associates are
incorporated in these financial statements using the equity method
of accounting. Under the equity method, investments in associates
are carried in the consolidated balance sheet at cost as adjusted
for post-acquisition changes in the Company's share of the net
assets of the associate, less any impairment in the value of
individual investments. Losses of an associate in excess of the
group's interest in that associate (which includes any long-term
interests that, in substance, form part of the Company's net
investment in the associate) are not recognised, unless the group
has incurred legal or constructive obligations or made payments on
behalf of the associate.
Any excess of the cost of acquisition over the Company's share of
the net fair value of the identifiable assets, liabilities and
contingent liabilities of the associate recognised at the date of
acquisition is recognised as goodwill. The goodwill is included
within the carrying amount of the investment and is assessed for
impairment as part of the investment. Any excess of the Company's
share of the net fair value of the identifiable assets, liabilities
and contingent liabilities over the cost of acquisition, after
reassessment, is recognised immediately in the consolidated profit
and loss statement.
Where a group entity transacts with an associate of the group,
profits and losses are eliminated to the extent of the group's
interest in the relevant associate.
F-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
2.9 Investments
The Company classifies its investments in marketable equity and debt
securities as "available-for-sale", "held to maturity" or "trading"
at the time of purchase in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115").
Available-for-sale securities are carried at fair value with
unrealized gains and losses, net of related tax, if any, reported as
a component of other comprehensive income (loss) until realized.
Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis. A
decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary will result in an
impairment, which is charged to earnings.
Available-for-sale securities that are not publicly traded or have
resale restrictions greater than one year are accounted for at cost.
The Company's cost method investments include companies involved in
the broadband and entertainment industry. The Company uses available
qualitative and quantitative information to evaluate all cost method
investment impairments at least annually.
F-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
2.10 Valuation of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets to be
held and used, other than intangible assets with indefinite lives,
when events or circumstances warrant such a review. No impairment
losses were recorded for the six months ended June 30, 2007 and
the three months ended March 31, 2007.
2.11 Investments at fair value through profit or loss
An instrument is classified as at fair value through profit or loss
if it is held for trading or is designated as such upon initial
recognition. Financial instruments are designated as fair value
through profit or loss if the Company manages such investments and
makes purchase and sales decisions based on their fair value. Upon
initial recognition, attributable transaction costs are recognised
in the income statement when incurred. Financial instruments at fair
value through profit or loss are measured at fair value, and changes
therein are recognized in the income statement.
2.12 Advances from Related Party
Advances from related party are unsecured, non-interest bearing and
payable on demand.
2.13 Leases
Leased assets in which the Company assumes substantially all the
risks and rewards of ownership are classified as finance leases.
Upon initial recognition, property, plant and equipment acquired
through finance leases are capitalized at the lower of its fair
value and the present value of the minimum lease payments.
Subsequent to recognition, the asset is accounted for in accordance
with the accounting policy applicable to that asset. Leased assets
are depreciated over the shorter of the lease term and their useful
lives. Lease payments are apportioned between finance expense and
reduction of the lease liability. The finance expense is allocated
to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability.
Contingent lease payments are accounted for by revising the minimum
lease payments over the remaining term of the lease when the lease
adjustment is confirmed.
2.14 Foreign Currency Translation
Transactions in foreign currencies are translated at foreign
exchange rates ruling at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies at the
balance sheet date are translated into US dollars at foreign
exchange rate ruling at that date. Non-monetary assets and
liabilities measured at cost in a foreign currency are translated
using exchange rates at the date of the transaction. Foreign
currency transaction gains and losses are included in determining
net income and were not significant.
2.15 Revenues
Subscription and related services revenues are recognized over the
period that services are provided. Advertising and sponsorship
revenues are recognized as the services are performed or when the
goods are delivered. Licensing and content syndication revenue is
recognized when the license period begins, and the contents are
available for exploitation by customer, pursuant to the terms of the
license agreement. Gaming revenue is recognized as earned net of
winnings. E-commerce commissions are recognized as received.
Broadband consulting services and on-line turnkey solutions revenue
are recognized as earned.
2.16 Costs of Services
The cost of services pertaining to advertising and sponsorship
revenue and subscription and related services are cost of bandwidth
charges, channel design and alteration, copyright licensing, and
hardware hosting and maintenance costs. The cost of services
pertaining to E-commerce revenue is channel design and alteration,
and hardware hosting and maintenance costs. The cost of services
pertaining to gaming is for managing and operating the operations
and gaming centers. All these costs are accounted for in the period
it was incurred.
F-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
2.17 Income Taxes
Deferred income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income taxes are measured using enacted tax rates
expected to apply to taxable income in years in which such temporary
differences are expected to be recovered or settled. The effect on
deferred income taxes of a change in tax rates is recognized in the
statement of income of the period that includes the enactment date.
In addition, a valuation allowance is established to reduce any
deferred tax asset for which it is determined that it is more likely
than not that some portion of the deferred tax asset will not be
realized.
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
2.16 Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued FAS No. 128 "Earnings Per Share" which requires the Company
to present basic and diluted earnings per share, for all periods
presented. The computation of earnings per common share (basic and
diluted) is based on the weighted average number of shares actually
outstanding during the period. The Company has no common stock
equivalents, which would dilute earnings per share.
2.17 Financial Instruments
The carrying amounts for the Company's cash, other current assets,
accounts payable, accrued expenses and other liabilities approximate
their fair value.
2.18 Advertising
The cost of advertising is expensed as incurred. For the six months
ended June 30, 2007 and 2006, the Company incurred advertising
expenses of $317,437 and $421,831 respectively. For the three months
ended June 30, 2007 and 2006, the Company incurred advertising
expenses of $112,008 and $231,701 respectively.
2.19 Reclassifications
Certain amounts in the previous periods presented have been
reclassified to conform to the current year financial statement
presentation.
3. EQUITY SECURITIES HELD FOR TRADING INVESTMENT
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Quoted equity security, at fair value $ 7,020,000 $ --
============ ============
The fair value of the security is based on closing quoted market
price on the last market day of the financial period.
The Company's equity securities held for trading investment is
denominated in Indonesian Ruppiah.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Prepayments $ 135,183 $ 177,278
Deposits 175,211 172,882
Other receivables 171,354 189,444
------------ ------------
$ 481,748 $ 539,604
============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Office equipment $ 740,486 $ 721,085
Motor vehicle 112,563 11,000
Furniture, fixture and fittings 587,408 556,069
Set-top boxes 824,224 265,681
------------ ------------
2,264,681 1,553,835
Accumulated depreciation (608,299) (338,091)
------------ ------------
$ 1,656,382 $ 1,215,744
============ ============
Depreciation expense was $270,208 for the six months ended June 30,
2007 and $78,369 for the six months ended June 30, 2006.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
INDEFINITE LIVES
Film library $ 17,697,261 $ 17,674,378
Software license 2,420,227 2,420,227
------------ - -----------
20,117,488 20,094,605
DEFINITE USEFUL LIVES
Film library 3,984,789 2,947,564
Gaming license 7,090,000 7,090,000
Product development expenditures 678,616 669,529
------------ ------------
11,753,405 10,707,093
Accumulated amortization (3,540,308) (1,914,815)
------------ ------------
8,213,097 8,792,278
------------ ------------
$ 28,330,585 $ 28,886,883
============ ============
Amortization expense was $1,625,493 for the six months ended June 30,
2007 and $325,819 for the six months ended June 30, 2006.
7. ASSOCIATE
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Fair value of investment in associate $ 3,583,223 $ --
Goodwill 1,382,892 --
Share of post-acquisition loss (15,224) --
------------ ------------
$ 4,950,891 $ --
============ ============
Details of the Company's associate at June 30, 2007 are as follows:
Name of Business : 121 View Corporation (SEA) Ltd
Place of Incorporation : British Virgin Islands
Principle Activity : Digital signage solutions
Proportion of : JUNE 30, 2007 DECEMBER 31, 2006
Ownership Interest ------------ -----------------
30.1% 25.0%
One of the directors of the Company has interests in the associated
oompany and one of the directors of the Company is also a director in the
associated company.
On April 20, 2007, M2B World Asia Pacific Pte. Ltd subscribed for
additional 0.2% interest in the investee company, for an investment of
$66,115.
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
Summarised financial information in respect of the Company's associate is
set out below:
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Total assets $ 9,381,105 $ --
Total liabilities (22,108) --
------------ ------------
Net assets $ 9,358,997 $ --
============ ============
Company's share of associate's net assets $ 2,798,340 --
============ ============
Revenue $ 96,312 --
============ ============
Loss for the period $ (48,793) --
============ ============
Company's share of associate's loss for the
period $ (15,224) --
============ ============
8. AVAILABLE-FOR-SALE EQUITY SECURITIES
Available-for-sale equity securities consist of the following:
JUNE 30, DECEMBER 31,
2007 2006
------------ ------------
Quoted equity securities $8,214,288 $ 5,676,074
Unquoted equity securities 3,282,277 6,482,277
------------ ------------
$11,496,565 $ 12,158,351
============ ============
The investments in quoted equity securities comprised of 36,428,571 common
shares of Auston International Group Ltd (Auston). As of June 30, 2007,
the market value of the Auston shares was $0.225.
The unquoted equity securities classified as available-for-sale, with a
carrying value of $3,282,277 and $6,482,277 as of June 30, 2007 and
December 31, 2006, respectively, are measured at cost less impairment
losses as there is no quoted market price in an active market and other
methods of determining fair value do not result in a reasonable estimate.
The Company explores other alternatives and considers using other
valuation techniques to establish the fair value. Valuation techniques
include using recent arm's length market transactions between
knowledgeable and willing parties. However, as the key investments held by
the Company operate in Singapore, there are no established markets in
Singapore for similar investments for the Company to obtain comparables
and observable data to carry out a reliable fair valuation.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
9. COMMITMENTS
As of the balance sheet date, the Company has the following capital
commitments:
MARCH 31, DECEMBER 31,
2007 2006
------------ ------------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 3,416,945 $ 4,254,372
Set-top boxes 2,562,000 2,562,000
Other equipments 164,000 --
------------ ------------
$ 6,142,945 $ 6,816,372
============ ============
The Company has several noncancelable operating leases, primarily for
office spaces, that expire over the next five years.
As of June 30, 2007, the Company has commitments for future minimum
lease payments under non-cancellable operating leases (with initial or
remaining lease terms in excess of one year) as follows:
OPERATING
LEASES
-----------
Year ending December 31,
2007 151,183
2008 262,426
2009 178,675
2010 126,360
2011 80,504
-----------
Total minimum lease payments $ 799,148
===========
Rent expense totaled $171,914 for the six months ended June 30, 2007 and
$74,610 for the six months ended June 30, 2006.
10. CAPITAL STOCK
(a) Common stock issued for services
On March 19, 2007, the Company issued 40,000 shares of common stock
in a private placement at a price of $1.50 per share for a total
amount of $60,000 for services rendered to the Company.
(b) Common stock issued to employees
On December 20, 2006, 420,000 shares of common stock were approved
for issuance at a price of $0.45 a share to its employees. These
shares were issued on March 2, 2007 to the employees for their
services to the Company pursuant to the Company's 2004 Equity
Compensation Plan (the "Plan"). The shares of common stock issued to
the employees pursuant to the Plan have been registered on the
registration statement on Form S-8.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
11. INCOME TAXES
The Company files separate tax returns for Singapore and the United
States of America.
The Company had available approximately $5,201,580 of unused U.S. net
operating loss carry-forwards at June 30, 2007, that may be applied
against future taxable income. These net operating loss carry-forwards
expire for U.S. income tax purposes beginning in 2026. There is no
assurance the Company will realize the benefit of the net operating loss
carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. As of June 30, 2007 the Company maintained a valuation
allowance for the U.S. deferred tax asset due to uncertainties as to the
amount of the taxable income from U.S. operations that will be realized.
The Company had available approximately $770,639 of unused Singapore
capital allowance carry-forwards at June 30, 2007, that may be applied
against future Singapore taxable income indefinitely provided the company
satisfies the shareholdings test for carry-forward of tax losses and
capital allowances.
12. SEGMENT REPORTING
The Company classifies its business into reportable segments. The segments
consists principally of entertainment and digit gaming. Information as to
the operations of the Company in each of its business segments is set
forth below based on the nature of the products and services offered.
The Company has provided a summary of operating income by segment. The
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies in Note 2.
2007
Entertainment Digit Gaming Other Total
------------ ------------ ------------ ------------
Revenues from external customers $ 15,034,689 $ 10,459,791 $ -- $ 25,494,480
Interest revenue $ 26,101 $ -- $ -- $ 26,101
Interest expenses $ 171 $ -- $ -- $ 171
Depreciation and amortization $ 1,746,423 $ 149,278 $ -- $ 1,895,701
Segment profit $ 10,229,860 $ 161,906 $ -- $ 10,391,766
Segment assets $ 62,111,786 $ 7,163,454 $ 2,452,603 $ 71,727,843
Expenditures for segment assets $ 1,780,041 $ -- $ -- $ 1,780,041
F-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
Reconciliation :-
REVENUES
Total revenues for reportable segments $ 25,494,480
Other revenue $ --
-------------
Total consolidated revenues $ 25,494,480
-------------
INTEREST REVENUE
Total interest revenue for reportable segments $ 26,071
Corporate interest revenue $ 30
-------------
Total consolidated interest revenue $ 26,101
-------------
INTEREST EXPENSES
Total interest expenses for reportable segments $ 171
Corporate interest expenses $ --
-------------
Total consolidated interest revenue $ 171
-------------
PROFIT OR LOSS
Total loss for reportable segments $ 10,391,766
Corporate expenses $ (190,359)
Gain on dilution of interest in subsidiary $ 2,483,871
Gain on valuation of held for trading investment $ 4,320,000
Share of loss of associate $ (15,224)
-------------
Income before income tax $ 16,990,054
-------------
ASSETS
Total assets for reportable segments $ 69,275,240
Other assets $ 2,452,603
-------------
Total consolidated assets $ 71,727,843
-------------
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 1,780,041
-------------
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
12. SEGMENT REPORTING (Cont'd)
2006
Entertainment Digit Gaming Other Total
------------ ------------ ------------ ------------
Revenues from external customers $ 3,215,479 $ 11,094,343 $ 1,144 $ 14,310,966
Interest revenue $ 57,871 $ -- $ -- $ 57,871
Interest expense $ -- $ -- $ -- $ --
Depreciation and amortization $ 244,908 $ 159,280 $ -- $ 404,188
Segment profit (loss) $ 1,472,129 $ (197,815) $ 1,144 $ 1,275,458
Segment assets $ 25,837,054 $ 9,213,037 $ 7,201,873 $ 42,251,964
Expenditures for segment assets $ 17,046,324 $ -- $ -- $ 17,046,324
Reconciliation :-
REVENUES
Total revenues for reportable segments $ 14,309,822
Other revenue $ 1,144
-------------
Total consolidated revenues $ 14,310,966
-------------
INTEREST REVENUE
Total interest revenue for reportable segments $ 27,522
Corporate interest revenue $ 30,349
-------------
Total consolidated interest revenue $ 57,871
-------------
PROFIT OR LOSS
Total profit for reportable segments $ 1,275,458
Corporate expenses $ (121,464)
-------------
Income before income tax $ 1,153,994
-------------
ASSETS
Total assets for reportable segments $ 35,050,091
Other assets $ 7,201,873
-------------
Total consolidated assets $ 42,251,964
-------------
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures for assets for reportable segments $ 17,046,324
-------------
Following table presents revenues earned from customers located in
different geographic areas. Property and equipment is grouped by its
location.
2007 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------- ------------ ------------
Revenues from external customers $ 25,494,193 $ 287 $ -- $ 25,494,480
Property and equipment, net $ 1,306,001 $ 254,981 $ 95,400 $ 1,656,382
2006 ASIA PACIFIC UNITED STATES OTHER TOTAL
------------ ------------- ------------ ------------
Revenues from external customers $ 14,310,936 $ 30 $ -- $14,310,966
Property and equipment, net $ 347,359 $ 85,283 $ 85,000 $ 517,642
F-21
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007 AND 2006
13. RELATED PARTY TRANSACTIONS
Related parties are entities with common direct or indirect shareholders
and/or directors. Parties are considered to be related if one party has
the ability to control the other party or exercise significant influence
over the other party in making financial and operating decisions.
Some of the Company's transactions and arrangements are with the related
party and the effect of these on the basis determined between the party is
reflected in these financial statements. The balances are unsecured,
interest-free and repayable on demand unless otherwise stated.
During the period, the Company entered into the following transactions
with the associate:
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2007 2006 2007 2006
------------ ----------- ---------- ----------
Marketing $ 82,449 $ -- $ 40,233 $ --
============ =========== ========== ==========
14. SUBSEQUENT EVENTS
On July 10, 2007, the Company together with one of the subsidiaries of the
Company, Tremax International Limited entered into a sale and purchase agreement
(the "Agreement") with Domaine Group Limited, a British Virgin Islands
corporation (the "Vendor"), for the acquisition of CBBN Holdings Limited ("CBBN
Holdings"). CBBN Holdings is a 80% beneficial owner of Cosmactive Broadband
Networks Co. Ltd ("CBN"). The purchase consideration shall be satisfied in full
via the issuance of 5,333,333 of common stock of the Company.
F-22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
The Company is in the business of broadband entertainment and
education-on-demand, streaming via computers, television sets, PDAs (Personal
Digital Assistant) and the provision of broadband services. Its business
includes channel and program sponsorship (advertising and branding); online
subscriptions, channel/portal development (digital programming services);
content aggregation and syndication, broadband consulting services, broadband
hosting and streaming services and E-commerce.
The Company is also in the business of digit gaming (lottery). The Company has
an 18 year license to conduct nation wide lottery in Cambodia. The Company
through its subsidiary, M2B Commerce Limited, signed an agreement with Allsports
Limited, a British Virgin Islands company to operate and conduct digit games in
Cambodia and to manage the digit games activities in Cambodia.
The following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
RESULTS OF OPERATIONS
---------------------
For the six months and three months ended June 30, 2007 compared with the six
months and three months ended June 30, 2006
OVERVIEW
The key business focus of the Company is to establish itself as the leading
provider and creator of a new generation Of Entertainment-on-Demand,
Education-on-Demand and E-Commerce Channels on Broadband, and 3G (Third
Generation) devices.
For the broadband, the Company delivers both wire and wireless solutions,
streaming via computers, TV sets, PDAs and 3G hand phones.
At the same time the Company launches e-commerce channels (portals) that provide
on-line shopping but with a difference, merging two leisure activities of
shopping and entertainment. The entertainment channels are designed to drive and
promote the shopping portals, and vice versa.
The Company's business model in the area of broadband entertainment includes
both education on-demand and e-services, which would provide the Company with
multiple streams of revenue. Such revenues would be derived from advertising and
branding (channel and program sponsorship); on-line subscriptions; online games
micro-payments; channel/portal development (digital programming services);
content aggregation and syndication; broadband consulting services; on-line
shopping turnkey solutions; broadband hosting and streaming services; E-commerce
commissions and on-line dealerships; and digit games operations.
1
Business Operations
-------------------
Our principal operations are carried out through the following three segments of
our business:
1. Entertainment Services - Video on-Demand services such as for
entertainment and education, providing the Company with advertising,
subscriptions, online games and e-commerce ( B2B and B2C) revenues
2. Digit Games
3. E-Travel Services - Online Travel Portal
1. Entertainment Services
----------------------
The Company provides online entertainment and education on-demand on
Broadband channels, Internet portals and 3G devices across the globe,
for specific and identified viewer lifestyles, demographics and
interests. Entertainment and web visit experience is maintained
throughout from the initial viewing experience to on-line shopping and
payment checkout experience.
The Company uses Broadband technology to provide its services. Broadband
technology is defined as high speed, high-bandwidth, two-way data, voice
and video communications, delivered at high transmission rates.
SERVICES: Broadband technology allows us to deliver the following
services::
o Video-on-demand (VOD) services that enable individuals to select
videos from a Central Server, on-demand 24 hours a day, 7 days a
week, for viewing on:
o Television screens (Set top Box Technology)
o PCs (Digital Subscriber Line (DSL) Technology)
o Personal Digital Assistants(PDA), 3G hand phones
(Wireless Technology)
o E-Commerce or online shopping - linked interactively to
the VOD platforms on broadband. Consumers choose to buy
products online as they watch the videos.
The Company applies broadband technologies to facilitate its growth in
the broadband sector. Its main competitive advantage is derived from its
ownership of rights for various territories on broadband for its
contents i.e. movies and programs on lifestyles, education, business and
glamour.
The Company has built and installed its broadband streaming system
complete with firewalls, load balancing, bandwidth and consumer
monitoring systems, which include video streaming, video storage and web
servers in Singapore and the U.S. The Company has also developed its
streaming applications to stream into television sets, via a set top
box.
The Company has developed a capability to stream wireless broadband and
have its own digitized entertainment sites for wireless broadband
applications.
M2B offers consumers personalized entertainment through its wide range
of broadband streaming channels available at www.m2bworld.com.
2
PRODUCTS: We offer the following products on the VOD platform:
o Entertainment - Consumers access movies, music, glamour and
fashion, lifestyle (hobbies, cooking, and personalities),
documentaries, sports, health and fitness and others. They can
choose from a large number of different channels depending on
their interests or lifestyle preferences.
o Adult Education - consumers view program on management skills,
communication skills, decision making, customer services and
sales, motivation, presentation and writing skills, counseling
and others.
With this strategy, the Company generates diversified sources of revenue
from:
1. Advertising i.e. program and channel sponsorship
2. Online subscriptions
3. Channel/portal development i.e. digital programming services
4. Content aggregation and syndication
5. Broadband consulting services and online shopping turnkey
solutions
6. E-commerce services
7. Online games micro-payments
Currently, the Company is in the process of revamping it's Broadband
websites. The current Broadband websites, which may change from time to
time include:
1. Entertainment Sites
INTERNATIONAL AND U.S. SITES:
o Star78.com - currently shut down for revamping
o Shine8.com - an advertising-based Lifestyle site for
international viewers
o Jump29.com - an advertising-based Young Adults site for
international viewers
o Dreamstage7.com - an advertising and subscription-based
Glamour and Fashion site for international viewers
o Highfashion7.com - an advertising and subscription based
designer Fashion site for international viewers
o Dragon78.tv - an advertising and subscription-based
Mandarin Entertainment site for viewers in US only
o Chinois78.com - an advertising and subscription based
Mandarin Lifestyle site for viewers in US only
o m2btv - Broadband TV (IPTV) service available through
set-top box
ASIAN SITES:
o Dimension88.com - an advertising and subscription-based
Movie site in Singapore only
o Dragon78.com - currently shut down for revamping
o Ideas Broadband - four subscription based entertainment
sites (Movie Mania, Executive Online, Glamour Galore,
Dragon City providing 25 channels) dedicated for
Singapore Telecommunications Ltd Ideas Broadband viewers
in Singapore only
o Trilogy - a subscription based 3G mobile phone
entertainment site dedicated for Singapore
Telecommunications Trilogy viewers in Singapore only
o Colours78.com - an advertising and subscription based
Mandarin Lifestyle site in Singapore only
3
2. Education Sites
U.S. SITES:
o Wiz5.us - an advertising and subscription-based Business
& Corporate Training site for viewers in US only
ASIAN SITES:
o Wiz5.com - an advertising and subscription-based
Business and Corporate Training site for viewers in
Singapore only
3. E-Commerce Sites
INTERNATIONAL SITES:
o Starzmall.com - A One-Stop Shopping Paradise
o Royalhive.com - A One-Stop Health and Beauty Mall
3
BROADBAND SERVICES
The Company has an automated Content Management System ("CMS") to
enhance its advertising service offered to clients and to provide a new
revenue source for the Company. The system allows for the programming of
video, animation, streaming and flash content to multiple destinations
and was demonstrated back in 2005 at the Asia Television Forum (ATF
2005), a regional platform for media buyers and sellers. As a sponsor at
the event, M2B World showcased the automated CMS on plasma screens,
together with programming from the M2B content library that includes
movies, dramas, comedies, documentaries, music, fashion, lifestyle,
learning and more.
Linked by broadband networks and wireless set-top boxes to push content
and scheduled advertising at physical premises, the CMS allows
businesses the option of presenting targeted content on selected video
displays in multiple locations, such as on different levels of a
shopping mall, in various spots within a restaurant or club or on
separate elevators in the same building.
4
In store video panels can also carry individualized messages together
with customized content to reach consumers and target audiences within
the premises. Businesses and advertisers can then readily offer
customers feature-rich content with this versatile and easy-to-use CMS
designed to advance brand-building activities and widen the advertising
options for customer outreach. This integrated solution underscores
M2B's key strength in delivering content for viewing on PCs, 3G mobile
phones, PDAs as well as television screens. This is another method by
which M2B is continuing to meet the consumer shift toward on-demand and
personalized media experiences whether at home or work and now
additionally on video screens in stores, restaurants, clubs and other
business or leisure outlets.
DIGIT GAMES
The Company has an 18-year license to conduct nation wide lottery in
Cambodia. The Company also signed an agreement with Allsports Limited, a
British Virgin Islands company, to operate, administer, and manage the
lottery digit games activities in Cambodia.
E-TRAVEL SERVICES
The Company's subsidiary, M2B World Travel Limited., signed a global
agreement with Amadeus Global Travel Distribution, SA, a Spanish
corporation. Through the agreement, M2B continues to offer direct access
to the extensive range of travel options available through the Amadeus
network to their viewers around the world. The agreement extends M2B's
reach through its broadband streaming entertainment into the worldwide
travel arena.
According to PhoCusWright, a travel industry research provider, the
online portion of those sales is growing particularly quickly in the
U.S., Europe and the Asia-Pacific region, where combined online travel
sales in those three geographic regions is estimated to top $115 billion
this year. With eMarketer reporting that broadband currently reaches
over 58 million households in Asia-Pacific alone, M2B World Travel
Limited through its agreement with Amadeus, is now poised to immediately
access and serve this consumer market.
The M2B World Travel Website aims to provide competitive rates through
its direct connection to the Amadeus System using the Elleipsis
TravelTalk(TM) integration platform, which allows M2B to access not only
the major travel providers, but an expanded roster of additional
suppliers such as low-cost carriers, cruise lines, and widened hotel
distribution channels all through one single, easy-to-use platform.
The video e-travel portal brings an extensive range of travel options to
our viewers and gives the Company an entry into the travel and tourism
market; it directly aggregates travel solutions from 500 airlines,
58,000 hotel properties, some 42 car rental companies serving over
30,000 locations, as well as widespread air, ferry, rail, cruise, and
tour operators with proprietary video content, allowing customers to the
site to view their travel destination, thus influencing their purchasing
decision.
The Company plans to launch the M2B travel site in 2007. No assurances
can be made that such plan will materialize as planned.
5
SECOND QUARTER 2007 SUMARRY OF OPERATIONS
Financial Statement
- Revenue for the quarter ended June 30, 2007 was $20,007,405 compared with
$7,433,829 for the same period in 2006.
- Net income for the quarter ended June 30, 2006 was $14,653,386 compared with
$920,203 for the same period in 2006.
- The Company's cash balance was $4,200,078 as at June 30, 2007 compared with
$2,294,984 as at 31 December 2006.
Revenue
Revenue for the six months ended June 30, 2007 increased by $11,183,514 (78%),
from $14,310,966 for the six months ended June 30, 2006 to $25,494,480 for the
six months ended June 30, 2007. The revenue for the three months ended June 30,
2007 increased by $12,573,576 (169%), from $7,433,829 to $20,007,405 for the
three months ended June 30, 2006 and 2007, respectively.
This increase in revenue was mainly contributed by the entertainment segment
which included the completion and delivery of the IPTV platform in Indonesia.
This resulted in a revenue of $15 million in the three months ended June 30,
2007. The completion and delivery of the IPTV platform in Indonesia comprised of
the hardware, software and middleware, and supply and programming of content.
The digit games in Cambodia incurred a decrease in revenue of $634,552 (a drop
of 5.7%) for the six months ended June 30, 2007 from $11,094,343 in June 30,
2006 to $10,459,791 in June 30, 2007, mainly due to more holidays in the first
six months of 2007 as compared to the same period in 2006.
Cost of Sales
Cost of sales for the six months ended June 30, 2007 was $11,292,135 which
increased by $318,832 (2.9%) from $10,973,303 for the six months ended June 30,
2006.
Cost of sales for the three months ended June 30, 2007 was $5,868,634 which
increased by $683,724 (13%) from $5,184,910 for the three months ended June 30,
2006.
Increase in cost of sales of $318,832 and $683,724 for the six months and three
months ended June 30, 2007 respectively was mainly attributed to the delivery of
the IPTV platform in Indonesia, which included the hardware, software and
middleware, and supply and programming of content.
As a proportion of revenue, the cost of sales for the six months ended June 30,
2007 was 44% as compared to 77% for the six months ended June 30, 2006.
As a proportion of revenue, the cost of sales for the three months ended June
30, 2007 was 29% as compared to 70% for the three months ended June 30, 2006.
The cost of sales as a proportion of revenue of 44% and 29% for the six months
and three months ended June 30, 2007 was due to the delivery of the IPTV
platform in Indonesia which resulted in a significant increase in revenue, with
a lower cost.
Distribution Expenses
Distribution expenses for the six months ended June 30, 2007 at $505,653 were
lower by $53,876 (9.6%) as compared to the amount of $559,529 incurred for the
six months ended June 30, 2006.
The lower distribution expenses were attributed to decreased spending for
marketing and promotions which decreased by $104,394 (24%), from $421,831 for
the six months ended June 30, 2006 to $317,437 for the six months ended June 30,
2007.
Distribution expenses for the three months ended June 30, 2007 at $196,006 were
lower by $116,089 (37%) as compared to the amount of $312,095 for the three
months ended June 30, 2006.
The lower amount spent for the three months ended June 30, 2007 was attributed
to the lower expenditure on advertising and marketing, which decreased by
$119,693, (51%) from $231,701 to $112,008 for the three months ended June 30,
2006 and 2007, respectively.
General And Administrative Expenses
Administration expenses for the six months ended June 30, 2007 at $3,521,215
were higher by $1,839,204 (109%) as compared to the amount of $1,682,011
incurred for the six months ended June 30, 2006.
Administration expenses for the three months ended June 30, 2007 at $1,848,919
were higher by $800,585 (76%) as compared to the amount of $1,048,334 incurred
for the three months ended June 30, 2006.
The increase in administrative expenses for the six months and three months
ended June 30, 2007 was attributed mainly to increase in:
6
o Depreciation and license amortization had increased by $1,491,513 (369%),
from $404,188 for the six months ended June 30, 2006 to $1,895,701 for the
six months ended June 30, 2007. For the three months ended June 30, 2007,
depreciation and licensing cost had increased by $861,705 (398%) from
$216,460 to $1,078,165 for the three months ended June 30, 2006 and 2007
respectively. The increase was mainly attributed to the increase in
license amortization of the movies content which have a definite life and
which were acquired for the newly launched Broadband TV service.
o Staff costs. Staff costs had increased by $286,460 (47%) from $607,165 for
the six months ended June 30, 2006 to $893,625 for the six months ended
June 30, 2007. For the three months ended June 30, 2007, staff cost had
decreased by $21,251 (5%) from $406,519 to $385,268 for the three months
ended June 30, 2006 and 2007 respectively. The overall increase in staff
cost for the six months period ended June 30, 2007 resulted from the
increase in the number of professional employees hired. Staff costs were
however trimmed and lowered in the second quarter for the three months
ended June 30, 2007 in order to maintain cost efficient operations.
Income From Operations
The Company reported a gain from operations of $10,175,477 for the six months
ended June 30, 2007 as compared to the income from operations of $1,096,123 for
the six months ended June 30, 2006. For the three months ended June 30, 2007,
the gain from operations was $12,093,846 as compared to the gain of $888,490 for
the three months ended June 30, 2006. The significant increase in the income
from operations for the six months and three months ended June 30, 2007 was due
to the significant increase in the entertainment business for the three months
ended June 30, 2007.
Net Income
For the six months ended June 30, 2007, net income was $15,403,622 which
increased by $14,183,163 (1162%) from $1,220,459 for the six months ended June
30, 2006. For the three months ended June 30, 2007, net income was $14,653,386
which increased by $13,733,183 (1492%) from $920,203 for the three months ended
June 30, 2006.
The significant increase in net income for the six months and three months ended
June 30, 2007 was mainly attributed to increase in the entertainment business.
The increase was partly attributed to the gain on dilution of the Company's
interest in a subsidiary, M2B World Asia Pacific Pte. Ltd. by issuing shares to
the private investors at a premium. The increase was also partly attributed to
the net change in the fair value of an investment (equity securities) held for
trading.
7
Liquidity And Capital Resources
The Company had cash of $4,200,078 at June 30, 2007 as compared to cash of
$2,294,984 at December 31, 2006.
The Company does not finance its operations through short-term bank credit nor
long-term bank loans as it believes that cash generated from its operations will
be able to cover its daily running cost and overheads.
During the three months ended June 30, 2007, the Company had not entered into
any transactions using derivative financial instruments or derivative commodity
instruments. Accordingly the Company believes its exposure to market interest
rate risk is not material.
Cash generated from operations will not be able to cover the Company's intended
growth and expansion. The Company has plans in 2007 to expand its broadband
coverage by launching new broadband sites in Asia Pacific region and Australia.
No assurances can be made that such plans will be carried out in a timely
manner.
The Company intends to raise additional funds, to fund its business expansion,
however no assurances can be made that the Company will raise sufficient funds
as planned.
NEW CONTRACTS
On January 3, 2007, M2B World Asia Pacific Pte Ltd, issued 7,778,014 shares of
common stock through a private placement at a price of $0.77 a share for a total
amount of $6,000,000. This had effectively reduced the Company's effective
equity interest in M2B World Asia Pacific Pte. Ltd. from 100% to 81.7%.
On January 15, 2007, the Company through its subsidiary, Amaru Holdings Limited
(Amaru Holdings), a British Virgin Islands corporation, entered into a sale and
purchase agreement together with other sellers (the "Agreement") with Auston
International Group Ltd., a Singapore company (Auston) to sell to Auston its
majority owned subsidiary, M2B World Asia Pacific Pte Ltd., together with its
subsidiary, M2B World Holdings Limited (collectively, M2B Asia). Auston is a
company trading on the Singapore Stock Exchange. The Agreement provides for the
sale of 42,459,978 shares of M2B World Asia Pacific Pte. Ltd., its total issued
and outstanding capital. As the consideration for M2B World Asia Pacific Pte.
Ltd. shares, Auston agreed to issue a total of 660 million new ordinary shares
of Auston to M2B World Asia Pacific Pte. Ltd. shareholders. The Auston shares
are valued at S$0.25 per share.
The Agreement is subject to certain conditions precedent, including, but not
limited to the shareholder approval of the transaction by Auston shareholders,
the approval of the Singapore Stock Exchange and other related regulatory
approvals of both parties.
Amaru Holdings is required to deliver a valuation report by an independent
auditor to Auston confirming that the value of the assets of M2B World Asia
Pacific Pte. Ltd. is no less than that of the amount of consideration to be paid
by Auston.
On April 23, 2007, M2B World Holdings Limited ("M2B World"), a British Virgin
Islands corporation entered into a sale and purchase agreement (the "Agreement")
with P T Agis TBK, a company incorporated in Indonesia ("Agis") to sell to Agis
certain assets, including the domain name under which the IPTV business will
operate in Indonesia and the transfer and license of IPTV platform
(collectively, the "Assets"). M2B World is a wholly-owned subsidiary of M2B
World Asia Pacific Pte Ltd. which is a 81.7% owned by Amaru Holdings Limited.
Amaru Holdings Limited is a wholly-owned subsidiary of Amaru Inc., a Nevada
corporation (the "Company"). Agis is trading on the Indonesia Stock Exchange.
The Agreement provides for the consideration of US$15 million for the sale of
the Assets based on the mutually agreed valuation of such Assets. Such
consideration is to be provided through the issuance of 75 million of Agis
shares at an agreed price of IDR 1300 per share, and such number of shares of a
to be formed investment holding wholly-owned subsidiary of Agis that shall equal
to 50% of beneficial holdings of such subsidiary. The sale had been completed by
June 30, 2007.
8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ABILITY TO EXPAND CUSTOMER BASE
The Company's future operating results depend on our ability to expand
our customer base for broadband services and e-commerce portals. An
increase in total revenue depends on our ability to increase the number
of broadband and e-commerce portals, in the US, Europe and Asia. The
degree of success of this depends on
o our efforts to establish independent broadband sites in
countries where conditions are suitable.
o our ability to expand our offerings of content in entertainment
and education, to include more niche channels and offerings.
o our ability to provide content beyond just personal computers
but to encompass television, wireless application devices and 3G
hand phones.
ABILITY TO ACQUIRE NEW MEDIA CONTENTS
The continued ability of the Company to acquire rights to new media
contents, at competitive rates, is crucial to grow and sustain the
Company's business.
AVAILABILITY OF TECHNOLOGICALLY RELIABLE NEW GENERATION OF BROADBAND
DEVICES
The growth of demand for broadband services is dependent on the wide
availability of technologically reliable new generation of broadband
devices, at affordable prices to prospective customers of broadband
services. The early and widespread availability and market adoption of
new generation broadband devices, will significantly impact demand for
broadband services and the growth of the Company's business.
CAPITAL INVESTMENT IN BROADBAND INFRASTRUCTURE BY GOVERNMENT AND TELCOS
The growth of demand for broadband services is dependent on the capital
investment in broadband infrastructure by governments and Telcos. A
significant source of demand for the Company's broadband services could
be from homes and enterprises with access to high-speed broadband
connections. The ability of countries to invest in public broadband
infrastructure to offer public accessibility is subject to countries'
economic health. The Company's prospects for business growth in Asia
especially would be impacted by overall economic conditions in the
territories that we seek to expand into.
COMPETITION FROM BROADBAND CABLE AND TV NETWORKS OPERATORS
The competition of services provided by broadband cable network
operators and TV networks. As traditional TV networks and cable TV
operators provide alternate supply of entertainment and on-demand
broadband services, they are in competition with the Company, for market
share. The Company, nevertheless, will continue to leverage on its
advantage of ownership rights to its own portfolio of media content and
its ability to provide broadband services over both the cable and
wireless networks, at competitive rates.
The Company's business is reliant on complex information technology
systems and networks. Any significant system or network disruption could
have a material adverse impact on our operations and operating results.
The Company's nature of business is highly dependent on the efficient
and uninterrupted operation of complex information technology systems
networks, may they, either be that of ours, or our Telco/ ISP partners.
All information technology systems are potentially vulnerable to damage
or interruption from a variety of sources, including but not limited to
computer viruses, security breach, energy blackouts, natural disasters
and terrorism, war and telecommunication failures.
System or network disruptions may arise if new systems or upgrades are
defective or are not installed properly. The Company has implemented
various measures to manage our risks related to system and network
disruptions, but a system failure or security breach could negatively
impact our operations and financial results.
LAW AND REGULATIONS GOVERNING INTERNET
Increased regulation of the Internet or differing application of
existing laws might slow the growth of the use of the Internet and
online services, which could decrease demand for our services. The added
complexity of the law may lead to higher compliance costs resulting in
higher costs of doing business.
9
UNAUTHORIZED USE OF PROPRIETARY RIGHTS
Our copyrights, patents, trademarks, including our rights to certain
domain names are very important to M2B's brand and success. While we
make every effort to protect and stop unauthorized use of our
proprietary rights, it may still be possible for third parties to obtain
and use the intellectual property without authorization. The validity,
enforceability and scope of protection of intellectual property in
Internet-related industries remain uncertain and still evolving.
Litigation may be necessary in future to enforce these intellectual
property rights. This will result in substantial costs and diversion of
the Company's resources and could disrupt its business, as well as have
a material adverse effect on its business.
LAW AND REGULATIONS GOVERNING BUSINESS
As the Company continues to expand its business internationally across
different geographical locations there are risks inherent including:
1) Trade barriers and changes in trade regulations
2) Local labor laws and regulations
3) Currency exchange rate fluctuations
4) Political, social or economic unrest
5) Potential adverse tax regulation
6) Changes in governmental regulations
OUTBREAK OF BIRD FLU PANDEMIC OR SIMILAR PUBLIC HEALTH DEVELOPMENTS
Any future outbreak of the bird flu pandemic or similar adverse public
health developments may have a material adverse effect on the Company's
business operations, financial condition and results of operations.
10
ITEM 4: CONTROLS AND PROCEDURES
The Company's management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
An evaluation was conducted under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedure were effective as of June 30, 2007. There has been no change in the
Company's internal control over financial reporting that occurred during the
quarter ended June 30, 2007, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
The Company's annual report on Form 10-KSB for the year ended December 31, 2006
did not include (nor does this quarterly report on Form 10-Q include) an
attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report in the annual
report was not subject to attestation by the Company's registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that
permit the Company to provide only management's report in the annual report.
11
PART 2: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 23, 2007, a supplier filed a lawsuit against M2B World, Inc. for breach
of contract for an amount of $72,649. In the opinion of Management, the outcome
of this legal proceeding will not have a material effect on the Company's
consolidated financial statements.
ITEM 1A: RISK FACTORS
An investment in the Company's common stock involves a high degree of risk. One
should carefully consider the following risk factors in evaluating an investment
in the Company's common stock. If any of the following risks actually occurs,
the Company's business, financial condition, results of operations or cash flow
could be materially and adversely affected. In such case, the trading price of
the Company's common stock could decline, and one could lose all or part of
one's investment. One should also refer to the other information set forth in
this report, including the Company's consolidated financial statements and the
related notes.
The Company continues to use significant amounts of cash for its business
operations, which could result in us having insufficient cash to fund the
Company's operations and expenses under our current business plan.
The Company'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. 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
Competition in the Broadband business is expected to increase, which could cause
the business to fail.
The Company's Broadband services are targeted to the end user market. As the
Broadband penetration rates increase globally, an increasing number of
well-funded competitors have entered the market. Companies that compete with the
Company's business include telecommunications, cable, content management and
network delivery companies.
The Company may face increased competition as these competitors partner with
others or develop new Broadband websites and service offerings to expand the
functionality that they can offer to their customers. These competitors may,
over time, develop new technologies and acquire content that are perceived as
being more secure, effective or cost efficient than the Company. These
competitors could successfully garner a significant share of the market, to the
exclusion of the Company. Furthermore, increased competition could result in
pricing pressures, reduced margins, or the failure of the business to achieve or
maintain market acceptance, any one of which could harm the business.
The inability to successfully execute timely development and introduction of new
and related services and to implement technological changes could harm the
business.
The evolving nature of the Broadband business requires the Company to
continually develop and introduce new and related services and to improve the
performance, features, and reliability of the existing services, particularly in
response to competitive offerings.
The Company has under development new features and services for its businesses.
The Company may also introduce new services. The success of new or enhanced
features and services depends on several factors - primarily market acceptance.
The Company may not succeed in developing and marketing new or enhanced features
and services that respond to competitive and technological developments and
changing customer needs. This could harm the business.
Capacity limits on the Company's technology and network hardware and software
may be difficult to project, and the Company may not be able to expand and/or
upgrade its systems to meet increased use, which would result in reduced
revenues.
While the Company has ample through-put capacity to handle its customers'
requirements for the medium term, at some point it may be required to materially
expand and/or upgrade its technology and network hardware and software. The
Company may not be able to accurately project the rate of increase in usage of
its network. In addition, it may not be able to expand and/or upgrade its
systems and network hardware and software capabilities in a timely manner to
accommodate increased traffic on its network. If the Company does not
appropriately expand and/or upgrade our systems and network hardware and
software in a timely fashion, it may lose customers and revenues.
Interruptions to the data centers and broadband networks could disrupt business,
and negatively impact customer demand for the Company.
The Company's business depends on the uninterrupted operation at the data
centers and the broadband networks run by the various service providers. The
data centers may suffer for loss, damage, or interruption caused by fire, power
loss, telecommunications failure, or other events beyond the Company. Any damage
or failure that causes interruptions in the Company's operations could
materially harm business, financial conditions, and results of operations.
In addition, the Company's services depends on the efficient operation of the
Internet connections between customers and the data centers. The Company depends
on Internet service providers efficiently operating these connections. These
providers have experienced periodic operational problems or outages in the past.
Any of these problems or outages could adversely affect customer satisfaction
and customers could be reluctant to use our Internet related services.
The Company may not be able to acquire new content, or may have to defend its
rights in intellectual property of the content that is used for its services
which could be disruptive and expensive to its business.
The Company may not be able to acquire new content, or may have to defend its
intellectual property rights or defend against claims that it is infringing the
rights of others, where its content rights are concerned. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us to develop non-infringing services or enter onto royalty or
licensing arrangements. Royalty or licensing arrangements, if required, may not
be obtainable on terms acceptable to the Company. The business could be
significantly harmed if the Company is not able to develop or license new
content. Furthermore, it is possible that others may license substantially
equivalent content, thus enabling them to effectively compete against us.
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.
14
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 19, 2007, the Company issued 40,000 shares of
common stock through its private placement of shares of common stock at a
purchase price of $1.50 per share for a total amount of $60,000 to "accredited
investors", as that term is defined in Regulation D of the Securities Act of
1933.
The shares of the Company's common stock were issued and sold in reliance upon
the exemption provided by Section 4(2) and/or Regulation D/Regulation S of the
Securities Act of 1933.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS:
A - Exhibits:
Exhibit 31 CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT
Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER PURSUANT TO RULE 13A-14(b) OF THE
EXCHANGE ACT AND 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Amaru, Inc.
---------------------------------------
(Registrant)
August 14, 2007 /s/ Colin Binny
---------------- ---------------------------------------
Date President, CEO & CFO
16