10-Q 1 v173937_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

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

For the quarterly period ended December 31, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to .

Commission file number 000-51543

AURASOUND, INC.

(Exact name of Registrant as specified in its charter)

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

11839 East Smith Avenue
Santa Fe Springs, California		90670
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (562) 821-0275

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No (This registrant is not yet subject to this Regulation.)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of February12, 2010, the issuer had 4,678,662 shares of its common stock, $.01 par value issued and outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Financial statements are provided as follows:

	Page
	Number
AuraSound, Inc. and Subsidiary Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - (Unaudited) as of December 31, 2009 and June 30, 2009	3

Consolidated Statements of Operations - (Unaudited) For the three months and six months ended December 31, 2009 and 2008	4

Consolidated Statements of Cash Flows - (Unaudited) For the six months ended December 31, 2009 and 2008	5

Notes to Consolidated Financial Statements - (Unaudited)	6

AuraSound, Inc.

Consolidated Balance Sheets

(In whole dollars)

(Unaudited)

	December 31, 2009			June 30, 2009
Assets
Current Assets
Cash and cash equivalents	$	301,035		$	321,455
Trade accounts receivable- net		2,651,563			928,471
Inventories - net		264,004			164,994
Other assets		-			2,291
Total current assets		3,216,602			1,417,211

Property and equipment, net		112,222			89,834

Total Assets	$	3,328,824		$	1,507,045

Liabilities and Stockholders' Deficit
Current Liabilites:
Accounts payable	$	4,950,925		$	2,374,747
Accrued expenses		690,515			451,302
Due affiliate		470,508			412,293
Due to officer		25,000			25,000
Notes payable		1,253,558			1,253,558
Note payable-related party		1,264,526			1,264,791
Total Liabilities		8,655,032			5,781,691

Commitments and Contingencies		-			-

Stockholder's Deficit
Preferred Stock, $.01 par value, 3,333,333 shares authorized and none issued and outstanding as of June 30, 2009 and December 31, 2009.		-			-
Common Stock, $.01 par value, 16,666,667 shares authorized, 4,678,662 shares issued and outstanding as of June 30, 2009 and December 31, 2009.		280,720			280,720
Additional paid-in-capital		31,044,476			31,044,476
Accumulated deficit		(36,651,404	)		(35,599,842	)
Total Stockholder's Deficit		(5,326,208	)		(4,274,646	)

Total Liabilities and Stockholders' Deficit	$	3,328,824		$	1,507,045

See accompanying notes to unaudited consolidated financial statements.

AuraSound, Inc.

Consolidated Statement of Operations

(In whole dollars, except share data)

(Unaudited)

	Three months ended December 31,						Six months ended December 31,
	2009			2008			2009			2008
Net sales	$	1,784,316		$	103,890		$	3,063,216		$	315,519
Cost of sales		1,738,338			80,201			2,949,691			274,356
Gross profit (loss)		45,978			23,689			113,525			41,163

Research and development expenses		106,540			195,306			232,368			484,401
Selling, general and administrative expenses		414,747			333,581			844,530			790,432
Income (loss) from operations		(475,309	)		(505,198	)		(963,373	)		(1,233,670	)
Interest expense (net)		44,093			24,384			88,189			63,365
Loss before income tax expense		(519,402	)		(529,582	)		(1,051,562	)		(1,297,035	)

Income tax expense – Note 8		-			-			-			-
Net loss	$	(519,402	)	$	(529,582	)	$	(1,051,562	)	$	(1,297,035	)
Loss per common share:
Basic and diluted	$	(0.11	)	$	(0.11	)	$	(0.22	)	$	(0.28	)
Weighted average shares used in per share calculation:
Basic and diluted		4,678,662			4,678,662			4,678,662			4,678,662

The weighted average number of shares used to compute basic and diluted loss per share

is the same since the effect of dilutive securities is anti-dilutive.

See accompanying notes to unaudited consolidated financial statements

AuraSound, Inc.

Consolidated Statement of Cash Flows

(In whole dollars, except per share data)

(Unaudited)

	Six months ended December 31,
	2009			2008
Cash Flows from Operating activities:
Net loss	$	(1,051,562	)	$	(1,297,035	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		8,303			7,820
Changes in operating assets and liabilities
Accounts receivable, net		(1,723,092	)		191,865
Inventory		(99,010	)		31,163
Accounts payable		2,576,177			186,197
Accrued expenses		239,213			113,514
Due affiliate		58,215			185,249
Other		2,291			99,672
Net cash used in operating activities		10,535			(481,555	)
Cash Flows from Investing activities:
Purchase of property and equipment		(30,690	)		(371)
Cash Flows from Financing activities:
Repayments of amounts advanced under line of credit		-			(2,145,477	)
Proceeds of restricted cash		-			2,000,000
Increase in related party notes payable		-			149,982
Repayments of related party debt		(265)			(25,587	)
Due to Officer		-			25,000
Increase in loans payable		-			600,421
Net cash provided by financing activities		(265)			604,339
Net increase (decrease) in cash and cash equivalents		(20,420	)		122,413
Cash and cash equivalents, beginning of period		321,455			72,559
Cash and cash equivalents, end of period	$	301,035		$	194,972
Supplemental disclosure of cash flow information:
Cash paid for interest	$	-		$	7,508
Cash paid for income taxes	$	-		$	-

See accompanying notes to unaudited consolidated financial statements

AuraSound, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND OPERATIONS

General

AuraSound, Inc. (the Company or we/us/our) was incorporated as Hemcure, Inc. under the laws of the state of Minnesota in 1986. On September 8, 2006, the Company was reorganized by re-domiciling to the state of Nevada as Hemcure, Inc. pursuant to a merger with Hemcure, Inc., a Nevada corporation, and the adoption of Nevada Articles of Incorporation and By-laws. On June 7, 2007, we acquired AuraSound, Inc. ("AuraSound"). Aura Sound, a California corporation, was founded on July 28, 1999 to engage in the development, commercialization, and sales of audio products, sound systems, and audio components, using electromagnetic technology. On February 12, 2008 the Company changed its name from Hemcure, Inc. to AuraSound, Inc.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by AuraSound, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), Form 10-Q 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 Form 10-K. The results of the six months ended December 31, 2009 are not necessarily indicative of the results to be expected for the full year ending June 30, 2010.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of AuraSound, Inc. (a Nevada corporation) and its wholly owned subsidiary, AuraSound, Inc. (a California corporation). All material inter-company accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and disclosures made in the accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Accounts Receivable

The Company maintains an allowance for uncollectible accounts receivable to estimate the risk of extending credit to customers and distributors. The allowance is estimated based on the customer's or distributor's compliance with our credit terms, the financial condition of the customer or distributor and collection history where applicable. Additional allowances could be required if the financial condition of our customers or distributors were to be impaired beyond our estimates. As of December 31, 2009 and June 30, 2009 the allowance for doubtful accounts amounted to $63,690 and $59,040 respectively.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. As of December 31, 2009 and June 30, 2009, the allowance for obsolescence amounted to $186,736 and $286,853 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:

Buildings		40 years
Machinery and equipment		5 to 10 years
Furniture and fixtures		7 years

Improvements to leased property are amortized over the lesser of the life of the lease or the life of the improvements. Amortization expense on assets acquired under capital leases is included with depreciation and amortization expense on owned assets. Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.

As of December 31, 2009 and June 30, 2009, property, plant and equipment consisted of the following:

	December 31, 2009			June 30, 2009

Machinery and equipment and tooling	$	36,281		$	6,802
Tooling		105,193			105,193
Computer equipment		2,713			1,501
Accumulated depreciation		(31,965	)		(23,662	)
Total	$	112,222		$	89,834

Depreciation expenses were $8,304 and $7,820 for the six month periods ended December 31, 2009 and 2008.

The Company utilizes a facility leased by a related party.

Valuation of Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144 (ASC 360). Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from our normal business activities. We place our cash in what we believe to be credit-worthy financial institutions. We have a diversified customer base. We control credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Revenue Recognition

Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

AuraSound has significant income tax net operating losses carried forward from prior years. Due to the change in ownership of more than fifty percent, the amount of NOL which may be used in any one year will be subject to a restriction under section 382 of the Internal Revenue Code. Due to the uncertainty of the realizability of the related deferred tax asset, a reserve equal to the amount of deferred income taxes has been established at December 31, 2009.

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. Our management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed

Basic and diluted net loss per share

The basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. At December 31, 2009, the Company had no potentially dilutive warrant shares outstanding.

New Accounting Pronouncements

In June 2009, the FASB issued SFASB No.167 (ASC 810), Consolidation of Variable Interest Entities , which changes the consolidation rules as they relate to variable interest entities. Specifically, the new standard makes significant changes to the model for determining who should consolidate a variable interest entity, and also addresses how often this assessment should be performed. This standard will be effective for us on July 1, 2010. We have adopted ASC 810 and there has been no material impact on our consolidated financial statements..

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. Specifically, when a quoted price in an active market for the identical liability is not available, the new standard requires that the fair value of a liability be measured using one or more of the valuation techniques that should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. In addition, an entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. This standard will be effective for us on October 1, 2009. We do not expect the adoption will have a material impact on our consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue Recognition, to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective beginning July 1, 2010. Earlier application is permitted. The Company is currently evaluating both the timing and the impact of the pending adoption of the ASU on its consolidated financial statements.

Reclassifications:

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

NOTE 3 - INVENTORIES

Inventories at December 31, 2009 and June 30, 2009 consisted of the following:

	December 31, 2009			June 30, 2009
Raw materials	$	12,728		$	13,568
Finished goods		438,012			438,279
Provision for obsolescence		(186,736	)		(286,853	)
Total	$	264,004		$	164,994

NOTE 4- ACCRUED EXPENSES

Accrued expenses consisted of the following as of December 31, 2009 and June 30, 2009:

	December 31, 2009		June 30, 2009
Accrued consulting	$	236,359	$	236,359
Accrued interest		255,927		167,738
Accrued payroll and others		198,229		47,205
Total	$	690,515	$	451,302

NOTE 5 - NOTES PAYABLE

On October 6, 2008, one of our vendors, GGEC, entered into a non-binding letter of intent pursuant to which GGEC may acquire a 55% interest in AuraSound, Inc. During the evaluation period, GGEC agreed to fund up to $150,000 per month for current operating costs until the transaction is either consummated or terminated. As of December 31, 2009, GGEC had advanced $1,253,558 under the terms of that agreement. Such advances bear interest at 6% per annum, are secured by all the assets of AuraSound, Inc. and are payable in full plus accrued interest upon the earlier of the termination of the agreement or the closing of the transaction contemplated by the letter of intent. As of December 31, 2009, GGEC had obtained approvals to proceed with the transaction from the Chinese government, had completed their due diligence review of AuraSound, Inc. and the Company had initiated the process of completing the conditions precedent to an effective closing which includes appropriate approvals and filings as specified in the transaction documents.

NOTE 6- RELATED PARTY AND COMMITMENT

Notes payable to related party at December 31, 2009 and June 30, 2009 amounting to $1,264,526 and $1,264,791 respectively consist of notes to an entity owned by our Chief Executive Officer. These notes are of various dates and all bear interest at 8% per annum, with principal and interest due on demand. Interest expense for the six month period ended December 31, 2009 and December 31, 2008 amounted to $50,592 and $49,409 respectively.

Until October 3, 2009 the Company paid $20,000 per month to an entity owned by our Chief Executive Officer, Mr. Arthur Liu, for services provided such as accounting, shipping and receiving and general administrative. The Company also paid an average of $6,237 per month to the same entity for rent as it shares the offices, test laboratories and warehouse facilities with the related entity. The rent allocation was 40% of the rent payable by the related entity to the landlord. From October 1, 2009 through December 31, 2009, the Company paid an agreed upon amount of $5,836 for its share of the offices, test laboratories and warehouse and the $20,000 per month service charge was discontinued because the Company was providing its own administrative and accounting. The annual rent commitment to the landlord is as follows:

Year ended	Amount
June 30, 2010	$	82,205
June 30, 2011	$	84,671
June 30, 2012	$	87,211

The lease will expire on July 31, 2013. The Company is not a party to the lease.

As of December 31, 2009 and June 30, 2009, the total amount of $470,508 and $412,293 were due to the affiliate for such charges respectively. The amount is payable on demand and does not bear interest.

As of December 31, 2009, a total amount of $25,000 was due to our Chief Executive Officer. The amount is payable on demand and does not bear interest

NOTE 7- STOCKHOLDERS' EQUITY

Common Stock

At December 31, 2009, after the 1 for 6 reverse split which was effective November 17, 2009, the Company was authorized to issue 3,333,333 shares of $.01 par value preferred stock and 16,666,667 shares of $.01 par value common stock. As of December 31, 2009 and June 30, 2009 there were no preferred shares issued and outstanding. Reflecting the 1 for 6 reverse split, there were 4,678,662 common shares issued and outstanding as of December 31, 2009 and June 30, 2009.

NOTE 8- WARRANTS

As of December 31, 2009, the Company reserved 3,001,945 shares of common stock for issuance in respect of warrants.

Following is a summary of the status of warrants outstanding at December 31, 2009:

		Outstanding						Exercisable
Price(*)		Shares		Life (Months)		Weighted Average Exercise Price		Shares		Intrinsic Value
$	4.80		40,833		60	$	0.07		40,833	$	-
$	6.00		533,333		60	$	1.07		533,333		-
$	9.00		2,427,779		60	$	7.28		2,427,779		-
			3,001,945			$	8.41		3,001,945	$	-

(*) Pursuant to waiver and release agreements entered into by seventeen of our warrant holders on November 3, 2009 and the terms of the Letter of Intent with GGEC America, Inc., the exercise price of all currently outstanding warrants will be adjusted to $.50 at the closing of the GGEC transaction.

The following table summarizes the activity for all stock warrants outstanding at December 31, 2009:

	Shares		Exercise Price		Remaining Life	Aggregate Intrinsic Value
Outstanding June 30, 2009		3,001,945	$	8.41	3.01 years	$	-
Granted		-		-			-
Exercised		-		-			-
Cancelled		-		-			-

Outstanding December 31, 2009		3,001,945	$	8.41	2.50 years	$	-

NOTE 9- INCOME TAXES

The Company did not record any income tax expense due to net losses during the periods ended December 31, 2009 and 2008. 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 December 31, 2009 and 2008:

	2009			2008
Expected tax benefit		34	%		34	%
State income taxes, net of federal benefit		6			6
Changes in valuation allowance		(40	)		(40	)
Total		-	%		-	%

The following table summarizes the significant components of the Company's deferred tax asset at December 31, 2009, and 2008:

	2009			2008
Deferred tax asset:	$	11,580,571		$	10,647,311
Valuation allowance		(11,580,571	)		(10,647,311	)

Net deferred tax asset	$	—		$	—

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

A provision for income taxes has not been provided in these financial statements due to the net losses. At December 31, 2009, the Company had net operating loss carry-forwards of approximately $27,409,090, which expire through December 31, 2029. NOLs relating to the period before June 7, 2007 will be subject to a restriction as to the amount which may be used in any one year under section 382 of the Internal Revenue Code.

NOTE 10- GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the three and six month periods ended December 31, 2009, the Company incurred losses of $519,402 and $1,051,562 respectively. The Company had an accumulated deficit of $36,651,404 as of December 31, 2009. The Company has never been profitable and there can be no assurances that it will ever be profitable or that it will survive as a public company.

If the Company is unable to generate profits and unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to retain its current short term financing and ultimately to generate sufficient cash flow to meet its obligations on a timely basis in order to obtain additional financing, and ultimately to attain profitability.

On October 6, 2008, the Company entered into a non-binding letter of intent with GGEC pursuant to which GGEC may acquire a 55% interest in AuraSound, Inc. During the evaluation period, GGEC agreed to fund up to $150,000 per month for current operating costs until the transaction is either consummated or terminated. The process of obtaining regulatory approval from the government of China was completed and approval has been received. GGEC is in the final stages of its due diligence investigation, however if for any reason GGEC determines not to proceed with the contemplated transaction, the Company would not have sufficient funding to continue in business and would be forced to curtail operations or find alternative funding.

NOTE 11- MAJOR CUSTOMERS AND MAJOR VENDORS

There were two major customers of the Company during the six month period ended December 31, 2009 which accounted for 88% of the Company’s sales. The receivables due from these customers as of December 31, 2009 totaled $2,517,294. During the six month period ended December 31, 2008, there were two major customers of the Company which accounted for 48% of the Company’s sales. The receivables due from these customers as of December 31, 2008 totaled $47,435.

During the current six month period ended December 31, 2009, the Company had one major vendor, GGEC, which accounted for 100% of the Company’s purchases of finished products. As of December 31, 2009, the Company owed $4,943,960 to GGEC for tools, jigs, molds, raw materials and finished products relating to products which had been manufactured for the Company. As of December 31, 2009, GGEC had also advanced $1,253,558 to the Company (see Note 5).

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance. You can identify forward-looking statements because they are not historical in nature. In particular, those statements that use terminology such as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “intends,” “plans,” “projected,” “predicts,” “potential” or “continue” or the negative of these or similar terms are forward-looking statements. In evaluating these forward-looking statements, you should consider various factors, including those described in this report. These and other factors may cause our actual results to differ materially from any forward-looking statements.

The following is a listing of important risks, uncertainties and contingencies that could cause our actual results, performances or achievements to be materially different from the forward-looking statements included in this report.

Our ability to finance our operations on acceptable terms;

Our ability to retain members of our management team and our employees;

The success of our research and development activities, the development of viable commercial products, and the speed with which product launches and sales contracts may be achieved;

Our ability to develop and expand our sales, marketing and distribution capabilities;

Our ability to adapt to or upgrade our technologies and products as the markets in which we compete evolve;

Our ability to offer pricing for products which is acceptable to customers; and

Competition that exists presently or may arise in the future.

Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

We are a southern California based developer, manufacturer and marketer of premium audio products. Since our business began in 1987, we have focused on the development of innovative and revolutionary magnetic speaker motor designs to deliver high-end audio products to the OEM, home and professional audio markets. We have developed a proprietary portfolio of unique audio speaker technologies as a result of this emphasis on research and development, which we believe has led to strong brand recognition among audiophiles, sound engineers, electronics manufacturers and premium audio manufacturers.

From a product development standpoint, our company has focused its research and development efforts during the last two years on the development of new product lines for the micro-audio market. Specifically, we have developed miniaturized speakers that our tests indicate will deliver sound quality to devices such as laptop computers, flat-panel TVs, display screens, and mobile phones which we believe to be superior to the speakers currently utilized by such devices. Our micro-audio products have been tested and approved by NEC, Quanta, Hewlett Packard and Acer. NEC and Quanta have included our speakers into certain of their new product design specifications. We believe that the market for micro-audio products is significant and we expect continued rapid growth as the consumer appetite for devices such as mobile telephones, computers, televisions and personal digital assistants continues to grow. As of the date of this report, we had a backlog of approximately $1,409,467 in orders.

Our sales are made primarily on an OEM basis to manufacturers of high end speakers and sound systems. Historically, approximately 51% of our net sales were made to customers outside the United States. We believe that international sales will continue to represent a significant portion of our revenues.

Problems with our Suppliers

We originally utilized Grandford Holdings Ltd. (“Grandford”) as the primary manufacturer of our audio products. This relationship was established over 5 years ago. It was based upon the ability of the general manager of Grandford, David Liu, who is the son of Arthur Liu, our Chief Executive Officer, a director and a major shareholder, to provide quality products and timely deliveries to our customers. Historically, Grandford successfully supplied approximately 96% of our finished products without significant problems. As part of our plan for significant expansion and the introduction of microaudio products, we decided to continue using Grandford as our supplier.

Our OEM business is based upon verbal commitments which are subject to our ability to continue to meet customer/product specifications, quality standards and delivery schedules. The customers initiate periodic (usually monthly) purchase orders in increments designed to meet their production schedules. Prior to June 2007, the annual sales volumes of products manufactured by Grandford ranged between $2 million to $3 million. However, we had obtained verbal commitments from major OEM customers such as Amtran ($5.8 million), Softbank ($9.6 million), NEC ($4.5 million) and Quanta ($12.5 million) among others, which far exceeded Grandford’s historical monthly production volumes. In June 2007 we obtained the financing necessary to begin initial production of our microaudio products and to expand production of our other products. Grandford assured us that it could ramp-up operations to meet our requirements.

In order to ramp-up production at Grandford’s manufacturing facility, we established a temporary prepayment practice which was intended to transition to thirty day terms over a six month period. We made significant advance payments totaling $4,228,038 to Grandford for tools, jigs, molds and raw materials that were needed to produce our products. However, by September 2007 we had received significant complaints regarding late deliveries and it became apparent to us that Grandford did not have the infrastructure to support the required level of production. We attempted to resolve these issues, but we were ultimately unsuccessful and terminated that entity as our primary supplier. During this period, we also established alternative vendors, one of which was Zylux Acoustic Corporation (“Zylux”). Zylux began producing our microaudio products during October 2007.

Zylux made significant commitments to our Chief Executive Officer regarding its manufacturing processes and quality control procedures and had sufficient capacity to meet our customer demands. Accordingly, with appropriate controls and procedures in place, we began directing all of our production to Zylux. However, after only two months we alerted Zylux to the following problems:

Delivery schedules were not being met, with some models being months late. In one case, only 15,000 pieces of a 40,000 piece order were delivered. In another case, the customer prepaid for 10,500 pieces and received 2,000 pieces. These delivery problems caused a material disruption in the production schedules of our customers. In an attempt to bridge these delays and pacify our customers, we paid to air freight shipments from the manufacturing facility.

Commercially acceptable quality was never achieved and Zylux was unable to timely correct the deficiencies in the manufacturing process. Reject rates as high as 40% were experienced by our customers with an overall reject rate of about 30%.

The adverse impact on our reputation was significant. Furthermore, at least one of our customers had to add employees to sort through delivered products and perform quality checks on each piece. This caused an additional disruption in the production schedules which had already been disrupted by the late deliveries. As a result of the delivery and quality issues:

One customer excluded us from bidding on a newly designed speaker with expected volumes in excess of 50 million pieces

Another customer billed us $18,000 for additional employee costs incurred and put our company on probation whereby any future quality problems would result in termination of our supplier status.

Actual orders from impacted customers were significantly reduced from the number of orders that were promised while customers wait to see if we can supply microspeakers of acceptable quality.

Amtran and Softbank terminated their relationship with us completely and Quanta and NEC significantly reduced the volume of their orders and deferred designing our products into the early 2008 models pending our ability to prove we could deliver quality products in a timely manner. In addition, various other customers deferred certification of our products relating to early 2008 models pending our ability to prove we could fulfill their requirements. The approval window for many consumer products is June, July and August. The products are then manufactured in September and October and delivered to retail stores in November and December. If our samples are not delivered, tested and approved during the approval window, we will not be approved as a supplier for the new models. Some industries, such as notebook computers and cell phones, introduce new models on more random cycles but the result is the same – if our samples are not delivered, tested and approved during the window period, we will not be approved as a supplier for that model. When we were experiencing problems with Grandford and Zylux, we missed many approval windows.

Most of the customers who experienced quality problems requested that the defective product be replaced with quality products which met their inspection criteria. Accordingly, we replaced about $640,000 of product at no-charge, the accounting for which resulted in no change to revenue but an additional cost for the replacement product. Only about $14,000 of product was returned for credit. This amount was low because customers need the speakers which are designed into their finished product.

In order to save the company, we were required to search out another manufacturer, again pay the cost of certification, again delay deliveries and walk through starting up new production lines at a new facility.

Our Chief Executive Officer contacted Guoguang Electric Co. Ltd (“GGEC”), a company that was already producing speakers for Bose and Harmin Kardin among others, in an effort to place future production with a supplier with an established record of producing quality speakers for major OEM customers. GGEC has been able to satisfactorily meet the requirements of our customers and we are attempting to rebuild the relationships we lost.

General

Net sales are comprised of gross sales less returns and cash discounts. Our operating results are seasonal, with a greater percentage of net sales being earned in the third and fourth quarters of our fiscal year due to the fall and winter selling seasons.

Cost of goods sold consists primarily of material costs, direct labor, direct overhead, inbound freight and duty costs, warranty costs, sales commission and a reserve for inventory obsolescence.

Research and development costs consist primarily of costs related to new product commercialization including product research, development and testing.

Our selling, general and administrative expenses consist primarily of non-marketing payroll and related costs and corporate infrastructure costs.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The reported financial results and disclosures were determined using the significant accounting policies, practices and estimates described in Note 2 to our consolidated financial statements.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2009 compared to the Three Months Ended December 31, 2008

REVENUE

Revenue increased by $1,680,426 or 1618% compared to the same prior year period, from $103,890 to $1,784,316. The increase in sales for the current period has been the result of efforts by the Company and GGEC to re-establish relationships damaged by the problems incurred by the Company during 2007 and 2008 with two previous suppliers, Grandford Holdings and Zylux. Please see our discussion above titled “Problems with our Suppliers”. While the prior year results reflected the problems of the time, the current period results reflect significant progress in re-establishing the Company with prior customers and responding to new opportunities with new customers. The largest increase has come in applications which utilize our newly redesigned mini-speakers such as notebook computers. Speakers which utilize our NRT Technology have also experienced a significant increase in demand due to a focused marketing effort and our ability to provide quality products on a timely basis with our current supplier, GGEC.

GROSS PROFIT (LOSS)

Cost of sales for the three months ended December 31, 2009 was $1,738,337 as compared to cost of sales of $80,201 for the three months ended December 31, 2008, which resulted in a gross profit for the current quarter of $45,979, compared to $23,689 during the prior year period. With the emphasis on re-establishing credibility with our OEM customers, additional time and cost has been incurred to insure that quality standards are met. The result has been to defer significant profitability improvements while insuring the establishment of a disciplined and consistent quality assurance program and timely deliveries of finished products to our customers. A significant reduction in the reject rates and improved vendor acceptance of our products has resulted in an improved backlog which had increased to approximately $1,308,937 as of December 31, 2009.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for the quarter ended December 31, 2009 totaled $106,540, a reduction of $88,766 or 45% from the $195,306 incurred for the same prior year period. This reduction is the result of a cost reduction program which resulted in a reduction of salaries and related expenses. Research and development costs consist primarily of salaries and related expenses associated with designing and testing new speaker designs for new applications and redesigning old speaker designs for new customers and applications. While a short-term cost reduction program was deemed appropriate under the circumstances, development of new and customer specific products is the life line of the Company and as such the Company expects to continue to incur research and development costs for the foreseeable future.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the quarter ended December 31, 2009 increased by $81,166 or 24% to $414,747 as compared to $333,581 for the quarter ended December 31, 2008. The increase was primarily the result of increased legal fees and administrative costs. These expenses were partially offset by the cost reduction program implemented during the period which resulted in the reduction of about 40% of the work force in the US and a reduction of about 20% in the workforce in Taiwan and China. We expect our costs of administration will continue to be significant due to the costs of regulatory compliance as a public company and our current efforts to take over administrative and accounting activities previously performed by a related company. In addition, we expect incremental costs related to volumetric increases in the manufacturing and sale of audio speakers and other equipment.

INTEREST EXPENSE

Net interest expense totaled $44,093 in the quarter ended December 31, 2009 compared with net interest expense of $24,384 for the quarter ended December 31, 2008. Current interest charges relate primarily to the loans from GGEC which totaled $1,253,558 as of December 31, 2009 and to notes payable to InSeat Solutions LLC, a company owned by our President and Chief Executive Officer, which amounted to $1,264,526 as of December 31, 2009.

INCOME TAXES

We have significant income tax net operating loss carry forwards; however, due to the uncertainty of the realizability of the deferred tax asset, a reserve equal to the amount of deferred tax benefit has been established as of December 31, 2009 and December 31, 2008. Accordingly, no income tax benefit has been reflected for either period.

NET LOSS

As a result of the above, there was a net loss for the three month period ended December 31, 2009 of $519,402 compared to a net loss of $529,582 during the same period in the prior year.

Six Months Ended December 31, 2009 compared to the Six Months Ended December 31, 2008

REVENUE

Revenue increased by $2,747,697 or 871% compared to the same prior year period, from $315,519 to $3,063,216. The increase in sales for the current period has been the result of efforts by the Company and GGEC to re-establish relationships damaged by the problems incurred by the Company during 2007 and 2008 with two previous suppliers, Grandford Holdings and Zylux. Please see our discussion above titled “Problems with our Suppliers”. While the prior year results reflected the problems of the time, the current period results reflect significant progress in re-establishing the Company with prior customers and responding to new opportunities with new customers. The largest increase has come in applications which utilize our newly redesigned mini-speakers such as notebook computers. Speakers which utilize our NRT Technology have also experienced a significant increase in demand due to a focused marketing effort and our ability to provide quality products on a timely basis with our current supplier, GGEC.

GROSS PROFIT (LOSS)

Cost of sales for the six months ended December 31, 2009 was $2,949,691 as compared to cost of sales of $274,356 for the three months ended December 31, 2008, which resulted in a gross profit for the current quarter of $113,525, compared to $41,163 during the prior year period. With the emphasis on re-establishing credibility with our OEM customers, additional time and cost has been incurred to insure that quality standards are met. The result has been to defer significant profitability improvements while insuring the establishment of a disciplined and consistent quality assurance program and timely deliveries of finished products to our customers. A significant reduction in the reject rates and improved vendor acceptance of our products has resulted in an improved backlog which had increased to approximately $1,308,937 as of December 31, 2009.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for the six months ended December 31, 2009 totaled $232,368, a reduction of $252,033 or 52% from the $484,401 incurred for the same prior year period. This reduction is the result of a cost reduction program which resulted in a reduction of salaries and related expenses. Research and development costs consist primarily of salaries and related expenses associated with designing and testing new speaker designs for new applications and redesigning old speaker designs for new customers and applications. While a short-term cost reduction program was deemed appropriate under the circumstances, development of new and customer specific products is the life line of the Company and as such the Company expects to continue to incur research and development costs for the foreseeable future.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the six months ended December 31, 2009 increased by $54,098 or 7% to $844,530 as compared to $790,432 for the six months ended December 31, 2008. The increase was primarily the result of increased legal fees and administrative costs. These expenses were partially offset by the cost reduction program implemented during the period which resulted in the reduction of about 40% of the work force in the US and a reduction of about 20% in the workforce in Taiwan and China. We expect our costs of administration will continue to be significant due to the costs of regulatory compliance as a public company and our current efforts to take over administrative and accounting activities previously performed by a related company. In addition, we expect incremental costs related to volumetric increases in the manufacturing and sale of audio speakers and other equipment.

INTEREST EXPENSE

Net interest expense totaled $88,189 for the six months ended December 31, 2009 compared with net interest expense of $63,365 for the six months ended December 31, 2008. Current interest charges relate primarily to the loans from GGEC which totaled $1,253,558 as of December 31, 2009 and to notes payable to InSeat Solutions LLC, a company owned by our President and Chief Executive Officer, which amounted to $1,264,526 as of December 31, 2009.

INCOME TAXES

NET LOSS

As a result of the above, there was a net loss for the six month period ended December 31, 2009 of $1,051,562 compared to a net loss of $1,297,035 during the same period in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2009, our current liabilities exceeded our current assets by $5,438,430 compared to a deficit of $4,364,480 as of June 30, 2009. As previously discussed, during the current year we have worked closely with GGEC in focusing our efforts on transitioning relationships with existing customers and establishing relationships with new customers in addition to insuring a disciplined quality assurance program both of which we believe are necessary for us to grow as a company and meet the demands of our customers. Progress in gaining re-acceptance has been gaining momentum as reflected in the increased sales revenue and a backlog which had improved to about $1,308,937 as of December 31, 2009. The JIT inventory program for Quanta has been successful for both Quanta and the Company by providing longer runs and more efficient production scheduling while not resulting in a significant increase in inventory. Production for the 2010 models began during late 2009 and the beginning of 2010. Indications are that the Company has made significant gains in acceptance and trust with key customers. We expect to see a continuing increase in our backlog and believe that we have now established a solid foundation for the expected growth of the Company.

Net cash generated by operating activities during the six months ended December 31, 2009 was $10,535 as compared to net cash used of $481,555 during the same period in the prior year. This was due primarily to an increase in accounts payable (mainly to GGEC) and accrued expenses mostly offset by an increase in accounts receivable and net loss from operations.

Cash used in investing activities for the six months ending December 31, 2009 was $30,692. Cash used in the period was primarily used for the purchase of testing equipment. Cash used in investing activities for the six months ending December 31, 2008 was $371.

Cash used in financing activities for the six month period ended December 31, 2009was $265. Cash provided by financing activities during the period ended December 31, 2008 was $604,339. The net cash provided during the prior year period was primarily the result of advances from GGEC. Also reflected in the prior year period was the repayment of the credit facility with the proceeds of the restricted cash deposit.

We had net operating loss carry-forwards of approximately $27,409,090 as of December 31, 2009, which will expire in various amounts through the year 2029. Based upon historical operating results, management has determined that it cannot conclude that it is more likely than not that the deferred tax is realizable. Accordingly, a 100% valuation reserve allowance has been provided against the deferred tax benefit asset.

In September 2007, we executed a $10.0 million one-year accounts receivable credit facility and a one year $2.0 million fixed deposit credit facility with Bank SinoPac in order to insure resource availability. On September 25, 2008, we repaid our credit facility in full. We are currently in discussions with Bank SinoPac for the establishment of a new credit facility.

On October 8, 2008, GGEC entered into a non-binding letter of intent directed at a possible transaction whereby GGEC would acquire a 55% interest in AuraSound, Inc. During the evaluation period, GGEC agreed to fund up to $150,000 per month for current operating costs until the transaction is either consummated or terminated.

While the closing of the GGEC transaction has taken longer than originally anticipated, GGEC has continued to provide both financial and marketing support to the Company. This support has had a significant and positive effect on our operations, with net sales for the quarter just ended increasing from $103,890 for the quarter ended December 31, 2008 to $1,784,316. In addition to advancing $1,264,526 in cash to the Company, GGEC has provided extended terms on amounts due to GGEC as our sole manufacturing source. This trade debt totaled $4,943,960 as of December 31, 2009. Current expectations are that the closing of the GGEC transaction will occur during our fourth quarter.

We continue to believe that our long-term prognosis with GGEC as a financial partner is very positive, however, there can be no guarantees that the transaction with GGEC will be consummated or that the Company will be able to attract another financial partner or arrange for alternative financing in the absence of a transaction with GGEC. Management believes that it will continue to need financing to produce and expand its product lines during the next twelve months. If GGEC does not provide this financing or if the financing provided by GGEC is not adequate for our needs, the Company will attempt to obtain additional financing through loans, the sale of our securities or some combination of both. If the Company is unable to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

INFLATION

Management believes that inflation generally causes an increase in sales prices with an offsetting unfavorable effect on the cost of products sold and other operating expenses. Accordingly, with the possible impact on interest rates, management believes that inflation will have no significant effect on our results of operations or financial condition.

OFF-BALANCE SHEET ARRANGEMENTS

We currently do not have any off-balance sheet arrangements or financing activities with special purpose entities.

GOING CONCERN STATUS

If the Company is unable to generate profits and unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

ITEM 3.

CONTROLS AND PROCEDURES

Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer/President, who is also our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, the Chief Executive Officer/President/Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

During the period covered by this report, there was no significant change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Not applicable

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5.

OTHER INFORMATION

On December 15, 2009, AuraSound, Inc. and GGEC America, Inc. entered into a “Reinstatement of and First Amendment to Services, Operations and Management Agreement” (the “Amendment”). Pursuant to the Amendment, the original Services, Operations and Management Agreement (the “Original Agreement”) dated October 8, 2008 was reinstated and the term was extended. The term of the Original Agreement was defined as the earlier of a date 6 months from October 8, 2008 or the completion of the acquisition by GGEC. The Amendment redefined the term of the Original Agreement as the earlier of June 30, 2010 or the consummation of the acquisition by GGEC.

ITEM 6.

EXHIBITS

2.1	Amended and Restated Agreement and Plan of Share Exchange dated June 7, 2007 among AuraSound, Inc. and the shareholders of AuraSound, Inc. on the one hand, and Hemcure, Inc., Bartly J. Loethen and Synergy Business Consulting LLC, on the other hand (1)
3.1(i) 3.1(ii)	Articles of Incorporation (2) Certificate of Change to Articles of Incorporation (3)
3.2	By-Laws (1)
10.1	Reinstatement of and First Amendment to Services, Operations and Management Agreement by and between AuraSound, Inc. and GGEC America, Inc.*
31.1	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
31.2	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
32	Certification Pursuant to Section 1350 of Title 18 of the United States*

* Filed herewith.

(1) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2007 as file number 000-51543.

(2) Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the period ended June 30, 2000 filed with the Securities and Exchange Commission on July 6, 2005 as file number 000-51543.

(3) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2009 as file number 000-51543.

SIGNATURES

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

	AURASOUND, INC.

Dated: February 12, 2010	By:	/s/ Arthur Liu
		Arthur Liu, President and Chief
		Executive Officer

	By:	/s/ Arthur Liu
		Arthur Liu
		Principal Accounting and
		Finance Officer