Attached files
file | filename |
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EX-32 - AuraSound, Inc. | v183047_ex32.htm |
EX-31.2 - AuraSound, Inc. | v183047_ex31-2.htm |
EX-31.1 - AuraSound, Inc. | v183047_ex31-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10Q
x QUARTERLY
REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 31,
2010
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the
transition period from
to
.
Commission
file number 000-51543
AURASOUND,
INC.
|
(Exact
name of Registrant as specified in its
charter)
|
Nevada
|
20-5573204
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
11839
East Smith Avenue
|
||
Santa
Fe Springs, California
|
90670
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number: (562)
821-0275
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. x
Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o Yes o No (This registrant is
not yet subject to this Regulation.)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes x No
As of
April 30, 2010, the issuer had 4,678,662 shares of its common
stock, $.01 par value issued and outstanding.
PART I. FINANCIAL
INFORMATION
ITEM
1. Financial Statements
Financial
statements are provided as follows:
Page
|
|
Number
|
|
AuraSound,
Inc. and Subsidiary
Consolidated
Financial Statements
(Unaudited)
|
|
Consolidated
Balance Sheets - (Unaudited)
as
of March 31, 2010 and June 30, 2009
|
3
|
Consolidated
Statements of Operations - (Unaudited)
For
the three months and nine months ended March 31, 2010 and
2009
|
4
|
Consolidated
Statements of Cash Flows - (Unaudited)
For
the nine months ended March 31, 2010 and 2009
|
5
|
Notes
to Consolidated Financial Statements - (Unaudited)
|
6-12
|
2
AuraSound,
Inc.
Consolidated
Balance Sheets
(In
whole dollars)
(Unaudited)
As
of
|
||||||||
March 31,
2010
|
June 30,
2009
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
1,170,276
|
$
|
321,455
|
||||
Trade
accounts receivable- net
|
2,442,748
|
928,471
|
||||||
Inventories
- net
|
162,370
|
164,994
|
||||||
Other
assets
|
-
|
2,291
|
||||||
Total
current assets
|
3,775,394
|
1,417,211
|
||||||
Property
and equipment, net
|
107,033
|
89,834
|
||||||
Total
Assets
|
$
|
3,882,427
|
$
|
1,507,045
|
||||
Liabilities
and Stockholders' Deficit
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
5,942,571
|
$
|
2,374,747
|
||||
Accrued
expenses
|
736,967
|
451,302
|
||||||
Due
affiliate
|
466,666
|
412,293
|
||||||
Due
to officer
|
25,000
|
25,000
|
||||||
Notes
payable
|
1,253,558
|
1,253,558
|
||||||
Note
payable-related party
|
1,264,526
|
1,264,791
|
||||||
Total
Liabilities
|
9,689,288
|
5,781,691
|
||||||
Commitments
and Contingencies
|
-
|
-
|
||||||
Stockholder's
Deficit
|
||||||||
Preferred
Stock, $.01 par value, 3,333,333 shares authorized and none issued
and outstanding as of March 31, 2010 and June 30,
2009.
|
-
|
-
|
||||||
Common
Stock, $.01 par value, 16,666,667 shares authorized, 4,678,662 shares
issued and outstanding as of March 31, 2010 and June 30,
2009.
|
46,787
|
46,787
|
||||||
Additional
paid-in-capital
|
31,278,409
|
31,278,409
|
||||||
Accumulated
deficit
|
(37,132,057
|
)
|
(35,599,842
|
)
|
||||
Total
Stockholder's Deficit
|
(5,806,861
|
)
|
(4,274,646
|
)
|
||||
Total
Liabilities and Stockholders' Deficit
|
$
|
3,882,427
|
$
|
1,507,045
|
See
accompanying notes to unaudited consolidated financial
statements.
3
AuraSound,
Inc.
Consolidated
Statement of Operations
(In
whole dollars, except share data)
(Unaudited)
Three months ended
March 31,
|
Nine months ended
March 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net sales
|
$
|
1,745,664
|
$
|
311,338
|
$
|
4,808,880
|
$
|
626,857
|
||||||||
Cost
of sales
|
1,718,129
|
311,109
|
4,667,820
|
585,465
|
||||||||||||
Gross
profit
|
27,535
|
229
|
141,060
|
41,392
|
||||||||||||
Research
and development expenses
|
96,694
|
237,118
|
329,062
|
721,519
|
||||||||||||
Selling,
general and administrative expenses
|
367,400
|
360,081
|
1,211,930
|
1,150,513
|
||||||||||||
Total operations expense
|
464,094
|
597,199
|
1,540,992
|
1,872,032
|
||||||||||||
Loss
from operations
|
(436,559
|
)
|
(596,970
|
)
|
(1,399,932
|
)
|
(1,830,640
|
)
|
||||||||
Interest
expense (net)
|
44,094
|
37,641
|
132,283
|
101,006
|
||||||||||||
Loss
before income tax expense
|
(480,653
|
)
|
(634,611
|
)
|
(1,532,215
|
)
|
(1,931,646
|
)
|
||||||||
Income
tax expense – Note 9
|
-
|
-
|
-
|
-
|
||||||||||||
Net
loss
|
$
|
(480,653
|
)
|
$
|
(634,611
|
)
|
$
|
(1,532,215
|
)
|
$
|
(1,931,646
|
)
|
||||
Loss
per common share:
|
||||||||||||||||
Basic
and diluted
|
$
|
(0.10
|
)
|
$
|
(0.14
|
)
|
$
|
(0.33
|
)
|
$
|
(0.41
|
)
|
||||
Weighted
average shares used in per share calculation:
|
||||||||||||||||
Basic
and diluted
|
4,678,662
|
4,678,662
|
4,678,662
|
4,678,662
|
The
weighted average number of shares used to compute basic and diluted loss per
share is the same since the effect of dilutive securities is
anti-dilutive.
See
accompanying notes to unaudited consolidated financial statements
4
AuraSound,
Inc.
Consolidated
Statement of Cash Flows
(In
whole dollars, except per share data)
(Unaudited)
Nine months ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows from Operating activities:
|
||||||||
Net
loss
|
$
|
(1,532,215
|
)
|
$
|
(1,931,646
|
)
|
||
Adjustments
to reconcile net loss to cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
13,492
|
11,762
|
||||||
Provision
for obsolete inventory
|
-
|
12,910
|
||||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable, net
|
(1,514,277
|
)
|
80,866
|
|||||
Inventory
|
2,624
|
8,718
|
||||||
Accounts
payable
|
3,567,824
|
582,232
|
||||||
Accrued
expenses
|
285,665
|
158,205
|
||||||
Due
affiliate
|
54,373
|
-
|
||||||
Other
|
2,291
|
99,672
|
||||||
Net
cash provided by (used in) operating activities
|
879,777
|
(977,281
|
)
|
|||||
Cash
Flows from Investing activities:
|
||||||||
Purchase
of property and equipment
|
(30,691
|
)
|
(856)
|
|||||
Cash
Flows from Financing activities:
|
||||||||
Repayments
of amounts advanced under line of credit
|
-
|
(2,145,477
|
)
|
|||||
Proceeds
of restricted cash
|
-
|
2,000,000
|
||||||
Increase
in related party notes payable
|
-
|
119,444
|
||||||
Repayments
of related party debt
|
(265)
|
-
|
||||||
Loan
from officer
|
-
|
25,000
|
||||||
Advance
from affiliates
|
-
|
229,002
|
||||||
Increase
in loans payable
|
-
|
853,558
|
||||||
Net
cash provided by (used in) financing activities
|
(265)
|
1,081,527
|
||||||
Net
increase in cash and cash equivalents
|
848,821
|
103,390
|
||||||
Cash and cash
equivalents, beginning of period
|
321,455
|
72,559
|
||||||
Cash and cash
equivalents, end of period
|
$
|
1,170,276
|
$
|
175,949
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for interest
|
$
|
-
|
$
|
7,508
|
||||
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
See
accompanying notes to unaudited consolidated financial
statements
5
AuraSound,
Inc. and Subsidiary
Notes to
Unaudited Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND OPERATIONS
General
AuraSound,
Inc. (the Company or we/us/our) was incorporated as Hemcure, Inc. under the laws
of the state of Minnesota in 1986. On September 8, 2006, the Company was
reorganized by re-domiciling to the state of Nevada as Hemcure, Inc. pursuant to
a merger with Hemcure, Inc., a Nevada corporation, and the adoption of Nevada
Articles of Incorporation and By-laws. On June 7, 2007, we acquired AuraSound,
Inc. ("AuraSound"). Aura Sound, a California corporation, was founded on July
28, 1999 to engage in the development, commercialization, and sales of audio
products, sound systems, and audio components, using electromagnetic technology.
On February 12, 2008 the Company changed its name from Hemcure, Inc. to
AuraSound, Inc.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared by
AuraSound, Inc. pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”), Form 10-Q and generally accepted accounting
principles for interim financial reporting. The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K. The results of the nine
months ended March 31, 2010 are not necessarily indicative of the results to be
expected for the full year ending June 30, 2010.
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of
AuraSound, Inc. (a Nevada corporation) and its wholly owned subsidiary,
AuraSound, Inc. (a California corporation). All material inter-company accounts
have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and disclosures made in the accompanying notes. Actual results could
differ from those estimates.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
Company maintains an allowance for uncollectible accounts receivable to estimate
the risk of extending credit to customers and distributors. The allowance is
estimated based on the customer's or distributor's compliance with our credit
terms, the financial condition of the customer or distributor and collection
history where applicable. Additional allowances could be required if the
financial condition of our customers or distributors were to be impaired beyond
our estimates. As of March 31, 2010 and June 30, 2009 the allowance for doubtful
accounts amounted to $63,690 and $59,040 respectively.
Inventories
Inventories
are valued at the lower of cost (first-in, first-out) or market. Appropriate
consideration is given to deterioration, obsolescence and other factors in
evaluating net realizable value. As of March 31, 2010 and June 30,
2009, the allowance for obsolescence amounted to $156,144 and $286,853
respectively.
6
Property,
Plant, and Equipment
Property,
plant, and equipment, including leasehold improvements, are recorded at cost
less accumulated depreciation and amortization. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets as follows:
Machinery
and equipment
|
5
to 10 years
|
|
Furniture
and fixtures
|
7
years
|
Improvements
to leased property are amortized over the lesser of the lease term or the life
of the improvements. Amortization expense on assets acquired under capital
leases is included with depreciation and amortization expense on owned assets.
Maintenance and minor replacements are charged to expense as incurred. Gains and
losses on disposals are included in the results of operations. The Company’s
furniture and fixtures includes tooling and computer equipment.
As of
March 31, 2010 and June 30, 2009, property, plant and equipment consisted of the
following:
March 31, 2010
|
June
30, 2009
|
|||||||
|
|
|||||||
Machinery
and equipment and tooling
|
$
|
36,281
|
$
|
6,802
|
||||
Tooling
|
105,193
|
105,193
|
||||||
Computer
equipment
|
2,713
|
1,501
|
||||||
Accumulated
depreciation
|
(37,154
|
)
|
(23,662
|
)
|
||||
Total
|
$
|
107,033
|
$
|
89,834
|
Depreciation
expenses were $13,492 and $11,762 for the nine month periods ended March 31,
2010 and 2009.
The
Company utilizes a facility leased by a related party.
Valuation
of Long-Lived Assets
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144 (ASC 360). Impairment losses are
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from our normal
business activities. We place our cash in what we believe to be credit-worthy
financial institutions. We have a diversified customer base. We control credit
risk related to accounts receivable through credit approvals, credit limits and
monitoring procedures. The Company routinely assesses the financial strength of
its customers and, based upon factors surrounding the credit risk, establishes
an allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance
is limited.
Revenue
Recognition
Sales
revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured.
7
Research
and Development
Research
and development costs are expensed as incurred.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
AuraSound
has significant income tax net operating losses carried forward from prior
years. Due to the change in ownership of more than fifty percent, the amount of
NOL which may be used in any one year will be subject to a restriction under
section 382 of the Internal Revenue Code. Due to the uncertainty of the
realizability of the related deferred tax asset, a reserve equal to the amount
of deferred income taxes has been established at March 31, 2010.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. Our management and legal counsel
assess such contingent liabilities, and such assessment inherently involves an
exercise of judgment. In assessing loss contingencies related to legal
proceedings that are pending against the Company or unasserted claims that may
result in such proceedings, the Company’s legal counsel evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be
disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Basic
and diluted net loss per share
The basic
loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similar to basic loss per common share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Under this
method, options and warrants are assumed to be exercised at the beginning of the
period (or at the time of issuance, if later), and as if funds obtained thereby
were used to purchase common stock at the average market price during the
period. At March 31, 2010, the Company had no potentially dilutive warrant
shares outstanding.
8
New
Accounting Pronouncements
In June
2009, the FASB issued SFASB No.167 (ASC 810), Consolidation of Variable Interest
Entities, which changes the consolidation rules as they relate to
variable interest entities. Specifically, the new standard makes significant
changes to the model for determining who should consolidate a variable interest
entity, and also addresses how often this assessment should be performed. This
standard will be effective for us on July 1, 2010. We have adopted ASC 810
and there has been no material impact on our consolidated financial
statements..
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, Measuring
Liabilities at Fair Value, which provides additional guidance on the
measurement of liabilities at fair value. Specifically, when a quoted price
in an active market for the identical liability is not available, the new
standard requires that the fair value of a liability be measured using one or
more of the valuation techniques that should maximize the use of relevant
observable inputs and minimize the use of unobservable inputs. In addition,
an entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of
a liability. We have adopted this standard and there has been no material
impact on our consolidated financial statements.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which
amends ASC Topic 605, Revenue
Recognition, to require companies to allocate revenue in multiple-element
arrangements based on an element’s estimated selling price if vendor-specific or
other third-party evidence of value is not available. ASU 2009-13 is effective
beginning July 1, 2010. Earlier application is permitted. The Company is
currently evaluating both the timing and the impact of the pending adoption of
the ASU on its consolidated financial statements.
Reclassifications:
For
comparative purposes, the prior year’s consolidated financial statements have
been reclassified to conform to reporting classifications of the current year
periods.
NOTE
3 - INVENTORIES
Inventories
at March 31, 2010 and June 30, 2009 consisted of the
following:
March 31, 2010
|
June 30, 2009
|
|||||||
Raw
materials
|
$
|
12,581
|
$
|
13,568
|
||||
Finished
goods
|
305,933
|
438,279
|
||||||
Provision
for obsolescence
|
(156,144
|
)
|
(286,853
|
)
|
||||
Total
|
$
|
162,370
|
$
|
164,994
|
NOTE
4 - ACCRUED EXPENSES
Accrued
expenses consisted of the following as of March 31, 2010 and June 30,
2009:
March 31, 2010
|
June 30, 2009
|
|||||||
Accrued
consulting
|
$
|
236,359
|
$
|
236,359
|
||||
Accrued
interest
|
300,021
|
167,738
|
||||||
Accrued
payroll and others
|
200,587
|
47,205
|
||||||
Total
|
$
|
736,967
|
$
|
451,302
|
9
NOTE
5 - NOTES PAYABLE
On
October 6, 2008, one of our vendors, GGEC, entered into a non-binding letter of
intent pursuant to which GGEC may acquire a 55% interest in the
Company. During the evaluation period, GGEC agreed to fund up to
$150,000 per month for current operating costs until the transaction is either
consummated or terminated. As of March 31, 2010, GGEC had advanced $1,253,558
under the terms of that agreement. Such advances bear interest at 6% per annum,
are secured by all the assets of AuraSound, Inc. and are payable in full plus
accrued interest upon the earlier of the termination of the agreement or the
closing of the transaction contemplated by the letter of intent. As of March 31,
2010, GGEC and the Company had initiated the process of completing the
conditions precedent to an effective closing which includes appropriate
approvals and filings as specified in the transaction documents.
NOTE
6 - RELATED PARTY AND COMMITMENT
Notes
payable to related party at March 31, 2010 and June 30, 2009 amounting to
$1,264,526 and $1,264,791 respectively consist of notes to an entity owned by
our Chief Executive Officer. These notes are of various dates and all bear
interest at 8% per annum, with principal and interest due on demand. Interest
expense for the nine month periods ended March 31, 2010 and March 31, 2009
amounted to $75,873 and $75,000 respectively.
Until
October 3, 2009 the Company paid $20,000 per month to an entity owned by our
Chief Executive Officer, Mr. Arthur Liu, for services provided such as
accounting, shipping and receiving and general administrative. The Company also
paid an average of $6,237 per month to the same entity for rent as it shares the
offices, test laboratories and warehouse facilities with the related entity. The
rent allocation was 40% of the rent payable by the related entity to the
landlord. From October 1, 2009 through March 31, 2010, the Company paid an
agreed upon amount of $5,836 for its share of the office space, test
laboratories, utilities and warehouse and the $20,000 per month service charge
was discontinued because the Company was providing its own administrative and
accounting.
As of
March 31, 2010 and June 30, 2009, the total amount of $466,666 and $412,293
were due to the affiliate for such charges respectively. The amount
is payable on demand and does not bear interest.
As of
March 31, 2010, a total amount of $25,000 was due to our Chief Executive
Officer. The amount is payable on demand and does not bear
interest
NOTE
7 - STOCKHOLDERS' EQUITY
Stock
Split
Effective November
17, 2009, the Board of Directors of the Company approved a one-for-six reverse
stock split of the Company’s authorized and outstanding shares of common stock.
All outstanding share amounts have been retroactively adjusted to reflect the
stock split. As a result of the reverse split, there are 4,678,662 shares issued
and outstanding as of March 31, 2010 and June 30, 2009.
Common
Stock
At March
31, 2010, after the 1 for 6 reverse split that was effective November 17, 2009,
the Company was authorized to issue 3,333,333 shares of $0.01 par value
preferred stock and 16,666,667 shares of $0.01 par value common stock. As of
March 31, 2010 and June 30, 2009, there were no preferred shares
issued and outstanding.
10
NOTE
8 - WARRANTS
As of
March 31, 2010, the Company reserved 3,001,945 shares of common stock for
issuance in respect of warrants.
Following
is a summary of the status of warrants outstanding at March 31,
2010:
Outstanding
|
Exercisable
|
|||||||||||||||||
Price(*)
|
Shares
|
Life (Months)
|
Weighted Average
Exercise Price
|
Shares
|
Intrinsic Value
|
|||||||||||||
$4.80 |
40,833
|
60
|
$
|
0.07
|
40,833
|
$
|
-
|
|||||||||||
$6.00 |
533,333
|
60
|
$
|
1.07
|
533,333
|
-
|
||||||||||||
$9.00 |
2,427,779
|
60
|
$
|
7.28
|
2,427,779
|
-
|
||||||||||||
3,001,945
|
$
|
8.41
|
3,001,945
|
$
|
-
|
(*)
Pursuant to waiver and release agreements entered into by seventeen of our
warrant holders on November 3, 2009 and the terms of the Letter of Intent with
GGEC America, Inc., the exercise price of all currently outstanding warrants
will be adjusted to $.50 at the closing of the GGEC
transaction.
The
following table summarizes the activity for all stock warrants outstanding at
March 31, 2010:
Shares
|
Exercise Price
|
Remaining
Life
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
June 30, 2009
|
3,001,945
|
$
|
8.41
|
3.01
years
|
$
|
-
|
|||||||
Granted
|
-
|
-
|
-
|
||||||||||
Exercised
|
-
|
-
|
-
|
||||||||||
Cancelled
|
-
|
-
|
-
|
||||||||||
|
|||||||||||||
Outstanding
March 31, 2010
|
3,001,945
|
$
|
8.41
|
2.25
years
|
$
|
-
|
NOTE
9 - INCOME TAXES
The
Company did not record any income tax expense due to net losses during the
periods ended March 31, 2010 and 2009. The actual tax benefit differs from the
expected tax benefit computed by applying the United States corporate tax rate
of 40% to loss before income taxes as follows for the periods ended March 31,
2010 and 2009:
2010
|
2009
|
|||||||
Expected
tax benefit
|
34
|
%
|
34
|
%
|
||||
State
income taxes, net of federal benefit
|
6
|
6
|
||||||
Changes
in valuation allowance
|
(40
|
)
|
(40
|
)
|
||||
Total
|
-
|
%
|
-
|
%
|
The
following table summarizes the significant components of the Company's deferred
tax asset at March 31, 2010 and 2009:
2010
|
2009
|
|||||||
Deferred
tax asset:
|
$
|
11,772,832
|
$
|
10,899,571
|
||||
Valuation
allowance
|
(11,772,832
|
)
|
(10,899,571
|
)
|
||||
Net
deferred tax asset
|
$
|
—
|
$
|
—
|
The
Company recorded an allowance of 100% for its net operating loss carry-forward
due to the uncertainty of its realization.
A
provision for income taxes has not been provided in these financial statements
due to the net losses. At March 31, 2010, the Company had net operating loss
carry-forwards of approximately $27,845,649, which expire through March 31,
2030. NOLs relating to the period before June 7, 2007 will be subject to a
restriction as to the amount which may be used in any one year under section 382
of the Internal Revenue Code.
11
NOTE
10 - GOING CONCERN
The
accompanying financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. During the three and nine month periods ended
March 31, 2010, the Company incurred losses of $480,653 and $1,532,215
respectively. The Company had an accumulated deficit of $37,132,057 as of March
31, 2010. The Company has never been profitable and there can be no assurances
that it will ever be profitable or that it will survive as a public
company.
If the
Company is unable to generate profits and unable to obtain financing
continuously for its working capital needs and on going business plan, it may
have to curtail its business sharply or cease business altogether.
The
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to retain its current short
term financing and ultimately to generate sufficient cash flow to meet its
obligations on a timely basis in order to obtain additional financing, and
ultimately to attain profitability.
On
October 6, 2008, the Company entered into a non-binding letter of intent with
GGEC pursuant to which GGEC may acquire a 55% interest in the Company. During
the evaluation period, GGEC agreed to fund up to $150,000 per month for current
operating costs until the transaction is either consummated or terminated. The
process of obtaining regulatory approval from the government of China was
completed and approval has been received. GGEC is in the final stages of
its due diligence investigation, however if for any reason GGEC
determines not to proceed with the contemplated transaction, the Company would
not have sufficient funding to continue in business and would be forced to
curtail operations or find alternative funding.
NOTE
11 - MAJOR CUSTOMERS AND MAJOR VENDORS
There
were two major customers of the Company during the nine month period ended March
31, 2010 which accounted for 83% of the Company’s sales. The receivables due
from these customers as of March 31, 2010 totaled $2,266,505. During the
nine month period ended March 31, 2009, there were two major customers of the
Company which accounted for 46% of the Company’s sales. The receivables due from
these customers as of March 31, 2009 totaled $182,588.
During
the current nine months ended March 31, 2010, the Company had one major
vendor, GGEC, which accounted for 100% of the Company’s purchases of finished
products. As of March 31, 2010, the Company owed $5,929,895 to GGEC for tools,
jigs, molds, raw materials and finished products relating to products which had
been manufactured for the Company. As of March 31, 2010, GGEC had also advanced
$1,253,558 to the Company (see Note 5). During the nine months ended March 31,
2009, the Company had one major vendor, GGEC, which accounted for 100% of
the Company’s purchases of finished products. As of March 31, 2009, the Company
owed $1,310,935 to GGEC for tools, jigs, molds, raw materials and finished
products relating to products that had been manufactured for the
Company. As of March 31, 2009, GGEC had also advanced $853,558 to the
Company.
12
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements. In addition, from time to time, we
or our representatives may make forward-looking statements orally or in writing.
We base these forward-looking statements on our expectations and projections
about future events, which we derive from the information currently available to
us. Such forward-looking statements relate to future events or our future
performance. You can identify forward-looking statements because they are not
historical in nature. In particular, those statements that use terminology such
as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,”
“believes,” “intends,” “plans,” “projected,” “predicts,” “potential” or
“continue” or the negative of these or similar terms are forward-looking
statements. In evaluating these forward-looking statements, you should consider
various factors, including those described in this report. These and other
factors may cause our actual results to differ materially from any
forward-looking statements.
The
following is a listing of important risks, uncertainties and contingencies that
could cause our actual results, performances or achievements to be materially
different from the forward-looking statements included in this
report.
·
|
Our
ability to finance our operations on acceptable
terms;
|
·
|
Our
ability to retain members of our management team and our
employees;
|
·
|
The
success of our research and development activities, the development of
viable commercial products, and the speed with which product launches and
sales contracts may be achieved;
|
·
|
Our
ability to develop and expand our sales, marketing and distribution
capabilities;
|
·
|
Our
ability to adapt to or upgrade our technologies and products as the
markets in which we compete evolve;
|
·
|
Our
ability to offer pricing for products which is acceptable to customers;
and
|
·
|
Competition
that exists presently or may arise in the
future.
|
Except to
the extent required by applicable laws or rules, we undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
Overview
We are a
southern California based developer, manufacturer and marketer of premium audio
products. Since our business began in 1987, we have focused on the development
of innovative and revolutionary magnetic speaker motor designs to deliver
high-end audio products to the OEM, home and professional audio markets. We have
developed a proprietary portfolio of unique audio speaker technologies as a
result of this emphasis on research and development, which we believe has led to
strong brand recognition among audiophiles, sound engineers, electronics
manufacturers and premium audio manufacturers.
From a
product development standpoint, our company has focused its research and
development efforts during the last two years on the development of new product
lines for the micro-audio market. Specifically, we have developed miniaturized
speakers that our tests indicate will deliver sound quality to devices such as
laptop computers, flat-panel TVs, display screens, and mobile phones which we
believe to be superior to the speakers currently utilized by such devices. Our
micro-audio products have been tested and approved by NEC, Quanta, Hewlett
Packard and Acer. NEC and Quanta have included our speakers into certain
of their new product design specifications. We believe that the market for
micro-audio products is significant and we expect continued rapid growth as the
consumer appetite for devices such as mobile telephones, computers, televisions
and personal digital assistants continues to grow. As of April 12, 2010, we had
a backlog of approximately $2,413,000 in orders.
Our
primary product sales are made on an OEM basis to manufacturers of televisions
and computers. Our NRT technology is sold primarily to high-end speakers and
sound systems manufacturers. Historically, approximately 83% of our
net sales were made to customers outside the United States. We believe that
international sales will continue to represent a significant portion of our
revenues.
13
Problems
with our Suppliers
We
originally utilized Grandford Holdings Ltd. (“Grandford”) as the primary
manufacturer of our audio products. This relationship was established over 5
years ago. It was based upon the ability of the general manager of Grandford,
David Liu, who is the son of Arthur Liu, our Chief Executive Officer, a director
and a major shareholder, to provide quality products and timely deliveries to
our customers. Historically, Grandford successfully supplied approximately 96%
of our finished products without significant problems. As part of our plan for
significant expansion and the introduction of microaudio products, we decided to
continue using Grandford as our supplier.
Our OEM
business is based upon verbal commitments which are subject to our ability to
continue to meet customer/product specifications, quality standards and delivery
schedules. The customers initiate periodic (usually monthly) purchase orders in
increments designed to meet their production schedules. Prior to June 2007, the
annual sales volumes of products manufactured by Grandford ranged between $2
million to $3 million. However, we had obtained verbal commitments from major
OEM customers such as Amtran ($5.8 million), Softbank ($9.6 million), NEC ($4.5
million) and Quanta ($12.5 million) among others, which far exceeded Grandford’s
historical monthly production volumes. In June 2007 we obtained the financing
necessary to begin initial production of our microaudio products and to expand
production of our other products. Grandford assured us that it could
ramp-up operations to meet our requirements.
In order
to ramp-up production at Grandford’s manufacturing facility, we established a
temporary prepayment practice which was intended to transition to thirty day
terms over a six month period. We made significant advance payments which
totaled $4,228,038 to Grandford for tools, jigs, molds and raw materials that
were needed to produce our products. However, by September 2007 we had received
significant complaints regarding late deliveries and it became apparent to us
that Grandford did not have the infrastructure to support the required level of
production. We attempted to resolve these issues, but we were ultimately
unsuccessful and terminated that entity as our primary supplier. During this
period, we also established alternative vendors, one of which was Zylux Acoustic
Corporation (“Zylux”). Zylux began producing our microaudio products in October
2007.
Zylux
made significant commitments to our Chief Executive Officer regarding its
manufacturing processes and quality control procedures and had sufficient
capacity to meet our customer demands. Accordingly, with appropriate controls
and procedures in place, we began directing all of our production to Zylux.
However, after only two months we alerted Zylux to the following
problems:
·
|
Delivery
schedules were not being met, with some models being months late. In one
case, only 15,000 pieces of a 40,000 piece order were delivered. In
another case, the customer prepaid for 10,500 pieces and received 2,000
pieces. These delivery problems caused a material disruption in the
production schedules of our customers. In an attempt to bridge these
delays and pacify our customers, we paid to air freight shipments from the
manufacturing facility.
|
|
·
|
Commercially
acceptable quality was never achieved and Zylux was unable to timely
correct the deficiencies in the manufacturing process. Reject rates as
high as 40% were experienced by our customers with an overall reject rate
of about 30%.
|
The
adverse impact on our reputation was significant. Furthermore, at least one of
our customers had to add employees to sort through delivered products and
perform quality checks on each piece. This caused an additional disruption in
the production schedules which had already been disrupted by the late
deliveries. As a result of the delivery and quality issues:
·
|
One
customer excluded us from bidding on a newly designed speaker with
expected volumes in excess of 50 million pieces.
|
|
·
|
Another
customer billed us $18,000 for additional employee costs incurred and put
our company on probation whereby any future quality problems would result
in termination of our supplier status.
|
|
·
|
Actual
orders from impacted customers were significantly reduced from the number
of orders that were promised while customers waited to see if
we could supply microspeakers of acceptable
quality.
|
14
·
|
Amtran
and Softbank terminated their relationships with us completely and Quanta
and NEC significantly
reduced the volume of their orders and deferred designing our products
into the early
2008 models pending our ability to prove we could deliver quality products
in a timely
manner.
|
In
addition, various other customers deferred certification of our products
relating to early 2008 models pending our ability to prove we could fulfill
their requirements. The approval window for many consumer products is June, July
and August. The products are then manufactured in September and October and
delivered to retail stores in November and December. If our samples are
not delivered, tested and approved during the approval window, we will not be
approved as a supplier for the new models. Some industries, such as notebook
computers and cell phones, introduce new models on more random cycles but the
result is the same – if our samples are not delivered, tested and approved
during the window period, we will not be approved as a supplier for that model.
When we were experiencing problems with Grandford and Zylux, we missed many
approval windows.
Most of
the customers who experienced quality problems requested that the defective
product be replaced with quality products which met their inspection criteria.
Accordingly, we replaced about $640,000 of product at no-charge, the accounting
for which resulted in no change to revenue but an additional cost for the
replacement product. Only about $14,000 of product was returned for credit. This
amount was low because customers need the speakers which are designed into their
finished product.
In order
to save the company, we were required to search out another manufacturer, again
pay the cost of certification, again delay deliveries and walk through starting
up new production lines at a new facility.
Our Chief
Executive Officer contacted Guoguang Electric Co. Ltd (“GGEC”), a company that
was already producing speakers for Bose and Harmin Kardin among others, in an
effort to place future production with a supplier with an established record of
producing quality speakers for major OEM customers. GGEC has been able to
satisfactorily meet the requirements of our customers and we are attempting to
rebuild the relationships we lost.
General
Net sales
are comprised of gross sales less returns and cash discounts. Our operating
results are seasonal, with a greater percentage of net sales being earned in the
third and fourth quarters of our fiscal year due to the fall and winter selling
seasons.
Cost of
goods sold consists primarily of material costs, direct labor, overhead, inbound
freight and duty costs, warranty costs and a reserve for inventory
obsolescence.
Research
and development expenses consist primarily of expenditures related to new
product commercialization including product research, development and
testing.
Our
selling, general and administrative expenses consist primarily of non-marketing
payroll and related expenses and depreciation of corporate infrastructure
costs.
Critical
Accounting Policies and Estimates
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The reported financial
results and disclosures were determined using the significant accounting
policies, practices and estimates described in Note 2 to our consolidated
financial statements.
15
RESULTS OF
OPERATIONS
Three Months Ended March 31,
2010 compared to the Three Months Ended March 31, 2009
REVENUE
Revenue
increased by $1,434,326 or 461% compared to the same prior year period, from
$311,338 to $1,745,664. The increase in sales for the current period has been
the result of efforts by the Company and GGEC to re-establish relationships
damaged by the problems incurred by the Company during 2007 and 2008
with two previous suppliers, Grandford Holdings and Zylux. Please see our
discussion above titled “Problems with our Suppliers”. While the prior year
results reflected the problems of the time, the current period results reflect
significant progress in re-establishing the Company with prior customers and
responding to new opportunities with new customers. The largest increase has
come in applications which utilize our newly redesigned mini-speakers such as
notebook computers. Speakers which utilize our NRT Technology have also
experienced a significant increase in demand due to a focused marketing effort
and our ability to provide quality products on a timely basis with our current
supplier, GGEC.
GROSS
PROFIT (LOSS)
Cost of
sales for the three months ended March 31, 2010 was $1,718,129 as compared to
cost of sales of $311,109 for the three months ended March 31, 2009, which
resulted in a gross profit for the current quarter of $27,535, compared to
$229 during the prior year period. With the emphasis on re-establishing
credibility with our OEM customers, additional time and cost has been incurred
to insure that quality standards are met. The result has been to defer
significant profitability improvements while insuring the establishment of a
disciplined and consistent quality assurance program and timely deliveries of
finished products to our customers. A significant reduction in the reject rates
and improved vendor acceptance of our products has resulted in an increase in
customer orders and an improved backlog which had increased to approximately
$2,413,000 as of April 12, 2010.
RESEARCH AND DEVELOPMENT
EXPENSES
Research
and development expenses for the quarter ended March 31, 2010 totaled $96,694, a
reduction of $140,424 or 59% from the $237,118 incurred for the same prior year
period. This reduction is the result of a cost reduction program which resulted
in a reduction of salaries and related expenses. Research and development
expenses consist primarily of salaries and related expenses associated with
designing and testing new speaker designs for new applications and
redesigning old speaker designs for new customers and applications. While a
short-term cost reduction program was deemed appropriate under the
circumstances, development of new and customer specific products is the life
line of the Company and as such the Company expects to continue to incur
research and development costs for the foreseeable future.
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses for the quarter ended March 31, 2010 increased by
$7,319 or 2% to $367,400 as compared to $360,081 for the quarter
ended March 31, 2009. The increase was primarily the result of increased
legal fees and administrative costs. These expenses were partially
offset by the cost reduction program implemented during the period which
resulted in the reduction of about 40% of the work force in the US and a
reduction of about 20% in the workforce of Taiwan and China. We expect our
costs of administration will continue to be significant due to the costs of
regulatory compliance as a public company and our current efforts to take over
administrative and accounting activities previously performed by a related
company. In addition, we expect incremental costs related to
volumetric increases in the manufacturing and sale of audio speakers and other
equipment.
INTEREST
EXPENSE
Net
interest expense totaled $44,094 in the quarter ended March 31, 2010 compared
with net interest expense of $37,641 for the quarter ended March 31, 2009.
Current interest charges relate primarily to the loans from
GGEC which totaled $1,253,558 as of March 31, 2010 and to notes
payable to InSeat Solutions LLC, a company owned by our President and Chief
Executive Officer, which amounted to $1,264,526 as of March 31,
2010.
16
INCOME
TAXES
We have
significant income tax net operating loss carry forwards; however, due to the
uncertainty of the realizability of the deferred tax asset, a reserve equal to
the amount of deferred tax benefit has been established as of March 31, 2010 and
March 31, 2009. Accordingly, no income tax benefit has been reflected for either
period.
NET
LOSS
As a
result of the above, there was a net loss for the three month ended March 31,
2010 of $480,653 compared to a net loss of $634,611 for the same period in
the prior year.
Nine Months Ended March 31,
2010 compared to the Nine Months Ended March 31, 2009
REVENUE
Revenue
in the current year period increased by $4,182,023 or 667% compared to the same
prior year period, from $626,857 to $4,808,880. The increase in sales for the
current period has been the result of efforts by the Company and GGEC to
re-establish relationships damaged by the problems incurred by the Company
during 2007 and 2008 with two previous suppliers, Grandford Holdings and
Zylux. Please see our discussion above titled “Problems with our Suppliers”.
While the prior year results reflected the problems of the time, the current
period results reflect significant progress in re-establishing the Company with
prior customers and responding to new opportunities with new customers. The
largest increase has come in applications which utilize our newly redesigned
mini-speakers such as notebook computers. Speakers which utilize our NRT
Technology have also experienced a significant increase in demand due to a
focused marketing effort and our ability to provide quality products on a timely
basis with our current supplier, GGEC.
GROSS
PROFIT
Cost of
sales for the nine months ended March 31, 2010 was $4,667,820 as compared to
cost of sales of $585,465 for the nine months ended March 31, 2009, which
resulted in a gross profit for the current year period of $141,060, compared to
$41,392 during the same prior year period. With the emphasis on re-establishing
credibility with our OEM customers, additional time and cost has been incurred
to insure that quality standards are met. The result has been to defer
significant profitability improvements while insuring the establishment of a
disciplined and consistent quality assurance program and timely deliveries of
finished products to our customers. A significant reduction in the reject rates
and improved vendor acceptance of our products has resulted in an increase in
orders received from customers and an improved backlog which had increased to
approximately $2,413,000 as of April 12, 2010.
RESEARCH
AND DEVELOPMENT EXPENSES
Research
and development expenses for the nine months ended March 31, 2010 totaled
$329,062, a reduction of $392,457 or 54% from the $721,519 incurred for the same
period in the prior year. This reduction is the result of a cost reduction
program which resulted in a reduction of salaries and related expenses. Research
and development expenses consist primarily of salaries and related expenses
associated with designing and testing new speaker designs for new
applications and redesigning old speaker designs for new customers and
applications. While a short-term cost reduction program was deemed appropriate
under the circumstances, development of new and customer specific products is
the life line of the Company and as such the Company expects to continue to
incur research and development costs for the foreseeable future.
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses for the nine months ended March 31, 2010 increased
by $61,417 or 5% to $1,211,930 as compared to $1,150,513 for the nine months
ended March 31, 2009. The increase was primarily the result of increased legal
fees and administrative costs. These expenses were partially offset by the cost
reduction program implemented during the period which resulted in the reduction
of about 40% of the work force in the US and a reduction of about 20% in the
workforce of Taiwan and China. We expect our costs of administration will
continue to be significant due to the costs of regulatory compliance as a public
company and our current efforts to take over administrative and accounting
activities previously performed by a related company. In addition, we
expect incremental costs related to volumetric increases in the manufacturing
and sale of audio speakers and other equipment.
17
INTEREST
EXPENSE
Net
interest expense totaled $132,283 for the nine months ended March 31, 2010
compared with net interest expense of $101,006 for the nine months ended March
31, 2009. Current interest charges relate primarily to the loans from GGEC
which totaled $1,253,558 as of March 31, 2010 and to notes payable to
InSeat Solutions LLC, a company owned by our President and Chief Executive
Officer, which amounted to $1,264,526 as of March 31, 2010.
INCOME
TAXES
We have
significant income tax net operating loss carry forwards; however, due to the
uncertainty of the realizability of the deferred tax asset, a reserve equal to
the amount of deferred tax benefit has been established as of March 31, 2010 and
March 31, 2009. Accordingly, no income tax benefit has been reflected for either
period.
NET
LOSS
As a
result of the above, there was a net loss for the nine month period ended March
31, 2010 of $1,532,215 compared to a net loss of $1,931,646 during the same
period in the prior year.
LIQUIDITY
AND CAPITAL RESOURCES
As of
March 31, 2010, our current liabilities exceeded our current assets by
$5,913,894 compared to a deficit of $4,364,480 as of June 30, 2009. As
previously discussed, during the current year we have worked closely with GGEC
in focusing our efforts on transitioning relationships with existing customers
and establishing relationships with new customers in addition to insuring a
disciplined quality assurance program both of which we believe are necessary for
us to grow as a company and meet the demands of our customers. Progress in
gaining re-acceptance has been gaining momentum as reflected in the increased
sales revenue and a backlog which had improved to about $2,413,000 as of April
12, 2010. The JIT inventory program for Quanta has been successful for both
Quanta and the Company by providing longer runs and more efficient production
scheduling while not resulting in a significant increase in inventory.
Production for the 2010 models began during late 2009 and the beginning of
2010. Indications are that the Company has made significant gains in acceptance
and trust with key customers. We expect to see a continuing increase in our
backlog and believe that we have now established a solid foundation for the
expected growth of the Company.
Net cash
generated by operating activities during the nine months ended March 31, 2010
was $879,777 as compared to net cash used of $977,281 during the same period in
the prior year. This was due primarily to an increase in accounts payable
(mainly to GGEC) and accrued expenses mostly offset by an increase in accounts
receivable and net loss from operations.
Cash used
in investing activities for the nine months ending March 31, 2010 was $30,691.
Cash used in this period was primarily used for the purchase of testing
equipment. Cash used in investing activities for the nine months
ending March 31, 2009 was $856.
Cash used
in financing activities for the nine month period ended March 31, 2010 was $265.
Cash provided by financing activities during the period ended March 31, 2009 was
$1,081,527. The net cash provided during the prior year period was
primarily the result of advances from GGEC. Also reflected in the prior year
period was the repayment of the credit facility with the proceeds of the
restricted cash deposit.
We had
net operating loss carry-forwards of approximately $27,845,649 as of March 31,
2010, which will expire in various amounts through the year 2030. Based upon
historical operating results, management has determined that it cannot conclude
that it is more likely than not that the deferred tax is realizable.
Accordingly, a 100% valuation reserve allowance has been provided against the
deferred tax benefit asset.
In
September 2007, we executed a $10.0 million one-year accounts receivable credit
facility and a one year $2.0 million fixed deposit credit facility with Bank
SinoPac in order to insure resource availability. On September 25, 2008, we
repaid our credit facility in full. We are currently in discussions with Bank
SinoPac for the establishment of a new credit facility.
18
On
October 8, 2008, GGEC entered into a non-binding letter of intent directed at a
possible transaction whereby GGEC would acquire a 55% interest in AuraSound,
Inc. During the evaluation period, GGEC agreed to fund up to $150,000 per month
for current operating costs until the transaction is either consummated or
terminated.
While the
closing of the GGEC transaction has taken longer than originally anticipated,
GGEC has continued to provide both financial and marketing support to the
Company. This support has had a significant and positive effect on
our operations, with net sales for the quarter just ended increasing from
$311,338 for the quarter ended March 31, 2009 to $1,745,664 for the current
quarter ended March 31, 2010. In addition to advancing $1,253,558 in
cash to the Company, GGEC has provided extended terms on amounts due to GGEC as
our sole manufacturing source. This trade debt totaled $5,929,895 as
of March 31, 2010. Current expectations are that the closing of the
GGEC transaction will occur during our fourth quarter.
We
continue to believe that our long-term prognosis with GGEC as a financial
partner is very positive, however, there can be no guarantees that the
transaction with GGEC will be consummated or that the Company will be able to
attract another financial partner or arrange for alternative financing in the
absence of a transaction with GGEC. Management believes that it will continue to
need financing to produce and expand its product lines during the next twelve
months. If GGEC does not provide this financing or if the financing
provided by GGEC is not adequate for our needs, the Company will attempt to
obtain additional financing through loans, the sale of our securities or some
combination of both. If the Company is unable to obtain
financing for its working capital requirements, it may have to curtail its
business sharply or cease business altogether.
INFLATION
Management
believes that inflation generally causes an increase in sales prices with an
offsetting unfavorable effect on the cost of products sold and other operating
expenses. Accordingly, with the possible impact on interest rates, management
believes that inflation will have no significant effect on our results of
operations or financial condition.
OFF-BALANCE
SHEET ARRANGEMENTS
We
currently do not have any off-balance sheet arrangements or financing activities
with special purpose entities.
GOING
CONCERN STATUS
The
accompanying financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. During the three and nine month periods ended
March 31, 2010, the Company incurred losses of $480,653 and $1,532,215
respectively. The Company had an accumulated deficit of $37,132,057
as of March 31, 2010. The Company has never been profitable and there can be no
assurances that it will ever be profitable or that it will survive as a public
company.
If the
Company is unable to generate profits and unable to continue to obtain financing
for its working capital needs and on going business plan, it may have to curtail
its business sharply or cease business altogether.
The
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to retain its current short
term financing and ultimately to generate sufficient cash flow to meet its
obligations on a timely basis in order to obtain additional financing, and
ultimately to attain profitability.
On
October 6, 2008, the Company entered into a non-binding letter of intent with
GGEC pursuant to which GGEC may acquire a 55% interest in the Company. During
the evaluation period, GGEC agreed to fund up to $150,000 per month for current
operating costs until the transaction is either consummated or terminated. The
process of obtaining regulatory approval from the government of China was
completed and approval has been received. GGEC is in the final stages of
its due diligence investigation, however if for any reason GGEC
determines not to proceed with the contemplated transaction, the Company would
not have sufficient funding to continue in business and would be forced to
curtail operations or find alternative funding.
19
ITEM
3.
|
CONTROLS
AND PROCEDURES
|
Management
carried out an evaluation, under the supervision and with the participation of
our Chief Executive Officer/President, who is also our Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. The evaluation
was undertaken in consultation with our accounting personnel. Based on that
evaluation, the Chief Executive Officer/President/Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms.
During
the period covered by this report, there was no significant change in our
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER
INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS
|
Not
applicable
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None
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
|
2.1
|
Amended
and Restated Agreement and Plan of Share Exchange dated June 7, 2007 among
AuraSound, Inc. and the shareholders of AuraSound, Inc. on the one hand,
and Hemcure, Inc., Bartly J. Loethen and Synergy Business Consulting LLC,
on the other hand (1)
|
3.1(i)
3.1(ii)
|
Articles
of Incorporation (2)
Certificate
of Change to Articles of Incorporation (3)
|
3.2
|
By-Laws
(1)
|
31.1
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
|
31.2
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
|
32
|
Certification
Pursuant to Section 1350 of Title 18 of the United
States*
|
* Filed
herewith.
(1)
Incorporated by reference to the registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 13, 2007 as file number
000-51543.
(2)
Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for
the period ended June 30, 2000 filed with the Securities and Exchange Commission
on July 6, 2005 as file number 000-51543.
(3)
Incorporated by reference to the registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 13, 2009 as file number
000-51543.
20
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.
AURASOUND,
INC.
|
||
Dated:
May 5, 2010
|
By:
|
/s/
Arthur Liu
|
Arthur
Liu, President and Chief
|
||
Executive
Officer
|
||
By:
|
/s/
Arthur Liu
|
|
Arthur
Liu
|
||
Chief Financial Officer |
21