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Approximate
date of proposed sale to the public: As soon as practicable after this
registration statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
Prospectus
Subject
To Completion, Dated November 27,
2007
Hemcure,
Inc.
30,848,805
Shares of Common Stock
This
prospectus relates to the resale of 30,848,805 shares of our common stock,
par
value $0.01 per share, by the selling shareholders named on pages 28 through
31.
These shares include up to 16,100,000 shares of our common stock issuable upon
the exercise of warrants. We will not receive any proceeds from the sale of
the
shares made by the selling shareholders but we may receive proceeds from the
exercise of the warrants. Any such proceeds will be used by us for working
capital and general corporate purposes. We will pay the expenses of registering
these shares.
Our
common stock is traded and quoted on the National Association of Securities
Dealers OTC Bulletin Board under the trading symbol HMCU. On November 20, 2007,
the last reported sale price of our common stock was $.65 per share. As of
November 20, 2007 we had 28,071,972 shares of common stock
outstanding.
You
should read this prospectus and any amendment or supplement hereto together
with
additional information described under the heading “Where You Can Find
Additional Information.”
Our
executive offices are located at 11839 East Smith Avenue, Santa Fe Springs,
California90670 and our telephone number is (562) 447-1780.
An
investment in the shares of our common stock being offered by this prospectus
involves a high degree of risk. You should read the “Risk Factors” section
beginning on page 5 before you decide to purchase any shares of our common
stock.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of the prospectus. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is _______, 2007
TABLE
OF CONTENTS
Page
Prospectus
Summary
1
Risk
Factors
5
Note
on Forward-Looking Statements
13
Business
14
Use
of Proceeds
23
Capitalization
23
Selling
Shareholders
24
Plan
of Distribution
29
Directors,
Executive Officers, Promoters and Control Persons
31
Security
Ownership of Certain Beneficial Owners and Management
33
Management’s
Discussion and Analysis and Plan of Operation
35
Certain
Relationships and Related Party Transactions
45
Description
of Securities
46
Market
For Common Equity and Related Stockholder Matters
49
Shares
Eligible for Future Sale
49
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
50
Experts
50
Legal
Matters
51
Where
You Can Find Additional Information
51
Index
To Financial Statements
F-1
You
should rely only upon the information contained in this prospectus and the
registration statement of which this prospectus is a part. We have not
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should
not
rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. We have not sought the consent of the sources to refer to their
reports in this prospectus.
i
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus.
This summary does not contain all the information that you should consider
before investing in our common stock. You should carefully read the entire
prospectus, including the “Risk Factors” section, the financial statements and
the notes to the financial statements, before making an investment decision.
In
this prospectus and any amendment or supplement hereto, unless otherwise
indicated, the terms “Hemcure, Inc.”, the “Company”, “we”, “us”, and “our” refer
and relate to Hemcure, Inc., a Nevada corporation, and it’s wholly-owned
subsidiary, AuraSound, Inc, a California corporation.
Our
Business
We
are
engaged, through our wholly-owned subsidiary, AuraSound, Inc., a California
corporation (“AuraSound”), in the development, manufacturing and marketing of
premium audio products. AuraSound has, since its inception in 1987, invested
in
the development of innovative audio technologies for use in ultra high end
home
and professional audio products. We specialize in the production of high sound
pressure level (“SPL”), bass-rich, low distortion compact acoustic transducers
(speakers). We recently expanded our product line to the micro-audio market.
Specifically, we have developed and are currently marketing undersized speakers
to deliver sound quality to devices such as laptops, flat-panel televisions,
mobile phones and other types of electronic displays that we believe is far
superior to the current sound quality found in these devices. We are currently
delivering our micro-audio products to Quanta and have received commitments
for
future delivery of our micro-audio products to Quanta, Compal, NEC, Toshiba,
Sharp, Hitachi, JBL, Dell, Gateway, Hewlett Packard, Mando, and Acer although
these commitments are not legally binding and we cannot assure you that we
will
complete sales to these companies.
Our
History and Recent Developments
Hemcure,
Inc. was incorporated under the laws of the state of Minnesota in 1986 to
provide administrative and marketing services to physicians and physician
groups. It ceased operations in April 1991 and liquidated its assets to pay
off
remaining trade debt. We were involuntarily dissolved by the State of Minnesota
effective July 29, 1996 and reinstated in good standing on February 16,2005.
In
January 2005, Robert Geller, John Ferris and Clifton Sherwood resigned as our
officers and directors. The remaining Board members, consisting of Allen
Goldstone and Sanford Schwartz, appointed two new directors, Michael Friess
and
John Venette and appointed Michael Friess as President and CEO and John Venette
as Secretary, Treasurer and Chief Financial Officer. We then opted to become
a
"blank check" company and to further engage in any lawful corporate undertaking,
including selected mergers and acquisitions.
On
April
7 2005, Allen Goldstone, Sanford Schwartz, Michael Friess and Dave Lilja
contributed $16,000 to us as paid-in capital to pay for our operating costs.
In
consideration for the capital contributions, we issued to these individuals
an
aggregate of 7,000,000 shares of our common stock.
Effective
May 26, 2006, four of our existing shareholders sold 7,218,750 shares or
approximately 73.2% (calculated prior to our reverse stock split) of our common
stock to Synergy Business Consulting, LLC, resulting in a change in control
of
our company, with John Venette and Sanford Schwartz resigning their respective
officer and director positions and the remaining director, Michael Friess,
appointing Bartly J. Loethen, principal of Synergy Business Consulting, LLC,
as
a director. On May 30, 2006, Mr. Friess resigned his officer and director
positions and Mr. Loethen was appointed our President, CEO, Secretary, Treasurer
and Chief Financial Officer.
On
September 8, 2006, we reorganized by re-domiciling to the state of Nevada
pursuant to a merger with Hemcure, Inc., a Nevada corporation. The
reorganization included a reverse stock split pursuant to which 17.5 shares
of
our common stock were exchanged for one share of common stock. The reverse
split
was effective September 22, 2006 and resulted in 563,695 shares outstanding.
We
also adopted Nevada Articles of Incorporation and by-laws and Mr. Loethen
continued as our sole officer and director. Since September 22, 2006, HMCU
has
been our trading symbol on the OTCBB.
1
On
June7, 2007, we consummated a share exchange and acquired 100% of the issued and
outstanding capital stock of AuraSound pursuant to an Amended and Restated
Agreement and Plan of Share Exchange. Pursuant to the agreement, we issued
to
Arthur Liu, our current Chief Executive Officer and AuraSound’s sole
shareholder, 11,505,305 shares of our common stock, constituting approximately
43.6% of our issued and outstanding common stock in exchange for all of the
issued and outstanding capital stock of AuraSound, and all outstanding warrants
of AuraSound were exchanged for our warrants to purchase an aggregate of
3,200,000 shares of our common stock at an exercise price of $1.00 per share.
Mr. Loethen appointed new officers effective June 7, 2007 and directors to
take
office upon his resignation, effective July 7, 2007. See “Directors, Executive
Officers, Promoters and Control Persons” for the names and biographies of our
new officers and directors.
Recent
Financings
Concurrent
with the share exchange, on June 7, 2007 we completed the initial closing of
a
private placement to 16 investors pursuant to which we have issued a total
of
12,900,000 units. Each unit consisted of one share of our common stock and
a
five-year non-callable warrant to purchase one share of our common stock at
an
exercise price of $1.50 per share. The units were issued at $1.00 per unit,
yielding net proceeds to us, after expenses and placement agent fees, of
approximately $11,543,000. Pursuant to contractual obligations to our investors
in the private placement, we are registering the shares of common stock, and
shares of common stock underlying the warrants. Investors who purchased at
least
$3,000,000 of the units were given the option to purchase a number of additional
units equal to 50% of the dollar amount invested by the investor at a price
of
$1.35 per unit for a period of 12 months from the initial closing date of the
private placement. We are required to reserve 8,888,888 shares of our common
stock to cover the possible exercise of the options to purchase the
units.
GP
Group,
LLC, an NASD member firm and an affiliate of Gemini Partners, Inc., acted as
exclusive placement agent with respect to our private placement and received
cash commissions of 8% of the gross proceeds of the private placement and
$73,167.52 for all costs, fees and expenses it incurred in connection with
the
private placement.
In
contemplation of the June 7, 2007 share exchange and private placement,
AuraSound obtained the following short-term bridge loans aggregating $2,450,000,
which loans were repaid in full with the proceeds from the private
placement:
·
$750,000
from Mapleridge Insurance Services pursuant to a Loan Agreement dated
December 29, 2006. Mapleridge Insurance Services received a five-year
warrant to purchase 750,000 shares of our common stock at an exercise
price of $1.00 per share in conjunction with this loan
transaction.
·
$500,000
from Westrec Properties, Inc. & Affiliated Companies 401(k) Plan
(“Westrec Properties”) pursuant to a Loan Agreement dated January 29,2007. In exchange for this loan and for the cancellation of a warrant
issued by AuraSound to GP Group, LLC which was assigned to Westrec
Properties.on January 29, 2007, Westrec Properties received a five-year
warrant to purchase 750,000 shares of our common stock at an exercise
price of $1.00 per share.
·
$500,000
from Apex Investment Fund, Ltd. pursuant to a Loan Agreement dated
February 5, 2007. Apex Investment Fund, Ltd. received a five-year
warrant
to purchase 750,000 shares of our common stock at an exercise price
of
$1.00 per share in accordance with this loan
transaction.
·
$500,000
from Clearview Partners, LLC pursuant to a Loan Agreement dated April2,2007. Clearview Partners, LLC received a five-year warrant to purchase
750,000 shares of our common stock at an exercise price of $1.00
per share
in conjunction with this loan
transaction.
2
·
$200,000
from YKA Partners, Ltd. pursuant to a Loan Agreement dated February14,2007. YKA Partners, Ltd. received a five-year warrant to purchase
200,000
shares of our common stock at an exercise price of $1.00 per share
in
conjunction with this loan
transaction.
Our
executive offices are located at 11839 East Smith Avenue, Santa Fe Springs,
California90670 and our telephone number there is (562) 447-1780. We also
maintain a website at www.aurasound.com
.
Information included on our website is not a part of this
prospectus.
Up
to 30,848,805 shares of common stock, including up to 16,100,000
shares of
common stock issuable upon the exercise of warrants, which warrants
have
an exercise price ranging from $1.00 to $1.50 per
share.
Proceeds
The
selling shareholders will receive the proceeds from the sale of shares.
We
will not receive any of the proceeds from the sale of shares offered
by
this prospectus. We may, however, receive proceeds upon the exercise
of
the warrants which, if all such warrants are exercised in full, would
be
$22,550,000, except to the extent such warrants are exercised on
a
cashless basis. Proceeds, if any, received from the exercise of warrants
will be used for working capital and general corporate purposes
.
Risk
Factors
See
“Risk Factors” for a discussion of factors you should carefully consider
before deciding to invest in shares of our common
stock.
The
total number of outstanding shares of common stock above
excludes
·
14,566,667
shares of our common stock issuable upon the exercise of warrants
at an exercise price of $1.50 per share;
·
3,200,000
shares of our common stock issuable upon exercise of warrants at
an
exercise price of $1.00 per share;
·
245,000
shares of our common stock issuable upon exercise of warrants at
an
exercise price of $.80 per share;
·
8,888,888
shares of our common stock underlying options to purchase additional
units
at a price of $1.35 per unit to qualifying investors in our private
placement that initially closed on June 7,2007.
3
SUMMARY
HISTORICAL AND PROFORMA FINANCIAL DATA
The
following tables set forth our summary historical financial information for
the
fiscal years ended June 30, 2006 and 2007 and for the three months ended
September 30, 2006 and 2007. Our summary unaudited pro forma condensed financial
information for the year ended June 30, 2007 is presented as if the acquisition
of AuraSound, Inc. had occurred on July 1, 2006 and 2005.
The
summary historical financial information for the fiscal years ended June 30,2006 and 2007 was derived from our audited financial statements included
elsewhere in this prospectus. Our summary historical financial information
for
the three months ended September 30, 2006 and 2007 were derived from the
unaudited financial statements included elsewhere in this prospectus. The
unaudited financial statements reflect, in the opinion of management, all
adjustments necessary for the fair presentation of the financial condition
and
the results of operations for such periods. Operating results for the three
months ended September 30, 2007 are not necessarily indicative of the results
that may be expected for the entire year ending June 30, 2008.
The
summary unaudited pro forma condensed financial information combines our results
for the year ended June 30, 2007 and the results of AuraSound, Inc. for the
years ended June 30, 2007 and 2006. The summary unaudited pro forma condensed
information is provided for informational purposes only and is not necessarily
indicative of the results of operations that would have been reported had the
acquisition actually been effected on the dates indicated or of the expected
results of operations in the future.
The
summary historical financial information and summary unaudited pro forma
condensed financial information should be read in conjunction with, and are
qualified in their entirety by reference to, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our financial
statements and related notes included elsewhere in this prospectus.
(1)
Pro-forma consolidated results of operations have been prepared as if the
acquisition of AuraSound, Inc. had occurred on July 1, 2006 and
2005.
(2)
Net
income per share is based on: (i) an assumed market price of $1.00; (ii)
26,405,305 shares issued and outstanding; (iii) exercise of 245,000 warrants
at
$.80 per share. Does not include: 16,100,000 shares underlying warrants
or
8,888,888 shares underlying options to purchase additional units consisting
of
common stock and warrants.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties described below before you purchase any
of
our common stock. These risks and uncertainties are not the only ones we face.
Unknown additional risks and uncertainties, or ones that we currently consider
immaterial, may also impair our business operations. If any of these risks
or
uncertainties actually occur, our business, financial condition or results
of
operations could be materially adversely affected. In this event you could
lose
all or part of your investment.
RISKS
RELATING TO OUR BUSINESS
We
had a net loss of $3,809,260 for our last fiscal year, a net loss of $33,209
for
the prior fiscal year and a net loss of $1,969,288 for the three months ended
September 30, 2007. We have never been profitable and we may not be profitable
in the future. If we do not become profitable, the value of your investment
could be adversely affected or you could lose your
investment.
Our
independent auditor has noted in its report concerning our financial statements
as of June 30, 2007, our fiscal year end, that we have incurred substantial
losses and had negative cash flow in operating activities for the last two
fiscal years, which, along with our accumulated deficit of $6,570,108, raises
substantial doubt about our ability to continue as a going concern.
We
sustained a net loss of $3,809,260 for the fiscal year ended June 30, 2007,
a
net loss of $33,209 for the fiscal year ended June 30, 2006 and a net loss
of
$1,969,288 for the three months ended September 30, 2007. We cannot assure
you
that we will generate sufficient cash flow to meet our obligations or achieve
operating profits in the future. If we do not become profitable, the value
of
your investment could be adversely affected or you could lose your
investment.
We
experience variability in quarterly operating results because our sales increase
during the fall and winter. Because of this, our quarterly operating results
will not provide you with a reliable indicator of our future operating
results.
Our
operating results tend to vary from quarter to quarter because our sales
increase during the fall and winter selling seasons. Revenue in each quarter
is
substantially dependent on orders received within that quarter. Conversely,
our
expenditures are based on investment plans and estimates of future revenues.
We
may, therefore, be unable to quickly reduce spending if revenues decline in
a
given quarter. As a result, operating results for such quarters would be
adversely impaired. Results of operations for any one quarter are not
necessarily indicative of results for any future period. Other factors which
may
cause quarterly results to fluctuate or to be adversely impacted
include:
·
increased
competition in the micro-audio product
market;
5
·
timing
of new product announcements;
·
product
releases and pricing changes by us or our competitors;
·
market
acceptance or delays in the introduction of new
products;
·
production
constraints;
·
the
timing of significant orders;
·
customers’
budgets; and
·
foreign
currency exchange rates.
Because
our quarterly operating results are unpredictable, they will not provide you
with a reliable indicator of our future operating results.
We
will need to raise additional capital in order to implement our long-term
business plan. If we are unable to raise capital as and when we need it we
could
be forced to curtail or alter our long-term growth strategy or delay needed
capital expenditures. This could adversely affect our business and results
of
operations.
Our
ability to implement our long-term strategy, which is to expand our customer
base to include additional OEM electronics manufacturers in existing product
categories and to expand our product line to include micro-audio products
designed for additional applications such as mobile phones and PDAs, largely
depends on our access to capital. To implement our long-term strategy, we plan
to make ongoing expenditures for the expansion and improvement of our micro
speaker product lines and the promotion of our products with manufacturers
of
computers, cell phones, home entertainment systems and iPods. We may also wish
to make expenditures to acquire other businesses which provide similar products
or products which can be marketed to our existing customer base.
To date,
we have financed our operations primarily through sales of equity and the
issuance of notes. If we were to attempt to expand our business at a faster
pace
than currently contemplated, or if we were to identify an acquisition target,
we
would need to raise additional capital through the sale of our equity securities
or debt instruments. However, additional capital may not be available on terms
acceptable to us. Our failure to obtain sufficient additional capital could
curtail or alter our long-term growth strategy or delay needed capital
expenditures.
If
we are unable to effectively manage our growth as planned, our business, results
of operation and financial condition may be adversely
affected.
Our
strategy envisions growing our business, which will require us to hire, train
and supervise additional employees and to continue to develop and adjust our
technology to meet the evolving needs of manufacturers who use micro speakers
in
their products. During the next 12 months we intend to hire two sales support
staff members, three administrative staff members and two development engineers.
Our expected sales growth and the related expansion of our manufacturing sources
are likely to place a strain on our management and administrative resources,
infrastructure and systems and require us to make significant outlays of
capital. These measures are time consuming and expensive, will increase
management’s responsibilities and will divert management’s attention from our
day-to-day operations. We cannot assure you that we will be able
to:
·
expand
our systems effectively or efficiently or in a timely
manner;
·
allocate
our human resources optimally;
·
meet
our capital needs;
·
identify
and hire qualified employees or retain valued employees;
or
6
·
incorporate
effectively the components of any business or product line that we
may
acquire in our effort to achieve
growth.
Our
inability or failure to manage our growth effectively could harm our business
and materially and adversely affect our operating results and financial
condition.
If
we fail to manage our inventory effectively, our results of operations could
be
adversely affected.
Our
customers have many brands to choose from when they decide to order products.
If
we cannot deliver products quickly and reliably, customers will order from
a
competitor. We must stock enough inventory to fill orders promptly, which
increases our financing requirements and the risk of inventory obsolescence.
Competition may force us to shorten our product life cycles and more rapidly
introduce new and enhanced products. This, too, could leave us with obsolete
designs and inventory. If we do not manage our inventory successfully, it could
have a material adverse effect on our results of operations.
We
are conducting our business under the assumption that the United States will
continue to grant China “normal trade relations” and that China will continue to
remain a member of the World Trade Organization. The loss of China’s normal
trade relations status or its failure to continue to be a member of the World
Trade Organization could adversely affect our results of operations.
Our
ability to import products from China at current tariff levels could be
materially and adversely affected if the “normal trade relations” (“NTR”,
formerly “most favored nation”) status the United States government has granted
to China for trade and tariff purposes is terminated. As a result of its NTR
status, China receives the same favorable tariff treatment that the United
States extends to its other “normal” trading partners. China’s NTR status,
coupled with its membership in the World Trade Organization, could eventually
reduce barriers to manufacturing products in and exporting products from China.
However, we cannot provide any assurance that China’s WTO membership or NTR
status will not change. If China were to lose its NTR status, the increase
in
tariffs could adversely affect our results of operations.
Complex
components and assemblies used in our products may contain undetected defects
that are subsequently discovered at any point in the life of the product.
Defects in our products may result in a loss of sales, delay in market
acceptance, injury or other loss to customers, and injury to our reputation
and
increased warranty or service costs.
Our
products are electronically powered and carry a risk of electrical shock. If
someone using our products is severely injured or killed as a result of a
product defect, the resulting litigation could adversely affect our operations
and financial condition.
Some
of
our products, such as amplifiers, speakers and our Bass Shaker devices, are
electronically powered and carry a risk of electrical shock or fire. If our
products caused electrical shock or fire, the damaged party could bring claims
for property damage, physical injury or death. These types of legal actions,
if
threatened or brought, may be costly to defend, may distract management’s
attention from operating our business and may result in large damage awards
that
could exceed the limits of our insurance policy.
As
of June 2007, over 15% of our net sales are made to customers that are located
outside the United States. Any one of several factors that affect overseas
sales
could adversely affect our results of operations.
As
of
June 2007, approximately 15.5% of our net sales are made to customers outside
the United States. We believe that international sales will continue to
represent a significant portion of our revenues. Our revenues from international
sales may fluctuate due to various factors, including:
·
changes
in regulatory requirements;
7
·
changes
to tariffs and taxes;
·
increases
in freight costs, or damage or loss in shipment;
·
difficulties
in hiring and managing foreign sales personnel;
·
longer
average payment cycles and difficulty in collecting accounts
receivable;
·
fluctuations
in foreign currency exchange rates;
·
product
safety and other certification requirements; and
·
political
and economic instability, wars and terrorist
activity.
If
international sales declined significantly or if any of the above factors
adversely impacted the revenues we earn from international sales, there may
be a
material adverse effect on our results of operations.
Our
products are subject to regulations and standards in the United States and
abroad. If we fail to obtain regulatory approval to sell our products, it could
have a material adverse effect on our business and results of
operations.
In
the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission, the Consumer Products Safety
Commission and Underwriters’ Laboratories. Internationally, our products may be
required to comply with regulations or standards established by authorities
in
the countries into which we sell our products, as well as various multinational
or extra-national bodies. The European Union, or EU, has issued a directive
on
the restriction of certain hazardous substances in electronic and electrical
equipment, known as RoHs, and has enacted the Waste Electrical and Electronic
Equipment directive, or WEEE, applicable to persons who import electrical or
electronic equipment into Europe. Although neither of these directives is
currently applicable to our products, both are expected to become effective
and
at that time they would apply to our products. We are currently implementing
measures to comply with each of these directives as individual EU nations adopt
their implementation guidelines. Although we believe our products are currently
in compliance with domestic and international standards and regulations in
countries to which we export, we can offer no assurances that our existing
and
future product offerings will remain compliant with evolving standards and
regulations. If we fail to obtain timely domestic or foreign regulatory
approvals or certification, we may be unable to sell our products into
jurisdictions to which these standards apply. This would have a material adverse
effect on our business and results of operations.
In
the
past, a significant portion of our revenue was attributed to a small number
of
customers and this may continue. During the fiscal year ended June 30, 2007,
three customers were responsible for approximately 81% of our revenues.
Furthermore, none of our customers have continuing obligations to purchase
products from us. If our relationships with our largest customers deteriorated
for any reason we could lose a substantial portion of our net sales revenues,
which would have a material adverse impact on our results of operations,
liquidity and financial condition.
We
own 29 patents and seven trademarks, which we believe are important to our
business. While we try to protect our intellectual property, if we are unable
to
do so our business could be harmed.
We
try to
protect our intellectual property in a number of different ways. We rely in
part
on patent, trade secret, unfair competition and trademark law to protect our
rights to certain aspects of our products, including product designs,
proprietary manufacturing processes and technologies, product research and
concepts and recognized trademarks, all of which we believe are important to
the
success of our products and our competitive position. There can be no assurance
that any of our pending patent or trademark applications will result in the
issuance of a registered patent or trademark, or that any patent or trademark
granted will be effective in thwarting competition or be held valid if
subsequently challenged. In addition, there can be no assurance that the actions
taken by us to protect our proprietary rights will be adequate to prevent
imitation of our products, that our proprietary information will not become
known to competitors, that we can meaningfully protect our rights to unpatented
proprietary information or that others will not independently develop
substantially equivalent or better products that do not infringe on our
intellectual property rights. We could be required to devote substantial
resources to enforce our patents and protect our intellectual property, which
could divert our resources and result in increased expenses. In addition, an
adverse determination in litigation could subject us to the loss of our rights
to a particular patent or other intellectual property, could require us to
obtain from or grant licenses to third parties, could prevent us from
manufacturing, selling or using certain aspects of our products or could subject
us to substantial liability, any of which could harm our business.
8
We
may become subject to litigation for infringing the intellectual property rights
of others.
Such
actions could result in a decrease in our operating income and cash flow and
would harm our business.
Others
may initiate claims against us for infringing on their intellectual property
rights. We may be subject to costly litigation relating to such infringement
claims and we may be required to pay compensatory and punitive damages or
license fees if we settle or are found culpable in such litigation. In addition,
we may be precluded from offering products that rely on intellectual property
that is found to have been infringed by us. We also may be required to cease
offering the affected products while a determination as to infringement is
considered. These developments could cause a decrease in our operating income
and reduce our available cash flow, which could harm our business.
The
loss of the services of our key employees, particularly the services rendered
by
Arthur Liu,our
Chief Executive Officer and Chief Financial Officer, could harm our
business
Our
success depends to a significant degree on the services rendered to us by our
key employees. If we fail to attract, train and retain sufficient numbers of
these qualified people, our prospects, business, financial condition and results
of operations will be materially and adversely affected. In particular, we
are
heavily dependent on the continued services of Arthur Liu, our Chief Executive
Officer and Chief Financial Officer, and the other members of our senior
management team. We do not have long-term employment agreements with any of
the
members of our senior management team, each of whom may voluntarily terminate
his employment with us at any time. Following any termination of employment,
these employees would not be subject to any non-competition covenants. The
loss
of any key employee, including members of our senior management team, and our
inability to attract highly skilled personnel with sufficient experience in
our
industry could harm our business.
Historically
we have utilized only Grandford Holdings Ltd. in China to manufacture our
products. As of June 30, 2007 we had advanced $3,066,476 to Grandford Holdings
Ltd. for tools, jigs, molds and raw materials for the manufacture of our
products. In September 2007 we became aware of certain performance issues
including both quality control and processing issues relating to the products
being manufactured. We immediately began to make arrangements to have our
products manufactured by another supplier. Because we are uncertain whether
or
not we will receive value for the advances we made, we have determined it
appropriate to write off the advances because we are not certain that we will
be
able to recover some or all of the advances. A description of this transaction
is included in the sections of this prospectus titled “Liquidity and Capital
Resources” on page 42 and “Certain Relationships and Related Party Transactions”
on page 47.
9
We
utilize third-party manufacturing sources to manufacture our products and may
not be able to control quality. Too many defective products could lead to
customer dissatisfaction and a loss of business which would materially adversely
effect our business and operating results.
Because
we utilize third party manufacturers to manufacture our products, we may have
an
inability to control quality issues resulting in a high defect rate. This could
lead to customer dissatisfaction and a loss of future business. In this case,
our business and operating results would be materially, adversely
affected.
RISKS
RELATED TO OUR INDUSTRY
Our
products may become obsolete due to rapid technological change within the
industry. If this were to happen, it would have a material adverse effect on
our
business and financial condition.
Speaker
technology evolves rapidly, making timely product innovation essential to
success in the marketplace. The introduction of products with improved
technologies or features may render our existing products obsolete and
unmarketable. If we cannot develop products in a timely manner in response
to
industry changes, or if our products do not perform well, our business and
financial condition will be adversely affected.
Our
Whisper driver technology may not gain market acceptance. If our Whisper driver
technology is not accepted by the market, we may not achieve anticipated revenue
or profits.
Our
future financial performance as it relates to supplying micro devices will
depend on market acceptance of our Whisper driver technology and the resulting
sound quality of our products. To date, we have had limited sales of products
containing our new Whisper drivers. If our Whisper driver technology and product
line do not gain sufficient positive market acceptance, we may not achieve
expected profitability and performance levels.
We
are a small company and we do not represent a significant presence in the sound
enhancement products market. We are subject to intense competition. We cannot
assure you that we can compete successfully.
The
market for sound enhancement products in general is intensely competitive and
sensitive to new product introductions or enhancements and marketing efforts
by
our competitors. The market is affected by ongoing technological developments,
frequent new product announcements and introductions, evolving industry
standards and changing customer requirements. We face competition from a number
of well-known brands including Bose, NXT, and Bang & Olufsen. Many of our
competitors are substantially better capitalized and have substantially stronger
market presence than we have. Although we have attempted to design our home
audio systems to compete favorably with other products in the market, we may
not
be able to establish and maintain our competitive position against current
or
potential competitors. Competition may have the effect of reducing the prices
we
can charge for our products, increasing marketing costs associated with
developing and maintaining our market niche, or reducing the demand for our
products. If we fail to compete successfully, either now or in the future,
our
profitability and financial performance will likely be materially adversely
affected. We do not currently represent a significant presence in the sound
enhancement products market.
We
are susceptible to general economic conditions, and a downturn in our industry
or a reduction in spending by consumers could adversely affect our operating
results.
The
electronics industry in general has historically been characterized by a high
degree of volatility and is subject to substantial and unpredictable variations
resulting from changing business cycles. Our operating results will be subject
to fluctuations based on general economic conditions, in particular conditions
that impact discretionary consumer spending. A downturn in the electronics
sector in particular or in the economy in general could directly and negatively
impact sales of audio products, which would adversely impact our revenues and
results of operations.
Our
management owns or controls a significant number of the outstanding shares
of
our common stock and will continue to have significant ownership of our voting
securities for the foreseeable future.
As
of the
date of this prospectus, Arthur Liu owns or controls approximately 49.9% of
our
issued and outstanding capital stock. Even if the all of the shares of our
common stock underlying warrants held by the selling shareholders are exercised,
Mr. Liu, together with entities controlled by him, would own or control
approximately 27.0% of our issued and outstanding capital stock. See “Security
Ownership of Certain Beneficial Owners and Management.” As a result, Mr. Liu has
the ability to effectively control our affairs and business, including the
election of directors and, subject to certain limitations, approval or
preclusion of fundamental corporate transactions. This concentration of
ownership may be detrimental to the interest of our minority stockholders in
that it may:
·
limit
our shareholders’ ability to elect or remove
directors;
·
delay
or prevent a change in the control of the
Company;
·
impede
a merger, consolidation, take over or other transaction involving
the
Company; or
·
discourage
a potential acquirer from making a tender offer or otherwise attempting
to
obtain control of our Company.
We
will likely issue additional securities in the future. Any issuance of
securities in the future will dilute your investment.
Our
authorized capital stock consists of 120,000,000 shares, par value $0.01 per
share, consisting of 100,000,000 shares of common stock and 20,000,000 shares
of
preferred stock. As of the date of this prospectus, there are 26,405,305 shares
of common stock issued and outstanding and no shares of preferred stock issued
and outstanding. There are also an aggregate of 18,011,667 shares of our common
stock underlying warrants to purchase shares of our common stock at prices
ranging from $0.80 to $1.50 per share. We have also reserved 8,888,888 shares
of
our common stock underlying options to purchase additional units at a price
of
$1.35 per unit to qualifying investors in our private placement that initially
closed on June 7, 2007. To the extent that we issue additional securities,
the
holders of our common stock will experience percentage and potentially economic
dilution. In addition, in the event that any future financing should be in
the
form of, be convertible into or exchangeable for, equity securities, holders
of
our securities may experience additional dilution.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act, new SEC regulations and stock
market rules, are creating uncertainty for public companies. It is likely that
we will become subject to such laws, rules and regulations in the future. Our
efforts to comply with evolving laws, regulations and standards will likely
result in increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance
activities. In particular, our efforts to comply with SOX 404 and the related
regulations regarding our required assessment of our internal controls over
financial reporting and our independent registered public accounting firm’s
audit of that assessment will require the commitment of significant financial
and managerial resources. We expect these efforts to require the continued
commitment of significant resources. Further, our board members and principal
executive and accounting officers could face an increased risk of personal
liability in connection with the performance of their duties. As a result,
we
may have difficulty attracting and retaining qualified board members and
executive officers, which could slow down our business. If we are unable to
fully comply with new or changed laws, regulations and standards, or if our
efforts differ from the activities intended by regulatory or governing bodies
due to ambiguities related to practice, our reputation may be harmed and our
stock price may suffer.
11
There
is only a limited market for our common stock, which could cause our investors
to incur trading losses and or to be unable to resell their shares at or above
the price they paid for them, or to sell them at all.
Our
common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB) under
the
symbol “HMCU.” On November 20, 2007, the last reported sale price of our common
stock was $.65 per share. Our common stock is not actively traded and there
can
be no assurance that an active trading market will be developed or maintained.
See “Market for Our Common Stock.”
The
OTCBB
is an unorganized, inter-dealer, over-the-counter market which provides
significantly less liquidity than NASDAQ or other national or regional
exchanges. Securities traded on the OTCBB are usually thinly traded, highly
volatile, have fewer market makers and are not followed by analysts. The SEC’s
order handling rules, which apply to NASDAQ-listed securities, do not apply
to
securities quoted on the OTCBB. Quotes for stocks included on the OTCBB are
not
listed in newspapers. Consequently, prices for securities traded solely on
the
OTCBB may be difficult to obtain and are frequent targets of fraud or market
manipulation. Dealers may dominate the market and set prices that are not
based on competitive forces. Individuals or groups may create fraudulent
markets and control the sudden, sharp increase of price and trading volume
and
the equally sudden collapse of the market price for shares of our common stock.
Moreover, the dealer's spread (the difference between the bid and ask
prices) may be large and may result in substantial losses to the seller of
shares of our common stock on the OTCBB if the stock must be sold immediately
and may incur an immediate “paper” loss from the price spread.
Due
to
the foregoing, demand for shares of our common stock on the OTCBB may be
decreased or eliminated and holders of our common stock may be unable to resell
their securities at or near their original acquisition price, or at any
price.
Even
though our securities are quoted on the OTCBB, the OTCBB may not permit our
investors to sell securities when and in the manner that they wish. Because
there are no automated systems for negotiating trades on the OTCBB, trades
are
conducted via telephone. In times of heavy market volume, the limitations of
this process may result in a significant increase in the time it takes to
execute investor orders. Therefore, when investors place an order to buy or
sell
a specific number of shares at the current market price it is possible for
the
price of a stock to go up or down significantly during the lapse of time between
placing a market order and its execution.
Sales
of a substantial number of shares of our common stock may cause the price of
our
common stock to decline.
We
have
registered for resale 30,848,805 shares of our common stock, consisting of
shares issuable upon the exercise of outstanding warrants and currently
outstanding shares that are not currently freely tradable. If our stockholders
sell substantial amounts of our common stock in the public market, including
shares issued upon exercise of outstanding warrants, the market price of our
common stock could fall. These sales also may make it more difficult for
us to sell equity or equity-related securities in the future at a time and
price
that we deem reasonable or appropriate.
Authorized
additional shares of our common stock available for issuance may dilute current
stockholders.
We
are
authorized to issue 100,000,000 shares of our common stock and 20,000,000 shares
of our preferred stock. As of the date of this prospectus, there are 28,071,972
shares of common stock issued and outstanding and no shares of preferred stock
issued or outstanding. However, the total number of shares of our common stock
outstanding does not include shares of our common stock reserved in anticipation
of the exercise of warrants described herein. Further, in the event that any
additional financing should be in the form of, be convertible into or exchanged
for equity securities, investors may experience additional
dilution.
12
The
“penny stock” rules could make selling our common stock more
difficult.
Our
common stock is subject to the “penny stock” rules promulgated under the
Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers
who recommend such securities to persons other than institutional accredited
investors must: (i) make a special written suitability determination for the
purchaser; (ii) receive the purchaser’s written agreement to a transaction prior
to sale; (iii) provide the purchaser with risk disclosure documents that
identify certain risks associated with investing in “penny stocks” and that
describe the market for these “penny stocks,” as well as a purchaser’s legal
remedies; and (iv) obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required risk
disclosure document before a transaction in “penny stock” can be completed. Due
to these rules, broker-dealers may find it difficult to effect customer
transactions, related transaction costs will rise and trading activity in our
securities may be greatly reduced. As a result, the market price of our
securities may be depressed, and you may find it more difficult to sell our
securities.
You
should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns
include:
·
Control
of the market for the security by one or a few broker-dealers that
are
often related to the promoter or
issuer;
·
Manipulation
of prices through prearranged matching of purchases and sales and
false
and misleading press releases;
·
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
·
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
·
The
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with
the
inevitable collapse of those prices with consequent investor
losses.
We
do not intend to pay dividends in the foreseeable future. If you require
dividend income, you should not rely on an investment in our
company.
We
have
never paid cash dividends and do not anticipate paying cash dividends in the
foreseeable future. Instead, we intend to retain future earnings, if any, for
reinvestment in our business and/or to fund future acquisitions. If you require
dividend income, you should not expect to receive any cash dividends as a holder
of our securities.
NOTE
ON FORWARD-LOOKING STATEMENTS
This
prospectus 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 by those that
are not historical in nature, particularly those 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. In evaluating these
forward-looking statements, you should consider various factors, including
those
described in this prospectus under the heading “Risk Factors” beginning on page
7. These and other factors may cause our actual results to differ materially
from any forward-looking statements. Forward-looking statements are only
predictions. The forward-looking events discussed in this prospectus and other
statements made from time to time by us or our representatives may not occur,
and actual events and results may differ materially and are subject to risks,
uncertainties and assumptions about us.
13
We
cannot
give any guarantee that these plans, intentions or expectations will be
achieved. All forward-looking statements involve risks and uncertainties,
and
actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including those factors described
in
the “Risk Factors” section of this prospectus. 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 prospectus.
·
Our
ability to finance our operations on acceptable terms, either through
the
raising of capital, the incurrence of convertible or other indebtedness
or
through strategic financing
partnerships;
·
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.
The
foregoing does not represent an exhaustive list of risks. Please see “Risk
Factors” above for additional risks which could adversely impact our business
and financial performance. Moreover, new risks emerge from time to time and
it
is not possible for our management to predict all risks, nor can we assess
the
impact of all risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ from those contained
in
any forward-looking statements. All forward-looking statements included in
this
prospectus are based on information available to us on the date of this
prospectus. 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.
All subsequent written and oral forward-looking statements attributable to
us or
persons acting on our behalf are expressly qualified in their entirety by
the
cautionary statements contained throughout this prospectus.
Our
business operations are conducted through AuraSound, our wholly-owned
subsidiary. Founded in 1987, AuraSound develops, manufactures and markets
premium audio products. AuraSound specializes in the production of high sound
pressure level (“SPL”), bass-rich, low distortion sound from compact acoustic
transducers (speakers). AuraSound has invested in the development of innovative
audio technologies for use in ultra high end home and professional audio
products. We recently expanded our product line to the micro-audio market.
Specifically, AuraSound has developed and is currently marketing undersized
speakers that will deliver sound quality to devices such as laptops, flat-panel
televisions, mobile phones and other electronics displays that we believe
is far
superior to the currently sound quality found in these devices. We are currently
delivering our micro-audio products to Quanta and have commitments for future
delivery of our micro-audio products to Quanta, Compal, NEC, Toshiba, Sharp,
Hitachi, JBL, Dell, Gateway, Hewlett Packard, Mando and Acer, although these
commitments are not legally binding and we cannot assure you that sales will
be
made to these companies. We are based in Santa Fe Springs,
California.
14
Historically,
we have provided our products to the ultra high end home and professional
audio
markets. Our products for this market start at $100 and reach upwards of
$1,000.
Until recently, the extremely low annual unit sales volumes that characterize
the high end home and professional audio markets limited our ability to
accelerate our growth. However, we believe that the following recent
developments have created an opportunity for more rapid expansion.
After
completing the development and commercialization of our micro-audio product
line, we began the process of testing and validating these products with
major
electronics manufacturers. In the first quarter of 2006, following an extensive
evaluation process, NEC was the first major manufacturer to use our micro-audio
technology to differentiate its laptop computers from competitors. NEC notified
its OEM manufacturer, Quanta, a leading manufacturer of laptop computers,
that
it would like to incorporate our speakers into NEC’s laptops. Since then, Quanta
has decided to incorporate our micro-speaker technology into other laptop
computers in order to reduce weight and improve sound quality. In the second
quarter of 2006 NEC expanded the use of NRT to its desktop computers and
monitors.
Following
the decisions of NEC and Quanta to incorporate our micro-speaker technology
into
their products, we began aggressively targeting additional large electronics
manufacturers. As a result of these efforts, several leading electronics
manufacturers including Compal, Toshiba, Amtran, Epson and Acer have made
the
decision to incorporate our technology into their products. As of November20,2007 we had a backlog of approximately $1.4 million, which we are in the
process
of manufacturing for our customers.
Our
goal
is to continue to rapidly expand our sales pipeline by expanding our customer
base to include additional OEM electronics manufacturers in existing product
categories, expanding our product line to include micro-audio products designed
for additional applications such as mobile phones and PDAs and incorporating
our
micro-technology into a larger number of models and products with existing
OEM
customers.
Technology
Neo-Radial
Technology (NRT)
We
have
developed an unconventional audio technology that creates unsurpassed efficiency
and performance. We believe our neo-radial technology provides us with a
significant competitive advantage over those in our industry who use traditional
speaker designs.
In
a
traditional speaker design, a speaker’s voicecoil moves up and down in a piston
like manner as a result of motion generated by opposing magnetic fields created
when positive and negative electric charges are administered to the magnets
in a
speaker. The up and down motion of the voicecoil vibrates the diaphragm,
which
then creates sound waves by vibrating the surrounding air.
15
The
voice
coil length, magnet design and the quality of the material in the speaker
influence the quality of the sound that is produced. Speaker quality is
generally assessed based on four criteria:
1.
Sound
pressure level (SPL) - measure of pressure of a noise
(volume)
2.
Excursion
- the linear movement range of a
speaker
3.
Frequency
range - the range from the lowest note to the highest note that
a speaker
can reproduce
4.
Distortion
- the presence of unwanted noise that was not present in the original
sound signal
As
a
result of the inherent limitations of conventional speaker design, the
performance of a conventional speaker in one performance category often must
be
compromised in order to generate the desired level of performance in another
category. For example, when SPL is maximized, a conventional speaker will
create
significant distortion and will be unable to create adequate amounts of bass.
Likewise, when a conventional speaker is designed to minimize distortion
and
increase bass performance, SPL and high frequency performance will suffer.
Our
NRT overcomes such limitations through the use of our propriety magnetic
technology and design.
As
illustrated below, the NRT design utilizes an “underhung” voice coil
configuration in which the voice coil is always located within the magnetic
field. This creates less distortion, less power compression, superior bass
performance and greater acoustical output. Additionally, the NRT system utilizes
a neodymium magnet, as opposed to a ceramic magnet typically used in
conventional speakers. The neodymium magnet is much more powerful than ceramic
magnets, allowing for a significantly smaller and lighter magnet to be utilized,
which contributes to the compact design of the NRT system. In addition to
significantly improved audio performance, the NRT design eliminates stray
magnetic flux that can create significant interference issues in a variety
of
electronics applications and has improved cooling and venting characteristic,
greatly improving product integration abilities.
Conventional
Speaker Design
Voice
coil and magnetic design compromise performance and create stray
flux
16
AuraSound
NRT Speaker Design
Light
weight magnet, smaller voice coil and “underhung” design increase quality and
performance while preventing stray flux
Whisper
Technology
AuraSound’s
Whisper technology is a specialized application of the NRT transducer design
to
small, high power drivers. The technology is fully scaleable from speakers
smaller than 1” to larger 3”, 200W drivers and was designed to specifically
address the severe performance limitations of conventional micro-audio
products.
Similar
to larger speakers that are made using standard designs, conventionally designed
small speakers are subject to an innate set of performance limitations. For
example, as a speaker’s size decreases it becomes increasingly difficult to
allow the necessary amounts of speaker excursion to provide adequate low
frequency response. Likewise, when conventional designs incorporate adequate
excursion capabilities to allow for increased low frequency response, high
frequency response will decrease significantly. In addition to these issues,
conventionally designed small speakers typically have very limited power
handling capability, thereby limiting the volume of sound they are able to
reproduce. The result of these limitations is a quiet speaker that reproduces
sound in a limited frequency range.
Conventionally
designed small speakers also suffer from severe integration issues as a result
of poor venting abilities. As a speaker moves in and out in a piston-like
motion
air is pushed forward, creating sound, and subsequently pushed backward as
the
speaker retracts. Traditional designs have the magnets located behind the
voice
coil, trapping the air under the diaphragm and thus requiring the air to
be
vented or pushed out of the sides of the driver. In small speakers and extremely
compact integration scenarios (e.g. a laptop or cell phone) this air becomes
trapped and inadvertently vibrates the speaker cone, causing significant
distortion and requiring that the area around the speaker be left open, thus
limiting the compactness of the design.
AuraSound’s
patented Whisper driver addresses the issues that plague traditional small
speaker designs by utilizing an NRT-like design with the following
features:
Extended
Low Frequency Response - Whisper drivers create more bass by utilizing a
high
excursion design due to a short voice coil in a long magnetic gap (underhung
magnet structure) and large suspension elements to allow movement.
Extended
High Frequency Response - Whisper drivers provide extended high frequency
response by minimizing moving mass and driver inductance by utilizing a short
voice coil.
17
Higher
Power Handling and SPL - Whisper drivers maximize power handling and SPL
by
utilizing a long excursion, larger diameter, underhung voice coil, providing
a
maximum level of excursion and good thermal dissipation to eliminate heat
and
allow more power input.
Easy
Product Integration and Low Resonance Frequency - Whisper drivers utilize
an
innovative rear venting design which eliminates trapped air and allows for
increased SPL with minimal distortion and does not require the area around
the
driver to be kept open.
We
provide standardized and custom design drivers based upon NRT technology
to leading ultra-high end home audio manufacturers including such
notable
names as McIntosh and MDesign. We believe that our component loudspeaker
transducers are considered by many audio enthusiasts and specialty
loudspeaker manufacturers to be the best available. We produce
components
ranging from less than 1” to 18” and 800 Watts. From the miniature
NSW1Cougar to the enormous NS18 woofer to the low profile NSFB
woofer, all
feature our patented NRT magnet structure for maximum fidelity
with
life-like dynamics and minimal distortion.
We
believe that our home audio systems are elegantly designed and
provide a
dynamic acoustic experience. The home audio line features three
series,
the Whisper Ensemble, the Baby Grand and the Concert Series, all
of which
utilize the NRT and/or Whisper platforms. The Whisper Ensemble
is an ultra
compact home theater system that maintains the quality and performance
of
a larger speaker system. The Baby Grand is the mid sized system
and has
excellent bandwidth, powerful dynamics and precise stereo imaging.
The
Concert Series is the largest system, providing the greatest range,
lowest
distortion and most bass while maintaining the same accurate spatial
sound
field and focused coverage of the other systems. All three of the
systems
have a sophisticated style with the cabinets having a beautiful
black or
white high-gloss lacquer finish. Additionally, the grills are held
in
place magnetically allowing the consumer the choice of displaying
the
system with or without the grill.
19
Our
Pro Audio products are an extension of our component business
and consist
primarily of the NRT 18-8 Subwoofer. The NRT 18-8 18" is an 800-Watt
high-output subwoofer with a high-temperature neodymium ring
magnet,
unique magnet geometry with underhung 4" edgewound aluminum voice
coil,
dual over-size spiders and tough epoxy cone. With a 20 - 200
Hz frequency
response the 18-8 delivers deeper bass, enhances overall performance
and
is designed to move using a minimal amount of power, thereby
maximizing
motor efficiency. The NRT 18-8 has appeared on-stage and on-tour
with
artists such as Rod Stewart and features AuraSound's patented
NRT
technology .
Automotive
Products
We
produce automotive competition-grade speaker and component systems.
Our
automotive division designs and manufactures amplifiers, loudspeakers
and
subwoofers. The subwoofer line features the NRT platform and is
designed
for extremely low throw and high output, yielding unsurpassed linearity
and exceptionally low distortion. Our automotive loudspeakers,
built with
coaxial high quality components, are available in a full range
of products
from easy-to-install budget systems to top of the line competition
grade
systems. The line is competitively priced and has recently been
completely
redesigned with a new industrial style, improved performance and
other
unique features. Our line of competition-grade amplifiers are built
with
performance enhancing features that include gold-plated speaker
and power
connections, modular internal design for improved separation and
a high
efficiency dual heat sink which eliminates the need for noisy,
power
consuming fans.
Bass
Shaker Products
Our
Bass Shaker products are transducers that can be mounted to a fixed
surface to transmit vibration creating the “sensation of sound” or very
low bass, providing impact for music, sounds and special effects.
The Bass
Shaker Plus and Bass Shaker add the impact of bass sub woofers
without
excessive volume or the space required by traditional subwoofers.
Our
patented technology enhances the sound pressure levels so there's
no
distortion while amplifying the bass energy delivered from the
stereo.
Research
and Development and Product Manufacturing
We
employ
a skilled research and development team based in our California headquarters
that is responsible for identifying and creating new products and applications
along with improving and enhancing existing products. Recently, we added
an
additional research and development team in China. Historically, we have
outsourced all product manufacturing and some testing and development functions
to Grandford Holdings Ltd. The manufacturing facility of Grandford Holdings
Ltd.
is located in Dongguan, China. The general manager of Grandford Holdings
Ltd. is
David Liu, the son of Arthur Liu, our Chief Executive Officer and the chairman
of our board of directors. Recently, quality control problems have surfaced
relating to the products Grandford Holdings Ltd. manufactured for us, which
required us to find another manufacturer. We are currently trying to resolve
these issues with Grandford Holdings Ltd. but there is no guarantee we will
be
able to do so.
20
Market
Overview
A
major
component of the consumer electronics market is the personal and professional
audio manufacturing industry, which is mature, fragmented and highly
competitive. Cutting edge technologies are noted to have a short life in
an
industry that is defined by research and development. The audio industry
is
dominated by large domestic and international manufacturers that include
Harman
International, Bose Corporation, Polk Audio, Alpine Electronics, Sony
Corporation, Boston Acoustics, Altec Lansing Technologies, Kenwood Corp.,
LOUD
Technologies, JBL Incorporated, Panasonic Corporation, Pioneer, Rockford
Corp.
and Yamaha Corp. Additionally, there are numerous small, niche companies
that
attract consumers based upon specialty product offerings. Industry participants
compete based on acoustic quality, technology, price, reliability, brand
recognition and reputation.
Although
the audio industry as a whole is relatively mature and is dominated by large
players, the micro-audio segment remains a relatively new niche market.
The
rapid
consumer acceptance of flat-panel televisions, laptop computers, portable
devices (such as portable DVD players, MP3 and portable music devices) and
mobile phones demonstrates the overwhelming consumer demand for sleeker and
increasingly more compact electronics. The slenderness of these products
requires ultra compact speakers and we believe that consumers are increasingly
expecting the audio performance of these products to be comparable to their
visual quality. Despite significant technological innovations in laptops,
portable music players and mobile phones, the auditory capabilities of these
devices has stagnated or been significantly reduced as a result of efforts
to
minimize size to achieve increased portability. This reduction in audio quality
has occurred despite a massive increase in media usage, particularly audio,
on
these devices. We believe that the micro-audio market currently lacks a true
leader with an economical, easy to integrate audio product capable of delivering
high quality acoustics in an ultra-compact format.
We
compete in the traditional audio and micro-audio market segments.
In
the
traditional audio market we provide component speakers to ultra high-end
manufacturers and sell our own line of home and mobile audio products. Several
well established companies participate in the mid to high-end of the traditional
home and pro audio markets. Among these companies are Bose Corporation, Boston
Acoustics, Inc., Harman International Industries, Inc., Polk Audio, Inc.,
Alpine
Electronics, Inc., Bang & Olufsen Holding A/S and Clarion Co.
Ltd.
The
markets for traditional audio and micro-audio speakers are competitive and
subject to continuous technological innovation. Our competitiveness depends
on
our ability to offer high-quality products that meet our customers’ needs on a
timely basis. The principal competitive factors of our products are time
to
market, quality, price and breadth of product line. Many of our competitors
have
significant advantages over us such as far greater name recognition and
financial resources than we have. At this time we do not represent a significant
competitive presence in our industry.
21
Sales
and Marketing
We
market
and sell our products through a network of our independent sales representatives
located in Taiwan, Japan, China and California, our primary target markets.
Our
sales representatives are compensated on a draw plus commission basis. Arthur
Liu, our CEO, is also actively involved in developing new sales contacts,
as
well as obtaining customer orders.
Customers
In
the
2007 fiscal year, approximately 15.5% of our sales were made to customers
outside the United States. We are currently delivering our micro-audio products
to Quanta and have received commitments for future delivery of our micro-audio
products to Quanta, Compal, NEC, Toshiba, Amtran, Epson, Mando, and Acer,
although these companies are not legally obligated to honor these commitments
and we can provide no assurance that we can complete sales to them. We believe
that international sales will expand with the focus on micro devices and
will
represent an increasingly significant portion of our revenues in the future.
A
significant portion of our revenues has historically been attributed to a
small
number of customers and we expect that this may continue. During the fiscal
year
ended June 30, 2006, we made no sales outside the United States. None of
our
customers have continuing obligations to purchase products from us.
Intellectual
Property and Proprietary Rights
We
try to
protect our intellectual property through existing laws and regulations and
by
contractual restrictions. We rely upon trademark, patent and copyright law,
trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to help us protect our intellectual
property.
We
currently have twenty-nine issued US patents covering the design and technical
innovations found in our audio products. The granting of any patent involves
complex legal and factual questions. The scope of allowable claims is often
uncertain. As a result, we cannot be sure that any patent application filed
by
us will result in a patent being issued, nor that any patents issued will
afford
adequate protection against competitors with similar technology, nor can
we
provide assurance that patents issued to us will not be infringed upon or
designed around by others.
We
also
own seven trademarks. We believe that these trademarks significantly strengthen
consumer awareness of the AuraSound brand.
Government
Regulation
In
the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission, the Consumer Products Safety
Commission and Underwriters’ Laboratories. Internationally, our products may be
required to comply with regulations or standards established by authorities
in
the countries into which we sell our products, as well as various multinational
or extranational bodies. The European Union, or EU, has issued a directive
on
the restriction of certain hazardous substances in electronic and electrical
equipment, known as RoHs, and has enacted the Waste Electrical and Electronic
Equipment directive, or WEEE, applicable to persons who import electrical
or
electronic equipment into Europe. Although neither of these directives is
currently applicable to our products, both are expected to become effective
and
at that time they would apply to our products. We are currently implementing
measures to comply with each of these directives as individual EU nations
adopt
their implementation guidelines. Although we believe our products are currently
in compliance with domestic and international standards and regulations in
countries to which we export, we can offer no assurances that our existing
and
future product offerings will remain compliant with evolving standards and
regulations.
We
share
office space with InSeat Solution, LLC, an entity under the control of our
Chief
Executive Officer and Chief Financial Officer, Arthur Liu, and have agreed
to
pay 40% of the rent commitment. We do not have a written lease or rental
agreement with InSeat Solutions, LLC and we have no obligation in connection
with our use of the premises other than the payment of rent. For the fiscal
year
ended June 30, 2007, this amount totaled approximately $5,932 for the period
from June 7, 2007, the date of our acquisition of AuraSound, through June30,2007. For the twelve months ended June 30, 2008, we expect to pay approximately
$71,179 in rent. InSeat Solutions currently leases approximately 21,355 square
feet of office, warehouse and technical research and development space which
is
located at 11839 East Smith Avenue, Santa Fe Springs, California. The lease
will
expire on August 31, 2008.
Employees
As
of
November 20, 2007, we employed 7 full-time employees, of which one provides
sales support, one is a technician, three are engineers, one is our controller
and one is our Chief Executive Officer. We also employ various engineering
design consultants from time-to-time on an as needed basis. None of our
employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good.
Legal
Proceedings
From
time
to time we may be involved in litigation relating to claims arising out of
our
operations in the normal course of our business. We are not currently parties
to
any legal proceedings, the adverse outcome of which, in management’s opinion,
individually or in the aggregate, would have a material adverse effect on
our
results of operations or financial position.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of shares by the selling shareholders.
We
will receive approximately $22,550,000 if the warrant holders exercise, for
cash, all of the warrants covering the shares included in this prospectus.
We
currently intend to use any proceeds received by us from the exercise of
the
warrants for working capital and general corporate purposes. We cannot estimate
how many, if any, warrants may be exercised as a result of this
offering.
We
have
agreed to pay all costs and fees relating to the registration of the common
stock covered by this prospectus, except for any discounts, concessions,
or
commissions payable to underwriters, dealers, or agents incident to the offering
of the shares covered by this prospectus. We anticipate that these expenses
will
be approximately $200,000.
CAPITALIZATION
The
following table sets forth our estimated capitalization as of November 20,2007.
The
following table sets forth information as of November 20, 2007, to our
knowledge, about the beneficial ownership of our common stock by the selling
shareholders both before and immediately after the offering. Actual ownership
of
the shares is subject to exercise of the warrants. Except as otherwise noted,
we
believe that the selling shareholders have sole voting and investment power
with
respect to all of the shares of common stock beneficially owned by
them.
The
percent of beneficial ownership for the selling shareholder is based on
28,071,972 shares of common stock outstanding as of November 20, 2007. Shares
of
common stock subject to warrants that are currently exercisable or exercisable
within 60 days of November 20, 2007 are considered outstanding and beneficially
owned by a selling stockholder who holds those warrants for the purpose of
computing the percentage ownership of that selling stockholder but are not
treated as outstanding for the purpose of computing the percentage ownership
of
any other stockholder. Unless otherwise stated below, to our knowledge, none
of
the selling shareholders has had a material relationship with us other than
as a
shareholder at any time within the past three years or has ever been one
of our
officers or directors.
The
shares of common stock being offered under this prospectus may be offered
for
sale from time to time during the period the registration statement of which
this prospectus is a part remains effective, by or for the account of the
selling shareholders. After the date of effectiveness, the selling shareholders
may have sold or transferred, in transactions covered by this prospectus
or in
transactions exempt from the registration requirements of the Securities
Act,
some or all of their common stock.
Information
about the selling shareholders may change over time. Any changed information
will be set forth in an amendment to the registration statement or supplement
to
this prospectus, to the extent required by law.
Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes
any
shares of our common stock as to which a shareholder has sole or shared voting
power or investment power, and also any shares of our common stock which
the
shareholder has the right to acquire within 60 days, including upon exercise
of
common stock purchase warrants. There were 28,071,972 shares of our common
stock
outstanding as of November 20, 2007.
Assumes
the sale of all shares offered under this
prospectus.
(2)
Percentage
ownership is based on 28,071,972 shares of our common stock outstanding
as
of November 20, 2007.
(3)
Maxi
Brezzi and Bachir Taleb-Ibrahimi, of Crescent International Ltd.,
have the
control and power to vote and/or sell the securities held by Crescent
International Ltd.
(4)
50%
of such shares represent shares of our common stock issuable upon
exercise
of a five-year warrant at an exercise price of $1.50 per share
issued in
our private offering of units with an initial closing date of June7,2007.
(4A)
Includes
500,000 shares of our common stock issuable upon exercise of a
five-year
warrant at an exercise price of $1.50 per share issued in our private
offering of units with an initial closing date of June 7, 2007
and 370,370
shares of our common stock underlying an option to purchase additional
units in such private offering at a price of $1.35 per
unit.
26
(4B)
Includes
1,000,000 shares of our common stock issuable upon exercise of
a five-year
warrant at an exercise price of $1.50 per share issued in our private
offering of units with an initial closing date of June 7, 2007
and 740,741
shares of our common stock underlying an option to purchase additional
units in such private offering at a price of $1.35 per
unit.
(4C)
Includes
2,000,000 shares of our common stock issuable upon exercise of
a five-year
warrant at an exercise price of $1.50 per share issued in our private
offering of units with an initial closing date of June 7, 2007
and 481,481
shares of our common stock underlying an option to purchase additional
units in such private offering at a price of $1.35 per
unit.
(4D)
Includes
1,000,000 shares of our common stock issuable upon exercise of
a five-year
warrant at an exercise price of $1.50 per share issued in our private
offering of units with an initial closing date of June 7, 2007
and 740,741
shares of our common stock underlying an option to purchase additional
units in such private offering at a price of $1.35 per
unit.
Includes
7,500,000 shares of our common stock issuable upon exercise of
a five-year
warrant at an exercise price of $1.50 per share issued in our private
offering of units with an initial closing date of June 7, 2007
and
5,555,556 shares of our common stock underlying an option to purchase
additional units in such private offering at a price of $1.35 per
unit.
(5)
Daniel
A. Deikel, the Trustee of the Daniel A. Deikel Trust Declaration,
has the
control and power to vote and/or sell the securities held by Daniel
A.
Deikel Trust Declaration.
(6)
James
Gibson, the Trustee of the Gibson Living Trust, has the control
and power
to vote and/or sell the securities held by Gibson Living
Trust.
(7)
H.
Leigh Severance, the Trustee of H.L. Severance Inc. Pension Plan
Trust,
has the control and power to vote and/or sell the securities held
by H.L.
Severance Inc. Pension Plan Trust.
(8)
H.
Leigh Severance, the Trustee of H.L. Severance Inc. Profit Sharing
Plan
and Trust, has the control and power to vote and/or sell the securities
held by H.L. Severance Inc. Profit Sharing Plan and
Trust.
(9)
Adam
Caribi, the General Partner of Icon Capital Partners LP, has the
control
and power to vote and/or sell the securities held by Icon Capital
Partners
LP.
(10)
Russell
Cleveland, the Director of Premier RENN US Emerging Growth Fund
Limited,
has the control and power to vote and/or sell the securities held
by
Premier RENN US Emerging Growth Fund
Limited.
(11)
Russell
Cleveland, the Director of Renaissance Capital Growth & Income Fund
III, Inc., has the control and power to vote and/or sell the securities
held by Renaissance Capital Growth & Income Fund III,
Inc.
(12)
Russell
Cleveland, the Director of Renaissance US Growth Investment Trust
PLC, has
the control and power to vote and/or sell the securities held by
Renaissance US Growth Investment Trust
PLC.
(13)
Russell
Cleveland, the Director of US Special Opportunities Trust PC, has
the
control and power to vote and/or sell the securities held by US
Special
Opportunities Trust PC.
(14)
Adam
Benowitz, the Portfolio Manager of Vision Opportunity Master Fund,
LTD,
has the control and power to vote and/or sell the securities held
by
Vision Opportunity Master Fund,
LTD.
(15)
Nathan
Johnson, the President of Next Stage Investments, Inc., an affiliate
of GP
Group, LLC, the placement agent for our private placement offering
of units with an initial closing date of June 7, 2007, has the
control and
power to vote and/or sell the securities held by Next Stage Investments,
Inc. The selling stockholder is an affiliate of a broker-dealer.
At the
time of acquiring the securities, the selling stockholder had no
agreement
or understanding, directly or indirectly, with any person to distribute
such securities.
27
(16)
Bartly
J. Loethen, the President of Synergy Business Consulting, LLC,
has the
control and power to vote and/or sell the securities held by Synergy
Business Consulting, LLC. Synergy Business Consulting, LLC was
our former
majority stockholder and Bartly J. Loethen was our former sole
officer and
director.
(17)
A.J.
Meade, the President of Mapleridge Insurance Services, has the
control and
power to vote and/or sell the securities held by Mapleridge Insurance
Services.
(18)
Represents
shares of our common stock issuable upon exercise of a five-year
warrant
at an exercise price of $1.00 per share issued in connection with
a bridge
loan.
(19)
Michael
Sachs, the Trustee of Westrec Properties, Inc & Affiliated Companies
401(k) Plan, (“Westrec”) has the control and power to vote and/or sell the
securities held by Westrec.
(20)
Susan
Fairhurst, the Director of Apex Investment Fund, Ltd., has the
control and
power to vote and/or sell the securities held by Apex Investment
Fund,
Ltd.
(21)
John
Linton, the Managing Director of Clearview Partners, LLC, has the
control
and power to vote and/or sell the securities held by Clearview
Partners,
LLC.
(22)
Kenneth
Aldrich, the Managing Director of YKA Partners Ltd., has the control
and
power to vote and/or sell the securities held by YKA Partners
Ltd.
(23)
Shaye
Hirsch, the Manager of the General Partner of Brio Capital L.P.,
has the
control and power to vote and/or sell the securities held by Brio
Capital
L.P.
The
selling shareholders or any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of our common stock on any stock exchange, market or trading facility on
which
the shares are traded or in private transactions. These sales may be at
prevailing market prices or privately negotiated prices. The selling
shareholders may use any one or more of the following methods when selling
shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal
to
facilitate the transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
·
broker-dealers
may agree with the selling stockholder to sell a specified number
of such
shares at a stipulated price per
share;
·
a
combination of any such methods of
sale;
·
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
·
any
other method permitted pursuant to applicable
law.
Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts
from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an
agency
transaction not in excess of a customary brokerage commission in compliance
with
NASD Conduct Rule 2440; and in the case of a principal transaction a markup
or
markdown in compliance with NASD IM-2440.
In
connection with the sale of our common stock or interests therein, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
shareholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or
more
derivative securities which require the delivery to such broker-dealer or
other
financial institution of shares offered by this prospectus, which shares
such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
Notwithstanding
the foregoing, shares of common stock issued to those selling shareholders
who,
as indicated in the table above, received such shares as part of compensation
pursuant to a placement agency agreement between us and such selling
shareholders are restricted in accordance with Rule 2710(g)(1) of the NASD
Conduct Rules. Accordingly, those selling shareholders shall not directly
or
indirectly offer, sell, agree to offer or sell, transfer, assign, pledge,
hypothecate or subject to hedging, short sale, derivative, put or call
transaction such shares for a period of 180 days after the effective date
of
this registration statement.
Because
the selling shareholders may be deemed to be an “underwriter” within the meaning
of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by
this
prospectus which qualify for sale pursuant to Rule 144 under the Securities
Act
may be sold under Rule 144 rather than under this prospectus. The selling
shareholders have advised us that they have not entered into any written
or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the shares by the selling
shareholders.
We
agreed
to use our reasonable best efforts to keep this prospectus effective for
a
period of 24 months following the closing date of our private placement of
units
on June 7, 2007.
The
shares will be sold only through registered or licensed brokers or dealers
if
required under applicable state securities laws. In addition, in certain
states,
the shares may not be sold unless they have been registered or qualified
for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with. Under applicable
rules and regulations under the Exchange Act, any person engaged in the
distribution of the shares may not simultaneously engage in market making
activities with respect to our common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of our common stock by the selling shareholders or any other
person. We will make copies of this prospectus available to the selling
shareholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale.
The
following table sets forth certain information with respect to our directors
and
executive officers as of November 20, 2007.
Directors
serve until the next annual meeting of the shareholders, until their successors
are elected or appointed and qualified, or until their prior resignation or
removal. Our executive officers are appointed by, and serve at the discretion
of, our board of directors.
Name
Age
Year
Became an
Executive Officer or Director
Position(s)
Arthur
Liu
67
2007
Chairman
of the Board, Chief Executive Officer and Chief Financial
Officer
Amy
Liu
31
2007
Director
Donald
North
33
2007
Vice
President of Engineering
There
are
no material proceedings known to us to which any of our directors, officers
or
affiliates, or any owner of record or beneficially of more than 5% of any class
of our voting securities, or any affiliate of such persons is a party adverse
to
us or has a material interest adverse to our interests. None of our directors
received any additional compensation for his or her services as a director.
The
following brief biographies contain information about our directors and our
executive officers. The information includes each person’s principal occupation
and business experience for at least the past five years. This information
has
been furnished to us by the individuals named. There are no family relationships
known to us between the directors and executive officers other than as indicated
below. We do not know of any legal proceedings that are material to the
evaluation of the ability or integrity of any of the directors or executive
officers.
Arthur
Liu, Chairman of the Board, Chief Executive Officer and Chief Financial Officer
-
Mr. Liu
became our Chairman of the Board on July 4, 2007 and our Chief Executive Officer
and Chief Financial Officer on June 7, 2007 in connection with our acquisition
of AuraSound. Mr. Liu has served as the Chairman of AuraSound’s board of
directors and as its Chief Executive Officer since 1999. Mr. Liu moved to the
U.S. in 1991 and subsequently purchased and developed three companies:
AuraSound, Alaris, a company engaged in developing computer video technologies,
and InSeat Solutions, a company that develops and manufactures massage and
heat
components for chairs and sofas. Mr. Liu is currently operating AuraSound and
InSeat and has since sold Alaris. Prior to moving to U.S., Mr. Liu jointly
purchased Universal Appliance Limited, a Hong Kong-based company where he served
as the owner and general manager. Mr. Liu took the company public in 1987 and
sold his shares in 1990. Prior to his purchase of Universal Appliance Limited,
Mr. Liu served as the Director of Engineering at an electronics company in
Hong
Kong. Mr. Liu began his career as a mechanical engineer at an automotive and
electronics company in Taiwan. Mr. Liu is a graduate of the Navy Academy in
Taiwan where he majored in mechanical engineering. Mr. Liu is Amy Liu’s father.
See “Certain Relationships and Related Party Transactions.”
Amy
Liu, Director -
Ms. Liu
became a member of our board of directors on July 4, 2007 in connection with
our
acquisition of AuraSound . Ms. Liu is a Senior Art Director at BLT &
Associates in Los Angeles, California, a creative design agency where she
oversees marketing projects for clients such as Paramount, Sony Pictures, Warner
Bros and Universal. Ms. Liu graduated from the Art Center College of Design
in
Pasadena, California in 2000. Ms. Liu is the daughter of Arthur
Liu.
Our
board
of directors presently consists of two persons, our executive officer and his
daughter. While our common stock is not traded on any exchange, we have used
Section 121A of the Rules of the American Stock Exchange to determine if our
directors are “independent.” Using the definition of “independent” as set forth
in Section 121A, we have determined that none of our directors is an
“independent director”. We have also determined that neither of our directors
has the qualifications necessary to be deemed an audit committee financial
expert.
We
do not
have specific minimum qualifications that a person must meet in order to serve
on our board of directors. We seek out individuals who would be able to guide
our operations based on a number of traits including, but not limited to,
business experience, knowledge of our industry, education and familiarity with
operating a public company. To date, we have not paid any third parties to
assist us in finding suitable candidates to serve as directors. We have not
received a director-nominee recommendation from any stockholder, other than
Bartly J. Loethen, who controls one of our minority stockholders, our former
sole officer and director.
Term
of Office
Our
directors are appointed for a one-year term to hold office until the next annual
general meeting of our stockholders or until removed from office in accordance
with our bylaws. Our officers are appointed by our board of directors and hold
office until removed by the board.
Board
Committees
We
do not
currently have a compensation committee, audit committee, or nominating and
corporate governance committee. The functions customarily delegated to these
committees have been performed by the board of directors.
EXECUTIVE
COMPENSATION
The
following table sets forth certain summary information with respect to the
compensation paid to the named executive reflecting total compensation paid
before our acquisition of AuraSound on June 7, 2007 for the fiscal year ended
June 30, 2007.
SUMMARY
COMPENSATION TABLE
Summary
Compensation Table
Name
and principal position
Year
Salary ($)
Bonus($)
Stock
Awards
($)
Option
Awards
($)
Non-
Equity
Incentive Plan Compen
-sation
($)
Nonquali-fied
Deferred Compen-sation Earnings
($)
All
Other Compen-
sation(2)
($)
Total
($)
Arthur
Liu
Chief
Executive Officer and Chief Financial Officer
2007
$
13,846
0
0
0
0
0
0
$
13,846
32
We
do not
have any annuity, retirement, pension or deferred compensation plan or other
arrangements under which any executive officers are entitled to participate
without similar participation by other employees.
Employment
Agreements
We
have
no employment agreements with any of our executive officers. In addition, there
have been no options granted to any executive officer.
Board
Compensation
Our
directors do not currently receive compensation for their services as directors,
but are reimbursed for expenses incurred in attending board meetings. In
addition, there have been no options granted to any director.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information as to our shares of common stock
beneficially owned as of November 20, 2007 by: (i) each person known by us
to be
the beneficial owner of more than five percent of our outstanding common stock,
(ii) each of our directors, (iii) each of our executive officers and (iv) all
of
our directors and executive officers as a group.
Beneficial
ownership has been determined in accordance with the rules and regulations
of
the SEC and includes voting or investment power with respect to the shares.
Under the rules of the Securities and Exchange Commission, a person (or group
of
persons) is deemed to be a “beneficial owner” of a security if he or she,
directly or indirectly, has or shares the power to vote or to direct the voting
of such security, or the power to dispose of or to direct the disposition of
such security. Accordingly, more than one person may be deemed to be a
beneficial owner of the same security. Unless otherwise indicated, to our
knowledge, the persons named in the table below have sole voting and investment
power with respect to the number of shares indicated as beneficially owned
by
them. A person is also deemed to be a beneficial owner of any security, which
that person has the right to acquire within 60 days, such as options or warrants
to purchase our common stock. Common stock beneficially owned and percentage
ownership are based on 28,071,972 shares outstanding.
Funds
to which RENN Capital Group serves as an investment advisor (which
includes Renaissance US Growth Investment Trust PLC), 8080 N. Central
Expressway, Suite 210, LB 59
Information
in this table regarding directors and executive officers is based
on
information provided by them. Unless otherwise indicated in the footnotes
and subject to community property laws where applicable, each of
the
directors and executive officers has sole voting and/or investment
power
with respect to such shares.
33
(2)
All
addresses are c/o Hemcure, Inc., 11839 East Smith Avenue, Santa FeSprings, CA90670, unless otherwise indicated
.
(3)
Consists
of 11,505,305 shares held by Mr. Liu. Also includes 1,666,667 shares
and
1,666,667 shares of our common stock issuable upon exercise of a
five-year
warrant at an exercise price of $1.50 per share which are held by
InSeat
Solutions LLC, an entity under the control of Mr. Liu. All of our
securities owned by Arthur Liu are subject to a two-year lock-up
commencing on the effectiveness of this registration statement of
which
this prospectus is a part, except with respect to charitable gifts
or for
estate planning purposes, without the written consent of investors
who
purchased at least 60% of the units issued in our private offering
that
initially closed on June 7, 2007.
(4)
Vision
Opportunity Master Fund, LTD acquired these securities pursuant to
our
private placement on June 7, 2007. Includes 7,500,000 shares of our
common
stock issuable upon exercise of a five-year warrant at an exercise
price
of $1.50 per share and an option to purchase 5,555,556 additional
units of
our securities at a price of $1.35 per unit, with each unit consisting
of
one share of common stock and a warrant to purchase one share of
common
stock at an exercise price of $1.50 per share.
(5)
Includes
2,000,000 shares of our Common Stock directly owned, (ii) 2,000,000
shares
of our Common Stock issuable upon exercise of five-year warrants,
at an
exercise price of $1.50 per share, and (iii) an option to purchase
up to
an additional 740,741 units of our securities at a price of $1.35
per
unit, with each unit consisting of one share of common stock and
a warrant
to purchase one share of common stock at an exercise price of $1.50
per
share. Russell Cleveland, Director of Renaissance US Growth Investment
Trust PLC, is deemed to have sole voting and dispositive power over
these
securities. RENN Capital Group serves as investment advisor to Renaissance
US Growth Investment Trust PLC. These securities are also included
in the
information included in this table relating to the security ownership
of
funds to which RENN Capital Group is an investment
advisor.
(6)
Funds
to which RENN Capital Group is an investment advisor acquired these
securities pursuant to our private placement on June 7, 2007. The
acquisitions were made as follows: (i) each of Renaissance Capital
Growth
& Income Fund III Inc. and BFS US Special Opportunities Trust PLC own
1,000,000 shares of our common stock, a warrant to purchase 1,000,000
shares of our common stock at an exercise price of $1.50 per share,
a
right to purchase 370,370 shares of our common stock at a purchase
price
of $1.35 per share and, if the right to purchase is exercised, the
right
to exercise a warrant to purchase an additional 370,370 shares of
our
common stock at a purchase price of $1.50 per share and (ii) Renaissance
US Growth Investment Trust PLC owns 1,000,000 shares of our common
stock,
a warrant to purchase 2,000,000 shares of our common stock at an
exercise
price of $1.50 per share, a right to purchase 740,741 shares of our
common
stock at a purchase price of $1.35 per share and, if the right to
purchase
is exercised, the right to exercise a warrant to purchase 740,741
shares
of our common stock at a purchase price of $1.50 per share. In all
cases
the warrant to purchase shares of our common stock expires on June7,2012, the right to purchase shares of our common stock expires on
June 7,2008 and, if the right to purchase shares of our common stock is
exercised, the warrant associated with the right to purchase will
expire
five years from the date the right to purchase is exercised. RENN
Capital
Group disclaims ownership of these securities.
The
following discussion should be read in conjunction with the information
contained in our financial statements and the Notes thereto appearing elsewhere
herein.
Before
June 7, 2007, we did not engage in any operations and we were dedicated to
locating and consummating an acquisition, including the requisite fund raising
efforts. On June 7, 2007, we completed a $12.9 million private placement of
units and acquired AuraSound in a stock acquisition. We issued 11,505,305 shares
of our common stock, valued at $1.00 per share, to the stockholders of
AuraSound. The acquisition has been accounted for as a purchase in accordance
with FAS 141 and the financial statements included herein only include the
operations of AuraSound for the period that began on June 7, 2007 and ended
on
June 30, 2007.
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.
During
the last two years, our company has focused its research and development efforts
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, Compal, Toshiba, Amtran, Epson and Acer,
with NEC and Quanta already designing our speakers into their new products.
We
believe that the market for micro-audio products is significant and we expect
continued rapid growth as devices such as mobile telephones, computers,
televisions and personal digital assistants continue growing. We expect that
micro-audio revenue will soon exceed revenue from our premium audio products,
however, we intend to continue making our premium speakers in addition to our
micro-audio speakers for the foreseeable future.
While
most of the research and development is done in Santa Fe Springs, California,
in
the past our products have been manufactured in a 120,000 square foot
manufacturing facility in Dongguan China under a long-term relationship with
Granford Holdings Limited. Due to quality issues that we are attempting to
resolve, we have established an alternative vendor who began producing our
audio
products during October 2007.
Our
sales
are made primarily on an OEM basis to manufacturers of high end speakers and
sound systems. During the fiscal year ended June 30, 2007, approximately 15.5%
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.
On
June7, 2007, in order to provide the resources necessary for the ramp-up of
production of our micro-audio products to meet demand, we completed a securities
offering of $12.9 million. The net proceeds from this offering were
approximately $11.5 million and we will use these funds primarily for the
purchase of inventory, repayment of certain debt and for working capital.
Concurrent with the closing of the securities offering, we obtained a $10.0
million one-year accounts receivable credit facility and a one year $2.0 million
letter of credit facility with Bank SinoPac in order to insure resource
availability.
35
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.
Revenue
increased by $763,800 from no sales in the prior three month period. The sales
for the current period represent the sales of audio sound speakers and equipment
by AuraSound. During the prior year period, we did not engage in any operations
as we were dedicated to locating and consummating an acquisition, including
the
requisite fund raising efforts.
Gross
Profit (Loss)
Cost
of
sales for the three months ended September 2007 was $886,830, which resulted
in
a gross loss for the current quarter of $(123,030). This loss was
indicative of the incremental costs necessary to ramp up production of audio
speakers and other equipment and re-establish disciplined quality assurance
after an extensive period during which very little product was
manufactured.
Research
and Development Expenses
Research
and development expenses for the current quarter totaled $305,477 during the
current period and consisted 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.
General
and Administrative Expenses
General
and administrative expenses for the current quarter increased by $1,074,052
to
$1,080,910. This increase was attributable to the administrative costs of
AuraSound for the three month period. These costs were made up primarily of
amortization of intangible assets related to the acquisition of AuraSound,
Inc.
and salaries and related expenses. It is expected that the cost of regulatory
compliance as a public company will result in further increases in the cost
of
administration, in addition to the expected incremental costs related to
volumetric increases in the manufacturing and sale of audio speakers and other
equipment.
36
Prepaid
Expenses Written Off
Grandford
Holdings Ltd. accounted for 96% of our purchases during the year ended June30,2007. As of September 30, 2007, we had made advance payments totaling $4,228,038
to Grandford Holdings Ltd. for tools, jigs, molds and raw materials relating
to
products being manufactured for us, of which $820,155 was related to products
actually shipped to our customers during the period June through September
2007.
During September 2007, we determined that there were significant performance
issues with Grandford Holdings Ltd. which we are attempting to resolve. As
an
interim solution, we have established an alternative vendor who began producing
our audio products during October 2007. Due to the questionable nature of a
continuing relationship with Grandford Holdings Ltd., we expensed $3,066,477
of
the advanced payments as of June 30, 2007 and the balance of $341,406 during
the
three month period ended September 30, 2007. We will recognize any future
benefits when they are realized. The general manager of Grandford Holdings
Ltd.
is David Liu, son of Arthur Liu, our Chief Executive Officer and a
director.
Interest
Expense
Interest
expense totaled $58,465 in the quarter ended September 30, 2007. Current
interest charges relate primarily to notes payable to InSeat Solutions LLC,
a
company owned by our President and Chief Executive Officer, which amounted
to
$2,118,907 as of September 30, 2007.
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 September 30,2007. Accordingly, no income tax benefit is being reflected for the period
then
ended.
Net
Loss
As
a
result of the above, there was a net loss for the three month period ended
September 30, 2007 of $1,969,288 compared to a net loss of $6,858 during the
same prior year period.
Liquidity
and Capital Resources
As
of
September 30, 2007, our current assets exceeded our current liabilities by
$363,472 compared to a deficit of $7,415 for the prior year. In June 2007 in
order to ramp-up production with Grandford Holdings Ltd., formerly our primary
supplier, we established a temporary prepayment practice which was intended
to
transition to thirty day terms over a six month period. As of September 30,2007, we had made advance payments totaling $4,228,038 to Grandford Holdings
Ltd. for tools, jigs, molds and raw materials relating to products being
manufactured for us, of which $820,155 was related to products actually shipped
to our customers during the period June through September 2007. During September
2007, we determined that there were significant performance issues with
Grandford Holdings Ltd. which we are attempting to resolve. As an interim
solution, we have established an alternative vendor who began producing our
audio products during October 2007. Due to the questionable nature of a
continuing relationship with Grandford Holdings Ltd., we expensed $3,066,477
of
the advanced payments as of June 30, 2007 and the balance of $341,406 during
the
quarter ended September 30, 2007. We will recognize any future benefits when
they are realized. The general manager of Grandford Holdings Ltd. is David
Liu,
son of Arthur Liu, our Chief Executive Officer and a director. In spite of
the
performance issues presented by Grandford Holdings Ltd., we intend to continue
to focus on the issues required for us to meet the demands of our customers
such
as quality, processing times, availability of raw materials and timely delivery.
We expect that the short-term impact of the problems with Grandford Holdings,
Ltd. on our earnings and cash flow will be to defer profitability and positive
cash flows. We believe, however, that by taking the time to establish multiple
suppliers now, the longer term benefits will be more stability in the production
cycle, more timely deliveries and more leverage to meet the needs of our
customers.
37
Net
cash
used in operating activities during the quarter ended September 30, 2007 was
$1,580,969 compared to net cash provided of $10,334 during the same prior year
period. This was due primarily to the administrative expenses of AuraSound
and
the write off of the prepayments to Grandford Holdings Ltd.
Cash
used
in investing activities for the quarter ending September 30, 2007 was $16,285
and consisted primarily of advances from our restricted deposit
account.
Cash provided
by financing activities for the quarter ending September 30, 2007 totaled
$92,884 for the current year period compared to cash provided from financing
activities of $7,796 in the comparable prior year period. Cash provided of
$1,300,000 from our certificate of deposit was mostly offset by the cash
used to repay notes to third parties and also to repay a portion of the
notes due to an affiliated company owned by our Chief Executive
Officer.
We
had
net operating loss carry-forwards of approximately $1,742,415 as of
September 30, 2007, which will expire in various amounts through the year 2027.
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. We believe that the new credit
facility will be sufficient to bridge temporary cash flow shortfalls which
may
occur from time to time. While the long-term prognosis is for steadily
decreasing costs and improving cash flows, there can be no guarantees that
internally generated cash flow and the existing credit facility will be
sufficient to meet our working capital requirements for the 2008 fiscal year.
As
of September 30, 2007, we had not drawn any advances under the revolving credit
facility of $10.0 million, however we drew advances of $1.3 million from the
$2.0 million deposit facility. As of September 30, 2007, the Company was in
compliance with all covenants pertaining to the senior credit
facility.
Management
believes that future production and expansion of product lines will need to
be
funded by a combination of internally generated cash flows and externally by
some combination of bridge financing, private placement(s), short-term
bridge financing, or by some other form of cash infusion depending on the
timing.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net sales if the selling
prices of our products do not increase with these increased costs.
Off-Balance
Sheet Arrangements
We
currently do not have any off-balance sheet arrangements or financing activities
with special purpose entities.
Going
Concern Status
Our
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 years ended June 30, 2007 and 2006,
we
incurred losses of $3,809,260 and $33,209, respectively. We had an accumulated
deficit of $6,570,108 as of June 30, 2007. $3,066,477 of the total loss incurred
of $3,809,260 related to expense incurred in connection with advances made
to
Grandford Holdings Ltd., our primary supplier. During the quarters ended
September 30, 2007 and 2006, we incurred losses of $1,969,288 and $6,858,
respectively. $341,406 of the total loss incurred during the quarter related
to
the write-off of advances made to Grandford Holdings Ltd. There is no certainty
we can adequately replace this source of supply.
38
If
we are
unable to generate profits and unable to continue to obtain financing for our
working capital requirements, we may have to curtail our business sharply or
cease business altogether.
Revenue
increased by $208,988 from no sales in the prior year period. The sales for
the
current period represent the sales of audio sound speakers and equipment by
AuraSound for the period from June 7, 2007, the date of acquisition, through
June 30, 2007. During the prior year period, we did not engage in any operations
and were dedicated to locating and consummating an acquisition, including the
requisite fund raising efforts.
Gross
Profit (Loss)
The
gross
loss for the current year period was $(98,520). This loss was indicative of
the
incremental costs necessary to ramp up production of audio speakers and other
equipment and re-establish disciplined quality assurance after a six month
period during which very little product was manufactured.
Research
and Development Expenses
Research
and development expenses for the current year period were $51,699 and consisted
primarily of designing and testing new speaker designs for new applications
and
redesigning old speaker designs for new customers and applications.
General
and Administrative Expenses
General
and administrative expenses for fiscal year 2007 increased by $553,549 to
$565,123. This increase primarily resulted from the impact of the issuance
of
common shares for services during the current year and the administrative costs
of AuraSound from June 7, 2007, the date of acquisition, through June 30, 2007.
It is expected that the cost of regulatory compliance as a public company will
result in further increases in the cost of administration, in addition to the
expected incremental costs related to volumetric increases in the manufacturing
and sale of audio speakers and other equipment.
Prepaid
Expenses Written Off
Grandford
Holdings Ltd. accounted for 96% of our purchases during the year ended June30,2007. As of June 30, 2007, we had made advance payments totaling $3,066,476
to
Grandford Holdings Ltd. for tools, jigs, molds and raw materials relating to
products being manufactured for us. During September 2007, we determined that
there were significant performance issues with Grandford Holdings Ltd. which
we
are attempting to resolve. As an interim solution, we have established an
alternative vendor who began producing our audio products in October 2007.
Due
to the questionable nature of a continuing relationship with Grandford Holdings
Ltd., we have expensed the $3,066,476 advance payments and will recognize any
future benefits when they are realized. The general manager of Grandford
Holdings Ltd. is David Liu, son of Arthur Liu, our Chief Executive Officer
and a
director.
Interest
Expense
Interest
expense increased by $5,807 in fiscal 2007. All of our pre-existing debt was
extinguished in May 2006. Current interest charges relate to notes payable
to
six lenders totaling $688,000 and notes payable to InSeat Solutions LLC, a
company owned by our president and chief executive officer, which amounted
to
$2,544,601 as of June 30, 2007. The interest on this indebtedness is only for
the period beginning June 7, 2007, the date of acquisition, through June 30,2007.
39
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 June 30, 2007.
Accordingly, no income tax benefit is being reflected for the period then
ended.
Net
Income
As
a
result of the above, there was a net loss for the fiscal year ended June 30,2007 of $3,809,260 compared to a net loss of $33,209 in fiscal year
2006.
Liquidity
and Capital Resources
Our
cash
requirements are principally for working capital. Our need for working capital
is seasonal, with the greatest requirements from July through the end of
November each year as a result of our inventory build-up during this period
for
our fall and winter selling seasons.
As
of
June 30, 2007, our current assets exceeded our current liabilities by $2,324,437
compared to a deficit of $557 for the prior year. On June 7, 2007, we completed
a $12.9 million private placement of our securities from which we received
net
proceeds of approximately $11.4 million. We used a portion of these funds to
pay
certain liabilities and bridge loans that had been incurred by AuraSound. The
payment of these obligations was a condition to our acquisition of AuraSound.
At
the close of the acquisition, $2,606,637 was paid to certain bridge lenders,
$700,000 was paid toward related party notes, and $400,000 was paid to one
of
our stockholders for services rendered in conjunction with the acquisition.
In
addition, in order to ramp-up production with our primary supplier, Grandford
Holdings, Ltd., we established a temporary prepayment practice which was
intended to transition to thirty day terms over a six month period. As of June30, 2007, we had made advance payments totaling $3,066,477 to Grandford
Holdings, Ltd. for tools, jigs, molds and raw materials relating to products
being manufactured for us. During September 2007, we determined that there
were
significant performance issues with Grandford Holdings Ltd. which we are
attempting to resolve. As an interim solution, we have established an
alternative vendor who began producing our audio products during October 2007.
Due to the questionable nature of a continuing relationship with Grandford
Holdings Ltd., we have expensed the $3,066,477 advance payments and will
recognize any future benefits when they are realized. The general manager of
Grandford Holdings Ltd. is David Liu, son of Arthur Liu, our Chief Executive
Officer and a director. With a continuation of our strategic focus on rapid
growth, the short-term impact on our earnings and cash flow will be to defer
profitability and positive cash flows. We believe, however, that the timing
is
right for the technological advantages of the speaker systems designed and
sold
by AuraSound and that the longer term benefits of becoming a major force in
providing miniature speakers for computers, cell phones and other electronic
devices will deliver lasting value to our shareholders.
Net
cash
used in operating activities during the fiscal year ended June 30, 2007 was
$3,882,545 compared to $16,017 during the same prior year period. This was
due
primarily to the write off of the prepayments to our primary supplier which
were
directed at ramping up production from that supplier.
Cash
flows used in investing activities for the fiscal year ending June 30, 2007
was
$2,400,000 and consisted of a $2,000,000 restricted deposit related to our
credit facility at Bank SinoPac and a $400,000 payment made to one of our
stockholders in exchange for services rendered in connection with the
acquisition of AuraSound.
Cash
flow
provided by financing activities for the fiscal year ending June 30, 2007
totaled $7,892,997 compared to $7,796 in the comparable prior year period.
The
cash provided was primarily the result of the private placement which was
completed on June 7, 2007, partially offset by various repayments of obligations
of AuraSound. We had net operating loss carry-forwards of approximately $692,481
as of June 30, 2007, which will expire in various amounts through the year
2027.
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 June 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. We believe that the new credit facility will be sufficient to
bridge temporary cash flow shortfalls which may occur from time to time. While
the long-term prognosis is for steadily decreasing costs and improving cash
flows, there can be no guarantees that internally generated cash flow and the
existing credit facility will be sufficient to meet our working capital
requirements for fiscal 2008. As of November 20, 2007, we had not drawn any
advances under the revolving credit facility of $10.0 million but we had drawn
down $1.5 million from the $2.0 million deposit facility. Any significant
expansion or acquisition beyond what is currently budgeted will need to be
funded by a combination of internally generated cash flows, short-term bridge
financing, or by some other form of cash infusion depending on the
timing.
40
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net sales if the selling
prices of our products do not increase with these increased costs.
Our
ability to access sources of liquidity may be negatively impacted by a decrease
in demand for our products as well as the other factors described in "Risk
Factors."
Notes
Payable
As
of
June 30, 2007, long term notes payable totaled $2,544,601 and consists of notes
to an entity under the control of Mr. Arthur Liu, our Chief Executive Officer
and a director, bearing interest at 8% per annum, with principal and interest
due on March 31, 2009.
Off-Balance
Sheet Arrangements
We
currently do not have any off-balance sheet arrangements or financing activities
with special purpose entities.
Critical
Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States. To prepare these
financial statements, we must make estimates and assumptions that affect the
reported amounts of assets and liabilities. These estimates also affect our
reported revenues and expenses. On an ongoing basis, management evaluates
its estimates and judgment, including those related to revenue recognition,
accrued expenses, financing operations and contingencies and litigation.
Management bases its estimates and judgment on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The most significant accounting estimates inherent
in
the preparation of our financial statements are set forth in Note 1 to our
audited financial statements.
41
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash in hand and cash in time deposits, certificates
of
deposits and all highly liquid debt instruments with original maturity of three
months or less.
Accounts
Receivable
We
maintain 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 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
June 30, 2007, the allowance for doubtful accounts amounted to
$159,694.
Inventories
Inventories
are valued at the lower of cost (first-in, first-out) or market.
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.
We did not have any property, plant and equipment as of June 30, 2007 and 2006,
as we utilize the facility owned by a related party.
Maintenance
and minor replacements are charged to expense as incurred. Gains and losses
on
disposals are included in the results of operations.
Revenue
Recognition
Our
revenue recognition policies are in compliance with Staff Accounting Bulletin
(SAB) 104. 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 exist and collectibility is
reasonably assured.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to us 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 us or unasserted claims that may result in such proceedings,
our 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.
42
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 our 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.
In
accordance with SFAS No. 128, “Earnings 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 June30,2007 we had 16,145,000 potentially dilutive warrant shares outstanding and
8,888,888 potentially dilutive options outstanding.
Stock-based
compensation
SFAS
No. 123, “Accounting for Stock-Based Compensation,” establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using
the
fair value of stock-based compensation determined as of the date of grant and
is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to
account for stock-based compensation. We have elected to use the intrinsic
value
based method and have disclosed the pro forma effect of using the fair value
based method to account for our stock-based compensation issued to employees.
For options granted to employees where the exercise price is less than the
fair
value of the stock at the date of grant, we recognize an expense in accordance
with APB 25.
For
non-employee stock based compensation we recognize an expense in accordance
with
SFAS No. 123 and value the equity securities based on the fair value of the
security on the date of grant or the value of services, whichever is more
determinable. For stock-based awards the value is based on the market value
for
the stock on the date of grant and if the stock has restrictions as to
transferability a discount is provided for lack of tradability. Stock option
awards are valued using the Black-Scholes option-pricing model.
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R was effective beginning in our second quarter of fiscal 2006. FAS
No.
123R is effective beginning in our first quarter of fiscal year ended June30,2007. We do not expect the adoption of FAS No. 123R to have a material impact
on
our financial position, results of operations or cash flows.
43
New
Accounting Pronouncements
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48)”. FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. Management is currently
in
the process of evaluating the expected effect of FIN 48 on our results of
operations and financial position.
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this statement does not require
any
new fair value measurements. However, for some entities, the application of
this
statement will change current practice. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Management is currently
evaluating the effect of this pronouncement on financial
statements.
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)’ This statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
*
A
brief description of the provisions of this
statement
*
The
date that adoption is required
*
The
date the employer plans to adopt the recognition provisions of this
statement, if earlier.
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. Management is currently evaluating
the effect of this pronouncement on financial statements.
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
44
In
March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on
issue number 06-10, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements,” (“EITF 06-10”). EITF 06-10 provides guidance to help companies
determine whether a liability for the postretirement benefit associated with
a
collateral assignment split-dollar life insurance arrangement should be recorded
in accordance with either SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (if, in substance, a postretirement
benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract).
EITF 06-10 also provides guidance on how a company should recognize and measure
the asset in a collateral assignment split-dollar life insurance contract.
EITF
06-10 is effective for fiscal years beginning after December 15, 2007,
though early adoption is permitted. The management is currently evaluating
the
effect of this pronouncement on financial statements.
We
are
exposed to market risks relating to changes in interest rates because our credit
facilities from Bank SinoPac. We currently do not engage in any interest rate
hedging activity and have no intention of doing so in the foreseeable
future.
Foreign
Exchange
During
the month of June 2007, approximately 15.5% of our sales were international.
The
reporting currency for our financial statements is the U.S. Dollar. To date,
we
have not been impacted materially by changes in exchange rates and do not expect
to be impacted materially for the foreseeable future. However, as our net
sales generated outside of the United States increase, and should future sales
be generated in foreign currencies, our results of operations could be adversely
impacted by changes in exchange rates. For example, if we recognize
international sales in local foreign currencies, as the U.S. Dollar strengthens
it would have a negative impact on our international results upon translation
of
those results into U.S. Dollars upon consolidation. We do not currently
hedge foreign currency fluctuations and do not intend to do so for the
foreseeable future.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net sales if the selling
prices of our products do not increase with these increased costs.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During
April 2007 we repaid the final $8,000 of an unsecured, non-interest bearing
demand loan in the amount of $38,000 from Arthur Liu, our Chief Executive
Officer, Chief Financial Officer and Chairman of our board of directors with
the
net proceeds of our private placement of units with an initial closing on June7, 2007.
InSeat
Solutions, LLC, an entity controlled by Arthur Liu, has made the following
three
loans to us, each bearing interest at 8% per annum: a loan dated March 31,2005
in the amount of $1,650,948 due and payable on March 31, 2009, a loan dated
March 31, 2006 in the amount of $731,873 due and payable on March 31, 2009,
and
a loan in the amount of $995,115 on September 30, 2006 due and payable on March31, 2009. As of June 30, 2007, the unpaid balance of principal and interest
totaled $2,544,601 and $693,137 respectively. During July, 2007 we made a
payment in the amount of $200,000. On October 15, 2007, the board of directors
authorized, and we entered into, an Agreement to Convert Debt (the “Agreement”),
pursuant to which we agreed to convert $2,500,000 of debt owed to Inseat
Solutions LLC into 1,666,667 Units of our securities, with each Unit consisting
of one share of our common stock and a warrant to purchase one share of our
common stock at an exercise price of $1.50 per share.
45
We
have a
management contract with InSeat Solution, LLC, an entity controlled by Arthur
Liu. We have accrued a total management fee of $240,000 for services provided
to
us by this entity during the fiscal years ended March 31, 2006 and 2005, which
is currently outstanding.
We
share
office space with InSeat Solution, LLC, an entity controlled by Arthur Liu,
and
have agreed to pay 40% of the rent commitment. For the period that began on
June7, 2007 (the date of the acquisition) and ended on June 30, 2007 we paid a
total
of $7,752 for rent. For the twelve months ended June 30, 2008, we expect to
pay
approximately $71,179 in rent.
Between
December 29, 2006 and April 2, 2007 we borrowed a total of $2,450,000 from
certain bridge lenders, as more fully described on page 2 of this
prospectus. Arthur Liu personally guaranteed each of the bridge loans, with
the
exception of the loan made by YKA Partners, Ltd. We paid the bridge loans in
full on June 7, 2007.
Historically,
we have utilized Grandford Holdings Ltd. as the primary manufacturer of our
audio products. During the period ended June 30, 2007, Grandford Holdings Ltd.
supplied approximately 96% of our finished products. In order to ramp-up
production at the Grandford Holdings Ltd. facility, we established a temporary
prepayment practice which was intended to transition to thirty day terms over
a
six month period. As of June 30, 2007, we had made advance payments totaling
$3,066,477 to Grandford Holdings Ltd. for tools, jigs, molds and raw materials
relating to products being manufactured for us. During September 2007, we
determined that there were significant performance issues with Grandford
Holdings Ltd. which we are attempting to resolve. As an interim solution, we
have established an alternative vendor who began producing our audio products
during October 2007. Due to the questionable nature of a continuing relationship
with Grandford Holdings Ltd., we have expensed the $3,066,477 advance payments
and will recognize any future benefits when they are realized. The general
manager of Grandford Holdings Ltd. is David Liu, son of Arthur Liu, our Chief
Executive Officer and a director.
The
following description of our capital stock is a summary and does not purport
to
be complete and is subject to, and qualified in its entirety by, our Articles
of
Incorporation and by-laws.
General
Our
authorized capital stock consists of 120,000,000 shares, par value $0.01 per
share, consisting of 100,000,000 shares of common stock and 20,000,000 shares
of
preferred stock. As of the date of this prospectus, there are 28,071,972 shares
of common stock issued and outstanding and no shares of preferred stock issued
and outstanding.
Common
Stock
Holders
of our common stock are entitled to one vote per share on each matter submitted
to a vote at any meeting of stockholders. There are no cumulative voting rights,
and therefore, subject to the rights of the holders of any shares of preferred
stock (if and when issued), holders of a majority of the outstanding shares
of
voting common stock are able to elect the entire board of directors. Our board
of directors has authority, without action by the stockholders, to issue all
or
any portion of the authorized but unissued shares of our common stock (whether
voting or non-voting), which would reduce the percentage ownership of the
present stockholders and which might dilute the book value of outstanding
shares. Stockholders have no pre-emptive rights to acquire additional shares
of
our common stock. Our common stock is not subject to redemption and carries
no
subscription or conversion rights. In the event of liquidation, the shares
of
our common stock are entitled to share equally in corporate assets after
satisfaction of all liabilities and any preference in liquidation of the
preferred stock then outstanding. Holders of our common stock are entitled
to
receive such dividends as our board of directors may from time to time declare
out of funds legally available for the payment of dividends, after payment
of
any preference on preferred stock, if any, then outstanding.
46
Preferred
Stock
Our
board
of directors, without obtaining the approval of our stockholders, may issue
shares of preferred stock from time to time in one or more series and with
such
designations, preferences, rights, qualifications, limitations and restrictions
as the board approves. These designations, preferences, rights, qualifications,
limitations and restrictions may include, but are not limited to, the power
to
determine:
·
the
redemption and liquidation preferences;
·
the
rate of dividends payable, the time for and the priority of payment
of the
dividends, and whether or not the dividends will be
cumulative;
·
the
terms of conversion of the preferred stock into common stock,
and
·
the
voting power of the preferred
stock.
We
do not
currently have plans to issue shares of preferred stock.
Share
Purchase Warrants
On
October 15, 2007, we entered into an Agreement to Convert Debt (the
“Agreement”), pursuant to which we agreed to convert $2,500,000 of debt owed to
Inseat Solutions LLC, a company controlled by our Chief Executive Officer,
Arthur Liu, into 1,666,667 Units of our securities, with each Unit consisting
of
one share of our common stock and a warrant to purchase one share of common
stock at an exercise price of $1.50 per share. The term of the warrant is five
years.
On
June7, 2007, we issued an aggregate of 12,900,000 five-year warrants to purchase
12,900,000 shares of our common stock at an exercise price of $1.50 per share
to
investors, included as selling stockholders listed on pages 28 through 31,
in
our private placement of 12,900,000 units at a price of $1.00 per unit, each
unit consisting of one share of our common stock and a five-year warrant to
purchase one share of our common stock at an exercise price of $1.50 per share
in connection with our private.
In
connection with our acquisition on June 7, 2007 of all of the issued and
outstanding capital stock of AuraSound, Inc., all outstanding warrants of
AuraSound were exchanged for five-year warrants to purchase an aggregate of
3,200,000 shares of our common stock at an exercise price of $1.00 per share.
The value of our common stock on June 7, 2007 was $1.00 per share. AuraSound
had
issued these warrants in connection with bridge loans aggregating $2,450,000
in
principal amount from four lenders.
In
addition, on June 7, 2007, we issued a five year warrant to purchase 245,000
shares of common stock at an exercise price of $0.80 per share to GP Group,
LLC,
an affiliate of Gemini Partners, Inc., as part of a bridge loan placement
fee.
On
November 20, 2007, we issued a five-year warrant to purchase 1,666,667 shares
of
our common stock at an exercise price of $1.50 per share to InSeat Solutions
LLC
in conjunction with a transaction in which InSeat Solutions LLC exchanged notes
receivable from AuraSound, Inc. totaling $2,500,000 for 1,666,667 Units, each
Unit consisting of one share of our common stock and one five-year warrant
to
purchase one share of our common stock at an exercise price of $1.50 per
share.
47
Options
Investors
of $3,000,000 or more in our private placement that initially closed on June7,2007 have the option to purchase such number of additional units, each unit
consisting of one share of our common stock and a five-year warrant to purchase
one share of our common stock at an exercise price of $1.50 per share, equal
to
50% of the dollar amount invested by such investor at a price of $1.35 per
unit
for a period of 12 months from the initial closing date of the private
placement, requiring us to reserve 8,888,888 shares of our common stock
underlying such options.
Dividend
Policy
We
have
never declared or paid cash dividends on our capital stock and have no present
intention of paying cash dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our board of directors and
will
depend on our financial condition, results of operations, capital requirements
and such other factors as our board of directors deems relevant. It is our
board’s present policy to retain all earnings to provide for our future
growth.
Anti-Dilution
Rights
Shares
of
our common stock underlying all of our warrants are subject to proportional
adjustments for stock splits, stock dividends, recapitalizations and the
like.
Anti-Takeover
Provisions
Sections
78.411 through 78.444 of the Nevada Revised Statutes are designed to afford
stockholders of public corporations in Nevada protection against acquisitions
in
which a person, entity or group seeks to gain voting control. With enumerated
exceptions, the statute provides that shares acquired within certain specific
ranges will not possess voting rights in the election of directors unless the
voting rights are approved by a majority vote of the public corporation’s
disinterested stockholders. Disinterested shares are shares other than those
owned by the acquiring person or by a member of a group with respect to a
control share acquisition, or by any officer of the corporation or any employee
of the corporation who is also a director. The specific acquisition ranges
that
trigger the statute are: acquisitions of shares possessing one-fifth or more
but
less than one-third of all voting power; acquisitions of shares possessing
one-third or more but less than a majority of all voting power; or acquisitions
of shares possessing a majority or more of all voting power. Our Articles of
Incorporation specifically provide that the corporation will not
be
governed by the provisions of NRS 78.411 through 78.444.
Our
authorized but unissued shares of common stock and preferred stock are available
for future issuance without stockholder approval, which may enable our board
of
directors to issue shares of stock to persons friendly to existing management,
thereby making it more difficult and more expensive for an independent party
to
obtain voting control.
In
connection with our private placement of units that initially closed on June7,2007, pursuant to which we issued 12,900,000 shares of our common stock and
warrants to purchase 12,900,000 shares of our common stock, we agreed to
register for resale for a period of 24 months following such closing date (a)
such shares of our common stock and such shares of our common stock underlying
such warrants, and (b) the 3,200,000 shares of our common stock underlying
warrants issued to former warrant holders of AuraSound. We also agreed to
register the 800,000 shares of our common stock held by Synergy Business
Consulting, LLC, our former majority stockholder controlled by Bartley J.
Loethen, our former sole officer and director, and the 1,048,805 shares of
our
common stock held by Next Stage Investments, Inc., an affiliate of GP Group,
LLC. The registration statement of which this prospectus is a part is intended
to satisfy these obligations and is intended to register such shares.
48
Transfer
Agent and Registrar
Computershare
Trust Company, Inc., located at 350 Indiana Street, #800, Golden, CO80401,
is
our transfer agent and the registrar for our common stock. Its telephone number
is (303) 262-0600.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is quoted on the OTCBB under the symbol “HMCU,” which we intend to
change concurrent with our planned corporate name change to AuraSound,
Inc.
Holders
As
of
November 20, 2007, there were approximately 250 record holders of our common
stock. This number does not include an indeterminate number of shareholders
whose shares are held by brokers in street name.
The
following table sets forth, for the periods indicated, the high and low bid
price per share of our common stock as reported by the OTCBB. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and
may not represent actual transactions.
We
have
never paid a cash dividend on our common stock and we have no present intention
to declare or pay cash dividends on our common stock in the foreseeable future.
We intend to retain any earnings which we may realize in the foreseeable future
to finance our operations. Future dividends, if any, will depend on earnings,
financing requirements and other factors.
Future
sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices from time to time.
As
of the
date of this prospectus 28,071,972 shares of our common stock are issued and
outstanding. Of these shares, the 14,748,805 shares being registered in this
prospectus, excluding those shares issuable upon the exercise of warrants,
will
be freely tradable without restrictions or further registration under the
Securities Act, unless one or more of our existing affiliates, as that term
is
defined in Rule 144 under the Securities Act, purchases such shares.
Approximately 563,695 shares are freely tradable without restriction and the
remaining 12,759,472 issued and outstanding shares are deemed to be restricted
securities as defined under Rule 144. Restricted shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 144(k) promulgated under the Securities
Act,
which rules are summarized below.
49
Rule
144
In
general, under Rule 144 as currently in effect, a person who has owned
restricted shares of common stock beneficially for at least one year is entitled
to sell, within any three-month period, a number of shares that does not exceed
1% of the total number of outstanding shares of the same class. Sales under
Rule
144 are also subject to manner of sale provisions, notice requirements and
the
availability of current public information about us. A person who has not been
one of our affiliates for at least the three months immediately preceding the
sale and who has beneficially owned shares of common stock for at least two
years is entitled to sell the shares under Rule 144 without regard to any of
the
limitations described above.
Rule
144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
at
the time of or at any time during the three months preceding a sale, and who
has
beneficially owned the restricted shares proposed to be sold for at least two
years, including the holding period of any prior owner other than an affiliate,
is entitled to sell their shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule
144.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the
payment by us of expenses incurred or paid by a director, officer or controlling
person of ours in the successful defense of any action, suit or proceeding)
is
asserted by such director, officer or controlling person in connection with
the
securities being registered, we will, unless in the opinion of our counsel
the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such issue.
Included
in this prospectus are financial statements of Hemcure, Inc. which have been
audited by Schumacher & Associates, Inc. and financial statements of
AuraSound, Inc., which have been audited by Kabani & Company, Inc., both
independent registered public accounting firms. To the extent and for the
periods set forth in their reports, such financial statements are included
herein in reliance upon such reports given upon the authority of such firms
as
experts in accounting and auditing.
Changes
in and Disagreements with Accountants
Schumacher
& Associates, Inc., the independent accountant whom we had engaged as our
principal accountant to audit our financial statements, was dismissed effective
June 12, 2007. Our board of directors approved the engagement of Kabani &
Company, Inc., Certified Public Accountants, as the new principal independent
accountant to audit our financial statements for the fiscal year ending June30,2007.
50
The
report of Schumacher & Associates, Inc. in our financial statements as of
and for the fiscal years ended June 30, 2006 and June 30, 2005 did not contain
an adverse opinion, or a disclaimer of opinion, however the report issued on
the
financial statements for the fiscal years ended June 30, 2006 and June 30,2005
was qualified as to our ability to continue as a going concern. During the
fiscal years ended June 30, 2005 and June 30, 2006 and the interim period from
July 1, 2006 through the date of dismissal, we did not have any disagreements
with Schumacher & Associates, Inc. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which
disagreements, if not resolved to the satisfaction of Schumacher &
Associates, Inc., would have caused it to make a reference to the subject matter
of the disagreements in connection with its reports.
Prior
to
engaging Kabani & Company, Inc. we had not consulted Kabani & Company,
Inc. regarding the application of accounting principles to a specified
transaction, completed or proposed, or the type of audit opinion that might
be
rendered on the financial statements of the combined companies.
LEGAL
MATTERS
The
legality of the securities offered in this prospectus has been passed upon
for
us by Richardson & Patel LLP, New York, New York.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have
filed with the SEC a registration statement on Form SB-2 to register the
securities offered by this prospectus. The prospectus is part of the
registration statement, and, as permitted by the SEC’s rules, does not contain
all of the information in the registration statement. For further information
about us and the securities offered under this prospectus, you may refer to
the
registration statement and to the exhibits and schedules filed as a part of
the
registration statement. Statements in this prospectus as to the contents of
any
contract or other document filed as an exhibit to the registration statement,
set forth the material terms of such contract or other document but are not
necessarily complete, and in each instance reference is made to the copy of
such
document filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
We
are
also subject to the informational requirements of the Securities Exchange Act
of
1934which requires us to file reports, proxy statements and other information
with the SEC. Such reports, proxy statements and other information along with
the registration statement, including the exhibits and schedules thereto, may
be
inspected at public reference facilities maintained by the SEC at 100 F Street,
NE, Washington, D.C. Copies of such material can be obtained from the Public
Reference Section of the SEC at 100 F Street, NE, Washington, D.C. at prescribed
rates. Because we file documents electronically with the SEC, you may also
obtain this information by visiting the SEC's Internet website at http://www.sec.gov
.
51
HEMCURE,
INC.
Index
to
Unaudited
Consolidated Financial Statements
Page
Number
Hemcure,
Inc. and Subsidiary Consolidated
Financial Statements (Unaudited)
Proprietary
technology:
less
amortization of $435,416
10,014,574
Customer
relationships:
less amortization of $257,031
4,369,518
Trade
Marks:
less
amortization of $32,038
640,768
Total
Assets
$
25,058,048
Liabilities
and Stockholders' Equity
Current
liabilities
Line
of credit
$
1,300,000
Accounts
payable
498,943
Accrued
expenses
854,398
Total
current liabilities
2,653,341
Notes
payable - related party
2,118,907
Total
Liabilities
4,772,248
Stockholders'
equity
Preferred
stock, $.01 par value, 20,000,000 shares authorized and none issued
and
outstanding.
-
Common
stock, $.01 par value, 100,000,000 shares authorized 14,900,000 issued
and
outstanding
149,000
Additional
paid-in capital
17,170,891
Shares
to be issued
11,505,305
Accumulated
deficit
(8,539,396
)
Total
Stockholders' Equity
20,285,800
Total
Liabilities and Stockholders' Equity
$
25,058,048
See
accompanying notes to unaudited consolidated financial
statements.
F-2
Hemcure,
Inc.
Consolidated
Statement of Operations
(In
whole
dollars, except per share data)
(Unaudited)
For
the Three Months Ended
September
September
2007
2006
Net
Revenue
$
763,800
$
-
Cost
of sales
886,830
-
Gross
loss
(123,030
)
-
Research
& development expenses
305,477
-
General
and administrative expenses
1,080,910
6,858
Advance
to venders written off
341,406
-
Total
operating expenses
1,727,793
6,858
Income
(loss) from operations
(1,850,823
)
(6,858
)
Interest
expense
58,465
-
Other
expense
60,000
-
Income
before income tax expense
(1,969,288
)
(6,858
)
Income
tax expense-Note 8
-
-
Net
income
$
(1,969,288
)
$
(6,858
)
Net
income per common share
Basic
and Diluted
$
(0.13
)
$
(0.01
)
Weighted
average shares issued and outstanding
Basic
and Diluted
14,900,000
562,324
The
average value of dilutive securities has not been calculated since the effect
of
dilutive securities will be anti-dilutive.
See
accompanying notes to unaudited consolidated financial
statements.
F-3
Hemcure,
Inc.
Consolidated
Statement of Cash Flows
(In
whole
dollars, except per share data)
(Unaudited)
For
the Three Months Ended
September
September
2007
2006
Cash
flows from operating activities
Net
loss
$
(1,969,288
)
$
(6,858
)
Adjustments
to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation
and amortization
543,725
-
Provision
for obsolete inventory
34,624
-
(Increase)
decrease in current assets:
Accounts
receivable
(236,933
)
-
Inventory
(26,603
)
-
Increase
(decrease) in current liabilities:
Accounts
payable
153,880
-
Accrued
expenses
(80,374
)
17,192
Net
cash used in operating activities
(1,580,969
)
10,334
Cash
flows from investing activities
Purchase
of fixed assets
(16,285
)
-
Net
cash used in investing activities
(16,285
)
-
Cash
flows from financing activities
Advances
under line of credit
1,300,000
-
Repayments
of notes payable
(688,000
)
-
Repayments
of related party Notes payable
(425,694
)
-
Loan
from shareholder
-
500
Advance
from affiliate
-
7,296
Private Placement Fee
(93,422
)
-
Net
cash provided by financing activities
92,884
7,796
Net
decrease in cash and cash equivalents
(1,504,370
)
18,130
Cash
and cash equivalents,
beginning of period
1,610,952
8,721
Cash
and cash equivalents,
end of period
$
106,582
$
26,851
Supplemental
disclosure of cash flow information:
(a)
Cash paid for:
Interest
$
58,466
$
-
State
income taxes
$
-
$
-
See
accompanying notes to unaudited consolidated financial
statements.
F-4
Hemcure
, Inc. and Subsidiary
Notes
to Unaudited Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND OPERATIONS
General
Hemcure,
Inc. (the Company or we/us/our) was incorporated under the laws of the state
of
Minnesota in 1986. On September 8, 2006, our Company was reorganized by
re-domiciling to the state of Nevada 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 its patented and proprietary electromagnetic technology.
Hemcure, Inc. was a development stage company. The Company, through its
acquisition of AuraSound, Inc., has become an operating entity and is no longer
a development stage entity.
Basis
of Presentation
Before
June 7, 2007, Hemcure Inc. did not engage in any operations and was dedicated
to
locating and consummating an acquisition, including the requisite fund raising
efforts. On June 7, 2007, the Company completed a $12.9 million private
placement and acquired AuraSound, Inc. in a stock acquisition. The 11,405,305
shares of common stock issued for the acquisition were valued at $1.00 per
share, the same as the per share price of the private placement. The acquisition
was accounted for as a purchase in accordance with FAS 141.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Interim Financial Information:
The
accompanying unaudited consolidated financial statements have been prepared
by
Hemcure, Inc. pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”) Form 10-QSB and item 310 of Regulation S-B, 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 10KSB. The results
of the three months ended September 30, 2007 are not necessarily indicative
of
the results to be expected for the full year ending June 30, 2008.
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of Hemcure,
Inc. and its wholly owned subsidiary, AuraSound, Inc. 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.
F-5
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 September 30, 2007 the allowance for doubtful accounts
amounted to $159,694.
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.
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
September 30, 2007, Property, Plant and Equipment consisted of the
following:
Machinery
$16,286
Accumulated
depreciation
(362
)
Total
$
15,924
Depreciation
expenses were $362 and $0 for the three month periods ended September 30, 2007
and 2006
The
Company utilizes a facility leased to it by a related party.
F-6
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the
identifiable assets and liabilities acquired as a result of the Company’s
acquisitions of interests in its subsidiaries. Under Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets (“SFAS 142”),” goodwill is no longer amortized, but tested for impairment
upon first adoption and annually, thereafter, or more frequently if events
or
changes in circumstances indicate that it might be impaired. The Company
assesses goodwill for impairment periodically in accordance with SFAS 142.
The
management determined there was no impairment of goodwill at September 30,2007.
Intangible
Assets
The
Company applies the criteria specified in SFAS No. 141, “Business
Combinations” to determine whether an intangible asset should be recognized
separately from goodwill. Intangible assets acquired through business
acquisitions are recognized as assets separate from goodwill if they satisfy
either the “contractual-legal” or “separability” criterion. Per SFAS 142,
intangible assets with definite lives are amortized over their estimated useful
life and reviewed for impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets.” Intangible
assets, such as purchased technology, trademark, customer list, user base and
non-compete agreements arising from the acquisitions of subsidiaries and
variable interest entities are recognized and measured at fair value upon
acquisition. Intangible assets are amortized over their estimated useful lives
from one to ten years.
Valuation
of Long-Lived Assets
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations for a Disposal of a Segment of a Business.” The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be 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.
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
F-7
Basic
and diluted net loss per share
In
accordance with SFAS No. 128, “Earnings 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
September 30, 2007, the Company had 3,445,000 potentially dilutive warrant
shares outstanding and 4,444,444 potentially dilutive options
outstanding.
Stock-based
compensation
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which applies the
fair-value method of accounting for stock-based compensation plans. In
accordance with this standard, the Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
In
March
2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 44 (Interpretation 44), “Accounting for Certain Transactions Involving Stock
Compensation.” Interpretation 44 provides criteria for the recognition of
compensation expense in certain stock-based compensation arrangements that
are
accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain provisions that
were effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 did not have any material impact on the Company’s financial
statements.
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair
value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal year
ended June 30, 2007.
New
Accounting Pronouncements
In
September 2006, FASB issued SFAS 157 “Fair Value Measurements”. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (“GAAP”), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
Pension and Other Post-retirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)”. This Statement improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
F-8
1.
A brief description of the provisions of this Statement
2.
The date that adoption is required
3.
The date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48)”. FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. Management is currently
in
the process of evaluating the expected effect of FIN 48 on our results of
operations and financial position.
In
February 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
Reclassifications:
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform with report classifications of the current
year.
Effective
June 7, 2007, the Company entered into a one-year $12 million credit facility
with Bank SinoPac pursuant to which a $10.0 million revolving accounts
receivable facility and a $2 million certificate of deposit facility were made
available to the Company. Obligations under the agreement are secured by
substantially all the assets of the Company. The accounts receivable facility,
which may be used for working capital and other general corporate purposes,
bears interest at the rate of prime minus .5%. The certificate of deposit
facility bears interest at the rate of TCD plus 1%. The credit facility is
also
subject to certain covenants and conditions and contains standard
representations, covenants and events
of
default for facilities of this type. Occurrence of an event of default allows
the lenders to accelerate the payment of the loans and/or terminate the
commitments to lend, in addition to the exercise of other legal remedies,
including foreclosing on collateral. As of September 30, 2007, the Company
had
drawn $1,300,000 from this facility. The Company paid $3,151 of interest
on the amount withdrawn.
F-9
Pursuant
to the certificate of deposit facility, the Company has pledged and assigned
a
time certificate of deposit account for one year having an initial deposit
balance of $2,000,000 to be held and maintained at all times with the bank.
This
balance has been recorded as a restricted cash balance in the accompanying
financial statements.
NOTE
5- NOTES PAYABLE -RELATED PARTY
Long
term
notes payable at September 30, 2007 consists 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 March 31, 2009. Interest
expense for the three month period ended September 30, 2007 amounted to $58,466.
Under terms of the private placement, the Company may not repay more than
$900,000 of the June 6, 2007 balance without shareholder consent. On June 6,2007, the Company repaid $700,000 and on July 6, 2007, the Company repaid
$200,000 of such notes. The Company also repaid $300,000 of management fee
accruals to the related party. As of September 30, 2007, $2,118,907 is reflected
in notes payable - related party and the accrued interest thereon which amounted
to $740,526 is reflected in accrued expenses on the accompanying financial
statements.
NOTE
6- STOCKHOLDERS' EQUITY
Common
Stock
At
September 30, 2007, the Company was authorized to issue 20,000,000 shares of
$.01 par value preferred stock and 100,000,000 shares of $.01 par value common
stock. As of September 30, 2007 there were no preferred shares issued and
outstanding. There were 14,900,000 common shares issued and outstanding as
of
September 30, 2007.
Also
on
June 7, 2007, the Company acquired AuraSound, Inc. for 11,505,305 shares of
its
$.01 par value common stock as consideration for such acquisition. The shares
were valued at the fair market value and have been recorded as shares to be
issued in the accompanying financial statements. These shares have not been
issued as of September 30, 2007.
NOTE
7- STOCK OPTIONS AND WARRANTS
On
June7, 2007 in conjunction with the private placement and the acquisition of
AuraSound, Inc., the Company has reserved 25,233,888 shares of common stock
for
issuance in respect of:
Options:
Investors
of $3,000,000 or more in our private placement have the option to purchase
additional units, each unit consisting of one share of our common stock and
a
five-year warrant to purchase one share of our common stock at an exercise
price
of $1.50 per share. The number of Units which may be purchased is equal to
50%
of the dollar amount invested by such investor at a price of $1.35 per unit
and
is only available for a period of 12 months from the initial closing date of
the
private placement. We have reserved 8,888,888 shares of our common stock
underlying such options and the warrants which will be granted when the options
are exercised. The value of the options of $378,424 was calculated using the
Black-Scholes model using the following assumptions: Discount rate of 4%,
volatility of 44% and expected term of one year.
F-10
The
following table summarizes weighted-average information about stock options
at
September 30, 2007:
The
value
of the options of $1,541,976 was calculated using the Black-Scholes model using
the following assumptions: Discount rate of 4.13%, volatility of 44% and
expected term of five years.
F-11
NOTE
8- INCOME TAXES
The
Company did not record any income tax expense due to net loss during the periods
ended September 30, 2007 and 2006. 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 September30, 2007 and 2006:
The
Company recorded an allowance of 100% for its net operating loss carryforward
due to the uncertainty of its realization.
A
provision for income taxes has not been provided in these financial statements
due to the net loss. At September 30, 2007, the Company had net operating loss
carryforwards of approximately $1,742,415, which expire through September 30,2027. The NOL which may be used in any one year will be subject to a restriction
under section 382 of the Internal Revenue Code.
NOTE
9- 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 month period ended September30, 2007, the Company incurred losses of $1,969,288. The Company had an
accumulated deficit of $8,539,396 as of September 30, 2007. $341,406 of the
total loss incurred during the three month period ended September 30, 2007
related to the write-off of advances made to Grandford Holdings Ltd. There
is no
certainty that the Company can adequately replace this source of
supply.
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 generate sufficient cash
flow to meet its obligations on a timely basis, to retain its current financing,
to obtain additional financing, and ultimately to attain
profitability.
F-12
On
June6, 2007, the Company completed a private placement wherein it raised $12.9
million to be used to fund the Company’s working capital needs. The Company
believes this will be sufficient to allow the Company to execute its business
plan and begin to generate sufficient cash flow to fund its ongoing operations
for the coming fiscal year. However, any change in the Company’s capital
requirements such as acceleration of the growth model or a change in terms
with
customers or suppliers may trigger a need for further funding.
NOTE
10- RELATED PARTY TRANSACTIONS AND COMMITMENT
The
Company pays $20,000 per month as a management fee to an entity owned by our
Chairman, Mr. Arthur Liu, for the services provided by the Company such as
accounting, shipping and receiving, and, general administrative. The Company
also pays $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 equals 40% of the rent payable by the related entity to its landlord,
which has the following rent commitment:
Historically,
we have utilized Grandford Holdings Ltd. as the primary manufacturer of our
audio products. During the period ended June 30, 2007, Grandford Holdings Ltd.
supplied approximately 96% of our finished products. In order to ramp-up
production at the Grandford Holdings Ltd. facility, we established a temporary
prepayment practice which was intended to transition to thirty day terms over
a
six month period. As of September 30, 2007, we had made advance payments
totaling $4,228,038 to Grandford Holdings Ltd. for tools, jigs, molds and raw
materials relating to products being manufactured for us, of which $820,155
was
related to products actually shipped to our customers during the period June
through September 2007. During September 2007, we determined that there were
significant performance issues with Grandford Holdings Ltd. which we are
attempting to resolve. As an interim solution, we have established an
alternative vendor who began producing our audio products during October 2007.
Due to the questionable nature of a continuing relationship with Grandford
Holdings Ltd., we expensed $3,066,477 of the advanced payments as of June 30,2007 and the balance of $341,406 during the quarter ended September 30, 2007.
We
will recognize any future benefits when they are realized. The general manager
of Grandford Holdings Ltd. is David Liu, son of Arthur Liu, our Chief Executive
Officer and a director.
NOTE
11- MAJOR CUSTOMERS AND MAJOR VENDORS
There
were two major customers of the Company during the period ended September 30,2007 which accounted for 43% of the Company’s sales. The receivable due from
these customers as of September 30, 2007 was $354,500. There were no major
customers during the prior year period.
Th
e
Company had one major vendor,Grandford Holdings Ltd., during the period
ended September 30, 2007 which accounted for 96% of the Company’s purchases. As
of September 30, 2007, the Company had made advance payments totaling $4,228,038
to that supplier for tools, jigs, molds and raw materials relating to products
being manufactured for the Company, of which $820,155 was related to products
actually shipped to our customers during the period June through September
2007.
During September 2007, we determined that there were significant performance
issues with the supplier which we are attempting to resolve. As an interim
solution, the Company has established an alternative vendor who will begin
producing our audio products in October 2007. Due to the questionable nature
of
a continuing relationship with the previous vendor, we expensed $3,066,477
of
the advance payments as of June 30, 2007 and the balance of $341,406 during
the
quarter ended September 30, 2007. We will recognize any future benefits when
they are realized. The general manager of Grandford Holdings Ltd. is David
Liu,
son of Arthur Liu, our Chief Executive Officer and a director.
Consolidated
Statements of Operations for the Years Ended June 30, 2007 and
2006
F-18
Consolidated
Statements of Stockholders’ Equity/ Deficit for the Years Ended June 30,2007 and 2006
F-19
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2007 and
2006
F-20
Notes
to Consolidated Financial Statements
F-22
to F-34
F-14
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Hemcure,
Inc.
We
have
audited the accompanying consolidated balance sheet of Hemcure, Inc. (a
California corporation) as of June 30, 2007, and related consolidated statements
of operations, stockholder’s equity/deficit, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hemcure, Inc. as of June30,2007, and the related consolidated statements of operations, stockholder’s
equity/deficit, and cash flows for the year ended June 30, 2007 in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. During the year ended June 30,2007, the Company incurred net losses of $3,809,260. In addition, the Company
had negative cash flow in operating activities amounting $3,882,546 in the
year
ended June 30, 2007. These factors, among others, as discussed in Note 10 to
the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 10. The consolidated financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty.
Report
of
Independent Registered Public Accounting Firm
Board
of
Directors
Hemcure,
Inc.
We
have
audited the statements of operations, stockholders’ deficit, and cash flows of
Hemcure, Inc., for the year ended June 30, 2006. These financial statements
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of its operations and cash flows for Hemcure,
Inc. for the year ended June 30, 2006, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As described in Note 10, there is substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also discussed in Note 10.
The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
Adjustments
to reconcile net loss to net cash used in operating
activities:
-
Amortization
181,120
Provision
for bad debt
74,155
Issuance
of stock for services
206,829
(Increase)
/ decrease in assets:
Accounts
receivable
(103,319
)
-
Inventories
33,844
-
Increase
/ (decrease) in liabilities:
Accounts
payable and accrued expenses
(465,914
)
17,192
Total
adjustments
(73,285
)
17,192
Net
cash used in operations
(3,882,545
)
(16,017
)
CASH
FLOWS FROM INVESTING ACTIVITIES
Restricted
cash
(2,000,000
)
-
Acquisition
of subsidiary
(400,000
)
-
Net
cash flow from financing activities
(2,400,000
)
-
CASH
FLOWS FROM FINANCING ACTIVITIES
Loan
from shareholder
500
Advance
from affiliate
7,296
Payment
on loans payable
(3,781,744
)
Issuance
of shares
11,674,741
-
Net
cash flow from Financing activities
7,892,997
7,796
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,610,452
(8,221
)
CASH
AND CASH EQUIVALENTS, BEGINNING BALANCE
500
8,721
CASH
AND CASH EQUIVALENTS, ENDING BALANCE
$
1,610,952
$
500
F-20
SUPPLEMENTAL
DISCLOSURES:
Cash
paid during the year for:
Interest
payments
$
156,637
$
-
Income
tax payments
$
-
$
-
Non-cash
transactions
Issuance
of common stock to be issued for purchase of business
$
11,505,305
$
-
Issuance
of common stock to facilitators of acquisition
$
1,229,476
$
-
Issuance
of warrants relating to purchase of business
$
1,541,976
$
-
The
accompanying notes are an integral part of these consolidated financial
statements
F-21
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND OPERATIONS
General
Hemcure,
Inc. (the Company or we/us/our) was incorporated under the laws of the state
of
Minnesota in 1986. On September 8, 2006, our Company was reorganized by
re-domiciling to the state of Nevada 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 its patented and proprietary electromagnetic technology.
Hemcure, Inc. was a development stage company. The Company, through it’s
acquisition of Aura Sound, has become an operating entity and is no longer
a
development stage entity.
Basis
of Presentation
Before
June 7, 2007, Hemcure Inc. did not engage in any operations and was dedicated
to
locating and consummating an acquisition, including the requisite fund raising
efforts. On June 7, 2007, the Company completed a $12.9 million private
placement and acquired AuraSound, Inc. in a stock acquisition. The 11,405,305
common stock issued for the acquisition has been valued at $1.00 per share,
the
same as the per share price of the private placement. The acquisition has been
accounted for as a purchase in accordance with FAS 141.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, AuraSound, Inc. 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 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 June 30, 2007 the allowance for doubtful accounts amounted
to $159,694.
F-22
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
The Company did not have any property, plant and equipment as of June 30, 2007
and 2006. The Company utilizes a facility leased by a related
party.
Maintenance
and minor replacements are charged to expense as incurred. Gains and losses
on
disposals are included in the results of operations.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the
identifiable assets and liabilities acquired as a result of the Company’s
acquisitions of interests in its subsidiaries. Under Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets (“SFAS 142”),” goodwill is no longer amortized, but tested for impairment
upon first adoption and annually, thereafter, or more frequently if events
or
changes in circumstances indicate that it might be impaired. The Company
assesses goodwill for impairment periodically in accordance with SFAS 142.
The
management determined there was no impairment of goodwill at June 30,2007.
Intangible
Assets
The
Company applies the criteria specified in SFAS No. 141, “Business
Combinations” to determine whether an intangible asset should be recognized
separately from goodwill. Intangible assets acquired through business
acquisitions are recognized as assets separate from goodwill if they satisfy
either the “contractual-legal” or “separability” criterion. Per SFAS 142,
intangible assets with definite lives are amortized over their estimated useful
life and reviewed for impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets.” Intangible
assets, such as purchased technology, trademark, customer list, user base and
non-compete agreements, arising from the acquisitions of subsidiaries and
variable interest entities are recognized and measured at fair value upon
acquisition. Intangible assets are amortized over their estimated useful lives
from one to ten years.
F-23
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Valuation
of Long-Lived Assets
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations for a Disposal of a Segment of a Business.” The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be 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
The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. 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 collectibility is reasonably assured.
Advertising
Expense
Advertising
costs are charged to expense as incurred and were immaterial for the years
ended
June 30, 2007 and 2006.
Research
and Development
Research
and development costs are expensed as incurred.
F-24
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the
recognition of deferred tax assets and liabilities 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 June 30, 2007.
Fair
Value of Financial Instruments
Statement
of financial accounting standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for assets and liabilities qualifying as financial
instruments are a reasonable estimate of fair value.
Segment
Reporting
Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About
Segments of an Enterprise and Related Information” requires use of the
“management approach” model for segment reporting. The management approach model
is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company.
SFAS
131 has no effect on the Company’s financial statements as the Company consists
of one reportable business segment as of June 30, 2007 and 2006.
F-25
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Risks
and Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated
with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history and the volatility of public markets.
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
In
accordance with SFAS No. 128, “Earnings 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 June30,2007, the Company had 16,145,000 potentially dilutive warrant shares outstanding
and 8,888,888 potentially dilutive options outstanding.
Stock-based
compensation
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which applies the
fair-value method of accounting for stock-based compensation plans. In
accordance with this standard, the Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
F-26
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
March
2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 44 (Interpretation 44), “Accounting for Certain Transactions Involving Stock
Compensation.” Interpretation 44 provides criteria for the recognition of
compensation expense in certain stock-based compensation arrangements that
are
accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain provisions that
were effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 did not have any material impact on the Company’s financial
statements.
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair
value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal year
ended June 30, 2007.
New
Accounting Pronouncements
In
September 2006, FASB issued SFAS 157 “Fair Value Measurements”. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (“GAAP”), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)”. This Statement improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of
this
Statement
in preparing those financial statements:
1.
A
brief description of the provisions of this Statement
2.
The
date that adoption is required
3.
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
F-27
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48)”. FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. Management is currently
in
the process of evaluating the expected effect of FIN 48 on our results of
operations and financial position.
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
Reclassifications:
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform with report classifications of the current
year.
NOTE
3 - INVENTORIES
Inventories
at June 30, 2007 consisted of the following:
Raw
materials
$
16,338
Finished
goods
132,084
Total
$
148,422
NOTE
4- DEBT AGREEMENTS
Credit
facility
Effective
June 7, 2007, the Company entered into a one-year $12 million credit facility
with Bank SinoPac pursuant to which a $10.0 million revolving accounts
receivable facility and a $2 million fixed deposit credit facility were made
available to the Company. Obligations under the agreement are secured by
substantially all the assets of the Company. The accounts receivable facility,
which may be used for working capital and other general corporate purposes
bears
interest at the rate of prime minus .5%. The letter of credit facility bears
interest at the rate of TCD plus 1%. The credit facility is also subject to
certain covenants and conditions and contains standard representations,
covenants and events of default for facilities of this type. Occurrence of
an
event of default allows the lenders to accelerate the payment of the loans
and/or terminate the commitments to lend, in addition to the exercise of other
legal remedies, including foreclosing on collateral. As of June 30, 2007, $0
has
been drawn from this facility.
Pursuant
to the credit facility, the Company has also pledged and assigned a time
certificate of deposit account for one year having an initial deposit balance
of
$2,000,000 to be held and maintained at all times with the bank. This balance
has been recorded as a restricted cash balance in the accompanying
financials.
F-28
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Notes
payable
During
the year, the Company raised notes payables of $688,000 payable to certain
investors. The notes are secured against the assets of the Company pursuant
to a
security agreement. All the notes bear interest at the rate of 9% per annum
with
the principal and interest due on demand. The Company accrued interest of
$64,108 on these notes through June 30, 2007. On August 1, 2007 the $688,000
in
principal and all interest accrued thereon was paid in full
NOTE
5- NOTES PAYABLE -RELATED PARTY
Long
term
notes payable at June 30, 2007 consists of notes to an entity owned by our
Chairman of the Board of directors. These notes are of various dates and all
bear interest at 8% per annum, with principal and interest due on March 31,2009. Interest expense for the period ended June 30, 2007 amounted to $16,964.
Under terms of the private placement, the Company may not repay more than
$900,000 of the June 6, 2007 balance without shareholder consent. On June 6,2007, the Company repaid $700,000 and on July 6, 2007, the Company repaid
$200,000 of such notes. The Company also repaid $300,000 of management fee
accrual to the related party. This balance amounting to $2,544,601 is reflected
in notes payable balance to related party and the accrued interest thereon
which
amounted to $693,137 is reflected in accrued expenses on the accompanying
financials as of June 30, 2007.
NOTE
6- STOCKHOLDERS' EQUITY
Common
Stock
At
June30, 2007, the Company was authorized to issue 20,000,000 shares of $.01 par
value preferred stock and 100,000,000 shares of $.01 par value common stock.
As
of June 30, 2007 there were no preferred shares issued and outstanding. There
were 2,000,000 common shares issued and outstanding as of June 30,2007.
On
February 20, 2007, the Company issued 206,829 to Mr. Bartley Loethen as
consideration for legal services rendered. The shares were recorded at the
fair
market value of $206,829.
On
June7, 2007, the Company completed the $12,9 million private placement and recorded
12,900,000 as shares to be issued of its $.01 par value common stock to
investors. Each unit sold comprised of 1 share and 1 warrant. These shares
were
issued in August, 2007. Investors of $3,000,000 or more have the option to
purchase additional units, each unit consisting of one share of our common
stock
and a five-year warrant to purchase one shares of our common stock at an
exercise price of $1.50 per share. The number of Units which may be purchased
is
equal to 50% of the dollar amount invested by such investor at a price of $1.35
per unit and is only available for a period of 12 months from the initial
closing date of the private placement. We have reserved 8,888,888 shares of
our
common stock underlying such options. .
Also
on
June 7, 2007, the Company acquired AuraSound, Inc. for 11,505,305 shares of
its
$.01 par value common stock as consideration for such acquisition. The shares
were valued at the fair market value and have been recorded as shares to be
issued in the accompanying financials. These shares have not been issued as
of
June 30, 2007 or subsequently. The Company also issued 1,229,476 to the
facilitators of the acquisition transaction as a success fee . These shares
were
also valued at the fair market value of $1,229,476.
NOTE
7- STOCK OPTIONS AND WARRANTS
On
June7, 2007 in conjunction with the private placement and the acquisition of
AuraSound, Inc., the Company has reserved 25,233,888 Common Shares for issuance
in respect of:
F-29
Options:
Investors
of $3,000,000 or more, in our private placement, have the option to purchase
additional units, each unit consisting of one share of our common stock and
a
five-year warrant to purchase one shares of our common stock at an exercise
price of $1.50 per share. The number of Units which may be purchased is equal
to
50% of the dollar amount invested by such investor at a price of $1.35 per
unit
and is only available for a period of 12 months from the initial closing date
of
the private placement. We have reserved 8,888,888 shares of our common stock
underlying such options and the warrants which will be granted when the options
are exercised. The value of the options of $378,424 was calculated using the
Black-Scholes model using the following assumptions: Discount rate of 4%,
volatility of 44% and expected term of one year.
The
following table summarizes weighted-average information about stock options
at
June 30, 2007:
The
value
of the options of $1,541,976 was calculated using the Black-Scholes model using
the following assumptions: Discount rate of 4.13%, volatility of 44% and
expected term of five years.
NOTE
8- INCOME TAXES
The
Company did not record any income tax expense due to net loss during the year
ended June 30, 2007 and 2006. 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 years ended June 30, 2007 and
2006:
2007
2006
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 June 30, 2007, and 2006:
2007
2006
Deferred
tax asset:
$
276,992
$
4,413
Valuation
allowance
(276,992
)
(4,413
)
Net
deferred tax asset
$
—
$
—
The
Company recorded an allowance of 100% for its net operating loss carryforward
due to the uncertainty of its realization.
A
provision for income taxes has not been provided in these financial statements
due to the net loss. At June 30, 2007, the Company had net operating loss
carryforwards of approximately $692,481, which expire through June 30, 2027
of
NOL which may be used in any one year will be subject to a restriction under
section 382 of the Internal Revenue Code.
NOTE
9- ACQUISITION
On
June6, 2007, the Company acquired AuraSound, Inc. (“AuraSound”). AuraSound designs,
and markets premium audio products, including the micro-audio products designed
for applications such as computers, cell phones, televisions and other miniature
speaker devices. The purchase price paid by the Company was $12,958,757, which
consisted of 11,505,305 shares of common stock having an aggregate value of
$11,505,305 and 3,445,000 replacement warrants, to lenders and consultants
of
Aura Sound, valued at the fair market value of $1,453,452. To fund the
operations of AuraSound, Inc. and payoff certain bridge loans and other
specified obligations of relating to the acquisition of AuraSound, Inc., the
Company completed a $12.9 million private placement.
The
Company incurred transaction costs of $400,000 and issued 1,229,476 shares
of
common stock to the facilitators of the transaction. The transaction has been
accounted for as a purchase, and accordingly, the results of operations have
been included in the statement of operations from the date of acquisition.
The
allocation of the fair values of assets and liabilities were based upon an
independent consultant appraisal of such values. The excess of the purchase
price over acquired assets was $7,000,451 and is classified as
goodwill.
F-31
A
summary
of the allocation of the purchase price is as follows:
Accounts
receivables
$
503,733
Inventories
182,264
Proprietory
technology
10,449,990
Customer
relationships
4,626,548
Trade
marks
672,806
Total
Assets
$
16,435,341
Accounts
payable and accrued liabilities
$
1,744,690
Notes
payable
7,014,345
Total
liabilities
$
8,759,035
Net
asset acquired
$
7,676,306
Consideration
paid:
Total
cost of investment
$
14,676,757
Goodwill
$
7,000,451
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
following (unaudited) pro forma consolidated results of operations have been
prepared as if the acquisition of AlgoSound, Inc. had occurred at July 1, 2006
and 2005:
The
accompanying financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the financial statements, during
the years ended June 30, 2007 and 2006, the Company incurred losses of
$3,809,260 and $33,209, respectively. The Company had an accumulated deficit
of
$ 6,570,108 as of June 30, 2007. $3,066,477 of the total loss incurred of
$3,809,260 related to expense incurred in connection with an advance to a
primary supplier. There is no certainty that the Company can adequately replace
this source of supply.
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 generate sufficient cash
flow to meet its obligations on a timely basis, to retain its current financing,
to obtain additional financing, and ultimately to attain
profitability.
F-32
On
June6, 2007, the Company completed a private placement wherein it raised $12.9
million to be used to fund the Company’s working capital needs. The Company
believes this will be sufficient to allow the Company to execute its business
plan and begin to generate sufficient cash flow to fund its ongoing operations
for the coming fiscal year. However, any change in the Company’s capital
requirements such as acceleration of the growth model or a change in terms
with
customers or suppliers may trigger a need for further funding.
F-33
HEMCURE,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11-RELATED
PARTY TRANSACTIONS AND COMMITMENT
Also,
the
company pays $20,000 per month as management fee to an entity owned by our
Chairman, Mr. Arthur Liu for the services provided by them such as accounting,
shipping and receiving, and, general administrative. The Company also pays
$6,237 per month to the same entity for rent as they share the offices, test
laboratories and warehouse facilities with the related entity. The rent
allocation is 40% of the rent payable by the related entity to its landlord,
which has the following rent commitment:
There
were three major customers of the Company during the year ended June 30, 2007
which accounted for 81% of the sales of the c
ompany.
The receivable due from these Customers as of June 30, 2007 was $170,629. There
were no major customers during the prior year period.
There
was
one major vendor of the Company during the year ended June 30, 2007 which
accounted for 96% of the purchases of the Company. As of June 30, 2007, the
Company had made advance payments totaling $3,066,477 to that supplier for
tools, jigs, molds and raw materials relating to products being manufactured
for
the Company. During September 2007, we determined that there were significant
performance issues with the supplier which we are attempting to resolve. As
an
interim solution, the Company has established an alternative vendor who will
begin producing our audio products during October 2007. Due to the questionable
nature of a continuing relationship with the previous vendor, we have expensed
the $3,066,477 advance payments and will recognize any future benefits when
they
are realized.
F-34
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and Officers.
Section
78.7502 of the Nevada Revised Statutes permits a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit
or
proceeding if he:
(a)
is
not liable pursuant to Nevada Revised Statute 78.138 (a breach of fiduciary
duty
involving intentional misconduct, fraud, or knowing violation of the law);
or
(b)
acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
In
addition, Section 78.7502 permits a corporation to indemnify any person who
was
or is a party or is threatened to be made a party to any threatened, pending
or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and
reasonably incurred by him in connection with the defense or settlement of
the
action or suit if he:
(a)
is not liable pursuant to Nevada Revised Statute 78.138 ; or
(b)
acted in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation.
To
the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter,
the
corporation is required to indemnify him against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with the
defense.
Section
78.752 of the Nevada Revised Statutes allows a corporation to purchase and
maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee or agent of the corporation or
is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise for any liability asserted against him and liability and expenses
incurred by him in his capacity as a director, officer, employee or agent,
or
arising out of his status as such, whether or not the corporation has the
authority to indemnify him against such liability and expenses.
II-1
Other
financial arrangements made by the corporation pursuant to Section 78.752 may
include the following:
o
the
creation of a trust fund.
o
the
establishment of a program of
self-insurance.
o
the
securing of its obligation of indemnification by granting a security
interest or other lien on any assets of the
corporation.
o
the
establishment of a letter of credit, guaranty or
surety.
No
financial arrangement made pursuant to Section 78.752 may provide protection
for
a person adjudged by a court of competent jurisdiction, after exhaustion of
all
appeals, to be liable for intentional misconduct, fraud or a knowing violation
of law, except with respect to the advancement of expenses or indemnification
ordered by a court.
Any
discretionary indemnification pursuant to NRS 78.7502, unless ordered by a
court
or advanced pursuant to an undertaking to repay the amount if it is determined
by a court that the indemnified party is not entitled to be indemnified by
the
corporation, may be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances. The determination must be
made:
(a)
by
the stockholders;
(b)
by
the board of directors by majority vote of a quorum consisting of directors
who
were not parties to the action, suit or proceeding;
(c)
if a
majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding so orders, by independent legal counsel in a written
opinion; or
(d)
if a
quorum consisting of directors who were not parties to the action, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
Article
XI of our Articles of Incorporation requires us to indemnify all of our
directors, officers, employees and agents to the fullest extent permitted by
Nevada law as provided within NRS 78.7502 and NRS 78.751 or any other law then
in effect or as it may hereafter be amended. Pursuant to our Articles of
Incorporation, we must indemnify each present and future director, officer,
employee or agent who becomes a party or is threatened to be made a party to
any
suit or proceeding, whether pending, completed or merely threatened, and whether
said suit or proceeding is civil, criminal, administrative, investigative,
or
otherwise, except an action by or in the right of the corporation, by reason
of
the fact that he is or was a director, officer, employee or agent of we or
is or
was serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses, including, but not limited to, attorneys’ fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action, suite, proceeding or settlement, provided such person acted
in
good faith and in a manner which he reasonably believed to be in or not opposed
to our best interest of and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The expenses of
our
directors, officers, employees or agents of incurred in defending a civil or
criminal action, suit or proceeding may be paid by us as they are incurred
and
in advance of the final disposition of the action if the director, officer,
employee or agent undertakes to repay the expenses to us if it is ultimately
determined by a court, after exhaustion of all appeals, that he is not entitled
to be indemnified. No indemnification shall be provided and any advancement
of
expenses to or on behalf of any director, officer, employee or agent must be
returned to us if a final adjudication establishes that the person’s acts or
omissions involved a breach of any fiduciary duties and, if applicable,
intentional misconduct, fraud or knowing violation of the law which was material
to the cause of action.
II-2
Indemnification
may also be granted pursuant to the terms of agreements which may be entered
in
the future or pursuant to a vote of stockholders or directors. We may purchase
and maintain insurance which protects our officers and directors against any
liabilities incurred in connection with their service in such a capacity, and
such a policy may be obtained by us in the future.
II-3
A
stockholder’s investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present, there is no pending litigation
or proceeding involving any of our directors, officers or employees regarding
which indemnification by us is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling our Company pursuant
to
the foregoing provisions, we have been informed that, in the opinion of the
SEC,
this indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Item
25. Other Expenses of Issuance and Distribution.
The
estimated expenses payable by the Registrant in connection with the issuance
and
distribution of the securities being registered are as follows:
SEC
Registration Fee
$
1,914
Blue
Sky Fees and Expenses
5,000
Legal
Fees and Expenses
25,000
Accounting
Fees and Expenses
95,000
Printing
and Engraving
3,000
Miscellaneous
5,000
TOTAL
$
234,914
Item
26. Recent Sales of Unregistered Securities.
With
respect to all of the transactions listed below, we relied on the exemption
provided by Section 4(2) of the Securities Act as a transaction by the issuer
not involving any public offering inasmuch as the securities were offered
without any form of general solicitation or general advertising and the offeree
was either an accredited investor or had effective access to the information
that registration would otherwise provide.
On
April7, 2005 we issued 400,000 shares of our common stock for paid in capital of
$16,000 cash. 375,000 of such shares were issued to three of our directors
for
paid in capital of $15,000.
During
August 2005, a $200,000 note payable by the Company was converted into 12,500
shares of our common stock.
On
February 20, 2007 we issued to Next Stage Investments, LLC, an affiliate of
GP
Group, LLC, 1,229,476 shares of our common stock at a price of $0.01 per share.
The shares of common stock were issued in exchange for services rendered to
us
in connection with the acquisition of AuraSound, Inc. on June 7,2007.
On
February 20, 2007 we issued 206,829 shares of our common stock at a price of
$0.01 per share to Bartley J. Loethen, our former sole officer and director,
in
exchange for legal services rendered to us.
On
June7, 2007, we issued 12,900,000 shares of our common stock and five-year warrants
to purchase 12,900,000 shares of our common stock at an exercise price of $1.50
per share to 15 investors, included as selling shareholders on pages 28 through
31, in connection with our private offering of 12,900,000 units at a price
of
$1.00 per unit, each unit consisting of one share of our common stock and a
five-year warrant to purchase one shares of our common stock at an exercise
price of $1.50 per share. We a greed to register with the SEC all of the
foregoing shares of our common stock and shares of our common stock underlying
the foregoing warrants . This registration statement is intended to satisfy
these obligations and is intended to register such shares. . Investors who
purchased at least $3,000,000 of such units have the option to purchase such
number of additional units equal to 50% of the dollar amount invested by such
investor at a price of $1.35 per unit for a period of 12 months from the initial
closing date of the private placement, which required us to reserve 8,888,888
shares of our common stock underlying such options.
II-4
On
June7, 2007, we consummated a share exchange of our common stock and acquired 100%
of the issued and outstanding capital stock of AuraSound, Inc. pursuant to
an
Amended and Restated Agreement and Plan of Share Exchange, dated June 7, 2007.
Pursuant to the agreement, the stockholders of AuraSound received 11,505,305
shares or approximately 43.6% of our issued and outstanding common stock in
exchange for all of the issued and outstanding capital stock of AuraSound,
and
all outstanding warrants of AuraSound were exchanged for our warrants to
purchase an aggregate of 3,200,000 shares of our common stock at an exercise
price of $1.00 per share. The value of our common stock on June 7, 2007 was
$1.00 per share.
On
June7, 2007, we issued GP Group, LLC, our placement agent in the private placement
of units that initially closed on June 7, 2007, a five year warrant to purchase
245,000 shares of our common stock at an exercise price of $0.80 per share
as
part of a bridge loan placement fee.
On
October 15, 2007, our board of directors authorized, and we entered into, an
Agreement to Convert Debt (the “Agreement”), pursuant to which we agreed to
convert $2,500,000 of debt owed to Inseat Solutions LLC, a company controlled
by
our Chief Executive Officer, Arthur Liu, into 1,666,667 Units of our securities,
with each “Unit” consisting of one share of our common stock and a warrant to
purchase one share of common stock at an exercise price of $1.50 per share.
The
warrant term is five years.
II-5
Item
27. Exhibits.
Exhibit
Number
Description
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)
Form
of Warrant issued to bridge lenders by AuraSound*
4.4
Form
of Warrant issued to investors in our Unit Offering closed on June7, 2007
(1)
4.5
AuraSound,
Inc. 12% Promissory Note , dated December 29, 2006 , in the amount
of
$750,000 issued to Mapleridge Insurance Services*
4.6
AuraSound,
Inc. 10% Promissory Note , dated January 29, 2007 , in the amount
of
$500,000 issued to Westrec Properties, Inc. & Affiliated Companies
401(k) Plan*
4.7
AuraSound,
Inc. 12% Promissory Note , dated February 5, 2007 , in the amount
of
$500,000 issued to Apex Investment Fund, Ltd.*
4.8
AuraSound,
Inc. 12% Promissory Note , dated April 2, 2007 , in the amount of
$500,000
issued to Clearview Partners, LLC,*
4.9
AuraSound,
Inc. 12% Promissory Note , dated February 14, 2007 , in the amount
of
$200,000 issued to YKA Partners, Ltd.*
4.10
Form
of Hermcure Warrant issued to bridge lenders in exchange for Warrant
issued by AuraSound*
5.1
Opinion
of Richardson & Patel LLP*
10.1
Form
of Subscription Agreement for investors in our Unit Offering closed
on
June 7, 2007(1)
II-6
Exhibit
Number
Description
10.2
Lock-up
Agreement dated June 7, 2007 executed by Arthur Liu (1)
10.3
Loan
Agreement dated December 29, 2006 between AuraSound, Inc. and Mapleridge
Insurance Services*
10.4
Loan
Agreement dated January 29, 2007 between AuraSound, Inc. and Westrec
Properties, Inc. & Affiliated Companies 401(k)
Plan*
10.5
Security
Agreement dated January 29, 2007 between AuraSound, Inc. and Westrec
Properties, Inc. & Affiliated Companies 401(k)
Plan*
10.6
Intercreditor
Agreement dated January 29, 2007 between Mapleridge Insurance Services
and
Westrec Properties, Inc. & Affiliated Companies 401(k)
Plan*
10.7
Loan
Agreement dated February 5, 2007 between AuraSound, Inc. and Apex
Investment Fund, Ltd.*
10.8
Security
Agreement dated February 5, 2007 between AuraSound, Inc. and Apex
Investment Fund, Ltd.*
10.9
Loan
Agreement dated April 2, 2007 between AuraSound, Inc. and Clearview
Partners, LLC *
10.10
Loan
Agreement dated February 14, 2007 between AuraSound, Inc. and YKA
Partners, Ltd.*
10.11
$10.0
Accounts Receivable credit facility with Bank SinoPac*
10.12
$2.0
million Letter of Credit facility with Bank SinoPac*
10.13
Personal
Guaranty of Arthur Lin in favor of Mapleridge Insurance
Services*
10.14
Personal
Guaranty of Arthur Lin in favor of Clearview Partners,
LLC*
10.15
Personal
Guaranty of Arthur Lin in favor of Apex Investment Fund,
Ltd.*
10.16
Personal
Guaranty of Arthur Lin in favor of Michael and Maureen Sachs Revocable
Trust (dated 10/21/03)*
10.17
Agreement
to Convert Dated dated October 15, 2007 between Inseat Solutions
LLC and
Hemcure, Inc. (4)
10.18
Warrant
to Purchase Common Stock of Hemcure, Inc. issued to Inseat Solutions
LLC
and dated October 15, 2007 (4)
1. To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
i.
Include
any prospectus required by section 10(a)(3) of the Securities Act
of
1933;
ii.
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing,, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) any deviation
from the
low or high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent
no
more than a 20% change in the maximum aggregate offering price set
forth
in the “Calculation of Registration Fee” table in the effective
registration statement; and
iii.
Include
any additional or changed material information on the plan of
distribution.
2. For
determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3. File
a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of offering.
4. Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
5. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons under the foregoing
provisions or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities
Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by any of
our
directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-8
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Fe Springs, California, on the 27th day of
November, 2007.
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)
Form
of Warrant issued to bridge lenders by AuraSound*
4.4
Form
of Warrant issued to investors in our Unit Offering closed on June7, 2007
(1)
4.5
AuraSound,
Inc. 12% Promissory Note , dated December 29, 2006 , in the amount
of
$750,000 issued to Mapleridge Insurance Services*
4.6
AuraSound,
Inc. 10% Promissory Note , dated January 29, 2007 , in the amount
of
$500,000 issued to Westrec Properties, Inc. & Affiliated Companies
401(k) Plan*
4.7
AuraSound,
Inc. 12% Promissory Note , dated February 5, 2007 , in the amount
of
$500,000 issued to Apex Investment Fund, Ltd.*
4.8
AuraSound,
Inc. 12% Promissory Note , dated April 2, 2007 , in the amount of
$500,000
issued to Clearview Partners, LLC,*
4.9
AuraSound,
Inc. 12% Promissory Note , dated February 14, 2007 , in the amount
of
$200,000 issued to YKA Partners, Ltd.*
4.10
Form
of Hermcure Warrant issued to bridge lenders in exchange for Warrant
issued by AuraSound*
5.1
Opinion
of Richardson & Patel LLP*
10.1
Form
of Subscription Agreement for investors in our Unit Offering closed
on
June 7, 2007(1)
10.2
Lock-up
Agreement dated June 7, 2007 executed by Arthur Liu (1)
10.3
Loan
Agreement dated December 29, 2006 between AuraSound, Inc. and Mapleridge
Insurance Services*
10.4
Loan
Agreement dated January 29, 2007 between AuraSound, Inc. and Westrec
Properties, Inc. & Affiliated Companies 401(k)
Plan*
10.5
Security
Agreement dated January 29, 2007 between AuraSound, Inc. and Westrec
Properties, Inc. & Affiliated Companies 401(k)
Plan*
II-10
Exhibit
Number
Description
10.6
Intercreditor
Agreement dated January 29, 2007 between Mapleridge Insurance Services
and
Westrec Properties, Inc. & Affiliated Companies 401(k)
Plan*
10.7
Loan
Agreement dated February 5, 2007 between AuraSound, Inc. and Apex
Investment Fund, Ltd.*
10.8
Security
Agreement dated February 5, 2007 between AuraSound, Inc. and Apex
Investment Fund, Ltd.*
10.9
Loan
Agreement dated April 2, 2007 between AuraSound, Inc. and Clearview
Partners, LLC *
10.10
Loan
Agreement dated February 14, 2007 between AuraSound, Inc. and YKA
Partners, Ltd.*
10.11
$10.0
Accounts Receivable credit facility with Bank SinoPac*
10.12
$2.0
million Letter of Credit facility with Bank SinoPac*
10.13
Personal
Guaranty of Arthur Lin in favor of Mapleridge Insurance Services*
10.14
Personal
Guaranty of Arthur Lin in favor of Clearview Partners,
LLC*
10.15
Personal
Guaranty of Arthur Lin in favor of Apex Investment Fund,
Ltd.*
10.16
Personal
Guaranty of Arthur Lin in favor of Michael and Maureen Sachs Revocable
Trust (dated 10/21/03)*
10.17
Agreement
to Convert Dated dated October 15, 2007 between Inseat Solutions
LLC and
Hemcure, Inc. (4)
10.18
Warrant
to Purchase Common Stock of Hemcure, Inc. issued to Inseat Solutions
LLC
and dated October 15, 2007 (4)
