UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

 OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-51543

 

AuraSound, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		20-5573204
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

2850 Red Hill Avenue, Santa Ana, California		92705
(Address of principal executive offices)		(Zip Code)

 

(949) 829-4000

(Registrant’s telephone number, including area code)

(Former name, address, and fiscal year  if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  x Yes    o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes oNo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer	o	Accelerated Filer	o
Non-accelerated Filer	o	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).  o Yes x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of May 4, 2011, there were 16,644,039 shares of Common Stock, $0.01 par value per share, issued and outstanding.

 

 

 

 

 

 

Explanatory Note

We are filing this Amendment No. 1 (this “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2011, originally filed with the Securities and Exchange Commission (the “SEC”) on May 5, 2011 (the “Original Form 10-Q”), in order to amend the Consolidated Statements of Cash Flows and Note 8 to the Company’s unaudited, consolidated financial statements in response to comments received by the Company from the SEC.

In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the Original Form 10-Q that is amended by this Form 10-Q/A is restated in its entirety, and this Form 10-Q/A is accompanied by currently dated certifications on Exhibits 31.1, 31.2, and 32.1 by our Chief Executive Officer and Chief Financial Officer.

Except as expressly set forth in this Form 10-Q/A, we are not amending any other part of the Original Form 10-Q. This Form 10-Q/A does not reflect events occurring after the filing of the Original Form 10-Q or modify or update any related or other disclosures, including forward-looking statements, unless expressly noted otherwise. Accordingly, this Form 10-Q/A should be read in conjunction with the Original Form 10-Q and with our other filings made with the SEC subsequent to the filing of the Original Form 10-Q, including any amendments to those filings.

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

AURASOUND, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2011 AND JUNE 30, 2010

(UNAUDITED)

 

			March 31, 2011			June 30, 2010
Assets
Current Assets
Cash and cash equivalents		$	498,397		$	129,939
Trade accounts receivable, net of allowance for doubtful accounts of $350,000 at March 31, 2011 and $63,675 at June 30, 2010			9,698,492			3,432,135
Inventory, net			13,443,803			537,198
Other assets			255,648			—
Total Current Assets			23,896,340			4,099,272
Property and Equipment, net			242,638			106,465
Other Assets
Intangible Assets, net			3,954,664			—
Goodwill			5,972,039			—
Other assets			30,939			—
Total Other Assets			9,957,642			—
Total Assets		$	34,096,620		$	4,205,737

 

Liabilities and Stockholder’s Equity (Deficit)
Current Liabilities
Accounts payable		$	25,762,888		$	6,916,004
Accrued expenses			455,348			800,044
Due to officer			—			25,000
Notes payable			—			2,978,282
Due to Bank Sinopac			1,200,754			—
Shares to be issued			310,696			—
Total Current Liabilities		$	27,729,686		$	10,719,330
Commitments and Contingencies
Stockholders Equity (Deficit)
Preferred stock - $0.01 par value, 3,333,333 shares authorized and none outstanding at March 31, 2011 and June 30, 2010.			—			—
Common stock - $0.01 par value, 16,666,667 shares authorized and 16,644,039 and 4,678,662 outstanding at March 31, 2011 and June 30, 2010.		$	166,441		$	46,787
Additional paid in capital			42,425,976			31,278,409
Accumulated Deficit			(36,225,483	)		(37,838,789	)
Total Stockholder’s Equity (Deficit)			6,366,934			(6,513,593	)
Total Liabilities and Stockholder’s Equity (Deficit)		$	34,096,620		$	4,205,737

 

The accompanying notes are an integral part of the unaudited consolidated financial statements

 

 

 

 

 

AURASOUND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

(UNAUDITED)

 

		For the three months-ended								For the nine months-ended
		March 31, 2011				March 31, 2010				March 31, 2011				March 31, 2010
Net revenue		$	16,034,279			$	1,745,664			$	54,184,648			$	4,808,880
Cost of sales			13,906,156				1,718,129				48,339,528				4,667,820
Gross profit			2,128,123				27,535				5,845,120				141,060
Research and development expense			111,639				96,694				504,425				329,062
Selling, general & administrative expenses			1,240,413				367,400				3,148,893				1,211,930
Amortization of intangibles			204,501				—				545,336				—
Total operating expenses			1,556,553				464,094				4,198,654				1,540,992
Income (loss) from Operations			571,570				(436,559	)			1,646,467				(1,399,932	)
Other (income) expense			—				—				—				—
Interest expense, net			4,579				44,094				21,800				132,283
Other expense			4,030				—				11,359				—
Income (Loss) before income tax			562,961				(480,653	)			1,613,308				(1,532,215	)
Income tax expense			—				—				—				—
Net income (loss)			562,961				(480,653	)			1,613,308				(1,532,215	)
Income (loss) per common share
Basic		$	0.03			$	(0.10	)		$	0.12			$	(0.33	)
Diluted		$	0.03			$	(0.10	)		$	0.10			$	(0.33	)
Weighted average shares
Basic			16,644,039				4,678,662				12,943,764				4,678,662
Diluted			20,147,583				4,678,662				16,373,690				4,678,662

 

The accompanying notes are an integral part of the unaudited consolidated financial statements

 

 

 

AURASOUND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

(UNAUDITED)

 

			For the nine months-ended
			March 31, 2011				March 31, 2010
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
Net income (loss)			$	1,613,308			$	(1,532,215	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Reserves on accounts receivable				(70,000	)			—
Reserves on inventory				(180,000	)			—
Depreciation				24,285				13,492
Amortization				545,336				—
Changes in operating assets and liabilities:
Accounts receivable, net				(1,057,543	)			(1,514,277	)
Inventory				(8,699,714	)			2,624
Other assets				(286,587	)			—
Accounts payable				7,022,683				3,567,824
Accrued expenses				250,141				285,665
Due affiliate				(25,000	)			54,373
Other				—				2,291
Net cash provided by/ (used in) operating activities				(863,091	)			879,777
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Acquisition of property and equipment				(124,176	)			(30,691	)
Cash acquired in acquisition of net assets and liabilities of ASI				154,971				—
Net cash provided by/(used in) investing activities				30,795				(30,691	)
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES
Repayments of related party debt				—				(265	)
Beginning Balance – Line of Credit (LOC)				—				—
Due to Bank Sinopac – LOC Borrowing				6,680,201				—
Due to Bank Sinopac – LOC Payments				(5,479,447)				—
Net cash provided by/(used in) financing activities				1,200,754				(265	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS				368,458				848,821
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE				129,939				321,455
CASH AND CASH EQUIVALENTS, ENDING BALANCE			$	498,397			$	1,170,276
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest			$	—			$	—
Income tax			$	—			$	—
Conversion of accounts payable and accrued expenses to equity			$	2,232,861			$	—
Conversion of notes payable to equity			$	1,724,724			$	—
Conversion of related party notes payable to equity			$	1,253,558			$	—
Issuance of Common Stock and
Warrants for purchase of net assets and liabilities of ASI			$	6,366,775			$	—

 

The accompanying notes are an integral part of the unaudited consolidated financial statements

 

 

AURASOUND, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1              ORGANIZATION AND OPERATIONS

 

GENERAL

AuraSound, Inc. (the “Company”, “AuraSound”, “we”, “us” or “our”) was originally incorporated in 1987, and specializes in the design, manufacture and sale of high-fidelity loudspeakers. The Company’s operations are based in the United States with offices in Hong Kong, Taiwan and the Peoples Republic of China.

 

UNAUDITED INTERIM FINANCIAL INFORMATION

 

The accompanying unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and generally accepted accounting principles for interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form10-K for the fiscal year ended June 30, 2010. The results of the nine month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year ending June 30, 2011.

NOTE 2              SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which we refer to throughout this report as US GAAP.

 

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of AuraSound, Inc. and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, revenue recognition, allowance for doubtful accounts, allowance for sales valuation's allowance income tax contingency accruals and valuation allowances, asset impairment, purchase price allocation and litigation-related accruals. Actual results could differ from our 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.

 

TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and our customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a specific item basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts and returns was $350,000 as of March 31, 2011 and $63,675 as of June 30, 2010. The Company does not have any off balance sheet credit exposure related to its customers.

 

 

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. As of March 31, 2011 and June 30, 2010, the allowance for obsolescence amounted to $180,000 and $193,139 respectively.

 

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:

	Depreciable Period
Furniture and fixtures	7 years
Machinery and equipment	5 to 10 years
Tooling	5 to 10 years
Computer software and equipment	3 to 5 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. Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.

 

VALUATION OF LONG-LIVED ASSETS

The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. 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.

 

INTANGIBLE ASSETS

The Company records intangible assets acquired individually or as part of a group at fair value. Intangible assets with definitive lives are amortized over the useful life of the intangible asset, which is the period over which the asset is expected to contribute directly or indirectly to the entity’s future cash flows. The Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

 

GOODWILL

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is tested for impairment annually, or more frequently when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

 

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 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. The Company recognizes revenue net of an allowance for estimated returns, at the time the merchandise is sold.

 

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

 

INCOME TAXES

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

 

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 INCOME PER SHARE

The basic loss per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. At March 31, 2011, the Company has 3,429,925 and 3,503,544 potentially dilutive warrant shares outstanding based respectively on the weighted averages for the nine month and three month periods ending March 31, 2011.

 

 

NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements.” This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In July 2010, the FASB issued ASU 2010-20, which amends “Receivables” (Topic 310). ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. While ASU 2010-20 will not have a material impact on our consolidated financial statements, we expect that it will expand our disclosures related to notes receivables. No other new accounting pronouncements issued or effective during 2010 has had or is expected to have a material impact on the consolidated financial statements.

 

RECLASSIFICATIONS

For comparative purposes, the prior year’s consolidated financial statements have been reclassified to conform with reporting classifications of the current year periods.

 

NOTE 3              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. As of March 31, 2011, the Company has an accumulated deficit of $36,225,483 and negative working capital of $3,833,346, and has reported significant losses over the past several years. During the nine months ended March 31, 2011, the Company recorded net income of $1,613,308 and had net cash used by operating activities of $863,092. The move to profitability is a direct result of the execution of our new management’s post-acquisition business plan to cut costs on all business lines, to hold and spread overhead costs against a larger revenue base and to continue to move toward sustained profitability. However, there can be no assurance that the Company can sustain profitability or positive cash flows from operations. As such, if the Company is unable to generate positive net income and unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease its operations 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.

NOTE 4              ACQUISITION

 

On July 10, 2010, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with ASI Holdings Limited (“ASI Holdings”) and ASI Holdings’ wholly-owned subsidiary, ASI Audio Technologies, LLC (“ASI Arizona” and collectively with ASI Holdings, “ASI”). Pursuant to the Asset Purchase Agreement, the Company agreed to acquire substantially all of the business assets and certain liabilities of ASI, in exchange for the issuance of an aggregate of 5,988,005 shares (the “ASI Transaction Shares”) of unregistered common stock of the Company (“Common Stock”) to the two shareholders of ASI Holdings, and the issuance to Sunny World Associates Limited (“Sunny World”), the owner of 90% of the outstanding shares of ASI Holdings, which is controlled by Harald Weisshaupt, our President and Chief Executive Officer, a five (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”) with vesting based on certain milestones.

 

 

Pursuant to the Asset Purchase Agreement, Sunny World was to receive 90% of the ASI Transaction Shares, and Faithful Aim Limited (“Faithful Aim”), the owner of 10% of the outstanding shares of ASI Holdings, was to receive 10% of the ASI Transaction Shares, all subject to and in accordance with the APA Amendment (as defined in the paragraph below).

 

On July 31, 2010 (the “Closing Date”), the Company, ASI Holdings and ASI Arizona entered into Amendment No. 1 to the Asset Purchase Agreement (the “APA Amendment”), pursuant to which the parties agreed that only 500,000 of the ASI Transaction Shares would be released to the shareholders of ASI Holdings on the Closing Date, and the balance of 5,488,005 shares (the “Contingent Shares”) were to be held in escrow by the Company’s outside legal counsel until (i) the Company or its manufacturer, Guoguang Electric Company Limited (“GGEC”), or an affiliate of GGEC, including, without limitation, GGEC America, Inc. (“GGEC America”), obtains the license rights needed for the Company to manufacture and sell ASI Holdings’ products to ASI Holdings’ customers after the Closing Date, and (ii) all of the members of the Company’s Board of Directors who have no beneficial ownership interest in the Contingent Shares approve the release of the Contingent Shares to the shareholders of ASI Holdings. These Contingent Shares were not immediately issued (for escrow placement) as the Company did not have at the time a sufficient number of authorized shares of Common Stock to issue the Contingent Shares. As of March 31, 2011, the two contingency requirements have been successfully achieved and the Company has issued 5,389,204 shares of Common Stock to Sunny World and 250,000 shares of Common Stock to Faithful Aim, leaving a balance of 348,801 shares of Common Stock which shall be issued to Faithful Aim effective upon the Company filing an amendment to its certificate of incorporation to increase the number of authorized shares of Common Stock to a number sufficient to permit the Company to issue such shares.

  

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed in the ASI acquisition:

 

		Amount
Purchase price		$	6,349,205
Fair Value of assets acquired
Current assets			9,320,676
Property & equipment			36,285
Intangible Assets			4,500,000
			13,856,961
Fair value of liabilities acquired
Current liabilities			13,479,795
Net assets acquired			377,166
Goodwill		$	5,972,039

 

The above estimated fair values of the assets acquired and the liabilities assumed are preliminary and are based on the information that was available as of the date of this report. The Company believes that information available to it provides a reasonable basis for estimating the fair values of the assets acquired and the liabilities assumed; however, the Company is awaiting the finalization of certain third-party valuations to finalize those fair values. Thus, the preliminary measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the Closing Date.

 

 

PROFORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company as they may have appeared if the closing of the ASI acquisition, presented in the aggregate, had been completed on July 1, 2010 and July 1, 2009.

 

		For the nine months ended
		March 31, 2011				March 31, 2010
Net sales		$	56,777,967			$	22,660,201
Income (Loss) from operations			733,703				(1,677,757	)
Net Income (Loss)		$	725,094			$	(1,845,084	)

 

PROFORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

INVENTORIES

Inventories at March 31, 2011 and June 30, 2010 consisted of the following:

 

		March 31, 2011				June 30, 2010
Raw materials		$	798,000			$	11,230
Finished goods			12,825,803				719,107
Inventory before provision			13,623,803				730,337
Provision for obsolescence			(180,000	)			(193,139	)
Inventory, net		$	13,443,803			$	537,198

 

NOTE 5               PROPERTY, PLANT & EQUIPMENT

 

As of March 31, 2011 and June 30, 2010, property, plant and equipment consisted of the following:

 

		March 31, 2011				June 30, 2010
Leasehold improvements		$	44,936			$	—
Furniture and Fixtures			103,437				—
Machinery and equipment			36,281				36,281
Tooling			105,193				105,193
Computer software and equipment			21,897				7,411
Office Equipment			26,679				—
Capital Lease Assets			3,285				—
Total property and equipment			341,708				148,885
Accumulated depreciation			(99,070	)			(42,420	)
Net value of property and equipment		$	242,638			$	106,465

 

Depreciation expense was $24,285 and $13,492 for the nine month periods ending March 31, 2011 and 2010 respectively.

 

NOTE 6              OTHER INTANGIBLE ASSETS

 

The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:

 

		Average Useful Life(Years)				Amount				Accumulated Amortization				Balance, net
Amortizable intangible assets
Customer relationships			10			$	2,200,000				(146,672	)		$	2,053,328
Non-compete agreement			3				1,600,000				(352,000	)			1,248,000
Trade name			10				700,000				(46,664	)			653,336
						$	4,500,000			$	(545,336	)			3,954,664

 

Amortization expense for the nine month periods ended March 31, 2011, and March 31, 2010 totaled $545,336 and $0, respectively. The Company estimates that the total amortization expense for the next five years will be as follows:

 

30-Jun-11		$	755,166
30-Jun-12			823,333
30-Jun-13			823,333
30-Jun-14			334,000
30-Jun-15			290,000
Thereafter			1,474,167
Total		$	4,500,000

 

NOTE 7              ACCRUED EXPENSES

 

Accrued expenses consisted of the following as of March 31, 2011 and June 30, 2010:

 

			March 31, 2011			June 30, 2010
Accrued consulting		$	—		$	236,359
Accrued interest			—			344,115
Accrued payroll and other			455,348			219,570
Total		$	455,348		$	800,044

 

NOTE 8               DEBT

 

EXTINGUISHMENT OF DEBT

On July 10, 2010, the Company entered into a securities purchase agreement (the “SPA”) with GGEC America and its parent, GGEC, the primary manufacturer of our products. Pursuant to the SPA, the Company issued to GGEC America: (i) 6,000,000 shares of unregistered Common Stock, which, following the consummation of the offering, constitutes approximately 55% of the Company’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 $3,000,000 (the “GGEC Transaction”). Concurrently therewith, the Company entered into a debt extinguishment agreement, whereby GGEC America agreed to cancel $3,000,000 of notes payable and other liabilities.

 

On July 31, 2010, the Company entered into a debt conversion agreement (the “DCA”) with InSeat Solutions, LLC (“InSeat”), a California limited liability company controlled by Arthur Liu, the Company’s former Chief Executive Officer and Chief Financial Officer.  Pursuant to the DCA, the Company issued to InSeat: (i) 326,173 shares of unregistered Common Stock, and (ii) a five (5) year warrant to purchase 2,243,724 shares of Common Stock at an exercise price of $0.50 per share, in exchange for the cancellation of $1,264,526 of notes payable and accrued interest of $232,317. See the Current Report on Form 8-K which we filed with the SEC on July 10, 2010 for more details regarding the DCA with InSeat.

 

RELATED PARTY NOTES

Notes payable to related party at March 31, 2011 and June 30, 2010 equaled $0 and $1,264,791, respectively, and consisted of notes to an entity owned by our former Chief Executive Officer, Arthur Liu.

 

These notes were of various dates and all bore interest at 8% per annum, with principle and interest due on demand. Interest expense for the three month period ended March 31, 2011 and June 30, 2010 amounted to $0 and $101,162, respectively. As of March 31, 2011 and June 30, 2010, the accrued interest on the notes payable related to these notes amounted to $0 and $227,814, respectively.

 

BANK DEBT

On February 24, 2011, we opened a revolving credit line with Bank SinoPac with up to $5,000,000 in borrowing availability..  The revolving credit line’s terms require monthly interest payments based on borrowed amounts at a floating interest rate, calculated as the prime rate of interest (3.25% at March 31, 2011) plus 1.75%.  The credit line matures January 31, 2012.

 

The credit line is secured by certain assets of the Company.  The credit line contains financial covenants that require us to comply with minimum quarterly liquidity and profitability thresholds, non-financial covenants that include quarterly and annual reporting requirements and certain operational restrictions. As of March 31, 2011, we were in compliance with all covenants of the Bank SinoPac asset based loan agreement.

 

The specific financial covenants included:

 

(1)

Borrower shall maintain a current ratio of 0.76x. (to be tested quarterly)

 

Actual:

Current ratio = Current Assets/current liabilities 23,896/27,729 = 0.86

 

(2)

Borrower shall maintain minimum effective current ratio of 1.0x by 6/30/2011. Effective current ratio is defined as current asset over current liability less subordinated debt. (to be tested quarterly)

 

N/A

for quarter ended 3/31/11

 

(3)

Borrower shall maintain minimum net worth of $326,294. (to be tested quarterly)

 

Actual:

Net worth $6,366,934

 

(4)

Borrower shall maintain positive effective tangible net worth by 12/31/2011

 

N/A for quarter ended 3/31/11

 

(5)

Borrower shall maintain accumulated quarterly pre-tax profit (to be tested quarterly)

 

Actual:

profit $562,961 for the quarter

$1,613,308

for the 9 months

 

We chose Sinopac bank after extensive discussions with a number of financing institutions to gain a credit facility. Timing was of the essence in gaining a financing package due to our capitalization and the seasonal nature of our working capital financing needs. SinoPac was chosen due to its history of supporting us and our predecessor companies and its willingness to enter into a credit facility with us at a reasonable price. Sinopac’s connections in and knowledge of the Asian market also helped, as all of our manufacturing is done in China. No other U.S.-based institution made a competitive proposal. We continue to seek alternative financing due to the size of the SinoPac facility and its expiration within the next 12 months.

 

As of March 31, 2011, there was $1,200,754 outstanding, with $3,799,246 available and $3,225,820 eligible to borrow based on eligible accounts receivable balances.

 

NOTE 9               STOCKHOLDERS’ EQUITY

 

PREFERRED STOCK

The following table summarizes the Company’s preferred stock at March 31, 2011 and June 30, 2010:

 

Par value $0.01	March 31, 2011			June 30, 2010
Authorized	3,333,333			3,333,333
Issued	—			—
Outstanding	—			—

 

COMMON STOCK

 

The following table summarizes the Company’s common stock at March 31, 2011 and June 30, 2010:

 

	March 31, 2011			June 30, 2010
Par value $0.01
Authorized	16,666,667			16,666,667
Issued	16,644,039			4,678,662
Outstanding	16,644,039			4,678,662

 

WARRANTS

 

The following table summarizes the activity for all stock warrants outstanding at March 31, 2011:

 

		Warrants				Exercise Price(s)			Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance, June 30, 2010			3,001,945			$	4.80- $9.00		2.0 years		$	—
Granted			14,140,989			$	0.50- $1.00		4.1 years		$	—
Exercised			—
Expired			—
Balance, March 31, 2011			17,142,934			$	0.50- $1.00		3.4 years		$	3,568,580
Exercisable, March 31, 2011			14,142,934			$	0.50- $1.00		3.2 years		$	3,538,580

 

NOTE 10             INCOME TAXES

 

The components of income tax expense for the nine month periods ended March 31, 2011 and 2010 is as follows:

 

		March 31, 2011				March 31, 2010
US Federal		$	548,525			$	(520,953	)
US State			96,798				(91,933	)
Change in valuation allowance			(645,323	)			612,886
Total Provision for Income Tax		$	—			$	—

 

The actual tax benefit differs from the expected tax benefit computed by applying the United States corporate tax rate of 40% to loss before income taxes as follows for the periods ended March 31, 2011 and 2010:

 

		March 31, 2011				March 31, 2010
Tax expense (Benefit) at statutory rate – federal			34	%			(34	%)
State tax expense net of federal tax			6	%			(6	%)
Changes in valuation allowance			(40	%)			40	%
Tax expense at actual rate			0	%			0	%

 

 

The following table summarizes the significant components of the Company’s deferred tax asset at March 31, 2011, and 2010

 

		March 31, 2011				June 30, 2010
Accumulated net operating loss (NOL)		$	11,369,688			$	12,015,011
Valuation allowance			(11,369,688	)			(12,015,011	)
Net deferred tax asset		$	—			$	—

 

The Company recorded an allowance of 100% for its net operating loss carry-forward tax asset due to the uncertainty of its realization.

 

The Company has significant income tax net operating losses (“NOLs”) 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 our being able to realize the related deferred tax asset, a reserve equal to the amount of deferred income taxes has been established. A provision for income taxes has not been provided in these financial statements due to the net loss. At March 31, 2011, the Company had net operating loss carry-forwards of approximately $26,853,656 for federal tax purposes, which expire through June 30, 2030. NOLs relating to the period before June 7, 2007 will be subject to a restriction as to the amount which may be used in any one year under section 382 of the Internal Revenue Code.

 

NOTE 11            MAJOR CUSTOMERS AND MAJOR VENDORS

 

Three customers of the Company accounted for in excess of 85% of revenue for the nine month period ended March 31, 2011. The aggregate receivable due from these customers as of March 31, 2011 was $5,998,291. One vendor (who also is the major shareholder of the Company) accounted for in excess of 90% of purchases of finished products and raw materials for the nine month period ended March 31, 2011. The aggregate payable due to this vendor for manufactured products was approximately $23,531,599 as of March 31, 2011.

 

NOTE 12            COMMITMENTS AND SUBSEQUENT EVENTS

 

We have evaluated events or transactions that occurred after the balance sheet date of March 31, 2011 and have identified no such events or transactions which required adjustment to, or disclosure in these Consolidated Financial Statements other than as presented in such financial statements and Notes thereto.

 

 

 

Part II—Other Information

Item 6. Exhibits

31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934*
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934*
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350*

* Filed herewith

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	AURASOUND, INC.
Dated: August 11, 2011	By:	/s/ Harald Weisshaupt
		Harald Weisshaupt
		President and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Harald Weisshaupt
		Harald Weisshaupt
		Chief Financial Officer (Principal Accounting and
		Financial Officer)