UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2010
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to _______
Commission File Number 000-32695
Amaru, Inc.
-------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Nevada 88-0490089
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
62 Cecil Street, #06-00 TPI Building, Singapore 049710
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (65) 6332 9287
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated reporting filer |_| Accelerated filer |_|
Non-accelerated filer|_| Smaller company |X|
(Do not check if a smaller reporting
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 173,796,323 shares
----------------------------- ---------------------------------
(Class) (Outstanding at April 30, 2010)
AMARU, INC. AND SUBSIDARIES
2010 Quarterly Report on Form 10-Q
Table of Contents
PART I: FINANCIAL INFORMATION
------------------------------
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statement of Stockholders' Equity and Comprehensive Income F-4 to F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-29
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 1
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7
ITEM 4: CONTROLS AND PROCEDURES 9
PART II: OTHER INFORMATION
---------------------------
ITEM 1: LEGAL PROCEEDINGS 11
ITEM 1A: RISK FACTORS 11
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5: OTHER INFORMATION 17
ITEM 6: EXHIBITS 17
SIGNATURES
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2010 2009
------------ ------------
(Unaudited) (Restated)
ASSETS
Current assets
Cash and cash equivalents $ 217,404 $ 356,477
Accounts receivable, net of allowance of
$170,660 and $10,697,363 at March 31, 2010
and December 31, 2009 respectively 2,583 --
Equity securities held for trading 362,107 326,980
Other current assets 184,130 187,131
------------ ------------
Total current assets 766,224 870,588
------------ ------------
Non-current assets
Property and equipment, net 561,550 642,960
Film library, net -- --
Investments - cost 2,718,749 2,718,749
------------ ------------
Total non-current assets 3,280,299 3,361,709
------------ ------------
Total assets $ 4,046,523 $ 4,232,297
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 909,065 $ 916,150
Advances from related parties 28,434 --
Capital lease payable - short term 11,108 11,079
Convertible term loan 2,464,046 2,432,796
------------ ------------
Total current liabilities 3,412,653 3,360,025
------------ ------------
Non-current liabilities
Capital lease payable - long term 34,245 36,924
------------ ------------
Total non-current liabilities 34,245 36,924
------------ ------------
Total liabilities 3,446,898 3,396,949
Commitments -- --
Stockholders' equity
Preferred stock (par value $0.001) 5,000,000 shares
authorized; 0 shares issued and outstanding at
March 31,2010 and December 31, 2009, respectively -- --
Common stock (par value $0.001) 200,000,000 shares
authorized; 167,734,392 and 165,856,168 shares issued
and outstanding at March 31, 2010 and
December 31, 2009, respectively 167,734 165,856
Additional paid-in capital 40,540,616 40,354,672
Accumulated Deficit (37,687,940) 37,641,903
Accumulated other comprehensive income 968,406 968,406
------------ ------------
Total Amaru Inc's Stockholder's Deficit 3,996,120 11,130,471
------------ ------------
Non controlling interest (3,389,191) (3,311,683)
------------ ------------
Total stockholders' equity 599,625 835,348
------------ ------------
Total liabilities and shareholders' equity $ 4,046,523 $ 4,232,297
============ ============
See accompanying notes to consolidated financial statements
F-2
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
2010 2009
-------------- --------------
Revenue:
Entertainment $ 5,598 $ 3,215
-------------- --------------
Total revenue 5,598 3,215
Cost of services (76,878) (55,053)
-------------- --------------
Gross loss (71,280) (51,838)
Distribution costs (13,016) (32,681)
Administrative expenses (347,642) (533,705)
-------------- --------------
Total expenses (360,658) (566,386)
-------------- --------------
Loss from operations (431,938) (618,224)
Other income (expenses):
Interest expenses (31,802) (31,771)
Interest income 4 67
Sundry income 5,064 13,598
Net change in fair value of equities held
for trading 35,127 (9,291)
-------------- --------------
Loss before income taxes (423,545) (645,621)
Income tax (provision) benefit -- --
-------------- --------------
Net income (loss) including noncontrolling interest $ (423,545) $ (645,621)
============== ==============
Attributable to:
Equity holders of Amaru, Inc. (346,037) (547,504)
Noncontrolling interest (77,508) (98,117)
-------------- --------------
Net loss per share attributable to
Amaru, Inc. - basic and diluted $ (0.05) $ (0.00)
============== ==============
Weighted average number of common shares outstanding
- basic and diluted 166,352,064 159,431,861
============== ==============
See accompanying notes to consolidated financial statements
F-3
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2009 and the three months ended March 31, 2010
PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------
NUMBER PAR NUMBER PAR SUBSCRIBED
OF VALUE OF VALUE ADDITIONAL PAID- COMMON ACCUMULATED
SHARES ($0.001) SHARES ($0.001) IN CAPITAL STOCK DEFICIT
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2008 -- -- 154,098,528 $ 154,098 $ 39,190,666 $ -- $ (9,726,413)
Subscribed common
stock issued -- -- 11,757,640 11,758 1,164,006 -- --
Net loss -- -- -- -- -- -- (27,615,491)
Comprehensive
loss -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2009 -- -- 165,856,168 $ 165,856 $ 40,354,672 $ -- $(37,341,904)
============ ============ ============ ============ ============ ============ ============
(CONTINUED)
See accompanying notes to consolidated financial statements
F-4
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-----------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE NONCONTROLLING SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
------------ ------------ ------------ ------------
Balance at
December 31, 2008 $ 12,927 $ 955,479 $ 2,766,375 $ 33,353,132
Subscribed common
Stock issued -- -- -- 1,175,764
Net loss -- -- (6,078,057) (33,693,548)
------------
Comprehensive
loss -- -- -- (33,693,548)
------------ ------------ ------------ ------------
Balance at
December 31, 2009 $ 12,927 $ 955,479 $ (3,311,682) $ 835,348
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-4a
AMARU, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2009,
and the three months ended March 31, 2010
PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------
NUMBER PAR NUMBER PAR SUBSCRIBED
OF VALUE OF VALUE ADDITIONAL PAID- COMMON ACCUMULATED
SHARES ($0.001) SHARES ($0.001) IN CAPITAL STOCK DEFICIT
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 31, 2009 -- -- 165,856,168 $ 165,856 $ 40,354,672 $ -- $(37,341,903)
SUBSCRIBED COMMON
STOCK ISSUED -- -- 1,878,224 1,878 185,944 -- --
NET LOSS -- -- -- -- -- -- (346,037)
COMPREHENSIVE
LOSS -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT
MARCH 31, 2010 -- -- 167,734,392 $ 167,734 $ 40,540,616 $ -- $(37,687,940)
============ ============ ============ ============ ============ ============ ============
(CONTINUED)
See accompanying notes to consolidated financial statements
F-5
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------
CURRENCY TOTAL
TRANSLATION FAIR VALUE NONCONTROLLING SHAREHOLDERS'
RESERVE RESERVE INTEREST EQUITY
----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 2009 $ 12,927 $ 955,479 $(3,311,683) $ 835,348
SUBSCRIBED COMMON
STOCK ISSUED -- -- -- 187,822
NET LOSS -- -- (77,508) (423,545)
-----------
COMPREHENSIVE
LOSS -- -- -- (423,545)
----------- ----------- ----------- -----------
BALANCE AT
MARCH 31, 2010 $ 12,927 $ 955,479 $(3,396,495) $ 599,625
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-5a
AMARU, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
---------------------------
March 31, March 31,
2010 2009
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (423,545) $ (645,621)
Adjustments to reconcile net income to cash and cash
equivalents used or provided by operations:
Amortization 32,875 207,786
Depreciation 81,410 128,076
Net change in fair value of financial assets at fair value
Through profit or loss-held for trading (35,127) 9,291
Changes in operation assets and liabilities
Accounts receivables (2,583) 1,408
Inventories -- 1,885
Others current assets 3,001 (336,083)
Accounts payable and accrued expenses (7,085) 266,164
Other payables -- (5,458)
----------- -----------
Net cash used in operating activities (351,054) (372,552)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of intangible assets (1,625) (2,102)
----------- -----------
Net cash provided by (used in) investing activities (1,625) (2,102)
----------- -----------
CASH PROVIDED FROM FINANCING ACTIVITIES
Advance from related parties 28,434 --
Repayment of related parties -- (48,681)
Repayments of obligations under finance leases (2,650) (5,190)
Receipts from common stock issued 187,822 --
----------- -----------
Net cash provided by (used in) financing activities 213,606 (53,871)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents -- --
----------- -----------
Cash flows from all activities (139,073) (428,525)
Cash and cash equivalents at beginning of period 356,477 1,484,945
----------- -----------
Cash and cash equivalents at end of period $ 217,404 $ 1,056,420
=========== ===========
See accompanying notes to consolidated financial statements
F-6
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
1. BASIS OF PRESENTATION AND REORGANIZATION
Amaru, Inc. (the "Company") is in the business of broadband
entertainment-on-demand, streaming via computers, television sets, PDAs
(Personal Digital Assistant) and the provision of broadband services.
Its business includes channel and program sponsorship (advertising and
branding); online subscriptions, channel/portal development (digital
programming services); content aggregation and syndication, broadband
consulting services, broadband hosting and streaming services and
E-commerce.
THE COMPANY WAS ALSO IN THE BUSINESS OF DIGIT GAMING (LOTTERY). THE
COMPANY HAS AN 18 YEAR LICENSE TO CONDUCT NATION WIDE LOTTERY IN
CAMBODIA. THE COMPANY THROUGH ITS SUBSIDIARY, M2B COMMERCE LIMITED,
SIGNED AN AGREEMENT WITH ALLSPORTS INTERNATIONAL LTD, A BRITISH VIRGIN
ISLANDS COMPANY TO OPERATE AND CONDUCT DIGIT GAMES IN CAMBODIA AND TO
MANAGE THE DIGIT GAMES ACTIVITIES IN CAMBODIA. THE LICENSE HAS BEEN
SUSPENDED, SEE NOTE 15.
The key business focus of the Company is to establish itself as the
leading provider and creator of a new generation of
Entertainment-on-Demand and E-Commerce Channels on Broadband, and 3G
(Third Generation) devices.
The Company delivers both wire and wireless solutions, streaming via
computers, TV sets, PDAs and 3G hand phones.
At the same time the Company launches e-commerce channels (portals)
that provide on-line shopping and pay per view services but with a
difference, merging two leisure activities of shopping and
entertainment. The entertainment channels are designed to drive and
promote the shopping portals, and vice versa.
The Company's business model in the area of broadband entertainment
includes e-services, which would provide the Company with multiple
streams of revenue. Such revenues would be derived from advertising and
branding (channel and program sponsorship); on-line subscriptions;
online games micro-payments; channel/portal development (digital
programming services); content aggregation and syndication; broadband
consulting services; on-line shopping turnkey solutions; broadband
hosting and streaming services; E-commerce commissions and on-line
dealerships; and digit game operations.
1.2 Recent Accounting Standards and Pronouncements
In February 2010, the FASB issued Accounting Standards Update 2010-10,
Consolidation (Topic 10): Amendments for Certain Funds. ASU 2010-10
defers the effective date of certain amendments to the consolidation
requirements of ASC Topic 810, Consolidation, resulting from the
issuance of FAS 167, Amendments to FASB Interpretation No. 46(R).
Specifically, the amendments to the consolidation requirements of Topic
810 resulting from the issuance of FAS 167 are deferred for a reporting
entity's interest in an entity (1) that has all the attributes of an
investment company; or (2) for which it is industry practice to apply
measurement principles for financial reporting purposes that are
consistent with those followed by investment companies. The ASU does
not defer the disclosure requirements in FAS 167 amendments to Topic
810. The amendments in this ASU are effective as of the beginning of a
reporting entity's first annual period that begins after November 15,
2009, and for interim for interim periods within that first annual
reporting period. Early application is not permitted. The provisions of
ASU 2010-10 is not expected to have an impact on the Company's
financial statements.
F-9
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
In February 2010, the FASB issued Accounting Standards Update 2010-09,
Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC
filer to disclose a date through which subsequent events have been
evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result
of either correction of an error or retrospective application of U.S.
GAAP. The FASB also clarified that if the financial statements have
been revised, then an entity that is not an SEC filer should disclose
both the date that the financial statements were issued or available to
be issued and the date the revised financial statements were issued or
available to be issued. The FASB believes these amendments remove
potential conflicts with the SEC's literature. In addition, the
amendments in the ASU requires an entity that is a conduit bond obligor
for conduit debt securities that are traded in a public market to
evaluate subsequent events through the date of issuance of its
financial statements and must disclose such date. All of the amendments
in the ASU were effective upon issuance (February 24, 2010) except for
the use of the issued date for conduit debt obligors. That amendment is
effective for interim or annual periods ending after June 15, 2010. The
provisions of ASU 2010-09 did not have a material impact on the
Company's financial statements.
In February 2010, the FASB issued Accounting Standards Update (ASU) No.
2010-08, Technical Corrections to Various Topics, thereby amending the
FASB Accounting Standards Codification (Codification). This ASU
resulted from a review by the FASB of its standards to determine if any
provisions are outdated, contain inconsistencies, or need
clarifications to reflect the FASB's original intent. The FASB believes
the amendments do not fundamentally change U.S. GAAP. However, certain
clarifications on embedded derivatives and hedging reflected in Topic
815, Derivatives and Hedging, may cause a change in the application of
the guidance in Subtopic 815-15. Accordingly, the FASB provided special
transition provisions for those amendments. The ASU contains various
effective dates. The clarifications of the guidance on embedded
derivatives and hedging (Subtopic 815-15) are effective for fiscal
years beginning after December 15, 2009. The amendments to the guidance
on accounting for income taxes in a reorganization (Subtopic 852-740)
applies to reorganizations for which the date of the reorganization is
on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. All other amendments are
effective as of the first reporting period (including interim periods)
beginning after the date this ASU was issued (February 2, 2010). The
provisions of ASU 2010-08 is not expected to have an impact on the
Company's financial statements.
In January 2010, the FASB issued Accounting Standards Update ("ASU")
No. 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends
Codification Subtopic 820-10 to add two new disclosures: (1) transfers
in and out of Level 1 and 2 measurements and the reasons for the
transfers, and (2) a gross presentation of activity within the Level 3
roll forward. The proposal also includes clarifications to existing
disclosure requirements on the level of disaggregation and disclosures
regarding inputs and valuation techniques. The proposed guidance would
apply to all entities required to make disclosures about recurring and
nonrecurring fair value measurements. The effective date of the ASU is
the first interim or annual reporting period beginning after December
15, 2009, except for the gross presentation of the Level 3 roll forward
information, which is required for annual reporting periods beginning
after December 15, 2010 and for interim reporting periods within those
years. Early application is permitted. The Company is currently
assessing the impact that the adoption will have on its financial
statements.
F-10
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
In January 2010, the FASB issued two ASU's that (1) codify SEC Observer
comments made at the June 2009 EITF meeting and (2) make technical
corrections to several SEC sections of the FASB Codification. In
general, the two ASU's, do not change existing practice. ASU 2010-05,
Compensation--Stock Compensation (Topic 718)--Escrowed Share
Arrangements and the Presumption of Compensation, codifies EITF Topic
D-110, Escrowed Share Arrangements and the Presumption of Compensation,
which provides the SEC staff's view on when an escrowed share
arrangement involving shareholders is presumed to be compensatory and
the factors to consider when analyzing whether that presumption has
been overcome. The SEC Observer announced the views captured in EITF
Topic D-110 at the June 2009 EITF meeting. ASU 2010-04, Accounting for
Various Topics--Technical Corrections to SEC Paragraphs, primarily
includes technical corrections to various topics containing SEC
guidance as a result of recently-issued authoritative guidance and
updates for Codification references. These two ASU's do not have an
impact on the Company's financial statements.
In January 2010, the FASB issued ASU No. 2010-02, Consolidation (Topic
810) - Accounting and Reporting for Decreases in Ownership of a
Subsidiary - A Scope Clarification. This ASU clarifies that the scope
of the decrease in ownership provisions of Subtopic 810-10 and related
guidance applies to (1) a subsidiary or group of assets that is a
business or nonprofit activity; (2) a subsidiary that is a business or
nonprofit activity that is transferred to an equity method investee or
joint venture; and (3) an exchange of a group of assets that
constitutes a business or nonprofit activity for a noncontrolling
interest in an entity (including an equity method investee or joint
venture). ASU 2010-02 also clarifies that the decrease in ownership
guidance in Subtopic 810-10 does not apply to: (a) sales of in
substance real estate; and (b) conveyances of oil and gas mineral
rights, even if these transfers involve businesses. The amendments in
this ASU expand the disclosure requirements about deconsolidation of a
subsidiary or derecognition of a group of assets. ASU 2010-02 is
effective beginning in the period that an entity adopts FASB Statement
No. 160, Noncontrolling Interests in Consolidated Financial Statements
- an amendment of ARB 51 (now included in Subtopic 810-10). If an
entity has previously adopted Statement 160, the amendments are
effective beginning in the first interim or annual reporting period
ending on or after December 15, 2009. The amendments in ASU 2010-02
should be applied retrospectively to the first period that an entity
adopts Statement 160. The provisions of ASU 2010-02 did not have an
impact on the Partnership's financial statements.
In January 2010, the FASB issued ASU No. 2010-01, Equity (Topic 505):
Accounting for Distributions to Shareholders with Components of Stock
and Cash. The amendments to the Codification in this ASU clarify that
the stock portion of a distribution to shareholders that allows them to
elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the
aggregate is considered a share issuance that is reflected in earnings
per share prospectively and is not a stock dividend. This ASU codifies
the consensus reached in EITF Issue No. 09-E, Accounting for Stock
Dividends, Including Distributions to Shareholders with Components of
Stock and Cash. ASU 2010-01 is effective for interim and annual periods
ending on or after December 15, 2009, and should be applied on a
retrospective basis. This ASU did not have an impact on the Company's
financial statements.
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic
810) - Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities, which codifies FASB Statement No. 167,
Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a
revision to former FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities, and changes how a
reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights)
should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other
F-11
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
things, the other entity's purpose and design and the reporting
entity's ability to direct the activities of the other entity that most
significantly impact the other entity's economic performance. ASU
2009-17 also requires a reporting entity to provide additional
disclosures about its involvement with variable interest entities and
any significant changes in risk exposure due to that involvement. A
reporting entity will be required to disclose how its involvement with
a variable interest entity affects the reporting entity's financial
statements. ASU 2009-17 is effective at the start of a reporting
entity's first fiscal year beginning after November 15, 2009. Early
application is not permitted. The provisions of ASU 2009-17 are
currently not expected to have an impact on the Company's financial
statements.
In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing
(Topic 860) - Accounting for Transfers of Financial Assets, which
formally codifies FASB Statement No. 166, Accounting for Transfers of
Financial Assets into the ASC. ASU 2009- 16 represents a revision to
the provisions of former FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities and will require more information about transfers of
financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred
financial assets. Among other things, ASU 2009-16 (1) eliminates the
concept of a "qualifying special-purpose entity", (2) changes the
requirements for derecognizing financial assets, and (3) enhances
information reported to users of financial statements by providing
greater transparency about transfers of financial assets and an
entity's continuing involvement in transferred financial assets. ASU
2009-16 is effective at the start of a reporting entity's first fiscal
year beginning after November 15, 2009. Early application is not
permitted. The provisions of ASU 2009-16 are not expected to have a
material impact on the Company's financial statements.
In October 2009, the FASB published FASB Accounting Standards Update
2009-15, Accounting for Own-Share Lending Arrangements in Contemplation
of Convertible Debt Issuance or Other Financing. It includes amendments
to Topic 470, Debt, (Subtopic 470- 20), and Topic 260, Earnings per
Share (Subtopic 260-10), to provide guidance on share-lending
arrangements entered into on an entity's own shares in contemplation of
a convertible debt offering or other financing. The provisions of ASU
2009-15 is effective for fiscal years beginning on or after December
15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements. The
provisions of ASU 2009-15 is effective for arrangements entered into on
(not outstanding) or after the beginning of the first reporting period
that begins on or after June 15, 2009. Certain transition disclosures
are also required. Early application is not permitted. The provisions
of ASU 2009-15 is not expected to have an impact on the Company's
financial statements.
In October 2009, the FASB published FASB Accounting Standards Update
2009-14, Software (Topic 985) - Certain Revenue Arrangements that
Include Software Elements. It changes the accounting model for revenue
arrangements that include both tangible products and software elements.
Under this guidance, tangible products containing software components
and non- software components that function together to deliver the
tangible product's essential functionality are excluded from the
software revenue guidance in Subtopic 985-605, Software-Revenue
Recognition. In addition, hardware components of a tangible product
containing software components are always excluded from the software
revenue guidance. The provisions of ASU 2009-14 is effective
prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The provisions of ASU 2009-14 is not expected to
have an impact on the Company's financial statements.
F-12
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
In October 2009, the FASB published FASB Accounting Standards Update
2009-13, Revenue Recognition (Topic 605) - Mutliple- Deliverable
Revenue Arrangements. It addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for
products or services (deliverables) separately rather than as a
combined unit. Specifically, this guidance amends the criteria in
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for
separating consideration in multiple- deliverable arrangements. This
guidance establishes a selling price hierarchy for determining the
selling price of a deliverable, which is based on: (a) vendor-specific
objective evidence; (b) third-party evidence; or (c) estimates. This
guidance also eliminates the residual method of allocation and requires
that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price
method. In addition, this guidance significantly expands required
disclosures related to a vendor's multiple-deliverable revenue
arrangements. The provisions of ASU 2009-13 is effective prospectively
for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted.
The provisions of ASU 2009-13 is not expected to have an impact on the
Company's financial statements.
In September 2009, the FASB published FASB Accounting Standards Update
No. 2009-12, Fair Value Measurements and Disclosures (Topic 820) -
Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent). It amends Subtopic 820-10, Fair Value
Measurements and Disclosures--Overall, to permit a reporting entity to
measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). It also
requires new disclosures, by major category of investments, about the
attributes includes of investments within the scope of this amendment
to the Codification. The provisions of ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. Early
application is permitted. The provisions of ASU 2009-12 is not expected
to have an impact on the Company's financial statements.
F-13
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Principles of Consolidation
THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE FINANCIAL STATEMENTS
OF AMARU, INC. AND ITS MAJORITY OWNED SUBSIDIARIES. ALL SIGNIFICANT
INTERCOMPANY BALANCES AND TRANSACTIONS HAVE BEEN ELIMINATED IN
CONSOLIDATION. IN ADDITION, THE COMPANY EVALUATES ITS RELATIONSHIPS
WITH OTHER ENTITIES TO IDENTIFY WHETHER THEY ARE VARIABLE INTEREST
ENTITIES AS DEFINED BY ASC 810 CONSOLIDATION OF VARIABLE INTEREST
ENTITIES AND TO ASSESS WHETHER IT IS THE PRIMARY BENEFICIARY OF SUCH
ENTITIES. IF THE DETERMINATION IS MADE THAT THE COMPANY IS THE PRIMARY
BENEFICIARY, THEN THAT ENTITY IS INCLUDED IN THE CONSOLIDATED FINANCIAL
STATEMENTS IN ACCORDANCE WITH ASC 860.
2.2 Presentation as a Going Concern
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America, which contemplate continuation of the
Company as a going concern. The Company has sustained net losses of
$423,545 and $645,621 for the three months ended March 31, 2010 and
March 31, 2009, respectively. The Company also has an accumulated
deficit of $37,687,940 and a working capital deficit of $2,646,429 at
March 31, 2010.
The items discussed above raise substantial doubts about the Company's
ability to continue as a going concern. If the Company's financial
resources are insufficient, the Company may require additional
financing in order to execute its operating plan and continue as a
going concern. The Company cannot predict whether this additional
financing will be in the form of equity, debt or another form. The
Company may not be able to obtain the necessary additional capital on a
timely basis, on acceptable terms, or at all. Should financing sources
fail to materialize, management would seek alternate funding sources
such as the sale of common and/or preferred stock, the issuance of debt
or other means. The Company plans to attempt to address its working
capital deficiency by increasing its sales, maintaining strict expense
controls and seeking strategic alliances.
In the event that these financing sources do not materialize, or the
Company is unsuccessful in increasing its revenues and profits, the
Company will be forced to further reduce its costs, may be unable to
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse
effect on its business, prospects, financial condition and results of
operations.
The financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or
amounts and reclassification of liabilities that might be necessary,
should the Company be unable to continue as a going concern.
2.3 Use of Estimates
The preparation of the consolidated financial statements in accordance
with generally accepted accounting principles requires management to
make estimates and assumptions relating to the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period.
Significant items subject to such estimates and assumptions include
carrying amount of property and equipment, intangibles, valuation
allowances of receivables and inventories. Actual results could differ
from those estimates.
F-14
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
Management has not made any subjective or complex judgments the
application of which would result in any material differences in
reported results.
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 consolidated statements of
cash flows, cash and cash equivalents consist of cash on hand and
deposits in banks, net of outstanding bank overdrafts.
The Company monitors its liquidity risk and maintains a level of cash
and cash equivalents deemed adequate by management to finance the
Company's operations and to mitigate the effects of fluctuations in
cash flows.
2.5 Accounts Receivable
Accounts receivable, which generally have 30 to 90 day terms, are
recorded at the invoiced amount less an allowance for any uncollectible
amounts (if any) and do not bear interest. Amounts collected on
accounts receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. The allowance
for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in the Company's existing accounts receivable.
Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery is
considered remote. Bad debts are written off as incurred. The Company
does not have any off-balance sheet credit exposure related to its
customers.
The Company's primary exposure to credit risk arises through its
accounts receivable. The credit risk on liquid funds is limited because
the counterparties are banks with high credit ratings assigned by
international credit-rating agencies.
FOR THE YEAR ENDED
-------------------------
MARCH 31, MARCH 31,
2010 2009
----------- -----------
SALES OUTSIDE OF THE U.S. $ 5,598 $ 3,215
SERVICES PURCHASED OUTSIDE OF THE U.S. $ 76,878 $ 55,053
2.6 Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets for financial reporting purposes. Expenditures for major
renewals and betterments that extend the useful lives are capitalized.
Expenditures for normal maintenance and repairs are expensed as
incurred. The cost of assets sold or abandoned and the related
accumulated depreciation are eliminated from the accounts and any gains
or losses are reflected in the accompanying consolidated statement of
income of the respective period. The estimated useful lives of the
assets range from 3 to 5 years.
F-15
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
2.7 FILM LIBRARY
Investment in the Company's film library includes movies, dramas,
comedies and documentaries in which the Company has acquired
distribution rights from a third party. For acquired films, these
capitalized costs consist of minimum guarantee payments to acquire the
distribution rights. Costs of acquiring the Company's film libraries
are amortized using the individual-film-forecast method in accordance
with SOP 00-2, "Accounting for Producers and Distributors of Films,"
whereby these costs are amortized and participations and residuals
costs are accrued in the proportion that current year's revenue bears
to management's estimate of ultimate revenue at the beginning of the
current year expected to be recognized from the exploitation,
exhibition or sale of the films. Ultimate revenue for acquired films
includes estimates over a period not to exceed twenty years following
the date of acquisition. Investments in films are stated at the lower
of amortized cost or estimated fair value.
The valuation of investment in films is reviewed on a overall basis,
when an event or change in circumstances indicates that the fair value
of the film library is less than its unamortized cost. The fair value
of the film is determined using management's future revenue and cost
estimates and a discounted cash flow approach. Additional amortization
is recorded in the amount by which the unamortized costs exceed the
estimated fair value of the film. Estimates of future revenue involve
measurement uncertainty and it is therefore possible that reductions in
the carrying value of investment in films may be required as a
consequence of changes in management's future revenue estimates.
The Company most recently completed an impairment evaluation in the
fourth quarter of fiscal year 2009. The film library was determined to
be impaired during the year ended December 31, 2009. In conducting the
analysis, the Company used a discounted cash flow approach in
estimating fair value as market values could not be readily determined
given the unique nature of the respective assets. Based upon the
analysis the Company determined that carrying amount of the film
library exceeded its fair value by $19,164,782, as reflected Note 6.
This adjustment is included in the Company's restated Form 10-K for
the year ended December 31, 2009.
2.8 INTANGIBLE ASSETS
Intangible assets consist of gaming, software license and product
development costs. Intangible assets which were purchased for a
specific period are stated at cost less accumulated amortization and
impairment losses. Such intangible assets are reviewed for impairment
in accordance with ASC 350, Accounting for Goodwill and Other
Intangible Assets. Such intangible assets are amortized over the period
of the contract, which is 2 to 18 years.
Included in the gaming license are the rights to a digit games license
in Cambodia. The license is for a minimum period of 18 years commencing
from June 1, 2005, with an option to extend for a further 5 years or
such other period as may be mutually agreed. The digit gaming license
was suspended, and the asset was impaired during the year ended
December 31, 2008. See Note 15.
The Company most recently completed an impairment evaluation in the
fourth quarter of fiscal year 2009 of its remaining gaming licenses
relating to it online video game downloads. The gaming license was
determined to be impaired during the year ended December 31, 2009. In
conducting the analysis, the Company used a discounted cash flow
F-16
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
The Company most recently completed an impairment evaluation in the
fourth quarter of fiscal year 2009 of its remaining gaming licenses
relating to it online video game downloads. The gaming license was
determined to be impaired during the year ended December 31, 2009. In
conducting the analysis, the Company used a discounted cash flow
approach in estimating fair value as market values could not be readily
determined given the unique nature of the gaming licenses. For the
gaming licenses identified as being impaired, the cash flows associated
with underlying assets did not support a value greater than zero due to
a lack of revenue associated with the gaming license. The licenses were
fully impaired as disclosed in Note 7.
The Company capitalized the development and building cost related to
the broad-band sites and infrastructure for the streaming system, most
of which was developed in 2002 as product development costs. The
Company projects that these development costs will be useful for up to
5 years before additional significant development needs to be done.
2.9 Equity Method Investment
An Equity Method Investment is an entity over which the group has
significant influence and that is neither a subsidiary nor an interest
in a joint venture. Significant influence is the power to participate
in the financial and operating policy decisions of the investee but is
not control or joint control over those policies. The results and
assets and liabilities of Equity Method Investment are incorporated in
these financial statements using the equity method of accounting. Under
the equity method, investments are carried in the consolidated balance
sheet at cost as adjusted for post-acquisition changes in the group's
share of the net assets of the Equity Method Investment, less any
impairment in the value of individual investments. Losses of an Equity
Method Investment in excess of the group's interest in that Equity
Method Investment (which includes any long-term interests that, in
substance, form part of the Company's net investment in the Equity
Method Investment) are not recognised, unless the group has incurred
legal or constructive obligations or made payments on behalf of the
Equity Method Investment.
Any excess of the cost of acquisition over the Company's share of the
net fair value of the identifiable assets, liabilities and contingent
liabilities of the Equity Method Investment recognized at the date of
acquisition is recognised as goodwill. The goodwill is included within
the carrying amount of the investment and is assessed for impairment as
part of the investment. Any excess of the Company's share of the net
fair value of the identifiable assets, liabilities and contingent
liabilities over the cost of acquisition, after reassessment, is
recognised immediately in the consolidated profit and loss statement.
Where a group entity transacts with an Equity Method Investment of the
group, profits and losses are eliminated to the extent of the group's
interest in the relevant associate.
2.10 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" ("ASC 320"). Equity
securities held for trading as of March 31, 2010 totaled $362,107,
December 31, 2009 totaled $326,980. The changes relates to an
unrealized gain of $35,127 and a loss of 9,291, for three months ended
March 31, 2010 and 2009, respectively.
F-17
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
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.
Investments 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. An impairment is booked when there is an
other-than-temporary difference between the carrying amount and fair
value of the investment that would result in a loss.
2.11 Valuation of Long-Lived Assets
The Company accounts for long-lived assets under ASC 360,"Accounting
for the Impairment or Disposal of Long-lived Assets". Management
assesses the recoverability of its long-lived assets, which consist
primarily of fixed assets and intangible assets with finite useful
lives, whenever events or changes in circumstance indicate that the
carrying value may not be recoverable. The following factors, if
present, may trigger an impairment review: (i) significant
underperformance relative to expected historical or projected future
operating results; (ii) significant negative industry or economic
trends; (iii) significant decline in the Company's stock price for a
sustained period; and (iv) a change in the Company's market
capitalization relative to net book value. If the recoverability of
these assets is unlikely because of the existence of one or more of the
above-mentioned factors, an impairment analysis is performed using a
projected discounted cash flow method. Management must make assumptions
regarding estimated future cash flows and other factors to determine
the fair value of these respective assets. If these estimates or
related assumptions change in the future, the Company may be required
to record an impairment charge. Impairment charges would be included
with costs and expenses in the Company's consolidated statements of
operations, and would result in reduced carrying amounts of the related
assets on the Company's consolidated balance sheets. See notes 2.7 and
2.8 for impairment.
2.12 Fair Value of Financial Instruments
ASC 820 establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy under ASC 820 are described below:
Level 1: Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or
inputs that are observable, either directly or
indirectly, for substantially the full term of the
asset or liability.
Level 3: Prices or valuation techniques that require inputs
that are both significant to the fair value
measurement and unobservable (supported by little or
no market activity).
F-18
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
The following table sets forth the Company's financial assets and
liabilities measured at fair value by level within the fair value
hierarchy. As required by ASC 820, assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
The table below sets forth a summary of the fair values of the
Company's financial assets and liabilities as of March 31, 2010:
Total Level 1 Level 2 Level 3
-------- -------- --------- ---------
Assets:
Equity securities held for trading $362,107 $362,107 $ -- $ --
-------- -------- --------- ---------
$362,107 $362,107 $ -- $ --
======== ======== ========= =========
The Company's equity securities held for trading are classified within
the Level 1 of the fair value hierarchy and it is valued using quoted
market prices reported on the active market on which the securities are
traded.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159 (ASC 825), The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option
has been elected are reported in net income. SFAS No. 159 (ASC 825) is
effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Upon adoption of this
Statement, the Company did not elect SFAS No. 159 (ASC 825) option for
existing financial assets and liabilities and therefore adoption of
SFAS No. 159 (ASC 825) did not have any impact on its Consolidated
Financial Statements.
F-19
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
2.13 Advances from Related Party
Advances from director and related party of $28,434 and $0 at March
31, 2010 and December 31, 2009, respectively, are unsecured,
non-interest bearing and payable on demand.
2.14 Leases
The Company is the lessee of equipment under a capital lease expiring
in 2014. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are amortized over the lower of
their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation
expense for the quarter ended March 31, 2010 and 2009.
On November 1, 2007, the Company sub-leased the office premises of M2B
World Inc, a wholly owned subsidiary of the Company in Los Angeles,
California as part of its efforts to streamline its operations and
reduce operating costs.
2.15 Foreign Currency Translation
Transactions in foreign currencies are measured and recorded in the
functional currency, U.S. dollars, using the Company's prevailing month
exchange rate. The Company's reporting currency is also in U.S.
dollars. At the balance sheet date, recorded monetary balances that are
denominated in a foreign currency are adjusted to reflect the rate at
the balance sheet date and the income statement accounts using the
average exchange rates throughout the period. Translation gains and
losses are recorded in stockholders' equity as other Comprehensive
income and realized gains and losses from foreign currency transactions
are reflected in operations.
2.16 Revenues
The Company's primary sources of revenue are from the sales of
advertising space on interactive websites owned by the Company;
distribution and licensing of content to our partners, broadband
consulting services, and gaming revenue from our digit games.
The Company recognizes revenue in accordance with Accounting Standard
Codification (ASC) 605-10 Revenue is recognized only when the price is
fixed or determinable, persuasive evidence of an arrangement exists,
the service or product is performed or delivered and collectability of
the resulting receivable is reasonably assured.
F-20
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
Website advertising revenue is recognized on a cost per thousand
impressions (CPM) or cost per click (CPC), and flat-fee basis. The
Company earns CPM or CPC revenue from the display of graphical
advertisements. An impression is delivered when an advertisement
appears in pages viewed by users. Revenue from graphical advertisement
impressions is recognized based on the actual impressions delivered in
the period. Revenue from flat-fee services is based on a customer's
period of contractual service and is recognized on a straight-line
basis over the term of the contract. Proceeds from subscriptions are
deferred and are included in revenue on a pro-rata basis over the term
of the subscriptions.
The Company enters into contractual arrangements with customers to
license and distribute content; revenue is earned from content
licenses, and content syndication, Agreements with these customers are
typically for multi-year periods. For each arrangement, revenue is
recognized when both parties have signed an agreement, the fees to be
paid by the customer are fixed or determinable, collection of the fees
is probable, the delivery of the service has occurred, and no other
significant obligations on the part of the Company remain. 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
The Company enters into contractual arrangements with customers on
broadband consulting services and on-line turnkey solutions. Revenue is
earned over the period in which the services are rendered. For each
arrangement, revenue is recognized when a written agreement between
both parties exist, the fees to be paid by the customer are fixed or
determinable, collection of the fees is probable, and fulfillment of
the obligations under the agreement has occurred, Revenue from
broadband consulting services and on-line turnkey solutions is
recognized over the period in which the services are rendered, by
reference to completion of the specific transaction assessed on the
basis of the actual services provided as a proportion of the total
services to be performed. It is generally recognized from the date of
acceptance and fulfillment of obligations under the sale and purchase
agreement.
2.17 Costs of Services
The cost of services pertaining to advertising and sponsorship revenue
and subscription and related services are cost of bandwidth charges,
channel design and alteration, copyright licensing, and hardware
hosting and maintenance costs. The cost of services pertaining to
E-commerce revenue is channel design and alteration, and hardware
hosting and maintenance costs. The cost of services pertaining to
gaming is for managing and operating the operations and gaming centers.
All these costs are accounted for in the period its was incurred.
2.18 Income Taxes
Deferred income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred income taxes are measured using enacted tax rates expected to
apply to taxable income in years in which such temporary differences
are expected to be recovered or settled. The effect on deferred income
taxes of a change in tax rates is recognized in the statement of income
of the period that includes the enactment date. In addition, a
valuation allowance is established to reduce any deferred tax asset for
which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.
F-21
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
During the year ended December 31, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No.
109, "Accounting for Income Taxes," by defining the confidence level
that a tax position must meet in order to be recognized in the
financial statements. The Interpretation requires that the tax effects
of a position be recognized only if it is "more-likely-than-not" to be
sustained based solely on its technical merits as of the reporting
date. The more-likely-than-not threshold represents a positive
assertion by management that a company is entitled to the economic
benefits of a tax position, If a tax position is not considered
more-likely-than-not to be sustained based solely on its technical
merits. No benefits of the tax position are to be recognized. Moreover,
the more-likely-than-not threshold must continue to be met in each
reporting period to support continued recognition of a benefit. With
the adoption of FIN 48, companies are required to adjust their
financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained. Any necessary adjustment would be
recorded directly to retained earnings and reported as a change in
accounting principle.
Upon adoption of FIN 48 as of January 1, 2007, the Company had no gross
unrecognized tax benefits that, if recognized, would favorably affect
the effective income tax rate in future periods. At December 31, 2007
the amount of gross unrecognized tax benefits before valuation
allowances and the amount that would favorably affect the effective
income tax rate in future periods after valuation allowances were $0.
These amounts consider the guidance in FIN 48-1, "Definition of
Settlement in FASB Interpretation No. 48".The Company has not accrued
any additional interest or penalties as a result of the adoption of FIN
48.
The Company files income tax returns in the United States federal
jurisdiction and certain states in the United States and certain other
foreign jurisdictions. With a few exceptions, the Company is no longer
subject to U. S. federal, state or foreign income tax examination by
tax authorities on income tax returns filed before December 31, 2004.
U. S. federal. State and foreign income returns filed for years after
December 31, 2004 are considered open tax years as of the date of these
consolidated financial statements. No income tax returns are currently
under examination by any tax authorities.
2.19 Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued FAS No. 128 "Earnings Per Share" which requires the Company to
present basic and diluted earnings per share, for all periods
presented. The computation of earnings per common share (basic and
diluted) is based on the weighted average number of shares actually
outstanding during the period. The Company has no common stock
equivalents, which would dilute earnings per share.
2.20 Fair Value of Financial Instruments
Investments that are not publicly traded or have resale restrictions
greater than one year are accounted for at cost. Trading securities are
held at fair value based upon prices quoted on an exchange.
2.21 Advertising
The cost of advertising is expensed as incurred. For the three months
ended March 31, 2010 and 2009, the Company incurred advertising
expenses of $932 and $13,181 respectively.
F-22
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
2.22 Reclassifications
Certain amounts in the previous periods presented have been
reclassified to conform to the current year financial statement
presentation.
3. EQUITY SECURITIES HELD FOR TRADING
March 31, December 31,
2010 2009
------------ ------------
Quoted equity security, at fair value $ 362,107 $ 326,980
============ ============
The fair value of quoted security is based on the quoted closing market
price on the date of Sale and Purchase agreement. The investment in
quoted equity security at fair value includes an impairment loss of
$35,127.
The investments in quoted equity securities comprised of 37,000,000
common shares of PT Agis at the market value of $0.00979 and
$0.00884 per share as of March 31, 2010 and December 31, 2009,
respectively.
The Company's equity securities held for trading investment is
denominated in Indonesian Ruppiah.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
MARCH 31, DECEMBER 31,
2010 2009
------------ ------------
Prepayments $ 50,157 $ 53,159
Deposits 53,166 55,159
Other receivables 80,807 78,809
------------ ------------
$ 184,130 $ 187,131
============ ============
F-23
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2010 2009
----------- -----------
Office equipment $ 1,023,788 $ 1,023,788
Motor vehicle 91,190 91,190
Furniture, fixture and fittings 87,082 87,082
Pony set-top boxes 843,946 843,946
----------- -----------
2,046,006 2,046,006
Accumulated depreciation (1,484,456) (1,403,046)
----------- -----------
$ 561,550 $ 642,960
=========== ===========
Depreciation expense was $81,410 for the three months ended March 31,
2010 and $128,076 for the three months ended March 31, 2009.
6. FILM LIBRARY
Film library consist of the following:
MARCH 31, DECEMBER 31,
2010 2009
(RESTATED)
------------ ------------
Acquired Film Library $ 23,685,259 $ 23,683,634
------------ ------------
Accumulated Amortization (4,607,328) (4,518,852)
------------ ------------
$(23,683,634 $ 19,164,782
Impairment of Film Library 1,625) (19,164,782)
------------ ------------
Film Library $ -- $ --
============ ============
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
MARCH 31, DECEMBER 31,
2010 2009
----------- -----------
FINITE-LIVED INTANGIBLE ASSETS
Gaming license 7,090,000 7,090,000
Product development expenditures 719,220 719,220
Software license 12,649 12,649
----------- -----------
7,821,869 7,821,869
Accumulated amortization (1,974,328) (1,974,328)
----------- -----------
5,847,541 5,847,541
----------- -----------
Impairment loss (5,847,541) (5,847,541)
----------- -----------
$ -- $ --
=========== ===========
Amortization expense was $0 for the three months ended March 31,2010
and $30,000 for the three months ended March 31, 2009. See Note 2.8 for
impairment analysis.
F-24
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
8. INVESTMENTS - COST
Investments held at cost consist of the following:
MARCH 31, DECEMBER 31,
2010 2009
----------- -----------
Non Current:
Unquoted equity securities 116,136 116,136
Unquoted equity securities 2,602,613 2,602,613
----------- -----------
$ 2,718,749 $ 2,718,749
=========== ===========
The Company's $116,13 investment held at cost relates to its investment
in M2B Game World Pte Ltd. Management reviews this investment on a
quarterly basis and has noted no impairment for the three months ended
March 31, 2010 and 2009, respectively.
The Company's $2,602,613 investment at cost operates in Cambodia. This
investment is subject to numerous risks, including:
- difficulty enforcing agreements through the Cambodia's legal
system;
- general economic and political conditions in Cambodia; and
- the Cambodian government may adopt regulations or take other
actions that could directly or indirectly harm the equity method
investment's business and growth strategy.
The occurrence of any one of the above risks could harm equity method
investment's business and results of operations. Management reviews
this investment on a quarterly basis and has noted no impairment for
the three months ended March 31, 2010 and 2009,respectively.
It was not practicable to estimate the fair value of two of the
Company's investments held at cost. The investment held at cost located
in Cambodia represents 10 percent of the issued common stock of an
untraded company; that investment is carried at its original cost of
$2,602,613 for the period ended March 31, 2010 and December 31, 2010,
respectively in the consolidated balance sheet. At year-end 2009 the
total assets reported by the untraded company were $24,232,528
(2008,$24,592,585), common stockholders' equity was $20,070,792 (2008,
$23,047,695),revenues were $6,489,617 (2008, $12,468,674)and net income
(loss)was (2,715,893)(2008,$5,837,675). The investment held at cost
located in Singapore represents percent of the issued common stock of
an untraded company; the investment is carried at its original cost of
$116,136 (2008, $116,636)in the consolidated balance sheet. At year-end
2009 the total assets reported by the untraded company were $995,917,
(2008,$1,541,561), common stockholders' equity was $399,202
(2008,$1,016,574)), revenues were $42,670 (2008,$887,834) and net
income (loss) was ($617,372) (2008,$59,510).
9. COMMITMENTS
Capital Leases
The Company is the lessee of equipment under capital leases expiring in
various years through 2013. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are amortized
over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is
included in depreciation expense for 2010 and 2009. Interest rates on
capitalized leases is fixed at 2.85%.
The following summarizes the Company's capital lease obligations at
March 31, 2010:
MARCH 31, DECEMBER 31,
2010 2009
------------ ------------
Future minimum lease payments $ 54,401 $ 57,580
Less: amounts representing interest (9,048) (9,577)
------------ ------------
Present value of net minimum lease payments 45,353 48,803
Less: current portion (11,108) (11,079)
------------ ------------
$ 34,245 $ 36,924
============ ============
F-25
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
At March 31, 2010, total future minimum lease commitments under such
lease are as follows:
For the Year Ended
December 31, Capital
--------------------- --------
2010 7,629
2011 11,079
2012 11,079
2013 15,566
--------
$ 45,353
========
Operating Leases
The Company leases facilities and equipment under operating leases
expiring through 2012. Total rental expense on operating leases for the
three months ended March 31, 2010 and 2009 was $26,757 and $35,357,
respectively. As of March 31, 2010, the future minimum lease payments
are as follows:
For the Year Ended
December 31, Operating
--------------------- ---------
2010 80,088
2011 102,857
2012 60,000
--------
$242,945
========
10. INCOME TAXES
The Company files separate tax returns for Singapore and the United
States of America.
The Company had available approximately $7,600,000 of unused U.S. net
operating loss carry-forwards at March 31, 2010, that may be applied
against future taxable income. These net operating loss carry-forwards
expire for U.S. income tax purposes beginning in 2026. There is no
assurance the Company will realize the benefit of the net operating
loss carry-forwards.
ASC 740 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. As of March 31, 2010 the Company maintained a valuation
allowance for the U.S. deferred tax asset due to uncertainties as to
the amount of the taxable income from U.S. operations that will be
realized.
The Company had available approximately $7,200,000 of unused Singapore
tax losses and capital allowance carry-forwards at March 31, 2010, 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-26
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
12. RELATED PARTY TRANSACTIONS
Related parties are entities with common direct or indirect
shareholders and/or directors. Parties are considered to be related if
one party has the ability to control the other party or exercise
significant influence over the other party in making financial and
operating decisions.
Some of the company's transactions and arrangements are with the
related party and the effect of these on the basis determined between
the party is reflected in these financial statements. The balances are
unsecured, interest-free and repayable on demand unless otherwise
stated.
During the period, the Group entered into the following transactions
with a related pary:
MARCH 31, MARCH 31,
2010 2009
--------- --------
Advance from
related Party $ 28,434 $ --
========= =======
13. PURCHASE OF CBBN HOLDINGS LIMITED
The Company through its wholly owned subsidiary, Tremax International
Limited, entered into a sale and purchase agreement dated July 10, 2007
with Domaine Group Limited which has not yet been consummated. Per the
agreement the Company through its wholly owned subsidiary, Tremax
International Limited would transfer 5,333,333 shares of the Company
valued at $3,733,333 in exchange for Domaine Group Limited transferring
its 100% shares in CBBN Holdings Limited, a company incorporated in the
British Virgin Islands. The transaction has not been consummated and
the agreement had expired and was not extended. The Management of the
Company had decided not to proceed with this agreement.
On January 22, 2009, the Company approved the termination and recission
of the Agreement where the seller failed to comply with the terms of
the Agreement and did not deliver to the Company or Purchaser the
consideration for the issuance of the Amaru Shares. The Company further
approved the cancallation of the Amaru Shares.
F-27
AMARU, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 AND 2009
14. IMPAIRMENT OF DIGIT GAMES LICENSE
The digit game license has been impaired due to the digit game
operations being suspended and all operations stopped by the Cambodia
Government. The company, Allsports managing the digit games in the
Kingdom of Cambodia had also not released the profit to M2B Commerce,
Ltd. from 2007 to present. Management has been recording revenues based
on information provided by Allsports's staff throughout the years and
have verified and adjusted them to actual as of year end. Due to lack
of access as stated above, all revenues for the year ended 2008 will be
reversed since the Company's recognition criteria related to the
associated revenues were not met.
15. LOAN AND BORROWINGS
March 31, DECEMBER 31,
2010 2009
----------- -----------
Non-current
Convertible loan $ 2,500,000 2,500,000
Less: Future interest charges (35,954) (67,204)
----------- -----------
$ 2,464,046 2,432,796
=========== ===========
Term loans held by the Company at balance sheet date are as follows:
(a) $2,500,000 represents a two years convertible loan drawn down
by a subsidiary company. It bears interest at a fixed rate of
5.0% per annum. The loan allows the borrower the option to
convert the loan into shares of the subsidiary company at the
issue price of $0.942 per share at the end of the two years
period. The loan commenced in July 2008 and will mature in
June 2010.
16. SUBSEQUENT EVENTS
On April 27, 2010, the Company issued a total of 728,598 shares of
common stock through its private placement of shares of common stock at
a purchase price of $0.10 per share for a total amount of $72,859.80,
to an "accredited investor", as that term is defined in Regulation D of
the Securities Act of 1933.
F-28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 0F FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
The Company is in the business of broadband entertainment-on-demand, streaming
via computers, television sets, and 3G (Third Generation) devices and the
provision of broadband services. Its business includes channel and program
sponsorship (advertising and branding); online subscriptions, channel/portal
development (digital programming services); content aggregation and syndication,
broadband consulting services, broadband hosting and streaming services and
E-commerce.
The Company is also in the business of digit gaming (lottery). The Company has
an 18 year license to conduct nation wide lottery in Cambodia. The Company
through its subsidiary, M2B Commerce Limited, signed an agreement with Allsports
International Ltd, a British Virgin Islands company to operate and conduct digit
games in Cambodia and to manage the digit games activities in Cambodia. On March
25, 2009, the Company was notified that the digit game lottery operations have
been suspended by the government of Cambodia as part of the suspension of all
lotteries in Cambodia.
The Company believes at this time that the suspension of the digit games is
permanent, as the Government of Cambodia has closed the gaming business by the
order of its Ministry of Economy and Finance. See Note 15.
The following discussion should be read in conjunction with selected financial
data and the financial statements and notes to financial statements.
1
OVERVIEW
The business focus of the Company is Entertainment-on-Demand and E-Commerce
Channels on Broadband, and 3G (Third Generation) devices.
For the broadband, the Company delivers both wire and wireless solutions,
streaming via computers, TV sets, PDAs and 3G hand phones. At the same time the
Company launches e-commerce channels (portals) that provide on-line shopping but
with a difference, merging two leisure activities of shopping and entertainment.
The entertainment channels are designed to drive and promote the shopping
portals, and vice versa.
The Company's business model in the area of broadband entertainment includes
focuses on e-services, which would provide the Company with multiple streams of
revenue. Such revenues would be derived from advertising and branding (channel
and program sponsorship); on-line subscriptions; online games micro-payments;
channel/portal development (digital programming services); content aggregation
and syndication; broadband consulting services; on-line shopping turnkey
solutions; broadband hosting and streaming services; E-commerce commissions and
on-line dealerships; and digit game operations.
In fiscal 2008, the business was reorganized under the following entities to
spearhead the expansion of the Company's business and focus on specific growth
areas and territories.
M2B WORLD PTE. LTD.
M2B World Pte. Ltd. was incorporated on April 3, 2003. This subsidiary used to
oversee the management and operation of the Company as a whole and oversees the
Asian business. With effect from September 1, 2006, the Company's Asian business
was overseen by another subsidiary, M2B World Asia Pacific Pte. Ltd.
The Company took an investment on May 16, 2005 for a 9.1% equity position with a
company called Activ Lifestyle Pte Ltd in Singapore to help facilitate Amaru
Inc.'s diversification into the health and wellness market.On September 27,
2005, the Company raised its investment in Activ Lifestyle Pte Ltd to 12.6%.
This was further increased to 17.4% as of December 31, 2006.
In December 2005, M2B World Pte. Ltd. sold 81% equity interests of its
wholly-owned subsidiary, M2B Game World Pte. Ltd. to Auston International Group
Ltd (Auston), a public listed company in Singapore, in exchange for 27% equity
interest in Auston. As of December 31, 2008, the Company disposed all of its
common shares in Auston. As of the date of this report, the Company holds no
shares in Auston.
M2B WORLD, INC.
M2B World, Inc., a California corporation, was incorporated on January 24, 2005.
This subsidiary handles and oversees the Company's business in the U.S. The
Company has leased a new office on Sunset Boulevard, West Hollywood that came
into effect in August 2006, which offices are currently being subleased (see
below). In October 2007, M2B World Inc reduced its staffing and in November 2007
sub-leased its premise as part of the Company's cost reduction measures.
On May 27, 2005, M2B World, Inc. entered into an agreement with Indie Vision
Films, Inc., a California corporation, to purchase 20% of the beneficial
ownership of Indie Vision Films, Inc. The investment will allow M2B World,
Inc.to access the library of programs of Indie Vision Films, Inc. The Company
entered into an agreement on December 22, 2009 with Indie Vision Films, Inc to
convert its investment into content rights, thereby giving up its 20% share of
beneficial ownership in lieu of library rights that the Company could exploit
commercially for international use.
On November 1, 2007, the Company sub-leased the office premises of M2B World
Inc, a wholly owned subsidiary of the Company in Los Angeles, California as part
of its efforts to streamline its operations and reduce operating costs. The
staffing of M2B World Inc was also reduced from 9 staff to 1 staff as of October
31, 2007, and remains as 1 staff as of the date of this report. The company has
transferred its server farm to the Singapore server farm to, optimize bandwidth
and support cost.
2
M2B WORLD ASIA PACIFIC PTE. LTD.
M2B World Asia Pacific Pte Ltd was incorporated in the Republic of Singapore on
1 August 2006 for the purposes of handling all the business operations of the
Company in the Asia Pacific region. This company had taken over the Asian
business operations as well as the assets and liabilities of M2B World Pte. Ltd.
with effect from September 1, 2006.
On January 3, 2007, M2B World Asia Pacific Pte Ltd, issued 7,778,014 shares of
common stock through a private placement at a price of $0.77 a share for a total
amount of $6,000,000. This had effectively reduced the Company's effective
equity interest in M2B World Asia Pacific Pte. Ltd from 100% to 81.6%.
On July 8, 2008, M2B World Asia Pacific Pte Ltd signed a two year convertible
loan agreement with a third party to raise $2,500,000 in funding. The loan
allows the borrower to convert the loan into shares of the Company at the issue
price of $0.942 per share at the end of the two years period. The loan bears an
interest rate of 5.0% per annum, and will mature in June 2010. The note was
obtained from a company in which a board of director is the Joint Company
Secretary of the lender.
M2B COMMERCE LIMITED
M2B Commerce Limited, a company incorporated in the British Virgin Islands on
July 25, 2002, focuses on e-commerce and digit gaming, with a branch in Cambodia
that oversees the digit gaming operation in Cambodia.
The Company has an agreement with Allsports Limited, a British Virgin Islands
company to operate, administer, and manage the lottery digit game activities in
Cambodia, as an extension of the Company's entertainment operations. On March
25, 2009, the Company was notified that the digit game were suspended by the
Cambodia Government as part of the suspension of all lotteries in Cambodia. At
this time, the Company believes that the suspension of the digit game is
permanent as the Government of Cambodia has closed the gaming business by the
order of its Ministry of Economy and Finance.
The company had entered into an investment agreement on January 12, 2006, with
Khoo Kim Leng, the beneficial owner of Dai Long Co., Ltd, which holds a valid
casino license and freehold land and intends to develop and operate an
integrated resort in the Kingdom of Cambodia. The resort will feature a hotel,
guest house, shopping arcade, entertainment and amusement center and some gaming
tables. As of December 31, 2006, the company had invested $2,402,613 in relation
to this investment. The resort was completed and is in operation subsequent to
the balance sheet date.
M2B ENTERTAINMENT, INC.
M2B Entertainment, Inc. was incorporated on October 27, 2005. This subsidiary
will oversee the Company's Canadian market. As of June 30, 2008, this subsidiary
is dormant.
M2B AUSTRALIA PTY LTD
M2B Australia Pty Ltd was incorporated on June 15, 2005. This subsidiary handles
and oversees the Company's business in Australia. As of June 30, 2008 this
subsidiary is dormant.
M2B WORLD TRAVEL SINGAPORE PTE. LTD.
M2B World Travel Singapore Pte Ltd was incorporated in the Republic of Singapore
on March 7, 2006. This subsidiary of M2B World Travel Limited launches a global
online travel platform which offers global e-travel services.
The Company has completed the development of an online travel engine and travel
web applications for integration with suppliers of travel information and travel
services; and incorporating travel features with current media operations under
the M2B brand name.
3
M2B World Travel Limited signed a global agreement with Amadeus Global Travel
Distribution, SA, a Spanish corporation. Through the agreement, the company will
be able to offer direct access to the extensive range of travel options
available through the Amadeus network to viewers around the world.
AMARU HOLDINGS LIMITED AND M2B WORLD HOLDINGS LIMITED
Amaru Holdings Limited and M2B World Holdings Limited are incorporated in the
British Virgin Islands on February 21, 2005 and June 15, 2006, respectively.
Amaru Holdings Limited focuses on content syndication and distribution in areas
other than Asia Pacific region. M2B World Holdings Limited focuses on content
syndication and distribution in Asia Pacific region and is a subsidiary of M2B
World Asia Pacific Pte. Ltd.
TREMAX INTERNATIONAL LIMITED AND M2B WORLD TRAVEL LIMITED
Tremax International Limited and M2B World Travel Limited are both incorporated
in the British Virgin Islands on June 8, 2006 and May 3, 2005 respectively. Both
companies are investment holdings companies.
On July 10, 2007, Tremax International Limited entered into a sale and purchase
agreement (the "Agreement") with Domaine Group Limited, a British Virgin Islands
corporation (the "Vendor"), for the acquisition of CBBN Holdings Limited ("CBBN
Holdings"). CBBN Holdings is a 80% beneficial owner of Cosmactive Broadband
Networks Co. Ltd ("CBN"), which is a broadband service provider incorporated in
Taiwan. The purchase consideration is satisfied in full by the issuance of
5,333,333 of common stock of the Company.
On January 22, 2009, the Company approved the termination and rescission of the
Agreement, because the seller failed to comply with the terms of the Agreement
and did not deliver to the Company or Purchaser the consideration for the
issuance of the Amaru Shares. The Company further approved the cancellation of
the Amaru Shares.
4
RESULTS OF OPERATIONS
REVENUE
Financial Statement
- Revenue for the three months ended March 31, 2010 was $5,598 compared
with $3,215 for the same period in 2009.
- The Company's cash balance was $217,404 at March 31, 2010 compared with
$356,477 at December 31, 2009.
Revenue
Revenue from entertainment for the three months ended March 31, 2010 at $5,598
was higher than revenue of $3,215 for the three months ended March 31, 2009 by
$2,383 (74%). It was mainly due to increase in subscription received from new
customers for the three months ended March 31, 2010.
Cost of Services
Cost of services for the three months ended March 31, 2010 was $76,878 which
increased by $21,825 (40%) from $55,053 for the three months ended March 31,
2009. It was mainly due to increase in cost spending on bandwidth charges by
$28,635 (346%) from $8,285 for the three months ended March 31, 2009 to $36,920
for the three months ended March 31, 2010.
DISTRIBUTION EXPENSES
Distribution expenses for the three months ended March 31, 2010 at $13,016 were
lower by $19,665 (60%) as compared to the amount of $32,681 incurred for the
three months ended March 31, 2009.
The lower distribution expenses were attributed to decreased spending on
marketing and promoting the WOWtv and M2Btv services which decreased by
$12,249(93%) from $13,181 for the three months ended March 31, 2009 to $932 for
the three months ended March 31, 2010.
GENERAL AND ADMINISTRATIVE EXPENSES
Administration expenses for the three months ended March 31, 2010 at $347,642
were lowered by $186,063 (33 %) as compared to the amount of $533,705 incurred
for the three months ended March 31, 2009.
The decrease in administrative expenses for the period ended March 31, 2010 was
attributed mainly to the decrease in:
o Depreciation and amortization. Equipment depreciation and license
amortization and note amortization had decreased by $221,577 (67 %),
from $335,862 for the three months ended March 31, 2009 to $114,285 for
the period ended March 31, 2010. The decrease was mainly due to most of
the intangible assets and equipment being fully amortized and allowed
for during the year ended December 31, 2009.
o Legal and professional fees. Fees had decreased by $16,486 (27%), from
$61,434 for the three months ended March 31, 2009 to $44,948 for the
three months ended March 31, 2010. The decrease was mainly due as a
result of costs reduction measures to reduce operating costs
o Staff costs. Staff costs had decreased by $36,838 (32%), from $114,558
for the three months ended March 31, 2009 to $77,720 for the three
months ended March 31, 2010. The decrease was mainly due as a result of
costs reduction measures to reduce operating costs
5
(LOSS) INCOME FROM OPERATIONS
The Company incurred a loss from operations of $431,938 for the three months
ended March 31, 2010 as compared to the loss from operations of $618,224 for the
three months ended March 31, 2009 due mainly due as a result of costs reduction
measures to reduce operating costs and impairment loss provided on film library.
NET LOSS
Net loss for the three months ended March 31, 2010, was $423,545 which decreased
by $222,076 (34%) from net loss of $645,621 for the three months ended March 31,
2009. The decrease was mainly due as a result of costs reduction measures to
reduce operating cost.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at $217,404 at March 31, 2010 as compared to cash of
$356,477 at December 31, 2009.
The Company does not finance its operations through short-term bank credit nor
long-term bank loans as it believes that cash generated from its operations will
be able to cover its daily running cost and overheads.
During the three months ended March 31, 2010, the Company had not entered into
any transactions using derivative financial instruments or derivative commodity
instruments. Accordingly the Company believes its exposure to market interest
rate risk is not material.
Cash generated from operations will not be able to cover the Company's intended
growth and expansion. The Company has plans in 2009 to expand its broadband
coverage by launching new broadband sites in Asia Pacific region and Australia.
No assurances can be made that such plans will be carried out in a timely
manner.
The Company intends to raise additional funds, to fund its business expansion;
however no assurances can be made that the Company will raise sufficient funds
as planned.
6
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, high-grade corporate bonds, government and non- government
debt securities and certificates of deposit. In general, money market funds are
not subject to market risk because the interest paid on such funds fluctuates
with the prevailing interest rate. The Company held $362,107 and $326,980 in
marketable securities as of March 31, 2010 and December 31, 2009 respectively.
The Company does not believe that it faces material market risk with respect to
its cash and cash equivalents which totaled $217,404 and $356,477 at March 31,
2010 and December 31, 2009, respectively.
The Company has no long-term obligations or hedging activities.
ABILITY TO EXPAND CUSTOMER BASE
The Company's future operating results depend on our ability to expand our
customer base for broadband services and e-commerce portals. An increase in
total revenue depends on our ability to increase the number of broadband and
e-commerce portals, in the US, Europe and Asia. The degree of success of this
depends on
o our efforts to establish independent broadband sites in countries where
conditions are suitable.
o our ability to expand our offerings of content in entertainment and
education, to include more niche channels and offerings.
o our ability to provide content beyond just personal computers but to
encompass television, wireless application devices and 3G hand phones.
ABILITY TO ACQUIRE NEW MEDIA CONTENTS
The continued ability of the Company to acquire rights to new media contents, at
competitive rates, is crucial to grow and sustain the Company's business.
AVAILABILITY OF TECHNOLOGICALLY RELIABLE NEW GENERATION OF BROADBAND DEVICES
The growth of demand for broadband services is dependent on the wide
availability of technologically reliable new generation of broadband devices, at
affordable prices to prospective customers of broadband services. The early and
widespread availability and market adoption of new generation broadband devices,
will significantly impact demand for broadband services and the growth of the
Company's business.
7
CAPITAL INVESTMENT IN BROADBAND INFRASTRUCTURE BY GOVERNMENT AND TELCOS
The growth of demand for broadband services is dependent on the capital
investment in broadband infrastructure by governments and Telcos. A significant
source of demand for the Company's broadband services could be from homes and
enterprises with access to high-speed broadband connections. The ability of
countries to invest in public broadband infrastructure to offer public
accessibility is subject to countries' economic health. The Company's prospects
for business growth in Asia especially would be impacted by overall economic
conditions in the territories that we seek to expand into.
COMPETITION FROM BROADBAND CABLE AND TV NETWORKS OPERATORS
The competition of services provided by broadband cable network operators and TV
networks. As traditional TV networks and cable TV operators provide alternate
supply of entertainment and on-demand broadband services, they are in
competition with the Company, for market share. The Company, nevertheless, will
continue to leverage on its advantage of ownership rights to its own portfolio
of media content and its ability to provide broadband services over both the
cable and wireless networks, at competitive rates.
The Company's business is reliant on complex information technology systemsf and
networks. Any significant system or network disruption could have a material
adverse impact on our operations and operating results. The Company's nature of
business is highly dependent on the efficient and uninterrupted operation of
complex information technology systems networks, may they, either be that of
ours, or our Telco/ ISP partners.
All information technology systems are potentially vulnerable to damage or
interruption from a variety of sources, including but not limited to computer
viruses, security breach, energy blackouts, natural disasters and terrorism, war
and telecommunication failures.
System or network disruptions may arise if new systems or upgrades are defective
or are not installed properly. The Company has implemented various measures to
manage our risks related to system and network disruptions, but a system failure
or security breach could negatively impact our operations and financial results.
LAW AND REGULATIONS GOVERNING INTERNET
Increased regulation of the Internet or differing application of existing laws
might slow the growth of the use of the Internet and online services, which
could decrease demand for our services. The added complexity of the law may lead
to higher compliance costs resulting in higher costs of doing business.
UNAUTHORIZED USE OF PROPRIETARY RIGHTS
Our copyrights, patents, trademarks, including our rights to certain domain
names are very important to M2B's brand and success. While we make every effort
to protect and stop unauthorized use of our proprietary rights, it may still be
possible for third parties to obtain and use the intellectual property without
authorization. The validity, enforceability and scope of protection of
intellectual property in Internet-related industries remain uncertain and still
evolving. Litigation may be necessary in future to enforce these intellectual
property rights. This will result in substantial costs and diversion of the
Company's resources and could disrupt its business, as well as have a material
adverse effect on its business.
8
LAW AND REGULATIONS GOVERNING BUSINESS
As the Company continues to expand its business internationally across different
geographical locations there are risks inherent including:
1) Trade barriers and changes in trade regulations 2) Local labor laws and
regulations 3) Currency exchange rate fluctuations 4) Political, social or
economic unrest 5) Potential adverse tax regulation 6) Changes in governmental
regulations
OUTBREAK OF N1H1 VIRUS FLU PANDEMIC OR SIMILAR PUBLIC HEALTH DEVELOPMENTS
Any future outbreak of the N1H1 flu pandemic or similar adverse public health
developments may have a material adverse effect on the Company's business
operations, financial condition and results of operations.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
A system of disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as
amended [the "Exchange Act"]) are controls and other procedures that
are designed to provide reasonable assurance that the information that
the Company is required to disclose in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives, and management
necessarily is required to use its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. In
addition, the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Moreover, over
time, controls may become inadequate because of changes in conditions,
or the degree of compliance with policies or procedures may
deteriorate. Because of the inherent limitations in a control system,
misstatements due to error or fraud may occur and not be detected.
Notwithstanding the issues described below, the current management has
concluded that the consolidated financial statements for the periods
covered by and included in the Quarterly Report on Form 10-Q for the
period ended March 31, 2010 are fairly stated in all material respects
in accordance with generally accepted accounting principles in the
United States for each of the periods presented herein.
9
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and
maintaining adequate internal control over the Company's financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with United States of America generally accepted
accounting principles. A Company's internal control over financial
reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that
receipts and expenditures of the Company are being made only in
accordance with authorization of management and directors of the
Company and (iii) provide reasonable assurance regarding the prevention
or timely detection of unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on our
consolidated financial statements.
In connection with the preparation of this Quarterly Report on Form
10Q, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of internal
control over financial reporting based on criteria established in the
framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
("COSO"), as supplemented by the COSO publication Internal Control over
Financial Reporting - Guidance for Smaller Public Companies. Based on
such evaluation, our chief executive officer and our chief financial
officer have concluded that, as of the Evaluation Date, our disclosure
controls and procedures were not effective to ensure that information
required to be disclosed by us in the reports that we file or submit
under the Exchange Age is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms. Specifically, our chief executive officer
and our chief financial officer determined that our control over film
library and investment classification report was not effective. We have
resolved our film library and investment classification report issues
subsequent to the Evaluation Date and prior to the filing date of this
report. We intend to further monitor this failure by engaging more
frequently in training exercises and by implementing review policies
that begin prior to and continue during the various states of our
financial statement preparation.
Management
is aware that there is a lack of segregation of duties at the Company
due to the fact that there are only four people dealing with financial
and accounting matters. However, at this time, management has decided
that considering the experience and abilities of the employees involved
and the low quantity of transactions processed, the risks associated
with such lack of segregation are low and the potential benefits of
adding employees to clearly segregate duties do not justify the
substantial expenses associated with such increases. Management will
periodically reevaluate this situation.
Notwithstanding the above regarding the lack of segregation of duties,
management, including our Chief Executive Officer and Chief Financial
Officer, believes that the consolidated financial statements included
in this annual report present fairly, in all material respects, our
financial condition, results of operations and cash flows for the
periods presented. This annual report does not include an attestation
report of our registered independent auditors regarding internal
control over financial reporting. Management's report was not subject
to attestation by our registered independent auditors pursuant to
temporary rules of the SEC that permit us to provide only management's
report in this annual report.
There were no changes in Internal Control Over Financial Reporting
during the quarter ended March 31, 2010, there were no changes in our
internal controls that have materially affected or are reasonably
likely to have materially affected our internal control over financial
reporting. Our management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that our disclosure controls
and procedures or our internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of
the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the company have been detected.
10
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) has
concluded, based on their evaluation as of March 31, 2010, that the
design and operation of our "disclosure controls and procedures" (as
defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange
Act of 1934, as amended ("Exchange Act")) are effective to ensure that
information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded,
processed, summarized and reported to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding whether or not disclosure is required.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over
financial reporting during the most recently completed fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 15, 2008, M2B Commerce Limited filed a lawsuit in the Kingdom of
Cambodia for breach of the Performance and Maintenance Agreement dated May 20,
2005 between M2B Commerce Limited and Allsports International Ltd, by Allsports
International Ltd seeking damages in the total amount of $794,189 and calling
for the termination of the Performance and Maintenance Agreement.
On December 4, 2008, M2B Commerce Limited filed two further lawsuits in the
Kingdom of Cambodia against the owners of Allsports International Ltd, in
support of its earlier suit of September 15, 2008 against Allsports
International Ltd for breach of the Performance and Maintenance Agreement dated
May 20, 2005. One lawsuit was against the four principal officers of Allsports
International Ltd for breach of trust of the total amount of $794,189 owing to
M2B Commerce Limited. The other lawsuit was to get Allsports International Ltd
to transfer the shares of the Lottery Company to M2B Commerce Limited, in lieu
of the earlier lawsuit of September 15, 2008 which called for the termination of
the Performance and Maintenance Agreement.
With the suspension of all digit gaming operations by the Cambodia Government in
March 2009, and which the suspension is expected to be permanent, no progress
has been made by the Cambodian Courts with respect to the three lawsuits filed
on September 15, 2008 and December 4, 2008 in the Kingdom of Cambodia. The
Company believes that the Cambodian Courts are not likely to pursue these legal
cases with the parties concerned in the light of the digit games suspension in
Cambodia.
On November 7, 2008, M2B World Asia Pacific Pte. Ltd was served a summons in
Singapore by M2B Game World Pte. Ltd, a company owned 81% by Auston
International Group Limited and 19% by M2B World Pte. Ltd, claiming a sum of
US$153,744 (S$235,229) in unpaid invoices in 2006. Following this, M2B World
Asia Pacific Pte. Ltd filed a counter claim to strike off this summons on the
basis that the invoices were non-existent and that M2B World Asia Pacific Pte.
Ltd was not yet incorporated as a company as of the date of the invoices
produced by M2B Game World Pte. Ltd. The matter has not progressed since M2B
Game World Pte Ltd change of Solicitors on 21st October 2009.
On February 23, 2009, M2B World Pte Ltd was served a summons in Singapore by
Auston International Group Limited, claiming a sum of US$496,765 (S$760,050) to
be paid as shortfall in Guaranteed Profit to M2B Game World Pte. Ltd for
financial years 2006 and 2007, as part of the agreement for the acquisition of
M2B Game World in December 20, 2005 between M2B World Pte Ltd and Auston
International Group Limited. On March 20, 2009 in response to this summons, M2B
World Pte. Ltd filed a counter-claim against Auston International Group Limited
to claim damages amounting to US$1,568,172 and other damages as a result of
material breaches on the part of Auston International Group Limited to the
agreement of December 20, 2005 for the acquisition of M2B Game World Pte Ltd.
The Plaintiffs (Auston) have (on 12 May 2010) been granted leave to amend their
Statement of Claim and M2B World has had its application for discovery of the
2006 and 2007 audited accounts of Auston granted.
11
ITEM 1A: RISK FACTORS
An investment in the Company's common stock involves a high degree of risk. One
should carefully consider the following risk factors in evaluating an investment
in the Company's common stock. If any of the following risks actually occurs,
the Company's business, financial condition, results of operations or cash flow
could be materially and adversely affected. In such case, the trading price of
the Company's common stock could decline, and one could lose all or part of
one's investment. One should also refer to the other information set forth in
this report, including the Company's consolidated financial statements and the
related notes.
THE COMPANY CONTINUES TO USE SIGNIFICANT AMOUNTS OF CASH FOR ITS BUSINESS
OPERATIONS, WHICH COULD RESULT IN US HAVING INSUFFICIENT CASH TO FUND THE
COMPANY'S OPERATIONS AND EXPENSES UNDER OUR CURRENT BUSINESS PLAN. THE COMPANY
IS ALSO HOLDING A CONSIDERABLE AMOUNT OF QUOTED EQUITY SECURITIES THAT IS
AVAILABLE-FOR-SALE OR HELD FOR TRADING.
The Company's liquidity and capital resources remain limited. There can be no
assurance that the Company's liquidity or capital resource position would allow
us to continue to pursue its current business strategy. The Company's quoted
equity securities held as assets are dependent on the market value. Any
fluctuations or downturn in the securities market could adversely affect the
value of these equity securities held. As a result, without achieving growth in
its business along the lines it has projected, it would have to alter its
business plan or further augment its cash flow position through cost reduction
measures, sales of assets, additional financings or a combination of these
actions. One or more of these actions would likely substantially diminish the
value of its common stock.
THE MARKET MAY NOT BROADLY ACCEPT THE COMPANY'S BROADBAND WEBSITES AND SERVICES,
WHICH WOULD PREVENT THE COMPANY FROM OPERATING PROFITABLY.
The Company must be able to achieve broad market acceptance for its Broadband
websites and services, at a price that provides an acceptable rate of return
relative to the Company-wide costs in order to operate profitably. There is no
assurance that the market will develop sufficiently to enable the Company to
operate its Broadband business profitably. Furthermore, there is no assurance
that any of the Company's services will become generally accepted, nor is there
any assurance that enough paying users and advertisers will ultimately be
obtained to enable us to operate these business profitably.
BROADBAND USERS MAY FAIL TO ADOPT THE COMPANY'S BROADBAND SERVICES.
The Company's Broadband services are targeted to the growing market of Broadband
users worldwide to deliver content and E-commerce in an efficient, economical
manner over the Broadband networks. The challenge is to make the Company's
business attractive to consumers, and ultimately, profitable. To do so has
required, and will require, the Company to invest significant amounts of cash
and other resources. There is no assurance that enough paying users and
advertisers will ultimately be obtained to enable the Company to operate the
business profitably.
FAILURE TO SIGNIFICANTLY INCREASE THE COMPANY'S USERS AND ADVERTISERS MAY RESULT
IN FAILURE TO ACHIEVE CRITICAL MASS AND REVENUE TO BUILD A SUCCESSFUL BUSINESS.
The Company incurs significant up-front costs in connection with the acquisition
of content, and bandwidth and network charges. The plan is to obtain recurring
revenues in the form of subscription and advertising fees to use the Broadband
services, either paid by the users or advertisers.
There is no assurance as to whether the Company will be able to maintain, or
whether and how quickly the Company will be able to increase its user base, or
whether the Company will be able to generate recurring subscription and
advertising fees to such a level that would enable this line of business to
continue to operate profitably. If the Company is not successful in these
endeavors, the Company could be required to revise its business model, exit or
reduce the scale of the business, or raise additional capital.
12
COMPETITION IN THE BROADBAND BUSINESS IS EXPECTED TO INCREASE, WHICH COULD CAUSE
THE BUSINESS TO FAIL.
The Company's Broadband services are targeted to the end user market. As the
Broadband penetration rates increase globally, an increasing number of
well-funded competitors have entered the market. Companies that compete with the
Company's business include telecommunications, cable, content management and
network delivery companies.
The Company may face increased competition as these competitors partner with
others or develop new Broadband websites and service offerings to expand the
functionality that they can offer to their customers. These competitors may,
over time, develop new technologies and acquire content that are perceived as
being more secure, effective or cost efficient than the Company. These
competitors could successfully garner a significant share of the market, to the
exclusion of the Company. Furthermore, increased competition could result in
pricing pressures, reduced margins, or the failure of the business to achieve or
maintain market acceptance, any one of which could harm the business.
THE INABILITY TO SUCCESSFULLY EXECUTE TIMELY DEVELOPMENT AND INTRODUCTION OF NEW
AND RELATED SERVICES AND TO IMPLEMENT TECHNOLOGICAL CHANGES COULD HARM THE
BUSINESS.
The evolving nature of the Broadband business requires the Company to
continually develop and introduce new and related services and to improve the
performance, features, and reliability of the existing services, particularly in
response to competitive offerings.
The Company has under development new features and services for its businesses.
The Company may also introduce new services. The success of new or enhanced
features and services depends on several factors - primarily market acceptance.
The Company may not succeed in developing and marketing new or enhanced features
and services that respond to competitive and technological developments and
changing customer needs. This could harm the business.
CAPACITY LIMITS ON THE COMPANY'S TECHNOLOGY AND NETWORK HARDWARE AND SOFTWARE
MAY BE DIFFICULT TO PROJECT, AND THE COMPANY MAY NOT BE ABLE TO EXPAND AND/OR
UPGRADE ITS SYSTEMS TO MEET INCREASED USE, WHICH WOULD RESULT IN REDUCED
REVENUES.
While the Company has ample through-put capacity to handle its customers'
requirements for the medium term, at some point it may be required to materially
expand and/or upgrade its technology and network hardware and software. The
Company may not be able to accurately project the rate of increase in usage of
its network. In addition, it may not be able to expand and/or upgrade its
systems and network hardware and software capabilities in a timely manner to
accommodate increased traffic on its network. If the Company does not
appropriately expand and/or upgrade our systems and network hardware and
software in a timely fashion, it may lose customers and revenues.
INTERRUPTIONS TO THE DATA CENTERS AND BROADBAND NETWORKS COULD DISRUPT BUSINESS,
AND NEGATIVELY IMPACT CUSTOMER DEMAND FOR THE COMPANY.
The Company's business depends on the uninterrupted operation at the data
centers and the broadband networks run by the various service providers. The
data centers may suffer for loss, damage, or interruption caused by fire, power
loss, telecommunications failure, or other events beyond the Company. Any damage
or failure that causes interruptions in the Company's operations could
materially harm business, financial conditions, and results of operations.
In addition, the Company's services depend on the efficient operation of the
Internet connections between customers and the data centers. The Company depends
on Internet service providers efficiently operating these connections. These
providers have experienced periodic operational problems or outages in the past.
Any of these problems or outages could adversely affect customer satisfaction
and customers could be reluctant to use our Internet related services.
13
THE COMPANY MAY NOT BE ABLE TO ACQUIRE NEW CONTENT, OR MAY HAVE TO DEFEND ITS
RIGHTS IN INTELLECTUAL PROPERTY OF THE CONTENT THAT IS USED FOR ITS SERVICES
WHICH COULD BE DISRUPTIVE AND EXPENSIVE TO ITS BUSINESS.
The Company may not be able to acquire new content, or may have to defend its
intellectual property rights or defend against claims that it is infringing the
rights of others, where its content rights are concerned. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us to develop non-infringing services or enter onto royalty or
licensing arrangements. Royalty or licensing arrangements, if required, may not
be obtainable on terms acceptable to the Company. The business could be
significantly harmed if the Company is not able to develop or license new
content. Furthermore, it is possible that others may license substantially
equivalent content, thus enabling them to effectively compete against us.
THE COMPANY DEPENDS ON KEY PERSONNEL.
The Company depends on the performance of its senior management team. Its
success depends on its ability to attract, retain, and motivate these
individuals. There are no binding agreements with any of its employees that
prevent them from leaving the Company at any time. There is competition for
these people. The loss of the services of any of the key employees or failure to
attract, retain, and motivate key employees could harm the business.
THE COMPANY RELIES ON THIRD PARTIES.
If critical services and products that the Company sources from third parties,
such as content and network services were to no longer be made available to the
Company or at a considerably higher price than it currently pays for them, and
suitable alternatives could not be found, the business could be harmed.
THE COMPANY COULD BE AFFECTED BY GOVERNMENT REGULATION.
The list of countries to which our solutions and services could not be exported
could be revised in the future. Furthermore, some countries may in future impose
restrictions on streaming of broadband contents and related services. Failure to
obtain the required governmental approvals would preclude the sale or use of
services in international markets and therefore, harm the Company's ability to
grow sales through expansion into international markets. While regulations in
almost all countries in which our business currently operates generally permit
the broadband services, such regulations in future may not be as favorable and
may impede our ability to develop business.
THE COMPANY COULD BE AFFECTED BY PIRACY IN ASIA.
The Company is in the process of expanding its services globally, and in
particular is entering specific countries in Asia with customized country sites.
These country sites are designated to suit viewership patterns and styles in the
countries they are launched in, and make use of the Company's content and
intellectual property rights to the content. The piracy of content is a
significant problem in many Asian countries, and it is not uncommon to see
movies and television dramas appearing on illegal internet sites, and sold as
pirated DVDs and VCDs. The extent of this piracy of content in the specific
countries that the Company is launching its sites will adversely affect to a
certain degree the amount of advertising and subscription revenues that the
Company intends to earn.
THE COMPANY COULD BE AFFECTED BY ECONOMIC DOWNTURNS
The global economy underwent a massive downturn in 2009, which commenced in the
second half of 2008. Many countries were faced with negative growth rates..
Where the media industry was concerned, major corporations reduced their
advertising expenditures or even to cut back substantially all advertising and
promotional expenditures towards the later half of 2008. The Company is heavily
reliant on advertising and syndication revenues. Any future downturns in any one
country that the Company operates its WOWtv service would significantly affect
the Company's revenues.
14
OUR COMMON STOCK IS CONSIDERED A "PENNY STOCK". THE APPLICATION OF THE "PENNY
STOCK" RULES TO OUR COMMON STOCK COULD LIMIT THE TRADING AND LIQUIDITY OF THE
COMMON STOCK, ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE
THE TRANSACTION COSTS TO SELL THOSE SHARES.
Our common stock is a "low-priced" security or "penny stock" under rules
promulgated under the Securities Exchange Act of 1934, as amended. In accordance
with these rules, broker-dealers participating in transactions in low-priced
securities must first deliver a risk disclosure document which describes the
risks associated with such stocks, the broker-dealer's duties in selling the
stock, the customer's rights and remedies and certain market and other
information. Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer's financial situation, investment experience and objectives.
Broker-dealers must also disclose these restrictions in writing to the customer,
obtain specific written consent from the customer, and provide monthly account
statements to the customer. The effect of these restrictions will likely
decrease the willingness of broker-dealers to make a market in our common stock,
will decrease liquidity of our common stock and will increase transaction costs
for sales and purchases of our common stock as compared to other securities.
THE STOCK MARKET IN GENERAL HAS EXPERIENCED VOLATILITY THAT OFTEN HAS BEEN
UNRELATED TO THE OPERATING PERFORMANCE OF LISTED COMPANIES. THESE BROAD
FLUCTUATIONS MAY BE THE RESULT OF UNSCRUPULOUS PRACTICES THAT MAY ADVERSELY
AFFECT THE PRICE OF OUR STOCK, REGARDLESS OF OUR OPERATING PERFORMANCE.
Shareholders should be aware that, according to SEC Release No. 34-29093 dated
April 17, 1991, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (1) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (2) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (3) boiler room
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (4) excessive and undisclosed
bid-ask differential and markups by selling broker-dealers; and (5) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. The
occurrence of these patterns or practices could increase the volatility of our
share price.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE, AND WE MAY NEVER
PAY DIVIDENDS. INVESTORS SEEKING CASH DIVIDENDS SHOULD NOT PURCHASE OUR COMMON
STOCK.
We currently intend to retain any future earnings to support the development of
our business and do not anticipate paying cash dividends in the foreseeable
future. Our payment of any future dividends will be at the discretion of our
Board of Directors after taking into account various factors, including but not
limited to our financial condition, operating results, cash needs, growth plans
and the terms of any credit agreements that we may be a party to at the time. In
addition, our ability to pay dividends on our common stock may be limited by
Nevada state law. Accordingly, investors must rely on sales of their common
stock after price appreciation, which may never occur, as the only way to
realize a return on their investment. Investors seeking cash dividends should
not purchase our common stock.
FUTURE SALES OF OUR COMMON STOCK COULD PUT DOWNWARD SELLING PRESSURE ON OUR
COMMON STOCK, AND ADVERSELY AFFECT THE PER SHARE PRICE. THERE IS A RISK THAT
THIS DOWNWARD PRESSURE MAY MAKE IT IMPOSSIBLE FOR AN INVESTOR TO SELL SHARE OF
COMMON STOCK AT ANY REASONABLE PRICE, IF AT ALL.
Future sales of substantial amounts of our common stock in the public market or
the perception that such sales could occur, could put downward selling pressure
on our common stock and adversely affect its market price.
15
THE OVER THE COUNTER BULLETIN BOARD IS A QUOTATION SYSTEM, NOT AN ISSUER LISTING
SERVICE, MARKET OR EXCHANGE. THEREFORE, BUYING AND SELLING STOCK ON THE OTC
BULLETIN BOARD IS NOT AS EFFICIENT AS BUYING AND SELLING STOCK THROUGH AN
EXCHANGE. AS A RESULT, IT MAY BE DIFFICULT FOR YOU TO SELL YOUR COMMON STOCK OR
YOU MAY NOT BE ABLE TO SELL YOUR COMMON STOCK FOR AN OPTIMUM TRADING PRICE.
The Over the Counter Bulletin Board (the "OTC BB") is a regulated quotation
service that displays real-time quotes, last sale prices and volume limitations
in over-the-counter securities. Because trades and quotations on the OTC
Bulletin Board involve a manual process, the market information for such
securities cannot be guaranteed. In addition, quote information, or even firm
quotes, may not be available. The manual execution process may delay order
processing and intervening price fluctuations may result in the failure of a
limit order to execute or the execution of a market order at a significantly
different price. Execution of trades, execution reporting and the delivery of
legal trade confirmations may be delayed significantly. Consequently, one may
not be able to sell shares of our common stock at the optimum trading prices.
When fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual's orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry. Orders for OTC Bulletin Board
securities may be canceled or edited like orders for other securities. All
requests to change or cancel an order must be submitted to, received and
processed by the OTC Bulletin Board. Due to the manual order processing involved
in handling OTC Bulletin Board trades, order processing and reporting may be
delayed, and an individual may not be able to cancel or edit his order.
Consequently, one may not be able to sell shares of common stock at the optimum
trading prices.
The dealer's spread (the difference between the bid and ask prices) may be large
and may result in substantial losses to the seller of securities on the OTC
Bulletin Board if the common stock or other security must be sold immediately.
Further, purchasers of securities may incur an immediate "paper" loss due to the
price spread. Moreover, dealers trading on the OTC Bulletin Board may not have a
bid price for securities bought and sold through the OTC Bulletin Board. Due to
the foregoing, demand for securities that are traded through the OTC Bulletin
Board may be decreased or eliminated.
WE GENERATED A NET LOSS OF $423,545 AND $645,621 BEFORE TAXES FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND MARCH 31, 2009, RESPECTIVELY. WE MAY BE UNABLE
TO CONTINUE AS A GOING CONCERN.
Our consolidated financial statements have been prepared on a going concern
basis which assumes that we will be able to realize our assets and discharge our
liabilities in the normal course of business for the foreseeable future. We
generated a consolidated net loss before taxes of $423,545 for the three months
ended March 31, 2010 compared to a consolidated net loss before taxes of
$645,621 during 2009. We realized a negative cash flow from operating activities
of $351,054 for the three months ended March 31, 2010 compared to $372,552 for
the three months ended March 31,2009. For the three months ended 31 March 2010,
we had an accumulated deficit of $37,687,940 and a working capital deficiency of
$2,646,429 compared to an accumulated deficit of $37,341,903 and a working
capital deficiency of $2,489,437 for the year ended December 31, 2009. At at
March 31,2010, we had a stockholders' equity of $599,625 compared to a
stockholders' equity of $835,345 as at December 31, 2009. Our ability to
continue as a going-concern is in substantial doubt as it is dependent on a
number of factors including, but not limited to, the receipt of continued
financial support from our investors, our ability to raise equity or debt
financing as we need it, and whether we will be able to use our securities to
meet certain of our liabilities as they become payable. The outcome of these
matters is dependent on factors outside of our control and cannot be predicted
at this time.
16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of April 27, 2010, the Company issued a total of 728,598 shares of common
stock through its private placement of shares of common stock at a purchase
price of $0.10 per share for a total amount of $72,859.80, to an "accredited
investor", as that term is defined in Regulation D of the Securities Act of
1933. The total proceeds are used as working capital.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS:
Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT
Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Amaru, Inc.
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(Registrant)
May 17, 2010 /s/ Chua Leong Hin
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Date President, Chief Executive Officer and
Chief Financial Officer
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