UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period endedSeptember 30, 2012

For the transition period from                    to                    

Commission File Number:000-53643

Aurios Inc.

(Exact name of registrant as specified in its charter)

7608 N. Shadow Mountain Rd.

Paradise Valley, AZ 85253

(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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes [X] 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.

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:

FORM 10-Q

AURIOS INC.

September 30, 2012

TABLE OF CONTENTS

AURIOS INC.

CONDENSED BALANCE SHEETS

The Accompanying Notes are an Integral

Part of the Condensed Financial Statements

AURIOS INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

The Accompanying Notes are an Integral

Part of the Condensed Financial Statements

AURIOS INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)

For the nine months ended September 30, 2012

(Unaudited)

The Accompanying Notes are an Integral

Part of the Condensed Financial Statements

AURIOS INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

The Accompanying Notes are an Integral

Part of the Condensed Financial Statements

AURIOS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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 (GAAP) 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 GAAP for complete financial statements and should be read in conjunction with our December 31, 2011 Annual Report filed on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP 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 September 30, 2012 and the results of our operations and cash flows for the periods presented. The December 31, 2011 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the nine months ended September 30, 2012 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 formed under the laws of the State of Arizona on August 7, 2001. Its principal business activity is the marketing of vibration and motion control technology to the audio/video markets. The Company’s sales occur throughout the United States.

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 affect 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. Significant estimates are used when accounting for stock-based compensation, as well as the recoverability of inventory, and the collectability of accounts receivable. These are discussed in the respective notes to the financial statements.

Revenue Recognition

The Company derives its revenues primarily from the sale of vibration and motion control devices through sales from 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. The Company incurred no advertising expense for the nine months ended September 30, 2012 and 2011.

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 CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (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 September 30, 2012 and December 31, 2011, 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. The Company regularly assesses inventory quantities on hand at the end of the calendar year and records provisions for excess and obsolete inventory based primarily on our estimated forecast of product demand. At September 30, 2012 and 2011, the provision for excess and obsolete inventory was nil. Inventories at September 30, 2012 were determined using a perpetual inventory system with periodic counts.

Deferred Income Taxes

Deferred income taxes are provided for 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.

Discount on Debt

During the year ended December 31, 2010, the Company issued convertible debt instruments together with detachable warrants. This resulted in a beneficial conversion feature and the value of the warrants, creating a discount on the debt. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the straight line method which approximates the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense.

In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

New Accounting Pronouncements

There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company’s financial statements.

AURIOS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Stock-Based Compensation

The Company recognizes stock-based compensation based on the fair value of the award on the date of grant. The fair value of option grants and warrants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model.

Earnings Per Share

The earnings per share accounting guidance provides for the calculation of basic and diluted 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 September 30, 2012 and 2011 warrants to purchase 247,489 shares of the Company’s common stock were not included in the determination of diluted loss per share, as they were antidilutive, and would decrease the loss per share.In addition, the Company had notes payable and related accrued interest as of September 30, 2012 and 2011 that were convertible into 266,457 and 255,678, respectively, shares of common stock, which also would have been anti-dilutive and have been excluded in the calculation of loss per share.

Fair Values of Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, deferred income, and short-term loans approximate their fair values because of the relatively short-term maturity of these instruments.

The Company has a note payable to a related party, TGE, in the amount of $44,121 as of September 30, 2012 and December 31, 2011, bearing interest at a rate of 8.25%. All outstanding principal and interest was due and payable on December 15, 2010. In December 2010, the note and accrued interest were extended from December 15, 2010 until January 15, 2012. In January 2012, the note and accrued interest were further extended from January 15, 2012 until January 15, 2013. As of September 30, 2012 and December 31, 2011, there was accrued interest in the amount of $15,589 and $13,818, respectively.

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 April 1, 2010, TGE assumed ownership from the Company of all parts and raw materials maintained in the inventory. The Company now maintains only a finished goods inventory. Total purchases from TGE for the nine months ended September 30, 2012 and 2011 were $6,090 and $1,750, respectively.

On December 15, 2010, the Company issued convertible promissory notes in the amount of $10,000 each to Ira J. Gaines, Paul Attaway, and Christian J. Hoffmann III, all of whom are principal shareholders of the Company, for a total of $30,000 that they loaned to the Company. Each note bears interest at a rate of 6.0% per annum with principal and interest due on December 14, 2011. In December 2011, the maturity date of the notes and, along with accrued interest, were extended to December 14, 2012. The notes and any accrued interest are convertible into common stock of the Company at a rate of $0.30 per share. As of September 30, 2012 and December 31, 2011, there was accrued interest on the notes of $3,333 and $1,909, respectively. In addition, each note holder was issued 33,333 common stock warrants for a total of 99,999 warrants. The warrants vested immediately, have an exercise price of $0.30 per share and have a ten-year term expiring December 14, 2020. As a result of the warrants and the conversion feature, a discount was recorded on the debt in the amount of $15,000. The discount is amortized over the one-year term of the debt. During the nine months ended September 30, 2012 and 2011, the Company recorded interest expense related to the discount of $0 and $11,250, respectively. As of September 30, 2012 and December 31, 2011, there was $0 of non-amortized discount netted against the carrying amount of the debt.

AURIOS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

During the nine months ended September 30, 2012 and 2011, the Company paid $13,583 and $13,066, respectively, in legal services to a law firm in which Christian J. Hoffmann, III principal stockholder of Aurios is a partner. He also performed or supervised the legal services rendered by his law firm. As of September 30, 2012 and December 31, 2011, the Company owed the law firm $58,760 and $50,178, respectively. In addition, on December 31, 2010, the Company issued a note to such firm representing $44,248 in outstanding invoices that the Company owed. The note bears interest at a rate of 3.0% per annum, with all outstanding principal and interest due on January 15, 2012, or earlier upon the occurrence of certain events. In January 2012, the maturity date of the note was extended to January 14, 2013. The note is convertible into shares of the Company’s common stock at a rate of $0.30 per share. As of September 30, 2012 and December 31, 2011, there was accrued interest on the note of $2,356 and $1,346, respectively. The law firm was also issued 147,490 common stock warrants, which vested immediately, have an exercise price of $0.30 per share, and have a ten-year term expiring December 30, 2020. As a result of the warrants and the conversion feature, a discount was recorded on the debt in the amount of $22,124. The discount is amortized over the one-year term of the debt. During the nine months ended September 30, 2012 and 2011, the Company recorded interest expense related to the discount of $1,702 and $15,318, respectively. As of September 30, 2012 and December 31, 2011, there was $0 and $1,702, respectively, of non-amortized discount netted against the carrying amount of the debt.

On August 8, 2011, Ira J. Gaines, Paul Attaway and Christian J. Hoffmann III, all of whom are principal shareholders of the Company, each advanced $4,000, for a total of $12,000 to the Company. Each advance bore interest at a rate of 6.0% with principal and interest due on December 15, 2011. On November 14, 2011 all principal and accrued interest was repaid by the Company to the principal shareholders.

On August 14, 2011, Ira J. Gaines, Paul Attaway and Christian J. Hoffmann III, respectively all of whom are principal shareholders of the Company, advanced a total of $6,820 to the Company. Each advance bears interest at a rate of 6.0% per annum, with principal and interest due on February 14, 2013. As of September 30, 2012 and December 31, 2011, there was accrued interest on the notes of nil.

A schedule of minimum future principal payments on the above notes payable is as follows:

Accounts Receivable consists of:

AURIOS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The Company maintains cash accounts at a financial institution. At September 30, 2012 and December 31, 2011, the Company had no uninsured cash and cash equivalents.

For the nine months ended September 30, 2012 and 2011, the Company made 83% and 83% of its sales to three and five customers, respectively. As of September 30, 2012 and December 31, 2011 receivables from these customers were $430 and $2,250, respectively.

On November 10, 2011 the Company entered into an agreement with FastLane Retail Systems, Inc. (“FastLane”) under which it agreed to negotiate only with FastLane regarding a possible transaction until January 10, 2012. FastLane paid the Company $16,500 in consideration for entering into this agreement. The payment was non-refundable except if the Company violated its terms. The agreement expired on January 10, 2012 with no definitive agreement between the parties and the income was recognized at that time as other income.

On February 3, 2012 the Company entered into another agreement with FastLane under which it agreed to negotiate only with FastLane regarding a possible transaction. FastLane paid the Company $10,000 in consideration for entering into this agreement, which was to expire on March 30, 2012. The payment was non-refundable except if the Company violated its terms. The agreement expired on March 30, 2012 with no definitive agreement between the parties and the income was recognized at that time as other income.

On March 27, 2012 the Company entered into another agreement with FastLane under which it agreed to negotiate only with FastLane regarding a possible transaction. FastLane paid the Company $15,000 in consideration for entering into this agreement, which expired on May 1, 2012. The payment was non-refundable except if the Company violated its terms. The agreement expired on May 1, 2012 with no definitive agreement between the parties and the income was recognized at that time as other income.

On April 30, 2012 the Company entered into another agreement with FastLane under which it agreed to negotiate only with FastLane regarding a possible transaction. FastLane paid the Company $9,150 in consideration for entering into this agreement, which was to expire on May 30, 2012. The payment is non-refundable except if the Company violates its terms. The agreement expired on May 30, 2012 with no definitive agreement between the parties and the income was recognized at that time as other income.

Stock Options:

The Company, under its 2007 Stock Option Plan, is authorized to grant options for up to 625,000 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 September 30, 2012 no stock options had been granted.

AURIOS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Warrants:

The fair value of warrant grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for all grants: 5 year expected life of warrants using the “plain vanilla method”, which management believes approximates the actual expected term, risk-free interest rates of 2.01% - 2.11%, volatility of approximately 32.4%, and a 0% dividend yield.

On December 15, 2010, the Company granted warrants to purchase shares of common stock at $0.30 per share to Ira Gaines, Paul Attaway, and Christian Hoffmann III, respectively all of whom are principal shareholders of the Company, each were issued 33,333 common stock warrants for a total of 99,999 total warrants. The warrants vested immediately, have an exercise price of $0.30 per share and have a ten-year term expiring December 14, 2020. The Company valued the warrants at $0.10 per warrant using the Black-Scholes option pricing model.

On December 31, 2010, the Company granted 147,490 warrants to purchase shares of common stock at $0.30 per share to the law firm of Quarles & Brady LLP. The warrants vested immediately, have an exercise price of $0.30 per share and have a ten-year term expiring December 30, 2020. The Company valued the warrants at $0.10 per warrant using the Black-Scholes option pricing model.

The provisions for income tax expense consist of the following:

AURIOS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The Company’s deferred tax asset consists of the following:

As of September 30, 2012 and December 31, 2011, the Company had net operating loss carryforwards of approximately $434,000 and $432,000, respectively. The loss carryforwards, unless utilized, will expire from 2027 through 2032.

Our federal and state tax returns are subject to changes upon examination. For federal income tax purposes, years 2008 through 2012 are open for examination and for state income tax purposes the years 2007 through 2012 are open for examination.

The Company’s policy is to classify any interest and penalties to income taxes in the financial statements.

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. As such, the Company’s independent registered public accounting firm has expressed an uncertainty about the Company’s ability to continue as a going concern in their opinion attached to our audited financial statements for the year ended December 31, 2011. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The Company has no expansion plans that would require significant infusions of capital into its operations; however, it expects that it will need additional working capital in the next twelve months if it does not generate positive cash flow from operations. No assurances can be given that the Company will be able to raise such additional capital, when needed or at all, or that such capital, if available, will be on terms acceptable to the Company. If the Company is unable to raise additional funds, it could be required to either substantially reduce or terminate its 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 differing 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 independent registered public accounting firm 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 favorable 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 cost of production; (viii) our ability to protect our intellectual property through patents and other intellectual property protection, as well as keep our AVT License, as defined below, in effect; (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 continue to comply with the Sarbanes-Oxley Act of 2002; (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 were formed in August 2001 by our former parent, TGE. Our corporate offices are located at 7608 N. Shadow Mountain Blvd., Paradise Valley, AZ 85253 and our telephone number is (602) 321-1313.

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 are the Classic MIB, the PRO MIB, the Isotone MIB, the Series 100 Component Shelf, a shelf product, and Pivot Points, a spike mount product.

Our vibration isolation products produce superior sound quality by sharpening, not softening, the sound. AVT holds the patents respecting our products in the United States and Taiwan. AVT has granted us a non-exclusive world-wide license to sell the products under the patents (“AVT License”). The AVT License will expire on December 31, 2012 unless the parties mutually agree to an extension. We pay AVT a royalty of 5% of our net sales under the license agreement. We outsource the manufacture of our products to several qualified machine shops in the Phoenix metropolitan area. On March 26, 2010, TGE assigned its federally registered trademark respecting the “Aurios” name to us in consideration of $100.

For the Three Months Ended September 30, 2012 and 2011

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 September 30, 2012 and 2011 were $566 and $6,178, respectively. Revenues declined for the three months ended September 30, 2012 due to less demand from our distributors in the quarter.

Most of our sales are made through audio equipment distributors, with the balance being direct retail sales. For the three months ended September 30, 2012, we had sales of $566 to a dealer in Hong Kong named Non Stop Audio Company. For the three months ended September 30, 2011, 52%, 28% and 14% of sales were made through distributors, MWon Sang Sa Co, Absolute Hi End, and Non Stop Audio Company, 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 September 30, 2012 was $642 (113% of revenues) compared to $3,660 (59.2% of revenues) for the three months ended September 30, 2011 because we sold fewer units and the prices of those units were marked down from prior period levels.

Gross Margin

Gross margin for the three months ended September 30, 2012 totaled <$76> (<13%> of revenues) compared to $2,518 (40.8% of revenues) for the three months ended September 30, 2011 because the prices of the units sold were marked down from prior period levels.

Other Income

We had $339 of other income for the three months ended September 30, 2012 and no other income for the three months ended September 30, 2011.

General and Administrative Expenses

In the three months ended September 30, 2012, we had general and administrative expenses consisting of legal expenses of $0 and accounting expenses of $6,927 related to being publicly held and for certain corporate matters. In the three months ended September 30, 2011, we had general and administrative expenses consisting of legal expenses of $1,264 and accounting expenses of $3,254 related to being publicly held.

Interest Expense

Interest expense was $1,783 and $10,691 for the three months ended September 30, 2012 and 2011, respectively. The decrease was primarily related to interest expense from the issuance of convertible debt, common stock purchase warrants and a beneficial conversion feature on debt entered into in the year ended December 31, 2010 and expensed primarily in 2011.

Income Tax Provision

The Company had a potential tax provision benefit of approximately $4,200 and $6,400 for the three months ended September 30, 2012 and 2011, 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 September 30, 2012 and 2011, the Company recorded a net loss of $10,589 and $16,455, respectively, a decrease in its net loss of $5,866.

Basic and Diluted Loss per Share

The basic and diluted loss per share was <$0.00> for the three months ended September 30, 2012. The basic and diluted loss per share was <$0.00> for the three months ended September 30, 2011, for the reasons previously noted.

For the Nine Months Ended September 30, 2012 and 2011

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 nine months ended September 30, 2012 and 2011 were $8,907 and $15,727, respectively. Revenues decreased primarily due to less demand from our distributors in 2012.

Most of our sales are made through audio equipment distributors, with the balance being direct retail sales. For the nine months ended September 30, 2012, 27%, 31%, and 25% of sales were made through distributors, Music Direct, Non Stop Audio Co., and Absolute Hi End, respectively. For the nine months ended September 30, 2011, 23%, 20%, 18%, 11% and 11% of sales were made through distributors, Music Direct, Won Sang Sa Co., Roksan Trading Company, Absolute Hi End, and RAM Technology, 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 nine months ended September 30, 2012 totaled $6,792 (76.3% of revenues) compared to $7,115 (45.2% of revenues) for the nine months ended September 30, 2011. The cost of sales for the nine months ended September 30, 2012 was lower primarily due to a decrease in units sold and in the prices of such units. The cost of sales as a percentage of revenues for the periods in 2012 compared to 2011 increased primarily due to a decrease in the prices of the units sold in 2012.

Gross Margin

Gross margin for the nine months ended September 30, 2012 totaled $2,115 (23.7% of revenues) compared to $8,612 (54.8% of revenues) for the nine months ended September 30, 2011. The percentage decrease in gross margin was due primarily to lower unit sales prices.

Other Income

Other income for the nine months ended September 30, 2012 totaled $50,311 and related to four agreements we entered into with FastLane Retail Systems, Inc. providing for exclusivity in negotiations between the parties for a possible transaction. We had no other income for the nine months ended September 30, 2011.

General and Administrative Expenses

In the nine months ended September 30, 2012, we had general and administrative expenses consisting of legal expenses of $13,583 and accounting expenses of $29,341 related to being publicly held. In the nine months ended September 30, 2011, we had general and administrative expenses consisting of legal expenses of $13,066 and accounting expenses of $31,974 related to being publicly held.

Interest Expense

Interest expense was $6,907 and $31,804 for the nine months ended September 30, 2012 and 2011, respectively. The decrease was primarily related to interest expense from the issuance of convertible debt and common stock purchase warrants and a beneficial conversion feature on debt entered into in the year ended December 31, 2010 and expensed primarily in 2011.

Income Tax Provision

The Company had a potential tax provision benefit of approximately $900 and $29,200 for the nine months ended September 30, 2012 and 2011, respectively, arising from losses generated during the aforementioned periods. The Company has fully reserved against its benefits from net operating losses due to the uncertainty of their realization.

Net Loss

For the reasons listed above, for the nine months ended September 30, 2012 and 2011, the Company recorded net loss of ($2,171) and ($74,898), respectively, a decrease in its net loss of $72,727.

Basic and Diluted Loss per Share

The basic and diluted loss per share was <$0.00> and <$0.02> for the nine months ended September 30, 2012 and 2011, respectively, for the reasons previously noted.

Liquidity and Capital Resources

Our independent registered public accounting firm has rendered a going concern opinion. We provided for our cash requirements in 2010 and 2011 and into 2012 through the issuance of equity and debt, largely from capital from our three principal shareholders, as well as the cash from our other income. During the third quarter of 2012 and 2011 our three principal shareholders loaned us $6,820 and $12,000, respectively. We intend to obtain the working capital that we will require to operate for the next twelve months through the issuance of debt or equity securities, deferral of payment of certain accounts payable and, if we are able to, by generating operating income through increased sales. We can make no assurances that we will be successful in this regard. If our revenues do not increase and our cash flow is not positive or not sufficient to meet our working capital needs, we will need to seek to raise capital through the sale of our equity or debt securities. We have no commitments for obtaining such financing and there can be no assurance that we could 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. As such, the Company’s independent registered public accounting firm has expressed an uncertainty about the Company’s ability to continue as a going concern in their opinion attached to our audited financial statements for the year ended December 31, 2011. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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 through our connection with TGE 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 at favorable prices and will not have to allocate our working capital to the building of surplus inventory.

As of September 30, 2012, we had a working capital deficit of ($230,642).

Capital Commitments

We had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements as of September 30, 2012 and December 31, 2011.

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.

Stock Based Compensation.The Company uses the Black-Scholes option pricing model to estimate fair value of warrant grants.

New Accounting Pronouncements

There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company’s financial statements.

 A smaller reporting company is not required to provide the information required by this Item.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities and Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2012. 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 September 30, 2012, our disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed by us in this report was recorded, processed, summarized and communicated to our management as appropriate and within the time periods specified in SEC rules and forms.

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 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting, as such term is defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act, during the quarter ended September 30, 2012 that have materially affected or are reasonably likely to materially affect such controls.

PART II – OTHER INFORMATION

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.

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.