UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q / A-2
Amendment no.2 to Form 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2009
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-32695
Amaru, Inc.
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(Exact name of registrant as specified in its charter.)
Nevada 88-0490089
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(State of Incorporation) (IRS Employer Identification No.)
62 Cecil Street, #06-00 TPI Building, Singapore 049710
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (65) 6332 9287
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer|_|
Smaller reporting company |X| (Do not check if a smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 159,431,861 shares
- ----------------------------- -----------------------------
(Class) (Outstanding at July 31, 2009)
AMARU, INC. AND SUBSIDIARIES
2009 Quarterly Report on Form 10-Q/A-2
Table of Contents
PART I: FINANCIAL INFORMATION
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ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statement of Stockholders' Equity and Comprehensive
Income F-4 to F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-21
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 1
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7
ITEM 4: CONTROLS AND PROCEDURES 9 to 11
PART II: OTHER INFORMATION
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ITEM 1: LEGAL PROCEEDINGS 11
ITEM 1A: RISK FACTORS 11
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 SECURITY HOLDERS 15
ITEM 5: OTHER INFORMATION
15
ITEM 6: EXHIBITS 15
SIGNATURES
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2009 2008
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 324,025 $ 1,484,945
Accounts receivable, net of allowance of
$113,015 and $1,055,855 at June 30, 2009 and
December 31, 2008 respectively 135,535 134,710
Accounts receivable from sale of IPTV Platform 9,500,000 9,500,000
Equity securities held for trading 463,420 179,620
Other current assets 290,149 230,293
Inventories 642,268 644,153
------------ ------------
Total current assets 11,355,397 12,173,721
Non-current assets
Property and equipment, net 796,970 1,033,506
Film Library, net 18,387,743 18,667,290
Intangible assets, net 2,144,765 2,204,766
Investments held at cost 3,018,749 3,018,749
------------ ------------
Total non-current assets 24,348,227 24,924,311
------------ ------------
Total assets $ 35,703,624 $ 37,098,032
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,051,789 $ 1,319,897
Others payable -- 5,458
Advances from related parties -- 48,681
Capital lease payable - short term 10,700 10,809
Income taxes payable 5,428 5,428
------------ ------------
Total current liabilities 1,067,917 1,390,273
------------ ------------
Convertible term loan 2,370,296 2,307,796
Capital lease payable - long term 41,012 46,831
------------ ------------
Total non-current liabilities 2,411,308 2,354,627
------------ ------------
Total liabilities 3,479,225 3,744,900
Commitments -- --
Amaru, Inc. stockholders' equity
Preferred stock (par value $0.001) 5,000,000 shares -- --
authorized; 0 shares issued and outstanding at
June 30, 2009 and December 31, 2008, respectively
Common stock (par value $0.001) 200,000,000 shares 154,098 154,098
authorized;154,098,528 shares issued and outstanding
at June 30, 2009 and December 31, 2008, respectively
Additional paid-in capital 39,190,666 39,190,666
Accumulated Deficit (10,700,301) (9,726,413)
Accumulated other comprehensive income 968,406 968,406
------------ ------------
Total Amaru, Inc. stockholders' equity 29,612,869 30,586,757
Noncontrolling interest 2,611,530 2,766,375
------------ ------------
Total equity 32,224,399 33,353,132
------------ ------------
Total liabilities and shareholders' equity $ 35,703,624 $ 37,098,032
============ ============
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, 2009 June 30, 2008 June 30,2009 June 30, 2008
------------- ------------- ------------- -------------
Revenue:
Entertainment $ 30,820 $ 48,169 $ 14,007 $ 13,176
Digit gaming -- -- -- --
------------- ------------- ------------- -------------
Total revenue 30,820 48,169 14,007 13,176
Cost of services (111,143) (265,008) (56,090) (101,963)
------------- ------------- ------------- -------------
Gross loss (80,323) (216,839) (42,083) (88,787)
Distribution costs (97,122) (1,067,086) (64,441) (80,970)
Administrative expenses (1,171,647) (1,941,146) (637,942) (902,644)
------------- ------------- ------------- -------------
Total expenses (1,268,769) (3,008,232) (702,383) (983,614)
------------- ------------- ------------- -------------
Loss from operations (1,349,092) (3,225,071) (744,466) (1,072,401)
Other (expenses) income
Interest expense (63,545) (1,111) (31,774) (568)
Interest income 104 8,970 37 3,527
Gain on disposal of equipment -- 1,888 -- --
Loss on disposal of
investment available for sale -- (442,051) -- (44,296)
Net change in fair value of financial
assets at Fair value securities
for trading 283,800 (1,385,000) 293,091 (1,385,000)
Share of loss of associate -- (12,546) -- (3,718)
------------- ------------- ------------- -------------
Loss before income taxes (1,128,733) (5,054,921) (483,112) (2,502,456)
Benefit for income taxes -- 947,099 -- 826,000
------------- ------------- ------------- -------------
Net (loss) including
noncontrolling interest $ (1,128,733) $ (4,107,822) $ (483,112) $ (1,676,456)
============= ============= ============= =============
Less: Net (loss) attributable to
noncontrolling interest (154,845) (406,665) (56,728) (241,732)
------------- ------------- ------------- -------------
Net (loss) attributable to
Amaru, Inc. $ (973,888) $ (3,701,157) $ (426,384) $ (1,434,724)
============= ============= ============= =============
Earnings per share attributable to Amaru, Inc.
common shareholders
- - - Basic and diluted $ (0.01) $ (0.03) $ (0.003) $ (0.01)
============= ============= ============= =============
Weighted average number of Amaru, Inc. common
shares outstanding
- - - Basic and diluted 154,098,528 154,098,528 154,098,528 154,098,528
============= ============= ============= =============
See accompanying notes to consolidated financial statements
F-3
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
PREFERRED STOCK COMMON STOCK
--------------------------- ---------------------------
NUMBER PAR NUMBER PAR ADDITIONAL
OF VALUE OF VALUE PAID-In COMMON RETAINED
SHARES ($0.001) SHARES ($0.001) CAPITAL STOCK EARNINGS
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2007 -- -- 159,431,861 $ 159,431 $ 42,918,666 $ -- $ 5,650,447
Common stock received in
Cancellation of exchange for
Repayment of investment -- -- (5,333,333) (5,333) (3,728,000) -- --
Net loss -- -- -- -- -- -- (15,376,860)
Change in fair value
of available
for-sale-equity
securities, net
of tax -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- --
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 -- -- 154,098,528 $ 154,098 $ 39,190,666 $ -- $ (9,726,413)
========== ========== ============ ============ ============ ============ ============
(CONTINUED)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
---------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE NONCONTROLLING SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
------------ ------------ ------------ ------------
Balance at December 31, 2007 $ 12,927 $ 2,210,714 $ 4,619,381 $ 55,571,566
Common stock received in
Cancellation of exchange for
Repayment of investment -- -- -- (3,733,333)
Net loss -- -- (1,853,006) (17,229,866)
Change in fair value
of available
for-sale-equity
securities, net
of tax -- (1,255,235) -- (1,255,235)
Comprehensive loss -- -- -- (18,485,101)
------------ ------------ ------------ ------------
Balance at December 31, 2008 $ 12,927 $ 955,479 $ 2,766,375 $ 33,353,132
============ ============ ============ ============
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
--------------------------- ---------------------------
NUMBER PAR NUMBER PAR ADDITIONAL SUBSCRIBED
OF VALUE OF VALUE PAID-IN COMMON RETAINED
SHARES ($0.001) SHARES ($0.001) CAPITAL STOCK EARNINGS
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 -- -- 154,098,528 $ 154,098 $ 39,190,666 $ -- $ (9,726,413)
Net loss -- -- -- -- -- -- (973,888)
Comprehensive loss -- -- -- -- -- -- --
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2009 -- -- 154,098,528 $ 154,098 $ 39,190,666 $ -- $(10,700,301)
========== ========== ============ ============ ============ ============ ============
(CONTINUED)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
---------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE NONCONTROLLING SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
------------ ------------ ------------ ------------
Balance at December 31, 2008 $ 12,927 $ 955,479 $ 2,766,375 $ 33,353,132
Net loss -- -- (154,845) (1,128,733)
------------
Comprehensive loss -- -- -- (1,128,733)
------------ ------------ ------------ ------------
Balance at June 30, 2009 $ 12,927 $ 955,479 $ 2,611,530 $ 32,224,399
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
--------------------------
JUNE 30 2009 June 30, 2008
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) including noncontrolling interest $(1,128,733) (4,107,822)
Adjustments to reconcile net income including noncontrolling interest
to cash and cash equivalents used or provided by operations:
Amortization 349,255 585,042
Depreciation 253,121 340,450
Gain on disposal of equipment -- (1,888)
Loss on disposal of investment available for sales -- 442,051
Deferred taxes -- (947,099)
Net change in fair value of financial assets at fair value
Through profit or loss-held for trading (283,800) 1,385,000
Share of loss of Equity Method Investment -- 12,546
Changes in operation assets and liabilities
Accounts receivables (825) 586,233
Inventories 1,885 9,844
Others current assets (59,856) 42,435
Accounts payable and accrued expenses (268,108) (699,947)
Other payables (5,458) (60,005)
----------- -----------
Net cash used in operating activities (1,142,519) (2,413,160)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (16,585) (7,640)
Proceeds from disposal of equipment -- 2,684
Acquisition of intangible assets (9,707) (50,125)
Proceeds from disposal of investment available for sale -- 1,379,767
----------- -----------
Net cash provided by (used in) investing activities (26,292) 1,324,686
----------- -----------
CASH PROVIDED FROM FINANCING ACTIVITIES
Repayment of related parties (48,681) (1,769)
Repayments of obligations under capital leases (5,928) (31,520)
Receipts from convertible term loan 62,500 --
----------- -----------
Net cash provided by (used in) financing activities 7,891 (33,289)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents -- --
----------- -----------
Cash flows from all activities (1,160,920) (1,121,763)
Cash and cash equivalents at beginning of period 1,484,945 2,322,541
----------- -----------
Cash and cash equivalents at end of period $ 324,025 $ 1,200,778
=========== ===========
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, 2009 AND 2008
1. BASIS OF PRESENTATION AND REORGANIZATION
Amaru, Inc. (the "Company") is in the business of broadband
entertainment-on-demand, streaming via computers, television sets, PDAs
(Personal Digital Assistant) and the provision of broadband services. Its
business includes channel and program sponsorship (advertising and
branding); online subscriptions, channel/portal development (digital
programming services); content aggregation and syndication, broadband
consulting services, broadband hosting and streaming services and
E-commerce.
The Company is also in the business of digit gaming (lottery). The Company
has an 18 year license to conduct nation wide lottery in Cambodia. The
Company through its subsidiary, M2B Commerce Limited, signed an agreement
with Allsports International Ltd, a British Virgin Islands company to
operate and conduct digit games in Cambodia and to manage the digit games
activities in Cambodia. The digit game lottery operations have been
suspended by the government of Cambodia in March, 2009, and it cannot be
determined at this time whether the suspension of the digit games lottery
is temporary or permanent, see Note 14.
The key business focus of the Company is to establish itself as the leading
provider and creator of a new generation of Entertainment-on-Demand and
E-Commerce Channels on Broadband, and 3G (Third Generation) devices.
The Company delivers both wire and wireless solutions, streaming via
computers, TV sets, PDAs and 3G hand phones.
At the same time the Company intends to launch e-commerce channels
(portals) that provide on-line shopping and pay per view services but with
a difference, merging two leisure activities of shopping and entertainment.
The entertainment channels are designed to drive and promote the shopping
portals, and vice versa.
The Company's business model in the area of broadband entertainment
includes e-services, which would provide the Company with multiple streams
of revenue. Such revenues would be derived from advertising and branding
(channel and program sponsorship); on-line subscriptions; online games
micro-payments; channel/portal development (digital programming services);
content aggregation and syndication; broadband consulting services; on-line
shopping turnkey solutions; broadband hosting and streaming services;
E-commerce commissions and on-line dealerships; and digit game operations.
1.2 Recent Accounting Standards and Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, Accounting for Income Taxes ("FIN
48"), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by prescribing
a minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance
on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have an
impact on the Company's opening retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS
No. 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions.
F-7
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
Under the standard, fair value measurements would be separately disclosed
by level within the fair value hierarchy. In February 2008, the FASB issued
two Staff Positions that amend SFAS No. 157. The first FASB Staff Position
(FSP), No. FAS 157-1, excludes from the scope of SFAS No. 157 accounting
pronouncements that address fair value measurements for purposes of lease
classification and measurement. The second FSP, No. FAS 157-2, delays the
effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually).
SFAS 157 is effective for the Company on January 1, 2008, except for
nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value on a recurring basis for which its effective date
is January 1, 2009. The adoption of this statement did not have a material
impact on the Consolidated Financial Statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS
141R established principles and requirements for how an acquiring company
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest if the
acquired company and the goodwill acquired. SFAS 141R also established
disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective for
fiscal periods beginning after December 15, 2008. The Company is currently
evaluating the impact that SFAS 141R will have on the financial position
and results of operations.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of Accounting Research Bulletin No. 51 ("SFAS.
160"). SFAS 160 establishes accounting and reporting standards of ownership
interests in subsidiaries held by parties other than the parent, the amount
of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary
is deconsolidated. SFAS 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS 160 is effective for
fiscal periods beginning after December 15, 2008. The adoption of this
statement did not have a material impact on the Consolidated Financial
Statements.
In May 2008, the FASB issued SFAS No. 162 ("FAS 162"), The Hierarchy of
Generally Accepted Accounting Principles. FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used
in the preparation of financial statements that are presented in accordance
with accounting principles generally accepted in the United States of
America. FAS 162 was effective on November 13, 2008. The adoption of FAS
162 did not have a material impact on the Company's consolidated financial
statements. FAS 162 was superseded by FAS 168.
In June 2009, the FASB issued SFAS No. 168 ("FAS 168"), The FASB Accounting
Standards Codification. FAS 168 is effective for financial statements
issued for annual and interim periods beginning after September 15, 2009.
On the effective date of FAS 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. Rules and
interpretive releases of the SEC under authority of federal securities laws
will continue to be sources of authoritative GAAP for SEC registrants. The
adoption of FAS 168 is not expected to have a material effect on the
Consolidated Financial Statements.
F-8
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
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.
2.4 Accounts Receivable
Accounts receivable, which generally have 30 to 90 day terms, are recorded
at the invoiced amount less an allowance for any uncollectible amounts (if
any) and do not bear interest. Amounts collected on accounts receivable are
included in net cash provided by operating activities in the consolidated
statements of cash flows. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. Account balances are charged off
against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. Bad debts are written off
as incurred. The Company does not have any off-balance sheet credit
exposure related to its customers.
The Company's primary exposure to credit risk arises through its accounts
receivable. The credit risk on liquid funds is limited because the
counterparties are banks with high credit ratings assigned by international
credit-rating agencies.
F-9
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
2.5 Inventories
Inventories are carried at the lower of cost or and net realizable value.
Cost is calculated using first-in, first-out ("FIFO") method and comprises
all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
Inventories comprised primarily of finished products used in the Company's
IPTV service. As at June 30,, 2009, the net inventories amount is $642,268
after written off of $457,400 during the year ended December 31, 2008.
2.6 Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets for
financial reporting purposes. Expenditures for major renewals and
betterments that extend the useful lives are capitalized. Expenditures for
normal maintenance and repairs are expensed as incurred. The cost of assets
sold or abandoned and the related accumulated depreciation are eliminated
from the accounts and any gains or losses are reflected in the accompanying
consolidated statement of income of the respective period. The estimated
useful lives of the assets range from 3 to 5 years.
2.7 FILM LIBRARY
Previously, the Company accounted for its film library under SFAS 142,
"Goodwill and other intangible assets." The Company has changed its
accounting policy to account for its film library in accordance with SOP
00-2, "Accounting for Producers and Distributors of Films." This change in
accounting policy had no material impact on the Company's financial
statements as of June 30, 2009 and December 31, 2008, respectively.
Investment in the Company's film library includes movies, dramas, comedies
and documentaries in which the Company has acquired distribution rights
from a third party. For acquired films, these capitalized costs consist of
minimum guarantee payments to acquire the distribution rights. Costs of
acquiring the Company's film libraries are amortized using the individual-
film-forecast method in accordance with SOP 00-2, "Accounting for Producers
and Distributors of Films," whereby these costs are amortized and
participations and residuals costs are accrued in the proportion that
current year's revenue bears to management's estimate of ultimate revenue
at the beginning of the current year expected to be recognized from the
exploitation, exhibition or sale of the films. Ultimate revenue for
acquired films includes estimates over a period not to exceed twenty years
following the date of acquisition. Investments in films are stated at the
lower of amortized cost or estimated fair value.
The valuation of investment in films is reviewed on a overall basis, when
an event or change in circumstances indicates that the fair value of the
film library is less than its unamortized cost. The fair value of the film
is determined using management's future revenue and cost estimates and a
discounted cash flow approach. Additional amortization is recorded in the
amount by which the unamortized costs exceed the estimated fair value of
the film. Estimates of future revenue involve measurement uncertainty and
it is therefore possible that reductions in the carrying value of
investment in films may be required as a consequence of changes in
management's future revenue estimates.
2.8 Intangible Assets
Intangible assets consist of gaming, software license and product
development costs. 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. 142, Accounting for Goodwill and Other Intangible
Assets. Such intangible assets are amortized over the period of the
contract, which is 2 to 18 years.
Included in the gaming license are the rights to a digit games license in
Cambodia. The license is for a minimum period of 18 years commencing from
June 1, 2005, with an option to extend for a further 5 years or such other
period as may be mutually agreed. The license was suspended, see Note 14.
The Company capitalized the development and building cost related to the
broad-band sites and infrastructure for the streaming system, most of which
was developed in 2002 as product development costs. The Company projects
that these development costs will be useful for up to 5 years before
additional significant development needs to be done.
2.9 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").
F-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
Available-for-sale securities are carried at fair value with unrealized
gains and losses, net of related tax, if any, reported as a component of
other comprehensive income (loss) until realized. Realized gains and losses
from the sale of available-for-sale securities are determined on a
specific-identification basis. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than
temporary will result in an impairment, which is charged to earnings.
Available-for-sale securities that are not publicly traded or have resale
restrictions greater than one year are accounted for at cost. The Company's
cost method investments include companies involved in the broadband and
entertainment industry. The Company uses available qualitative and
quantitative information to evaluate all cost method investment impairments
at least annually.
2.10 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 quarter ended June 30, 2009 and 2008, respectively.
2.11 Fair Value
FAS 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy under FAS 157 are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that
are observable, either directly or indirectly, for
substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and
unobservable (supported by little or no market activity).
The following table sets forth the Companys financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by FAS 157, assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to
the fair value measurement.
The table below sets forth a summary of the fair values of the Companys
financial assets and liabilities as of March 31, 2009:
Total Level 1 Level 2 Level 3
--------- --------- --------- ---------
Assets:
Equity securities held
for trading $ 463,420 $ 463,420 $ -- $ --
--------- --------- --------- ---------
$ 463,420 $ 463,420 $ -- $ --
========= ========= ========= =========
F-11
The Company's equity securities held for trading are classified within the
Level 1 of the fair value hierarchy and are valued using quoted market
prices reported on the active market on which the securities are traded.
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in net income. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. Upon adoption of this Statement, the Company did not elect SFAS No.
159 option for existing financial assets and liabilities and therefore
adoption of SFAS No. 159 did not have any impact on its Consolidated
Financial Statements.
2.12 Advances from Related Party
Advances from director and related party of $48,681 at December 31, 2008
are unsecured, non-interest bearing and payable on demand. As at June 30,
2009, the amount is $0.00.
2.13 Leases
The Company is the lessee of equipment under a capital lease expiring in
2014. The assets and liabilities under capital leases are recorded at the
lower of the present value of the minimum lease payments or the fair value
of the asset. The assets are amortized over the lower of their related
lease terms or their estimated productive lives. Amortization of assets
under capital leases is included in depreciation expense for the quarter
ended June 30, 2009 and 2008.
On November 1, 2007, the Company sub-leased the office premises of M2B
World Inc, a wholly owned subsidiary of the Company in Los Angeles,
California as part of its efforts to streamline its operations and reduce
operating costs.
2.14 Foreign Currency Translation
Transactions in foreign currencies are measured and recorded in the
functional currency, U.S. dollars, using the Company's prevailing month
exchange rate. The Company's reporting currency is also in U.S. dollars. At
the balance sheet date, recorded monetary balances that are denominated in
a foreign currency are adjusted to reflect the rate at the balance sheet
date and the income statement accounts using the average exchange rates
throughout the period. Translation gains and losses are recorded in
stockholders' equity as other Comprehensive income and realized gains and
losses from foreign currency transactions are reflected in operations.
F-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
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. The digit game operations has been
suspended. See Note 14.
2.16 Costs of Services
The cost of services pertaining to advertising and sponsorship revenue and
subscription and related services are cost of bandwidth charges, channel
design and alteration, copyright licensing, and hardware hosting and
maintenance costs. The cost of services pertaining to E-commerce revenue is
channel design and alteration, and hardware hosting and maintenance costs.
The cost of services pertaining to gaming is for managing and operating the
operations and gaming centers. All these costs are accounted for in the
period its was incurred. The license and operations has been suspended. See
Note 14.
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.
During the year ended December 31, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No. 109,
"Accounting for Income Taxes," by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements.
The Interpretation requires that the tax effects of a position be
recognized only if it is "more-likely-than-not" to be sustained based
solely on its technical merits as of the reporting date. The
more-likely-than-not threshold represents a positive assertion by
management that a company is entitled to the economic benefits of a tax
position, If a tax position is not considered more-likely-than-not to be
sustained based solely on its technical merits. No benefits of the tax
position are to be recognized. Moreover, the more-likely-than-not threshold
must continue to be met in each reporting period to support continued
recognition of a benefit. With the adoption of FIN 48, companies are
required to adjust their financial statements to reflect only those tax
positions that are more-likely-than-not to be sustained. Any necessary
adjustment would be recorded directly to retained earnings and reported as
a change in accounting principle.
Upon adoption of FIN 48 as of January 1, 2007, the Company had no gross
unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods. At December 31, 2007 the
amount of gross unrecognized tax benefits before valuation allowances and
the amount that would favorably affect the effective income tax rate in
future periods after valuation allowances were $0. These amounts consider
the guidance in FIN 48-1, "Definition of Settlement in FASB Interpretation
No. 48".The Company has not accrued any additional interest or penalties as
a result of the adoption of FIN 48.
The Company files income tax returns in the United States federal
jurisdiction and certain states in the United States and certain other
foreign jurisdictions. With a few exceptions, the Company is no longer
subject to U. S. federal, state or foreign income tax examination by tax
authorities on income tax returns filed before December 31, 2004. U. S.
federal. State and foreign income returns filed for years after December
31, 2004 are considered open tax years as of the date of these consolidated
financial statements. No income tax returns are currently under examination
by any tax authorities.
F-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
2.18 Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
FAS No. 128 "Earnings Per Share" which requires the Company to present
basic and diluted earnings per share, for all periods presented. The
computation of earnings per common share (basic and diluted) is based on
the weighted average number of shares actually outstanding during the
period. The Company has no common stock equivalents, which would dilute
earnings per share.
2.19 Financial Instruments
The carrying amounts for the Company's cash, other current assets, accounts
payable, accrued expenses and other liabilities approximate their fair
value.
2.20 Advertising
The cost of advertising is expensed as incurred. For the six months ended
June 30, 2009 and 2008, the Company incurred advertising expenses of
$63,821 and $43,112 respectively.
3. EQUITY SECURITIES HELD FOR TRADING
June 30, December 31,
2009 2008
------------ ------------
Quoted equity security, at fair value $ 463,420 $ 179,620
============ ============
The fair value of quoted security is based on the quoted closing market
price on the date of Sale and Purchase agreement. The investment in quoted
equity security at fair value includes an unrealized gain of $283,800.
The investments in quoted equity securities comprised of 34,000,000 common
shares of PT Agis at the market value of US$ 0.01363 per share as of June
30, 2009 and 34,000,000 common shares of PT Agis at the market value of US$
0.00528 per share as of December 31, 2008.
The Company's equity securities held for trading investment is denominated
in Indonesian Ruppiah.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
June 30, December 31,
2009 2008
------------ ------------
Prepayments $ 50,512 $ 70,108
Deposits 162,116 69,995
Other receivables 77,521 90,190
------------ ------------
$ 290,149 $ 230,293
============ ============
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30, December 31,
2009 2008
------------ ------------
Office equipment $ 1,021,089 $ 1,004,504
Motor vehicle 91,190 91,190
Furniture, fixture and fittings 313,208 313,208
Pony set-top boxes 843,946 843,946
------------ ------------
2,269,433 2,252,848
Accumulated depreciation (1,472,463) (1,219,342)
------------ ------------
$ 796,970 $ 1,033,506
============ ============
Depreciation expense was $253,121 for the six months ended June 30, 2009
and $340,450 for the six months ended June 30, 2008.
6. FILM LIBRARY
Film library consist of the following:
June 30, DECEMBER 31,
2009 2008
----------- -----------
Acquired Film Library $23,173,833 $23,164,126
----------- -----------
Accumulated Amortization (4,786,090) (4,496,836)
----------- -----------
Film Library, Net $18,387,743 $18,667,290
=========== ===========
Amortization expense was $289,254 for the six months ended June 30, 2009.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30, DECEMBER 31,
2009 2008
------------ ------------
FINITE-LIVED INTANGIBLE ASSET
Gaming license 7,090,000 7,090,000
Product development expenditures 719,220 719,220
Software license 12,649 12,649
------------ ------------
7,821,869 7,821,869
Accumulated amortization (1,914,327) (1,854,326)
------------ ------------
5,907,542 5,967,543
------------ ------------
Impairment loss (3,762,777) (3,762,777)
------------ ------------
$ 2,144,765 $ 2,204,766
============ ============
Amortization expense was $60,001 for the six months ended June 30, 2009.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
8. INVESTMENTS HELD AT COST
Investments available-for-sale consist of the following:
June 30, December 31,
2009 2008
------------ ------------
Non Current :
M2B Game World Pte., Ltd. $616,136 $ 616,136
Dai Long Co., Ltd. 2,402,613 2,402,613
------------ ------------
$ 3,018,749 $ 3,018,749
============ ============
The Company's $616,136 investment held at cost relates to its investment in M2B
Game World Pte Ltd. Management reviews this investment on a quarterly basis and
has noted no impairment for the quarter ended March 31, 2009.
The Company's $2,402,613 investment held at cost relates to its investment in
Dai Long Co., Ltd. for the Grand Dragon Resort located in Cambodia. The resort
holds a valid casino license and includes a hotel, gaming tables and a duty free
shop. This investment is subject to numerous risks, including:
- difficulty enforcing agreements through Cambodia's legal system;
- general economic and political conditions in Cambodia; and
- the Cambodian government may adopt regulation or take other actions that
could directly or indirectly harm the equity method investments business
or strategy.
The occurrence of any one of the above risks could harm the resorts business
and results of operations. Management reviews this investment on a quarterly
basis and has noted no impairment for the quarter ended March 31, 2009.
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
9. COMMITMENTS
As of the balance sheet date, the Group has the following capital
commitments:
June 30, December 31,
2009 2008
------------ ------------
CAPITAL COMMITMENTS:
Contracted but not provided for
Film library $ 108,000 $ 110,171
Set-top boxes 2,074,825 2,074,825
------------ ------------
$ 2,182,825 $ 2,184,996
============ ============
Capital Leases
The following summarizes the Company's capital lease obligations at June
30, 2009:
2009 2008
------------ ------------
Future minimum lease payments $ 62,029 $ 69,140
Less: amounts representing interest (10,317) (11,500)
------------ ------------
Present value of net minimum lease payments 51,712 57,640
Less: current portion (10,700) (10,809)
------------ ------------
$ 41,012 $ 46,831
============ ============
The Company is the lessee of equipment under capital leases expiring in
various years through 2014. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are amortized over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation
expense for 2008 and 2007. Interest rates on capitalized leases is fixed at
2.85%.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 3, 2009 AND 2008
Operating Leases
The Company leases facilities and equipment under operating leases expiring
through 2012. Total rental expense on operating leases for the six months
ended June 30, 2009 and 2008 was $61,769 and $124,382, respectively. As of
June 30, 2009, the future minimum lease payments are as follows:
For the Quarter Ended
June 30, Operating Capital
--------------------- ------------ ------------
2009 23,645 10,319
2010 3,959 10,319
2011 -- 10,319
2012 -- 21,493
------------ ------------
27,604 52,450
============ ============
10. INCOME TAXES
The Company files separate tax returns for Singapore and the United States
of America.
The Company had available approximately $6,987,000 of unused U.S. net
operating loss carry-forwards at June 30, 2009, that may be applied against
future taxable income. These net operating loss carry-forwards expire for
U.S. income tax purposes beginning in 2026. There is no assurance the
Company will realize the benefit of the net operating loss carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. As of June 30, 2009 the Company maintained a valuation allowance
for the U.S. deferred tax asset due to uncertainties as to the amount of
the taxable income from U.S. operations that will be realized.
The Company had available approximately $6,045,000 of unused Singapore tax
losses and capital allowance carry-forwards at June 30, 2009, that may be
applied against future Singapore taxable income indefinitely provided the
company satisfies the shareholdings test for carry-forward of tax losses
and capital allowances.
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
11. RELATED PARTY TRANSACTIONS
Related parties are entities with common direct or indirect shareholders
and/or directors. Parties are considered to be related if one party has the
ability to control the other party or exercise significant influence over
the other party in making financial and operating decisions.
Some of the company's transactions and arrangements are with the related
party and the effect of these on the basis determined between the party is
reflected in these financial statements. The balances are unsecured,
interest-free and repayable on demand unless otherwise stated.
During the period, the Group entered into the following transactions with
the associate:
JUNE 30, JUNE 30,
2009 2008
------------ ------------
Associate :
Marketing $ 9,059 $ --
============ ============
Professional fee $ 6,108 $ --
============ ============
12. SALE OF IPTV PLATFORM
In April 2007 the Company through its subsidiary M2B World Holdings Limited
entered into an agreement to sell its IPTV platform to a company in Indonesia
(buyer) for $14,500,000. The total amount of the consideration was to be
received in shares of the buyer and a 50% share of a newly incorporated entity.
The Company has received $5,000,000 in cash and publicly-traded securities. The
balance outstanding receivable of $9,500,000 is included as "Receivable from
sale of IPTV platform" at June 30, 2009 and December 31, 2008, respectively,
which comprises of two portions: the first portion of $2 million to be settled
fully in publicly-traded shares of the buyer and the other portion of $7,500,000
million will be reinvested in the form of joint venture with the buyer as stated
in the terms of the sale agreement.
On December 15, 2008, M2B World Holdings entered into a further agreement with
PT Agis to set up a Joint Venture Company to launch WOWtv in Indonesia. The
agreement with PT Agis TBK would give M2B World Holdings a 49 percent equity
stake in the Joint Venture Company called PT WOW Television Management is in the
process of completing this transaction and has determined that the entire amount
of $9,500,000 is recoverable and no allowances are necessary. In accordance with
the agreement, the JV company was initially expected to be capitalized and go
into operations by July 2009. The Company intends to complete the valuation of
the content and to have the site up and running by September 2009.
Up to the second quarter, we were confident of resolving the matter of
the investment and the receivables. In our reply to the SEC on October
13, 2009, we indicated that the matter could be resolved by mid
November 2009. We had discussions with Agis management in July 2009 to
complete the transaction. We were informed by Agis Management that the
issue of the payment and the shares would require a valuation for the
Indonesian Authorities. Agis indicated that in the absence of any
valuation, the JV Company would not be able to show proof to the
government of the content value to be injected as capital.
While we are moving forward with the transaction, we are unable to
complete the valuation in November 2009. While negotiations are
ongoing, there is the possibility that we would not be able to collect
the receivables in the coming months. We think that the transaction may
completed in six to nine months, which by that time, we will seek to
recognize the receivables in our accounts as a recovery. Therefore
management has decided to allow for the total outstanding receivable of
$9,500,000 which was included in the "Receivable from sale of IPTV
platform" as of September 30, 2009.
F-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
13. PURCHASE OF CBBN HOLDINGS LIMITED
The Company through its wholly owned subsidiary, Tremax International Limited,
entered into a sale and purchase agreement dated July 10, 2007 with Domaine
Group Limited which has not yet been consummated. Per the agreement the Company
through its wholly owned subsidiary, Tremax International Limited would transfer
5,333,333 shares of the Company valued at $3,733,333 which is included as
"Prepayment on purchase" at June 30, 2008 and December 31, 2007, respectively,
in exchange for Domaine Group Limited transferring its 100% shares in CBBN
Holdings Limited, a company incorporated in the British Virgin Islands. The
transaction has not been consummated and the agreement had expired and was not
extended. The Management of the Company had decided not to proceed with this
agreement.
On January 22, 2009, the Company approved the termination and rescission of the
Agreement where the seller failed to comply with the terms of the Agreement and
did not deliver to the Company or Purchaser the consideration for the issuance
of the Amaru Shares. The Company further approved the cancellation of the Amaru
Shares.
14. IMPAIRMENT OF DIGIT GAMES LICENSE
On March 25, 2009, the Company was officially notified that the digit games were
suspended by the Cambodia Government as part of the suspension of all lotteries
in Cambodia. It cannot be determined at this time whether the suspension of the
digit games is temporary or permanent, though the Government of Cambodia is
currently closing the gaming business by the order of its Ministry of Economy
and Finance. Due to the lack of access to the digit game operations, the digit
games lottery operations resulting from the holding of the digit games lottery
license were impaired as of December 31, 2008, and no revenues were received as
of June 30, 2009 since the Company's recognition criteria related to the
associated revenues were not met.
15. LOAN AND BORROWINGS
JUNE 30, JUNE 30,
2009 2008
------------ ------------
Non-current
Convertible loan $ 2,500,000 $ --
Less: Future interest charges $ (129,704) --
------------ ------------
$ 2,370,296 $ --
============ ============
Term loans held by the Company at balance sheet date are as follows:
(a) $2,500,000 represents a two years convertible loan drawn down by a
subsidiary company. It bears interest at a fixed rate of 5.0% per annum.
The loan allows the borrower the option to convert the loan into shares of
the subsidiary company at the issue price of $0.942 per share at the end of
the two years period. The loan commenced in July 2008 and will mature in
June 2010. The note was obtained from a company in which a board of
director is the Joint Company Secretary of the lender.
16. LEGAL PROCEEDINGS
On September 15, 2008, M2B Commerce Limited filed a lawsuit in the Kingdom of
Cambodia for breach of the Performance and Maintenance Agreement dated May 20,
2005 between M2B Commerce Limited and Allsports International Ltd, by Allsports
International Ltd seeking damages in the total amount of $794,189 and calling
for the termination of the Performance and Maintenance Agreement.
On December 4, 2008, M2B Commerce Limited filed two further lawsuits in the
Kingdom of Cambodia against the owners of Allsports International Ltd, in
support of its earlier suit of September 15, 2008 against Allsports
International Ltd for breach of the Performance and Maintenance Agreement dated
May 20, 2005. One lawsuit was against the four principal officers of Allsports
International Ltd for breach of trust of the total amount of $794,189 owing to
M2B Commerce Limited. The other lawsuit was to get Allsports International Ltd
to transfer the shares of the Lottery Company to M2B Commerce Limited, in lieu
of the earlier lawsuit of September 15, 2008 which called for the termination of
the Performance and Maintenance Agreement.
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
On November 7, 2008, M2B World Asia Pacific Pte. Ltd was served a summons in
Singapore by M2B Game World Pte. Ltd, a company owned 81% by Auston
International Group Limited and 19% by M2B World Pte. Ltd, claiming a sum of
US$153,744 (S$235,229) in unpaid invoices in 2006. Following this, M2B World
Asia Pacific Pte. Ltd filed a counter claim to strike off this summons on the
basis that the invoices were non-existent and that M2B World Asia Pacific Pte.
Ltd was not yet incorporated as a company as of the date of the invoices
produced by M2B Game World Pte. Ltd.
On February 23, 2009, M2B World Pte Ltd was served a summons in Singapore by
Auston International Group Limited, claiming a sum of US$496,765 (S$760,050) to
be paid as shortfall in Guaranteed Profit to M2B Game World Pte. Ltd for
financial years 2006 and 2007, as part of the agreement for the acquisition of
M2B Game World in December 20, 2005 between M2B World Pte Ltd and Auston
International Group Limited. On March 20, 2009 in response to this summons, M2B
World Pte. Ltd filed a counter-claim against Auston International Group Limited
to claim damages amounting to US$1,568,172 and other damages as a result of
material breaches on the part of Auston International Group Limited to the
agreement of December 20, 2005 for the acquisition of M2B Game World Pte Ltd.
17. SUBSEQUENT EVENTS
The Company commenced a private placement pursuant to the Regulation D as
promulgated under the Securities Act of 1933 up to $254,778, and that the
company anticipates the closing of the placement on or about 20 August, 2009.
The total amount sold at the time of the filing of this Form 10-Q is $204,778
for 2,047,780 shares. The price per share in the offering is at USD 0.10 per
share.
The Company moved to a new premises at 62 Cecil Street #06-00,TPI Building
Singapore 049710 on July 27, 2009. The Company anticipates the signing of the
rental agreement on or about August 25, 2009. The monthly rental amount of the
premises is US$8,289 (S$12,000).
F-21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 0F FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
The Company is in the business of broadband entertainment-on-demand,
streaming via computers, television sets, and 3G (Third Generation) devices
and the provision of broadband services. Its business includes channel and
program sponsorship (advertising and branding); online subscriptions,
channel/portal development (digital programming services); content
aggregation and syndication, broadband consulting services, broadband
hosting and streaming services and E-commerce.
The Company is also in the business of digit gaming (lottery). The Company
has an 18 year license to conduct nation wide lottery in Cambodia. The
Company through its subsidiary, M2B Commerce Limited, signed an agreement
with Allsports Limited, a British Virgin Islands company to operate and
conduct digit games in Cambodia and to manage the digit games activities in
Cambodia. On March 25, 2009, the Company was notified that the digit games
were suspended by the Cambodia Government as part of the suspension of all
lotteries in Cambodia. It cannot be determined at this time whether the
suspension of the digit games is temporary or permanent, though the
Government of Cambodia is currently closing the gaming business by the
order of its Ministry of Economy and Finance.
The following discussion should be read in conjunction with selected
financial data and the financial statements and notes to financial
statements.
1
OVERVIEW
The business focus of the Company is Entertainment-on-Demand and E-Commerce
Channels on Broadband, and 3G (Third Generation) devices.
For the broadband, the Company delivers both wire and wireless solutions,
streaming via computers, TV sets, PDAs and 3G hand phones. At the same time the
Company launches e-commerce channels (portals) that provide on-line shopping but
with a difference, merging two leisure activities of shopping and entertainment.
The entertainment channels are designed to drive and promote the shopping
portals, and vice versa.
The Company's business model in the area of broadband entertainment includes
focuses on e-services, which would provide the Company with multiple streams of
revenue. Such revenues would be derived from advertising and branding (channel
and program sponsorship); on-line subscriptions; online games micro-payments;
channel/portal development (digital programming services); content aggregation
and syndication; broadband consulting services; on-line shopping turnkey
solutions; broadband hosting and streaming services; E-commerce commissions and
on-line dealerships; and digit game operations.
In fiscal 2008, the business was reorganized under the following entities to
spearhead the expansion of the Company's business and focus on specific growth
areas and territories.
M2B WORLD PTE. LTD.
M2B World Pte. Ltd. was incorporated on April 3, 2003. This subsidiary used to
oversee the management and operation of the Company as a whole and oversees the
Asian business. With effect from September 1, 2006, the Company's Asian business
was overseen by another subsidiary, M2B World Asia Pacific Pte. Ltd.
The Company took an investment on May 16, 2005 for a 9.1% equity position with a
company called Activ Lifestyle Pte Ltd in Singapore to help facilitate Amaru
Inc.'s diversification into the health and wellness market.On September 27,
2005, the Company raised its investment in Activ Lifestyle Pte Ltd to 12.6%.
This was further increased to 17.4% as of December 31, 2006.
In December 2005, M2B World Pte. Ltd. sold 81% equity interests of its
wholly-owned subsidiary, M2B Game World Pte. Ltd. to Auston International Group
Ltd (Auston), a public listed company in Singapore, in exchange for 27% equity
interest in Auston. As of December 31, 2008, the Company disposed all of its
common shares in Auston. As of the date of this report, the Company holds no
shares in Auston.
M2B WORLD, INC.
M2B World, Inc., a California corporation, was incorporated on January 24, 2005.
This subsidiary handles and oversees the Company's business in the U.S. The
Company has leased a new office on Sunset Boulevard, West Hollywood that came
into effect in August 2006, which offices are currently being subleased (see
below). In October 2007, M2B World Inc reduced its staffing and in November 2007
sub-leased its premise as part of the Company's cost reduction measures.
On May 27, 2005, M2B World, Inc. entered into an agreement with Indie Vision
Films, Inc., a California corporation, to purchase 20% of the beneficial
ownership of Indie Vision Films, Inc. The investment will allow M2B World,
Inc.to access the library of programs of Indie Vision Films, Inc. The Company is
currently into negotiations with Indie Vision Films, Inc to convert its
investment into content rights, thereby giving up its 20% share of beneficial
ownership in lieu of library rights that the Company could exploit commercially
for international use. As of the date of this report, the Company had received
the list of content titles from Indie Vision Films, Inc for evaluation and
selection in order to convert its investment into content rights.
On November 1, 2007, the Company sub-leased the office premises of M2B World
Inc, a wholly owned subsidiary of the Company in Los Angeles, California as part
of its efforts to streamline its operations and reduce operating costs. The
staffing of M2B World Inc was also reduced from 9 staff to 1 staff as of October
31, 2007, and remains as 1 staff as of the date of this report. The company has
transferred its server farm to the Singapore server farm to, optimize bandwidth
and support cost.
2
M2B WORLD ASIA PACIFIC PTE. LTD.
M2B World Asia Pacific Pte Ltd was incorporated in the Republic of Singapore on
1 August 2006 for the purposes of handling all the business operations of the
Company in the Asia Pacific region. This company had taken over the Asian
business operations as well as the assets and liabilities of M2B World Pte. Ltd.
with effect from September 1, 2006.
On January 3, 2007, M2B World Asia Pacific Pte Ltd, issued 7,778,014 shares of
common stock through a private placement at a price of $0.77 a share for a total
amount of $6,000,000. This had effectively reduced the Company's effective
equity interest in M2B World Asia Pacific Pte. Ltd from 100% to 81.6%.
On July 8, 2008, M2B World Asia Pacific Pte Ltd signed a two year convertible
loan agreement with a third party to raise $2,500,000 in funding. The loan
allows the borrower to convert the loan into shares of the Company at the issue
price of $0.942 per share at the end of the two years period. The loan bears an
interest rate of 5.0% per annum, and will mature in June 2010. The note was
obtained from a company in which a board of director is the Joint Company
Secretary of the lender.
M2B COMMERCE LIMITED
M2B Commerce Limited, a company incorporated in the British Virgin Islands on
July 25, 2002, focuses on e-commerce and digit gaming, with a branch in Cambodia
that oversees the digit gaming operation in Cambodia.
The Company has an agreement with Allsports Limited, a British Virgin Islands
company to operate, administer, and manage the lottery digit game activities in
Cambodia, as an extension of the Company's entertainment operations. On March
25, 2009, the Company was notified that the digit game were suspended by the
Cambodia Government as part of the suspension of all lotteries in Cambodia. It
cannot be determined at this time whether the suspension of the digit game is
temporary or permanent, though the Government of Cambodia is currently closing
the gaming business by the order of its Ministry of Economy and Finance.
The company had entered into an investment agreement on January 12, 2006, with
Khoo Kim Leng, the beneficial owner of Dai Long Co., Ltd, which holds a valid
casino license and freehold land and intends to develop and operate an
integrated resort in the Kingdom of Cambodia. The resort will feature a hotel,
guest house, shopping arcade, entertainment and amusement center and some gaming
tables. As of December 31, 2006, the company had invested $2,402,613 in relation
to this investment. The resort was completed and is in operation subsequent to
the balance sheet date.
M2B ENTERTAINMENT, INC.
M2B Entertainment, Inc. was incorporated on October 27, 2005. This subsidiary
will oversee the Company's Canadian market. As of June 30, 2009, this subsidiary
is dormant.
M2B AUSTRALIA PTY LTD
M2B Australia Pty Ltd was incorporated on June 15, 2005. This subsidiary handles
and oversees the Company's business in Australia. As of June 30, 2009 this
subsidiary is dormant.
M2B WORLD TRAVEL SINGAPORE PTE. LTD.
M2B World Travel Singapore Pte Ltd was incorporated in the Republic of Singapore
on March 7, 2006. This subsidiary of M2B World Travel Limited launches a global
online travel platform which offers global e-travel services.
The Company has completed the development of an online travel engine and travel
web applications for integration with suppliers of travel information and travel
services; and incorporating travel features with current media operations under
the M2B brand name.
3
M2B World Travel Limited signed a global agreement with Amadeus Global Travel
Distribution, SA, a Spanish corporation. Through the agreement, the company will
be able to offer direct access to the extensive range of travel options
available through the Amadeus network to viewers around the world.
The company has entered into an agreement with Elleipsis, Inc to host the travel
site and the travel software platform in the US with effect from June 30, 2008,
The Company plans to have the travel service and the site operational before the
end of the year. The launch and operations of the travel service is subject to
funding considerations, and there can be no guarantee that the service can be
operational as planned.
AMARU HOLDINGS LIMITED AND M2B WORLD HOLDINGS LIMITED
Amaru Holdings Limited and M2B World Holdings Limited are incorporated in the
British Virgin Islands on February 21, 2005 and June 15, 2006, respectively.
Amaru Holdings Limited focuses on content syndication and distribution in areas
other than Asia Pacific region. M2B World Holdings Limited focuses on content
syndication and distribution in Asia Pacific region and is a subsidiary of M2B
World Asia Pacific Pte. Ltd.
4
RESULTS OF OPERATIONS
REVENUE
Financial Statement
- - Revenue for the six months ended June 30, 2009 was $30,820 compared with
$48,169 for the same period in 2008.
- - The Company's cash balance was $324,025 at June 30, 2009 compared with
$1,484,945 at December 31, 2008.
Revenue
Revenue from entertainment for the six months ended June 30, 2009 at $30,820 was
lower than revenue of $48,169 for the six months ended June 30, 2008 by $17,349
(36%). It was insignificant mainly due to no new advertising or content
syndication contracts being secured.
Cost of Services
Cost of services for the three months ended June 30, 2009 was $111,143 which
decreased by $153,865 (58%) from $265,008 for the six months ended June 30,
2008.
As a proportion of revenue the cost of the services for the six months ended
June 30, 2009 was 361% (cost of sales at $111,143 and revenue of $ 30,820) as
compared to 550% (cost of sales at $265,008 and revenue of $48,169) for the six
months ended June 30, 2008.
The decrease in cost of services of $153,865(58%) was significant and was
attributed to cost reduction measures to reduce operating costs.
DISTRIBUTION EXPENSES
Distribution expenses for the six months ended June 30, 2009 at $97,122 were
lower by $969,964 (91%) as compared to the amount of $1,067,086 incurred for the
six months ended June 30, 2008.
The lower distribution expenses were attributed to the suspension of digit games
working capital amounting to $861,186 for the six months ended June 30, 2008,
and decreased spending on travelling expenses which decreased by $65,209(74%)
from $88,497 for the six months ended June 30, 2008 to $23,288 for the six
months ended June 30, 2009.
GENERAL AND ADMINISTRATIVE EXPENSES
Administration expenses for the six months ended June 30, 2009 at $1,171,647
were lowered by $769,499 (40 %) as compared to the amount of $1,941,146 incurred
for the six months ended June 30, 2008.
The decrease in administrative expenses for the period ended June 30, 2009 was
attributed mainly to the decrease in:
o Depreciation and amortization. Equipment depreciation and license
amortization had decreased by $323,116 (35 %), from $925,492 for the six
months ended June 30, 2008 to $ 602,376 for the period ended June 30, 2009.
The decrease was mainly due to most of the intangible assets and equipment
being fully amortized and written off during end of December 31, 2008.
o Legal and professional fees. Fees had decreased by $44,627 (25%), from
$180,842 for the six months ended June 30, 2008 to $136,215 for the six
months ended June 30, 2009. The decrease was mainly due as a result of cost
reduction measures to reduce operating costs
o Staff costs. Staff costs had decreased by $317,801 (61%), from $525,246 for
the six months ended June 30, 2008 to $207,445 for the six months ended
June 30, 2009. The decrease was mainly due as a result of cost reduction
measures to reduce operating costs
5
(LOSS) INCOME FROM OPERATIONS
The Company incurred a loss from operations of $1,349,092 for the six months
ended June 30, 2009 as compared to the loss from operations of $3,225,071 for
the six months ended June 30, 2008. This was mainly due as a result of cost
reduction measures to reduce operating costs for the six months ended June 30,
2009 and the write off of digit games working capital for the six months ended
June 30, 2008.
NET LOSS
Net loss for the six months ended June 30, 2009, was $1,128,733 which decreased
by $2,979,089 (73) from net loss of $4,107,822 for the six months ended June 30,
2008. The decrease was mainly due as a result of cost reduction measures to
reduce operating costs for the six months ended June 30, 2009, the write off of
digit games working capital and the net change in fair value of securities held
for trading for the six months ended June 30, 2008, and offset by the benefit
for income taxes incurred for the six months ended June 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at $324,025 at June 30, 2009 as compared to cash of
$1,484,945 at December 31, 2008.
The Company does not finance its operations through short-term bank credit nor
long-term bank loans as it believes that cash generated from its operations will
be able to cover its daily running cost and overheads.
During the six months ended June 30, 2009, 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 2009 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
o On March 31, 2009, the Company signed an agreement with Beijing Baidu
Network Science and Technology Co Ltd ("Baidu") to launch the WOWtv
platform in China. The agreement was a strategic partnership with Baidu to
provide content services to Baidu.com users.
o On April 17,2009, the Company signed a strategic cooperation agreement with
LTDnetwork Inc. who owns the brand name and music site called QTRAX. QTRAX
is the world's first free and legal peer-to-peer music service. Both
parties agreed to look into areas to promote each other's site to increase
internet traffic and to exploit each other's content.
6
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, high-grade corporate bonds, government and non- government
debt securities and certificates of deposit. In general, money market funds are
not subject to market risk because the interest paid on such funds fluctuates
with the prevailing interest rate. The Company held $3,482,169 and $3,198,369 in
marketable securities as of June 30, 2009 and December 31, 2008 respectively.
The Company does not believe that it faces material market risk with respect to
its cash and cash equivalents which totaled $324,025 and $1,484,945 at June 30,
2009 and December 31, 2008, respectively.
The Company has no long-term obligations or hedging activities.
ABILITY TO EXPAND CUSTOMER BASE
The Company's future operating results depend on our ability to expand our
customer base for broadband services and e-commerce portals. An increase in
total revenue depends on our ability to increase the number of broadband and
e-commerce portals, in the US, Europe and Asia. The degree of success of this
depends on
o our efforts to establish independent broadband sites in countries where
conditions are suitable.
o our ability to expand our offerings of content in entertainment and
education, to include more niche channels and offerings.
o our ability to provide content beyond just personal computers but to
encompass television, wireless application devices and 3G hand phones.
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.
7
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.
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.
8
LAW AND REGULATIONS GOVERNING BUSINESS
As the Company continues to expand its business internationally across different
geographical locations there are risks inherent including:
1) Trade barriers and changes in trade regulations
2) Local labor laws and regulations
3) Currency exchange rate fluctuations
4) Political, social or economic unrest
5) Potential adverse tax regulation
6) Changes in governmental regulations
OUTBREAK OF N1H1 VIRUS FLU PANDEMIC OR SIMILAR PUBLIC HEALTH DEVELOPMENTS
Any future outbreak of the N1H1 flu pandemic or similar adverse public health
developments may have a material adverse effect on the Company's business
operations, financial condition and results of operations.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
A system of disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e)) under the Securities Exchange Act of 1934, as amended [the "Exchange
Act"]) are controls and other procedures that are designed to provide reasonable
assurance that the information that the Company is required to disclose in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives, and management necessarily is
required to use its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. In addition, the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Moreover, over
time, controls may become inadequate because of changes in conditions, or the
degree of compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a control system, misstatements due to error or fraud
may occur and not be detected.
Notwithstanding the issues described below, the current management has concluded
that the consolidated financial statements for the periods covered by and
included in the Quarterly Report on Form 10-Q for the period ended June 30, 2009
are fairly stated in all material respects in accordance with generally accepted
accounting principles in the United States for each of the periods presented
herein.
9
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with United States of America generally
accepted accounting principles. A Company's internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the Company are
being made only in accordance with authorization of management and directors of
the Company and (iii) provide reasonable assurance regarding the prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on our consolidated financial
statements.
In connection with the preparation of this Quarterly Report on Form 10Q, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of internal control over financial reporting based on
criteria established in the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"), as supplemented by the COSO publication Internal Control over
Financial Reporting - Guidance for Smaller Public Companies. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our internal control over financial reporting was effective as of June 30,
2009, based on these criteria. Management is aware that there is a lack of
segregation of duties at the Company due to the fact that there are only four
people dealing with financial and accounting matters. However, at this time,
management has decided that considering the experience and abilities of the
employees involved and the low quantity of transactions processed, the risks
associated with such lack of segregation are low and the potential benefits of
adding employees to clearly segregate duties do not justify the substantial
expenses associated with such increases. Management will periodically reevaluate
this situation.
Notwithstanding the above regarding the lack of segregation of duties,
management, including our Chief Executive Officer and Chief Financial Officer,
believes that the consolidated financial statements included in this annual
report present fairly, in all material respects, our financial condition,
results of operations and cash flows for the periods presented. This annual
report does not include an attestation report of our registered independent
auditors regarding internal control over financial reporting. Management's
report was not subject to attestation by our registered independent auditors
pursuant to temporary rules of the SEC that permit us to provide only
management's report in this annual report.
There were no changes in Internal Control Over Financial Reporting during the
quarter ended June 30, 2009, there were no changes in our internal controls that
have materially affected or are reasonably likely to have materially affected
our internal control over financial reporting. Our management, including the
Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected.
Our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) has concluded, based on
their evaluation as of June 30, 2009, that the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) and
15d-15(e)) under the Securities Exchange Act of 1934, as amended ("Exchange
Act")) are effective to ensure that information required to be disclosed by us
in the reports filed or submitted by us under the Exchange Act is accumulated,
recorded, processed, summarized and reported to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding whether or not disclosure is required.
10
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial
reporting during the most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II : OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 15, 2008, M2B Commerce Limited filed a lawsuit in the Kingdom of
Cambodia for breach of the Performance and Maintenance Agreement dated May 20,
2005 between M2B Commerce Limited and Allsports International Ltd, by Allsports
International Ltd seeking damages in the total amount of $794,189 and calling
for the termination of the Performance and Maintenance Agreement.
On December 4, 2008, M2B Commerce Limited filed two further lawsuits in the
Kingdom of Cambodia against the owners of Allsports International Ltd, in
support of its earlier suit of September 15, 2008 against Allsports
International Ltd for breach of the Performance and Maintenance Agreement dated
May 20, 2005. One lawsuit was against the four principal officers of Allsports
International Ltd for breach of trust of the total amount of $794,189 owing to
M2B Commerce Limited. The other lawsuit was to get Allsports International Ltd
to transfer the shares of the Lottery Company to M2B Commerce Limited, in lieu
of the earlier lawsuit of September 15, 2008 which called for the termination of
the Performance and Maintenance Agreement.
On November 7, 2008, M2B World Asia Pacific Pte. Ltd was served a summons in
Singapore by M2B Game World Pte. Ltd, a company owned 81% by Auston
International Group Limited and 19% by M2B World Pte. Ltd, claiming a sum of
US$153,744 (S$235,229) in unpaid invoices in 2006. Following this, M2B World
Asia Pacific Pte. Ltd filed a counter claim to strike off this summons on the
basis that the invoices were non-existent and that M2B World Asia Pacific Pte.
Ltd was not yet incorporated as a company as of the date of the invoices
produced by M2B Game World Pte. Ltd.
On February 23, 2009, M2B World Pte Ltd was served a summons in Singapore by
Auston International Group Limited, claiming a sum of US$496,765 (S$760,050) to
be paid as shortfall in Guaranteed Profit to M2B Game World Pte. Ltd for
financial years 2006 and 2007, as part of the agreement for the acquisition of
M2B Game World in December 20, 2005 between M2B World Pte Ltd and Auston
International Group Limited. On March 20, 2009 in response to this summons, M2B
World Pte. Ltd filed a counter-claim against Auston International Group Limited
to claim damages amounting to US$1,568,172 and other damages as a result of
material breaches on the part of Auston International Group Limited to the
agreement of December 20, 2005 for the acquisition of M2B Game World Pte Ltd.
ITEM 1A: RISK FACTORS
An investment in the Company's common stock involves a high degree of risk. One
should carefully consider the following risk factors in evaluating an investment
in the Company's common stock. If any of the following risks actually occurs,
the Company's business, financial condition, results of operations or cash flow
could be materially and adversely affected. In such case, the trading price of
the Company's common stock could decline, and one could lose all or part of
one's investment. One should also refer to the other information set forth in
this report, including the Company's consolidated financial statements and the
related notes.
11
THE COMPANY CONTINUES TO USE SIGNIFICANT AMOUNTS OF CASH FOR ITS BUSINESS
OPERATIONS, WHICH COULD RESULT IN US HAVING INSUFFICIENT CASH TO FUND THE
COMPANY'S OPERATIONS AND EXPENSES UNDER OUR CURRENT BUSINESS PLAN. THE COMPANY
IS ALSO HOLDING A CONSIDERABLE AMOUNT OF QUOTED EQUITY SECURITIES THAT IS
AVAILABLE-FOR-SALE OR HELD FOR TRADING.
The Company's liquidity and capital resources remain limited. There can be no
assurance that the Company's liquidity or capital resource position would allow
us to continue to pursue its current business strategy. The Company's quoted
equity securities held as assets are dependent on the market value. Any
fluctuations or downturn in the securities market could adversely affect the
value of these equity securities held. As a result, without achieving growth in
its business along the lines it has projected, it would have to alter its
business plan or further augment its cash flow position through cost reduction
measures, sales of assets, additional financings or a combination of these
actions. One or more of these actions would likely substantially diminish the
value of its common stock.
THE MARKET MAY NOT BROADLY ACCEPT THE COMPANY'S BROADBAND WEBSITES AND SERVICES,
WHICH WOULD PREVENT THE COMPANY FROM OPERATING PROFITABLY.
The Company must be able to achieve broad market acceptance for its Broadband
websites and services, at a price that provides an acceptable rate of return
relative to the Company-wide costs in order to operate profitably. There is no
assurance that the market will develop sufficiently to enable the Company to
operate its Broadband business profitably. Furthermore, there is no assurance
that any of the Company's services will become generally accepted, nor is there
any assurance that enough paying users and advertisers will ultimately be
obtained to enable us to operate these business profitably.
BROADBAND USERS MAY FAIL TO ADOPT THE COMPANY'S BROADBAND SERVICES.
The Company's Broadband services are targeted to the growing market of Broadband
users worldwide to deliver content and E-commerce in an efficient, economical
manner over the Broadband networks. The challenge is to make the Company's
business attractive to consumers, and ultimately, profitable. To do so has
required, and will require, the Company to invest significant amounts of cash
and other resources. There is no assurance that enough paying users and
advertisers will ultimately be obtained to enable the Company to operate the
business profitably.
FAILURE TO SIGNIFICANTLY INCREASE THE COMPANY'S USERS AND ADVERTISERS MAY RESULT
IN FAILURE TO ACHIEVE CRITICAL MASS AND REVENUE TO BUILD A SUCCESSFUL BUSINESS.
The Company incurs significant up-front costs in connection with the acquisition
of content, and bandwidth and network charges. The plan is to obtain recurring
revenues in the form of subscription and advertising fees to use the Broadband
services, either paid by the users or advertisers.
There is no assurance as to whether the Company will be able to maintain, or
whether and how quickly the Company will be able to increase its user base, or
whether the Company will be able to generate recurring subscription and
advertising fees to such a level that would enable this line of business to
continue to operate profitably. If the Company is not successful in these
endeavors, the Company could be required to revise its business model, exit or
reduce the scale of the business, or raise additional capital.
COMPETITION IN THE BROADBAND BUSINESS IS EXPECTED TO INCREASE, WHICH COULD CAUSE
THE BUSINESS TO FAIL.
The Company's Broadband services are targeted to the end user market. As the
Broadband penetration rates increase globally, an increasing number of
well-funded competitors have entered the market. Companies that compete with the
Company's business include telecommunications, cable, content management and
network delivery companies.
12
The Company may face increased competition as these competitors partner with
others or develop new Broadband websites and service offerings to expand the
functionality that they can offer to their customers. These competitors may,
over time, develop new technologies and acquire content that are perceived as
being more secure, effective or cost efficient than the Company. These
competitors could successfully garner a significant share of the market, to the
exclusion of the Company. Furthermore, increased competition could result in
pricing pressures, reduced margins, or the failure of the business to achieve or
maintain market acceptance, any one of which could harm the business.
THE INABILITY TO SUCCESSFULLY EXECUTE TIMELY DEVELOPMENT AND INTRODUCTION OF NEW
AND RELATED SERVICES AND TO IMPLEMENT TECHNOLOGICAL CHANGES COULD HARM THE
BUSINESS.
The evolving nature of the Broadband business requires the Company to
continually develop and introduce new and related services and to improve the
performance, features, and reliability of the existing services, particularly in
response to competitive offerings.
The Company has under development new features and services for its businesses.
The Company may also introduce new services. The success of new or enhanced
features and services depends on several factors - primarily market acceptance.
The Company may not succeed in developing and marketing new or enhanced features
and services that respond to competitive and technological developments and
changing customer needs. This could harm the business.
CAPACITY LIMITS ON THE COMPANY'S TECHNOLOGY AND NETWORK HARDWARE AND SOFTWARE
MAY BE DIFFICULT TO PROJECT, AND THE COMPANY MAY NOT BE ABLE TO EXPAND AND/OR
UPGRADE ITS SYSTEMS TO MEET INCREASED USE, WHICH WOULD RESULT IN REDUCED
REVENUES.
While the Company has ample through-put capacity to handle its customers'
requirements for the medium term, at some point it may be required to materially
expand and/or upgrade its technology and network hardware and software. The
Company may not be able to accurately project the rate of increase in usage of
its network. In addition, it may not be able to expand and/or upgrade its
systems and network hardware and software capabilities in a timely manner to
accommodate increased traffic on its network. If the Company does not
appropriately expand and/or upgrade our systems and network hardware and
software in a timely fashion, it may lose customers and revenues.
INTERRUPTIONS TO THE DATA CENTERS AND BROADBAND NETWORKS COULD DISRUPT BUSINESS,
AND NEGATIVELY IMPACT CUSTOMER DEMAND FOR THE COMPANY.
The Company's business depends on the uninterrupted operation at the data
centers and the broadband networks run by the various service providers. The
data centers may suffer for loss, damage, or interruption caused by fire, power
loss, telecommunications failure, or other events beyond the Company. Any damage
or failure that causes interruptions in the Company's operations could
materially harm business, financial conditions, and results of operations.
In addition, the Company's services depend on the efficient operation of the
Internet connections between customers and the data centers. The Company depends
on Internet service providers efficiently operating these connections. These
providers have experienced periodic operational problems or outages in the past.
Any of these problems or outages could adversely affect customer satisfaction
and customers could be reluctant to use our Internet related services.
THE COMPANY MAY NOT BE ABLE TO ACQUIRE NEW CONTENT, OR MAY HAVE TO DEFEND ITS
RIGHTS IN INTELLECTUAL PROPERTY OF THE CONTENT THAT IS USED FOR ITS SERVICES
WHICH COULD BE DISRUPTIVE AND EXPENSIVE TO ITS BUSINESS.
The Company may not be able to acquire new content, or may have to defend its
intellectual property rights or defend against claims that it is infringing the
rights of others, where its content rights are concerned. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us to develop non-infringing services or enter onto royalty or
licensing arrangements. Royalty or licensing arrangements, if required, may not
be obtainable on terms acceptable to the Company. The business could be
significantly harmed if the Company is not able to develop or license new
content. Furthermore, it is possible that others may license substantially
equivalent content, thus enabling them to effectively compete against us.
13
THE COMPANY DEPENDS ON KEY PERSONNEL.
The Company depends on the performance of its senior management team. Its
success depends on its ability to attract, retain, and motivate these
individuals. There are no binding agreements with any of its employees that
prevent them from leaving the Company at any time. There is competition for
these people. The loss of the services of any of the key employees or failure to
attract, retain, and motivate key employees could harm the business.
THE COMPANY RELIES ON THIRD PARTIES.
If critical services and products that the Company sources from third parties,
such as content and network services were to no longer be made available to the
Company or at a considerably higher price than it currently pays for them, and
suitable alternatives could not be found, the business could be harmed.
THE COMPANY COULD BE AFFECTED BY GOVERNMENT REGULATION.
The list of countries to which our solutions and services could not be exported
could be revised in the future. Furthermore, some countries may in future impose
restrictions on streaming of broadband contents and related services. Failure to
obtain the required governmental approvals would preclude the sale or use of
services in international markets and therefore, harm the Company's ability to
grow sales through expansion into international markets. While regulations in
almost all countries in which our business currently operates generally permit
the broadband services, such regulations in future may not be as favorable and
may impede our ability to develop business.
THE COMPANY COULD BE AFFECTED BY PIRACY IN ASIA.
The Company is in the process of expanding its services globally, and in
particular is entering specific countries in Asia with customized country sites.
These country sites are designated to suit viewership patterns and styles in the
countries they are launched in, and make use of the Company's content and
intellectual property rights to the content. The piracy of content is a
significant problem in many Asian countries, and it is not uncommon to see
movies and television dramas appearing on illegal internet sites, and sold as
pirated DVDs and VCDs. The extent of this piracy of content in the specific
countries that the Company is launching its sites will adversely affect to a
certain degree the amount of advertising and subscription revenues that the
Company intends to earn.
THE COMPANY COULD BE AFFECTED BY THE GLOBAL ECONOMIC DOWNTURN.
The global economy is undergoing a massive downturn in 2009, which commenced in
the second half of 2008. Many countries are faced with negative growth rates..
Where the media industry is concerned, major corporations have began to reduce
their advertising expenditures or even to cut back substantially all advertising
and promotional expenditures towards the later half of 2008. The Company is
heavily reliant on advertising and syndication revenues and expects to be
significantly affected in 2008 and 2009 by the downsizing in advertising spent,
especially in countries where the WOWtv service is expected to roll out.
14
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS:
Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT
Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 6, 2010 /s/ Leong Hin Chua
- ---------------- ---------------------------------------
Date President, Chief Executive Officer and
Acting Chief Financial Officer