UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB/A (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2006 ( ) Transition report pursuant of Section 13 or 15(d) of the Securities Exchange Act of 1939 for the transition period ____ to______ COMMISSION FILE NUMBER 000-32695 AMARU, INC. (Exact name of registrant as specified in its charter) Nevada 88-0490089 --------------------------------------------- --------------------------------- (State or other jurisdiction of incorporation (IRS Employer Identification No.) incorporation or organization) 112 Middle Road, #08-01 Midland House, Singapore 188970 (011) (65) 6332 9287 -------------------------------------------------------------------------------- (Address of Principal Executive Offices, including Registrant's zip code and telephone number) 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 shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] The number of shares of the registrant's common stock as of August 11, 2006: 153,598,528 shares. The only amendment to this report is being made on the cover page by the statement referred to above and marked as revised. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements F-1 (a) Consolidated Balance Sheets F-2 (b) Consolidated Statements of Operations F-3 (c) Consolidated Statement of Shareholders' Equity F-4 (d) Consolidated Statements of Cash Flows F-5 (e) Notes to Consolidated Financial Statements F-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1 Item 3. Controls and Procedures 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 8 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8 Item 3. Defaults Upon Senior Securities 8 Item 4. Submission of Items to a Vote 8 Item 5. Other Information 8 Item 6. Exhibits and Reports on Form 8K 8 SIGNATURES AND CERTIFICATES 9 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements TABLE OF CONTENTS Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statement of Changes in Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 F-1 AMARU, INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, DECEMBER 31, 2006 2005 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,048,949 $ 4,776,819 Accounts receivable 486,064 842,371 Other receivable 17,528 -- Deposit for an investment 1,852,613 -- Prepayment to a supplier 1,098,000 -- Other current assets 790,013 247,566 ----------- ----------- Total current assets 10,293,167 5,866,756 NON CURRENT ASSETS Property and equipment, net 19,679,396 5,264,130 Product development, net 27,765 60,616 Investment at cost 879,664 441,206 Investments available for sale 2,147,580 2,147,580 License, net 9,224,392 6,964,671 ----------- ----------- Total non current assets 31,958,797 14,878,203 ----------- ----------- Total assets $42,251,964 $20,744,959 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,217,027 $ 656,484 Advances from related parties -- 58,392 ----------- ----------- Total current liabilities 1,217,027 714,876 NON-CURRENT LIABILITIES Deferred tax liability 91,291 157,756 ----------- ----------- Total liabilities 1,308,318 872,632 Commitments -- -- SHAREHOLDERS' EQUITY Preferred stock (par value $0.001) 5,000,000 shares authorized: 0 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively -- -- Common stock (par value $0.001) 200,000,000 shares authorized; 153,478,360 and 125,591,120 shares issued and outstanding at June 30, 2006 and December 31, 2005 respectively 153,478 125,591 Paid-in capital 38,722,403 14,642,550 Subscribed common stock, 0 and 5,675,840 shares at June 30, 2006 and December 31, 2005 respectively -- 4,256,880 Retained earnings 2,054,838 834,379 Comprehensive gain on currency translation 12,927 12,927 ----------- ----------- Total shareholders' equity 40,943,646 19,872,327 ----------- ----------- Total liabilities and shareholders' equity $42,251,964 $20,744,959 =========== =========== The accompanying notes form an integral part of these financial statements. F-2 AMARU, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED ------------------------------ ------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2006 2005 2006 2005 ------------- ------------- ------------- ------------- Revenue: Entertainment $ 3,215,479 $ 2,771,267 $ 2,212,822 $ 1,368,571 Digit gaming 11,094,343 1,964,491 5,220,649 1,964,491 Other income 1,144 941 358 414 ------------- ------------- ------------- ------------- Total revenue 14,310,966 4,736,699 7,433,829 3,333,476 Cost of services (10,973,303) (3,717,913) (5,184,910) (2,839,899) ------------- ------------- ------------- ------------- Gross profit 3,337,663 1,018,786 2,248,919 493,577 Distribution costs (559,529) (200,470) (312,095) (141,109) Administrative expenses (1,682,011) (619,407) (1,048,334) (393,356) ------------- ------------- ------------- ------------- Total expenses (2,241,540) (819,877) (1,360,429) (534,465) ------------- ------------- ------------- ------------- Income (Loss) from operations 1,096,123 198,909 888,490 (40,888) Other income: Interest received 57,871 1,081 40,289 1,081 ------------- ------------- ------------- ------------- Income (Loss) before income taxes 1,153,994 199,990 928,779 (39,807) Benefit (Provision) for Income taxes 66,465 (1,244) (8,576) 66,228 ------------- ------------- ------------- ------------- Net income $ 1,220,459 $ 198,746 $ 920,203 $ 26,421 ============= ============= ============= ============= Earnings per share - basic and diluted $ 0.009 $ 0.002 $ 0.006 $ 0.000 ============= ============= ============= ============= Weighted average number of common shares outstanding - basic and diluted 142,983,737 112,092,088 151,100,426 115,211,736 ============= ============= ============= ============= The accompanying notes form an integral part of these financial statements. F-3 AMARU, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) PREFERRED STOCK COMMON STOCK -------------------- --------------- NUMBER ADDITIONAL TOTAL OF PAR VALUE NUMBER OF PAR VALUE PAID-IN SUBSCRIBED RETAINED TRANSLATION SHAREHOLDERS' SHARES ($0.001) SHARES ($0.001) CAPITAL STOCK EARNINGS GAIN EQUITY ------ ------- ----------- --------- ------------ ------------ ------------ ---------- ------------ Balance at December 31, 2004 -- $ -- 108,800,000 $ 108,800 $ 2,851,151 -- $ 667,634 $ 9,188 $ 3,636,773 Common stock issued for cash -- -- 16,132,000 16,132 11,297,719 -- -- -- 11,313,851 Common stock issued for repayment of account payable -- -- 580,000 580 434,420 -- -- -- 435,000 Stock issued for services -- -- 79,120 79 59,260 -- -- -- 59,339 Common stock subscribed for cash (5,520,000 shares) -- -- -- -- -- 4,140,000 -- -- 4,140,000 Common stock subscribed for services (155,840 shares) -- -- -- -- -- 116,880 -- -- 116,880 Net income -- -- -- -- -- -- 166,745 -- 166,745 Comprehensive gain on currency translation -- -- -- -- -- -- -- 3,739 3,739 ------------ Comprehensive income -- -- -- -- -- -- -- -- 170,484 ---- ----- ----------- --------- ------------ ------------ ------------ ---------- ------------ Balance at December 31, 2005 -- -- 125,591,120 125,591 14,642,550 4,256,880 834,379 12,927 19,872,327 Common stock issued for cash -- -- 15,219,400 15,219 11,095,641 -- -- -- 11,110,860 Subscribed common stock issued -- -- 5,675,840 5,676 4,251,204 (4,256,880) -- -- -- Common stock issued in exchange for acquisition of film library -- -- 6,992,000 6,992 8,733,008 -- -- -- 8,740,000 Net income -- -- -- -- -- -- 1,220,459 -- 1,220,459 Comprehensive gain on currency -- -- -- -- -- -- -- -- -- translation ------------ Comprehensive income -- -- -- -- -- -- -- -- 1,220,459 ---- ----- ----------- --------- ------------ ------------ ------------ ---------- ------------ Balance at June 30, 2006 -- $ -- 153,478,360 $ 153,478 $ 38,722,403 $ -- $ 2,054,838 $ 12,927 $ 40,943,646 ==== ===== =========== ========= ============ ============ ============ ========== ============ The accompanying notes form an integral part of these financial statements. F-4 AMARU, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED ---------------------------- JUNE 30, JUNE 30, 2006 2005 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,220,459 $ 198,746 Adjustments to reconcile net income to cash and cash equivalents used or provided by operations: Amortization 173,130 104,815 Depreciation 231,058 26,393 Changes in operation assets and liabilities Accounts receivable 356,307 (582,330) Other receivables (17,528) 680,737 Other current assets (1,640,447) (90,577) Accounts payable and accrued expenses 494,078 250,338 ------------ ------------ Net cash generated from operating activities 817,057 588,122 CASH FLOWS FROM INVESTING ACTIVITIES Software development reduction -- (17,460) Acquisition of equipment (5,906,324) (2,665,664) Acquisition of license (2,400,000) (3,905,000) Acquisition of investments (438,458) (145,431) Deposit paid for an investment (1,852,613) -- ------------ ------------ Net cash used in investing activities (10,597,395) (6,733,555) CASH FLOWS FROM FINANCING ACTIVITIES Payable to related party (58,392) (72,892) Issuance of common stock for cash 11,110,860 6,749,500 ------------ ------------ Net cash provided by financing activities 11,052,468 6,676,608 Effect of exchange rate changes on cash and cash equivalents -- 3,739 ------------ ------------ CASH FLOWS FROM ALL ACTIVITIES 1,272,130 534,914 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,776,819 644,319 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD 6,048,949 1,179,233 ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: Common stock in exchange for repayment of accounts payable $ -- $ 435,000 Common stock in exchange for acquisition of film library $ 8,740,000 $ -- Subscribed common stock issued $ 4,256,880 $ -- ============ ============ The accompanying notes form an integral part of these financial statements. F-5 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 1 BASIS OF PRESENTATION AND REORGANIZATION 1.1 Description of Business Amaru, Inc. (the "Company") through its subsidiaries under the M2B brand is in the Broadband Media Entertainment business, and a provider of interactive Entertainment-on-demand, Education-on-demand and E-commerce streaming over Broadband channels, Internet portals and Third-Generation (3G) devices globally. It has launched multiple Broadband TV and integrated shopping websites with over 100 channels of content designed and programmed to target specific viewer profiles and lifestyles of local and international audiences. The Company controls substantial content libraries for aggregation, distribution and syndication on Broadband and other media, sourced from Hollywood and major content providers around the world. The Company's business strategy is to be a diversified media company specializing in the interactive media industry, using the latest broadband, E-Commerce and communications technologies and access to international content and programming. The Company's goal is to provide on-line entertainment and education on-demand on Broadband channels, Internet portals, 3G devices and TV set-top boxes across the globe; for specific and identified viewer lifestyles, demographics and interests; and to tie the viewing experience to an on-line shopping experience. This is to enable two leisure activities to be rolled into one for the ultimate convenience and reaching out to a global viewing audience. 1.2 Reorganization As of February 25, 2004, an agreement was entered into which provided 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. According to the agreement, there was an 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 were 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 Subsidiaries. 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. 1.3 Basis of Presentation The financial statements included herein are unaudited. However, such information reflects all adjustments (consisting solely of normal occurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the six months ended June 30, 2006, are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements do not include footnote and certain financial presentation normally required under generally accepted accounting principles, and, therefore, should be read in conjunction with the Company's Annual report on Form 10-KSB for the year ended December 31, 2005. F-6 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Principles of Consolidation The consolidated financial statements reflect the accounts of Amaru, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. 2.2 Use of Estimates The preparation of consolidated 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 at the date of the financial statements 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. 2.3 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 four customers totalling 100% of these related revenues for the six months ended June 30, 2006 and three customers totaling 100% of these related revenues for the six months ended June 30, 2005. The Company's operations are conducted over the world wide web and some purchases are made from locations outside of U.S. FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED ------------------------- -------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2006 2005 2006 2005 ---------- ---------- ---------- ----------- Sales outside of U.S $14,310,996 $ 4,736,699 $ 7,433,829 $ 3,333,476 Services purchased outside of U.S $10,957,064 $ 3,714,828 $ 5,183,218 $ 2,836,814 2.4 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 cash flow statement, cash and cash equivalents consist of cash on hand and deposits in banks, net of outstanding bank overdrafts. F-7 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 2.5 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 are recognized as earned. 2.6 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 incurred. 2.7 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 broadband sites and the revenue earned from advertising, sponsorship and subscription are then recognized according to our policy on revenue. 2.8 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. 2.9 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. The film library rights which were purchased for a specific period are stated at cost and are amortized over the period of the contract, which is two to ten years. The film library rights which were purchased and have indefinite lives are not being amortized and are stated at cost. 2.10 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. F-8 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 2.11 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 for the six months ended June 30, 2006 and 2005. 2.12 Advances from Related Party Advances from related party are unsecured, non-interest bearing and payable on demand. 2.13 Foreign Currency Translation Transactions in foreign currencies are measured and recorded in the functional currency U.S. dollars, using the Company's prevailing month exchange rate. The Company's reporting currency is also in U.S. dollars. At balance sheet date, recorded monetary balances that are denominated in a foreign currency are adjusted to reflect the rate at the balance sheet date and the income statement accounts using the average exchange rates throughout the period. Translation gains and losses are recorded in stockholders' equity as other comprehensive income and realized gains and losses from foreign currency transactions are reflected in operations. 2.14 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"). There are no investments classified as trading or held-to-maturity as of June 30, 2006 and December 31, 2005. 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. 2.15 Advertising The cost of advertising is expensed as incurred. For the six months ended June 30, 2006 and 2005, the Company incurred advertising expenses of $421,831 and $99,344 respectively. For the three months ended June 30, 2006 and 2005, the Company incurred $231,701 and $79,200 of advertising expenses respectively. 2.16 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. F-9 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 2.17 Earnings Per Share In February 1997, the Financial Accounting Standards Board (FASB) issued FAS No. 128 "Earnings Per Share" which requires the Company to present basic and diluted earnings per share, for all periods presented. The computation of earnings per common share (basic and diluted) is based on the weighted average number of shares actually outstanding during the period. The Company has no common stock equivalents, which would dilute earnings per share. 2.18 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. 2.19 Reclassifications Certain amounts in the previous periods presented have been reclassified to conform to the current period's financial statement presentation. 3 PROPERTY AND EQUIPMENT Property and equipment consist of the following: JUNE 30, DECEMBER 31, 2006 2005 ------------ ------------ Office equipment $ 567,477 $ 431,791 Film Library 19,392,573 4,905,066 Motor vehicle 11,000 11,000 Furniture, fixture and fittings 119,632 96,501 ------------ ------------ 20,090,682 5,444,358 Accumulated depreciation (411,286) (180,228) ------------ ------------ $ 19,679,396 $ 5,264,130 ============ ============ Depreciation expense was $231,058 for the six months ended June 30, 2006 and $26,393 for the six months ended June 30, 2005. 4 PRODUCT DEVELOPMENT Product development consists of the following: JUNE 30, DECEMBER 31, 2006 2005 --------- --------- Development expenditures $ 618,561 $ 618,561 Accumulated amortization (590,796) (557,945) --------- --------- $ 27,765 $ 60,616 ========= ========= Amortization expense was $32,851 for the six months ended June 30, 2006 and $69,454 for the six months ended June 30, 2005. F-10 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 5 LICENSE License consists of the following: JUNE 30, DECEMBER 31, 2006 2005 ----------- ----------- Software license $ 2,420,227 $ 2,420,227 Gaming license 7,090,000 4,690,000 ----------- ----------- 9,510,227 7,110,227 Accumulated amortization (285,835) (145,556) ----------- ----------- $ 9,224,392 $ 6,964,671 =========== =========== Amortization expense was $140,279 for the six months ended June 30, 2006 and $35,361 for the six months ended June 30, 2005. 6 LEASES COMMITMENT The Company leases a number of office spaces under operating leases. The leases typically run for an initial period of three, with an option to renew the lease after that date. Rent expense totaled $74,610 for the six months ended June 30, 2006 and $19,617 for the six months ended June 30, 2005. Minimum lease payments for the noncancellable operating lease for the years ending December 31, 2006 $ 88,002 2007 $ 176,006 2008 $ 136,066 2009 $ 52,315 ---------- Total $ 452,389 ========== 7 GAMING SERVICES The Company's wholly owned subsidiary, M2B Commerce Limited purchased 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. F-11 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 8 CAPITAL STOCK (a) Common stock issued for cash From January 23, 2006 to April 23, 2006, the Company issued 14,411,400 shares of common stock through a private placement at a price of $0.75 per share for a total amount of $10,808,550. From April 24, 2006 to April 26, 2006, the Company issued 808,000 shares of common stock through its new private placement at a price of $1.25 per share for a total amount sold of $1,010,000. This brings the total amount of cash raised through the private placement of shares of common stock in the six months ended June 30, 2006 to $11,818,550. Offering costs of $707,690 associated with the issuance of these shares of common stock were deducted from paid in capital. (b) Common stock issued for acquisition of film library On April 27, 2006, the Company issued 6,992,000 shares of common stock through a private placement at a price of $1.25 per share for a total amount of $8,740,000 for the acquisition of film library. (c) Stock subscriptions During the six months ended June 30, 2006, the Company issued 5,675,840 shares for stock subscriptions value at $4,256,880. (d) Stock split On May 16, 2006, the Company effected a 1-for-4 forward stock split of its outstanding shares of common stock. A total of 38,369,590 shares of common stock of the Company issued and outstanding as of the effective date had been changed into shares of common stock of the Company in the ratio of 1 pre-split share to 4 post-split shares. After the forward stock split and as at June 30, 2006, the Company have 153,478,360 shares of common stock issued and outstanding. All references to per stock amounts in the consolidated financial statements reflect the forward stock split. 9 INCOME TAXES The Company files separate tax returns for Singapore and the United States of America. The Company operated primarily in Singapore and incurred no United States federal or state income taxes as of June 30, 2006 and 2005. The Company had available approximately $1,440,000 of unused Federal net operating loss carry-forwards at June 30, 2006, that may be applied against future taxable income. These net operating loss carry-forwards expire for Federal purposes in 2025. 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 June 30, 2006, a valuation allowance for the full amount of the net United States deferred tax asset was established due to the uncertainties as to the amount of the taxable income that would be realized. The Company had available approximately $2,940,000 of unused Singapore capital allowance carry-forwards at June 30, 2006, 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-12 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 10 SEGMENT REPORTING The Company classifies its business into reportable segments. The segments consists principally of entertainment and digit gaming. Information as to the operations of the Company in each of its business segments is set forth below based on the nature of the products and services offered. The Company has provided a summary of operating income by segment. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies in Note 2. 2006 ENTERTAINMENT DIGIT GAMING OTHER TOTAL -------------- -------------- ------------- --------------- Revenues from external customers $ 3,215,479 $ 11,094,343 $ 1,144 $ 14,310,966 Interest revenue $ 57,871 $ -- $ -- $ 57,871 Depreciation and amortization $ 244,908 $ 159,280 $ -- $ 404,188 Segment profit (loss) $ 1,472,129 $ (197,815) $ 1,144 $ 1,275,458 Segment assets $ 25,837,054 $ 9,213,037 $ 7,201,873 $ 42,251,964 Expenditures for segment assets $ 14,646,324 $ -- $ -- $ 14,646,324 Reconciliation:- REVENUES Total revenues for reportable segments $ 14,309,822 Other revenue $ 1,144 --------------- Total consolidated revenues $ 14,310,966 =============== INTEREST REVENUE Total interest revenue for reportable segments $ 27,522 Corporate interest revenue $ 30,349 --------------- Total consolidated interest revenues $ 57,871 =============== PROFIT OR LOSS Total profit for reportable segments $ 1,275,458 Corporate expenses $ (121,464) --------------- Profit before income tax $ 1,153,994 =============== ASSETS Total assets for reportable segments $ 35,050,091 Other assets $ 7,201,873 --------------- Total consolidated assets $ 42,251,964 =============== EXPENDITURES FOR SEGMENT ASSETS Total expenditures for assets for reportable segments $ 14,646,324 =============== The Company entered into a licensing agreement for its Pony set top boxes on June 6, 2006. The Company received a licensing fee of $2,100,000 for sale of licensing rights for its Pony-set top boxes on a non-exclusive basis in four Asian countries. The revenue from this sale of licensing rights is included in entertainment segment revenues for the three and six months ended June 30, 2006. F-13 AMARU, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) 2005 ENTERTAINMENT DIGIT GAMING OTHER TOTAL -------------- -------------- ------------- --------------- Revenues from external customers $ 2,771,267 $ 1,964,491 $ 941 $ 4,736,699 Interest revenue $ 1,081 $ -- $ -- $ 1,081 Depreciation and amortization $ 115,930 $ 15,278 $ -- $ 131,208 Segment profit $ 202,801 $ 87,548 $ 941 $ 291,290 Segment assets $ 5,481,265 $ 3,504,633 $ 2,596,939 $ 11,582,837 Expenditures for segment assets $ 2,665,664 $ -- $ -- $ 2,665,664 Reconciliation:- REVENUES Total revenues for reportable segments $ 4,735,758 Other revenue $ 941 --------------- Total consolidated revenues $ 4,736,699 =============== INTEREST REVENUE Total interest revenue for reportable segments $ 1,081 Corporate interest revenue $ -- --------------- Total consolidated interest revenues $ 1,081 =============== PROFIT OR LOSS Total profit for reportable segments $ 291,290 Corporate expenses $ (91,300) --------------- Profit before income tax $ 199,990 =============== ASSETS Total assets for reportable segments $ 8,985,898 Other assets $ 2,596,939 --------------- Total consolidated assets $ 11,582,837 =============== EXPENDITURES FOR SEGMENT ASSETS Total expenditures for assets for reportable segments $ 2,665,664 =============== 11 SUBSEQUENT EVENT From July 3, 2006 to July 24, 2006, the Company issued 120,168 shares of common stock through private placement at a price of $1.50 per share for a total amount of $180,252. Consulting fees approximately $15,321 associated with the issuance of these shares of common stock were accrued. F-14 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 M2B World is in the business of broadband entertainment and education-on-demand, streaming via computers, television sets, PDAs (Personal Digital Assistant) and the provision of broadband services. Its business includes channel and program sponsorship (advertising and branding); online subscriptions, channel/portal development (digital programming services); content aggregation and syndication, broadband consulting services, broadband hosting and streaming services and E-commerce. The following discussion should be read in conjunction with selected financial data and the consolidated financial statements and notes to consolidated financial statements. RESULTS OF OPERATIONS The six months and three months ended June 30, 2006 compared with the six months and three months ended June 30, 2005. OVERVIEW The Company, through its subsidiaries under the M2B brand name is in the Broadband Media Entertainment business, and a provider of interactive Entertainment-on-demand, Education-on-demand and e-commerce streaming over Broadband channels, Internet portals, and 3G devices globally. The Company has launched multiple Broadband TV websites with entertainment, education and online shopping content, with over 100 channels designed to cater to various consumer segments and lifestyles. Its content covers diverse genres such as movies, dramas, comedies, documentaries, music, fashion, lifestyle, education, and more. The Company markets its products globally through its "M2B" brand name. The M2B brand has established its competitive edge by offering access to an expansive range of content libraries for aggregation, distribution and syndication on Broadband and other media, including rights for merchandising, product branding, promotion and publicity. 1 Business Operations ------------------- Our principal operations are carried out through the following three segments of our business: 1. ENTERTAINMENT SERVICES - Video on-Demand services for entertainment and education, providing the Company with advertising, subscriptions, online games and e-commerce (B2B and B2C) revenues. 2. DIGIT GAMES 3. E-TRAVEL SERVICES - Online Travel Portal 1. ENTERTAINMENT SERVICES ---------------------- The Company provides online entertainment and education on-demand on Broadband channels, Internet portals and 3G devices across the globe, for specific and identified viewer lifestyles, demographics and interests; and includes the viewing experience to an on-line shopping experience. The Company uses Broadband technology to provide its services. Broadband technology is defined as high speed, high-bandwidth, two-way data, voice and video communications, delivered at high transmission rates. It allows the following to be delivered: o Video-on-demand (VOD) services that enable individuals to select videos from a Central Server, on-demand 24 hours a day, 7 days a week, for viewing on: o Television screens (Set top Box Technology) o PCs (Digital Subscriber Line (DSL) Technology) o Personal Digital Assistants(PDA), 3G handphones (Wireless Technology) o E-Commerce or online shopping - linked interactively to the VOD platforms on broadband. Consumers choose to buy products online with digital cash as they watch the videos. The Company applies broadband technologies to facilitate its growth in the broadband sector. Its main competitive advantage is derived from its ownership of exclusive rights for various territories on broadband for its contents i.e. movies and programs on lifestyles, education, business and glamour. The Company has built and installed its broadband streaming system complete with firewalls, load balancing, bandwidth and consumer monitoring systems, video streaming, video storage and web servers in Singapore and US. The Company has also developed its streaming applications to stream into television sets, via a set top box. The Company has developed a capability to stream wireless broadband and have its own digitized entertainment sites for wireless broadband applications. M2B offers consumers personalized entertainment through its wide range of broadband streaming channels available at www.m2bworld.com. The Company's offers the following products on the VOD platform : o Entertainment - Consumers pay a monthly subscription for access to movies, music, glamour and fashion, lifestyle (hobbies, cooking, personalities), documentaries, sports, health and fitness and others. They can choose from a large number of different channels depending on their interests or lifestyle preferences. o Adult Education - Consumers pay a monthly subscription to view program on management skills, communication skills, decision making, customer services and sales, motivation, presentation and writing skills, counseling and others. With this strategy, the Company generates diversified sources of revenue from: a) Advertising i.e. program & channel sponsorship b) Online subscriptions c) Channel/portal development i.e. digital programming services d) Content aggregation and syndication 2 e) Broadband consulting services and online shopping turnkey solutions f) E-commerce services g) Online gaming micro-payments Currently, the M2B Broadband websites include: 1. ENTERTAINMENT SITES INTERNATIONAL AND US SITES: o Star78.com - an advertising-based Family Entertainment site for international viewers o Shine8.com - an advertising-based Lifestyle site for international viewers o Jump29.com - an advertising-based Young Adults site for international viewers o Dreamstage7.com - an advertising & subscription-based Glamour & Fashion site for international viewers o Highfashion7.com - an advertising and subscription based designer Fashion site for international viewers o Dragon78.tv - an advertising & subscription-based Mandarin Entertainment site for viewers in US only o Chinois78.com - an advertising and subscription based Mandarin Lifestyle site for viewers in US only ASIAN SITES: o Dimension88.com - an advertising & subscription-based Movie site in Singapore only o Dragon78.com - an advertising & subscription-based Mandarin Entertainment site in Singapore only o Joy Channel - a subscription based family entertainment site dedicated for United Power viewers in Japan only o Ideas Broadband - four subscription based entertainment sites (Movie Mania, Executive Online, Glamour Galore, Dragon City providing 25 channels) dedicated for Singapore Telecommunications Ltd Ideas Broadband viewers in Singapore only o Trilogy - a subscription based 3G mobile phone entertainment site dedicated for Singapore Telecommunications Trilogy viewers in Singapore only o Colours78.com - an advertising and subscription based Mandarin Lifestyle site in Singapore only o HappyDigi.com - a subscription based Mandarin site in China only (Movie entertainment platform) 2. EDUCATION SITES US SITES: o Wiz5.us - an advertising & subscription-based Business & Corporate Training site for viewers in US only ASIAN SITES: o Wiz5.com - an advertising & subscription-based Business & Corporate Training site for viewers in Singapore only 3 3. E-COMMERCE SITES INTERNATIONAL SITES: o Starzmall.com - A One-Stop Shopping Paradise o Trotteuse.com - A Second-Hand Branded Goods Mall o Royalhive.com - A One-Stop Health and Beauty Mall Broadband Services a) Content Management System The Company launched a state-of-the-art automated Content Management System ("CMS") to enhance its advertising service offered to clients and to provide a new revenue source for the Company. The system allows for the highly specialized programming of video, animation, streaming and flash content to multiple destinations and was demonstrated at the Asia Television Forum (ATF 2005), a regional platform for media buyers and sellers. As a sponsor at the event, M2B World showcased the automated CMS on plasma screens, together with programming from the wide ranging M2B content library that includes movies, dramas, comedies, documentaries, music, fashion, lifestyle, learning and more. Linked by broadband networks and wireless set-top boxes to push content and scheduled advertising at physical premises, the CMS allows businesses the option of presenting targeted content on selected video displays in multiple locations, such as on different levels of a shopping mall, in various spots within a restaurant or club or on separate elevators in the same building. In store video panels can also carry individualized messages together with customized content to effectively reach consumers and target audiences within the premises. The Company plans to introduce this integrated CMS and content solution to U.S. clients in 2006. Businesses and advertisers can then readily offer customers feature-rich content with this versatile and easy-to-use CMS designed to advance brand-building activities and widen the advertising options for customer outreach. As a frontrunner in broadband media, this integrated solution underscores M2B's key strength in delivering content for viewing on PCs, 3G mobile phones, PDAs as well as television screens. This is another method by which M2B is continuing to effectively meet the consumer shift toward on-demand and personalized media experiences whether at home or work and now additionally on video screens in stores, restaurants, clubs and other business or leisure outlets. b) Global Broadband TV Service The Company through its wholly owned subsidiaries, M2B World, Inc. incorporated in the state of California and M2B World Pte. Ltd. incorporated in Singapore, will be offering multiple TV channels, delivered live over the Internet, to homes that have a high-speed internet connection. The service has been in operation in US and Singapore in July 2006 and it is expected that 40 channels will be available to customers. Anyone subscribing to a local Internet service provider will be able to tune in to the service on a subscription basis. Subscribers will be provided with a set-top box that connects to their broadband modems instead of the cable TV point at home. They will be able to watch the programs on their TV sets. The Company plans to extend this service to broadband users worldwide in the later part of 2006. 2. Digit Games ----------- In May 2005, the Company through its subsidiary, M2B Commerce Limited, signed an agreement with Allsports Limited, a British Virgin Islands company to operate and conduct digit games in Cambodia and to manage the digit games activities in Cambodia. The license to manage, conduct and operate the digit games activities in Cambodia is for a period of eighteen years. 4 3. E-Travel Services ----------------- In December 2005, the Company's subsidiary, M2B World Travel Limited., signed a global agreement with Amadeus Global Travel Distribution, SA, a Spanish corporation. Through the agreement, M2B will be able to offer direct access to the extensive range of travel options available through the Amadeus network to their viewers around the world. The agreement extends M2B's reach from broadband streaming entertainment into the worldwide travel arena. The World Travel & Tourism Council (WTTC) recently estimated that worldwide spending for personal travel will hit $2.8 trillion in 2005. According to PhoCusWright, the online portion of those sales is growing particularly quickly in the US, Europe and the Asia-Pacific region, where combined online travel sales in those three geographic regions is estimated to top $115 billion this year. With eMarketer reporting that broadband currently reaches over 58 million households in Asia-Pacific alone, M2B World Travel Ltd. through its agreement with Amadeus, is now poised to immediately access and serve this consumer market. M2B World Travel Ltd. will now be able to offer consumers access to the huge range of content available through the Amadeus system, including 500 airlines, 58,000 hotels, and a whole range of other travel content. The M2B World Travel Website will consistently provide the most competitive rates through its direct connection to the Amadeus System using the Elleipsis TravelTalk(TM) integration platform, which allows M2B to access not only the major travel providers, but an expanded roster of additional suppliers such as low-cost carriers, cruise lines, and widened hotel distribution channels all through one single, easy-to-use platform based on the M2B website, www.m2bworld.com. The innovative video e-travel portal brings an extensive range of travel options to our viewers and giving the Company a powerful entry into the travel and tourism market; effectively allowing consumers worldwide to tap the broad and competitive options available no matter what their travel needs. The e-travel portal by M2B World Travel directly aggregates travel solutions from 500 airlines, 58,000 hotel properties, some 42 car rental companies serving over 30,000 locations, as well as widespread air, ferry, rail, cruise, and tour operators with proprietary video content, allowing customers to the site to view their travel destination, thus influencing their purchasing decision. The M2B travel site is expected to be launched by the end of 2006. REVENUE The revenue for the six months ended June 30, 2006 increased by $9,574,267 (202%), from $4,736,699 for the six months ended June 30, 2005 to $14,310,966 for the six months ended June 30, 2006. The revenue for the three months ended June 30, 2006 increased by $4,100,353 (123%), from $3,333,476 to $7,433,829 for the three months ended June 30, 2005 and 2006, respectively. This increase in revenue was mainly contributed by the digit games in Cambodia which commenced operations in June 2005 as well as from the sale of Pony set-top boxes licensing rights on a non-exclusive basis in four Asian countries. The revenue from this sale of licensing rights is included in entertainment segment revenues for the three months and six months ended June 30, 2006. COST OF SALES Cost of sales for the six months ended June 30, 2006 was $10,973,303 which increased by $7,255,390 (195%) from $3,717,913 for the six months ended June 30, 2005. As a proportion of revenue, the cost of sales for the six months ended June 30, 2006 was 77% (cost of sales at $10,973,303 and revenue at $14,310,966) as compared to 78% for the six months ended June 30, 2005 (cost of sales at $3,717,913 and revenue at $4,736,699). Cost of sales for the three months ended June 30, 2006 was $5,184,910 which increased by $2,345,011 (83%) from $2,839,899 for the three months ended June 30, 2005. The significant increase in cost of sales of $7,255,390 and $2,345,011 for the six months and three months ended June 30, 2006 was mainly attributed to the cost of managing and operating the operations and game centers in Cambodia for digit games (lottery). 5 As a proportion of revenue, the cost of sales for the three months ended June 30, 2006 was 83% (cost of sales at $5,184,910 and revenue at $7,433,829) as compared to 85% for the three months ended June 30, 2005 (cost of sales at $2,839,899 and revenue at $3,333,476), which is marginally constant. DISTRIBUTION EXPENSES Distribution expenses for the six months ended June 30, 2006 at $559,529 was higher by $359,059 (179%) as compared to the amount of $200,470 incurred for the six months ended June 30, 2005. The higher distribution expenses was attributed to increased spending on the branding of the M2B brand, marketing and promoting the global Broadband TV which increased by $322,487 (325%) from $99,344 for the six months ended June 30, 2005 to $421,831 for the six months ended June 30, 2006. Distribution expenses for the three months ended June 30, 2006 at $312,095 was higher by $170,986 (121%) as compared to the amount of $141,109 for the three months ended June 30, 2005. The higher amount spent for the three months ended June 30, 2006 was attributed to the higher expenditure on advertising and marketing which increased by $152,501 (193%) from $79,200 to $231,701 for the three months ended June 30, 2005 and 2006, respectively. The higher spending in the three months ended June 30, 2006 resulted from a publicity launch of the Company's global broadband TV services. GENERAL AND ADMINISTRATIVE EXPENSES Administration expenses for the six months ended June 30, 2006 at $1,682,011 was higher by $1,062,604 (172%) as compared to the amount of $619,407 incurred for the six months ended June 30, 2005. Administration expenses for the three months ended June 30, 2006 at $1,048,334 was higher by $654,978 (167%) as compared to the amount of $393,356 incurred for the three months ended June 30, 2005. The increase in administration expenses for the six months and three months ended June 30, 2006 were attributed mainly to increases in: o Staff costs. Staff costs had increased by $430,929 (245%) from $176,236 for the six months ended June 30, 2005 to $607,165 for the six months ended June 30, 2006. Similarly, for the three months ended June 30, 2006, staff cost had increased by $290,609 (251%) from $115,910 to $406,519 for the three months ended June 30, 2005 and 2006 respectively. The increase in staff cost resulted from the increase in the number of professional employees hired to cater to the expanding and growing business and the payment of mid-year bonuses. o Depreciation and license amortization attributed to the leasehold improvements for the expansion of the office and new editing suites to cater to the demands of the growing business. The increase in license amortization came from the on-line games license and gaming license in Cambodia. The amount increased by $272,980 (208%) and $123,844 (134%) for the six months and three months ended June 30, 2006 as compared to the six months and three months ended June 30, 2005 respectively. NET INCOME For the six months ended June 30, 2006, net income was $1,220,459 which increased by $1,021,713 (514%) from $198,746 for the six months ended June 30, 2005. For the three months ended June 30, 2006, net income was $920,203 which increased by $893,782 (3,383%) from $26,421 for the three months ended June 30, 2005. The significant increase in net income for the six months and three months ended June 30, 2006 was due to the revenue generated from the sale of distribution rights and lower cost of services offset by higher distribution expenses and administrative expenses. 6 LIQUIDITY AND CAPITAL RESOURCES The Company had cash at $6,048,949 at June 30 2006 as compared to cash of $4,776,819 at December 31, 2005. The Company does not finance its operations through short-term bank credit, long-term bank loans nor leasing arrangements with financial institutions 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, 2006, 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 and price 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 2006 to expand its broadband coverage by launching new broadband sites in North America, Europe and Australia. In North America, the Company intends to launch new broadband entertainment and business training content sites in 2006. The server farm will be expanded in the US to handle the North American business and the global Broadband TV service. The Company plans to offer multiple TV channels, delivered live over the Internet, to homes that have a high-speed internet connection. This service has been made available in the US and Singapore in July 2006 with more than 40 channels available to customers. The Company intends to provide a similar service to broadband users worldwide in later part of 2006. By the end of 2006, the Company plans to launch an innovative travel e-commerce portal, marketing travel products through a revolutionary world first video travel portal and providing distribution and technology solutions for the travel industry. The Company is continuing to raise additional funds through its private placement of equity to fund all business expansions and working capital. For the six months ended June 30, 2006, the Company raised a total of $11,110,860, net of issuance costs of $707,690. The Company believes that it can continue to raise funds through private placement of its securities to fund its growth and expansion. ITEM 3. Controls and Procedures Our President and Treasurer/Chief Financial Officer (the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures and internal controls and procedures for financial reporting for the Company. The Certifying Officers have designed such disclosure controls and procedures and internal controls and procedures for financial reporting to ensure that material information are made known to them, particularly during the period in which this report was prepared. The Certifying Officers have evaluated the effectiveness of the Company's disclosure controls and procedures and internal controls and procedures for financial reporting as of June 30, 2006 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. 7 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. Unregistered sales of equity securities and use of proceeds From January 23, 2006 to April 3, 2006, the Company issued 14,411,400 shares of common stock at a price of $0.75 per share for a total amount of $10,808,550 to "accredited investors", as that term is defined in Regulation D of the Securities Act of 1933. On April 27, 2006, the Company issued 808,000 shares of common stock through its new private placement of up to $10 million at a purchase price of $1.25 per share for a total amount of $1,010,000 to "accredited investors", as that term is defined in Regulation D of the Securities Act of 1933. Offering costs of $707,690 associated with the issuance of these shares of common stock were deducted from paid in capital. The use of the proceeds includes working capital and business expansion of the Company. The shares of the Company's common stock were issued and sold in reliance upon the exemption provided by Section 4(2) and/or Regulation D/Regulation S of the Securities Act of 1933. Item 3. Defaults 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 8K during the quarter: Form 8-K filed on April 6, 2006 Form 8-K filed on April 13, 2006 Form 8-K filed on April 24, 2006 Form 8-K filed on April 26, 2006 Form 8-K filed on April 28, 2006 Form 8-K filed on May 11, 2006 Form 8-K filed on May 17, 2006 8 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: December 28, 2006 By /s/ Colin Binny -------------------------------------------- President By /s/ Bee Leng Ho -------------------------------------------- Chief Financial Officer 9