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AMARU INC - 10-K - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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. You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the notes to our consolidated financial statements included elsewhere in this report. 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 was also in the business of digit gaming (lottery). The Company has an 18 year license to conduct nationwide lottery in Cambodia. The Company through its subsidiary, M2B Commerce Limited, signed an agreement with Allsports Limited, a British Virgin Islands company to operate and conduct digit games in Cambodia and to manage the digit games in Cambodia. On March 25, 2009, the Company was notified that the digit games were suspended by the Cambodia Government as part of the suspension of all lotteries in Cambodia. Although the Company is still a holder of the license, it cannot use it for the gaming business until the suspension of the digit games is lifted. At this time, the suspension of the digit games is expected to be permanent as the Government of Cambodia has closed the gaming business by the order of its Ministry of Economy and Finance. The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements. 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. The Company's business model in the area of broadband entertainment includes focuses on e-services, which provides the Company with multiple streams of revenue. Such revenues would be derived from advertising and branding (channel and program sponsorship); on-line subscriptions; channel/portal development (digital programming services); content aggregation and syndication; broadband consulting services; broadband hosting and streaming services; E-commerce commissions and on-line dealerships. 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. 20 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 not renewed its office lease in West Hollywood in August, 2011, and currently does not maintain an office space in the U.S. 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., which provided to M2B World, Inc. 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. 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 convertible loan represents a two year convertible loan drawn by a subsidiary company. It bears interest at a fixed rate of 5.0% per annum. The loan allowed the lender 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 year period. The due date of the loan was July 7, 2010. The conversion period of the convertible loan was extended for an additional twelve months commencing July 8, 2010 and was further extended to June 29, 2012. M2B World Asia Pacific Pte. Ltd. is negotiating to obtain further extension on the convertible loan, until which interest is accrued on the outstanding loan balance at 5% per annum. 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 oversaw 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. 21 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 that equivalents to 10% of the interest. The resort was completed and is in operation. M2B ENTERTAINMENT, INC. On April 19, 2010, M2B Entertainment, Inc. was dissolved because the Company did not want to continue operations in Canada. 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 December 31, 2013 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 to develop a global online travel platform which offers global e-travel services. On October 14, 2011, M2B World Travel Singapore was dissolved because the Company did not want to continue its travel operations. AMARU HOLDINGS LIMITED AND M2B WORLD HOLDINGS LIMITED Amaru Holdings Limited and M2B World Holdings Limited were 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 were 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 was 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES In the preparation of the financial statements, the Company adopted the following critical accounting policies. 22 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, 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 an 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. INTANGIBLE ASSETS Intangible assets consist of gaming licenses, software licenses and product development costs. Intangible assets which were purchased and have indefinite lives are stated at cost less impairment losses. Intangible assets which were purchased for a specific period are stated at cost less accumulated amortization and impairment losses. Such intangible assets are amortized over the period of the contract, which is 2 to 18 years. REVENUE Subscription and related services revenues are recognized over the period that services are provided. Advertising and sponsorship revenues are recognized as the services are performed or when the goods are delivered. Licensing and content syndication revenue is recognized when the license period begins, and the contents are available for exploitation by customer, pursuant to the terms of the license agreement. Gaming revenue is recognized as earned net of players' winnings. E-commerce commissions are recognized as received. Broadband consulting services and on-line turnkey solutions revenue are recognized as earned. The Company has adopted accounting pronouncements issued before December 31, 2013, that are applicable to the Company. See Note 2 to the Consolidated Financial Statements. RESULTS OF OPERATIONS For the fiscal year ended December 31, 2013 compared with the fiscal year ended December 31, 2012. REVENUE Financial Statement · Revenue for the year ended December 31, 2013 was $27,924 compared with $19,012 in 2012. · Loss from operations was $1,076,442 in 2013 compared with loss of $975,911 in 2012. · Net loss was $2,660,580 in 2013 compared with gain of $155,833 in 2012. · The Company's cash balance was $33,338 at December 31, 2013 compared with $33,460 at December 31, 2012. 23 Revenue Revenue entertainment for the year ended December 31, 2013 at $27,924 was higher than revenue entertainment of $19,012 for year ended December 31, 2012 by $8,912 (47%). It was mainly due to the increase in subscription revenue and other relevant revenue from new customers during 2013. Cost of Services Cost of services for the years ended December 31, 2013 was $146,060 which increased by $56,215 (63%) from $89,845 for the year ended December 31, 2012. It was mainly due to increase in cost spending on other related production costs by $34,743 (185%) from $18,784 for the year ended December 31, 2012 to $53,527 for the year ended December 31, 2013. DISTRIBUTION EXPENSES Distribution expenses for the year ended December 31, 2013 at $47,372 were lower by $3,166 (6%) as compared to the amount of $50,538 incurred for the year ended December 31, 2012. The insignificant lower distribution expenses were attributed to decrease spending on entertainment expenses during year ended December 31,2013. BAD DEBTS WRITTEN OFF The Company recorded bad debts expenses of $72,979 in 2013. GENERAL AND ADMINISTRATIVE EXPENSES Administration expenses for the year ended December 31, 2013 at $837,953 were lower by $16,587 (2%) as compared to the amount of $854,540 incurred for the year ended December 31, 2012. The decrease in administrative expenses for the year ended December 31, 2013 was attributed mainly to the decrease in: · Depreciation. Equipment depreciation had decreased by $32,915 (85%), from $38,689 for the year ended December 31,2012 to $5,847 for the year ended December 31,2013. The decrease was mainly due to most of the equipment being fully depreciated during end of December 31, 2012. · Rental and storage costs. Costs had increased by $1,157 (1%), from $114,074 for the year ended December 31, 2012 to $115,231 for the year ended December 31, 2013. (LOSS) INCOME FROM OPERATIONS The company incurred a loss from operations of $2,660,580 for the year ended December 31, 2013 as compared to the gain from operations of $155,833 for the year ended December 31, 2012. The decrease was mainly due to investment impairment loss during year ended December 31, 2013. NET LOSS Net loss for the year ended December 31, 2013, was $2,660,580 which decreased by $2,816,413 (-1,1807%) from net gain of $155,833 for the year ended December 31, 2012. 24 LIQUIDITY AND CAPITAL RESOURCES The Company had cash in the amount of $33,338 at December 31, 2013 as compared to cash of $33,460 at December 31, 2012. During the year ended December 31, 2013, 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. In summary of the sources and use of cash, the Company had raised $335,776 through equity financings in fiscal year 2013. It was used to cover the Company's operations and to reduce the Company's accounts payable and accrued expenses for fiscal year 2013. There was net cash used in operating activities of $445,891 and $900,540, for each of the two years in 2013 and 2012, respectively. The decrease of $454,649 for net cash used in operating activities in 2013 as compared to 2012 was mainly due to reduction of payments to the Company's suppliers. There was net cash generated from investing activities of $508,713 and $1,110,013 for each of the two years in 2013 and 2012, respectively. The decrease of $601,301 for net cash generated from investing activities in 2013 as compared to 2012 was mainly due to reduction in disposal of security activity. There was net cash used in financing activities of $62,944 and $395,361 for each of the two years in 2013 and 2012, respectively. The decrease of $332,417 for net cash used by financing activities in 2013 as compared to 2012 was mainly due lesser repayment of term loan in 2013. The Company believes that its operations strategically based in Singapore, are the crossroads of communication and commerce, and are ideally placed to grow the media industry. We expect that the broadband business segment would be able to generate sufficient cash to cover its operations by year 2014. Cash generated from operations meanwhile will not be able to cover the Company's intended growth and expansion. The Company intends to raise additional funds to fund its business expansion until its revenue generation is self-sufficient to fund the business. However, no assurances can be made that the Company will raise sufficient funds as planned. NEW CONTRACTS On January 2, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B"), signed a Joint Venture agreement with The Dive Channel ("TDC"), a leading company in filming underwater related contents, procurement, and international trade of diving equipment and accessories. Both parties agreed to work together to jointly develop, promote, own, operate and manage both Parties' Intellectual Properties, technologies, solutions, Content, and Services. 25 On January 3, 2013 the Company through its subsidiary M2B World Asia Pacific Pte. Ltd. ("M2B"), signed an agreement with Yahoo! Asia Pacific Pte. Ltd. ("Yahoo"), a leading technology company. Pursuant to the terms of the Agreement, Yahoo shall provide M2B's content and services on Yahoo! Websites. On January 21, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B") signed an agreement with Google Ireland Limited ("Google"), a leading technology company. Pursuant to the terms of the Agreement, Google shall provide WOWtv channel under Youtube for advertisement based revenue. M2B and Google shall share net of total revenue collected in the ratio of 55% ("M2B"):45% ("Google"). On January 30, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B") signed an agreement with LG Electronics Inc. ("LGE"), one of Korea's leading electronics company. Pursuant to the terms of the Agreement, LGE shall launch M2B's content and services on SmartTV devices. The LGE devices shall be launched in the following countries, namely Singapore, Indonesia, Malaysia, Thailand, Vietnam, Philippines, India, Australia, and New Zealand. M2B and LGE shall share net of total revenue collected in the ratio of 70% or 90%("M2B"):30% or 10%("LGE") respectively, depending on types of transaction and subscription fees. On March 20, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B"), has been awarded by Info-communications Development Authority of Singapore a grant of up to $156,200 for the project M2B World Regional Video Services Hub under the Inforcomm Enterprises Scheme. On April 15, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B"), signed a Memorandum of Agreement with Beijing Bellamind Productions Limited ("BBP"), a leading Chinese film and new media company. Both parties agreed to work together and to monetize Linear Channels and Contents from China to Asia Pacific and global distribution market. On September 25, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B"), signed an Agreement with AutoMoto TV ("AMTV"), a leading automotive content provider out of Europe. Both parties agreed to work together and to monetize the Contents from for Asia Pacific market. M2B and AMTV shall share net of total revenue collected in the ratio of 50% (M2B) and 50% ("AMTV") respectively. On September 25, 2013, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B"), signed an Agreement with Everymedia Technologies Pvt. Ltd. ("Everymedia"), a leading Bollywood content provider out of India. Both parties agreed to work together and to monetize the Contents from for global market. M2B and Everymedia shall share net of total revenue collected in the ratio of 50% (M2B) and 50% ("Everymedia") respectively. On October 30, 2012, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B") signed an agreement with Opera Software ASA ("OPERA"), a global leader in software solutions for SmartTVs. Pursuant to the terms of the Agreement, OPERA shall launch M2B's content and services on various 3rd party SmartTV devices including SONY. The Opera software with M2B's WOWtv Apps shall be launched globally. M2B and Opera shall share net of total revenue collected in the ratio of 70% (M2B) and 30% ("LGE") respectively. On November 5, 2012, the Company through its subsidiary, M2B World Asia Pacific Pte. Ltd. ("M2B") signed an agreement with Nokia Corporation ("NOKIA"). Pursuant to the terms of the Agreement, NOKIA shall launch M2B's Content in NOKIA Store (formerly Ovi Store) under the brand name WOWtv. M2B and NOKIA shall share net of total revenue collected in the ratio as per NOKIA Store policies. |