UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly report filed under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2004 or [ ] Transitional report filed under Section 13 or 15 (d) of the Exchange Act. Commission File No. 0-32695 Amaru, Inc. ------------- (Name of Small Business Issuer in its Charter) Nevada 88-0490089 -------- ------------ State or other jurisdiction of I.R.S. Employer Identification Number incorporation or organization 112 Middle Road, #08-01 Midland House, Singapore 188970 --------------------------------------------------------- (Address of principal executive office) Issuer's telephone number: (011) (65) 6332 9287 -------------------- 610 Newport Center Drive, Suite 1400, Newport Beach, Ca. 92660 --------------------------------------------------------------- Issuer's previous address Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) been subject to such filing requirements for the past ninety (90) days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: As of October 11, 2004, there were 20,900,000 shares of Common Stock, par value $.001 per share outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] AMARU, INC. & SUBSIDIARY FORM 10-QSB QUARTERLY REPORT FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS Forward-Looking Statements PART I Item 1. Financial Statements Item 2. Management's Discussion and Analysis or Plan of Operation Item 3. Controls and Procedures PART II Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-QSB contains forward-looking statements about the business, financial condition and prospects of the Company that reflect assumptions made by management and management's beliefs based on information currently available to it. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, the Company's actual results may differ materially from those indicated by the forward-looking statements. The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, the acceptance by customers of the Company's products and services, the Company's ability to develop new products and services cost-effectively, the ability of the Company to raise capital in the future, the development by competitors of products or services using improved or alternative technology, the retention of key employees and general economic conditions. There may be other risks and circumstances that management is unable to predict. When used in this Form 10-QSB, words such as, "believes," "expects," "intends," "plans," "anticipates" "estimates" and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934. 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMARU, INC. & SUBSIDIARY FINANCIAL STATEMENTS SEPTEMBER 30, 2004 TABLE OF CONTENTS Balance Sheets 5 Statements of Operations 6 Statement of Stockholders' Equity 7 Statements of Cash Flows 8 Notes to Financial Statements 9 4 AMARU, INC. AND SUBSIDIARY BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, 2004 DECEMBER 31, (CONSOLIDATED) 2003 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 61,260 $ 60,307 Accounts receivable 14,043 14,097 Other receivables 1,660 20,554 Prepaid expenses 5,263 33,758 ------------ ------------ Total current assets 82,226 128,716 Non current assets Property and equipment, net 15,542 18,866 Product development costs, net 212,125 297,402 Investment, at equity -- 1,403,493 License 2,420,227 -- Other 2,708 2,708 ------------ ------------ Total non current assets 2,650,602 1,722,469 ------------ ------------ Total assets $ 2,732,828 $ 1,851,185 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 57,993 $ 64,738 Accounts payable-related parties 530,260 423,444 Line of credit 52,591 58,188 Term loan current portion -- 5,007 Income tax payable 59,745 36,994 Advances from related parties 333,311 55,518 ------------ ------------ Total current liabilities 1,033,900 643,889 Shareholders' equity Series A convertible preferred stock (par value $0.001) 5,000,000 shares authorized: 143,000 and 0 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively 143 -- Common stock (par value $0.001) 200,000,000 shares authorized; 20,900,000 shares issued and outstanding at September 30, 2004 and 18,136,364 at December 31, 2003 20,900 18,136 Paid in capital 1,298,681 867,292 Subscribed common stock, 0 and 337,513 shares at September 30, 2004 and December 31, 2003, respectively -- 128,255 Retained earnings 333,411 160,696 Comprehensive gain on currency translation 45,793 32,917 ------------ ------------ Total shareholders' equity 1,698,928 1,207,296 ------------ ------------ Total liabilities and shareholders' equity $ 2,732,828 $ 1,851,185 ============ ============ The accompanying notes to financial statements are an integral part of these statements 5 AMARU, INC. AND SUBSIDIARY STATEMENTS OF OPERATIONS FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED ---------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 (CONSOLIDATED) (CONSOLIDATED) ------------- ------------- ------------- ------------- Revenue: Licensing and advertising (including $900,000 to a related party in the quarter ended September 30, 2004 and $1,800,000 for the nine months ended September 30, 2004) $ 2,997,479 $ 5,244 $ 901,163 $ 1,020 E-commerce 12,046 -- -- -- Subscription and related services 4,320 98 322 98 Other income 29,829 588 17,978 588 ------------ ------------ ------------ ------------ Total revenue 3,043,674 5,930 919,463 1,706 Cost of services (includes $998,026 and $157,895 from a related party in the quarter ended September 30, 2004 and 2003 respectively. Includes $2,060,430 and $157,895 for the nine months ended September 30, 2004 and 2003, respectively) 2,134,188 184,939 1,013,327 175,308 ------------- ------------- ------------- ------------- Gross profit (loss) 909,486 (179,009) (93,864) (173,602) Distribution costs 229,125 8,411 15,709 3,806 Administrative expenses 345,886 149,928 118,889 50,969 ------------- ------------- ------------- ------------- Total expenses 575,011 158,339 134,598 54,775 Income (loss) from operations 334,475 (337,348) (228,462) (228,377) Other (income) expense: Expenses related to public listing 89,494 -- 25,000 -- Finance expenses 1,713 2,816 768 1,003 Income taxes 70,553 -- (41,845) -- ------------- ------------- ------------- ------------- Net income (loss) $ 172,715 $ (340,164) $ (212,385) $ (229,380) ============= ============= ============= ============= Earnings (loss) per share-basic and diluted $ 0.01 $ (0.02) $ (0.01) $ (0.01) ============= ============= ============= ============= Weighted average number of common shares outstanding-basic and diluted 19,953,313 17,727,273 20,761,538 17,727,723 ============= ============= ============= ============= The accompanying notes to financial statements are an integral part of these statements 6 AMARU, INC. AND SUBSIDIARY STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) Series A Convertible Preferred Stock Common Stock -------------------- ------------------- Total Additional Currency share- Number Par Value Number of Par value Paid-in Subscribed Retained Translation holders' of Shares ($0.001) shares ($0.001) capital stock Earnings gain equity ---------------------------------------------------------------------------------------------------------- Balance December 31, 2002 -- $ -- 17,727,273 $ 17,727 $ 753,701 $ 82,844 $ 121,166 $ (4,475) $ 970,963 Common stock issued for cash -- -- 409,091 409 113,591 -- -- -- 114,000 Common stock subscribed at various dates -- -- -- -- -- 45,411 -- -- 45,411 Net income -- -- -- -- -- -- 39,530 -- 39,530 Comprehensive gain on currency translation -- -- -- -- -- -- -- 37,392 37,392 ------------ Comprehensive income 76,922 ----------------------------------------------------------------------------------------------------------- Balance December 31, 2003 -- -- 18,136,364 18,136 867,292 128,255 160,696 32,917 1,207,296 Shares issued for cash Feb. 10, 2004 -- -- 1,363,636 1,364 414,636 (128,255) -- -- 287,745 Reverse acquisition 143,000 143 500,000 500 (27,347) -- -- -- (26,704) Stock issued for services -- -- 900,000 900 44,100 -- -- -- 45,000 Net income -- -- -- -- -- -- 172,715 -- 172,715 Comprehensive gain on currency translation -- -- -- -- -- -- -- 12,876 12,876 ------------- Comprehensive income 185,591 ----------------------------------------------------------------------------------------------------------- Balance September 30, 2004 (consolidated) (Unaudited) 143,000 $ 143 20,900,000 $ 20,900 $1,298,681 $ -- $ 333,411 $45,793 $ 1,698,928 =========================================================================================================== The accompanying notes to financial statements are an integral part of these statements 7 AMARU, INC. AND SUBSIDIARY STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) FOR THE NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, 2004 SEPTEMBER 30, (CONSOLIDATED) 2003 ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ 172,715 $ (340,165) Adjustments to reconcile net income (loss) Amortization 85,277 84,335 Depreciation 8,778 21,281 Fixed assets written off -- 7,414 Acquisition of license in exchange for account receivable (1,016,734) -- Common stock issued for services 45,000 -- Changes in operating assets and liabilities Accounts receivable 54 (10,295) Prepaid and other 47,389 1,648 Accounts payable and accrued expenses 100,071 158,623 Income tax payable 22,751 260 ------------ ------------ Net cash used in operating activities (534,699) (76,899) CASH USED IN INVESTING ACTIVITIES Acquisition of equipment (5,454) -- ------------ ------------ Net cash used in investing activities (5,454) -- CASH PROVIDED FROM FINANCING ACTIVITIES Addition (payment) to related parties 277,793 30,011 Addition (payment) of line of credit and loans (10,604) 4,745 Re-capitalization of M2B World Pte. Ltd (26,704) -- Proceeds from sale of stock 287,745 38,368 ------------ ------------ Net cash provided from financing activities 528,230 73,124 Effect of exchange rate changes on cash 12,876 4,566 ------------ ------------ Cash flow from all activities 953 791 Cash and cash equivalents, beginning of period 60,307 57,700 ------------ ------------ Cash and cash equivalents, end of period $ 61,260 $ 58,491 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 1,714 $ 2,816 ============ ============ Income taxes $ 48,479 $ -- ============ ============ The accompanying notes to financial statements are an integral part of these statements 8 AMARU, INC. & SUBSIDIARY NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) 1. BASIS OF PRESENTATION AND REORGANIZATION ------------------------------------------- The financial information included herein is unaudited. However, such information reflects all adjustments (consisting solely of normal occurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the nine months ended September 30, 2004, are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles; and, therefore, should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003, and Form 8-K/A-2, filed on October 19, 2004. REORGANIZATION -------------- As of February 25, 2004, an agreement was entered into which provides for the reorganization of M2B World Pte. Ltd., a Singapore corporation with and into Amaru, Inc. (Amaru), a Nevada corporation, with M2B World Pte. Ltd. (M2B), becoming a wholly-owned subsidiary of Amaru. The agreement is for the exchange of 100% of the outstanding Common Stock of M2B World Pte. Ltd. for 19,500,000 common shares and 143,000 Series A convertible preferred shares of Amaru, which are each convertible into 38.461538 shares of Amaru common stock. The exchange was accounted for as a reverse acquisition. Accordingly, for financial statement purposes, M2B World Pte. Ltd. was considered the accounting acquiror and the related business combination was considered a recapitalization of M2B World Pte. Ltd. rather than an acquisition by the Company. The historical financial statements prior to the agreement will be those of M2B World Pte. Ltd. and the name of the consolidated Company going forward will be Amaru, Inc. and Subsidiary. On this basis, the historical financial statements prior to February 28, 2004 have been restated to be those of the accounting acquirer M2B World Pte. Ltd. The historical stockholders' equity prior to the reverse acquisition has been retroactively restated (a recapitalization) for the equivalent number of shares received in the acquisition after giving effect to any difference in par value of the issuer's and acquirer's stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --------------------------------------------- USE OF ESTIMATES ---------------- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has not made any subjective or complex judgments the application of which would result in any material differences in reported results. 9 CONCENTRATION OF CREDIT RISK ---------------------------- The credit risk is primarily attributable to the Company's trade receivables. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. Licensing and advertising revenues were concentrated with three customers totaling 100% of these related revenues for the nine months ended September 30, 2004. The Company's operations are conducted over the world wide web and some Sales and purchases are made to and from locations outside of Singapore. However all transactions are recorded in Singapore CASH AND CASH EQUIVALENTS ------------------------- Cash on hand, in banks and short-term deposits are held to maturity and are carried at cost. Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments readily convertible to cash and subject to insignificant risk of changes in value. For the purposes of the cash flow statement, cash and cash equivalents consist of cash on hand and deposits in banks, net of outstanding bank overdrafts. REVENUES -------- Subscription and related services revenues are recognized over the period that services are provided. Advertising and sponsorship revenues are recognized as the services are performed or when the goods are delivered. Content syndication revenue is recognized as the content is delivered. E-commerce commissions are recognized as received. Broad-band consulting services and on-line turnkey solutions are recognized as earned. To date the Company has only had revenues from licensing and advertising, E-commerce and subscriptions and related services. COSTS OF SERVICES ----------------- The cost of services pertaining to 1) advertising and sponsorship revenue and 2) subscription and related services are cost of bandwidth charges, channel design and alteration, copyright licensing, and hardware hosting and maintenance costs. The cost of services pertaining to E-commerce revenue are channel design and alteration, and hardware hosting and maintenance costs. All these costs are accounted for in the period incurred. LICENSING RIGHTS ---------------- Licensing rights refers to the rights to use the content. These rights are purchased for a specific period as determined in the contract. The costs of these rights are recognized in the accounts over the life of the contract on a straight line basis. These contents are then streamed into the broad-band sites and the revenue earned from advertising, sponsorship and subscription are then recognized according to our policy on revenue. TRADE AND OTHER RECEIVABLES --------------------------- Trade receivables, which generally have 30 to 90 day terms, are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts (if any). An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. The Company has reviewed trade and other receivables and determined that no allowance for doubtful accounts is required. 10 PROPERTY AND EQUIPMENT ---------------------- Property and equipment is stated at cost. Expenditures for major improvements are capitalized, while replacements, maintenance and repairs, which do not significantly improve or extend the useful life of the asset, are expensed when incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which is three to five years. PRODUCT DEVELOPMENT ------------------- The Company capitalized the development and building cost related to the broad-band sites and infrastructure for the streaming system, most of which was developed in 2002. The Company projects that these development costs will be useful for up to five years before additional significant development needs to be done IMPAIRMENT OF LONG-LIVED ASSETS ------------------------------- The Company reviews the carrying values of its long-lived and intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. No impairment losses were recorded in the nine months ended September 30, 2004 and the year 2003. INVESTMENTS ----------- Investments in unconsolidated subsidiaries in which the Company has a 20% to 50% interest or otherwise exercises significant influence are carried at cost, adjusted for the Company's proportionate share of their undistributed earnings or losses. ADVANCES FROM PARENT -------------------- Advances from parent are unsecured, non-interest bearing and carry no fixed terms of repayment. FOREIGN CURRENCY TRANSLATION ---------------------------- Transactions in foreign currencies are measured and recorded in the functional currency Singapore dollars using the exchange rate in effect at the date of the transaction. The reporting currency is U.S. dollars. At each balance sheet date, recorded monetary balances that are denominated in a foreign currency are adjusted to reflect the rate at the balance sheet date and the income statement accounts using the average exchange rates throughout the period. Translation gains and losses are recorded in stockholders' equity as other comprehensive income and realized gains and losses are reflected in operations. ADVERTISING ----------- The cost of advertising is expensed as incurred. For the quarter and the nine months ended September 30, 2004 the company incurred advertising expenses of $2,777 and $203,482 respectively. INCOME TAXES ------------ Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 11 EARNINGS(LOSS) PER SHARE ------------------------ In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128 "Earnings Per Share" which requires the Company to present basic and diluted earnings per share, for all periods presented. The computation of earnings per common share (basic and diluted) is based on the weighted average number of shares actually outstanding during the period. The Company has no common stock equivalents, which would dilute earnings per share. FINANCIAL INSTRUMENTS --------------------- The carrying amounts for the Company's cash, other current assets, accounts payable, accrued expenses, notes payable, and other liabilities approximate their fair value. RECLASSIFICATIONS ----------------- Certain amounts in the prior periods presented have been reclassified to conform to the current periods financial statement presentation. 3. PROPERTY AND EQUIPMENT ------------------------- Property and equipment consist of the following: December 31, September 30, 2003 2004 ------------ ------------ Office equipment $ 58,857 $ 64,145 Furniture, fixture and fittings 396 562 ------------ ------------ 59,253 64,707 Accumulated depreciation (40,387) (49,165) ------------ ------------ $ 18,866 $ 15,542 ============ ============ Depreciation expense was $24,689 the year ended December 31, 2003 and $8,778 for the nine months ended September 30, 2004. 4. PRODUCT DEVELOPMENT ---------------------- Product development consists of the following: December 31, September 30, 2003 2004 ------------ ------------ Development expenditures $ 595,413 $ 595,413 Accumulated amortization (298,011) (383,288) ------------ ------------ $ 297,402 $ 212,125 ============ ============ Amortization expense was $115,914 for the year ended December 31, 2003 and $85,277 for the nine months ended September 30, 2004. 5. INVESTMENT AT EQUITY ----------------------- CRE8 IP&P held the license to operate an E-commerce platform in Singapore as well as the first right of refusal in various Asian countries. The company had not commenced operations when it was acquired by M2B World. 12 In December 2003, M2B World acquired 50% of CRE8 IP&P in exchange for account receivable from CRE8 IP&P's parent, CRE8 International. Since M2B World did not have control over the license for Singapore, it recorded the acquisition as an investment at cost at December 31, 2003. The company gained control of CRE8 IP&P in January 2004 when they acquired the remaining 50% of the company in exchange for account receivable from CRE8 IP&P's parent, CRE8 International and obtained complete control over the license acquired. The basis of the license has been recorded at the Company's acquisition purchase price in accordance with the "Push Down" accounting as required by SAB No 54. The Subsidiary had no activities or operations during the period. The Company plans to start up the Subsidiary operation in the fourth quarter of 2004 or the first quarter of 2005. 6. LINE OF CREDIT ----------------- The Company has a $118,343 line of credit, repayable on demand, used to fund the Group's short-term working capital requirements. The line of credit bears interest at prime lending rate plus 1% per annum (6% at December 31, 2003). This loan is secured by a certificate of deposit of $60,189 and a personal guarantee of a director. Interest is payable monthly. The outstanding balance was $52,591 at September 30, 2004. 7. COMMITMENTS AND CONTINGENCIES -------------------------------- LEASES ------ The Company leases its office space under a one year operating lease which expires in February 2005 with a monthly payment of $1,856. Rent expense totaled $10,344 for the year ended December 31, 2003 and $13,029 for the nine months ended September 30, 2004 Future minimum lease payments due are as follows for the years ended December 31: 2004 $ 5,568 2005 3,712 ------------ $ 9,280 ============ 8. CAPITAL STOCK ---------------- COMMON STOCK ------------ On February 10, 2004 the M2B issued 1,363,636 shares of $0.31 par value Series D common stock for a total cash capital contribution of $416,000 prior to the reverse acquisition. On July 13, 2004, the Company issued 900,000 shares of common stock for services valued at $45,000. 13 9. INCOME TAXES --------------- The Company files separate tax returns for Singapore and the United States of America. Reconciliation of the differences between the statutory tax and the effective income tax are as follows: For the nine months ended ---------------------------- September 30, September 30, 2004 2003 ------------- ------------- U.S. Federal statutory tax (20.9%) -% U.S. State taxes, net of federal tax -% -% Foreign statutory tax rate 20.0% (22.0%) Valuation allowance 20.9% 22.0% ------------- ------------- Effective income tax rate 20.0% -% ============= ============= For the three months ended ---------------------------- September 30, September 30, 2004 2003 ------------- ------------- U.S. Federal statutory tax (30.2%) -% U.S. State taxes, net of federal tax -% -% Foreign statutory tax rate 20.0% (22.0%) Valuation allowance 30.2% 22.0% ------------- ------------- Effective income tax rate 20.0% -% ============= ============= The components of income tax expense consist of the following: For the nine months ended ---------------------------- September 30, September 30, 2004 2003 ------------- ------------- Current: Federal $ 18,678 $ -- State -- -- Foreign 70,553 -- Valuation allowance (18,678) -- ------------- ------------- $ 70,553 $ -- ============= ============= For the three months ended ---------------------------- September 30, September 30, 2004 2003 ------------- ------------- Current: Federal $ (7,555) $ -- State -- -- Foreign (41,845) -- Valuation allowance 7,555 -- ------------- ------------- $ (41,845) $ -- ============= ============= The Company operated primarily in Singapore and incurred no United States federal or state income taxes as of September 30, 2004 and 2003. The Company had no significant deferred tax assets or liabilities as of September 30, 2004 and 2003. 14 The Company had available approximately $89,500 of unused Federal net operating loss carry-forwards at September 30, 2004, that may be applied against future taxable income. These net operating loss carry-forwards expire for Federal purposes in 2024. There is no assurance that the Company will realize the benefit of the net operating loss carry-forwards. SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. At September 30, 2004, a valuation allowance for the full amount of the net deferred tax asset was established due to the uncertainties as to the amount of the taxable income that would be 10. RELATED PARTY TRANSACTIONS ------------------------------ During the nine months ended September 30, 2004 the Company purchased services from a related party in the amount of $2,060,430 and had sales to the same related party in the amount of $1,800,000. 11. SUBSEQUENT EVENT -------------------- As of October 25, 2004, a total of 143,000 shares of Series A Convertible Preferred Stock was converted into 5,500,000 shares of common stock of Amaru, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED. General As of February 25, 2004 (the "Closing Date"), Amaru, Inc. (the "Company") acquired M2B World Pte Ltd., a Singapore corporation ("M2B World") in exchange for 19,500,000 newly issued "restricted" shares of common voting stock of the Company and 143,000 "restricted" Series A Convertible Preferred Stock shares to the M2B World shareholders on a pro rata basis for the purpose of effecting a tax-free reorganization pursuant to sections 351, 354 and 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended ("IRC") pursuant to the Agreement and Plan of Reorganization (the "Reorganization Agreement") by and between the Company, M2B World and M2B World shareholders. As a condition of the closing of the share exchange transaction, certain shareholders of the Company cancelled a total of 1,457,500 shares of common stock. Each one (1) ordinary share of M2B World has been exchanged for 1.3636363 shares of the Company's Common Stock and 100 shares of the Company's Series A Convertible Preferred Stock. Each share of newly issued Company's Series A Convertible Preferred Stock can be converted to 38.461538 shares of the Company's common stock. Following the Closing Date, there were 20,000,000 shares of the Company's Common Stock outstanding and 143,000 shares of the Company's Series A Convertible Preferred Stock outstanding. Immediately prior to the Closing, there were 500,000 shares issued and outstanding. 15 M2B World is in the business of broadband entertainment and education-on-demand, streaming via computers, television sets, PDAs (Personal Digital Assistant) and in the near future through third generation devices; and the provision of broadband services. Its business includes channel and program sponsorship (advertising and branding); online subscriptions, channel/portal development (digital programming services); content aggregation and syndication; broadband consulting services and E-commerce. The restructuring and re-capitalization has been treated as a reverse acquisition with M2B World becoming the accounting acquirer. The historical financial statements prior to the closing of the transaction are those of M2B World. The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements. RESULTS OF OPERATIONS --------------------- For the three months and nine months ended September 30, 2004 compared with three months and nine months ended September 30, 2003 OVERVIEW The key business focus of M2B is to establish itself as the leading provider and creator of a new generation of Entertainment-on-Demand, Education-on-Demand and E-Commerce Channels on Broadband, and 3G (Third Generation) devices. M2B owns exclusive rights in the broadband media for various content. M2B will apply broadband technologies to facilitate its growth in the broadband and internet sector. Broadband technology is high speed, high-bandwidth two-way data, voice and video communications, delivered at high transmission rates up to 12 Mbps. This will encompass: o Digital Subscriber Line (DSL) technology for delivery into computers o Set-top box technology for delivery into TV screens o Wireless technology for delivery into PDAs and 3G hand phones The immediate plan of M2B in the next three years is to launch high impact, rich media, entertainment and education content channels globally over the broadband and 3G, comprising: o On-line "Television" on subscription basis - Broadband access premium sites o Advertising and Sponsorship - supporting the online broadband subscription sites o On-line shopping malls - E-commerce platforms, and alongside the broadband sites, on an interactive basis. M2B's broadband sites will consist of: o ENTERTAINMENT SITES (CURRENT) Music, movies, glamour and fashion, lifestyle (hobbies, cooking, personalities), documentaries, sports, health and fitness, and others. o EDUCATION SITES o BUSINESS AND CORPORATE TRAINING (CURRENT) Management skills, communication skills, decision making, customer services and sales, motivation, presentation and writing skills, counseling and others. o SCHOOL LEARNING CURRICULUMS (FUTURE) o HEALTH AND WELLNESS (FUTURE) For the broadband, M2B delivers both wire and wireless solutions, streaming via computers, TV sets, PDAs and 3G hand phones. 16 At the same time M2B launches e-commerce channels (portals) that provide on-line shopping but with a difference, merging two leisure activities of shopping and entertainment, delivering the ultimate on-line experience. The entertainment channels will drive and promote the shopping portals, and vice versa. M2B World has a wholly owned subsidiary, M2B Commerce Limited, registered in the British Virgin Islands. M2B World intends to consolidate all its e-commerce operations and possibly launch new e-bay initiatives under M2B Commerce Limited towards the last quarter of 2004 and the first quarter of 2005. M2B World has built and installed its broadband streaming system complete with firewalls, load balancing, bandwidth and consumer monitoring systems, video treaming, video storage and web servers in Singapore. M2B World has a joint venture with FSBM Holdings Berhad (formerly known as Fujitsu System Business Malaysia Berhad) in Malaysia. The company is registered in Malaysia as FSBM M2B Sdn Bhd. The joint venture has been given pioneer shares in Malaysia, and its incentives include an investment tax allowance of up to five years. The joint venture serves as the production base for M2B, having digital post-production suites for content production and repurposing. M2B World has currently developed its streaming applications to stream into television sets, through a copper wire or telephone cable and via a set top box. Testing of set top boxes was successfully completed in 2003. M2B had developed a capability to stream wireless broadband and have its own digitized entertainment sites for wireless broadband applications. By the end of 2004, the management believes that M2B will be ready to launch its broadband content sites in the modified form for the 2.75/3G hand phones. BUSINESS MODEL The business model in the area of broadband entertainment, education and services is to provide the company with multiple streams of revenue; from channel and program sponsorship (advertising and branding); on-line subscriptions; channel/portal development (digital programming services); content aggregation and syndication; broadband consulting services; on-line shopping turnkey solutions; E-commerce commissions and on-line dealerships. REVENUE Revenues for the nine months ended September 30, 2004 increased to $3,043,674 from $5,930 for the nine months ended September 30, 2003. The increase of $3,037,744 resulted primarily from advertising and content syndication arising out of the launch of newly enhanced broadband sites. The company's process of constructing and enhancing its broadband sites resulted in additional advertising revenue of $901,163 for the three months ended September 30, 2004 compared to $1,020 for the three months ended September 30, 2003. In the first three quarters of 2003, the company concentrated on enhancing its existing broadband content and e-commerce sites, with better design and content mix. Hence no or little revenue was earned in the nine months ended September 30, 2003. Beginning August, September and the last quarter of 2003, the company launched new broadband sites in US and Singapore. These sites included Chinese entertainment sites as well as business and corporate training sites, in the US and Singapore. One more new movie site was also launched in Singapore. These enhancements to the existing broadband sites, and the launch of the new broadband sites as highlighted above, saw the first reasonably significant revenues from advertising and content syndication materializing in the last quarter of 2003. By September 2004, the company had secured substantial advertising revenue as it sought to grow its subscription and e-commerce revenues. The company acquired licensing rights to content to increase its advertising revenues, and provide it with a rich content platform to begin securing subscription revenues in the near future. At the same time the company increased its marketing efforts by taking up online advertising of its broadband sites. The company enhanced its fashion and glamour site. This international glamour and fashion site, the US business and corporate training site and three other international sites attracted the bulk of the advertising revenues. 17 COST OF SALES The cost of sales for the nine months ended September 30, 2004 increased to $2,134,188 from $184,939 in the nine months ended September 30, 2003. The increase of $1,949,249 was due primarily to the acquisition of contents license rights for the broadband sites. The cost of sales incurred for the three months ended September 30, 2004 accounted for $1,013,327 compared to $175,308 for the three months ended September 30, 2003. For the nine months ended September 30, 2003 and the quarter ended September 30, 2003, no new acquisition of contents was undertaken, as the broadband sites were still in the process of enhancements and redesign. DISTRIBUTION EXPENSES Distribution expenses for the nine months ended September 30, 2004 increased to $229,125 from $8,411 in the nine months ended September 30, 2003. The significant increase was due mainly to the marketing and promotion of the broadband sites on an international basis in 2004. The main increase in distribution expenses over the nine months period ended September 2004 was in the three months from April to June 2004. The amount incurred of $204,443 in these three months accounted for 89% of the distribution costs of $229,125 incurred in the nine months ended September 2004. Distribution expenses increased by an insignificant amount of $11,903 from the three months ended September 2003 of $3,806 to $15,709 for the three months ended September 2004. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the nine months ended September 30, 2004 increased to $345,886 from $149,928 for the nine months ended September 30, 2003. The increase of $195,958 resulted primarily from legal and other professional fees paid in the nine months ended September 30, 2004. The company incurred additional administrative fees of $118,889 in the three months ended September 30, 2004 compared to $50,969 for the three months ended September 30, 2003. The high legal and other professional fees incurred in the nine months ended September 30, 2004 was due to the compliance required of a publicly listed company. These expenses were not incurred for the nine months ended September 30, 2003 since the Company was not reporting during the period then ended. OPERATING INCOME For the nine months ended September 30, 2004, the profit from income was $334,475 which increased by $671,823 from a loss of ($337,348) for the nine months ended September 30, 2003. For the three months ended September 30, 2004 the company incurred a loss of ($228,462)as compared to a loss of ($228,377) in the three months ended September 30, 2003. The loss was attributed to the cost of acquisition of content license rights, marketing and promotion of the broadband sites, and legal and professional fees incurred primarily for complying with the requirements of a publicly listed company. The profit from the three months from January to March 2004 more than offset the loss in the next six months from April to September 2004 resulting in a profit for the nine months ended September 30, 2004. LIQUIDITY AND CAPITAL RESOURCES The company had cash at $61,260 at September 30 2004 as compared to cash of $58,491 at September 30, 2003. The company believes that cash generated from its operations will be able to cover its daily running cost and overheads. Cash generated from operations will not be able to cover the company's intended growth and expansion. The company has plans in 2004 to expand its broadband coverage by launching new broadband sites in North America and Europe. In North America, the company intends to launch new broadband entertainment and business training content sites in 2004. As of September 2004, one new entertainment site and one new business training site had been launched in North America. In Asia, one new business training site had been launched in 2004. At least one new broadband entertainment site is also planned for launching streaming content on a world wide scale in the last quarter of 2004. In the area of E-commerce, the company plans to launch one new shopping mall for health and wellness products online. 18 The company has completed its prototype content for 3G (third generations) mobile phones. The company is working with telecommunication companies and mobile operators on the possibility of launching this new content in the later half of 2004 or first quarter of 2005. To achieve its plans, the company is seeking to fund its new growth activities through equity financing. The company plans to use the proceeds of such financing for expansion of its operations. In the nine months ended September 30, 2004 the company raised US $287,745 of equity financing to fund its growth activities. Such funds were raised prior to the acquisition by Amaru, Inc. INVESTMENTS The company has investments in the following companies: (a) M2B Commerce Limited, a wholly owned subsidiary of M2B World Pte Ltd, registered in the British Virgin Islands. (b) FSBM M2B Sdn Bhd, a company registered in Malaysia of which M2B World owns a 9.76% equity stake in the company. NEW CONTRACTS The company has entered into three significant contracts in the last six months, namely: (a) The provision of four broadband entertainment channels for an exclusive high megabit broadband service of one of the major Telecommunication companies in Asia. Roll up of the four new broadband channels is expected by year end 2004. (b) The acquisition of an on-line games franchise in six countries with an on-line games company in Asia. The company will enter the on-line games market to enhance its entertainment sites on the broadband. The company expects to launch the first of these on- line games sites by the last quarter of 2004, or early 2005. The transaction is being finalized. (c) The launch of an international fashion and glamour site with an on-line games company in Asia. In additional, the company signed two other contracts with a Korean company for the distribution of set-top boxes worldwide, and supply of content. The company intends to enhance its broadband entertainment services by allowing its viewers to have the option of watching its content via the television sets. ITEM 3. Controls and Procedures Our President and Treasurer/Chief Financial Officer (the "Certifying Officer") is responsible for establishing and maintaining disclosure controls and procedures and internal controls and procedures for financial reporting for the Company. The Certifying Officer has designed such disclosure controls and procedures and internal controls and procedures for financial reporting to ensure that material information is made known to him, particularly during the period in which this report was prepared. The Certifying Officer has evaluated the effectiveness of the Company's disclosure controls and procedures and internal controls and procedures for financial reporting as of September 30, 2004 and believes that the Company's disclosure controls and procedures and internal controls and procedures for financial reporting are effective based on the required evaluation. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 19 PART II. OTHER INFORMATION Item 1. Legal proceedings No disclosures are required pursuant to Item 103 of Regulation S-B, taking into account Instruction 1 to that Item. Item 2. Changes in securities and use of proceeds As of October 25, 2004, a total of 143,000 shares of Series A Convertible Preferred Stock was converted into 5,500,000 shares of common stock of Amaru, Inc. Item 3. Defaults on senior securities NONE Item 4. Submission of items to a vote NONE Item 5. Other information NONE Item 6. a) Exhibits -------- Exhibit No. Description ----------- ----------- Exhibit 31 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT b) Reports on 8-K during the quarter: NONE. 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMARU, INC. Date: November 3, 2004 By /s/ Colin Binny -------------------------------------------- President By /s/ Francis Foong Keong Kwong -------------------------------------------- Chief Financial Officer 21