Washington, D.C. 20549
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.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
We are filing this Amendment No. 2 on Form 10-Q/A (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, originally filed with the Securities and Exchange Commission (“SEC”) on February 23, 2011, as amended by Amendment No. 1 on Form 10-Q/A filed with the SEC on March 7, 2011 (the “Amended Form 10-Q”), in order to restate Note 12 to the Company’s unaudited, consolidated financial statements as of and for the three-months ended September 30, 2010 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 Amended Form 10-Q that is further 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 Amended Form 10-Q. This Form 10-Q/A does not reflect events occurring after the filing of the Amended 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 Amended Form 10-Q and with our other filings made with the SEC subsequent to the filing of the Amended Form 10-Q, including any amendments to those filings.
Item 1. Financial Statements
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated, Unaudited)
NOTE 1 ORGANIZATION AND OPERATIONS
GENERAL
AuraSound, Inc. (the “Company”, “AuraSound”, “we”, “us”, or “our”) was originally established in 1987, and specializes in the design, manufacturing 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. The results of the three month period ended September 30, 2010 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 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 $523,676 as of September 30, 2010 and $63,690 as of June 30, 2010. The Company does not have any off balance sheet credit exposure related to its customers.
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2010 and June 30, 2010, the allowance for obsolescence and rework amounted to $171,500 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.
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIC AND DILUTED NET INCOME/(LOSS) PER SHARE
The basic net income (loss) per common share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income/(loss) per common share is computed similar to basic net income/(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 September 30, 2010, the Company has potentially dilutive warrant shares outstanding.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, 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” (Topic310). ASU2010-20 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 to reporting classifications of the current year periods.
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2010 the Company has an accumulated deficit of $37,803,339, negative working capital of $10,262,705 and has reported significant losses over the past several years. During the three month period ended September 30, 2010 the Company recorded a net profit of $35,452 compared to a net loss of $532,160 for the comparable prior year period and generated net cash provided by operating activities of $2,962,588 compared to a negative $70,046 for the comparable prior year period. The move toward profitability and positive cash flow is a directly result of the execution of new management’s post acquisition business plan to cut costs on all business lines, 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 become profitable or sustain profitability or positive cash flows from operations. As such, if the Company is unable to generate positive net income and is 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.
NOTE 4 ACQUISITION
On July 10, 2010, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with ASI Holdings, and ASI Holding’s wholly-owned subsidiary ASI Audio Technologies, LLC, an Arizona limited liability company (“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 consideration of the issuance to the two shareholders of ASI Holdings of an aggregate of 5,988,005 shares (the “ASI Transaction Shares”) of unregistered common stock of the Company (“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. HaraldWeisshaupt, a five (5) year warrant to purchase an aggregate of 3,000,000 shares of Common Stock of the Company (the “ASI Warrant Shares”) at an exercise price of $1.00 per share (the “ASI Warrant”).
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 GGEC, or an affiliate of GGEC, including, without limitation, GGEC America, Inc., a California corporation (“GGEC America”), obtains the license rights needed for the Company to manufacture and sell ASI Holding’s products to ASI Holding’s 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 to issue the Contingent Shares. As of December 31, 2010 the two contingencies requirements were successfully achieved and the Company has issued 5,389,204 shares of Common Stock to Sunny World and 250,000 shares of Common Stock have been issued to Faithful Aim, leaving a balance of 348,801shares of Common Stock valued, at $310,696 yet to be issued to Faithful Aim . See note 12.
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the fair values of the assets acquired and liabilities assumed related to the acquisition of ASI.
| | | | |
| | 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 assets acquired and 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 provides a reasonable basis for estimating the fair values of assets acquired and 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 respective acquisition 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 ASI, presented in aggregate, had been completed on July 1, 2010 and July 1, 2009.
�� | | For the three months-ended | |
| | September 30, 2010 | | | September 30, 2009 | |
Net sales | | $ | 13,564,464 | | | $ | 6,548,834 | |
| | | | | | | | |
Loss from operations | | | 273,188 | | | $ | (843,003 | ) |
| | | | | | | | |
Net loss | | $ | 251,847 | | | $ | (1,034,470 | ) |
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INVENTORIES
Inventories at September 30, 2010 and June 30, 2010 consisted of the following:
| | September 30, 2010 | | | June 30, 2010 | |
Raw materials | | $ | — | | | $ | 11,230 | |
Finished goods | | | 11,159,014 | | | | 719,107 | |
Inventory before provision | | | 11,159,014 | | | | 730,337 | |
Provision for obsolescence | | | (171,500 | ) | | | (193,139 | ) |
| | | | | | | | |
Inventory, net | | $ | 10,987,514 | | | $ | 537,198 | |
NOTE 5 PROPERTY, PLANT & EQUIPMENT
As of September 30, 2010 and June 30, 2010, property, plant and equipment consisted of the following:
| | September 30, 2010 | | | June 30, 2010 | |
Leasehold improvements | | $ | 22,108 | | | $ | — | |
Furniture and Fixtures | | | 37,726 | | | | — | |
Machinery and equipment | | | 36,281 | | | | 36,281 | |
Tooling | | | 105,193 | | | | 105,193 | |
Computer software and equipment | | | 17,726 | | | | 7,411 | |
Total property and equipment | | | 219,034 | | | | 148,885 | |
Accumulated depreciation | | | (80,724 | ) | | | (42,420 | ) |
Net value of property and equipment | | $ | 138,310 | | | $ | 106,465 | |
Depreciation expense was $5,967 and $4,152 as of September 30, 2010 and 2009, 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 | | | | (36,668 | ) | | $ | 2,163,332 | |
Non-compete agreement | | 3 | | | | | 1,600,000 | | | | (88,000 | ) | | | 1,512,000 | |
Trade name | | 10 | | | | | 700,000 | | | | (11,666 | ) | | | 688,334 | |
| | | | | | $ | 4,500,000 | | | $ | (136,334 | ) | | $ | 4,363,666 | |
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amortization expense for the 3-Month Period-ended September 30, 2010, and September 30, 2009 totaled $136,334 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 September 30, 2010 and June 30, 2010:
| | | | | | |
| | September 30, 2010 | | | June 30, 2010 | |
Accrued consulting | | $ | 172,537 | | | $ | 236,359 | |
Accrued interest | | | — | | | | 344,115 | |
Accrued payroll and other | | | 64,085 | | | | 219,570 | |
Total | | $ | 236,622 | | | $ | 800,044 | |
NOTE 8 NOTES PAYABLE
EXTINGUISHMENT OF DEBT
On July 10, 2010, the Company entered into and consummated a securities purchase agreement with GGEC America, and its parent, GGEC, the primary manufacturer of our speaker drivers and 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 SPA, 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 US $3,000,000 (the “GGEC Transaction”). Simultaneously, the Company entered into a debt extinguishment agreement, whereby GGEC America agreed to cancel $3,000,000 of notes payable and other liabilities for an aggregate purchase price of $3,000,000.
On July 31, 2010, the Company entered into and consummated a debt conversion agreement with InSeat Solutions, LLC (“InSeat”), a California limited liability company controlled by Arthur Liu, the Company’s former Chief Executive Officer and former Chief Financial Officer.. Pursuant to the Debt Conversion Agreement, AuraSound issued: (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 for the consideration of cancellation of $1,264,526 of notes payable and accrued interest of $232,317.
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RELATED PARTY NOTES
Notes payable to related party at September 30, 2010 and June 30, 2010 amounting to $-0- and $1,264,791, respectively consist of notes to an entity owned by our former Chief Executive Officer, Arthur Liu. The notes had various dates of maturity, all bear interest at 8% per annum, with principal and interest due on demand. Interest expense for the three month periods ended September 30, 2010 and 2009 amounted to $0 and $25,292, respectively.
NOTE 9 STOCKHOLDERS’ EQUITY
PREFERRED STOCK
The following table summarizes the Company’s preferred stock at September 30, 2010 and June 30, 2010:
Par value $0.01 | | | September 30, 2010 | | | June 30, 2010 | |
Authorized | | | 3,333,333 | | | 3,333,333 | |
Issued | | | — | | | — | |
Outstanding | | | — | | | — | |
COMMON STOCK
The following table summarizes the Company’s common stock at September 30, 2010 and June 30, 2010:
Par value $0.01 | | | September 30, 2010 | | | June 30, 2010 | |
Authorized | | | 16,666,667 | | | 16,666,667 | |
Issued | | | 11,504,835 | | | 4,678,662 | |
Outstanding | | | 11,504,835 | | | 4,678,662 | |
WARRANTS
The following table summarizes the activity for all stock warrants outstanding at September 30, 2010:
| | Warrants | | Exercise Price(s) | | Average Remaining Contractual Life | | | |
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, September 30, 2010 | | | 17,142,934 | | $ | 0.50 - $1.00 | | | 3.9 years | | $ | 20,540,084 | |
Exercisable, September 30, 2010 | | | 14,142,934 | | $ | 0.50 - $1.00 | | | 3.7 years | | $ | 17,540,084 | |
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 INCOME TAXES
The components of income tax expense for the three month periods ended September 30, 2010 and 2009 is as follows:
| | September 30, 2010 | | | September 30, 2009 | |
US Federal | | $ | 12,054 | | | $ | (180,934 | ) |
US State | | | 2,127 | | | | (31,930 | ) |
Change in valuation allowance | | | (14,181 | ) | | | 212,864 | |
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 September 30, 2010 and 2009:
| | September 30, 2010 | | | September 30, 2009 | |
Tax expense (credit) 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 September 30, 2010, and 2009:
| | September 30, 2010 | | June 30, 2010 | |
Accumulated net operating loss (NOL) | | $ | 12,000,830 | | $ | 12,015,011 | |
Valuation allowance | | | (12,000,830 | ) | | (12,015,011 | ) |
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.
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 the realizability of the related deferred tax asset, a reserve equal to the amount of deferred income taxes has been established at September 30, 2010. A provision for income taxes has not been provided in these financial statements due to the net loss. At September 30, 2010, the Company had net operating loss carry-forwards of approximately $28,436,512 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.
AURASOUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 MAJOR CUSTOMERS AND MAJOR VENDORS
There were three customers of the Company, which accounted for 85% of revenue for three month period ended September 30, 2010. At September 30, 2010 three customers accounted for aggregate receivables of $8,357,898. There was one vendor (who also is the major shareholder of the Company), which accounted for in excess of 90% of purchases of finished products and raw materials for three month period ended September 30, 2010. The aggregate payable due to this vendor was $27,399,133 as of September 30, 2010.
In this Form 10-Q, we are restating our unaudited, consolidated balance sheet, statement of operations and statement of cash flows as of and for the three-months ended September 30, 2010.
The Company determined that the purchase accounting related to it’s recent acquisition of the net assets and certain liabilities of ASI Holdings and ASI Holdings’ wholly-owned subsidiary, ASI Audio Technologies, LLC (collectively “ASI), and the ongoing recording of accounts payable was incorrect. In addition, the inventory valuation on the historical, pre-acquisition financial statements of the Company was overstated due to a valuation error in the affected financial statements.
Management has determined that the principal errors to the purchase accounting are primarily attributable to accounts payable and accrued expenses of ASI that were either unrecorded, recorded in the wrong period, or were not a liability assumed at the time of the acquisition, along with lesser adjustments to reserves on accounts receivable and inventories.
The table below shows the net changes between the financial statements as previously reported and as restated and describes the reasons for such changes.
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.