Attached files
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| EX-32 - EX-32 - AuraSound, Inc. | v197675_ex32.htm |
| EX-21 - EX-21 - AuraSound, Inc. | v197675_ex21.htm |
| EX-31.2 - EX-31.2 - AuraSound, Inc. | v197675_ex31-2.htm |
| EX-31.1 - EX-31.1 - AuraSound, Inc. | v197675_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10 -
K
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x
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ANNUAL
REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended June
30, 2010
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
transition period from ________________________ to
_______________________
Commission
file number 005-80848
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AuraSound,
Inc.
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(Name
of small business issuer in its
charter)
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Nevada
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20-5573204
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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11839
East Smith Avenue
Santa
Fe Springs, California
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90670
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer's
telephone number: (562) 447-1780
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par
Value
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨ Yes x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨ Yes x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the 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 ¨
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).
¨ Yes ¨ No (The
registrant is not yet subject to this requirement.)
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated file or a smaller reporting
company.
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter.
As of December 31, 2009, after the 1 for 6 reverse split which was effective
November 17, 2009, the aggregate market value of the registrant’s voting and
non-voting common equity held by non-affiliates was approximately
$4,991,499.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. As of September
14, 2010, the issuer had 16,666,667 shares of its common stock,
$0.01 par value issued and outstanding.
Documents
incorporated by reference. List hereunder the following documents if
incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(g) or (c) under the Securities Act of
1933. The listed documents should be clearly described for
identification purposes. None
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K 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 by those that are not historical in nature, particularly those 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.
In evaluating these forward-looking statements, you should consider various
factors, including those described in this report under the heading “Risk
Factors” beginning on page 9. These and other factors may cause our actual
results to differ materially from any forward-looking statements.
Forward-looking statements are only predictions. The forward-looking events
discussed in this report and other statements made from time to time by us or
our representatives may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about
us.
We cannot
give any guarantee that these plans, intentions or expectations will be
achieved. The following is a list of important risks, uncertainties and
contingencies that could cause our actual results, performance or achievements
to be materially different from the forward-looking statements included in this
report:
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our ability to finance our
operations on acceptable terms, either by raising capital through sales of
our securities, including the sale of convertible or other indebtedness,
or through strategic financing
partnerships;
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·
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our ability to retain members of
our management team and our
employees;
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·
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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;
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·
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our ability to develop and expand
our sales, marketing and distribution
capabilities;
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·
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our ability to upgrade our
technologies and products and to adapt to evolving
markets;
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·
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our ability to offer pricing for
products which is acceptable to customers;
and
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·
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competition that exists presently
or may arise in the future.
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The
foregoing does not represent an exhaustive list of risks. Moreover, new risks
emerge from time to time and it is not possible for our management to predict
all risks, nor can we assess the impact of all risks on our business or the
extent to which any risk, or combination of risks, may cause actual results to
differ from those contained in any forward-looking statements. All
forward-looking statements included in this report are based on information
available to us on the date of this report. 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. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this report.
PART
I
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ITEM 1.
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BUSINESS.
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Overview
Our
business operations are conducted through our wholly-owned subsidiary,
AuraSound, Inc., a California corporation (referred to in this report as
“AuraSound”), which we acquired on June 7, 2007. Founded in 1987,
AuraSound develops, manufactures and markets premium audio products. AuraSound
specializes in the production of high sound pressure level (“SPL”), bass-rich,
low distortion sound from compact acoustic transducers (speakers). AuraSound has
invested in the development of innovative audio technologies for use in ultra
high end home and professional audio products. AuraSound has also expanded
its product line to include the micro-audio market. Specifically, AuraSound has
developed and is currently marketing undersized speakers that will deliver sound
quality to devices such as laptops, flat-panel televisions and displays that we
believe to be superior to the sound quality currently found in these
devices. During the year ended June 30, 2010, our operations in China
were conducted through Well-Tech International Co., a Hong Kong company owned by
Susanne Lee who is our office administrator in Hong Kong. Our
operations in Taiwan are conducted by AuraSound as a foreign corporation doing
business in Taiwan. Our home offices are located in Santa Fe Springs,
California.
Historically,
AuraSound has provided its products to the high end home and professional audio
markets. Products for this market start at $100 and reach upwards of $1,000.
Until recently, the extremely low annual unit sales volumes that characterize
the high end home and professional audio markets limited our ability to
accelerate our growth. However, successful development and customer acceptance
of our micro-audio product line has provided an opportunity for
accelerated growth with major electronics manufacturers. We are
currently delivering our micro-audio products to various OEM manufacturers
through Quanta , a leading private lable manufacturer of laptop computers, and
Compal, a leading manufacturer of notebooks and TVs. Our micro
speakers can now be found in products manufactured for HP, Sony and Toshiba, and
are being evaluated by Dell, LG, Sharp, and Acer. Quanta has become a strong
advocate for our micro-speaker technology in order to
reduce weight and improve sound quality in laptop computers. Because of the
manufacturing problems experienced by the Company, Quanta deferred certain
referrals until the Company could provide specific assurance that quality
control measures had been instituted to insure acceptable quality and timely
delivery of our products. Through our association with Guoguang
Electronic Co., Ltd. ("GGEC") the Company has provided such assurance and is
currently working with various Quanta customers on various current
and future products. Our backlog of orders as of June 30, 2010
totaled approximately $1,991,000.
Our goal
is to rapidly expand our sales pipeline by expanding our customer base to
include additional OEM electronics manufacturers in existing product
categories.
SUBSEQUENT EVENTS
Asset Purchase Agreement and
Ancillary Agreements
On July
10, 2010,we entered into an Asset Purchase Agreement (the “Asset Purchase
Agreement”) with ASI Holdings Limited, a Hong Kong corporation (“ASI Holdings”),
and its wholly-owned subsidiary ASI Audio Technologies, LLC, an Arizona limited
liability company (“ASI Arizona”), pursuant to which AuraSound agreed to acquire
substantially all of the business assets and certain liabilities of ASI Holdings
and ASI Arizona (the “ASI Transaction”), in consideration of the issuance to the
shareholders of ASI Holdings of an aggregate of 5,988,005 shares (the “ASI
Transaction Shares”) of unregistered common stock of AuraSound (“Common Stock”),
and 5 year warrants to purchase an aggregate of 3,000,000 shares of Common Stock
(“Warrant Shares”) at an exercise price of $1.00 per share (collectively, the
“ASI Warrant”). Pursuant to the Asset Purchase Agreement, AuraSound
has agreed to assume approximately $10,154,745 in liabilities of ASI Holdings
and ASI Arizona, primarily consisting of trade payables. See the
Current Reports on Form 8-K which we filed on July 10, 2010 and July 31, 2010
for more details regarding the ASI Transaction.
ASI is a
global provider of audio products, in particular, sound bars for applications in
home entertainment.
Securities Purchase
Agreement
On July
10, 2010, we entered into and consummated a Securities Purchase Agreement (the
“SPA”) with GGEC America, Inc., a California corporation (“GGEC America”), and
its parent, GGEC, the primary manufacturer of our speaker drivers and
products. Pursuant to the SPA, AuraSound sold and issued to GGEC
America (i) 6,000,000 shares of unregistered Common Stock, which, following the
consummation of the SPA, constituted approximately 55% of AuraSound’s issued and
outstanding shares of Common Stock, (ii) a 3 year warrant to purchase
6,000,000 shares of Common Stock at an exercise price of $1.00 per
share, and (iii) a 3 year warrant to purchase 2,317,265 shares of Common Stock
at an exercise price of $0.75 per share; for an aggregate purchase price of US
$3,000,000 (the “GGEC Transaction”). GGEC America paid the purchase
price for the shares and warrants by cancelling $3,000,000 of indebtedness owed
by AuraSound to GGEC America and GGEC. In addition, pursuant to the
SPA, AuraSound issued 3 year warrants to a total of 5 officers, employees and
consultants of AuraSound and GGEC America to purchase a total of 380,000 shares
of Common Stock at an exercise price of $0.75 per share (the “Service
Warrants”). Arthur Liu, AuraSound’s former Chief Executive Officer
and former Chairman of the Board, received 200,000 of the Service Warrants and
Donald North, AuraSound’s Vice President – Engineering, received 100,000 of the
Service Warrants. The warrants to be issued to GGEC and the 5
officers, employees and consultants of AuraSound and GGEC America are
exercisable for cash only and will not be exercisable until AuraSound has
increased its authorized Common Stock to a number sufficient to allow their full
exercise. See the Current Report on form 8-K which we filed on July
10, 2010 for more details regarding these transactions.
3
Debt Conversion
Agreement
On July
10, 2010, AuraSound entered into and consummated an Agreement to Convert Debt
(the “Debt Conversion Agreement”) with Inseat Solutions, LLC (“Inseat”), a
California limited liability company controlled by Arthur Liu, AuraSound’s
former Chief Executive Officer and former Chief Financial
Officer. Pursuant to the Debt Conversion Agreement, AuraSound issued
326,173 shares of unregistered Common Stock and a 5 year warrant to purchase
2,243,724 shares of Common Stock at an exercise price of $0.50 per share (the
“Inseat Warrant”), in consideration of the cancellation of $1,957,040 of
indebtedness owed by AuraSound to Inseat. The Inseat Warrant is
exercisable for cash only and will not become exercisable until AuraSound has
increased its authorized Common Stock to a number sufficient to enable the full
exercise of all of AuraSound’s outstanding convertible securities, including the
Inseat Warrant. See the Current Report on Form 8-K which we filed on
July 10, 2010 for more details regarding the Debt Conversion
Agreement.
Please
see the discussion titled “Liquidity and Capital Resources” in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Technology
During
the year ended June 30, 2010, the majority of our revenue came from sales of
speakers for notebook computers and TV embedded speakers. Because of
the characteristics and specifications of such speakers, these applications
utilize custom designs of traditional topologies. In a traditional
speaker design, a speaker’s voice coil moves up and down in a piston like manner
as a result of motion generated by opposing magnetic fields created when
positive and negative electric charges are administered to the magnets in a
speaker. The up and down motion of the voice coil vibrates the diaphragm, which
then creates sound waves by vibrating the surrounding air.
The voice
coil length, magnet design and the quality of the material in the speaker
influence the quality of the sound that is produced. Speaker quality is
generally assessed based on four criteria:
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1.
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Sound
pressure level (SPL) - measure of pressure of a noise
(volume)
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2.
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Excursion
- the linear movement range of a speaker
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3.
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Frequency
range - the range from the lowest note to the highest note that a speaker
can reproduce
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4.
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Distortion
- the presence of unwanted noise that was not present in the original
sound signal
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Conventional
Speaker Design
Example
of voice coil and magnetic design
4
Whisper
Technology
For
certain applications, AuraSound utilizes its patented Whisper technology which
is a specialized application of the NRT transducer design for small, high power
drivers. The technology is fully scalable from speakers smaller than 1” to
larger 3”, 200W drivers and was designed to specifically address the severe
performance limitations of conventional micro-audio products.
In those
applications which are able to utilize AuraSound’s patented Whisper driver, the
use of this driver addresses some quality and range issues which are inherent in
traditional small speaker designs by utilizing an NRT-like design with the
following features:
Extended
Low Frequency Response - Whisper drivers create more bass by utilizing a high
excursion design due to a short voice coil in a long magnetic gap (underhung
magnet structure) and large suspension elements to allow movement.
Extended
High Frequency Response - Whisper drivers provide extended high frequency
response by minimizing moving mass and driver inductance by utilizing a short
voice coil.
Higher
Power Handling and SPL - Whisper drivers maximize power handling and SPL by
utilizing a long excursion, larger diameter, underhung voice coil, providing a
maximum level of excursion and good thermal dissipation to eliminate heat and
allow more power input.
Easy
Product Integration and Low Resonance Frequency - Whisper drivers utilize an
innovative rear venting design which eliminates trapped air and allows for
increased SPL with minimal distortion and does not require the area around the
driver to be kept open.
AuraSound
Whisper Speaker Design
Products
Whisper
Micro-Audio Products
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We
provide standardized and custom developed micro-audio speakers ranging in
size from less than 1” to 3”. Our Whisper speakers can be easily
integrated into various products that require compact and light, high
performance speakers. We believe that our Whisper products have a
significant competitive advantage over other micro speakers that are based
upon conventional design parameters. We believe that our micro OEM
speakers are not only lighter and more compact than any other loudspeaker
currently available in their class, but that they are also more powerful
and provide significantly improved frequency response at the same price
point as competitive technologies. In addition, we believe that our
Whisper products provide significant advantages for integration in
electronics products relative to competing products as a result of their
favorable venting characteristics and natural ability to minimize
electronic interference that results from stray magnetic flux.
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5
Speaker
Component Products
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We
provide standardized and custom design drivers based upon NRT technology
to leading ultra-high end home audio manufacturers including such notable
names as McIntosh and MDesign. We believe that our component loudspeaker
transducers are considered by many audio enthusiasts and specialty
loudspeaker manufacturers to be the best available. We produce components
ranging from less than 1” to 18” and 800 Watts. From the miniature
NSW1Cougar to the enormous NS18 woofer to the low profile NSFB woofer, all
feature our patented NRT magnet structure for maximum fidelity with
life-like dynamics and minimal distortion.
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Home
and Pro Audio Products
We
believe that our home audio systems are elegantly designed and provide a
dynamic acoustic experience. The home audio line features three series,
the Whisper Ensemble, the Baby Grand and the Concert Series, all of which
utilize the NRT and/or Whisper platforms. The Whisper Ensemble is an ultra
compact home theater system that maintains the quality and performance of
a larger speaker system. The Baby Grand is the mid sized system and has
excellent bandwidth, powerful dynamics and precise stereo imaging. The
Concert Series is the largest system, providing the greatest range, lowest
distortion and most bass while maintaining the same accurate spatial sound
field and focused coverage of the other systems. All three of the systems
have a sophisticated style with the cabinets having a beautiful black or
white high-gloss lacquer finish. Additionally, the grills are held in
place magnetically allowing the consumer the choice of displaying the
system with or without the grill.
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Our
Pro Audio products are an extension of our component business and consist
primarily of the NRT 18-8 Subwoofer. The NRT 18-8 18" is an 800-Watt
high-output subwoofer with a high-temperature neodymium ring magnet,
unique magnet geometry with underhung 4" edgewound aluminum voice coil,
dual over-size spiders and tough epoxy cone. With a 20 - 200 Hz frequency
response the 18-8 delivers deeper bass, enhances overall performance and
is designed to move using a minimal amount of power, thereby maximizing
motor efficiency. The NRT 18-8 has appeared on-stage and on-tour with
artists such as Rod Stewart and features AuraSound's patented NRT
technology.
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Automotive
Products
We
produce automotive competition-grade speaker and component systems. Our
automotive division designs and manufactures amplifiers, loudspeakers and
subwoofers. The subwoofer line features the NRT platform and is designed
for extremely low throw and high output, yielding unsurpassed linearity
and exceptionally low distortion. Our automotive loudspeakers, built with
coaxial high quality components, are available in a full range of products
from easy-to-install budget systems to top of the line competition grade
systems. The line is competitively priced and was designed with a new
industrial styling, a high level of performance and other unique features.
Our line of competition-grade amplifiers are built with performance
enhancing features that include gold-plated speaker and power connections,
modular internal design for improved separation and a high efficiency dual
heat sink which eliminates the need for noisy, power consuming fans.
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Bass
Shaker Products
Our
Bass Shaker products are transducers that can be mounted to a fixed
surface to transmit vibration creating the “sensation of sound” or very
low bass, providing impact for music, sounds and special effects. The Bass
Shaker Plus and Bass Shaker add the impact of bass sub woofers without
excessive volume or the space required by traditional subwoofers. Our
technologically advanced design enhances the sound pressure levels so
there's no distortion while amplifying the bass energy delivered from the
stereo.
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Research
and Development and Product Manufacturing
We employ
a skilled research and development team which is lead by the Vice President of
Engineering who is based in Santa Fe Springs, California and is responsible for
identifying and creating new products and applications along with improving and
enhancing existing products. Our research engineers and facilities
are located in both Santa Fe Springs, California and Taiwan. We added the
research and development team in Taiwan in order to be closer to our customer
base. During the twelve month period ended June 30, 2008, we had
three major vendors and experienced quality and delivery problems with two of
them, namely Grandford Holdings Ltd and ZYLUX Acoustic Corporation,
before entering into a three-year non-exclusive Manufacturing Agreement with
GGEC in December 2007. GGEC is currently the primary manufacturer of
AuraSound's proprietary audio products. Pursuant to the December 2007
agreement, GGEC was compensated for units manufactured and shipped in an amount
equal to the manufacturing cost (consisting of material cost, direct labor and
overhead equal to 100% of direct labor cost) plus forty percent of the profit
margin.
On July
30, 2010 we and GGEC entered into a new Manufacturing Agreement which supersedes
and replaces the Manufacturing Agreement dated December
2007. Pursuant to the new Manufacturing Agreement, we agreed to fully
disclose to GGEC and its personnel our processes, trade secrets, engineering,
design, operating information, technical information and other data (defined in
the Manufacturing Agreement as “Know-how”) relating to our products and, as
necessary to provide instruction to GGEC’s personnel in the methods and
techniques for manufacturing the products. We also granted to GGEC
the right to manufacture and package our products and to transfer this right to
its affiliates. GGEC agreed that any new inventions or related
products or processes which it may develop as a result of disclosure of the
Know-how shall be the property of AuraSound. GGEC also agreed that it
will not, without our written consent, sell or distribute the products or
manufacture or sell competing products to any current or named customers of the
Seller.
For the
manufacturing services performed pursuant to the Manufacturing Agreement, we
will pay to GGEC the cost of all materials required to build the products, labor
charges, finance charges, selling, general and administrative expenses, spoilage
charges and an amount of profit. We will also be required to pay the
costs of shipping the products and tooling charges for the improvement of
products or for the development of new products.
GGEC will
provide an office to host our engineering and support team. GGEC has
also agreed to provide the use of its audio testing facilities at no charge to
AuraSound. GGEC and AuraSound have also agreed to develop new
products that will be manufactured by GGEC and sold by AuraSound.
All of
our intellectual property, as well as our Know-how and any patents, design
rights, copyrights and other intellectual property rights that relate to special
tooling, continue to belong to AuraSound. All products made pursuant
to the Manufacturing Agreement will belong to AuraSound. GGEC agrees
that it will supply the products only to AuraSound or to customers specified by
AuraSound and agrees that it will not manufacture for our competitors products
that compete with the products that it manufactures for AuraSound. So
long as GGEC gives AuraSound prompt notice of any claim made or action
threatened or brought against GGEC, we agree to indemnify GGEC against any claim
of infringement of letters patent, registered design, trade mark or copyright by
the use or sale of the products manufactured by GGEC for AuraSound.
7
We
currently outsource all product manufacturing and some testing and development
functions to GGEC, including the sound bars manufactured for the newly acquired
ASI customers. The manufacturing campus of GGEC is located in Guangzhou, China
and consists of 1,200,000 square meters with more than 26 production lines. The
plant is also ISO-9001, ISO 14000, TS16949 and QS-9000 certified and contains
extensive research and development facilities; a full range of testing
facilities including China’s largest anechoic chamber used for loudspeaker
design; research labs for magnetics, cone materials, vibrations and speaker
systems design; an engineering library; office space; and a show room. The
facility also has extensive warehousing and full living accommodations for the
staff.
Market
Overview
A major
component of the consumer electronics market is the personal and professional
audio manufacturing industry, which is mature, fragmented and highly
competitive. Cutting edge technologies have a short life in an industry that is
defined by research and development. The audio industry is dominated by large
domestic and international manufacturers that include Harman International, Bose
Corporation, Polk Audio, Alpine Electronics, Sony Corporation, Boston Acoustics,
Altec Lansing Technologies, Kenwood Corp., LOUD Technologies, JBL Incorporated,
Panasonic Corporation, Pioneer, Rockford Corp. and Yamaha Corp. Additionally,
there are numerous small, niche companies that attract consumers based upon
specialty product offerings. Industry participants compete based on acoustic
quality, technology, price, reliability, brand recognition and
reputation.
Although
the audio industry as a whole is relatively mature and is dominated by large
players, the micro-audio segment remains a relatively new niche market. With the
continued release of innovative new products, the consumer electronics industry
has experienced steady growth for several years. There are many manufacturers,
large and small, domestic and international, which offer products that vary
widely in price and quality and are distributed through a variety of channels.
The primary industry growth drivers have been increased portability and
miniaturization, sophisticated technological innovations and a dramatic
reduction in market prices.
The rapid
consumer acceptance of flat-panel televisions and displays, laptop computers,
portable devices (such as portable DVD players, MP3 and portable music devices)
and mobile phones demonstrates the overwhelming consumer demand for sleeker and
increasingly more compact electronics. The slenderness and compactness of these
products requires ultra compact speakers and we believe that consumers are
increasingly expecting the audio performance of these products to be comparable
to their visual quality. Despite significant technological innovations in
laptops, portable music players and mobile phones, the auditory capabilities of
these devices has stagnated or been significantly reduced as a result of efforts
to minimize size to achieve increased portability. This reduction in audio
quality has occurred despite a massive increase in media usage, particularly
audio, on these devices. We believe that the micro-audio market currently lacks
a true leader with an economical, easy to integrate audio product capable of
delivering high quality acoustics in an ultra-compact format.
We
believe that the integration of high-level audio capabilities provides device
makers with an additional product differentiator, and that the expanding market
for miniature electronic devices will ultimately drive rapid growth in high
quality ultra compact speaker sales.
Competition
We
compete in the traditional audio and micro-audio market segments.
In the
traditional audio market we provide component speakers to ultra high-end
manufacturers and sell our own line of home and mobile audio products. Several
well established companies participate in the mid to high-end of the traditional
home and pro audio markets. Among these companies are Bose Corporation, Boston
Acoustics, Inc., Harman International Industries, Inc., Polk Audio, Inc., Alpine
Electronics, Inc., Bang & Olufsen Holding A/S and Clarion Co.
Ltd.
In the
micro-audio market we provide component speakers incorporating our Whisper
technology to OEM manufacturers of electronics such as laptop computers and
televisions and displays. Companies that have developed micro-audio products
include NXT, Plc, AAC Acoustic Technologies Holdings, Inc., Tymphany
Corporation, SLS International, Inc. and American Technology Corporation.
However, not all of these companies target the laptop computer or mobile device
markets.
The
markets for traditional audio and micro-audio speakers are competitive and
subject to continuous technological innovation. Our competitiveness depends on
our ability to offer high-quality products that meet our customers’ needs on a
timely basis. The principal competitive factors of our products are time to
market, price and breadth of product line. Many of our competitors have
significant advantages over us such as far greater name recognition and
financial resources than we have. With the acquisition of ASI, we expect that
our market share will expand significantly in certain segments of the audio and
micro-audio speaker markets, particularly in the market for home entertainment
audio systems such as sound bars.
Sales
and Marketing
Currently,
we continue to market and sell certain of our OEM products through a network of
our sales representatives located in Taiwan, China and the U.S. The
products formerly produced by ASI are end user
products which are marketed and sold as private label products for sale by
retail outlets and chain stores.
8
Customers
During
the fiscal year ended June 30, 2010, approximately 94% of our sales were made to
customers outside the United States. We are currently delivering our micro-audio
products to Quanta and Compal, and have been approved or are being evaluated for
new product lines by HP, Sony, Toshiba, Dell, LG, Sharp and Acer. We
believe that international sales will expand with the current focus on micro
devices and will represent an increasingly significant portion of our revenues
in the future. A significant portion of our revenues has historically been
attributed to a small number of customers and we expect that this may continue.
None of our customers have continuing obligations to purchase products from
us. During the 2011 fiscal year, we expect that approximately 80% of
the products formerly manufactured by ASI will be sold to customers in the
United States.
Intellectual
Property and Proprietary Rights
We try to
protect our intellectual property through existing laws and regulations and by
contractual restrictions. We rely upon trademark, patent and copyright law,
trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to help us protect our intellectual
property.
Prior to
the ASI Transaction, we had twenty one active US patents covering the design and
technical innovations found in our audio products and three patents pending
which relate to our innovative micro speaker design. As a result of
the ASI Transaction, we acquired the rights to another 14 patent applications
that are pending. Two of these patent applications are pending in the
United States, two of these patent applications are pending in Taiwan and
ten of these patent applications are pending in China. The granting of any
patent involves complex legal and factual questions. The scope of allowable
claims is often uncertain. As a result, we cannot be sure that any patent
application filed by us will result in a patent being issued, nor that any
patents issued will afford adequate protection against competitors with similar
technology, nor can we provide assurance that patents issued to us will not be
infringed upon or designed around by others.
Government
Regulation
In the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission and the Consumer Products
Safety Commission. Internationally, our products may be required to comply with
regulations or standards established by authorities in the countries into which
we sell our products, as well as various multinational or extranational bodies.
The European Union, or EU, has issued a directive on the restriction of certain
hazardous substances in electronic and electrical equipment, known as RoHs, and
has enacted the Waste Electrical and Electronic Equipment directive, or WEEE,
applicable to persons who import electrical or electronic equipment into Europe.
Although neither of these directives is currently applicable to our products,
both are expected to become effective and at that time they will apply to our
products. We are currently implementing measures to comply with each of these
directives as individual EU nations adopt their implementation guidelines.
Although we believe our products are currently in compliance with domestic and
international standards and regulations in countries to which we export, we can
offer no assurances that our existing and future product offerings will remain
compliant with evolving standards and regulations.
Investing
in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. These risks and uncertainties are
not the only ones we face. Unknown additional risks and
uncertainties, or ones that we currently consider immaterial, may also impair
our business operations. If any of these risks or uncertainties
actually occur, our business, financial condition or results of operations could
be materially adversely affected. In this event you could lose all or
part of your investment.
We
had a net loss of $2,238,947 for the fiscal year ended June 30,
2010. We have never been profitable and we may not be profitable in
the future. If we do not become profitable, the value of your
investment could be adversely affected or you could lose your
investment.
Our
independent auditor has noted in its report concerning our financial statements
as of June 30, 2010 that we have incurred substantial losses and had negative
cash flow in operating activities for the last two fiscal years, which, along
with our accumulated deficit of $37,838,789, raises substantial doubt about our
ability to continue as a going concern.
We
sustained a net loss of $2,238,947 for the fiscal year ended June 30,
2010. We cannot assure you that we will generate sufficient cash flow
to meet our obligations or achieve operating profits in the
future. If we do not become profitable, the value of your investment
could be adversely affected or you could lose your investment.
9
On
July 31, 2010 we acquired ASI Holdings Limited. We cannot guarantee
that we will be able to successfully integrate ASI’s operations or that our
business and results of operations will improve as a result of this
acquisition.
On July
31, 2010 we acquired ASI Holdings Limited in exchange for 5,988,005 shares of
our common stock and a warrant to purchase 3,000,000 shares of our common stock
and the assumption of $10,154,745 in debt consisting primarily of trade
payables. This acquisition is likely to place a strain on our
management and administrative resources, infrastructure and systems and require
us to make significant outlays of capital. These measures are time
consuming, will increase management’s responsibilities and will divert
management’s attention from our day-to-day operations. We cannot
guarantee that we will be able to successfully integrate ASI’s operations with
our operations. Even if we are successful in integrating the
operations of the businesses, there is no guarantee that our business and
results of operations will improve as a result of this acquisition.
We
experience variability in quarterly operating results because our sales are
seasonal. Because of this, our quarterly operating results will not
provide you with a reliable indicator of our future operating
results.
Our
operating results tend to vary from quarter to quarter because our sales are
seasonal. Revenue in each quarter is substantially dependent on
orders received within that quarter. Conversely, our expenditures are
based on investment plans and estimates of future revenues. We may,
therefore, be unable to quickly reduce spending if revenues decline in a given
quarter. As a result, operating results for such quarters would be
adversely impaired. Results of operations for any one quarter are not
necessarily indicative of results for any future period. Other
factors which may cause quarterly results to fluctuate or to be adversely
impacted include:
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increased competition in niche
markets;
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new product announcements by our
competitors;
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product releases and pricing
changes by us or our
competitors;
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market acceptance or delays in
the introduction of new
products;
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production
constraints;
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the timing of significant
orders;
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customers’ budgets;
and
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foreign currency exchange
rates.
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Because
our quarterly operating results are unpredictable, they will not provide you
with a reliable indicator of our future operating results.
We
will need to raise additional capital in order to implement our long-term
business plan. We have no assurance that money will be available to
us when we need it. If money is not available to us when we need it,
we may be required to curtail or alter our long term business strategy or delay
capital expenditures.
Our
ability to implement our long-term strategy, which is to expand our operations
in order to meet expected demand for micro speakers, largely depends on our
access to capital. To implement our long-term strategy, we plan to
make ongoing expenditures for the expansion and improvement of our micro speaker
product lines and the promotion of our products with manufacturers of computers,
cell phones, home entertainment systems and iPods. We may also wish
to make expenditures to acquire other businesses which provide similar products
or products which can be marketed to our existing customer base. To date, we have
financed our operations primarily through sales of equity and
loans. If we were to attempt to expand our business at a faster pace
than currently contemplated, or if we were to identify an acquisition target, we
would need to raise additional capital through the sale of our equity securities
or debt instruments. However, additional capital may not be available
on terms acceptable to us. Our failure to obtain sufficient
additional capital could curtail or alter our long-term growth strategy or delay
needed capital expenditures.
Our
customers have many brands to choose from when they decide to order products. If
we cannot deliver products quickly and reliably, customers will order from a
competitor. We must stock enough inventory to fill orders promptly,
which increases our financing requirements and the risk of inventory
obsolescence. Competition may force us to shorten our product life
cycles and more rapidly introduce new and enhanced products. This,
too, could leave us with obsolete designs and inventory. If we do not
manage our inventory successfully, it could have a material adverse effect on
our results of operations.
If
the U.S. were to revoke NTR status for China, our results of operations could be
adversely affected.
Our
ability to import products from China at current tariff levels could be
materially and adversely affected if the “normal trade relations” (“NTR”,
formerly “most favored nation”) status the United States government has granted
to China for trade and tariff purposes is terminated. As a result of its NTR
status, China receives the same favorable tariff treatment that the United
States extends to its other “normal” trading partners. China’s NTR status,
coupled with its membership in the World Trade Organization, could eventually
reduce barriers to manufacturing products in and exporting products from China.
However, we cannot provide any assurance that China’s WTO membership or NTR
status will not change. If China were to lose its NTR status, the increase in
tariffs could adversely affect our results of operations.
10
Defects
in our products could reduce demand for our products and result in a loss of
sales, delay in market acceptance and injury to our reputation.
Complex
components and assemblies used in our products may contain undetected defects
that are subsequently discovered at any point in the life of the
product. Defects in our products may result in a loss of sales, delay
in market acceptance, injury or other loss to customers, and injury to our
reputation and increased warranty or service costs.
Our
products could subject us to liability. Liability claims could have a
material adverse effect on our results of operations.
Some of
our products, such as amplifiers, speakers and our Bass Shaker devices are
electronically powered and carry a risk of electrical shock or fire. If our
products caused electrical shock or fire, the damaged party could bring claims
for property damage, physical injury or death. While the Company carries
insurance for these types of contingencies, these types of legal actions, if
threatened or brought, may be very costly to defend, may distract management’s
attention from operating our business and may result in large damage awards
which may exceed our coverage limits and could have a material adverse effect on
our results of operations.
During
the 2010 fiscal year, over four-fifths of our net sales were made to
customers that are located outside the United States. Any one of
several factors that affect overseas sales could adversely affect our results of
operations.
During
the year ended June 30, 2010, about 94% of our net sales were made to customers
outside the United States. Even though approximately 80% of ASI’s
products are sold in the United States, we believe that international
sales will continue to have a material impact on our revenues and
profitability. Our revenues from international sales may fluctuate
due to various factors, including:
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changes in regulatory
requirements;
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changes to tariffs and
taxes;
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increases in freight costs, or
damage or loss in shipment;
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difficulties in hiring and
managing foreign sales
personnel;
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longer average payment cycles and
difficulty in collecting accounts
receivable;
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fluctuations in foreign currency
exchange rates;
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product safety and other
certification requirements;
and
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political and economic
instability, wars and terrorist
activity.
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If
international sales declined significantly or if any of the above factors
adversely impacted the revenues we earn from international sales, there may be a
material adverse effect on our results of operations.
In the sale of our micro-audio
products, we depend on
key customers, a small number of which account for a significant portion of our
revenue. The loss of one or more of these customers could have a
material adverse impact on our results of operations, liquidity and financial
condition.
In the
past, a significant portion of our revenue for micro-audio products was
attributed to a small number of customers and this may continue. We had three
major customers during the year ended June 30, 2010 which accounted for 85%
of our sales. We had two major customers during the year ended June
30, 2009 which accounted for 65% of our sales. The receivables due
from these customers as of June 30, 2010 and 2009 totaled $2,901,330 and
$718,582 respectively. Furthermore, none of our micro-audio customers
have continuing obligations to purchase products from us. If our relationships
with our largest customers deteriorated for any reason, we could lose a
substantial portion of our net sales revenues, which would have a material
adverse impact on our results of operations, liquidity and financial
condition.
Prior
to the ASI Transaction, we owned 21 active issued patents with three patents
pending and one trademark with three additional trademarks applied for, which we
believe are important to our business. In the ASI Transaction, we acquired
the rights to several patents pending in both the United States and China, and
the rights to two trademarks. While we try to protect our
intellectual property, if we are unable to do so our business could be
harmed.
We try to
protect our intellectual property in a number of different ways. We rely in part
on patent, trade secret, unfair competition and trademark law to protect our
rights to certain aspects of our products, including product designs,
proprietary manufacturing processes and technologies, product research and
concepts and recognized trademarks, all of which we believe are important to the
success of our products and our competitive position. There can be no assurance
that any of our pending patent or trademark applications will result in the
issuance of a registered patent or trademark, or that any patent or trademark
granted will be effective in thwarting competition or be held valid if
subsequently challenged. In addition, there can be no assurance that the actions
taken by us to protect our proprietary rights will be adequate to prevent
imitation of our products, that our proprietary information will not become
known to competitors, that we can meaningfully protect our rights to unpatented
proprietary information or that others will not independently develop
substantially equivalent or better products that do not infringe on our
intellectual property rights. We could be required to devote substantial
resources to enforce our patents and protect our intellectual property, which
could divert our resources and result in increased expenses. In addition, an
adverse determination in litigation could subject us to the loss of our rights
to a particular patent or other intellectual property, could require us to
obtain from or grant licenses to third parties, could prevent us from
manufacturing, selling or using certain aspects of our products or could subject
us to substantial liability, any of which could harm our business.
11
We may become subject to litigation
for infringing the intellectual property rights of others . Such actions could result
in a decrease in our operating income and cash flow and would harm our
business.
Others
may initiate claims against us for infringing on their intellectual property
rights. We may be subject to costly litigation relating to such infringement
claims and we may be required to pay compensatory and punitive damages or
license fees if we settle or are found culpable in such litigation. In addition,
we may be precluded from offering products that rely on intellectual property
that is found to have been infringed by us. We also may be required to cease
offering the affected products while a determination as to infringement is
considered. These developments could cause a decrease in our operating income
and reduce our available cash flow, which could harm our business.
The loss of the services of our key
employees, particularly the services rendered by Harald Weisshaupt, our Chief Executive Officer and Chief
Financial Officer, could harm our business
Our
success depends to a significant degree on the services rendered to us by our
key employees. If we fail to attract, train and retain sufficient
numbers of these qualified people, our prospects, business, financial condition
and results of operations will be materially and adversely affected. In
particular, we are heavily dependent on the continued services of Harald
Weisshaupt, our Chief Executive Officer and Chief Financial Officer, and the
other members of our senior management team. With the exception of Harald
Weisshaupt who has a one-year, renewable contract, we do not have long-term
employment agreements with any of the other members of our senior management
team, each of whom may voluntarily terminate his employment with us at any time.
With the exception of Mr. Weisshaupt, following any termination of employment,
these employees would not be subject to any non-competition covenants. The loss
of any key employee, including members of our senior management team, and our
inability to attract highly skilled personnel with sufficient experience in our
industry could harm our business.
We
have historically utilized a primary manufacturer to manufacture our products
and during the twelve months ended June 30, 2008 we experienced significant
negative issues with two successive suppliers. Any negative issues
with our current supplier could have a material adverse effect on our business
and operating results and would jeopardize our ability to timely meet customer
requirements, transition to a new vendor or become a multi-source
company. Our current supplier is GGEC.
Because
we have historically utilized a primary third party manufacturer to manufacture
our products, we have been totally dependent on that supplier to meet the
quality and volume requirements of our customers. Any continuing dependency on a
primary supplier will make us vulnerable to performance issues related to that
manufacturer, which could lead to customer dissatisfaction and a loss of current
and future business. This could have a material adverse affect our
business and operating results.
We
do not manufacture the products we sell. Instead, we rely on third
parties, and one supplier in particular, to manufacture the products to our
specifications. However, we have experienced problems with the
products manufactured by our suppliers. Too many defective products
could lead to customer dissatisfaction and a loss of business which would
materially adversely affect our business and operating results.
Because
we utilize third party manufacturers to manufacture our products, we may not
become aware of issues relating to quality or performance until the products
have been shipped. This has in the past, and may in the future,
result in high defect and rejection rates. We have in the past, and
we may in the future, be required to replace products, at our expense, that do
not pass our customers’ inspections. As a result of problems with our
products, we could be subject to lawsuits and lose future
business. Any problems that we have with defective products could
have a material adverse affect on our business and operating
results.
Product
technology evolves rapidly, making timely product innovation essential to
success in the marketplace. The introduction of products with improved
technologies or features may render our existing products obsolete and
unmarketable. If we cannot develop products in a timely manner in response to
industry changes, or if our products do not perform well, our business and
financial condition will be adversely affected.
If
our technologies, including the product technology that we acquired in the ASI
Transaction, is not accepted by the market, we may not achieve anticipated
revenue or profits.
Our
future financial performance as it relates to supplying audio devices will
depend on market acceptance of our product technology, including the product
technology we acquired in the ASI Transaction. If our technologies
and product lines do not gain sufficient positive market acceptance, we may not
achieve profitability.
12
We
are a small company and we do not represent a significant presence in the sound
enhancement products market. We are subject to intense
competition. We cannot assure you that we can compete
successfully.
The
market for sound enhancement products in general is intensely competitive and
sensitive to new product introductions or enhancements and marketing efforts by
our competitors. The market is affected by ongoing technological developments,
frequent new product announcements and introductions, evolving industry
standards and changing customer requirements. We face competition from a number
of well-known brands including Bose, NXT, and Bang & Olufsen. Many of our
competitors are substantially better capitalized and have substantially stronger
market presence than we have. Although we have attempted to design our home
audio systems to compete favorably with other products in the market, we may not
be able to establish and maintain our competitive position against current or
potential competitors. Competition may have the effect of reducing the prices we
can charge for our products, increasing marketing costs associated with
developing and maintaining our market niche, or reducing the demand for our
products. If we fail to compete successfully, either now or in the future, our
profitability and financial performance will likely be materially adversely
affected. We do not currently represent a significant presence in the sound
enhancement products market.
We
are susceptible to general economic conditions, and a downturn in our industry
or a reduction in spending by consumers could adversely affect our operating
results.
The
electronics industry in general has historically been characterized by a high
degree of volatility and is subject to substantial and unpredictable variations
resulting from changing business cycles. Our operating results will be subject
to fluctuations based on general economic conditions, in particular conditions
that impact discretionary consumer spending. As a result of the current downturn
in the U.S. economy, the audio products sector of the electronics industry may
experience a slowdown in sales, which would adversely impact our ability to
generate revenues and impact the results of our future operations.
Our
management owns or controls a significant number of the outstanding shares of
our common stock, which may be detrimental to our minority
stockholders.
As of the
date of this report, approximately 70% of our issued and outstanding common
stock is owned by 2 stockholders. See Item 12 titled “Security
Ownership of Certain Beneficial Owners and Management.” As a result
of this significant ownership of our common stock, these 2 stockholders will be
able to effectively control our affairs and business, including the election of
directors and, subject to certain limitations, approval or preclusion of
fundamental corporate transactions. This concentration of ownership
may be detrimental to the interests of our minority stockholders in that it
may:
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limit our shareholders’ ability
to elect or remove
directors;
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delay or prevent a change in
control;
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impede a merger, consolidation,
take over or other transaction involving our company;
or
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discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of
our company.
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There
is only a limited market for our common stock, which could cause our investors
to incur trading losses or prevent them from reselling their shares at or above
the price they paid for them, or from selling them at all.
Our
common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB) under the
symbol “ARUZ.” On August 31, 2010, our common stock traded 300 shares
at a price of $2.75. Since then, our shares have not traded and there
can be no assurance that an active trading market will be developed or
maintained. See Item 5, “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.”
The OTCBB
is an unorganized, inter-dealer, over-the-counter market which provides
significantly less liquidity than NASDAQ or other national or regional
exchanges. Securities traded on the OTCBB are usually thinly traded,
highly volatile, have fewer market makers and are not followed by analysts.
The Securities and Exchange Commission’s order handling rules, which apply
to NASDAQ-listed securities, do not apply to securities quoted on the OTCBB.
Quotes for stocks included on the OTCBB are not listed in newspapers.
Consequently, prices for securities traded solely on the OTCBB may be
difficult to obtain and are frequent targets of fraud or market manipulation.
Dealers may dominate the market and set prices that are not based on
competitive forces. Individuals or groups may create fraudulent markets
and control the sudden, sharp increase of price and trading volume and the
equally sudden collapse of the market price for shares of our common stock.
Moreover, the dealer's spread (the difference between the bid and ask
prices) may be large and may result in substantial losses to the seller of
shares of our common stock on the OTCBB if the stock must be sold immediately
and may incur an immediate “paper” loss from the price spread.
Due to
the foregoing, demand for shares of our common stock on the OTCBB may be
decreased or eliminated and holders of our common stock may be unable to resell
their securities at or near their original acquisition price, or at any
price.
13
Investors
must contact a broker-dealer to trade OTCBB securities. As a result, you
may not be able to buy or sell our securities at the times you
wish.
Even
though our securities are quoted on the OTCBB, the OTCBB may not permit our
investors to sell securities when and in the manner that they wish.
Because there are no automated systems for negotiating trades on the
OTCBB, trades are conducted via telephone. In times of heavy market
volume, the limitations of this process may result in a significant increase in
the time it takes to execute investor orders. Therefore, when investors
place an order to buy or sell a specific number of shares at the current market
price it is possible for the price of a stock to go up or down significantly
during the lapse of time between placing a market order and its
execution.
Sales
of a substantial number of shares of our common stock may cause the price of our
common stock to decline.
If our
stockholders sell substantial amounts of our common stock in the public market,
including shares issued upon exercise of outstanding warrants, the market price
of our common stock could fall. These sales also may make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem reasonable or appropriate.
Authorized
additional shares of our common stock available for issuance may dilute current
stockholders.
We are
authorized to issue 16,666,667 shares of our common stock and 3,333,333 shares
of our preferred stock. As of the date of this report, there are
16,666,667 shares of common stock issued and outstanding and no shares of
preferred stock issued or outstanding. However, the total number of shares
of our common stock outstanding does not include shares of our common stock
reserved in anticipation of the exercise of warrants. Further, in the
event that any additional financing should be in the form of, be convertible
into or exchanged for equity securities, investors may experience additional
dilution.
The
“penny stock” rules could make selling our common stock more
difficult.
Our
common stock has a market price of less than $5.00 per share, therefore,
transactions in our common stock are subject to the “penny stock” rules
promulgated under the Securities Exchange Act of 1934, as
amended. Under these rules, broker-dealers who recommend such
securities to persons other than institutional accredited investors must: (i)
make a special written suitability determination for the purchaser; (ii) receive
the purchaser’s written agreement to a transaction prior to sale; (iii) provide
the purchaser with risk disclosure documents that identify certain risks
associated with investing in “penny stocks” and that describe the market for
these “penny stocks,” as well as a purchaser’s legal remedies; and (iv) obtain a
signed and dated acknowledgment from the purchaser demonstrating that the
purchaser has actually received the required risk disclosure document before a
transaction in “penny stock” can be completed. As a result,
broker-dealers may find it difficult to effect customer transactions, related
transaction costs will rise and trading activity in our securities may be
greatly reduced. As a result, the market price of our securities may
be depressed, and you may find it more difficult to sell our
securities.
You
should be aware that, according to the Securities and Exchange Commission, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include:
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Control of the market for the
security by one or a few broker-dealers that are often related to the
promoter or issuer;
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Manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases;
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“Boiler room” practices involving
high pressure sales tactics and unrealistic price projections by
inexperienced sales persons;
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Excessive and undisclosed bid-ask
differentials and markups by selling broker-dealers;
and
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The wholesale dumping of the same
securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the inevitable collapse of
those prices with consequent investor
losses.
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We
do not intend to pay dividends in the foreseeable future. If you
require dividend income, you should not rely on an investment in our
company.
We have
never paid cash dividends and do not anticipate paying cash dividends in the
foreseeable future. Instead, we intend to retain future earnings, if
any, for reinvestment in our business and/or to fund future
acquisitions. If you require dividend income, you should not expect
to receive any cash dividends as a stockholder of our company.
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ITEM
1B
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UNRESOLVED
STAFF COMMENTS.
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As a
smaller reporting company, we are not required to provide this
information.
14
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ITEM 2.
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PROPERTIES.
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InSeat
Solutions, LLC, an entity under the control of our former Chairman and former
Chief Executive Officer, Mr. Arthur Liu, currently leases approximately 21,355
square feet of office, warehouse and technical research and development space
which is located at 11839 East Smith Avenue, Santa Fe Springs, California. The
current lease will expire on July 31, 2013. We share this space with
InSeat Solutions, LLC and we pay 23% of the rent commitment. We do
not have a written lease or rental agreement with InSeat Solutions, LLC and we
have no obligation in connection with our use of the premises other than the
payment of rent. For the fiscal year ended June 30, 2010, this amount
totaled $53,997 and we expect to pay at least this amount during the next fiscal
year. Our operations in Taiwan are conducted by AuraSound
as a foreign corporation doing business in Taiwan. We rent office
space in Taiwan on a month to month basis at a rental rate of $1,558 per month.
In the ASI Transaction, we assumed month- to- month obligations for offices in
Hong Kong, Shenzhen Province and Arizona.
Employees
As of the
date of this report, we employed 55 full-time employees and 7 consultants. Of
these, eight employees and one consultant were located in Taiwan, 26 employees
were located in Hong Kong and eight employees were located in Santa Fe Springs,
California, two were located in Arizona and eleven employees and six consultants
were located in Shenzhen, China. We also employ various engineering design and
financial consultants from time-to-time on an as needed basis. None of our
employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good.
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ITEM
3.
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LEGAL
PROCEEDINGS.
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ITEM
4.
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REMOVED
AND RESERVED
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15
PART
II
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ITEM 5.
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MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES.
|
Market
information
Our
common stock is currently quoted on the OTCBB under the symbol
“ARUZ”.
The
following table sets forth, for the periods indicated, the high and low bid
information per share of our common stock as reported by the
OTCBB. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions. The information below reflects the 1-for-6 reverse
stock split that was effected on November 17, 2009.
|
2010
|
Low Bid
|
High Bid
|
||||||
|
First
quarter ended September 30, 2009
|
$
|
.240
|
$
|
3.600
|
||||
|
Second
quarter to ended December 31, 2009
|
$
|
.150
|
$
|
2.050
|
||||
|
Third
quarter ended March 31, 2010
|
$
|
.950
|
$
|
2.010
|
||||
|
Fourth
quarter ended June 30, 2010
|
$
|
1.040
|
$
|
2.750
|
||||
|
2009
|
Low Bid
|
High Bid
|
||||||
|
First
quarter ended September 30, 2008
|
$
|
1.800
|
$
|
6.6
00
|
||||
|
Second
quarter to ended December 31, 2008
|
$
|
.006
|
$
|
3.060
|
||||
|
Third
quarter ended March 31, 2009
|
$
|
.120
|
$
|
.480
|
||||
|
Fourth
quarter ended June 30, 2009
|
$
|
.060
|
$
|
2.940
|
||||
Shareholders
As of
September 14, 2009, there were 144 record holders of our common stock. This does
not include an indeterminate number of stockholders whose shares are held by
brokers in street name.
Dividends
We have
never declared any cash dividends on our common stock and we do not anticipate
declaring a cash dividend in the foreseeable future. We intend to retain any
earnings which we may realize in the foreseeable future to finance our
operations. Future dividends, if any, will depend on earnings, financing
requirements and other factors.
Sales
of Unregistered Securities
Not
Applicable
Securities
Authorized for Issuance under Equity Compensation Plans
Equity
Compensation Plan Information
|
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
|
Weighted average exercise
price of outstanding
options warrants and rights
(b)
|
Number of securities
remaining available for
future issuance under the
equity compensation plan
(excluding securities
reflected in column (a)
(c)
|
|||||||||
|
Shareholder
Approved Equity Incentive Plan
|
0
|
N/A
|
8,421,591
|
|||||||||
(1) The
AuraSound, Inc. 2007 Equity Incentive Plan was adopted by our board of directors
on November 29, 2007 and approved by our stockholders on February 12,
2008. Pursuant to the terms of the plan, awards may be granted for
options (both incentive stock options and non-qualified stock options) and for
stock.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
As a
smaller reporting company we are not required to provide this
information.
16
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
Basis
of Presentation
Prior to
June 7, 2007, we were a shell company and did not engage in any business
operations and were dedicated to locating and consummating an acquisition. On
June 7, 2007, we completed a $12.9 million private placement and acquired
AuraSound in a stock acquisition. The 11,505,305 shares of common stock issued
for the acquisition were valued at $1.00 per share, the same as the per share
price of the private placement. The acquisition was accounted for as a purchase
in accordance with FAS 141. The operating results for the periods ended June 30,
2010 and 2009 include the full twelve month periods then ended.
Overview
With the
acquisition of ASI on July 31, 2010, AuraSound has developed into a company
which specializes in the design and manufacture of high-end fidelity speakers.
With over 20 years experience, the Company’s broad expertise now ranges from TV
soundbars, USB speakers, high-quality drivers for TV’s and laptops, to
state-of-the art subwoofers and tactile transducers. AuraSound has
patented technologies which the Company believes will enable it to
deliver superior sound quality at excellent
value. AuraSound’s products are based on patented and proprietary
NRT® Drivers, BassShakers™, Line Source™ tweeters and other proprietary
technology. We are currently based in southern
California. 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.
During
the last two years, our company has focused its research and development efforts
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 Quanta and Compal. Quanta has 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 devices such as notebooks, netbooks, and
televisions continue growing. As of June 30, 2010, we had a backlog of
approximately $1,991,000 in orders.
Our sales
are made primarily on an OEM basis to manufacturers of high end speakers and
sound systems. Historically, approximately 89% of our net sales were made to
customers outside the United States. While approximately 80% of ASI’s sales are
made in the United States, we believe that international sales will continue to
represent a significant portion of our revenues.
Problems
with our Suppliers
Historically,
our practice has been to engage the services of one manufacturer because of the
cost benefits of concentrated volume and significant efforts required to
establish appropriate quality control measures. During 2007, we
originally utilized Grandford Holdings Ltd. as our primary
manufacturer. When Grandford was unable to meet our manufacturing
specifications and delivery schedules, we engaged Zylux Acoustic Corporation as
our manufacturer, but Zylux was also unable to meet our manufacturing
specification and delivery schedules. The failure of these 2
manufacturers resulted in damage to our reputation, a significant decrease in
the orders promised to us by certain OEMs, exclusion from bidding on certain
contracts, the payment to one customer of additional employee costs related to
sorting through and testing the pieces we had supplied and costs to express ship
replacement pieces to customers.
As a
result, 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.
We
contacted GGEC, a manufacturer of 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 and on
December 21, 2007, we entered into a three-year manufacturing agreement with
GGEC. This agreement was terminated in July 2010, a new manufacturing
agreement was entered into with GGEC and GGEC became a major stockholder of our
company. A discussion of the terms of the new manufacturing agreement
with GGEC is included in Item 1 of this report. GGEC has been able to
satisfactorily meet the requirements of our customers and we are continuing to
rebuild the relationships we lost.
17
General
The
discussion below provides information about our operations and accounting
methods for the fiscal year ended June 30, 2010 and does not, therefore, reflect
any changes to our accounting methods and operations that may result from the
acquisition of ASI Holdings Limited.
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, direct overhead,
inbound freight and duty costs, warranty costs, sales commission and a reserve
for inventory obsolescence.
Research
and development costs consist primarily of costs 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 costs and 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.
RESULTS OF
OPERATIONS
Fiscal Year Ending June 30,
2010 Compared to Fiscal Year Ending June 30, 2009
REVENUE
Revenue
for the year ended June 30, 2010 increased by $5,951,229 or 383% compared to the
prior year, from $1,551,963 to $7,503,192. The increase in sales for the 2010
fiscal year has been the result of joint efforts of the Company and GGEC to
re-establish relationships damaged by the problems incurred by the Company
during 2007 and 2008 with its two previous suppliers, Grandford Holdings
and Zylux. Please see our discussion above titled “Problems with our Suppliers”.
The 2010 fiscal year 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 for 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 year ended June 30, 2010 was $7,388,488 as compared to
cost of sales of $1,670,804 for the year ended June 30, 2009, which resulted in
a gross profit for the current year of $114,704, compared to a gross loss of
$118,841 during the prior year. 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
$3,117,000 as of August 31, 2010.
18
RESEARCH
AND DEVELOPMENT EXPENSES
Research
and development expenses for the year ended June 30, 2010 totaled $411,779, a
reduction of $376,531 or 48% from the $788,310 incurred for the same period in
the prior year. This reduction is the result of a cost reduction program which
resulted in a reduction in 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 year ended June 30, 2010 increased by
$245,697 or 16% to $1,765,263 as compared to $1,519,566 for the year ended June
30, 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 in 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 as a result of establishing our own administrative and accounting
activities, which were previously performed by a related company. In
addition, we expect incremental administrative costs related to volumetric
increases in the manufacturing and sale of audio speakers and other
equipment.
INTEREST EXPENSE
Net
interest expense totaled $176,609 for the year ended June 30, 2010 compared with
net interest expense of $144,085 for the year ended June 30, 2009.
Interest charges for the 2010 fiscal year relate primarily to the loans from
GGEC which totaled $1,253,558 as of June 30, 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 June 30,
2010. On July 10, 2010 we repaid the loans by issuing to GGEC
6,000,000 shares of our common stock and warrants to purchase a total of
8,317,265 shares of our common stock.
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 June 30, 2010 and
June 30, 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 year ended June 30, 2010
of $2,238,947 compared to a net loss of $2,570,802 during the prior
year.
LIQUIDITY
AND CAPITAL RESOURCES
As of
June 30, 2010, our current liabilities exceeded our current assets by $6,620,058
compared to a deficit of $4,364,480 as of June 30, 2009. As
previously discussed, during the 2010 fiscal 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. While progress in gaining re-acceptance has been slow, we
are beginning to see progress as is reflected in our backlog which totaled
approximately $3,117,000 as of August 31, 2010.
Net cash
used in operating activities during the year ended June 30, 2010 was $202,383 as
compared to net cash used of $1,284,300 during the prior year. This was due
primarily to an increase in accounts payable (mainly to GGEC), an increase in
accrued expenses (mainly interest), an increase in the amounts due to an
affiliate, and a reduction in both accounts receivable and
inventory.
Cash used
in investing activities for the year ended June 30, 2010 was $36,773 as compared
to $4,808 of cash used during the same prior year period. Cash used
in both periods was primarily used for the purchase of various tools, jigs and
dies for use in the production of customer products.
19
Cash provided
by financing activities for the year ended June 30, 2010 totaled $47,640
compared to cash provided by financing activities of $1,538,004 in the prior
year. The cash provided during the prior year period resulted primarily
from an increase in the amount due a related party and the proceeds from loans
received from GGEC which totaled $1,253,558.
We had
net operating loss carry-forwards of approximately $27,341,296 as of June 30,
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.
On June
30, 2010, we had $129,939 in cash as compared to $321,455 in cash on June 30,
2009. As of the date of this report, we have sufficient cash to
continue our operations for a period of about two months.
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. 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. As of June 30, 2009, GGEC
had advanced $1,253,558 under the terms of that agreement. On July 10, 2010
AuraSound entered into and consummated a Securities Purchase Agreement with GGEC
America, Inc. and its parent, GGEC, whereby GGEC America Inc. purchased 55% of
the then issued and outstanding shares of common stock of
AuraSound. Also on July 10, 2010, AuraSound entered into an Asset
Purchase Agreement with ASI Holdings Limited whereby AuraSound agreed to acquire
substantially all the business assets and certain liabilities of ASI Holdings
and its wholly owned subsidiary for common stock and warrants of AuraSound,
Inc. The ASI Holdings acquisition was completed on July 31,
2010. See the Current Report on Form 8-K filed which we filed on July
10, 2010 and the Current Report on Form 8-K which we filed on July 31, 2010 for
more details relating to these transactions. While we believe that
our long-term relationship with GGEC as our financial partner and the
acquisition of ASI Holdings will affect our business positively, the need for
working capital continues and the need for a working capital line remains a very
high priority. If the Company is unable to obtain financing for its working
capital requirements, it will need to obtain additional loans from GGEC, sell
more of its securities or curtail its business sharply.
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 year ended June 30, 2010, the
Company incurred losses of $2,238,947. The Company had an accumulated deficit of
$37,838,789 as of June 30, 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 requirements, 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 and to attain profitability.
20
|
ITEM7A.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
As a
smaller reporting company we are not required to provide this
information.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
|
The
information called for by this Item 8 is hereby incorporated by reference from
the Company's Financial Statements beginning at page F-1 of this
report.
|
ITEM
9.
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
Not
applicable
|
ITEM 9A.
|
CONTROLS AND
PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer, 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/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.
Report
on Internal Control over Financial Reporting
Our Chief
Executive Officer, who is also our Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
|
|
·
|
pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our
assets;
|
|
|
·
|
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles,
and that our receipts and expenditures are being made only in accordance
with authorizations of management and our directors;
and
|
|
|
·
|
provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the
financial statements.
|
Because
of its inherent limitations, our internal control over financial reporting may
not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Our Chief
Executive Officer/Chief Financial Officer assessed the effectiveness of our
internal control over financial reporting as of June 30, 2010. In
making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework
Based on
our assessment, our Chief Executive Officer/Chief Financial Officer believes
that, as of June 30, 2010, our internal control over financial reporting is
effective based on those criteria.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this report.
Changes
to Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
fourth quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
ITEM 9B.
|
OTHER
INFORMATION.
|
Not
applicable
21
PART
III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE.
|
Directors
and Executive Officers
As of
September 24, 2010, the following table sets forth certain information with
respect to our directors and executive officers.
|
Name
|
Age
|
Year Became an
Executive Officer or
Director
|
Position(s)
|
|||
|
Danny
Tsui
|
46
|
2010
|
Chairman
of the Board
|
|||
|
Harald
Weisshaupt
|
44
|
2010
|
Director,
Chief Executive Officer, President and Chief Financial
Officer
|
|||
|
Robert
Pearson
|
75
|
2008
|
Director
|
|||
|
Robert
Tetzlaff
|
59
|
2010
|
Director
|
|||
|
Vidian
Tran
|
34
|
2010
|
Director
and Secretary
|
|||
|
Pete
Andreyev
|
53
|
2010
|
Director
|
|||
|
Willian
H Kurtz
|
53
|
2010
|
Director
|
|||
|
Donald
North
|
38
|
2007
|
Vice
President of
Engineering
|
Messrs.
Tsui and Tetzlaff and Ms. Tran were appointed to the board of directors in
conjunction with the GGEC Transaction. Mr. Weisshaupt was appointed
to the board of directors in conjunction with the ASI
Transaction. Messrs. Kurtz and Andreyev were appointed to the board
of directors in August, 2010. The following brief biographies contain
information about our directors and our executive officers. The
information includes each person’s principal occupation and business experience
for at least the past five years. This information has been furnished
to us by the individuals named. There are no family relationships
known to us between the directors and executive officers.
Danny Tsui,
Chairman of the Board – Mr. Tsui is the General Manager of GGEC Hong
Kong, a subsidiary of GGEC China, a position he has held since April
1994. Prior to assuming the role of General Manager of GGEC Hong
Kong, Mr. Tsui worked for GGEC China as Administration Manager from April 1990
to March 1994. Mr. Tsui’s knowledge of the business of GGEC China and
its subsidiaries led AuraSound to conclude that he should serve as a
director.
Harald
Weisshaupt, Director, President, Chief Executive Officer and Chief
Financial Officer – Mr. Weisshaupt was the founder of, and has been
employed by, ASI Holdings as its Chief Executive Officer from April
2006. Mr. Weisshaupt has almost 20 years senior management experience
with both multi-national companies and start ups. Prior to founding
ASI Holdings, from October 2003 to April 2006 Mr. Weisshaupt worked for
Gateway/eMachines as the Vice President of Procurement. His business
experience includes employment with Hewlett Packard and 3PARdata, which, at the
time of his involvement, was a start up company that eventually became publicly
traded. Mr. Weisshaupt earned a double major master of science degree
in Supply Chain and Accounting from the University of Ulm,
Germany. Mr. Weisshaupt’s knowledge of the business of ASI Holdings
and its operations led AuraSound to conclude that he should serve as a
director.
Robert C.
Pearson , Director
– Mr. Pearson became a
director in January 2008. Mr. Pearson retired in March 2010 from his
position as Senior Vice President –Investments of RENN Capital Group
which he joined in April 1997 From May 1994 to May
1997, Mr. Pearson was an independent financial management consultant primarily
engaged by RENN Capital Group. From May 1990 to May 1994, he served as
Chief Financial Officer and Executive Vice President of Thomas Group, Inc., a
management consulting firm, where he was instrumental in moving a small
privately held company from a start-up to a public company with over $40 million
in revenues. Prior to 1990, Mr. Pearson spent 25 years at Texas
Instruments where he served in several positions including Vice
President-Controller and later as Vice President-Finance. Mr. Pearson
holds a BS in Business from the University of Maryland and was a W.A. Paton
Scholar with an MBA from the University of Michigan.
Robert Tetzlaff,
Director – Mr. Tetzlaff is currently the President of GGEC America, an
OEM audiosystems and electronics manufacturer, a position he has held since
April 2010. Prior to April 2010, from and after October 2001, he was
employed by GGEC America as Vice President and Business Unit
Manager. Prior to October 2001, Mr. Tetzlaff held various positions
with a number of companies that provided audio systems or speakers to the
automotive industry. Mr. Tetzlaff graduated from the University of
Illinois with a degree in Electrical Engineering Technology. His long
experience in the audiosystem industry, which began in 1979, his familiarity
with the operations of GGEC America and his education as an electrical engineer
led AuraSound to conclude that he should serve as a director.
22
Vidian
Tran, Director and Secretary – Ms. Tran
has been employed by GGEC America as its Finance Manager since July
2006. Ms. Tran graduated from the University of Utah with a
bachelor’s degree in finance in 2002. Ms. Tran’s familiarity with the
operations of GGEC America and her background in finance led AuraSound to
conclude that she should serve as a director.
Pete Andreyev,
Director – Mr.
Andreyev has over 30 years experience in the high technology
industry. Since September 2006 he has been the Chief Executive
Officer and President of MaxProfit Consulting, a company he
founded. From 2003 to September 2006, he was Vice
President of Asia Pacific Sales at Hitachi Global Storage
Technologies. His overall experience includes new product
development, manufacturing, corporate strategy, and sales and
marketing. Mr. Andreyev currently serves as a board member of several
public and private firms. He earned a B.S. degree in Electrical
Engineering at the University of Notre Dame and a M.S. degree in Management at
Stanford University.
William H Kurtz,
Director –
William Kurtz has accumulated 30 years experience serving as either Chief
Financial Officer or COO/CFO for both Fortune 500 companies and fast growth
Mid-Cap companies in both the East Coast and Silicon Valley. Mr. Kurtz is
currently Chief Financial Officer for Bloom Energy, a company he joined in March
2008. Prior to joining Bloom Energy, Mr. Kurtz was Executive Vice
President and Chief Financial Officer of Novellus Systems, Inc., a global
semiconductor equipment company from September, 2005 to February,
2008and was Senior Vice President and Chief Financial Officer of Engenio
Information Technologies, Inc. from March 2004 to August, 2005. Prior
to Engenio, Bill held Senior Financial positions and served as Chief Operating
Officer & Chief Financial Officer for 3PAR Data, Inc. and Chief Financial
Officer for Scient Corporation. Bill spent 15 years at AT&T and rose rapidly
thru the management ranks holding a number of high profile development roles
intended to prepare him for the position of CFO of AT&T, including AT&T
Cost Czar where he was responsible for AT&T's worldwide cost reduction
program. Bill began his career in public accounting and earned his CPA
certification at Price Waterhouse, now PricewaterhouseCoopers LLP. Bill
currently serves on the Board of Directors for PMC-Sierra Inc and is Chair of
their Audit Committee. From October 1999 to February 2007, he served
on the Board of Directors of Redback Networks, Inc. He holds a bachelor's degree
in Commerce from Rider University and a master's degree in Management
Sciences from Stanford University.
Donald North,
Vice President of Engineering - Mr. North became our Vice President of
Engineering on June 7, 2007 in connection with our acquisition of AuraSound. Mr.
North has served as AuraSound’s Engineering Director since 2005. Prior to his
current position at AuraSound, Mr. North was a Loudspeaker Design Engineer at
Harman International from 1999 to 2000 and served as a Transducer Engineer at
AuraSound from 1995 to 1999. Mr. North began his career as an engineer for
Boston Acoustics in 1995. Mr. North is the inventor of the Whisper transducer
and has served as the lead project engineer and project manager for the research
and development teams responsible for the creation of several AuraSound product
lines including the Mobile Reference series of woofers and Monster Cable’s M
Design series of home theater loudspeakers. Mr. North graduated from California
Institute of Technology in 1994 with a B.S. in Engineering and Applied
Science.
Term
of Office
Our
directors are appointed for a one-year term to hold office until the next annual
general meeting of our stockholders or until removed from office in accordance
with our bylaws. Our officers are appointed by our board of directors
and hold office until removed by the board.
Board
Committees/Audit Committee Financial Expert
We do not
currently have a compensation committee, audit committee, or nominating and
corporate governance committee. The functions customarily delegated
to these committees have been performed by the board of
directors. Our board of directors has not made a determination as to
whether any of our directors would qualify as an audit committee financial
expert. Until we
have the financial resources to pay an audit committee financial expert, we do
not expect to be able to attract or retain the services of an individual with
such knowledge and experience.
Section
16(a) Compliance
Section
16(a) of the Securities Exchange Act requires our directors, executive officers
and persons who own more than 10% of our common stock to file reports of
ownership and changes in ownership of our common stock with the Securities and
Exchange Commission. Directors, executive officers and persons who
own more than 10% of our common stock are required by Securities and Exchange
Commission regulations to furnish to us copies of all Section 16(a) forms they
file.
To our
knowledge, based solely upon review of the copies of such reports received or
written representations from the reporting persons, we believe that during our
fiscal year ended June 30, 2010, none of our officers, directors or owners of
10% of our common stock failed to file on a timely basis reports required by
section 16(a) of the Exchange Act during the most recent fiscal
year.
Code
of Ethics
We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. Our code of ethics will be
provided to any person without charge, upon request. Requests should
be in writing and addressed to Mr. Harald Weisshaupt, c/o AuraSound, Inc., 11839
East Smith Avenue, Santa Fe Springs, California 90670.
23
Nomination
of Directors
We do not
have procedures in place whereby security holders may recommend nominees to our
board of directors and there has been no change to this during the last fiscal
year.
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
The
following table sets forth certain summary information with respect to the total
compensation paid to the named executive officers during our fiscal
years ended June 30, 2009 and 2010.
SUMMARY
COMPENSATION TABLE
|
Name and
principal position
|
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compen-
sation
Earnings
($)
|
Other
Comp
($)
|
Total ($)
|
|||||||||||||||||||||||||
|
Arthur
Liu (1), Former Chief Executive Officer
|
2009
|
$ | 155,385 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 155,385 | |||||||||||||||||||||||
|
and
President
|
2010
|
$ | 120,000 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 120,000 | |||||||||||||||||||||||
|
Donald
North,
Vice
President
|
2009
|
$ | 107,651 | $ | 107,651 | |||||||||||||||||||||||||||||
|
Of
Engineering
|
2010
|
$ | 122,528 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 122,528 | |||||||||||||||||||||||
|
|
(1)
|
Arthur
Liu resigned effective July 31,
2010
|
We do not
have any annuity, retirement, pension or deferred compensation plan or other
arrangements under which any executive officers are entitled to participate
without similar participation by other employees.
Employment
Agreements
The
following discussion provides only a brief description of the document described
below. The discussion is qualified by the full text of the
agreement.
We
entered into an employment agreement with Harald Weisshaupt, pursuant to which
Mr. Weisshaupt serves as our Chief Executive Officer. The employment
agreement provides for a base salary of $120,000 per year and will renew for
successive one year terms until terminated by either party. Aside
from the base salary, Mr. Weisshaupt will be entitled to participate in benefit
plans (such as medical and dental plans) or receive other benefits (such as life
or disability insurance) provided to other executive officers of
AuraSound. We will also reimburse Mr. Weisshaupt for the cost of his
housing in Hong Kong, which is currently $2,500 per month. We may
terminate the employment agreement for “cause” or without cause, upon written
notice to Mr. Weisshaupt. Mr. Weisshaupt may terminate the employment
agreement by resigning for “good reason” or by providing 60 days notice of his
intent to resign. If the employment agreement is terminated by
AuraSound without cause or by Mr. Weisshaupt for good reason, AuraSound will
continue to pay or provide to Mr. Weisshaupt, for a period of 12 months, his
then current base salary and the premiums necessary to keep Mr. Weisshaupt, his
spouse and his dependents on AuraSound’s group medical coverage.
Discussion
of Compensation
In
setting the compensation for our executive officers, our board of directors
looked at their responsibilities, at salaries paid to others in businesses
comparable to ours, at their experience and at our ability to replace
them. We expect the salaries of our executive officers to remain
relatively constant unless their responsibilities are materially
changed.
Bonuses
may used to reward exceptional performance, either by the individual or by the
company. Bonuses are discretionary. No bonuses were
granted to our executive officers during the last fiscal year.
During
the 2010 fiscal year, we did not grant any stock options or other equity awards
to our executive officers, although we may decide to do so in the
future. We would grant awards of equity to employees because we
believe that share ownership may be an effective method to deliver superior
stockholder returns by increasing the alignment between the interests of our
employees and our stockholders. No employee is required to own common
stock in our company.
24
Board
Compensation
With the
exception of Robert Pearson, our directors do not currently receive compensation
for their services as directors, but are reimbursed for expenses incurred in
attending board meetings. Effective August 1, 2010, Mr. Pearson
receives a $10,000 annual retainer plus $2,000 per meeting and $1,000 for
serving on a committee for his services as a director There have been no
options granted to any director for their services as a director.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED
STOCKHOLDER MATTERS.
|
The
following table sets forth information as to our shares of common stock
beneficially owned as of September 20, 2010 by: (i) each person known by us to
be the beneficial owner of more than five percent of our outstanding common
stock, (ii) each of our directors, (iii) each of our executive officers and (iv)
all of our directors and executive officers as a group.
Beneficial
ownership has been determined in accordance with the rules and regulations of
the Securities and Exchange Commission and includes voting or investment power
with respect to the shares. Under the rules of the Securities and
Exchange Commission, a person (or group of persons) is deemed to be a
“beneficial owner” of a security if he or she, directly or indirectly, has or
shares the power to vote or to direct the voting of such security, or the power
to dispose of or to direct the disposition of such
security. Accordingly, more than one person may be deemed to be a
beneficial owner of the same security. Unless otherwise indicated, to
our knowledge, the persons named in the table below have sole voting and
investment power with respect to the number of shares indicated as beneficially
owned by them. A person is also deemed to be a beneficial owner of
any security, which that person has the right to acquire within 60 days, such as
options or warrants to purchase our common stock. Common stock
beneficially owned and percentage ownership are based on 16,666,667 shares
outstanding.
|
Title of Class of
Security
|
Name and Address
|
Number of Shares
of Common Stock
Beneficially
Owned
|
Percentage of
Common
Stock
|
|||||||
|
Officers,
Directors and Director Designees
|
||||||||||
|
Common
Stock
|
Harald
Weisshaupt, Chief Executive Officer designee, Chief Financial Officer
designee and Director Designee
|
5,988,005 | (1) | 35.9 | % | |||||
|
Common
Stock
|
Donald
North, Vice President, Engineering
|
100,000 | (2) | .6 | % | |||||
|
Common
Stock
|
Danny
Tsui, Director Designee
|
0 | 0 | |||||||
|
Common
Stock
|
Robert
Tetzlaff, Director
|
0 | 0 | |||||||
|
Common
Stock
|
Vivian
Tran, Director Designee
|
20,000 | (3) | .1 | % | |||||
|
Common
Stock
|
Robert
Pearson, Director
|
0 | 0 | |||||||
|
Common
Stock
|
Kobe
Zhang, Director
|
0 | 0 | |||||||
|
Common
Stock
|
William
H. Kurtz
|
|||||||||
|
Common
Stock
|
Pete
Andreyev
|
|||||||||
|
All
executive officers, executive officer designees, directors and Director
Designees as a group
|
6,108,005 | 36.6 | % | |||||||
|
5%
Holders
|
||||||||||
|
Common
Stock
|
Arthur
Liu
|
4,582,871 | (4) | 27.5 | % | |||||
|
Common
Stock
|
InSeat
Solutions, LLC
|
3,125,453 | (4) | 18.8 | % | |||||
|
Common
Stock
|
Sunny
World Associates Limited (5)
|
5,389,204 | (5) | 32.3 | % | |||||
|
Common
Stock
|
GGEC
America, Inc. (6)
|
14,317,265 | (6) | 57.3 | % | |||||
|
Common
Stock
|
Robert
Eide (7)
|
3,035,000 | (7) | 18.2 | % | |||||
|
Common
Stock
|
Vision
Opportunity Master Fund (8)
|
964,837 | (8) | 5.5 | % | |||||
25
(1)
5,389,204 shares of Common Stock are held by Sunny World Associates Limited and
598,801 shares of Common Stock are held by Faithful Aim Limited, both of which
are controlled by Mr. Weisshaupt. All but 500,000 of the shares are subject to
forfeiture under certain conditions and are currently held in an escrow account,
however, Sunny World Associates Limited and Faithful Aim Limited are entitled to
vote the shares.
(2)
Represents a warrant to purchase 100,000 shares of Common Stock at a price of
$0.75 per share that may be exercised once the number of authorized shares of
Common Stock .is increased.
(3)
Represents a warrant to purchase 20,000 shares of Common Stock at a price of
$0.75 per share that may be exercised once the number of authorized shares of
Common Stock .is increased.
(4)
Includes 1,257,418 shares of Common Stock and a warrants to purchase 200,000
shares of Common Stock at a price of $0.75 held by Arthur Liu and 603,951 shares
of Common Stock, a warrant to purchase 277,778 shares of Common Stock at a price
of $0.50 per share and a warrant to purchase 2,243,724 shares of Common Stock at
a price of $0.50 per share which are held by Inseat Solutions LLC, an entity
controlled by Arthur Liu. The warrant to purchase 200,000 shares of Common Stock
held by Mr. Liu and the warrant to purchase 2,243,724 shares of Common Stock
held by InSeat Solutions LLC may be exercised once the number of authorized
shares of Common Stock .is increased.
(5) See
footnote number 1 above. The address of Sunny World Associates Limited is Third
Floor, Jonsim Place, 228 Queen’s Road, Wanchai, Hong Kong.
(6)
Includes 6,000,000 shares of Common Stock and warrants to purchase 6,000,000
shares of Common Stock at a price of $1.00 per share and 2,317,265 shares of
Common Stock at a price of $0.75 per share. The address of GGEC America, Inc. is
1801 E. Edinger Avenue, Suite 255, Santa Ana, California 92705.
(7) This
information is based on a public filing dated May 19, 2009 made by Mr. Eide.
According to that filing, Mr. Eide’s address is c/o Aegis Capital Corporation,
810 7th Avenue, 11th Floor, New York, New York 10019.
(8)
Includes warrants to purchase 964,837 shares of Common Stock at a price of $0.50
per share. The address of Vision Opportunity Master Fund Ltd. is 20 W. 55th
Street, 5th Floor, New York, New York 10019.
(9)
Includes 750,000 shares of Common Stock and warrants to purchase 750,000 shares
of Common Stock at a price of $0.50 per share. The address of RENN Capital Group
Plc. is 8080 N. Central Expressway, Suite 210, Dallas, Texas 75206.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
|
Board
Independence
Our board
of directors presently consists of Mr. Danny Tsui, Mr. Harald Weisshaupt, Mr.
Robert Pearson, Mr. Robert Tetzlaff, Ms Vidian Tran, Mr. Pete Andreyev, and Mr.
William H. Kurtz. While our common stock is not traded on any exchange, we have
used Section 803(A)(2) of the Rules of NYSE Amex to determine if our directors
are “independent.” Using the definition of “independent” as set forth in Section
803(A)(2), we have determined that Mr. Robert Pearson and Mr. William Kurtz are
our only independent director.
Related
Party Transactions
Described
below are certain transactions or series of transactions that occurred from July
1, 2008 through the date of this report (the “Period Reported”) between us and
our executive officers, directors and the beneficial owners of 5% or more of our
common stock, on an as converted basis, and certain persons affiliated with or
related to these persons, including family members, in which they had or will
have a direct or indirect material interest in an amount that exceeds the lesser
of $120,000 or 1% of the average of our total assets as of year-end for the last
two completed fiscal years, other than compensation arrangements that are
otherwise required to be described under “Executive Compensation.”
On July
10, 2010, we entered into and consummated a Securities Purchase Agreement with
GGEC America and its parent GGEC. Pursuant to the Securities Purchase Agreement,
we sold and issued to GGEC America (i) 6,000,000 shares of unregistered common
stock, which, following the consummation of the Securities Purchase Agreement,
constituted approximately 55% of AuraSound’s issued and outstanding shares of
common stock, (ii) a 3 year warrant to purchase 6,000,000 shares of common stock
at an exercise price of $1.00 per share, and (iii) a 3 year warrant to purchase
2,317,265 shares of common stock at an exercise price of $0.75 per share; for an
aggregate purchase price of US $3,000,000 (the “GGEC Transaction”). GGEC America
paid the purchase price for the shares and warrants by cancelling $3,000,000 of
indebtedness owed by AuraSound to GGEC America and GGEC. In addition, pursuant
to the Securities Purchase Agreement, we issued 3 year warrants to a total of 5
officers, employees and consultants of AuraSound and GGEC America to purchase a
total of 380,000 shares of common stock at an exercise price of $0.75 per share
(the “Service Warrants”). Arthur Liu, our former Chief Executive Officer and
former Chairman of the Board, received 200,000 of the Service Warrants, Donald
North, our Vice President – Engineering, received 100,000 of the Service
Warrants and Vidian Tran, a director, received 20,000 of the Service Warrants.
The warrants to be issued to GGEC and the 5 officers, employees and consultants
of AuraSound and GGEC America are exercisable for cash only and will not be
exercisable until we have increased our authorized common stock to a number
sufficient to allow their full exercise.
26
On July
10, 2010, we entered into and consummated an Agreement to Convert Debt (the
“Debt Conversion Agreement”) with Inseat Solutions, LLC (“Inseat”), a California
limited liability company controlled by Arthur Liu, our former Chief Executive
Officer and Chief Financial Officer. Pursuant to the Debt Conversion Agreement,
we issued 326,173 shares of unregistered common stock and a 5 year warrant to
purchase 2,243,724 shares of common stock at an exercise price of $0.50 per
share (the “Inseat Warrant”), in consideration of the cancellation of $1,957,040
of indebtedness owed by us to Inseat. The Inseat Warrant is exercisable for cash
only and will not become exercisable until we have increased our authorized
common stock to a number sufficient to enable the full exercise of all of
AuraSound’s outstanding convertible securities, including the Inseat
Warrant.
On July
10, 2010, we entered into an Asset Purchase Agreement with ASI Holdings Limited,
a Hong Kong corporation (“ASI Holdings”), and its wholly-owned subsidiary ASI
Audio Technologies, LLC, an Arizona limited liability company (“ASI Arizona”).
Pursuant to the Asset Purchase Agreement, we acquired, on July 31, 2010 (the
“Closing Date”), substantially all of the business assets and we assumed certain
liabilities of ASI Holdings and ASI Arizona, in consideration of the issuance to
the two stockholders of ASI Holdings of an aggregate of 5,988,005 shares (the
“ASI Transaction Shares”) of unregistered common stock, and the issuance to
Sunny World Associates Limited (“Sunny World”), the owner of 90% of the
outstanding shares of ASI Holdings and controlled by the founder and Chief
Executive Officer of ASI Holdings, Mr. Harald Weisshaupt, a 5 year warrant to
purchase an aggregate of 3,000,000 shares of common stock (the “ASI Warrant
Shares”) at an exercise price of $1.00 per share (the “ASI Warrant”). The
liabilities we assumed totaled approximately $10,154,745 and consisted primarily
of trade payables.
The ASI
Warrant is exercisable for cash only and shall not become exercisable until we
have increased our authorized common stock to a number sufficient to enable the
full exercise of all outstanding warrants and options of AuraSound. The ASI
Warrant is also subject to the following vesting conditions:
(i) 500,000
Warrant Shares will vest upon the 1 year anniversary of the Closing Date,
provided that during the period commencing January 1, 2011 and ending December
31, 2011 the total revenue minus all expenses, less taxes, dividends and
appreciation (the “Net Profit”) of AuraSound and its consolidated subsidiaries,
measured in accordance with U.S. GAAP, equals or exceeds US$3.3
million;
(ii) 500,000
Warrant Shares will vest upon the 2 year anniversary of the Closing Date,
provided that during the period commencing January 1, 2012 and ending December
31, 2012 the total Net Profit of AuraSound and its consolidated subsidiaries,
measured in accordance with U.S. GAAP, equals or exceeds US$4.3
million;
(iii) 2,000,000
Warrant Shares will vest upon the 3 year anniversary of the Closing Date,
provided that during the period commencing January 1, 2013 and ending December
31, 2013 the total Net Profit of AuraSound and its consolidated subsidiaries,
measured in accordance with U.S. GAAP, equals or exceeds US$5.4 million;
and
(iv) All
remaining Warrant Shares will vest upon the 3 year anniversary of the Closing
Date, provided that during the period commencing January 1, 2011 and ending
December 31, 2013, the total Net Profit of AuraSound and its consolidated
subsidiaries, measured in accordance with U.S. GAAP, equals or exceeds US$13.0
million, notwithstanding the failure to achieve one or more milestones set forth
in (i)-(iii) above.
Also on
the Closing Date, AuraSound, ASI Holdings and ASI Arizona entered into Amendment
No. 1 to the Asset Purchase Agreement (the “Amendment”), pursuant to which the
parties agreed that only 500,000 of the ASI Transaction Shares would be released
to the stockholders of ASI Holdings on the Closing Date, and the balance of
5,488,005 shares (the “Contingent Shares”) would be held in escrow by our legal
counsel until (i) AuraSound or its manufacturer, GGEC, or an affiliate of GGEC,
including, without limitation, GGEC America, Inc., obtains the license rights
needed for AuraSound to manufacture and sell ASI Holdings’ products to ASI
Holdings’ customers after the Closing Date, and (ii) all of the members of
AuraSound’s Board of Directors who have no beneficial ownership interest in the
Contingent Shares approve the release of the Contingent Shares to the
stockholders of ASI Holdings, which approval shall not be unreasonably withheld
if the condition in the preceding clause (i) is satisfied. The stockholders of
ASI Holdings will have the right to vote their respective Contingent Shares
notwithstanding that the Contingent Shares are held in escrow, until or unless
the Contingent Shares are cancelled as contemplated in the following sentence.
If the conditions in the preceding clauses (i) and (ii) are not satisfied on or
prior to the six month anniversary of the Closing Date, the Contingent Shares
shall be deemed automatically cancelled in their entirety and the certificates
representing the Contingent Shares shall be returned forthwith to our transfer
agent for cancellation.
On the
Closing Date, the stockholders of ASI Holdings entered into a Lock-Up Agreement
restricting them from selling any of their respective ASI Transaction Shares for
a period of 6 months from the Closing Date, and during the period from 6 months
after the Closing Date until the 1 year anniversary of the Closing Date, the
stockholders of ASI Holdings may sell no more than 25% of their respective ASI
Transaction Shares, and in the period from 1 year after the Closing Date until
the 2 year anniversary of the Closing Date, the stockholders may not sell more
than 50% of their ASI Transaction Shares, and the lock-up restriction will cease
as to all of the ASI Transaction Shares following the second anniversary of the
Closing Date.
27
On the
Closing Date, Harald Weisshaupt and AuraSound entered into a Noncompetition
Agreement pursuant to which Mr. Weisshaupt will be prohibited from engaging in
any business activity that is competitive with our business, and from soliciting
our employees and independent contractors, for a period of 2 years from the
termination of Mr. Weisshaupt’s employment with us.
On July
30, 2010 AuraSound and GGEC entered into a new Manufacturing Agreement which
superseded and replaced the Manufacturing Agreement between them dated December
12, 2007 (the “Prior Manufacturing Agreement”). Pursuant to the new
Manufacturing Agreement, AuraSound agreed to fully disclose to GGEC and its
personnel our processes, trade secrets, engineering, design, operating
information, technical information and other data (defined in the Manufacturing
Agreement as “Know-how”) relating to our products and, as necessary to provide
instruction to GGEC’s personnel in the methods and techniques for manufacturing
the products. AuraSound also granted to GGEC the right to manufacture and
package AuraSound’s products and to transfer this right to its affiliates. GGEC
agreed that any new inventions or related products or processes which it may
develop as a result of disclosure of the Know-how shall be the property of
AuraSound. GGEC also agreed that it will not, without the written consent of
AuraSound, sell or distribute the products or manufacture or sell competing
products to any current customers of AuraSound.
For the
manufacturing services performed pursuant to the Manufacturing Agreement,
AuraSound will pay to GGEC the cost of all materials required to build the
products, labor charges, finance charges, selling, general and administrative
expenses, spoilage charges and an amount of profit. AuraSound will also be
required to pay the costs of shipping the products and tooling charges for the
improvement of products or for the development of new products.
GGEC will
provide an office to host AuraSound’s engineering and support team. GGEC China
has also agreed to provide the use of its audio testing facilities at no charge
to AuraSound. GGEC and AuraSound have also agreed to develop new products that
will be manufactured by GGEC and sold by AuraSound.
All of
AuraSound’s intellectual property, as well as its Know-how and any patents,
design rights, copyrights and other intellectual property rights that relate to
special tooling, will belong to AuraSound. All products made pursuant to the
Manufacturing Agreement will belong to AuraSound. GGEC agrees that it will
supply the products only to AuraSound or to customers specified by AuraSound and
agrees that it will not manufacture for AuraSound’s competitors products that
compete with the products that it manufactures for AuraSound. So long as GGEC
gives AuraSound prompt notice of any claim made or action threatened or brought
against GGEC, AuraSound agrees to indemnify GGEC against any claim of
infringement of letters patent, registered design, trade mark or copyright by
the use or sale of the products manufactured by GGEC for AuraSound.
On
October 8, 2008, GGEC entered into a non-binding letter of intent pursuant to
which GGEC would acquire a 55% interest in AuraSound. 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 June 30, 2010,
GGEC had advanced $1,253,558, which was the largest aggregate principal amount
outstanding during the Period Reported. Under the terms of that agreement,
interest accrued at 8% and the notes were collateralized by all of our present
and future tangible and intangible assets. Interest accrued on the notes totaled
$116,301 as of June 30, 2010 and $ 41,088 as of June 30, 2009. The indebtedness
was cancelled on July 10, 2010 in conjunction with the GGEC
Transaction.
At June
30, 2010, notes payable to InSeat Solutions LLC, an entity controlled by, Arthur
Liu, our former Chairman and CEO, totaled $1,264,526. The notes and advances
were issued on various dates and all bear interest at 8% per annum, with
principal and interest due on March 31, 2009. Interest expense for the period
ended June 30, 2010 and 2009 amounted to $173,377 and $115,122 respectively. In
conjunction with the private placement it undertook on June 7, 2007, the Company
agreed that it would not repay more than $900,000 of the June 6, 2007 balance
without stockholder consent. On June 6, 2007, the Company repaid $700,000 and on
July 6, 2007, the Company repaid $200,000 of such notes. The Company also repaid
$300,000 of a management fee accrual to the related party. The total amount due
to InSeat Solutions LLC as of June 30, 2010 including the notes and accounts
payable amounted to $1,724,724. As of June 30, 2010, the accrued interest on the
notes payable to this related party amounted to $232,317 and is reflected in
accrued expenses on the accompanying financials.
We have a
month to month services agreement with InSeat Solutions, LLC. We have recorded
allocated expenses excluding rent of $71,210, for the year ended June 30, 2010
for services provided to us by this entity, all of which had been paid as of
June 30, 2010.
We share
office space with InSeat Solutions, LLC and have agreed to pay 23% of the rent
commitment. For the period ended June 30, 2010 this amount totaled $53,997, all
of which had been paid as of June 30, 2010.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND
SERVICES
|
AUDIT
FEES
The
aggregate fees estimated to be billed for the fiscal year ended June 30, 2010
for professional services rendered by our principal accountants for the audit of
our annual financial statements is $45,000. The aggregate fees billed for the
fiscal year ended June 30, 2009 were $45,000.
28
AUDIT
RELATED FEES
The
aggregate fees billed for the fiscal year ended June 30, 2010 for professional
services rendered by our principal accountants for the review of the financial
statements included in our quarterly reports on Form 10-QSB and other services
provided by the accountants in connection with statutory and regulatory filings
were $30,000. The aggregate fees billed for the fiscal year ended June 30, 2009
were $30,000.
TAX
FEES
The
aggregate fees billed for the fiscal year ended June 30, 2009 for professional
services rendered by our principal accountants for tax advice was $5,000. No
such fees were paid for the fiscal year ended June 30, 2010.
ALL OTHER
ACCOUNTANT FEES
The
aggregate fees paid for other professional services rendered by our principal
accountants for the fiscal year ended June 30, 2010 was $60,000. No such fees
were paid for the fiscal year ended June 30, 2009.
|
ITEM 15.
|
EXHIBITS.
|
|
Exhibit
Number
|
Description
|
|
|
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
|
Articles
of Incorporation (2)
|
|
|
3.2
|
By-Laws
(1)
|
|
|
4.1
|
Specimen
Certificate of Common Stock (3)
|
|
|
4.2
|
Form
of Warrant issued to GP Group, LLC(4)
|
|
|
4.3
|
Form
of Warrant issued to former warrant holders of
AuraSound(4)
|
|
|
4.4
|
Form
of Warrant issued to investors in our Unit Offering closed on June 7, 2007
(1)
|
|
|
4.5
|
AuraSound,
Inc. 12% Promissory Note , dated December 29, 2006 , in the amount of
$750,000 issued to Mapleridge Insurance Services(4)
|
|
|
4.6
|
AuraSound,
Inc. 10% Promissory Note , dated January 29, 2007 , in the amount of
$500,000 issued to Westrec Properties, Inc. & Affiliated Companies
401(k) Plan(4)
|
|
|
4.7
|
AuraSound,
Inc. 12% Promissory Note , dated February 5, 2007 , in the amount of
$500,000 issued to Apex Investment Fund, Ltd.(4)
|
|
|
4.8
|
AuraSound,
Inc. 12% Promissory Note , dated April 2, 2007 , in the amount of $500,000
issued to Clearview Partners, LLC,(4)
|
|
|
4.9
|
AuraSound,
Inc. 12% Promissory Note , dated February 14, 2007 , in the amount of
$200,000 issued to YKA Partners, Ltd.(4)
|
|
|
10.1
|
$10.0
Accounts Receivable credit facility with Bank
SinoPac(4)
|
|
|
10.2
|
$2.0
million Letter of Credit facility with Bank SinoPac(4)
|
|
|
10.3
|
Agreement
to Convert Debt dated October 15, 2007 between the registrant and Arthur
Liu(5)
|
|
|
10.4
|
Manufacturing
Agreement entered into between AuraSound, Inc. and Guoguang Electronic
Co., Ltd. on December 12,
2007(6)
|
29
|
10.5
|
Promissory
Note dated March 3, 2008 in the amount of $461,080 in favor of InSeat
Solutions, Inc.(7)
|
|
|
10.6
|
Nonbinding
letter of intent dated October 7, 2008 between AuraSound, Inc. and GGEC
America(8)
|
|
|
21
|
Subsidiaries
of registrant(9)
|
|
|
31
|
Certification
of President/Chief Executive Officer and Principal Accounting and Finance
Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934(9)
|
|
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002(9)
|
|
(1)
Incorporated by reference to the registrant’s Report on Form 8-K filed
with the Securities and Exchange Commission on June 13, 2007.
(2)
Incorporated by reference to the registrant’s Annual Report on Form 10-KSB
for the period ended June 30, 2006 filed with the Securities and Exchange
Commission on September 28, 2006.
(3)
Incorporated by reference to Exhibit 3.1 to the registrant’s Form
10-SB12G/A filed with the Securities and Exchange Commission on October
17, 2005.
(4)
Incorporated by reference to the registrant’s registration statement on
Form SB-2, SEC file no. 333-144861, filed with the Securities and Exchange
Commission on July 25, 2007.
(5)
Incorporated by reference to the registrant’s Report on Form 8-K filed
with the Securities and Exchange Commission on November 20,
2007.
(6)
Incorporated by reference to the registrant’s Report on Form 8-K filed
with the Securities and Exchange Commission on December 18,
2007.
(7)
Incorporated by reference to the registrant’s Report on Form 8-K filed
with the Securities and Exchange Commission on March 26,
2008.
(8)
Incorporated by reference to the registrant’s Report on Form 8-K filed
with the Securities and Exchange Commission on October 9,
2008.
(9)
Filed herewith.
|
30
AURASOUND,
INC.
CONSOLIDATED
FINANCIAL STATEMENTS
June
30, 2010
Index
to Consolidated Financial Statements
|
Reports
of Independent Registered Public Accounting Firms
|
F-1
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets as of June 30, 2010 and June 30, 2009
|
F-2
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2010 and
2009
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity/Deficit for the Years Ended June 30,
2010 and 2009
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2010 and
2009
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
to F-14
|
31
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
AuraSound,
Inc.
We have
audited the accompanying consolidated balance sheets of AuraSound, Inc. (a
Nevada corporation) as of June 30, 2010 and June 30, 2009 and the related
consolidated statements of operations, stockholder’s (deficit) and cash flows
for the years ended June 30, 2010 and 2009. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AuraSound, Inc. as of June
30, 2010 and June 30, 2009 and the related consolidated statements of
operations, stockholder’s (deficit) and cash flows for the years ended June 30,
2010 and 2009 in conformity with accounting principles generally accepted in the
United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. During the year ended June 30,
2010, the Company incurred net losses of $2,238,947. In addition, the Company
had negative cash flow from operating activities amounting to $202,383 for the
year ended June 30, 2010. These factors, among others, as discussed in Note 10
to the consolidated financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 10. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/
Kabani & Company, Inc.
Certified
Public Accountants
Los
Angeles, California
September
27, 2010
F-1
AURASOUND,
INC.
CONSOLIDATED
BALANCE SHEET
|
AS AT
|
||||||||
|
June 30, 2010
|
June 30, 2009
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 129,939 | $ | 321,455 | ||||
|
Trade
accounts receivable, net
|
3,432,135 | 928,471 | ||||||
|
Inventories
- net
|
537,198 | 164,994 | ||||||
|
Other
assets
|
- | 2,291 | ||||||
|
Total
current assets
|
4,099,272 | 1,417,211 | ||||||
|
Property
and equipment, net
|
106,465 | 89,834 | ||||||
|
Total
Assets
|
$ | 4,205,737 | $ | 1,507,045 | ||||
|
Liabilities
and Stockholders' Deficit
|
||||||||
|
Current
Liabilites:
|
||||||||
|
Accounts
payable
|
$ | 6,916,004 | $ | 2,374,747 | ||||
|
Accrued
expenses
|
800,044 | 451,302 | ||||||
|
Due
to officer
|
25,000 | 25,000 | ||||||
|
Notes
payable
|
1,253,558 | 1,253,558 | ||||||
|
Note
payable-related party
|
1,724,724 | 1,677,084 | ||||||
|
Total
Liabilities
|
10,719,330 | 5,781,691 | ||||||
|
Commitments
and Contingencies
|
- | - | ||||||
|
Stockholder's
Deficit
|
||||||||
|
Preferred
Stock, $.01 par value, 3,333,333 shares authorized and none issued and
outstanding
at June 30, 2010 and 2009 |
- | - | ||||||
|
Common
Stock, $.01 par value, 16,666,667 shares authorized, 4,678,662 issued and
outstanding
at June 30, 2010 and 2009 |
46,787 | 46,787 | ||||||
|
Additional
paid-in-capital
|
31,278,409 | 31,278,409 | ||||||
|
Accumulated
deficit
|
(37,838,789 | ) | (35,599,842 | ) | ||||
|
Total
Stockholder's Deficit
|
(6,513,593 | ) | (4,274,646 | ) | ||||
|
Total
Liabilities and Stockholders' Deficit
|
$ | 4,205,737 | $ | 1,507,045 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-2
AURASOUND,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009
|
2010
|
2009
|
|||||||
|
Net
Revenue
|
$
|
7,503,192
|
$
|
1,551,963
|
||||
|
Cost
of sales
|
7,388,488
|
1,670,804
|
||||||
|
Gross
income (loss)
|
144,704
|
(118,841
|
)
|
|||||
|
Operating
expenses
|
||||||||
|
Research
& development
|
411,779
|
788,310
|
||||||
|
Selling,
general and administrative expenses
|
1,765,263
|
1,519,566
|
||||||
|
Total
operating expenses
|
2,177,042
|
2,307,876
|
||||||
|
Loss
from operations
|
(2,062,338
|
)
|
(2,426,717
|
)
|
||||
|
Other
Expense
|
||||||||
|
Interest
expense (net)
|
176,609
|
144,085
|
||||||
|
Net
Loss
|
$
|
(2,238,947
|
)
|
$
|
(2,570,802
|
)
|
||
|
Basic
& diluted net income (loss) per share
|
$
|
(.48
|
)
|
$
|
(.55
|
)
|
||
|
Weighted
average shares of share capital outstanding - basic &
diluted
|
4,678,662
|
4,678,662
|
||||||
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
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
AURASOUND,
INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDER'S EQUITY(DEFICIT)
FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009
|
Capital Stock
|
Paid In
|
Shares to be
|
Accumulated
|
Total
Stockholder's
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
issued
|
Deficit
|
Equity(Deficit)
|
|||||||||||||||||||
|
Balance
June 30, 2008
|
4,678,662
|
$
|
280,720
|
$
|
31,044,476
|
$
|
-
|
$
|
(33,029,040
|
)
|
$
|
(1,703,844
|
)
|
|||||||||||
|
Net
loss for the year ended June 30, 2009
|
2,570,802
|
|||||||||||||||||||||||
|
Adjustment
to reflect reverse split
|
(233,933
|
)
|
233,933
|
|||||||||||||||||||||
|
Balance
June 30, 2009 adjusted for reverse split
|
4,678,662
|
$
|
46,787
|
$
|
31,278,409
|
$
|
-
|
$
|
(35,599,842
|
)
|
$
|
(4,274,646
|
)
|
|||||||||||
|
Net
loss for the year ended June 30, 2010
|
-
|
-
|
-
|
-
|
(2,238,947
|
)
|
(2,238,947
|
)
|
||||||||||||||||
|
Balance
June 30, 2010
|
4,678,662
|
$
|
46,787
|
$
|
31,278,409
|
$
|
-
|
$
|
(37,838,789
|
)
|
$
|
(6,513,593
|
)
|
|||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
AURASOUND,
INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net
loss
|
$
|
(2,238,947
|
)
|
$
|
(2,570,802
|
)
|
||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
20,142
|
15,806
|
||||||
|
Provision
for bad debts
|
18,935
|
|||||||
|
Provision
for obsolete inventory
|
-
|
208,901
|
||||||
|
(Increase)
/ decrease in assets:
|
||||||||
|
Accounts
receivable
|
(2,522,599
|
)
|
(626,909
|
)
|
||||
|
Inventories
|
(372,204
|
)
|
(8,451
|
)
|
||||
|
Other
current assets
|
2,291
|
97,381
|
||||||
|
Increase
/ (decrease) in liabilities:
|
||||||||
|
Accounts
payable and accrued expenses
|
4,889,999
|
1,599,774
|
||||||
|
Total
adjustments
|
2,036,564
|
1,286,502
|
||||||
|
Net
cash used in operations
|
(202,383
|
)
|
(1,284,300
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Investment
in fixed assets
|
(36,773
|
)
|
(4,808
|
)
|
||||
|
Net
cash used in investing activities
|
(36,773
|
)
|
(4,808
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
(Repayments)
advances on credit facility
|
(2,145,477
|
)
|
||||||
|
Restriction
on cash removed
|
-
|
2,000,000
|
||||||
|
(Repayments)
proceeds of related party notes payable
|
91,762
|
|||||||
|
Proceeds
from affiliate
|
47,640
|
313,161
|
||||||
|
Due
to officer
|
25,000
|
|||||||
|
Proceeds
from loans payable
|
1,253,558
|
|||||||
|
Net
cash provided by (used in) financing activities
|
47,640
|
1,538,004
|
||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(191,516
|
)
|
248,896
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING BALANCE
|
321,455
|
72,559
|
||||||
|
CASH
AND CASH EQUIVALENTS, ENDING BALANCE
|
$
|
129,939
|
$
|
321,455
|
||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Cash
paid during the year for:
|
||||||||
|
Interest
payments
|
$
|
-
|
$
|
7,508
|
||||
|
Income
tax payments
|
$
|
-
|
$
|
-
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-5
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND OPERATIONS
General
Hemcure,
Inc. (the Company or we/us/our) was incorporated under the laws of the state of
Minnesota in 1986. On September 8, 2006, our Company was reorganized by
re-domiciling to the state of Nevada 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 incorporated on July 28, 1999 to engage in the
development, commercialization, and sales of audio products, sound systems, and
audio components using electromagnetic technology. The Company, through its
acquisition of Aura Sound, became an operating entity and was no longer a
development stage entity. On February 12, 2008 the Company changed its name from
Hemcure, Inc. to AuraSound, Inc.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, AuraSound, Inc. 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 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 June 30, 2010 and 2009, the allowance for doubtful accounts
amounted to $63,689.64 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 June 30, 2010 and 2009, the allowance for
obsolescence amounted to $193,139 and $286,853 respectively.
F-6
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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:
|
Buildings
|
40
years
|
|
Machinery
and equipment
|
5
to 10 years
|
|
Furniture
and fixtures
|
7
years
|
Improvements
to leased property are amortized over the lesser of the life of the lease or the
life of the improvements. Amortization expense on assets acquired under capital
leases is included with depreciation and amortization expense on owned assets.
As of June 30, 2010 and June 30, 2009, the Company had net property, plant and
equipment in the amount of $106,465 and $89,834 respectively consisting of the
following:
|
2010
|
2009
|
|||||||
|
Machinery
& Equipment
|
$
|
36,281
|
$
|
6,802
|
||||
|
Tooling
|
105,193
|
105,193
|
||||||
|
Computer
software and equipment
|
7,411
|
1,501
|
||||||
|
Accumulated
depreciation
|
(42,420
|
)
|
(23,662)
|
|||||
|
Total
|
$
|
106,465
|
$
|
89,834
|
||||
The
Company utilizes a facility leased from a related party. Maintenance
and minor replacements are charged to expense as incurred. Gains and losses on
disposals are included in the results of operations.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the
identifiable assets and liabilities acquired as a result of the Company’s
acquisitions of interests in its subsidiaries. Goodwill is no longer amortized,
but tested for impairment upon first adoption and annually, thereafter, or more
frequently if events or changes in circumstances indicate that it might be
impaired. The Company assesses goodwill for impairment periodically. As a result
of such assessment at June 30, 2008, Management determined that goodwill had
been impaired due to insufficient undiscounted future cash flows to assure
recovery of the carrying value of such assets.
Intangible Assets
The
Company applies the specific criteria to determine whether an intangible asset
should be recognized separately from goodwill. Intangible assets acquired
through business acquisitions are recognized as assets separate from goodwill if
they satisfy either the “contractual-legal” or “separability” criterion.
Accordingly, intangible assets with definite lives are amortized over their
estimated useful life and reviewed for impairment. Intangible assets, such as
purchased technology, trademark, customer list, user base and non-compete
agreements, arising from the acquisitions of subsidiaries and variable interest
entities are recognized and measured at fair value upon acquisition. Intangible
assets are amortized over their estimated useful lives from one to ten
years.
Valuation of Long-Lived Assets
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in order to determine which such assets requires impairment losses
to be 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.
F-7
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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.
Advertising Expense
Advertising
costs are charged to expense as incurred and were immaterial for the years ended
June 30, 2010 and 2009.
Research and Development
Research
and development costs are expensed as incurred.
Income Taxes
The
Company recognizes deferred tax assets and liabilities 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 June 30, 2010 and June 30,
2009.
Fair Value of Financial
Instruments
The
carrying amounts reported in the statements of financial position for assets and
liabilities qualifying as financial instruments are a reasonable estimate of
fair value.
Segment Reporting
The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. Based upon our review and analysis, the Company
consists of one reportable business segment as of June 30, 2010 and
2009.
F-8
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Risks
and Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history and the volatility of public markets.
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 June 30, 2009 and 2010, the Company had no potentially
dilutive warrant shares outstanding.
Stock-based
compensation
The
Company accounts for Stock-Based Compensation utilizing the
fair-value method of accounting for stock-based compensation.
The
Company authorized no stock options or other equity based compensation for any
employees during the fiscal years ended June 30, 2010 and
2009.
New
Accounting Pronouncements
In August
2009, the Financial Accounting Standards Board (“FASB”) amended guidance related
to the measurement of liabilities at fair value, which was effective upon
issuance. These amendments clarify that in circumstances in which a quoted price
in an active market for the identical liability is not available, we are
required to use the quoted price of the identical liability when traded as an
asset, quoted prices for similar liabilities, or quoted prices for similar
liabilities when traded as assets. If these quoted prices are not available, we
are required to use another valuation technique, such as an income approach or a
market approach. The adoption of these amendments did not have a material impact
on the Company’s consolidated financial statements.
F-9
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
In
October 2009, the FASB amended guidance related to revenue recognition that will
be effective for the Company beginning July 1, 2010. Under the new guidance on
arrangements that include software elements, tangible products that have
software components that are essential to the functionality of the tangible
product will no longer be within the scope of the software revenue recognition
guidance, and software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB amended guidance on revenue
arrangements with multiple deliverables that are outside the scope of the
software revenue recognition guidance. Under the new guidance, when vendor
specific objective evidence or third party evidence for deliverables in an
arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition. The adoption of these amendments
is not expected to have a material impact on the Company’s consolidated
financial statements.
In
December 2009, the FASB amended guidance related to fair value measurements and
Disclosures, which was effective beginning the 2nd quarter
of the Company’s 2010 fiscal year, December 31, 2009. These amendments prescribe
new disclosures and clarify certain existing disclosure requirements related to
fair value measurements. The objective of the amendments was to improve these
disclosures and, thus, increase the transparency in financial reporting. The
adoption of these amendments did not have a material impact on the Company’s
consolidated financial statements.
In
February 2010, the FASB amended guidance related to disclosure of subsequent
events, which was effective upon issuance. These amendments prescribe that
entities that are SEC filers are required to evaluate subsequent events through
the date that the financial statements are issued. The adoption of these
amendments did not have a material impact on the Company’s consolidated
financial statements.
Reclassifications:
For
comparative purposes, the prior year’s consolidated financial statements have
been reclassified to conform with report classifications of the current
year.
NOTE
3 - INVENTORIES
Inventories
at June 30, 2010 and 2009 consisted of the following:
|
2010
|
2009
|
|||||||
|
Raw
materials
|
$
|
11,230
|
$
|
13,568
|
||||
|
Finished
goods
|
719,107
|
438,279
|
||||||
|
Provision
for obsolescence
|
(193,139
|
)
|
(286,853)
|
|||||
|
Total
|
$
|
537,198
|
$
|
164,994
|
||||
NOTE
4 -ACCRUED EXPENSES
Accrued
expenses consisted of the following as of June 30, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Accrued
consulting fees
|
$
|
236,359
|
$
|
236,359
|
||||
|
Accrued
interest
|
344,115
|
167,738
|
||||||
|
Accrued
payroll and others
|
219,570
|
47,205
|
||||||
|
Total
|
$
|
800,044
|
$
|
451,302
|
F-10
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5- DEBT AGREEMENTS & RESTRICTED CASH
Credit
facility
Effective
June 7, 2007, the Company entered into a one-year $12 million credit facility
with Bank SinoPac pursuant to which a $10.0 million revolving accounts
receivable facility and a $2 million fixed deposit credit facility were made
available to the Company. Obligations under the agreement were secured by
substantially all the assets of the Company. The accounts receivable facility,
which could be used for working capital and other general corporate purposes,
bears interest at the rate of prime minus .5%. The letter of credit facility
bears interest at the rate of TCD plus 1%. The credit facility was also subject
to certain covenants and conditions and contains standard representations,
covenants and events of default for facilities of this type. Occurrence of an
event of default allows the lenders to accelerate the payment of the loans
and/or terminate the commitments to lend, in addition to the exercise of other
legal remedies, including foreclosing on collateral. As of June 30, 2008,
$2,000,000 had been drawn from this facility.
Pursuant
to the credit facility, the Company also pledged and assigned a time certificate
of deposit account for one year having an initial deposit balance of $2,000,000
to be held and maintained at all times with the bank. On June 30, 2008, this
balance was recorded as a restricted cash balance in the accompanying
financials. As of September 25, 2008, the Company had repaid all
amounts due under the accounts receivable credit facility with Bank SinoPac and
had repaid the $2.0 million in loans plus accrued interest thereon which had
been made to the Company by Bank SinoPac under the deposit credit facility by
collecting the restricted cash deposit totaling $2.0 million plus accrued
interest thereon and applying the amount received to repay the debt. The
restricted cash deposit was the primary security for the deposit credit
facility.
Factoring
payable
At June
30, 2008, the factoring charge amounted to one half of one percent (.50%) of the
gross amount of accounts receivable assigned to the factor (Bank SinoPac) on a
non-recourse basis. In addition, for all accounts factored on a recourse basis,
the Company pays the factor fifteen hundreths of one percent (.15%) of the gross
amount of accounts receivable assigned. The Company’s obligations to the bank
were collateralized by all of the Company’s present and future tangible and
intangible assets including documents, instruments, chattel paper, returned or
repossessed goods and all books and records and proceeds of the foregoing. The
advances for the factored receivables are made pursuant to the revolving credit
and security agreement, which expires on the first anniversary date unless
terminated earlier by the factor upon the occurrence of an event of default.
This agreement shall be automatically renewed each year on the anniversary date
for an additional one year term unless the Company or the factor provides the
other with written notice of non-renewal of the agreement. There are no specific
covenants attached to the credit line except a $20.00 wire fee per transaction.
As of June 30, 2008 the factor payable amounted to $145,477. As of
September 25, 2008, the Company had repaid all amounts due under the accounts
receivable credit facility with Bank SinoPac.
Notes
payable
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. As of June 30, 2010, GGEC had advanced $1,253,558. Under
the terms of that agreement, interest was accrued at 8% and the notes were
collateralized by all of the Company’s present and future tangible and
intangible assets.
Interest
expense of $75,213 and $41,088 was related to these notes for the years ended
June 30, 2010 and 2009 respectively. Interest accrued on the notes
totaled $116,301 as of June 30, 2010 and $ 41,088 as of June 30,
2009.
On July
10, 2010 AuraSound entered into and consummated a Securities Purchase Agreement
with GGEC America, Inc. (“GGEC”)and its parent Guoguang Electric Company Limited
(“GGEC China”) whereby GGEC purchased 55% of the then issued and outstanding
shares of Common Stock of AuraSound for a purchase price of
$3,000,000. GGEC America, Inc. paid the purchase price by cancelling
$3,000,000 of indebtedness owed by AuraSound to GGEC and to GGEC China,
including cancelling the $1,253,558 in notes and the related accrued interest as
of the date of the transaction.
NOTE
6 - RELATED PARTY TRANSACTIONS AND COMMITMENT
For the
first three months of the year ended June 30, 2010, the Company paid $20,000 per
month as a management fee to an entity owned by our former Chairman of the board
of directors, Mr. Arthur Liu, for the 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. Beginning October 1, 2009, the Company entered into a
new agreement with the related entity whereby AuraSound provided its own
management services and paid 23% of the rent paid to the landlord and certain
allocable expenses. A total of $53,997 was paid to the related party
for rent and allocable expenses during the year ended June 30,
2010..
F-11
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
annual rent commitment to the landlord is as follows:
|
Year ended
|
Amount
|
|||
|
June
30, 2011
|
$
|
82,205
|
||
|
June
30, 2012
|
$
|
84,431
|
||
|
June
30, 2013
|
$
|
86,711
|
||
The lease
will expire on July 31, 2013. The Company is not a party to the
lease.
As of
June 30, 2010, the total amount of $460,198 was due to the affiliate for various
costs and expenses.
Notes
payable to related party as of June 30, 2010 and June 30, 2009 amounting to
$1,264,791 and 1,264,526 respectively consist of notes payable to an entity
controlled by our former Chief Executive Officer and Chairman. These notes were
issued on various dates and all bear interest at 8% per annum, with principal
and interest due on March 31, 2009 or on demand. Interest expense for the
periods ended June 30, 2010 and 2009 amounted to $101,162 and $102,997
respectively.
As of June 30, 2010 and
2009, the accrued interest on the notes payable to this related party amounted
to $227,814 and $131,050 respectively and is reflected in accrued expenses on
the accompanying financials. The total amount due to this related party
including notes and accrued costs and expenses as of June 30, 2010 amounted to
$1,724,724.
NOTE
7 - STOCKHOLDERS' EQUITY
Common
Stock
At June
30, 2010, 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.
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 authorized and outstanding share amounts
have been retroactively adjusted to reflect the stock split. As a
result of the stock split and the retroactive adjustment, there were 4,678,662
shares issued and outstanding as of June 30, 2010 and 2009. There
were no preferred shares issued and outstanding as of June 30, 2010 or
2009.
NOTE
8 - WARRANTS
Following
is a summary of the status of warrants outstanding at June 30,
2010:
|
Outstanding
|
Exercisable
|
|||||||||||||||||||||
|
Price(*)
|
Shares
|
Life (Months)
|
Exercise Price
|
Shares
|
Intrinsic Value
|
|||||||||||||||||
| $ | 4.80 | 40,833 | 60 | $ | 0.07 | 40,833 | $ | - | ||||||||||||||
| $ | 6.00 | 533,333 | 60 | $ | 1.07 | 533,3333 | $ | - | ||||||||||||||
| $ | 9.00 | 2,427,779 | 60 | $ | 7.28 | 2,427,779 | - | |||||||||||||||
| 3,001,945 | 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
GGEC transaction was consummated on July 10, 2010.
The
following table summarizes the activity for all stock warrants outstanding at
June 30, 2009:
|
Shares
|
Exercise Price
|
Remaining Life
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
June 30, 2008
|
3,001,945 | $ | 8.41 |
4.02
years
|
$ | - | |||||||
|
Granted
|
- | - | |||||||||||
|
Exercised
|
- | - | |||||||||||
|
Cancelled
|
- | - | |||||||||||
|
Outstanding
June 30, 2009
|
3,001,945 | $ | 8.41 |
3.01
years
|
$ | - | |||||||
|
Granted
|
- | - | |||||||||||
|
Exercised
|
- | - | |||||||||||
|
Cancelled
|
- | - | |||||||||||
|
Outstanding
June 30, 2010
|
3,001,945 | $ | 8.41 |
2.00
years
|
$ | - | |||||||
The value
of the warrants was calculated using the Black-Scholes model using the following
assumptions: discount rate of 4.40%, volatility of 25% and expected term of five
years.
F-12
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - INCOME TAXES
The
Company did not record any income tax expense due to net loss during the years
ended June 30, 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 years ended June 30, 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 June 30, 2010, and 2009:
|
2010
|
2009
|
|||||||
|
Deferred
tax asset due to net operating loss:
|
$
|
12,015,011
|
$
|
11,159,946
|
||||
|
Valuation
allowance
|
(12,015,011
|
)
|
(11,159,946
|
)
|
||||
|
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 loss. At June 30, 2010, the Company had net operating loss
carry-forwards of approximately $28,471,964, which expire through June 30, 2030.
Certain of the NOL is subject to a restriction under section 382 of the Internal
Revenue Code, whereby the amount which may be reflected in any one year is
limited.
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 year ended June 30, 2010, the
Company incurred losses of $2,238,947. The Company had an accumulated deficit of
$37,838,789 as of June 30, 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 requirements, 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 attain profitability.
On
October 8, 2008, GGEC entered into a non-binding letter of intent pursuant to
which 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 was either consummated or terminated. The transaction was
consummated on July 10, 2010. Also on July 10, 2010, AuraSound entered into an
Asset Purchase Agreement with ASI Holdings Limited to acquire all of the
business assets of ASI and its wholly owned subsidiary and certain related
liabilities. This transaction was consummated on July 31, 2010. While we believe
that our long-term prognosis with GGEC as a financial partner and the
acquisition of ASI Holdings is very positive, the need for working capital
continues and the need for a working capital line remains a very high priority.
There can be no guarantee that the Company will be able to obtain financing for
its working capital requirements, or that GGEC America will advance more loans
to AuraSound or that we will be able to finance the steadily increasing working
capital needs through sales of securities or third party loans. If such
arrangements cannot be made, the Company will be forced to curtail its
operations sharply or cease operations altogether.
F-13
AURASOUND,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11- MAJOR CUSTOMERS AND MAJOR VENDORS
The
Company had three major customers during the year ended June 30, 2010 which
accounted for 85% of its sales. The Company had two major customers during the
year ended June 30, 2009 which accounted for 65% of its sales. The receivables
due from these customers as of June 30, 2010 and 2009 totaled $2,901,330 and
$718,582 respectively.
The
Company had one major vendor during the years ended June 30, 2010 and 2009 which
accounted for 100% of the Company’s purchases. The amount due this vendor as of
June 30, 2010 and 2009 totaled $5,581,243 and $2,191,739
respectively.
NOTE 12 - SUBSEQUENT EVENTS
Asset Purchase Agreement and
Ancillary Agreements
On July
10, 2010, AuraSound, Inc. (“AuraSound”) entered into an Asset Purchase Agreement
(the “Asset Purchase Agreement”) with ASI Holdings Limited, a Hong Kong
corporation (“ASI Holdings”), and its wholly-owned subsidiary ASI Audio
Technologies, LLC, an Arizona limited liability company (“ASI Arizona”),
pursuant to which AuraSound agreed to acquire substantially all of the business
assets and certain liabilities of ASI Holdings and ASI Arizona (the “ASI
Transaction”), in consideration of the issuance to the shareholders of ASI
Holdings of an aggregate of 5,988,005 shares (the “ASI Transaction Shares”) of
unregistered common stock of AuraSound (“Common Stock”), and five (5) year
warrants to purchase an aggregate of 3,000,000 shares of Common Stock (“Warrant
Shares”) at an exercise price of $1.00 per share (collectively, the “ASI
Warrant”). Pursuant to the Asset Purchase Agreement, AuraSound has agreed to
assume approximately $10,154,745 in liabilities of ASI Holdings and ASI Arizona,
primarily consisting of trade payables. See Form 8k filed on July 10, 2010 for
more details
Securities Purchase
Agreement
On July
10, 2010, AuraSound entered into and consummated a Securities Purchase Agreement
(the “SPA”) with GGEC America, Inc., a California corporation (“GGEC America”),
and its parent Guoguang Electric Company Limited, a Chinese corporation (“GGEC
China”), the sole source manufacturer of our speaker drivers and products.
Pursuant to the SPA, AuraSound sold and issued to GGEC America (i) 6,000,000
shares of unregistered Common Stock, which, following the consummation of the
SPA, constitutes approximately 55% of AuraSound’s issued and outstanding shares
of Common Stock, (ii) a three (3) year warrant to purchase 6,000,000 shares of
Common Stock at an exercise price of $1.00 per share, and (iii) a three (3) year
warrant to purchase 2,317,265 shares of Common Stock at an exercise price of
$0.75 per share; for an aggregate purchase price of US $3,000,000 (the “GGEC
Transaction”). GGEC America paid the purchase price for the shares and warrants
by cancelling $3,000,000 of indebtedness owed by AuraSound to GGEC America and
GGEC China. In addition, pursuant to the SPA, AuraSound issued three (3) year
warrants to a total of five (5) officers, employees and consultants of AuraSound
and GGEC America to purchase a total of 380,000 shares of Common Stock at an
exercise price of $0.75 per share (the “Service Warrants”). Arthur Liu,
AuraSound’s Chief Executive Officer and former Chairman of the Board, received
200,000 of the Service Warrants and Donald North, AuraSound’s Vice President –
Engineering, received 100,000 of the Service Warrants. The warrants to be issued
to GGEC and the five (5) officers, employees and consultants of AuraSound and
GGEC America are exercisable for cash only and will not be exercisable until
AuraSound has increased its authorized Common Stock to a number sufficient to
allow their full exercise. See forms 8K filed on July 10, 2010 and July 31, 2010
for more details.
Debt Conversion
Agreement
On July
10, 2010, AuraSound entered into and consummated an Agreement to Convert Debt
(the “Debt Conversion Agreement”) with Inseat Solutions, LLC (“Inseat”), a
California limited liability company controlled by Arthur Liu, AuraSound’s Chief
Executive Officer and Chief Financial Officer. Pursuant to the Debt Conversion
Agreement, AuraSound issued 326,173 shares of unregistered Common Stock and a
five (5) year warrant to purchase 2,243,724 shares of Common Stock at an
exercise price of $0.50 per share (the “Inseat Warrant”), in consideration of
the cancellation of $1,957,040 of indebtedness owed by AuraSound to Inseat. The
Inseat Warrant is exercisable for cash only and will not become exercisable
until AuraSound has increased its authorized Common Stock to a number sufficient
to enable the full exercise of all of AuraSound’s outstanding convertible
securities, including the Inseat Warrant. See Form 8K filed on July 10, 2010 for
more details.
F-14
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
AURASOUND, INC.
|
||
|
Dated:
September 28, 2010
|
By:
|
/s/ Harald Weisshaupt
|
|
Harald
Weisshaupt, President and Chief
|
||
|
Executive
Officer
|
||
|
By:
|
/s/ Harald Weisshaupt
|
|
|
Harald
Weisshaupt
|
||
|
Principal
Accounting and
|
||
|
Finance
Officer
|
||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signatures
|
Title
|
Date
|
||
|
/s/ Danny Tsui
|
Director
and Chairman of the Board
|
September
28, 2010
|
||
|
Danny
Tsui
|
||||
|
/s/ Harald Weisshaupt
|
Director,
Chief Executive Officer, President, Principal Accounting and
Finance Officer
|
September
28, 2010
|
||
|
Harald
Weisshaupt
|
||||
|
/s/ Robert Pearson
|
Director
|
September
28, 2010
|
||
|
Robert
Pearson
|
||||
|
/s/ Robert Tetzlaff
|
Director
|
September
28, 2010
|
||
|
Robert
Tetzlaff
|
|
/s/
Vidian Tran
|
Director
and Secretary
|
September
28, 2010
|
||
|
Vidian
Tran
|
|
/s/
William H. Kurtz
|
Director
|
September 28,
2010
|
||
|
William
H. Kurtz
|
|
/s/
Pete Andreyev
|
Director
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September 28,
2010
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Pete
Andreyev
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