ITEM 1. FINANCIAL STATEMENTS
AURA SYSTEMS, INC.
BALANCE SHEETS
(Unaudited)
|
|
As of
August 31,
|
|
|
As of
February 29,
|
|
|
|
2016
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
432,711
|
|
|
$
|
22,175
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
2,115
|
|
Other current assets
|
|
|
9,677
|
|
|
|
16,282
|
|
Total current assets
|
|
|
442,388
|
|
|
|
40,572
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
-
|
|
|
|
90,213
|
|
Property, plant, and equipment, net
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
442,388
|
|
|
$
|
130,785
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,402,270
|
|
|
$
|
1,823,776
|
|
Accrued expenses
|
|
|
5,805,583
|
|
|
|
5,389,883
|
|
Customer advances
|
|
|
641,751
|
|
|
|
641,751
|
|
Notes payable
|
|
|
4,348,958
|
|
|
|
3,927,468
|
|
Convertible note payable and accrued interest-related party, net of discount
|
|
|
2,793,402
|
|
|
|
-
|
|
Convertible notes payable, net of discount
|
|
|
3,662,260
|
|
|
|
2,720,700
|
|
Notes payable and accrued interest-related party
|
|
|
27,855,026
|
|
|
|
26,869,911
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
47,509,250
|
|
|
|
41,373,489
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable, net of discount
|
|
|
470,193
|
|
|
|
1,366,922
|
|
Convertible note payable and accrued interest-related party, net of discount
|
|
|
-
|
|
|
|
2,560,425
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
47,979,443
|
|
|
|
45,300,836
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 150,000,000 shares authorized at August 31 and February 28, 2015; 113,951,432 and 113,041,432 issued and outstanding at August 31 and February 29, 2016, respectively
|
|
|
11,399
|
|
|
|
11,304
|
|
Additional paid-in capital
|
|
|
410,499,597
|
|
|
|
410,404,692
|
|
Accumulated deficit
|
|
|
(458,048,051
|
)
|
|
|
(455,586,047
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(47,537,055
|
)
|
|
|
(45,170,051
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
442,388
|
|
|
$
|
130,785
|
|
The accompanying
notes are an integral part of these financial statements.
AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED AUGUST
31, 2016 AND 2015
(Unaudited)
|
|
Three Months ended
August
31,
|
|
|
Six Months ended
August
31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
-
|
|
|
$
|
101,307
|
|
|
$
|
-
|
|
|
$
|
207,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
40,198
|
|
|
|
-
|
|
|
|
113,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
-
|
|
|
|
61,109
|
|
|
|
-
|
|
|
|
93,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research and development expenses
|
|
|
100
|
|
|
|
94,735
|
|
|
|
33,888
|
|
|
|
232,222
|
|
Selling, general and administrative expenses
|
|
|
231,444
|
|
|
|
789,134
|
|
|
|
848,421
|
|
|
|
2,244,822
|
|
Total costs and expenses
|
|
|
231,544
|
|
|
|
883,869
|
|
|
|
882,309
|
|
|
|
2,477,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(231,544
|
)
|
|
|
(822,760
|
)
|
|
|
(882,309
|
)
|
|
|
(2,383,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
823,803
|
|
|
|
756,423
|
|
|
|
1,651,750
|
|
|
|
1,497,124
|
|
Gain on debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,288
|
)
|
|
|
-
|
|
Other (income) expense, net
|
|
|
-
|
|
|
|
(-
|
)
|
|
|
(1,767
|
)
|
|
|
(59,500
|
)
|
Total other (income) expense
|
|
|
823,803
|
|
|
|
756,423
|
|
|
|
1,579,695
|
|
|
|
1,437,624
|
|
Net Loss
|
|
$
|
(1,055,347
|
)
|
|
$
|
(1,579,183
|
)
|
|
$
|
(2,462,004
|
)
|
|
$
|
(3,820,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Weighted average shares used to compute basic and
diluted income (loss) per share
|
|
|
113,951,432
|
|
|
|
113,041,432
|
|
|
|
113,899,802
|
|
|
|
113,041,432
|
|
*Weighted
average number of shares used to compute basic and diluted loss per share is the same since the effect of the dilutive securities
is anti-dilutive.
See
accompanying notes to these unaudited condensed financial statements.
AURA
SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2016 AND 2015
(Unaudited)
|
|
Six Months Ended
August 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,462,004
|
)
|
|
$
|
(3,820,794
|
)
|
Adjustments to reconcile Net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
|
-
|
|
|
|
790
|
|
Amortization of debt discount
|
|
|
128,220
|
|
|
|
128,219
|
|
Gain on debt settlement
|
|
|
(70,288
|
)
|
|
|
-
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,115
|
|
|
|
26,637
|
|
Other current assets and deposit
|
|
|
96,819
|
|
|
|
(3,212
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable, customer deposit and accrued expenses
|
|
|
2,075,512
|
|
|
|
2,806,360
|
|
Net cash used in operations
|
|
|
(229,626
|
)
|
|
|
(862,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
571,490
|
|
|
|
161,440
|
|
Proceeds from notes payable-related party
|
|
|
68,672
|
|
|
|
672,500
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities:
|
|
|
640,162
|
|
|
|
833,940
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash & cash equivalents
|
|
|
410,536
|
|
|
|
(28,060
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
22,175
|
|
|
|
34,855
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
432,711
|
|
|
$
|
6,795
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
|
|
|
-
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Unaudited supplemental disclosure of non-cash investing and
financing activities:
None
See
accompanying notes to these unaudited condensed financial statements.
AURA
SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – ACCOUNTING POLICIES
Accounting principles
In the
opinion of management, the accompanying balance sheets and related interim statements of income and comprehensive income, and
cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity
with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not
necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with
information included in the Company’s annual report on Form 10-K for the year ended February 29, 2016 filed on
September
18, 2017
with the U.S. Securities and Exchange Commission.
Estimates
The preparation of financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In April 2015, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation
of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements.
ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability
rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual
reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively
to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on
its balance sheets.
In January 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on
the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for
equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial
instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax
assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and
interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect
adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption
is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting
from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting
this guidance.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters
into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle
of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in
the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating
the impact of adopting ASU No. 2016-02 on our financial statements.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08
clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred
to the customer and provides additional guidance about how to apply the control principle when services are provided and when
goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date
of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods
within those years. The Company has not yet determined the impact of ASU 2016-08 on its financial statements.
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating the impact of adopting ASU No. 2016-09 on our financial statements.
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability
of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended
by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years.
In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements
and Practical Expedients,” which amends the guidance on transition, collectability, non-cash consideration, and the presentation
of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or
substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity
should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue
if an arrangement does not meet the standard’s contract criteria. The standard allows for both retrospective and modified
retrospective methods of adoption. The Company has not yet determined the impact of ASU 2016-10 on its financial statements.
In
June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Statements,” which requires companies
to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual reporting
periods, and interim periods therein, beginning after December 15, 2019 (fiscal year 2021 for the Company). The Company has not
yet determined the potential effects of the adoption of ASU 2016-13 on its Financial Statements.
In
August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which aims to
eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of
cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods,
and interim periods therein, beginning after December 15, 2017 (fiscal year 2019 for the Company). The Company has not yet determined
the potential effects of the adoption of ASU 2016-15 on its Financial Statements.
Reclassifications
Certain
reclassifications have been made to the comparative financial statements to conform to the current period presentation.
NOTE
2 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
During the six months ended August 31, 2016 and August 31, 2015, the Company incurred losses of $2,462,004 and $3,820,794,
respectively and had negative cash flows from operating activities of $229,626 and $862,000, respectively.
If the Company is unable
to generate profits and is unable to continue to obtain financing for its working capital requirements, it may have to curtail
its business sharply or cease business altogether.
Substantial
additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing
and business development activities. 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.
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that could result from the outcome of this uncertainty.
During
the next twelve months we intend to restart operations of our AuraGen/VIPER business both domestically and internationally. At
the next shareholders meeting the shareholders will vote for an entire new slate of five board candidates. The new board when
elected will hire a new management team. In addition we plan to acquire a new facility of approximately 45,000 square feet for
operations, as well as, rebuild the engineering QA and sales teams to support the operation. We anticipate being able to fund
these additions in the upcoming fiscal year.
NOTE
3 – INVENTORIES
Inventories,
stated at the lower of cost (first in first out), or market consisted of the following:
|
|
August 31, 2016
|
|
|
February 29, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,872,720
|
|
|
$
|
1,858,347
|
|
Finished goods
|
|
|
1,568,188
|
|
|
|
1,558,554
|
|
|
|
|
3,440,908
|
|
|
|
3,416,901
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
|
(3,440,908
|
)
|
|
|
(3,416,901
|
)
|
Current portion
|
|
$
|
0
|
|
|
$
|
0
|
|
The
Company has not operated, and therefore has not produced product since late 2015. As a result, while the Company believes that
a significant portion of the inventory has value, we are unable to substantiate it’s demand and market value and as a result have
elected to reserve it in its entirety as of August 31, 2016 and February 29, 2016.
NOTE
4 – OTHER CURRENT ASSETS
Other assets of $9,677 and $16,283 are comprised of vendor advances of $2,895 and $16,283 as of August 31, 2016
and February 29, 2016.
NOTE
5 – PROPERTY, PLANT, AND EQUIPMENT
Property,
plant, and equipment consisted of the following:
|
|
August 31, 2016
|
|
|
February 29, 2016
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
964,111
|
|
|
$
|
964,111
|
|
Furniture and fixtures
|
|
|
163,302
|
|
|
|
163,302
|
|
|
|
|
1,127,413
|
|
|
|
1,127,413
|
|
Less accumulated depreciation
|
|
|
(1,127,413
|
)
|
|
|
(1,127,413
|
)
|
Property, plant and equipment, net
|
|
$
|
0
|
|
|
$
|
0
|
|
Depreciation expense
was $0 and $791 for the Six months ended August 31, 2016 and August 31, 2015, respectively.
NOTE
6 – NOTES PAYABLE
Notes
payable consisted of the following:
|
|
August 31,
2016
|
|
|
February 29, 2016
|
|
|
|
|
|
|
|
|
Demand notes payable, at 10% and 16%
|
|
$
|
4,348,958
|
|
|
$
|
3,927,468
|
|
Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 10
th
of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.
|
|
|
941,560
|
|
|
|
910,488
|
|
Convertible Promissory Note dated October 2, 2012, due October 2, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 2
nd
of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.
|
|
|
470,193
|
|
|
|
456,434
|
|
Senior secured convertible notes dated May 7, 2013, due May 7, 2014, convertible into shares of our common stock at a price of $0.75 per share. The note was not repaid.
|
|
|
2,395,700
|
|
|
|
2,395,700
|
|
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50 per share. The note was not repaid.
|
|
|
325,000
|
|
|
|
325,000
|
|
Convertible notes dated April thru August, 2016. The notes carry an interest rate of 5% and might be converted into shares of Company’s common stock if the shareholders approve a 7:1 reverse stock split.
|
|
|
566,940
|
|
|
|
-
|
|
|
|
|
8,481,411
|
|
|
|
8,015,090
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
$
|
8,011,218
|
|
|
|
6,648,168
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
470,193
|
|
|
$
|
1,366,922
|
|
CONVERTIBLE
DEBT
On
May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest,
and consulting fees to a senior secured convertible note with a principal value of $1,087,000 (“New Kenmont Note”)
and warrants to Kenmont Capital Partners (“Kenmont”). The New Kenmont Note has a 1-year maturity date and is convertible
into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,449,333 shares
and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $342,020 as a discount, which
is being amortized over the life of the note. As of the date of filing, the Company has not made any interest payments under the
Kenmont Note.
On May 7, 2013, the Company transferred
2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with
a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. (“LPD”). The New LPD
Note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The
warrants entitle the holder to acquire 744,933 shares and have an initial exercise price of $0.75 per share, and have a 7-year
term. The Company recorded $175,793 as a discount, which is being amortized over the life of the note. As of the date of filing,
the Company has not made any interest payments under the New LPD Note.
On May 7, 2013, the Company entered into
an agreement with an individual for the sale of a $750,000 of secured convertible note payable and warrants. The note has a 1-year
maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the
holder to acquire 1,000,000 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded
$235,985 as a discount, which is being amortized over the life of the note. As of the date of filing, the note has not been repaid
and is currently accruing interest at the rate of 16%.
On June 20, 2013, the Company entered into
an agreement with four individuals for the sale of $325,000 of secured convertible notes payable and warrants. These notes have
a 1-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants
entitle the holders to acquire 433,334 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The
Company recorded $63,622 as a discount, which is being amortized over the life of these notes. As of the date of filing, these
notes have not been repaid and are currently accruing interest at the rate of 16%.
On August 19, 2013, the Company entered
into an agreement with a member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Director
Note”) and warrants. The Director Note carries a base interest rate of 9.5%, has a 4-year maturity date and is convertible
into shares of common stock at the conversion price of $0.50 per share. The warrant entitles the holder to acquire 5,000,000 shares
at an initial exercise price of $0.75 per share for a 7-year exercise period. The Company recorded $667,118 as a discount, which
is being amortized over the life of the Director Note. On June 20, 2013, $500,000 of this Director Note was converted to a demand
note payable.
Future
maturities of notes payable at August 31, 2016 are as follows:
2017
|
|
$
|
470,193
|
|
Total
|
|
$
|
470,193
|
|
7%
Convertible Promissory Notes:
On
August 10, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory
note in the amount of $1,000,000. The note’s balance together with all accrued interest thereon shall be due and payable
on August 10, 2017 and the annual interest rate is 7% per annum and is due to be repaid 5 years from the closing date. The
note holder will receive interest on the unpaid principal amount payable monthly in arrears on the tenth day of each calendar
month commencing September 10, 2012. Interest shall be computed on the actual number of days elapsed over a 360-day year. The
note holder has the right from and after the date of issuance, and until any time until the note is fully paid, to convert any
outstanding and unpaid principal portion of the note into shares of the Company’s common stock. The company recorded $310,723
as a debt discount, which is being amortized over the life of the note
.
As of the date of filing, no payments of interest
or principal have been made by the Company on this note.
On October 2, 2012 the Company entered
into an agreement with an individual for the sale of an unsecured convertible promissory note in the amount of $500,000.
The note’s balance together with all accrued interest thereon shall be due and payable on October 2, 2017 and the annual
interest rate is 7% per annum and is due to be repaid 5 years from the closing date. The note holder will receive interest
on the unpaid principal amount payable monthly in arrears on the second day of each calendar month commencing November 2, 2012.
Interest shall be computed on the actual number of days elapsed over a 360-day year. The note holder has the right from and after
the date of issuance, and until any time until the note is fully paid, to convert any outstanding and unpaid principal portion
of the note into shares of the Company’s common stock. The company recorded $137,583 as a debt discount, which is being
amortized over the life of the note
.
As of the date of filing, no payments of interest or principal have been made by the
Company on this note.
NOTE
7 – ACCRUED EXPENSES
Accrued
expenses consisted of the following:
|
|
August 31, 2016
|
|
|
February 29, 2016
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
3,146,841
|
|
|
$
|
3,148,841
|
|
Accrued rent
|
|
|
211,523
|
|
|
|
218,025
|
|
Accrued interest
|
|
|
2,357,219
|
|
|
|
1,933,017
|
|
Other
|
|
|
90,000
|
|
|
|
90,000
|
|
Total
|
|
|
5,820,583
|
|
|
$
|
5,389,883
|
|
Accrued
payroll and related expenses consists of salaries and vacation time accrued but not paid to employees due to our lack of financial
resources.
NOTE
8 – SHAREHOLDERS’ EQUITY
Common
Stock
During the six months ended August 31, 2016,
we issued 950,000 shares of common stock were issued in settlement for a note payable balance $150,000 plus accrued interest of
$15,288.
During
the Six months ended August 31, 2015, we did not issue any shares of common stock.
Employee
Stock Options
During
the Six months ended August 31, 2016, there were no stock options granted to employees.
In
September, 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan. Activity in this plan is as follows:
|
|
2006 Plan
|
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Number of
Options
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, February 29, 2016
|
|
|
$
0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,224,000
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, August 31, 2016
|
|
|
$
0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,224,000
|
|
The
exercise prices for the options outstanding at August 31, 2016, and information relating to these options is as follows:
Options Outstanding
|
|
|
Exercisable Options
|
|
Range of
Exercise
Price
|
|
|
Number
|
|
|
Weighted
Average
Remaining Life
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Life
|
|
|
Number
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.75-$1.00
|
|
|
|
7,224,000
|
|
|
|
3.5 years
|
|
|
$
|
0.79
|
|
|
|
3.5 years
|
|
|
|
7,224,000
|
|
|
$
|
0.79
|
|
Warrants
Activity
in issued and outstanding warrants is as follows:
|
|
Number of Shares
|
|
|
Exercise Prices
|
|
Outstanding, February 29, 2016
|
|
|
36,726,208
|
|
|
|
$0.10-$1.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(8,337,187
|
)
|
|
$
|
1.50
|
|
Outstanding, August 31, 2016
|
|
|
28,349,021
|
|
|
|
$0.10-$1.25
|
|
There
were no warrants issued in the six months ended August 31,2016.
The
exercise prices for the warrants outstanding at August 31, 2016, and information relating to these warrants is as follows:
Range of
Exercise
Prices
|
|
|
Stock Warrants Outstanding
|
|
|
Stock Warrants Exercisable
|
|
|
Weighted-
Average Remaining Contractual Life
|
|
Weighted-
Average Exercise
Price of
Warrants Outstanding
|
|
|
Weighted-
Average
Exercise
Price of
Warrants
Exercisable
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10-$0.75
|
|
|
|
19,481,012
|
|
|
|
19,481,012
|
|
|
55 months
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
|
$0.75
|
|
|
|
1,082,734
|
|
|
|
1,082,734
|
|
|
54 months
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
|
$0.75
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
44 months
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
|
$0.75-$1.00
|
|
|
|
5,990,275
|
|
|
|
5,990,275
|
|
|
39 months
|
|
$
|
0.77
|
|
|
$
|
0.77
|
|
|
$
|
0.00
|
|
|
$1.00-$1.25
|
|
|
|
795,000
|
|
|
|
795,000
|
|
|
1 months
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,349,021
|
|
|
|
28,349,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
9 – INCOME TAXES
Our
effective tax rates were approximately 0.0% for the six months ended August 31, 2016 and 2015. Our effective tax rate was lower
than the U.S. federal statutory rate primarily due to the fact that we record a full valuation allowance against our deferred
tax assets, which is primarily comprised of net operating losses.
NOTE
10 – SEGMENT INFORMATION
We
are a United States based company providing advanced technology products to various industries. The principal markets for our
products are North America, Europe, and Asia. All of our operating long-lived assets are located in the United States. We operate
in one segment.
Total
net revenues from customer geographical segments are as follows for the six months ended August 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
0
|
|
|
$
|
41,261
|
|
Canada
|
|
|
-
|
|
|
|
2,800
|
|
Europe
|
|
|
-
|
|
|
|
210
|
|
Asia
|
|
|
-
|
|
|
|
107,384
|
|
Other
|
|
|
-
|
|
|
|
55,979
|
|
Total
|
|
$
|
0
|
|
|
$
|
207,634
|
|
NOTE 11 – SIGNIFICANT CUSTOMERS
Concentration Risk
In the six months ended August 31, 2016,
we did not have any sales to customers. In the six months ended August 31, 2015, we sold AuraGen related products to three significant
customers whose sales comprised 58%, 23% and 16% of sales, respectively. Net accounts receivable from these customers at August
31, 2015 were $29,999, $0 and $0 respectively. These customers are not related to or affiliated with us.
NOTE 12 – RELATED PARTIES
TRANSACTIONS
At
August 31, 2016, the balance reflected in Notes Payable and accrued interest-related party, current, includes $14,913,683 of unsecured
notes payable plus accrued interest of $8,427,183 to Mr. Breslow, a member of our Board of Directors, payable on demand, bearing
interest at a rate of 10% per annum. The balance of $14,880,372 plus accrued interest of $7,680,164 as of February 29, 2016. During
the six months ended August 31, 2016 and August 31, 2015, interest amounting to $747,019 and $723,013 respectively, was incurred
on these notes. The balance also includes $82,000 of unsecured notes payable plus accrued interest of $27,793 and $23,704 to our
CEO pursuant to a demand note entered into on April 5, 2013 and an unsecured note payable to Mr. Kopple, another member of our
Board of Directors in the total amount of $3,454,098 and $3,418,738 plus accrued interest of $950,268 and $784,934 with interest
at a rate of 10% per annum as of August 31, 2016 and February 29, 2016, respectively.
At August 31, 2016, the balance reflected in Convertible note payable and accrued interest-related party,
long term, includes $1,922,545 of secured convertible notes payable net of discounts of $77,455 plus accrued interest of $870,857
to Mr. Kopple, a member of our Board of Directors.
NOTE
13 – COMMITMENTS
Our
facilities consist of approximately 20,000 rented square feet in Stanton, California. The Stanton facility is currently being
used for small quantity assembly and testing using components that are produced by various suppliers as well as for general offices,
engineering and warehousing. The rent for the Stanton facility is $10,000 per month. The facility is not sufficient for our near
term anticipated needs and the Company is actively looking for a new facility. The Company arrangements for the Stanton facility
are on a month per month rent.
NOTE
14 – SUBSEQUENT EVENTS:
On January 24, 2017 the Company entered into a Debt Refinancing
Agreement with Mr. Breslow, a Director of the Company. Pursuant to the agreement, both Mr. Breslow and the Company acknowledged
that total debt owed to Mr. Breslow was $23,872,614 including $8,890,574 of accrued interest. Mr. Breslow agreed to cancel and
forgive all interest due, waive all events of default and sign a new five year convertible note in the amount of $14,930,041 providing
for no interest for six months and interest of 5% per annum thereafter payable monthly in arrears. The note also provides various
default provisions. The agreement further provides that $11,982,041 of the note will be converted into 7,403,705 shares of common
stock concurrent with the stockholders approving a 1 for 7 reverse stock split within one year of entering this agreement and the
remaining may be converted at any time thereafter post reverse split. In the absence of the approval within one year, this agreement
will become null and void. The Company has elected to continue to accrue interest on this agreement until such time as the 1 for
7 reverse stock split has been approved.
On January 30, 2017, the Company entered into an agreement with
five of our secured creditors (the “Secured Creditors”), pursuant to which a Securities Purchase Agreement dated May
6, 2013 (the “2013 Purchase Agreement”) among the Company, the Secured Creditors, and two other parties was amended
(the “Amended Agreement”). As part of the 2013 transaction, we entered into a security agreement with the Secured Creditors
and two other parties (collectively the “Buyers”) pursuant to which the Buyers were granted a security interest in
all of Company’s assets except for its patents and other intellectual properties. The Secured Creditors have the right to
amend the 2013 Purchase Agreement on behalf of all Buyers. The Amended Agreement amends the 2013 Purchase Agreement and the original
security agreement, replaces the convertible notes with “Amended Notes” and replaces the warrants with “Amended
Warrants.” The Amended Notes provide that all accrued and unpaid interest on the original notes through October 31, 2016
be added to the principal amount of the Amended Notes. The Amended Notes bear interest at the rate of 0% until May 1, 2017 and
5% per annum thereafter, subject to reduction to comply with applicable law, and mature in 60 months from the effective date of
a 1 for 7 reverse stock split. Upon certain financings, the Company is obligated to make a payment to the holders of the Amended
Notes in the amount of 20% of the outstanding Notes. Immediately upon the effectiveness of a 1 for 7 reverse stock split, 80% of
the then-unpaid principal of and all of the then accrued but unpaid interest on the Amended Notes is automatically converted. In
addition, the Amended Agreement waives any and all events of default under the 2013 Purchase Agreement and related transaction
documents existing on or prior to January 30, 2017 and amends the defaults and remedies section of the 2013 Purchase Agreement.
Two Buyers, who together represent less than 3% of the Company’s common stock issuable upon conversion of the original notes
and exercise of the original warrants, did not sign the amendment and have named the Company and the Company’s Chief Executive
Officer among several defendants in a lawsuit demanding repayment of loans totaling $125,000 plus accrued interest and exemplary
damages. Management believes that the two plaintiffs have no valid claim against the Company or our Chief Executive Officer. In
March 2017, plaintiffs moved for partial summary adjudication against the Company and our Chief Executive Officer; however, the
Court denied plaintiffs’ motion. Both the Company and Mr. Gagerman have filed demurrers seeking dismissal of this action,
which remain pending at this time.
On January 27, 2017, the Company entered into a joint venture
(JV) agreement with a Chinese company to manufacture, market and distribute certain mobile power products based on Aura’s patented
technology solely for the Peoples Republic of China territories. The JV will be owned 49% by the Company and 51% by the Chinese
company who will also contribute $9,750,000 to the JV. The Company is required to contribute $250,000 and a license to specific
technology. In addition, the Chinese company will invest $2,000,000 in Aura at $0.20 per share for a total of 10,000,000 shares
of common stock and purchase a minimum of $1,250,000 of product supported by letters of credit for distribution until the JV factory
is built, equipped, and staffed. Aura has also committed to supply training and technical personnel to the JV for six months at
no cost other than reimbursement for travel, room and board. The agreement was subject to the approval of the Chinese Government
which was received in April, 2017.
The Company is presently engaged in a dispute with one of its
directors, Robert Kopple, relating to approximately $5.4 million and approximately 22 million warrants which Mr. Kopple claims
to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well as against
current Directors Mr. Gagerman and Mr. Diaz-Verson together with former Directors Mr. Breslow and Mr. Howsmon in connection with
these allegations. The Company believes that it has valid defenses in these matters and intends to vigorously defend against these
claims.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward
Looking Statements
This
Report contains forward-looking statements within the meaning of the federal securities laws. Statements other than statements
of historical fact included in this Report, including the statements under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” regarding future events or prospects are forward-looking statements.
The words “approximates,” “believes,” “forecasts,” “expects,” “anticipates,”
“estimates,” “intends,” “plans” “would,” “could,” “should,”
“seek,” “may,” or other similar expressions in this Report, as well as other statements regarding matters
that are not historical fact, constitute forward-looking statements. We caution investors that any forward-looking statements
presented in this Report are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements
are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors
that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees
of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our
expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements
to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements
to differ materially from those expressed or implied by forward-looking statements include the following:
|
●
|
Our ability to generate positive cash flow from operations;
|
|
|
|
|
●
|
Our ability to obtain additional financing to fund our operations;
|
|
|
|
|
●
|
The impact of economic, political and market conditions on us and our customers;
|
|
|
|
|
●
|
The impact of unfavorable results of legal proceedings;
|
|
|
|
|
●
|
Our exposure to potential liability arising from possible errors and omissions, breach of fiduciary duty, breach of duty
of care, waste of corporate assets and/or similar claims that may be asserted against us;
|
|
|
|
|
●
|
Our ability to compete effectively against competitors offering different technologies;
|
|
|
|
|
●
|
Our business development and operating development;
|
|
|
|
|
●
|
Our expectations of growth in demand for our products; and
|
|
|
|
|
●
|
Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form
10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed
under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 29, 2016 (as the same
may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.
|
We do not intend to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except to the
extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons
acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place
undue reliance on these forward-looking statements.
Overview
Our business is based
on the exploitation of our patented mobile power solution known as the AuraGen for commercial and industrial applications and
the VIPER for military applications. Our business model consists of three major components: (i) sales and marketing, (ii) engineering,
and (iii) customer service and support.
(i) Our sales and marketing
approach is composed of direct sales in North America and the use of agents, distributors and joint ventures for sales internationally.
In North America, our primary focus is in (a) transport refrigeration, and (b) U.S. Military applications.
(ii) The second component
of our business model is focused on the engineering support for the sales activities described above. The engineering support
consists of the introduction of new features for our AuraGen/VIPER solution such as higher power, different voltages, three phase
options, shore power systems, higher current solutions as well as interface kits for different platforms.
(iii) The third component
of our business model is customer service. In fiscal 2018, we expect to rehire several previously trained field engineers to support
our product in North America. In addition, we are working closely with our Chinese Joint Venture partner to train their staff
to support our products overseas.
During the first half
of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second half of fiscal
2016 the Company’s operations were disrupted when the Company was forced to move from its facilities in Redondo Beach, California
to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were sporadic. During fiscal 2017,
the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial
obligations.
The Company has been
successful in restructuring its secured debt and has reached an agreement with its secured creditors whereby all defaults and
penalties have been waived and 80% of the secured debt will be converted into shares of the Company’s common stock as soon
as the Company holds an annual meeting of stockholders to elect a new board of directors. The balance (the remaining 20%), is
to be paid to the secured creditors in cash if the Company raises at least $4.0 million in proceeds through new equity offering.
Upon conversion, the converting secured creditors will receive approximately 3.9 million new common shares in exchange for approximately
$5.73 million of converting debt.
The Company has also
been successful in restructuring approximately $27.5 million of unsecured debt. Various unsecured creditors have agreed to waive
all defaults and penalties, to forgive an aggregate of approximately $9.3 million in debt, and convert an aggregate of approximately
$15.2 million of unsecured debt into approximately 10.2 million common shares. As of the date of this filing, Robert Kopple, the
Company’s Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his
debt. Mr. Kopple claims to be owed approximately $5.4 million on terms significantly preferable to other similarly-situated unsecured
creditors. Mr. Kopple has not accepted the Company’s offer to restructure this debt to-date.
Our financial statements
included in this report have been prepared on the assumption that we will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of business. However, as a result of our losses from
operations, there is substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report
on the Company’s financial statements for the year ended February 29, 2016 expressed substantial doubt about the Company’s
ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result
from our possible inability to continue as a going concern.
Our ability to continue
as a going concern is dependent upon the successful achievement of profitable operations, and the ability to generate sufficient
cash from operations and obtain financing resources to meet our obligations. There is no assurance that such efforts will be successful.
Our
current level of sales reflects our efforts to introduce a new product into the marketplace. Until recently, many purchases of
the product were for evaluation purposes. Recently we started to receive repeat orders for larger quantities as different organizations
are integrating our products into their vehicles. We seek to achieve profitable operations by obtaining market acceptance of the
AuraGen
®
as a competitive - if not superior - product providing mobile power anywhere anytime. There can be no
assurance that this success will be achieved.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on-going
basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition. We use authoritative pronouncements,
historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates.
We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation
of our consolidated financial statements.
Revenue
Recognition
We
are required to make judgments based on historical experience and future expectations, as to the reliability of shipments made
to our customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting
Bulletin (“SAB”) No. 101, “Revenue Recognition,” and related guidance. Because sales are currently in limited
volume and many sales are for evaluative purposes, we have not booked a general reserve for returns. We will consider an appropriate
level of reserve for product returns when our sales increase to commercial levels.
Inventory
Valuation and Classification
Inventories
consist primarily of components and completed units for our AuraGen® product. Inventories are valued at the lower of cost
(first-in, first-out) or market. Provision is made for estimated amounts of current inventories that will ultimately become obsolete
due to changes in the product itself or vehicle engine types that go out of production. Management believes that existing inventories
can, and will, be sold in the future without significant costs to upgrade it to current models and that the valuation of the inventories
accurately reflects the realizable values of these assets. The AuraGen® product being sold currently is not technologically
different from those in current use. Existing finished goods inventories can be upgraded to the current model with only a small
amount of materials and manpower. We make these assessments based on the following factors: i) existing orders, ii) age of the
inventory, iii) historical experience and iv) our expectations as to future sales. If expected sales volumes do not materialize,
there would be a material impact on our financial statements.
Valuation
of Long-Lived Assets
Long-lived
assets, consisting primarily of property and equipment, and patents and trademarks, comprise a portion of our total assets.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values
August not be recoverable. Recoverability of assets is measured by a comparison of the carrying value of an asset to the future
net cash flows expected to be generated by those assets. Net cash flows are estimated based on expectations as to the realize-ability
of the asset. Factors that could trigger a review include significant changes in the manner of an asset’s use or our overall
strategy.
Specific
asset categories are treated as follows:
Accounts
Receivable: We record an allowance for doubtful accounts based on our expectation of collect-ability of current and past due accounts
receivable.
Property,
Plant and Equipment: We depreciate our property and equipment over various useful lives ranging from five to ten years. Adjustments
are made as warranted when market conditions and values indicate that the current value of an asset is less than its net book
value.
When
we determine that an asset is impaired, we measure any such impairment by discounting an asset’s realizable value to the
present using a discount rate appropriate to the perceived risk in realizing such value. When we determine that an impaired asset
has no foreseeable realizable value, we write such asset down to zero.
Results of Operations
Six months ended August 31, 2016 compared
to six months ended August 31, 2015
Net revenues for the
six months ended August 31, 2016 (the “Six Months FY2017”) decreased $207,634 to $0 from $207,634 in the six months
ended August 31, 2015 (the “Six Months FY2016”). The Company has virtually ceased operations due to a lack of funding.
Cost
of goods decreased $113,760 to $0 in the Six Months FY2017 from $113,760 in the Six Months FY2016 as a result of the virtual cessation
of operations as noted above.
Engineering, research
and development expenses decreased $198,334 (85%) to $33,888 in the Six Months FY2017 from $232,222 in the Six Months FY 2016.
The decline is attributable to a lack of funds resulting in the virtual cessation of operations as noted above.
Selling, general and
administrative expense decreased $1,396,402 (62%) to $848,421 in the Six Months FY2017 from $2,244,823 in the Six Months FY2016.
As noted above, the decrease is attributable to the curtailment of activities due to a lack of financial resources.
Net interest expense
in the Six Months FY2017 increased $154,626 (10%) to $1,651,750 from $1,497,124 in the Six Months FY2016 as a result of our increased
debt levels.
Our net loss for the
Six Months FY2017 decreased $1,358,790 to $2,462,004 from $3,820,794 in the Six Months FY2016.
Three months ended August 31, 2016
compared to three months ended August 31, 2015
Net revenues for the
three months ended August 31, 2016 (the “Second Quarter FY2017”) decreased $101,307 to $0 from $101,307 in the three
months ended August 31, 2015 (the “Second Quarter FY2016”). The Company has virtually ceased operations due to a lack
of funding.
Cost of goods decreased
$40,198 to $0 in the Second Quarter FY2017 from $40,198 in the Second Quarter FY2016 as a result of the virtual cessation of operations
as noted above.
Engineering, research
and development expenses decreased $94,635 to $100 in the Second Quarter FY2017 from $94,735 in the Second Quarter FY 2016. The
decline is attributable to a lack of funds resulting in the virtual cessation of operations as noted above.
Selling, general and
administrative expense decreased $557,690 (71%) to $231,444 in the Second Quarter FY2017 from $789,134 in the Second Quarter FY2016.
The decline is primarily attributable to a lack of funds causing the Company to severely curtail operations.
Net interest expense
in the Second Quarter FY2017 increased $67,380 (9%) to $823,803 from $756,423 in the Second Quarter FY2016 as a result of our increased
debt levels.
Our net loss for the
Second Quarter FY2017 decreased $523,836 to $1,055,347 from $1,579,183 in the Second Quarter FY2016.
Liquidity and Capital Resources
We had cash of approximately
$433,000 and $22,000 as of August 31, 2016, and February 29, 2016, respectively. We had a working capital deficit at August
31, 2016, and February 29, 2016 of $47,066,862 and $41,332,917, respectively. The working capital deficit includes notes payable
and accrued interest to related parties of $27,855,026 and $26,869,911 as of August 31 and February 29, 2016, respectively. As
of August 31, 2016, we had accounts receivable, net of allowance for doubtful accounts, of $0 compared to $2,115 as of February
29, 2016.
Net cash used in operations
for the Six months ended August 31, 2016, was $229,626, a decrease of $632,374 from the comparable period in the prior fiscal year.
Net cash provided by financing activities during the Six months ended August 31, 2016, was $640,162, resulting from net proceeds
from notes payable.
There were no acquisitions
of property and equipment in the Six Months FY 2017 or the Six Months FY 2016.
Accrued expenses
as of August 31, 2016 increased $415,700 to $5,805,583 from $5,389,883 as of February 29, 2016. Approximately $1,335,000 of accrued
expenses is salaries accrued but unpaid to certain employees and ex-employees due to a lack of resources, and approximately $518,000
is accrued but unused vacation time earned by employees.
Net proceeds from the
issuance of debt totaled $640,162 in the Six Months FY 2017, compared with $833,940 in the Six Months FY 2016. As of August 31,
2016, the total amount owing a board member is $14,913,683 plus accrued interest of approximately $8,427,000. We also owe another
Board member a total of $5,376,644, net of discounts of $77,455 plus accrued interest of approximately $1,821,125. If the Board
members were to demand repayment, we do not currently have the resources to make the payments.
The Company had a deficit
of $47,537,055 in shareholders’ equity as of August 31, 2016, compared to $45,170,051 as of February 29, 2016.
Since 2002 substantially
all of our revenues from operations have been derived from sales of the AuraGen
®
. The cash flow generated from our
operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will
be sufficient to fund working capital needs.
In the past, in order
to maintain liquidity we have relied upon external sources of financing, principally equity financing and private indebtedness.
We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. The issuance of additional
shares of equity in connection with any such financing could dilute the interests of our existing stockholders, and such dilution
could be substantial. If we cannot raise needed funds, we would also be forced to make further substantial reductions in our operating
expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.
Capital Transactions
During
the six months ended August 31, 2016, we issued 950,000 shares of common stock to settle a note payable balance of $150,000 plus
accrued interest of $15,588.
During
the six months ended August 31, 2015, we did not issue any shares of common stock.
Inventories
Inventories
consist primarily of components and completed units of the Company’s AuraGen® product.
Early
in our AuraGen® program, we determined it was most cost-effective to outsource production of components and subassemblies
to volume-oriented manufacturers, rather than produce these parts in house. As a result of this decision, and based on then anticipated
sales, we purchased, prior to fiscal 2001, a substantial inventory of components at volume prices. Since sales did not meet such
expectations, we have been selling product from this inventory for several years.
Most
of our inventory consists of a variety of (i) metallic, mechanical components, and (ii) electrical components including metallic
chassis to hold the assembled electrical systems. The vast majority of mechanical components are not aged and most of the electrical
components are also not aged. The components that are aged are related to the prime mover/Generator interface that may not be
in demand any longer.
In the past
we
have offered and ship three different basic models of systems; (i) a 5 kW based systems, (ii) an 8.5 kW based system and (iii)
a 16 kW based systems (two 8.5 kW systems configured in tandem back-to-back). Each of these systems can be configured with
different options such as 110 VAC only, 220 VAC only, 24 VDC only, 12 VDC only and AC/DC combinations of the same or
different voltages. In addition, the system can be configured with single phase, split phase or three-phase
output.
A
number of the mechanical components are common to all three of the above configurations, while others are very specific. For example,
the stators and rotors for the 5 kW systems are different from the 8.5 kW systems, but the housings are the same. Similarly, the
electrical components consist of some parts that are geared for a specific configuration while others are generic and can be used
for all of the configurations. The electrical chassis are also interchangeable between the 5 kW and 8.5 kW configurations. Due
to the nature and mix of the product being sold, frequently, the 5 kW electrical systems are upgraded to 8.5 kW systems by replacing
some components.
From
the above description one can understand that the inventory consists of numerous components and subassemblies but not finished
systems; therefore, each system that is sold and shipped to a customer is built from some components that are in inventory and
others that need to be purchased to be able to configure the required system.
8.5
kW systems represent the majority of product previously shipped. These systems are built by using existing inventory subassemblies
and parts, including some that can be used for both 5 kW and 8.5 kW systems, and additional parts that are purchased to provide
the required configuration. Typically, such systems are built using approximately 20 to 25 percent of existing inventory and approximately
75% of additional parts that are purchased.
However, most of the systems
sold to the Korean military consist of 5 kW systems. They have been purchasing approximately 100 systems per year and have indicated
to us that they will continue to do so for the next five years. To date we have shipped over 500 such systems (in this case 100%
of the rotors and stators are used from existing inventory and over 50% of the electrical parts are also from inventory).
In addition
to the above, we have encountered demand for different and unique configurations that require the purchase of additional parts.