UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report filed under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 2004
or
[ ] Transitional report filed under Section 13 or 15 (d) of the
Exchange Act.
Commission File No. 0-32695
Amaru, Inc.
-------------
(Name of Small Business Issuer in its Charter)
Nevada 88-0490089
-------- ------------
State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization
112 Middle Road, #08-01 Midland House, Singapore 188970
---------------------------------------------------------
(Address of principal executive office)
Issuer's telephone number: (011) (65) 6332 9287
--------------------
610 Newport Center Drive, Suite 1400, Newport Beach, Ca. 92660
---------------------------------------------------------------
Issuer's previous address
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) been
subject to such filing requirements for the past ninety (90) days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: As of October 11, 2004, there were
20,900,000 shares of Common Stock, par value $.001 per share outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
AMARU, INC. & SUBSIDIARY
FORM 10-QSB QUARTERLY REPORT
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Forward-Looking Statements
PART I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements about the business,
financial condition and prospects of the Company that reflect assumptions made
by management and management's beliefs based on information currently available
to it. We can give no assurance that the expectations indicated by such
forward-looking statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties underlying such
expectations should materialize, the Company's actual results may differ
materially from those indicated by the forward-looking statements.
The key factors that are not within the Company's control and that may have
a direct bearing on operating results include, but are not limited to, the
acceptance by customers of the Company's products and services, the Company's
ability to develop new products and services cost-effectively, the ability of
the Company to raise capital in the future, the development by competitors of
products or services using improved or alternative technology, the retention of
key employees and general economic conditions.
There may be other risks and circumstances that management is unable to
predict. When used in this Form 10-QSB, words such as, "believes," "expects,"
"intends," "plans," "anticipates" "estimates" and similar expressions are
intended to identify forward-looking statements, although there may be certain
forward-looking statements not accompanied by such expressions. All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMARU, INC. & SUBSIDIARY
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
TABLE OF CONTENTS
Balance Sheets 5
Statements of Operations 6
Statement of Stockholders' Equity 7
Statements of Cash Flows 8
Notes to Financial Statements 9
4
AMARU, INC. AND SUBSIDIARY
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30,
2004 DECEMBER 31,
(CONSOLIDATED) 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 61,260 $ 60,307
Accounts receivable 14,043 14,097
Other receivables 1,660 20,554
Prepaid expenses 5,263 33,758
------------ ------------
Total current assets 82,226 128,716
Non current assets
Property and equipment, net 15,542 18,866
Product development costs, net 212,125 297,402
Investment, at equity -- 1,403,493
License 2,420,227 --
Other 2,708 2,708
------------ ------------
Total non current assets 2,650,602 1,722,469
------------ ------------
Total assets $ 2,732,828 $ 1,851,185
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 57,993 $ 64,738
Accounts payable-related parties 530,260 423,444
Line of credit 52,591 58,188
Term loan current portion -- 5,007
Income tax payable 59,745 36,994
Advances from related parties 333,311 55,518
------------ ------------
Total current liabilities 1,033,900 643,889
Shareholders' equity
Series A convertible preferred stock (par value $0.001) 5,000,000
shares authorized: 143,000 and 0 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively 143 --
Common stock (par value $0.001) 200,000,000 shares authorized;
20,900,000 shares issued and outstanding at September 30, 2004
and 18,136,364 at December 31, 2003 20,900 18,136
Paid in capital 1,298,681 867,292
Subscribed common stock, 0 and 337,513 shares at September 30, 2004
and December 31, 2003, respectively -- 128,255
Retained earnings 333,411 160,696
Comprehensive gain on currency translation 45,793 32,917
------------ ------------
Total shareholders' equity 1,698,928 1,207,296
------------ ------------
Total liabilities and shareholders' equity $ 2,732,828 $ 1,851,185
============ ============
The accompanying notes to financial statements are an integral part of these statements
5
AMARU, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
---------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
(CONSOLIDATED) (CONSOLIDATED)
------------- ------------- ------------- -------------
Revenue:
Licensing and advertising (including $900,000
to a related party in the quarter ended
September 30, 2004 and $1,800,000 for the nine
months ended September 30, 2004) $ 2,997,479 $ 5,244 $ 901,163 $ 1,020
E-commerce 12,046 -- -- --
Subscription and related services 4,320 98 322 98
Other income 29,829 588 17,978 588
------------ ------------ ------------ ------------
Total revenue 3,043,674 5,930 919,463 1,706
Cost of services (includes $998,026 and $157,895
from a related party in the quarter ended September
30, 2004 and 2003 respectively. Includes $2,060,430
and $157,895 for the nine months ended September 30,
2004 and 2003, respectively) 2,134,188 184,939 1,013,327 175,308
------------- ------------- ------------- -------------
Gross profit (loss) 909,486 (179,009) (93,864) (173,602)
Distribution costs 229,125 8,411 15,709 3,806
Administrative expenses 345,886 149,928 118,889 50,969
------------- ------------- ------------- -------------
Total expenses 575,011 158,339 134,598 54,775
Income (loss) from operations 334,475 (337,348) (228,462) (228,377)
Other (income) expense:
Expenses related to public listing 89,494 -- 25,000 --
Finance expenses 1,713 2,816 768 1,003
Income taxes 70,553 -- (41,845) --
------------- ------------- ------------- -------------
Net income (loss) $ 172,715 $ (340,164) $ (212,385) $ (229,380)
============= ============= ============= =============
Earnings (loss) per share-basic and diluted $ 0.01 $ (0.02) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted average number of common shares
outstanding-basic and diluted 19,953,313 17,727,273 20,761,538 17,727,723
============= ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements
6
AMARU, INC. AND SUBSIDIARY
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Series A Convertible
Preferred Stock Common Stock
-------------------- -------------------
Total
Additional Currency share-
Number Par Value Number of Par value Paid-in Subscribed Retained Translation holders'
of Shares ($0.001) shares ($0.001) capital stock Earnings gain equity
----------------------------------------------------------------------------------------------------------
Balance
December 31, 2002 -- $ -- 17,727,273 $ 17,727 $ 753,701 $ 82,844 $ 121,166 $ (4,475) $ 970,963
Common stock
issued for cash -- -- 409,091 409 113,591 -- -- -- 114,000
Common stock
subscribed at
various dates -- -- -- -- -- 45,411 -- -- 45,411
Net income -- -- -- -- -- -- 39,530 -- 39,530
Comprehensive gain
on currency
translation -- -- -- -- -- -- -- 37,392 37,392
------------
Comprehensive income 76,922
-----------------------------------------------------------------------------------------------------------
Balance
December 31, 2003 -- -- 18,136,364 18,136 867,292 128,255 160,696 32,917 1,207,296
Shares issued
for cash
Feb. 10, 2004 -- -- 1,363,636 1,364 414,636 (128,255) -- -- 287,745
Reverse acquisition 143,000 143 500,000 500 (27,347) -- -- -- (26,704)
Stock issued
for services -- -- 900,000 900 44,100 -- -- -- 45,000
Net income -- -- -- -- -- -- 172,715 -- 172,715
Comprehensive gain
on currency
translation -- -- -- -- -- -- -- 12,876 12,876
-------------
Comprehensive income 185,591
-----------------------------------------------------------------------------------------------------------
Balance
September 30, 2004
(consolidated)
(Unaudited) 143,000 $ 143 20,900,000 $ 20,900 $1,298,681 $ -- $ 333,411 $45,793 $ 1,698,928
===========================================================================================================
The accompanying notes to financial statements are an integral part of these statements
7
AMARU, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30,
2004 SEPTEMBER 30,
(CONSOLIDATED) 2003
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 172,715 $ (340,165)
Adjustments to reconcile net income (loss)
Amortization 85,277 84,335
Depreciation 8,778 21,281
Fixed assets written off -- 7,414
Acquisition of license in exchange for account receivable (1,016,734) --
Common stock issued for services 45,000 --
Changes in operating assets and liabilities
Accounts receivable 54 (10,295)
Prepaid and other 47,389 1,648
Accounts payable and accrued expenses 100,071 158,623
Income tax payable 22,751 260
------------ ------------
Net cash used in operating activities (534,699) (76,899)
CASH USED IN INVESTING ACTIVITIES
Acquisition of equipment (5,454) --
------------ ------------
Net cash used in investing activities (5,454) --
CASH PROVIDED FROM FINANCING ACTIVITIES
Addition (payment) to related parties 277,793 30,011
Addition (payment) of line of credit and loans (10,604) 4,745
Re-capitalization of M2B World Pte. Ltd (26,704) --
Proceeds from sale of stock 287,745 38,368
------------ ------------
Net cash provided from financing activities 528,230 73,124
Effect of exchange rate changes on cash 12,876 4,566
------------ ------------
Cash flow from all activities 953 791
Cash and cash equivalents, beginning of period 60,307 57,700
------------ ------------
Cash and cash equivalents, end of period $ 61,260 $ 58,491
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,714 $ 2,816
============ ============
Income taxes $ 48,479 $ --
============ ============
The accompanying notes to financial statements are an integral part of these statements
8
AMARU, INC. & SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. BASIS OF PRESENTATION AND REORGANIZATION
-------------------------------------------
The financial information included herein is unaudited. However, such
information reflects all adjustments (consisting solely of normal
occurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The
results of operations for the nine months ended September 30, 2004, are
not necessarily indicative of the results to be expected for the full
year.
The accompanying financial statements do not include footnotes and
certain financial presentations normally required under generally
accepted accounting principles; and, therefore, should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2003, and Form 8-K/A-2, filed on October 19,
2004.
REORGANIZATION
--------------
As of February 25, 2004, an agreement was entered into which provides
for the reorganization of M2B World Pte. Ltd., a Singapore corporation
with and into Amaru, Inc. (Amaru), a Nevada corporation, with M2B World
Pte. Ltd. (M2B), becoming a wholly-owned subsidiary of Amaru. The
agreement is for the exchange of 100% of the outstanding Common Stock
of M2B World Pte. Ltd. for 19,500,000 common shares and 143,000 Series
A convertible preferred shares of Amaru, which are each convertible
into 38.461538 shares of Amaru common stock.
The exchange was accounted for as a reverse acquisition. Accordingly,
for financial statement purposes, M2B World Pte. Ltd. was considered
the accounting acquiror and the related business combination was
considered a recapitalization of M2B World Pte. Ltd. rather than an
acquisition by the Company. The historical financial statements prior
to the agreement will be those of M2B World Pte. Ltd. and the name of
the consolidated Company going forward will be Amaru, Inc. and
Subsidiary.
On this basis, the historical financial statements prior to February
28, 2004 have been restated to be those of the accounting acquirer M2B
World Pte. Ltd. The historical stockholders' equity prior to the
reverse acquisition has been retroactively restated (a
recapitalization) for the equivalent number of shares received in the
acquisition after giving effect to any difference in par value of the
issuer's and acquirer's stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period.
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.
9
CONCENTRATION OF CREDIT RISK
----------------------------
The credit risk is primarily attributable to the Company's trade
receivables. The credit risk on liquid funds is limited because the
counterparties are banks with high credit ratings assigned by
international credit-rating agencies. Licensing and advertising
revenues were concentrated with three customers totaling 100% of these
related revenues for the nine months ended September 30, 2004.
The Company's operations are conducted over the world wide web and some
Sales and purchases are made to and from locations outside of
Singapore. However all transactions are recorded in Singapore
CASH AND CASH EQUIVALENTS
-------------------------
Cash on hand, in banks and short-term deposits are held to maturity and
are carried at cost.
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.
For the purposes of the cash flow statement, cash and cash equivalents
consist of cash on hand and deposits in banks, net of outstanding bank
overdrafts.
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. Content syndication revenue is recognized as the content is
delivered. E-commerce commissions are recognized as received.
Broad-band consulting services and on-line turnkey solutions are
recognized as earned.
To date the Company has only had revenues from licensing and
advertising, E-commerce and subscriptions and related services.
COSTS OF SERVICES
-----------------
The cost of services pertaining to 1) advertising and sponsorship
revenue and 2) 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 are channel design and alteration, and hardware
hosting and maintenance costs. All these costs are accounted for in the
period incurred.
LICENSING RIGHTS
----------------
Licensing rights refers to the rights to use the content. These rights
are purchased for a specific period as determined in the contract. The
costs of these rights are recognized in the accounts over the life of
the contract on a straight line basis. These contents are then streamed
into the broad-band sites and the revenue earned from advertising,
sponsorship and subscription are then recognized according to our
policy on revenue.
TRADE AND OTHER RECEIVABLES
---------------------------
Trade receivables, which generally have 30 to 90 day terms, are
recognized and carried at the original invoice amount less an allowance
for any uncollectible amounts (if any). An estimate for doubtful debts
is made when collection of the full amount is no longer probable. Bad
debts are written off as incurred.
The Company has reviewed trade and other receivables and determined
that no allowance for doubtful accounts is required.
10
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost. Expenditures for major
improvements are capitalized, while replacements, maintenance and
repairs, which do not significantly improve or extend the useful life
of the asset, are expensed when incurred.
Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets,
which is three to five years.
PRODUCT DEVELOPMENT
-------------------
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. The Company projects that these
development costs will be useful for up to five years before additional
significant development needs to be done
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
The Company reviews the carrying values of its long-lived and
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. No impairment losses were recorded in the nine months
ended September 30, 2004 and the year 2003.
INVESTMENTS
-----------
Investments in unconsolidated subsidiaries in which the Company has a
20% to 50% interest or otherwise exercises significant influence are
carried at cost, adjusted for the Company's proportionate share of
their undistributed earnings or losses.
ADVANCES FROM PARENT
--------------------
Advances from parent are unsecured, non-interest bearing and carry no
fixed terms of repayment.
FOREIGN CURRENCY TRANSLATION
----------------------------
Transactions in foreign currencies are measured and recorded in the
functional currency Singapore dollars using the exchange rate in effect
at the date of the transaction. The reporting currency is U.S. dollars.
At each 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 are reflected in operations.
ADVERTISING
-----------
The cost of advertising is expensed as incurred. For the quarter and
the nine months ended September 30, 2004 the company incurred
advertising expenses of $2,777 and $203,482 respectively.
INCOME TAXES
------------
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
11
EARNINGS(LOSS) PER SHARE
------------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS 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.
FINANCIAL INSTRUMENTS
---------------------
The carrying amounts for the Company's cash, other current assets,
accounts payable, accrued expenses, notes payable, and other
liabilities approximate their fair value.
RECLASSIFICATIONS
-----------------
Certain amounts in the prior periods presented have been reclassified
to conform to the current periods financial statement presentation.
3. PROPERTY AND EQUIPMENT
-------------------------
Property and equipment consist of the following:
December 31, September 30,
2003 2004
------------ ------------
Office equipment $ 58,857 $ 64,145
Furniture, fixture and fittings 396 562
------------ ------------
59,253 64,707
Accumulated depreciation (40,387) (49,165)
------------ ------------
$ 18,866 $ 15,542
============ ============
Depreciation expense was $24,689 the year ended December 31, 2003 and
$8,778 for the nine months ended September 30, 2004.
4. PRODUCT DEVELOPMENT
----------------------
Product development consists of the following:
December 31, September 30,
2003 2004
------------ ------------
Development expenditures $ 595,413 $ 595,413
Accumulated amortization (298,011) (383,288)
------------ ------------
$ 297,402 $ 212,125
============ ============
Amortization expense was $115,914 for the year ended December 31, 2003
and $85,277 for the nine months ended September 30, 2004.
5. INVESTMENT AT EQUITY
-----------------------
CRE8 IP&P held the license to operate an E-commerce platform in
Singapore as well as the first right of refusal in various Asian
countries. The company had not commenced operations when it was
acquired by M2B World.
12
In December 2003, M2B World acquired 50% of CRE8 IP&P in exchange for
account receivable from CRE8 IP&P's parent, CRE8 International. Since
M2B World did not have control over the license for Singapore, it
recorded the acquisition as an investment at cost at December 31, 2003.
The company gained control of CRE8 IP&P in January 2004 when they
acquired the remaining 50% of the company in exchange for account
receivable from CRE8 IP&P's parent, CRE8 International and obtained
complete control over the license acquired. The basis of the license
has been recorded at the Company's acquisition purchase price in
accordance with the "Push Down" accounting as required by SAB No 54.
The Subsidiary had no activities or operations during the period. The
Company plans to start up the Subsidiary operation in the fourth
quarter of 2004 or the first quarter of 2005.
6. LINE OF CREDIT
-----------------
The Company has a $118,343 line of credit, repayable on demand, used to
fund the Group's short-term working capital requirements. The line of
credit bears interest at prime lending rate plus 1% per annum (6% at
December 31, 2003). This loan is secured by a certificate of deposit of
$60,189 and a personal guarantee of a director. Interest is payable
monthly. The outstanding balance was $52,591 at September 30, 2004.
7. COMMITMENTS AND CONTINGENCIES
--------------------------------
LEASES
------
The Company leases its office space under a one year operating lease
which expires in February 2005 with a monthly payment of $1,856. Rent
expense totaled $10,344 for the year ended December 31, 2003 and
$13,029 for the nine months ended September 30, 2004
Future minimum lease payments due are as follows for the years ended
December 31:
2004 $ 5,568
2005 3,712
------------
$ 9,280
============
8. CAPITAL STOCK
----------------
COMMON STOCK
------------
On February 10, 2004 the M2B issued 1,363,636 shares of $0.31 par value
Series D common stock for a total cash capital contribution of $416,000
prior to the reverse acquisition.
On July 13, 2004, the Company issued 900,000 shares of common stock for
services valued at $45,000.
13
9. INCOME TAXES
---------------
The Company files separate tax returns for Singapore and the United
States of America. Reconciliation of the differences between the
statutory tax and the effective income tax are as follows:
For the nine months ended
----------------------------
September 30, September 30,
2004 2003
------------- -------------
U.S. Federal statutory tax (20.9%) -%
U.S. State taxes, net of federal tax -% -%
Foreign statutory tax rate 20.0% (22.0%)
Valuation allowance 20.9% 22.0%
------------- -------------
Effective income tax rate 20.0% -%
============= =============
For the three months ended
----------------------------
September 30, September 30,
2004 2003
------------- -------------
U.S. Federal statutory tax (30.2%) -%
U.S. State taxes, net of federal tax -% -%
Foreign statutory tax rate 20.0% (22.0%)
Valuation allowance 30.2% 22.0%
------------- -------------
Effective income tax rate 20.0% -%
============= =============
The components of income tax expense consist of the following:
For the nine months ended
----------------------------
September 30, September 30,
2004 2003
------------- -------------
Current:
Federal $ 18,678 $ --
State -- --
Foreign 70,553 --
Valuation allowance (18,678) --
------------- -------------
$ 70,553 $ --
============= =============
For the three months ended
----------------------------
September 30, September 30,
2004 2003
------------- -------------
Current:
Federal $ (7,555) $ --
State -- --
Foreign (41,845) --
Valuation allowance 7,555 --
------------- -------------
$ (41,845) $ --
============= =============
The Company operated primarily in Singapore and incurred no United
States federal or state income taxes as of September 30, 2004 and 2003.
The Company had no significant deferred tax assets or liabilities as of
September 30, 2004 and 2003.
14
The Company had available approximately $89,500 of unused Federal net
operating loss carry-forwards at September 30, 2004, that may be
applied against future taxable income. These net operating loss
carry-forwards expire for Federal purposes in 2024. There is no
assurance that 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. At September 30, 2004, a valuation allowance for the
full amount of the net deferred tax asset was established due to the
uncertainties as to the amount of the taxable income that would be
10. RELATED PARTY TRANSACTIONS
------------------------------
During the nine months ended September 30, 2004 the Company purchased
services from a related party in the amount of $2,060,430 and had sales
to the same related party in the amount of $1,800,000.
11. SUBSEQUENT EVENT
--------------------
As of October 25, 2004, a total of 143,000 shares of Series A
Convertible Preferred Stock was converted into 5,500,000 shares of
common stock of Amaru, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
As of February 25, 2004 (the "Closing Date"), Amaru, Inc. (the "Company")
acquired M2B World Pte Ltd., a Singapore corporation ("M2B World") in exchange
for 19,500,000 newly issued "restricted" shares of common voting stock of the
Company and 143,000 "restricted" Series A Convertible Preferred Stock shares to
the M2B World shareholders on a pro rata basis for the purpose of effecting a
tax-free reorganization pursuant to sections 351, 354 and 368(a)(1)(B) of the
Internal Revenue Code of 1986, as amended ("IRC") pursuant to the Agreement and
Plan of Reorganization (the "Reorganization Agreement") by and between the
Company, M2B World and M2B World shareholders. As a condition of the closing of
the share exchange transaction, certain shareholders of the Company cancelled a
total of 1,457,500 shares of common stock. Each one (1) ordinary share of M2B
World has been exchanged for 1.3636363 shares of the Company's Common Stock and
100 shares of the Company's Series A Convertible Preferred Stock. Each share of
newly issued Company's Series A Convertible Preferred Stock can be converted to
38.461538 shares of the Company's common stock. Following the Closing Date,
there were 20,000,000 shares of the Company's Common Stock outstanding and
143,000 shares of the Company's Series A Convertible Preferred Stock
outstanding. Immediately prior to the Closing, there were 500,000 shares issued
and outstanding.
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M2B World is in the business of broadband entertainment and education-on-demand,
streaming via computers, television sets, PDAs (Personal Digital Assistant) and
in the near future through 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 and E-commerce.
The restructuring and re-capitalization has been treated as a reverse
acquisition with M2B World becoming the accounting acquirer. The historical
financial statements prior to the closing of the transaction are those of M2B
World.
The following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
RESULTS OF OPERATIONS
---------------------
For the three months and nine months ended September 30, 2004 compared with
three months and nine months ended September 30, 2003
OVERVIEW
The key business focus of M2B is to establish itself as the leading provider and
creator of a new generation of Entertainment-on-Demand, Education-on-Demand and
E-Commerce Channels on Broadband, and 3G (Third Generation) devices.
M2B owns exclusive rights in the broadband media for various content. M2B will
apply broadband technologies to facilitate its growth in the broadband and
internet sector.
Broadband technology is high speed, high-bandwidth two-way data, voice and video
communications, delivered at high transmission rates up to 12 Mbps. This will
encompass:
o Digital Subscriber Line (DSL) technology for delivery into computers
o Set-top box technology for delivery into TV screens
o Wireless technology for delivery into PDAs and 3G hand phones
The immediate plan of M2B in the next three years is to launch high impact, rich
media, entertainment and education content channels globally over the broadband
and 3G, comprising:
o On-line "Television" on subscription basis - Broadband access premium
sites
o Advertising and Sponsorship - supporting the online broadband
subscription sites
o On-line shopping malls - E-commerce platforms, and alongside the
broadband sites, on an interactive basis.
M2B's broadband sites will consist of:
o ENTERTAINMENT SITES (CURRENT)
Music, movies, glamour and fashion, lifestyle (hobbies, cooking,
personalities), documentaries, sports, health and fitness, and others.
o EDUCATION SITES
o BUSINESS AND CORPORATE TRAINING (CURRENT)
Management skills, communication skills, decision making, customer
services and sales, motivation, presentation and writing skills,
counseling and others.
o SCHOOL LEARNING CURRICULUMS (FUTURE)
o HEALTH AND WELLNESS (FUTURE)
For the broadband, M2B delivers both wire and wireless solutions, streaming via
computers, TV sets, PDAs and 3G hand phones.
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At the same time M2B launches e-commerce channels (portals) that provide on-line
shopping but with a difference, merging two leisure activities of shopping and
entertainment, delivering the ultimate on-line experience. The entertainment
channels will drive and promote the shopping portals, and vice versa. M2B World
has a wholly owned subsidiary, M2B Commerce Limited, registered in the British
Virgin Islands. M2B World intends to consolidate all its e-commerce operations
and possibly launch new e-bay initiatives under M2B Commerce Limited towards the
last quarter of 2004 and the first quarter of 2005.
M2B World has built and installed its broadband streaming system complete with
firewalls, load balancing, bandwidth and consumer monitoring systems, video
treaming, video storage and web servers in Singapore.
M2B World has a joint venture with FSBM Holdings Berhad (formerly known as
Fujitsu System Business Malaysia Berhad) in Malaysia. The company is registered
in Malaysia as FSBM M2B Sdn Bhd. The joint venture has been given pioneer shares
in Malaysia, and its incentives include an investment tax allowance of up to
five years. The joint venture serves as the production base for M2B, having
digital post-production suites for content production and repurposing.
M2B World has currently developed its streaming applications to stream into
television sets, through a copper wire or telephone cable and via a set top box.
Testing of set top boxes was successfully completed in 2003.
M2B had developed a capability to stream wireless broadband and have its own
digitized entertainment sites for wireless broadband applications. By the end of
2004, the management believes that M2B will be ready to launch its broadband
content sites in the modified form for the 2.75/3G hand phones.
BUSINESS MODEL
The business model in the area of broadband entertainment, education and
services is to provide the company with multiple streams of revenue; from
channel and program sponsorship (advertising and branding); on-line
subscriptions; channel/portal development (digital programming services);
content aggregation and syndication; broadband consulting services; on-line
shopping turnkey solutions; E-commerce commissions and on-line dealerships.
REVENUE
Revenues for the nine months ended September 30, 2004 increased to $3,043,674
from $5,930 for the nine months ended September 30, 2003. The increase of
$3,037,744 resulted primarily from advertising and content syndication arising
out of the launch of newly enhanced broadband sites. The company's process of
constructing and enhancing its broadband sites resulted in additional
advertising revenue of $901,163 for the three months ended September 30, 2004
compared to $1,020 for the three months ended September 30, 2003.
In the first three quarters of 2003, the company concentrated on enhancing its
existing broadband content and e-commerce sites, with better design and content
mix. Hence no or little revenue was earned in the nine months ended September
30, 2003.
Beginning August, September and the last quarter of 2003, the company launched
new broadband sites in US and Singapore. These sites included Chinese
entertainment sites as well as business and corporate training sites, in the US
and Singapore. One more new movie site was also launched in Singapore.
These enhancements to the existing broadband sites, and the launch of the new
broadband sites as highlighted above, saw the first reasonably significant
revenues from advertising and content syndication materializing in the last
quarter of 2003.
By September 2004, the company had secured substantial advertising revenue as it
sought to grow its subscription and e-commerce revenues. The company acquired
licensing rights to content to increase its advertising revenues, and provide it
with a rich content platform to begin securing subscription revenues in the near
future. At the same time the company increased its marketing efforts by taking
up online advertising of its broadband sites.
The company enhanced its fashion and glamour site. This international glamour
and fashion site, the US business and corporate training site and three other
international sites attracted the bulk of the advertising revenues.
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COST OF SALES
The cost of sales for the nine months ended September 30, 2004 increased to
$2,134,188 from $184,939 in the nine months ended September 30, 2003. The
increase of $1,949,249 was due primarily to the acquisition of contents license
rights for the broadband sites.
The cost of sales incurred for the three months ended September 30, 2004
accounted for $1,013,327 compared to $175,308 for the three months ended
September 30, 2003. For the nine months ended September 30, 2003 and the quarter
ended September 30, 2003, no new acquisition of contents was undertaken, as the
broadband sites were still in the process of enhancements and redesign.
DISTRIBUTION EXPENSES
Distribution expenses for the nine months ended September 30, 2004 increased to
$229,125 from $8,411 in the nine months ended September 30, 2003. The
significant increase was due mainly to the marketing and promotion of the
broadband sites on an international basis in 2004. The main increase in
distribution expenses over the nine months period ended September 2004 was in
the three months from April to June 2004. The amount incurred of $204,443 in
these three months accounted for 89% of the distribution costs of $229,125
incurred in the nine months ended September 2004.
Distribution expenses increased by an insignificant amount of $11,903 from the
three months ended September 2003 of $3,806 to $15,709 for the three months
ended September 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September 30, 2004
increased to $345,886 from $149,928 for the nine months ended September 30,
2003. The increase of $195,958 resulted primarily from legal and other
professional fees paid in the nine months ended September 30, 2004. The company
incurred additional administrative fees of $118,889 in the three months ended
September 30, 2004 compared to $50,969 for the three months ended September 30,
2003. The high legal and other professional fees incurred in the nine months
ended September 30, 2004 was due to the compliance required of a publicly listed
company. These expenses were not incurred for the nine months ended September
30, 2003 since the Company was not reporting during the period then ended.
OPERATING INCOME
For the nine months ended September 30, 2004, the profit from income was
$334,475 which increased by $671,823 from a loss of ($337,348) for the nine
months ended September 30, 2003. For the three months ended September 30, 2004
the company incurred a loss of ($228,462)as compared to a loss of ($228,377) in
the three months ended September 30, 2003. The loss was attributed to the cost
of acquisition of content license rights, marketing and promotion of the
broadband sites, and legal and professional fees incurred primarily for
complying with the requirements of a publicly listed company. The profit from
the three months from January to March 2004 more than offset the loss in the
next six months from April to September 2004 resulting in a profit for the nine
months ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The company had cash at $61,260 at September 30 2004 as compared to cash of
$58,491 at September 30, 2003.
The company believes that cash generated from its operations will be able to
cover its daily running cost and overheads.
Cash generated from operations will not be able to cover the company's intended
growth and expansion. The company has plans in 2004 to expand its broadband
coverage by launching new broadband sites in North America and Europe.
In North America, the company intends to launch new broadband entertainment and
business training content sites in 2004. As of September 2004, one new
entertainment site and one new business training site had been launched in North
America. In Asia, one new business training site had been launched in 2004. At
least one new broadband entertainment site is also planned for launching
streaming content on a world wide scale in the last quarter of 2004. In the area
of E-commerce, the company plans to launch one new shopping mall for health and
wellness products online.
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The company has completed its prototype content for 3G (third generations)
mobile phones. The company is working with telecommunication companies and
mobile operators on the possibility of launching this new content in the later
half of 2004 or first quarter of 2005.
To achieve its plans, the company is seeking to fund its new growth activities
through equity financing. The company plans to use the proceeds of such
financing for expansion of its operations.
In the nine months ended September 30, 2004 the company raised US $287,745 of
equity financing to fund its growth activities. Such funds were raised prior to
the acquisition by Amaru, Inc.
INVESTMENTS
The company has investments in the following companies:
(a) M2B Commerce Limited, a wholly owned subsidiary of M2B World Pte Ltd,
registered in the British Virgin Islands.
(b) FSBM M2B Sdn Bhd, a company registered in Malaysia of which M2B World owns
a 9.76% equity stake in the company.
NEW CONTRACTS
The company has entered into three significant contracts in the last six months,
namely:
(a) The provision of four broadband entertainment channels for an exclusive
high megabit broadband service of one of the major Telecommunication
companies in Asia. Roll up of the four new broadband channels is expected
by year end 2004.
(b) The acquisition of an on-line games franchise in six countries with an
on-line games company in Asia. The company will enter the on-line games
market to enhance its entertainment sites on the broadband. The company
expects to launch the first of these on- line games sites by the last
quarter of 2004, or early 2005. The transaction is being finalized.
(c) The launch of an international fashion and glamour site with an on-line
games company in Asia.
In additional, the company signed two other contracts with a Korean company for
the distribution of set-top boxes worldwide, and supply of content. The company
intends to enhance its broadband entertainment services by allowing its viewers
to have the option of watching its content via the television sets.
ITEM 3. Controls and Procedures
Our President and Treasurer/Chief Financial Officer (the "Certifying Officer")
is responsible for establishing and maintaining disclosure controls and
procedures and internal controls and procedures for financial reporting for the
Company. The Certifying Officer has designed such disclosure controls and
procedures and internal controls and procedures for financial reporting to
ensure that material information is made known to him, particularly during the
period in which this report was prepared. The Certifying Officer has evaluated
the effectiveness of the Company's disclosure controls and procedures and
internal controls and procedures for financial reporting as of September 30,
2004 and believes that the Company's disclosure controls and procedures and
internal controls and procedures for financial reporting are effective based on
the required evaluation. There have been no significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 1. Legal proceedings
No disclosures are required pursuant to Item 103 of Regulation S-B, taking into
account Instruction 1 to that Item.
Item 2. Changes in securities and use of proceeds
As of October 25, 2004, a total of 143,000 shares of Series A
Convertible Preferred Stock was converted into 5,500,000 shares of
common stock of Amaru, Inc.
Item 3. Defaults on senior securities NONE
Item 4. Submission of items to a vote NONE
Item 5. Other information NONE
Item 6.
a) Exhibits
--------
Exhibit No. Description
----------- -----------
Exhibit 31 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT
Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT
b) Reports on 8-K during the quarter: NONE.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMARU, INC.
Date: November 3, 2004
By /s/ Colin Binny
--------------------------------------------
President
By /s/ Francis Foong Keong Kwong
--------------------------------------------
Chief Financial Officer
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