UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-53643
Aurios Inc.
(Exact name of registrant as specified in its charter)
| Arizona | 86-1037558 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1741 W. University Drive, Suite 146
Tempe, AZ 85281
(Address of principal executive offices)
(602) 321-1313
(Registrant’s telephone number, including area code)
(Former name, former address and former 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 issuer 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
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,” “non-accelerated filer,” and “a smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | 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 x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | | Outstanding at May 14, 2010 |
| Common Stock, no par value | | 3,678,000 |
FORM 10-Q
AURIOS INC.
March 31, 2010
TABLE OF CONTENTS
| | | | Page |
| PART I – FINANCIAL INFORMATION | | |
| | | | |
| Item 1. | Financial Statements. | | 1 |
| | | | |
| | Condensed Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009 | | 2 |
| | | | |
| | Condensed Statements of Operations (Unaudited) for the three months ended March 31, 2010 and 2009 | | 3 |
| | | | |
| | Condensed Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three months ended March 31, 2010 | | 4 |
| | | | |
| | Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 2010 and 2009 | | 5 |
| | | | |
| | Notes to Condensed Financial Statements | | 6 |
| | | | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | | 11 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | | 14 |
| Item 4T. | Controls and Procedures. | | 14 |
| | | | |
| PART II – OTHER INFORMATION | | |
| | | | |
| Item 1. | Legal Proceedings. | | 15 |
| Item 1A. | Risk Factors. | | 15 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | | 15 |
| Item 3. | Defaults Upon Senior Securities. | | 15 |
| Item 4. | (Removed and Reserved.) | | 15 |
| Item 5. | Other Information. | | 15 |
| Item 6. | Exhibits. | | 15 |
| | | | |
| Signatures | | | 16 |
| Exhibits | | | |
| Certifications | | | |
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Our unaudited condensed financial statements included in this Form 10-Q for the three months ended March 31, 2010 are as follows:
Condensed Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009
Condensed Statements of Operations (Unaudited) for the three months ended March 31, 2010 and 2009
Condensed Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three months ended March 31, 2010
Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 2010 and 2009
Notes to Condensed Financial Statements
These unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended March 31, 2010 are not necessarily indicative of the results that can be expected for the full year.
AURIOS INC.
CONDENSED BALANCE SHEETS
| | | (Unaudited) | | | | |
| | | March 31, | | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| ASSETS | | | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | | $ | 17,557 | | | $ | 6,676 | |
| Accounts receivable, net | | | - | | | | 2,932 | |
| Inventory | | | 18,113 | | | | 19,469 | |
| Total Assets | | $ | 35,670 | | | $ | 29,077 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT) | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 60,454 | | | $ | 62,396 | |
| Due to related party | | | 510 | | | | 1,792 | |
| | | | | | | | | |
| Total Current Liabilities | | | 60,964 | | | | 64,188 | |
| | | | | | | | | |
| Long-Term Liabilities | | | | | | | | |
| Accrued interest | | | 12,668 | | | | 11,683 | |
| Note payable - related party | | | 44,121 | | | | 44,121 | |
| Total Liabilities | | | 117,753 | | | | 119,992 | |
| | | | | | | | | |
| Stockholders' Equity / (Deficit): | | | | | | | | |
| Convertible preferred stock - no par value; 10,000,000 shares | | | | | | | | |
| authorized, 0 and 460,000 shares issued and outstanding | | | | | | | | |
| at March 31, 2010 and December 31, 2009, respectively | | | - | | | | 115,000 | |
| Common stock - no par value; 90,000,000 shares authorized, | | | | | | | | |
| 3,678,000 and 2,400,000 shares issued and outstanding | | | | | | | | |
| at March 31, 2009 and December 31, 2009, respectively | | | 197,795 | | | | 50,795 | |
| Accumulated deficit | | | (279,878 | ) | | | (256,710 | ) |
| | | | | | | | | |
| Total Stockholders' Equity/(Deficit) | | | (82,083 | ) | | | (90,915 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholders' Equity / (Deficit) | | $ | 35,670 | | | $ | 29,077 | |
The Accompanying Notes are an Integral
Part of the Condensed Financial Statements
AURIOS INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| | | Three Months Ended | |
| | | March 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Sales | | $ | 5,120 | | | $ | 5,067 | |
| | | | | | | | | |
| Cost of Sales | | | 2,956 | | | | 2,973 | |
| | | | | | | | | |
| Gross Profit | | | 2,164 | | | | 2,094 | |
| | | | | | | | | |
| General and Administrative Expenses | | | 24,347 | | | | 28,699 | |
| | | | | | | | | |
| Loss from Operations | | | (22,183 | ) | | | (26,605 | ) |
| | | | | | | | | |
| Interest Expense | | | 985 | | | | 985 | |
| | | | 985 | | | | 985 | |
| | | | | | | | | |
| Net Loss (Unaudited) | | $ | (23,168 | ) | | $ | (27,590 | ) |
| | | | | | | | | |
| Loss per share - basic and diluted | | $ | (0.01 | ) | | $ | (0.03 | ) |
| | | | | | | | | |
| Weighted average shares outstanding - basic and diluted | | | 2,712,400 | | | | 896,000 | |
The Accompanying Notes are an Integral
Part of the Condensed Financial Statements
AURIOS INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)
For the three months ended March 31, 2010
(Unaudited)
| | | | | | | | | | | | | | | Total | |
| | | | | | | | | Convertible | | | | | | Stockholders' | |
| | | Common Stock | | | Preferred Stock | | | Accumulated | | | Equity | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Deficit | | | (Deficit) | |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2009 | | | 2,400,000 | | | $ | 50,795 | | | | 460,000 | | | $ | 115,000 | | | $ | (256,710 | ) | | $ | (90,915 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stock conversion to common stock | | | 1,150,000 | | | | 115,000 | | | | (460,000 | ) | | | (115,000 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash | | | 128,000 | | | | 32,000 | | | | - | | | | - | | | | - | | | | 32,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss for the three months ended March 31, 2010 (Unaudited) | | | | | | | | | | | | | | | | | | | (23,168 | ) | | | (23,168 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2010 (Unaudited) | | | 3,678,000 | | | $ | 197,795 | | | | - | | | $ | - | | | $ | (279,878 | ) | | $ | (82,083 | ) |
The Accompanying Notes are an Integral
Part of the Condensed Financial Statements
AURIOS INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended | |
| | | March 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net Loss | | $ | (23,168 | ) | | $ | (27,590 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| used by operating activities: | | | | | | | | |
| Changes in Assets and Liabilities: | | | | | | | | |
| Accounts receivable | | | 2,932 | | | | 850 | |
| Inventory | | | 1,356 | | | | 2,324 | |
| Accounts payable | | | (1,942 | ) | | | (696 | ) |
| Accrued interest-related party | | | 985 | | | | 985 | |
| Due to related party | | | (1,282 | ) | | | (300 | ) |
| | | | | | | | | |
| Net cash used by operating activities | | | (21,119 | ) | | | (24,427 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from issuance of common stock | | | 32,000 | | | | - | |
| Net cash provided by financing activities | | | 32,000 | | | | - | |
| | | | | | | | | |
| Net change in cash and cash equivalents | | | 10,881 | | | | (24,427 | ) |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 6,676 | | | | 43,321 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 17,557 | | | $ | 18,894 | |
| | | | | | | | | |
| Supplemental Information: | | | | | | | | |
| Interest paid | | $ | - | | | $ | - | |
| Income taxes paid | | $ | - | | | $ | - | |
The Accompanying Notes are an Integral
Part of the Condensed Financial Statements
AURIOS INC.
NOTES TO FINANCIAL STATEMENTS
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates
Presentation of Interim Information
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for smaller reporting companies. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our December 31, 2009 Annual Report filed on Form 10K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures made are adequate to make the information presented not misleading. Further, the condensed financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to fairly present our financial position at March 31, 2010 and the results of our operations and cash flows for the periods presented. The December 31, 2009 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year.
Nature of Corporation
Aurios Inc. (the “Company” or “we”) is a corporation which was duly formed and organized under the laws of the State of Arizona on August 7, 2001. Its principal business activity is the production, marketing and distribution of vibration isolation products to the high-end audio and video market. The Company’s sales occur throughout the United States and in certain foreign countries. The Company is a former wholly-owned subsidiary of True Gravity Enterprises Inc. (“TGE”). On December 31, 2007, the principal shareholder, who is also a director and officer of the Company, purchased all of the stock owned by TGE. On February 25, 2010, TGE sold substantially all of its assets to Advanced Vibration Technologies Inc., an Arizona corporation (“AVT”). Pursuant to a Management and Rental Agreement between AVT and the Company that expires on July 31, 2010, the Company pays AVT $1,500 per month for rent and certain management services.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues primarily from the sale of vibration and motion control devices through sales on the Company’s website and its distributors. Revenues are recognized at the time the sale is completed and shipped. Once shipped, title to the products, as well as the risks and rewards of ownership, passes to the customers.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the three months ended March 31, 2010 and 2009 were $0 and $3,700, respectively.
Cash and Cash Equivalents
For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less.
AURIOS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
Accounts Receivable
The Company provides for potentially uncollectible accounts receivable by use of the allowance method. The allowance is provided based upon a review of the individual accounts outstanding and the Company’s prior history of uncollectible accounts receivable. As of March 31, 2010 and December 31, 2009 there was no provision for uncollectible trade accounts receivable. The Company does not accrue interest charges on delinquent accounts receivable. The accounts are generally unsecured.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or market value. We regularly assess inventory quantities on hand and record provisions for excess and obsolete inventory based primarily on our estimated forecast of product demand. Inventory consists primarily of components used in assembling vibration control bearings.
Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the State of Arizona. The Company is subject to federal, state and local income tax examinations by tax authorities for approximately the past three years, or in some instances longer periods.
Deferred income taxes are provided on an asset and liability method, whereby deferred tax assets and liabilities are recognized for deductible temporary differences and operating loss carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that the carryforwards will not be utilized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
New Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). This ASU codified consolidation guidance previously issued in June 2009 which applies to variable interest entities and affects the overall consolidation analysis under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. This standard is effective for fiscal years beginning after November 15, 2009. Our adoption of ASU 2009-17 on January 1, 2010, did not have an impact on our financial statements.
In December 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets (“ASU 2009-16”). This ASU codified guidance previously issued in June 2009 which amends existing derecognition guidance, eliminates the exemption from consolidation for qualifying special-purpose entities, and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. This standard is effective for fiscal years beginning after November 15, 2009, and applies to financial asset transfers occurring on or after the effective date. Our adoption of ASU 2009-16 on January 1, 2010, did not have an impact on our financial statements.
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity.
As of March 31, 2009, there were 460,000 shares of Series A Convertible Preferred Stock convertible into 1,150,000 common shares. These shares were not included in the determination of diluted earnings per share as their effect was anti-dilutive. Holders of shares of Series A Convertible Preferred Stock are entitled to receive dividends as declared from time to time by the board of directors. Since their issuance, no dividends have been declared on the Series A Convertible Preferred Stock. On March 9, 2010, the 460,000 shares of Series A Convertible Preferred Stock were converted into 1,150,000 common shares. There were no potentially dilutive securities outstanding as of March 31, 2010.
On August 31, 2009, the Company approved a 2.5 for 1 stock split of its outstanding common stock, resulting in 2,240,000 shares of Common Stock outstanding, which has been reflected retroactively for all periods presented.
Note 2
Related Party Transactions
The Company had a balance due to a related party, TGE, in the amount of $0 and $1,500 at March 31, 2010 and December 31, 2009, respectively. These are considered short term in nature and non-interest bearing.
The Company had a note payable to a related party, TGE, in the amount of $44,121 as of March 31, 2010 and December 31, 2009, bearing interest at a rate of 8.25%. All outstanding principal and interest are due and payable on December 15, 2011. As of March 31, 2010 and December 31, 2009, there was accrued interest in the amount of $12,668 and $11,683, respectively.
In July 2007 the Company entered into a non-exclusive License Agreement with a related party, TGE, giving the Company rights in various patents, pending applications for patents and trademarks in various countries of the world, including the United States. The Company pays the related party five percent (5.0%) of worldwide net sales of the licensed products. In October 2007, the License Agreement was amended to provide that the royalty would begin to accrue on January 1, 2008. This agreement was terminated on February 25, 2010 as a result of the sale of substantially all of TGE’s assets to AVT. As of March 31, 2010 and December 31, 2009, the accrued royalty the Company owed to TGE was $510 and $292, respectively. The Company now pays royalties to AVT under a new agreement with AVT.
TGE shares common management with the Company and both the Company and TGE have the same majority owner.
During the three months ended March 31, 2010 and 2009, the Company paid $4,687 and $485, respectively, in legal services to a firm in which a principal stockholder of Aurios is a partner. He also performed or supervised the legal services rendered by his law firm.
On February 25, 2010, TGE, the Company’s affiliate and former parent, sold substantially all of its assets to AVT.
The Company and TGE, its affiliate and former parent, entered into an administrative services/rental agreement on January 1, 2009. Under such agreement, TGE performed certain administrative duties for Aurios and provided it office space as required at $1,500 per month. Aurios has no employees and had contracted with TGE for all services. Paul Attaway controls TGE as its principal shareholder, and an officer and director. This agreement was terminated on February 25, 2010 as a result of the sale of substantially all of TGE’s assets to AVT. As of February 25, 2010, AVT provides administrative support and personnel to the Company at $1,500 per month under an administration services/rental agreement that expires on July 31, 2010. During the first quarter ended March 31, 2010, the Company paid a fee of $3,000 to TGE to compensate it for administrative expenses and the use of TGE’s facilities from January 1, 2010 to February 25, 2010.
On March 26, 2010, TGE, the Company’s affiliate and former parent, assigned the Company its federally registered trademark “Aurios” in consideration for a payment of $100.
On March 25, 2010, Paul Attaway, an officer and director of the Company, purchased 48,000 shares of common stock for $0.25 per share for a total of $12,000 in the Company's private placement of common stock.
On March 26, 2010 and March 29, 2010, Ira J. Gaines and Christian J. Hoffmann, III, respectively, both of whom are principal shareholders of the Company, each purchased 40,000 shares of common stock for $0.25 per share for a total of $10,000 in the Company's private placement of common stock.
AURIOS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Concentration of Credit Risk
The Company maintains cash accounts at a financial institution. Deposits not to exceed $250,000 are insured by the Federal Deposit Insurance Corporation. At March 31, 2010 and December 31, 2009, the Company had no uninsured cash and cash equivalents.
For the three months ended March 31, 2010 and 2009, the Company had 92% and 91% of sales to two customers, respectively. As of March 31, 2010 and December 31, 2009 receivables from these customers were $0 and $2,931, respectively.
On March 9, 2010, 460,000 shares of Series A Convertible Preferred Stock were converted into 1,150,000 common shares.
Common Stock:
On September 27, 2007, the Company amended its Articles of Incorporation to authorize the Company to issue up to 90,000,000 shares of no par value Common Stock.
On August 31, 2009, the Company approved a 2.5 for 1 stock split, which resulted in 2,240,000 shares of Common Stock outstanding, which has been reflected retroactively for all periods presented.
Additionally, on August 31, 2009, the Company commenced a private placement of a minimum of 80,000 shares and a maximum of 400,000 shares of its Common Stock to accredited investors at a price of $0.25 per share. As of March 31, 2010, the Company had sold 288,000 shares, for gross proceeds of $72,000, under the private placement.
Stock Options:
The Company, under its 2007 Stock Option Plan, is authorized to grant options for up to 250,000 shares of common stock, no par value. Options may be granted as incentive stock options or nonqualified stock options. Incentive stock options shall not be granted at less than one hundred percent (100%) of the fair market value of the common stock on the date of the grant, and have exercise terms of up to ten years with vesting periods determined at the discretion of the Company’s board of directors. As of March 31, 2010 no stock options have been granted.
AURIOS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The provisions for income tax expense consist of the following:
| | | March 31, | |
| | | 2010 | | | 2009 | |
| Deferred: | | | | | | |
| Income tax benefit at statutory rates | | $ | 9,000 | | | $ | 10,800 | |
| Valuation allowance of net operating loss | | | (9,000 | ) | | | (10,800 | ) |
| | | $ | - | | | $ | - | |
The Company’s deferred tax asset consists of the following:
| | | March 31, | |
| | | 2010 | | | 2009 | |
| Deferred tax asset: | | | | | | |
| Net operating loss carryforward | | $ | 96,800 | | | | 47,600 | |
| Less: Valuation allowance | | | (96,800 | ) | | | (47,600 | ) |
| Net deferred tax asset | | $ | - | | | $ | - | |
During the year ended December 31, 2006 and through June 30, 2007, the net operating loss carryforward was consolidated by TGE pursuant to a tax sharing agreement. No intercompany receivable was recorded due to the uncertainty of the utilization of the net operating loss carryforward by TGE.
The loss carryforwards, unless utilized, will expire at various times from 2027 through 2030.
The Company has incurred an accumulated deficit and has had negative cash flows from its operations. Realization of the Company’s assets is dependent upon the Company’s ability to meet its future financing requirements and the success of future operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
No assurances can be given that the Company will be able to raise additional capital, when needed or at all, or that such capital, if available, will be on terms acceptable to the Company. In the event the Company is unable to raise additional funds, it could be required to either substantially reduce or terminate its operations.
Currently the Company has no extensive expansion plans that would require significant infusions of capital into its operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results to differ materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) our history of declining operating results; (ii) our auditors have expressed a going concern opinion; (iii) our ability to raise additional working capital that we may require and, if available, that such working capital will be on terms acceptable to us; (iv) our ability to implement our business plan; (v) uncertainties regarding our ability to increase revenues and penetrate our market; (vi) economic and general risks relating to business; (vii) our ability to manage our costs of production; (viii) our ability to protect our intellectual property through patents and other intellectual property protection; (ix) our dependence on key personnel; (x) increased competition or our failure to compete successfully; (xi) our ability to keep pace with technological advancements in our industry; (xii) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404; (xiii) our nonpayment of dividends and lack of plans to pay dividends in the future; (xiv) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock lower our value and make it more difficult for us to raise capital; (xv) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xvi) the price of our stock is likely to be highly volatile because of several factors, including a relatively limited public float; and (xvii) indemnification of our officers and directors.
As used in this Report, the terms “we,” “us,” “our,” and “Aurios” mean Aurios Inc. unless otherwise indicated.
General
The following discussion should be read in conjunction with our Financial Statements and notes thereto. The following discussion contains forward-looking statements, including, but not limited to, statements concerning our plans, anticipated expenditures, the need for additional capital and other events and circumstances described in terms of our expectations and intentions. You are urged to review the information set forth under the captions for factors that may cause actual events or results to differ materially from those discussed below.
Overview
We produce, market and distribute vibration isolation products to the high-end audio and video markets in the United States and in certain foreign countries. Our products include three bearings: the Aurios Classic Media Isolation Bearing (the “Classic MIB”), the Aurios Pro Max Media Isolation Bearing (the “Pro Max MIB”), and the Aurios Isotone Media Isolation Bearing (the “Isotone MIB”); the Series 100 Component Shelf, a shelf product; and Pivot Points, a spike mount product. We sell the last of the foregoing bearings products to one distributor and it is a variation of the Classic MIB. The manner in which the bearings alter body wave transmissions is a function of material selection, surface harness and material volume, to name just a few of the parameters that will impact how the sound is reproduced.
The Pro Max MIB replaces the Aurios Pro bearing, and is engineered to offer the same performance at an attractive wholesale price of between $250 and $349 for a package of three. The size of the Pro Max MIB is approximately one inch high and two and one-half inches in diameter. The Pro Max MIB:
| • | re-configures the effective mass of the original Pro bearing and adds 2% more mass to the critical wave pathway; |
| • | reduces the critical surface contact areas by 25%, thus enhancing the level of decoupling; and |
| • | reduces costs through its new symmetrical design. |
The Pro Max MIB is the largest bearing that we offer and is ideal for large speakers. These bearings can be used in a home, in a recording studio and on stage. The weight capacity per bearing is 500 lbs (227 kgs). The Pro Max MIB can be used under DVD/CD players, amps, preamps, turntables and power conditioners.
The Classic MIB lacks the girth of the Pro Max MIB bearings. This slimmed down model is the most popular bearing in the Aurios product line. These bearings are also placed under amps, preamps, CD/DVD players, turntables, speakers and power conditioners. The price of the Classic MIB is from $99 to $199 on a wholesale basis for a box of three. The size of the Classic MIB is approximately one inch high and one and one-half inches in diameter.
We also offer a shelf product, the Series 100 Component Shelf, that incorporates our bearings products and a spike mount that is used to support equipment and reduce the effects of vibrations. The shelf product incorporates four bearings, is placed on the floor and a speaker is placed on the shelf. The Series 100 Component Shelf provides the same level of isolation as our bearings product. Our spike mounts, Pivot Points, are used to support equipment and reduce the effects of vibrations. The Pivot Points product is not as effective as our Media Isolation Bearing products, but it can be sold at a much lower price.
Our annual sales have declined from approximately $255,000 in 2001, on an unaudited basis, to current levels. The initial downward trend in sales was due to a poor working relationship with our first distributor. Payment from this first distributor was slow and we wrote off approximately $75,000 (unaudited) worth of returned inventory in 2003. We then attempted to sell the product directly and were not successful. The next distributor we selected was too small to sell a large quantity of product. By mid-2004, we only had one distributor, located in Chicago, with whom we continue to work. We have done little to support the product line since 2004 due to a lack of resources.
For the Three Months Ended March 31, 2010 and 2009
Results From Operations
Revenues
Since our inception, our activities have focused on product and market development with a nominal level of operations. Revenues for the three months ended March 31, 2010 and March 31, 2009 were $5,120 and $5,067, respectively. Sales for the periods remained relatively flat and are the result of the current economic recession.
Most of our sales are made through audio equipment distributors, with the balance being direct retail sales. For the period ending March 31, 2010, 69% and 23% of sales were made through distributors, Bernard Knoop and Music Direct, respectively. For the period ending March 31, 2009, 68% and 23% of sales were made through distributors, ECS, Ltd. and Galen Carol, respectively. No other customer accounted for more than 10% of sales in either period.
Cost of Sales
The cost of sales on units sold for the three months ended March 31, 2010 totaled $2,956 (57.7% of revenues) on the products, as compared to $2,973 (58.7% of revenues) for the three months ended March 31, 2009. The cost of sales for the three months ended March 31, 2010 was slightly lower than for the same period in 2009 due to changes in the product mix sold.
Gross Margin
Gross margin for the three months ended March 31, 2010 was $2,164 (42.3% of revenues) compared to $2,094 (41.3% of revenues) for the three months ended March 31, 2009 due to changes in the product mix sold.
General and Administrative Expenses
All general and administrative expenses, as well as research and development expenses, are incurred through a contractual relationship with TGE that expired on February 25, 2010 and with Advanced Vibrations Technologies Inc. that commenced on February 25, 2010 and expires on July 31, 2010, pursuant to which they perform these services under administrative services agreements with us. These expenses were $4,500 in the three months ended March 31, 2010 and 2009. In the three months ended March 31, 2010, we had additional expenses consisting of legal expenses of $4,687 and accounting expenses of $14,749 related to being publicly held. In the three months ended March 31, 2009, we had additional expenses consisting of legal expenses of $485 and accounting expenses of $12,266 related to preparing us to become publicly held.
Interest Expense. Interest expense was $985 for both the three months ended March 31, 2010 and 2009.
Income Tax Provision
The Company had a potential tax provision benefit of approximately $9,000 and $10,800 for the three months ended March 31, 2010 and 2009, respectively, arising from losses generated during the aforementioned periods. The Company has fully reserved against these benefits due to the uncertainty of their realization.
Net Loss
For the reasons listed above, for the three months ended March 31, 2010 and 2009, we recorded net loss of $23,168 and $27,590, respectively, a decrease of our net loss of $4,422.
Basic and Diluted Loss per Share
The basic and diluted loss per share were <$0.01> and <$0.03> for the three months ended March 31, 2010 and 2009, respectively, for the reasons previously noted.
Liquidity and Capital Resources
Our auditors have rendered a going concern opinion. Because our revenues and cash flow have not increased enough to provide sufficient working capital, we needed to raise capital through the sale of our equity securities. We provided for our cash requirements in the first quarter of 2010 with the capital we raised from August 2009 to March 2010 through the sale of Common Stock in a private placement, yielding $72,000 in gross proceeds.
We plan to use the proceeds from this private placement to pay a portion of our outstanding payables, expand our promotion and marketing activities, including for product introduction, and provide working capital. If the proceeds from our private placement and cash flow from our operations are not sufficient to meet our working capital needs, we will need to raise additional capital through the sale of our debt securities. We have no commitments to obtain debt financing and there can be no assurance that we will be able to obtain the necessary funds or obtain them on terms favorable to us. Any future financing may be on terms that substantially dilute the ownership interests of present shareholders. If we are unable to raise sufficient additional capital as necessary, we may have to suspend or contract operations or cease operations entirely.
We do not anticipate that we will have any large capital requirements over the next twelve months. In addition, we have relationships with third parties who will manufacture small quantities of our products quickly and charge us the same lower prices as we would be charged for larger orders, particularly in the current economic environment. Accordingly, we believe we can continue to place smaller orders with a number of such manufacturers at favorable prices and will not have to allocate our working capital to increase our surplus inventory. We work with five manufacturers.
As of March 31, 2010, we had a working capital deficit of ($25,294) and long-term debt of $44,121.
Capital Commitments
We had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of March 31, 2010 and March 31, 2009.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses. The following is a discussion of what we feel is the most critical estimate that we must make when preparing our financial statements.
Recoverability of Inventory. We assume that our inventory can be sold for at least its carrying cost.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There are no such disagreements or changes.
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). This ASU codified consolidation guidance previously issued in June 2009 which applies to variable interest entities and affects the overall consolidation analysis under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. This standard is effective for fiscal years beginning after November 15, 2009. Our adoption of ASU 2009-17 on January 1, 2010, did not have an impact on our financial statements.
In December 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets (“ASU 2009-16”). This ASU codified guidance previously issued in June 2009 which amends existing derecognition guidance, eliminates the exemption from consolidation for qualifying special-purpose entities, and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. This standard is effective for fiscal years beginning after November 15, 2009, and applies to financial asset transfers occurring on or after the effective date. Our adoption of ASU 2009-16 on January 1, 2010, did not have an impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2010. This evaluation was carried out under the supervision and with the participation of our President, Chief Executive Officer and Chief Financial Officer, Paul Attaway. Based upon that evaluation, he has concluded that, as of March 31, 2010, our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2010 that have materially affected or are reasonably likely to materially affect such controls.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of five percent or more of our voting securities are adverse to us or have a material interest adverse to us.
Item 1A. Risk Factors.
A smaller reporting company is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On August 31, 2009, we commenced a private placement of shares of our common stock to “accredited investors,” as such term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (“Securities Act”), at a price of $0.25 per share. During the first quarter ended March 31, 2010, the Company has sold 128,000 shares, for gross proceeds of $32,000, under the private placement. Our officers and directors sold the common stock and we did not pay any commissions to them in connection with such sales. The shares were issued in reliance on the exemptions from registration set forth in Section 4(2) of the Securities Act.
Item 3. Defaults upon Senior Securities.
None.
Item 4. (Removed and Reserved.)
None.
Item 5. Other Information
None.
Item 6. Exhibits.
Exhibit Number | | Description of Exhibit |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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.
| | Aurios Inc. |
| | |
| Date: | May 17, 2010 |
| | |
| | By: | /s/ Paul Attaway |
| | | Paul Attaway |
| | Title: | President, Chief Executive Officer, Chief Financial Officer and Director |
