Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
PART
I
ITEM
1. BUSINESS
Introduction
The
Company, a Delaware corporation, was founded in 1987. Prior to experiencing severe financial pressures that started in the second
half of 2014 and which are further described below under “—Business Arrangements”, the Company designed, assembled,
tested and sold our proprietary and patented Axial Flux induction machine (“AF”) known as the AuraGen
®
for
industrial and commercial applications and the VIPER for military applications. Our patented system when applied as a generator
uses the engine of a vehicle or any other prime mover to create mechanical energy and the AuraGen converts the mechanical energy
to electric power. Our patented control system is used to deliver such power to the user. When used as an electric motor, our
system delivers mechanical power to drive mechanical devices. 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
completely 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 with
several Note holders.
Traditional
induction machines are Radial Flux (“RF”) machines and are the workhorse of industry due to their robustness, attractive
cost, and easy control. However, they are relatively heavy and bulky. Axial flux induction machines on the other hand, have all
of the advantages of the radial flux machines, but with the advantage of higher energy density resulting in smaller, lighter machines
with equivalent performance. Unlike permanent magnet (“PM”) machines, induction machines do not use any permanent
magnets and therefore the controller can change the magnetic (B) fields since generally the magnetic (B) field is proportionate
to the voltage divided by the frequency (V/f). It is generally accepted that for PM machines, as machine size grows, the magnetic
losses increase proportionately and partial load efficiency drops. On the other hand,with induction machines, as the machine size
grows, magnetic losses do not necessarily grow. Induction drives could offer an advantage when high-performance is desired. The
peak efficiency of an induction drive will be somewhat lower than with PM machines, but average efficiency may actually increase.
The
history of electric motors reveals that the earliest machines were in fact axial flux machines. However, after the first radial
flux machines were demonstrated in the early 1900’s, such machines were accepted as mainstream configuration. The reason
for shelving the axial flux machines were multifold and can be summarized as follows: (i) strong axial magnetic attraction force
between the stator and the rotor, (ii) fabrication difficulties such as cutting the slots in laminated cores, (iii) high cost
involved in manufacturing the laminated stator core, (iv) difficulties in assembling the machine and maintaining a uniform air
gap and (v) providing a laminated rotor that can stand the large centrifugal forces. Modern techniques show that all of the historical
objections for axial flux machines can be addressed with recent developments in the design of such machines, as well as, the design
of the proper manufacturing processes and tooling.
The
issue of the strong axial magnetic attraction force between the stator and the rotor was addressed by Aura’s patented approach
of using a topology of two stators and a rotor sandwiched between them. This has been disclosed in Aura’s U.S. Patent 5,734,217
(March 1998 ), which expires in March 2018, and U.S. Patent 6,157,175 (Dec. 2000). In addition to other benefits, the topology
is such that the axial forces on the bearings are very small and negligible.
The
issues of fabrication difficulties and the high cost involved in manufacturing of the laminated stator cores were resolved years
ago by Aura Systems using a technique involving punching the slots while rolling the steel. This approach creates a continuous
punched steel ribbon at a cost that is lower than the traditional punched laminates because less material is wasted. The equipment
required uses a closed loop control system that controls a precision step-motor and a punching press. Over the past 10 years,
we have delivered thousands of units of our induction axial flux machines in the 5-16kW range and have not encountered technical
issues that would appear to affect the use of the same techniques in any other size induction axial flux machines.
Many
manufacturers of PM axial flux machines, as well as Aura Systems with its induction axial flux machines, have resolved the issues
regarding difficulties in assembling the machine and maintaining a uniform air gap. Therefore this is no longer an issue.
Aura
Systems Inc. has also developed a cast rotor for the axial flux machine as described in U.S. Patents 5,734,217 and 6,157,175.
This rotor does not require any laminates and provides the structural integrity to withstand very large centrifugal forces, while
at the same time provides the proper electric and magnetic properties.
As
described above, Aura Systems developed the technology and manufacturing processes to overcome the traditional objections to axial
flux machines. Once Aura Systems resolved the historical issues relating to the axial flux approach as described above, the next
step was to develop a smart control system that provided for a total variable speed solution. A complete power generation system
based on Aura’s axial flux generator and Aura’s unique smart controller is disclosed in Aura’s U.S. Patent 6,700,214
(March 2, 2004). Finally, Aura’s U.S. Patent 6,700,802 (March 2, 2004) disclosed a method where power from multi sources
can be added to handle sudden power spikes such those that occur when a compressor, motor, pump, etcetera are turned on. In addition,
patent 6,700,802 provides a very unique method (bi-directional Power supply) for uninterrupted seamless transition from generator
power to battery pack power and back to generator power.
The
AuraGen
®
/VIPER system is composed of three primary subsystems (i) the patented axial flux design alternator, (ii)
the electronic control unit (“ECU”) and (iii) mounting kit that is a mechanical interface between the alternator and
the prime mover. The architecture of our patented ECU is designed to separate the power generation from the power user, thus creating
a flexible system that can support multi voltages simultaneously. The system architecture is based on having a direct current
(“DC”) power bus that is used to excite the alternator and also to collect energy from the alternator. The user loads
are supported from the power bus and not directly from the alternator. This immediately leads to a load following design where
the demand on the alternator at any moment in time is equal to the demanded user load (up to the maximum alternator power capabilities).
In addition, the output power is constructed from the power bus with either a PWM based inverter for alternating current (“AC”)
output, and/or, a unique patented bi direction power supply (“BDPS”) that acts as a DC to DC converter to provide
different DC voltages as an output. The BDPS provides the capability of adding power to the bus from a DC source such as batteries
whenever sudden spikes or demands occur. The BDPS also provides the seamless transition to maintain the power bus when the prime
mover is turned off (batteries are used to support the power bus).
After
a lengthy development period, the Company began commercializing the AuraGen
®
in late 1999 and early 2000. Our first
commercial product was a 5,000-watt 120/240V AC machine, in 2001; we subsequently added an 8,000-watt configuration and also introduced
the BDPS that allowed us to provide simultaneously an AC/DC solution. In fiscal 2008, the Company introduced a system that generates
up to 16,000-watts of continuous power by combining two 8,000 watts’ systems (dual system) and in fiscal 2010 introduced
the TanGen system that combines two 8,000 watts systems on a single output shaft (two rotors on a single shaft). The Company is
currently developing a 30,000-watt system consisting of two rotors on a single shaft (each one with 15,000 watts’ capability).
As described above, the focus is on mobile power applications and thus requires an interface kit to the prime mover. Many of our
applications are such that the AuraGen/VIPER is driven directly from a truck or SUV engine. The Company now has configurations
available for more than 90 different engine types, including a majority of models of General Motors and Ford, some Chrysler models
and numerous other engine models made by International, Isuzu, Nissan, Hino (Toyota), Mitsubishi, Caterpillar, Detroit Diesel,
Cummins, and Freightliner. In addition, the Company has interface kits for numerous model of military HMMWV, as well as other
military vehicles. Also, starting in fiscal 2008, the AuraGen/VIPER was installed on a number of U.S. Navy boats and on a number
of the U.S. Coast Guard 44 ft. patrol boats. In addition to the usage of the vehicle engine as the prime mover, the Company has
also developed numerous Power-Take-Off (“PTO”) interface kits for many different vehicle platforms and is also working
with a number of customers on integrating our AuraGen/VIPER power solution with stand-alone engines known as Auxiliary-Power-Unit
(“APU”) to be used in emergency rescue and electric vehicle applications.
Since March 2017, the Company has started
to reexamine the market and identified key areas upon which to initially focus as the Company plans to restart operations. A key
element of our business plan is focused on all-electric transport refrigeration. The market is well understood and both social
and economic forces are providing an unprecedented opportunity to gain significant market share. Our immediate focus is on 20-k
BTU/hr midsize trucks and the 50-k BTU/hr trailers. The market for new20-k BTU/hr midsize trucks is for approximately 15,000 new
trucks per year and a significant retrofit market of the existing over 100,000 operating systems across North America. The market
for new 50-k BTU/hr trailers is approximately 40,000 new units per year and also a significant retrofit market for the over 400,000
operating systems in North America. Another key element is the acceptance of our mobile power solution in military applications
around the globe. Our near term focus is marketing efforts in the U.S., South Korea, Israel and China.
Business
Arrangements
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. During this time, the Company’s agreements with numerous customers,
third party vendors, and organizations and entities material to the operation of the Company business were canceled, delayed or
terminated. Based on informal discussions with various customers and vendors, management believes that many of the canceled or
terminated agreements could be reinstated once the Company commences operating again. In March 2017, the Company signed a joint
venture agreement with a Chinese company to build, service and distribute the AuraGen patented products in China. The Chinese
partner owns 51% of the joint venture and the Company owns 49%. The Chinese partner contributed approximately $9.75 million for
facility, equipment, and working capital of the joint venture and the Company is required to contribute $250,000. The joint venture
is required to purchase the rotor and control software from the Company.
The
AuraGen
®
/VIPER
The
AuraGen
®
is composed of three basic subsystems. The first subsystem is the AF generator that is bolted to, and
driven by, the vehicle’s engine, PTO, or any other prime mover. The second subsystem is the ECU, which filters and conditions
the electricity to provide clean, steady voltages for both AC and DC power, and provides for variable speed applications as well
as load following for increased efficiency. The third subsystem consists of mounting brackets and supporting components for installation
and integration of the generator with the vehicle engine, PTO, or the prime mover.
Currently
the Company has power solutions for three continuous power levels, (a) 5,000 watts AC/DC, (b) 8,000 watts AC/DC and (c) 16,000
watts AC/DC. All the AC power is pure sine wave with total harmonic distortion of less than 2.1% and is available in
120 VAC and/or 240 VAC and in some application 480 VAC. In addition, the power generated on all models can be partitioned
to provide simultaneous AC and 14 or 28 volts of DC or only DC, if required by the user. The AuraGen power levels can be
generated as the prime mover speed varies from idle to maximum rated speed. The VIPER (the military version of the AuraGen
®
system) includes as an option a complete power management system which (i) monitors in real time the batteries’ voltage
and temperature, (ii) provides a partition of the power between AC and DC simultaneously with the ability to be programmed from
all AC to all DC, (iii) monitors the RPM of the generator, (iv) monitors the temperatures of the generator and the ECU, (v) monitors
the raw power generated, (vi) monitors both the AC and DC loads as to voltage and current, and (vii) provides programming of load
prioritization and load shedding.
Mobile
and Remote (not power grid connected) Power Industry
The
mobile and remote power generation market is large and growing. There are four basic market segments (i) military, (ii) stationary
but remote commercial/industrial, (iii) mobile commercial/industrial, and (iv) hybrid and electric vehicles. The military market
place is also divided between mobile and stationary applications.
According
to the U.S. Census Bureau, in 2007 the U.S. motor and generator industry, for larger than one horsepower applications, recorded
more than $9.5 billion in sales (
U.S Census Bureau Industry Statistical Sampler).
We
believe that one of the fastest growing segments in the military market place is On-Board-Exportable-Power (OBEP), which is electric
power on vehicles that can be used to support other than vehicle functions. The driver for the increased demand for on board power
are numerous advance weapon systems as well as increase in C
4
I functions (command, control, communication, computers
and information). Currently, most on board power is provided by APUs that are (i) large fuel users, (ii) bulky, (iii) heavy and
(iv) require constant maintenance. Militaries all over the world are seeking more efficient integrated power solutions for their
vehicles.
Similar
to the military demands, the commercial and industrial markets also require on board power to support modern computers, digital
sensors and instruments as well as electrical driven tools. Current automotive alternators cannot supply the existing demanded
power and thus the common solution is the use of APUs. These APUs are environmentally unfriendly, substantial users of fuel, heavy,
bulky and require constant maintenance and scheduled service. Vehicles used in the telecommunications, utilities, public works,
construction, catering, oil and gas industries, emergency/rescue, and recreational vehicles rely heavily on mobile power for their
daily work. Hybrid and electric vehicles by their nature require significant amounts of on board power to charge batteries as
well as to operate electric motors.
The
traditional available solutions for mobile and remote power users are:
|
●
|
Gensets
(AKA APUs),
Gensets are standalone power generation units that are not incorporated
into a vehicle and require external fuel, either gasoline or diesel, in order to generate
electricity. Gensets (i) are generally noisy and cumbersome to transport because of their
weight and size, (ii) typically run at constant speed to generate 50 or 60 Hz of AC power,
(iii) must be operated at a significant part of the rated power to avoid wet staking,
(iv) are significantly derated in the presence of harmonics in the loads and (v) require
significant scheduled maintenance and service. Genset technology has been utilized since
the 1950s.
|
|
●
|
High-Output
Alternators,
High-output alternators are traditionally found in trucks and commercial
vehicles and the vehicle’s engine is used as the prime mover. All high-output alternators
provide their rated power at very high RPM and significantly less power at lower RPM.
In addition, high-output alternators are generally only 30% efficient at the low RPM
range and increase to 50% efficiency at the high end of the RPM range. The power generated
by high-output alternators is 12 or 24 Volt DC and an inverter is required if AC power
is needed. In addition, due to the low power output at low RPMs, in order to get significant
power, a throttle controller is used to speed-up the engine.
|
|
●
|
Inverters,
Inverters are devices that invert DC to AC. Inverters as mobile power generators
are traditionally used in low power requirements, typically less than 2,500 watts, and
do not have the ability to recharge the batteries that are traditionally used as the
source of power. Thus, typical inverter users require other means to recharge the used
batteries such as “shore-power” or gensets. More recently dynamic inverters
became available. Dynamic inverters use power from the alternator to augment power from
the batteries and are able to achieve power levels in excess of 6,000 watts. Dynamic
inverters introduce significant stresses on both the batteries and alternators, which
causes significant life shortening for both. When the inverter is turned on, the alternator
is switched off from the vehicle battery and tied into a transformer that uses electronic
controls to change the DC alternator inputs to AC inverter output. A separate transformer
winding provides battery charging so that fully regulated 120 Volt AC and 12 Volt DC
power is available as long as the engine is running at high enough RPM to provide power
for the load and the battery charging. All dynamic inverters require a high-output alternator
to be able to output significant AC power. As is often the case, the limiting factor
is the high-output alternator. In order to get stable output, a very accurate throttle
controller is also needed to maintain steady speed on the engine.
|
|
●
|
Permanent-Magnet
Alternators.
Recently a number of companies have introduced alternators using exotic
permanent magnets. These alternators tend to have higher power generation capabilities
than regular alternators at lower engine RPM. In order to be practical in an under-the–hood
environment (200
o
F) active cooling must be added, since the magnets are demagnetized
at approximately 176
o
F. There are other issues that require an active control
system that will add and subtract magnetic field strength as the engine RPM increases.
Currently, the vast majority of the magnets used for electric machines come from China.
|
|
●
|
Fuel
Cells.
Fuel cells are solid-state devices that produce electricity by combining a
fuel containing hydrogen with oxygen. They have a wide range of applications and can
be used in place of the internal combustion engine and traditional lead-acid and lithium-ion
batteries. The most widely deployed fuel cells cost about $2,000 per kilowatt.
|
|
●
|
Batteries
.
Batteries convert stored chemical energy to electrical
.
|
Competition
The
Company is involved in the application of its AuraGen technology to mobile power and, as such, faces substantial competition from
companies offering different technologies
.
Over the last several years there have not been new significant developments
in this industry.
Gensets
AKA APU
- Portable generators meet a large market need for auxiliary power. Millions of units per year are sold in North
America alone, and millions more across the world to meet market demands for 1 to 20 Kilowatts of portable power. The market for
these power levels addresses the commercial, leisure and residential markets, and divides essentially into: a) higher power, higher
quality and higher price commercial level units; and b) lower power, lower quality and lower price level units. Gensets provide
the strongest competition across the widest marketplace for auxiliary power. Onan, Honda and Kohler, among others, are well established
and respected brand names in the genset market for auxiliary power generation. There are 44 registered genset-manufacturing companies
in the U.S. with many more through Asia and, particularly, within China.
High
Output Alternators
- There are many high output alternator manufacturers and the prices vary from hundreds to thousands
of dollars per unit. Some well-known manufacturers include: Delco-Remy, Bosh, Nippon Densu, Hitachi, Mitsubishi, Prestolite, EMP
and Neihoff. Alternatorsprovide rated power at very high RPM and significantly less power at lower RPM. In addition, alternators
are generally only 30% efficient at the low RPM range and increase to 50% efficiency at the high RPM range. The AuraGen/VIPER
system (including mechanical linkages and belt) is over 80% efficient at the low RPM range and is approximately 75% efficient
at the very high RPM range.
Inverters
- There
are many inverter manufacturers; across the globe the best known one is Xentrex. The pricing of industrial grade sine wave inverters
is approximately $500 per kilowatt plus the cost of a high output alternator ($650) and a good throttle controller ($250).
Permanent-Magnet
(“PM”) alternators.
- A number of companies have introduced alternators using exotic NdFeB magnets (UQM
technologies is one of the better known). These alternators tend to have higher power generation capabilities than regular
alternators at lower RPM. Unfortunately, PM machines with NdFeB magnets are very sensitive to temperature and, unlike the
AuraGen, cannot survive the typical under-the-hood environment (200
o
F+). In order to apply such devices for
automotive applications one must add expensive and cumbersome active cooling since the magnets are demagnetized at
approximately (176
o
F). To date, such machines have been used mostly in wind-power generation
applications.
In
addition to the temperature challenges of such machines, there are other issues involving active control of the magnetic field.
A disadvantage of PM generators is the difficulty of output voltage regulation to compensate for
speed and load variation due to the lack of a simple means of field control. In addition, in PM alternators as the machine size
grows, the magnetic loses increase proportionally.
Finally, PM machines are more expensive than induction machines.
Fuel
Cells
- Fuel cells are solid-state, devices that produce electricity by combining a fuel containing hydrogen with oxygen.
They have a wide range of applications, and can be used in place of the internal combustion engine and traditional lead-acid and
lithium-ion batteries. These systems are, however, generally prohibitively expensive, and the most widely deployed fuel cells
cost about $1,500 per kilowatt.
Others
- Symetron Technology by Raser Inc. is sometimes mistaken for a new form of motor or generator. The Symetron technology is a
variable frequency motor/generator controller that uses numerous control schemes to optimize performance. The Symetron technology
involves adaptive tuning to continuously optimize motor and system efficiency for the speed and torque operating point. When the
system was tested in November 2006 the adaptive algorithm or table calculations were performed offline and then input to the controller.
The
Symetron controller is a potential competitor to variable speed motor controllers provided by such companies as of ABB, or Baldor-Electric
Co. The Symetron technology is not a new form of motor/generator.
There
are a number of companies that advertise a “secret” approach for higher performance of inductive machines. Typically,
these claims are not proven and are based on changing the winding connections from Y to D or D to Y.
Axco
in Finland briefly introduced axial flux machines similar to Aura’s. However, Axco stopped its pursue of patent protection
in the U.S. when they discovered Aura’s patents. Furthermore, one of Axco scientist cites Aura’s approach in his PhD
dissertation. Axco business is currently focused on large permanent magnets applications mostly related to large windmills.
Evans
electric in Australia has recently introduced an axial flux machine with a complete conductive rotor. Such a machine was first
introduced by Brinner more than 20 years ago and was abandoned because the rotor lacked the required rigidity to withstand the
magnetic and centrifugal forces. The Brinner machine is cited in Aura’s patents.
Transport
Refrigeration (“TRU”)
- The main competitors for the all-electric TRU are traditional diesel based solutions
provided by Thermo-king and Carrier. The diesel based comparable systems provided by Thermo-king and Carrier are somewhat less
expensive than our AuraGen all-electric solution , however the diesel solutions require frequent maintenance and the utilization
of a separate diesel engine that consumes considerable fuel every operating hour. In addition, the diesel solutions emit harmful
emissions that have been recognized by the U.S. Environmental Protection Agency, California’s Air Resource Board and others
as dangerous pollutants and are increasingly subject to federal and state regulations.
The
economic and environmental benefits of the AuraGen solution are greatly amplified in transport refrigeration applications where
a separate diesel engine is eliminated. An analysis of our solution for large refrigeration trucks (117,000 trucks across the
nation) shows potential annual savings in excess of 26,000
tons of NMHC+NOx, 23,000 tons of CO and over to 1,400 tons of
PM
. The
diesel fuel savings exceed 100,000,000 annual gallons
. The above numbers are very conservative since
they reflect: (i) the assumption that all refrigeration diesel engines already meet the Tier 4 EPA requirements and (ii) that
there are no additional savings from idle reductions. Both assumptions are used as a lower bound for the anticipated savings.
Most
of our competitors have greater financial, technical, and marketing resources than we have. They have larger budgets for research,
new product development and marketing, and have long-standing customer relationships. We also compete with many larger and more
established companies in the hiring and retention of qualified personnel. Our financial condition has limited our ability to market
the AuraGen
®
aggressively.
The
AuraGen
®
uses new technology and because our product is radically different from traditionally available mobile
power solutions, users may require lengthy evaluation periods to gain confidence in the product. OEMs and large fleet users also
typically require considerable time to make changes to their planning and production.
Targeted
Markets
It
is only recently that the Company has started to reexamine and identify key markets upon which to initially focus as the Company
plans to restart operations.
(i)
A key element of our business plan is focused on All-Electric Transport refrigeration. The market is well understood and both
social and economic forces are providing an unprecedented opportunity to gain significant market share. Our immediate focus is
on 20-k BTU/hr midsize trucks and the 50-k BTU/hr trailers.
(ii)
Another element of our business plan is focused of our mobile power solution for military applications around the globe.
(iii)
We plan to look for joint venture opportunities similar to the agreement we recently entered in China to explore other international
opportunities.
Facilities,
Manufacturing Process and Suppliers
As
part of downsizing due to financial distress experienced by the Company as further described in “--Business Arrangements”,
our current facilities consist of approximately 20,000 square feet in Stanton California and an additional storage facility for
existing inventory. The Stanton facility is currently used for some assembly and testing of AuraGen/VIPER systems. The facility
is rented on a month-to-month basis. The rent for the Stanton facility is $10,000 per month and the storage facility is additional
$5,000 per month. The current Stanton facility is not sufficient to support the expected operations should the Company’s
operations return to pre-2014 production levels. Accordingly, the Company is currently looking for a new facility of approximately
45,000 square feet that would be used for production, testing, and engineering for AuraGen/VIPER mobile power solution as well
as needed office space for support staff. Prior to May 2015, we occupied a 69,000 square foot facility in Redondo Beach, California.
The Redondo Beach facility was used for assembly and testing of products,as well as for general offices, engineering and warehousing.
The rent for the Redondo Beach facility was approximately $60,000 per month.
As
the Company is gearing up operations again, we need to renew relationships and contracts with our suppliers or locate suitable
new suppliers for subassemblies and other components. Recently, the Company entered into discussions with several of its prior
suppliers and is in the process of negotiating settlements of old payables and arranging new supply contracts.
Research
and Development
We
believe that ongoing research and development is important to the success of our product in order to utilize the most recent technology,
develop additional products and additional uses for existing products, stay current with changes in vehicle manufacture and design
and maintain an ongoing advantage over potential competition. Our engineering, research and development costs for fiscal 2017
were approximately $34,000 compared to approximately $0.4 million in fiscal 2016.
We
stopped practically all research and development in the last two years due to severe cash shortfall; however, we did redesign
the Electronic Control Unit (“ECU”) to include the latest state-of-the-art power electronics and processors. We set
a modest budget of $400,000 for research and development in 2017 and $1.0 million budget for 2018 based on our anticipated resources.
We believe that ongoing research and development is important to the success of our product in order to utilize the most recent
technology, develop additional products and additional uses for existing products, stay current with changes in vehicle manufacture
and design and maintain an ongoing advantage over potential competition.
Patents
and Intellectual Property
Our
intellectual property portfolio consists of trademarks, proprietary know-how and patents.
In
the area of electromagnetic technology, we have developed numerous magnetic systems and designs that result in a significant increase
of magnetic field density per unit volume that can be converted into useful power energy or work. This increase in field density
is a factor of three to four, which, when incorporated into mechanical devices, could result in a significant reduction in size
and cost of production for the same performance.
The
applications of these technological advances are in machines used every day by industrial, commercial, and consumers. We have
applied technology to numerous applications in industrial machines, such as generators, motors, actuators, and linear motors.
We
hold the following patents: Nos. 5,734,217; 6,157,175; 6,700,214; 6,700,802; with expiration dates in 2018, 2020, 2024 and 2024
respectively. A provisional patent for a water-cooled AuraGen was granted in March 2013. Application 61/516,071 was filed January
2012 and claims allowed in March 2015, with an expiration date of March 2032.
The
following applications are pending: Application 13/849,464 filed in March 2013; and Application 13/781,749 filed in March 2013.
Induction
Machine
The
basic patent covers a new form of induction machine with superior performance in a much smaller size than conventional machines.
The solid cast rotor, the shaped magnetic field, the secondary conduction path through the steel and the axial magnetic orientations
are key components of this innovation.
Control
System
This
system separates the power generation from the power delivery by introducing a 400 VDC buss. For each cycle of each phase, part
of the cycle power is drawn from the bus to run the electronics and energize the coils, while during the other part of the cycle,
power is delivered to charge up the buss. The control system must balance all the timing to effect zero voltage change to the
buss under dynamic variations of frequency and loads. The ability to optimize in real time the slip frequency is a key innovation
in motor and generator control for variable speed, variable frequency, and variable load systems.
Bi-Directional
Power Supply (“BDP”)
The
patented ICS system developed by Aura provides a new capability in power systems. The BDP allows a system to use multiple sources
of power simultaneously. It is a key component in providing the ability to deliver both AC and DC power simultaneously, as well
as the ability to handle large power surges without the need for a throttle controller.
At
the end of fiscal 2013 and the first quarter of fiscal 2014, we filed five new patent applications related to the AuraGen. These
new patent applications are specifically designed to cover the (i) integration of the AuraGen power solution with transport refrigeration,
(ii) the interface kit of the AuraGen with prime movers, (iii) a water cooled AuraGen solution for situations where ventilation
is not available, (iv) a unique cable system with safety protection to transfer high power between two moving objects, and (v)
a unique clamping of power electronic components to heat sink to ensure good thermal conductivity.
Government
Regulation
We
are subject to laws and regulations that affect the Company’s activities, which include, but are not limited to, the areas
of labor, intellectual property and ownership and infringement, tax, import and export requirements, environmental, and health
and safety. As we recommence operations, our operations will again be subject to federal, state and local laws and regulations
governing the occupational health and safety of our employees and wage regulations. For example, we are subject to the requirements
of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee
health and safety. We expect to expend resources to maintain compliance with OSHA requirements and industry best practices.
Employees
As
of the date of this filing, other than our CEO Mr. Gagerman, the Company has no employees. However there are four independent
contractors two of which are working to support the outside independent auditor, one who is working on redesigning the Electronic
Control Unit for the AuraGen/VIPER and one who is helping dealing with the JV Agreement, and other technical matters. The independent
contractors are used on an as need basis.
Significant
Customers
We
have no significant customers at this time. However, the Company has an initial commitment of approximately $1.25 million
over the next eight months to deliver AuraGen systems and components to the Chinese Joint Venture partner to support their
marketing efforts as the Joint Venture facilities are being readied. For additional information, see “Certain
Subsequent Events—China Joint Venture.”
We
had no sales during the fiscal year ended February 28, 2017. During the year ended February 29, 2016, we conducted business with
two major customers whose sales comprised 55.9% and 22.0% of net sales, respectively. As of February 29, 2016, these customers
accounted for 68.0% of net accounts receivable.
Backlog
There are no significant customers as of the date of the filing
of this Annual Report on Form 10-K. However, the Company has an initial order of AuraGen systems and components representing approximately
$1.25 million and deliverable during fiscal 2018 to a joint venture partner to support their marketing efforts as the joint venture
facilities are being readied. Management believes that once the Company is operating again, a significant backlog will develop.
No assurances, however, can be given how long it will take the Company, if at all, to develop a significant backlog. For additional
information, see “Certain Subsequent Events—China Joint Venture.”
Raw
Materials
The most important raw materials
we use in manufacturing our products are steel, copper, and aluminum. Raw materials are purchased both domestically and outside
the United States. We have no significant long-term supply contracts. When possible, we maintain a number of sources for our raw
materials, which we believe contribute to our ability to obtain competitive pricing. The cost of some of our raw materials and
shipping costs are dependent on petroleum cost. Higher material prices, cost of petroleum, and costs of sourced products could
have an adverse effect on margins.
We enter into standard purchase agreements with certain foreign
and domestic suppliers to source selected products. The terms of these arrangements are customary for the industry and do not
contain any long-term contractual obligations on our behalf.
Certain
Subsequent Events
Subsequent
to the end of fiscal 2017, certain material developments have occurred relating to the business of the Company.
China
Joint Venture
-
On January 27, 2017, we entered into a Sino-Foreign Cooperative Joint Venture Agreement (the “JV
Agreement”) with Jiangsu AoLunTe Electrical Machinery Industrial Co., Ltd. (“AoLunTe”) pursuant to which the
parties will establish a joint venture company (the “JV”) for the purposes of manufacturing and distributing our patented
mobile power solution in the Peoples Republic of China (“PRC”). The business of the JV is limited to the manufacturing,
marketing and sale, repair and maintenance of selected mobile power products for commercial and military use in the PRC only.
Pursuant
to the JV Agreement, AoLunTe will own 51% of the JV and we will own 49%, and profits will be distributed based on the ownership
interest of each party. AoLunTe will contribute the RMB equivalent of $500,000 US dollars in cash within 30 days after the Establishment
Date (as defined), as well as tangible and intangible assets (including but not limited to equipment, land and facilities of the
site for the JV) not later than 180 days after the Establishment Date valued at 9.25 million in US Dollars. The “Establishment
Date” is the first business day after the JV’s receipt of the certificate of approval issued by the PRC governmental
authority responsible for approving the JV Agreement and the Articles of Association of the JV. Such approval was granted in March
2017. Pursuant to the JV Agreement, we are required to contribute the RMB equivalent of $250,000 in US dollars within 45 days
after the Establishment Date, as well as an exclusive, non-assignable, and royalty-free license in the PRC to use our intellectual
property. We have made the required payment.
The
JV shall be governed by a Board of Directors, consisting of three directors nominated by AoLunTe and three directors nominated
by us. All “Major Decisions” of the Board, which are specified in a schedule to the JV Agreement, require the vote
of two-thirds of the directors, including at least one director nominated by us and one director nominated by AoLunTe. All other
decisions of the Board require the approval of a simple majority of directors. A general manager appointed by the Board upon the
nomination by AoLunTe shall be responsible for the day-to-day operation and management of the JV, while quality control as well
as the financial controller are to managed by individuals to be appointed by the Board upon our nomination, under the supervision
of the Board.
The
term of the JV Agreement is 30 years from the Establishment Date, subject to extension by mutual written agreement of the parties.
The JV Agreement may be terminated sooner by the written agreement of the parties or in the event of certain specified events,
including without limitation a material breach of the JV Agreement which is not remedied (if capable of remedy) within 30 days
after written notice of such breach is provided to the other party.
Pursuant
to the JV Agreement, AoLunTe will purchase from us $1,250,000 of product, payable in four payments after the Establishment Date
in the amounts of $500,000, $250,000, $250,000, and $250,000. The fourth payment will be offset against a prior advance for products
paid by AoLunTe to us.
AoLunTe
is required by the JV Agreement to purchase 10 million shares of our Common Stock (such number being prior to a contemplated 1-for-7
reverse stock split by us, the “Reverse Split”) for an aggregate of $2,000,000 pursuant to a Securities Purchase Agreement,
the form of which is attached to the JV Agreement. Pursuant to the terms of the Securities Purchase Agreement, the first installment
of $1,000,000 was paid into a mutually-agreed escrow account and subsequently released from escrow in March 2017. The second installment
of $1,000,000 was also paid into a mutually-agreed escrow account and is scheduled to be released to us following approval by
our stockholders of resolutions electing a new board of directors and approving an amendment to our Certificate of Incorporation
to effect the above-referenced 1-for-7 reverse stock split of our Common Stock. The shares of Common Stock to be sold to AoLunTe
are being sold pursuant to Regulation S under the Securities Act of 1933, as amended, and will not be offered or sold to any U.S.
person or for the account or benefit of any U.S. person prior to the end of the restricted period provided by Regulation S and
any other applicable law.
Available
Information
We
file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”
or the “Commission”). These materials can be inspected and copied at the SEC’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s
Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.
On
our website, www.aurasystems.com, we provide free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after they have been
electronically filed or furnished to the SEC. Information contained on our website is not part of this Annual Report on Form
10-K or our other filings with the SEC.
ITEM
1A. RISK FACTORS
We
have a history of losses, and we may not be profitable in any future period.
In each fiscal year since
our reorganization in 2006, we have reported losses. Since the Company’s Chapter 11 Plan reorganization in 2006,
we have spent considerable amounts on, among other things, building market awareness and infrastructure for sales and distribution,
enhancing our engineering capabilities, perfecting an all electric refrigeration transport system for midsize trucks, developing
a 16-18 kW product, and developing a nine-inch system capable of delivering approximately 4 kW of power. We continue
to need substantial funds for the development of new products and in order to expand sales. However, sales of our products
have not increased as we expected them to and may never increase to the level that we need to expand our operations, or even to
sustain them. We can provide no assurance as to when, or if, we will recommence operations or be profitable in the future. Even
if we recommence operations and achieve profitability, we may not be able to sustain it.
We will need additional capital in the future to meet
our obligations and financing may not be available. During fiscal 2017, the Company suspended its engineering, manufacturing,
sales, and marketing activities to focus on renegotiating numerous financial obligations. If we cannot obtain additional capital,
we will not be able to recommence our operations.
As
a result of our operating losses, we have financed our operations through sales of our debt and equity securities. 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. During fiscal 2017, the Company suspended its engineering, manufacturing,
sales, and marketing activities to focus on renegotiating numerous financial obligations. While we plan
to recommence operations, expand sales and marketing and improve operations, we continue to operate at negative cash flow. Our
ability to continue as a going concern is dependent upon our ability to obtain additional operating capital and generating sufficient
operating cash flow. If we are unable to obtain additional funding as and when we need it, we will not be able to
recommence operations or undertake our planned expansion.
Our
independent public accounting firm has included an explanatory paragraph in its opinion to the effect that there is substantial
doubt about our ability to continue as a going concern.
Our
independent public accounting firm has included an explanatory paragraph in its opinion to the effect that there is substantial
doubt about our ability to continue as a going concern. We do not have any sufficient committed sources of capital
and do not know whether additional financing will be available when needed on terms that are acceptable, if at all. This
going concern statement from our independent public accounting firm may discourage some investors from purchasing our stock or
providing alternative capital financing. The failure to satisfy our capital requirements will adversely affect our
business, financial condition, results of operations and prospects.
If
we do not receive additional financing when and as needed, we may not be able to continue the research, development and commercialization
of our technology and products. In that case, our business and results of operations would be materially and adversely
affected.
Our
capital requirements have been and will continue to be significant. We anticipate that we will require substantial
additional funds in excess of our current financial resources for research, development and commercialization of our technology
and products, to obtain and maintain patents and other intellectual property rights in these technologies and products, and for
working capital and other purposes, the timing and amount of which are difficult to ascertain. When and as we need
additional funds, such funds may not be available on commercially reasonable terms or at all. If we cannot obtain additional
funding when and as needed, our business and results of operation would be materially and adversely affected.
Market
acceptance of our AuraGen® product line is uncertain. If a large enough market does not develop for our products,
our business and the results of our operations will be materially and adversely affected.
Our
business is dependent upon sales generated from our AuraGen®/VIPER family of products. This product line utilizes
advanced technology and has only recently begun being used in the marketplace for selected applications. We are dependent
on the broad acceptance by businesses and industry of our products. Because the market for our product line is emerging,
the potential size of this market and the timing of its development cannot be predicted. A significant market may fail
to develop or it may develop more slowly than we anticipate, either of which will have a material adverse effect on our business
and results of operations.
Our
intellectual property rights are valuable, and any inability or failure to protect them could reduce the value of our products,
services and brand, which would have a material adverse effect on our business.
Our patents, trademarks, and
all of our other intellectual property rights are important assets for us. There are events that are outside of our
control that pose a threat to our intellectual property rights. For example, effective intellectual property protection
may not be available in every country in which our products and services are distributed or made available. Also, the
efforts we have taken to protect our proprietary rights may not be sufficient or effective. The expiration of patents
in our patent portfolio may also have an adverse effect on our business. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and
time consuming and we may need to resort to litigation to enforce our patent rights or to determine the scope and validity of third-party
intellectual property rights. Some of our competitors may be able to sustain the costs of complex patent litigation
more effectively than we can because they have substantially greater resources.
We
seek to obtain patent protection for our innovations. It is possible, however, that some of these innovations may not
be protectable. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations
that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope
of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable. Our
inability or failure to protect our intellectual property rights could have a material adverse effect on our business by reducing
the value of our products, services and brand.
We
occasionally become subject to commercial disputes that could harm our business by distracting our management from the operation
of our business, by increasing our expenses and, if we do not prevail, by subjecting us to potential monetary damages and other
remedies.
From
time to time we are engaged in disputes regarding our commercial transactions. These disputes could result in monetary
damages or other remedies that could adversely impact our financial position or operations. Even if we prevail in these disputes,
they may distract our management from operating our business and the cost of defending these disputes would reduce our operating
results.
We are currently party to litigation with one of our
directors relating to approximately $5.4 million and approximately 22 million warrants which the director claims are owed to him
and his affiliates. An adverse ruling on these claims in this litigation would materially and adversely affect our business results
or operating and financial condition, dilute our shareholders’ equity interests in the Company and could adversely effect
our stock price.
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 other members of the Board of Directors in connection with these allegations. The Company believes that it has
valid defenses in these matters and believes that no warrants are due to Mr. Kopple or his affiliates. The Company intends to vigorously
defend against these claims. However, if Mr. Kopple were to prevail, an adverse ruling on these claims would materially and adversely
affect our business results or operating and financial condition, dilute our shareholders’ equity interests in the Company
and could adversely affect our stock price. See Item 3. “Legal Proceedings”, “Liquidity and Capital Resources”
in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere
in this Annual Report on Form 10-K for additional information regarding the transactions under dispute.
Our
business is not diversified. If we cannot increase market acceptance of our products, modify our products and services,
or compete with new technologies, we may never be profitable.
We
currently focus all of our resources on the successful commercialization of the AuraGen®/VIPER family of products. Because
we have elected to focus our business on a single product line rather than diversifying into other areas, our success will be
dependent upon the commercial success of these products. If we are unable to increase market acceptance of our products,
if we are unable to modify our products and services on a timely basis so that we lose customers, or if new technologies make
our technology obsolete, we may never be profitable.
Many
of our competitors are larger and better financed than we are and have a greater presence in the marketplace. Our business
may be adversely affected by industry competition.
Both
in the U.S. and internationally, the industries in which we operate are extremely competitive. We face substantial
competition from companies that have a long history of offering traditional auxiliary power units (portable generators), traditional
automotive alternators, and inverters (a device that inverts battery direct current electricity to alternating current). Many
of our competitors have substantially greater financial resources, spend considerably larger sums than we spend on research, new
product development and marketing, and have long-standing customer relationships. Furthermore, we must compete with
many larger and better-established companies in the hiring and retention of qualified personnel. Although we believe
we have significant technological advantages over our competitors, realizing and maintaining such advantages will require us to
develop customer relationships and will also depend on market acceptance of our products. We may not have the financial
resources, technical expertise, or marketing and support capabilities to compete successfully, which would materially and adversely
affect our business.
We
may not be able to establish an effective distribution network or strategic OEM relationships, in which case our sales will not
increase as expected and our financial condition and results of operations would be adversely affected.
We
are in the early stages of developing our distribution network and establishing strategic relationships with original equipment
manufacturer (OEM) customers. We may not be able to identify appropriate distributors or OEM customers on a timely
basis. The distributors with which we partner may not focus adequate resources on selling our products or may otherwise
be unsuccessful in selling them. In addition, we cannot assure you that we will be able to establish OEM relationships
on favorable terms or at all. The lack of success of distributors or OEM customers in marketing our products would
adversely affect our financial condition and results of operations.
If
we are successful in executing our business plan, we expect our business to grow. Our failure to efficiently manage
our growth could have an adverse affect on our business.
If
we are successful in executing our business plan, we may experience growth in our business that could place a significant strain
on our management and other resources. Our ability to manage this growth will require us to successfully assimilate
new employees, improve existing management information systems and reorganize our operations. If we fail to manage
growth efficiently, our business could be adversely affected.
We
may experience delays in product shipments and increased product costs because we depend on third party manufacturers for certain
product components. Delays in product shipment or an inability to replace certain suppliers could have a material adverse
effect on our business and results of operations.
We
currently have a limited capability to manufacture most of the AuraGen®/VIPER components on a commercial scale. Therefore,
we rely extensively on subcontracts with third party manufacturers for such components. The use of third party manufacturers
increases the risk of delay of shipments to our customers and increases the risk of higher costs if our manufacturers are not
available when required. Our suppliers and manufacturers may not supply us with a sufficient amount of components or
components of adequate quality, which would delay production of our product. We do not have written agreements with
our suppliers. Furthermore, those suppliers who make our more technically difficult components may not be easily replaced. Any
of these disruptions in the supply of components could have a material adverse effect on our business or results of operations.
Although
we generally aim to use standard parts and components for our products, some of our components are currently available only from
limited sources.
We
may experience delays in production of the AuraGen®/VIPER if we fail to identify alternate vendors, or if any parts supply
is interrupted or reduced or if there is a significant increase in production costs, each of which could materially adversely
and affect our business and operations.
We
will need to renew sources of component supplies to meet increases in demand for the AuraGen®/VIPER. There is no
assurance that our suppliers can or will supply the components to us on favorable terms or at all.
In
order to meet demand for AuraGen®/VIPER systems, we will need to renew contracts with our prior manufacturers and suppliers
or locate other suitable manufacturers and suppliers. Although we believe that there are a number of potential manufacturers
and suppliers of the components, we cannot guarantee that contracts for components can be obtained on favorable terms or at all. Any
material adverse change in terms of the purchase of these components could increase our cost of goods.
We
need to invest in tooling to have a more extensive line of products. If we cannot expand our tooling, it may not be
possible for us to expand our operations.
We
are currently limited in the products that we are able to manufacture because of the limitations of our tooling capabilities. In
order to have a broader line of products that address industrial and commercial needs, we must make a significant investment in
additional tooling. We do not currently have the required funds to acquire such tooling and no assurances can be given
that we will have the required funds in the future. If we do not acquire the required funds for tooling we may not
be able to expand our product line to meet industrial and commercial needs.
We
are subject to government regulation that may restrict our ability to use certain suppliers outside the U.S. or to sell our products
into certain countries. If we cannot obtain the required approval from government agencies, then our business may be
adversely affected.
We
depend on third party suppliers for our parts and components, some of which are located outside of the United States. In
the event that some of these suppliers are barred from selling their products in the United States, or cannot meet other U.S.
government regulations, we would need to locate other suppliers, which could delay or prevent us from shipping product to our
customers. We use copper, steel and aluminum in our product and in the event of government regulations or restrictions
of these materials we may experience a shortage of these materials to manufacture our product. Furthermore, U.S. law
restricts us from selling products in some potential foreign markets without U.S. government approval. If we cannot
obtain the required approvals from government agencies to obtain materials or contract with suppliers or if we are restricted
by government regulation from selling our products into certain countries, our business may be adversely affected.
We
face changes in global and local economic conditions that may adversely affect consumer demand and spending, our manufacturing
operations or sources of merchandise and international operations.
Our
industry is subject to variations in the general economy and to uncertainty regarding future economic prospects. Such uncertainty,
as well as other variations in global economic conditions such as rising fuel costs, wage and benefit inflation, currency fluctuations,
and increasing interest rates, may continue to cause inconsistent and unpredictable customer spending while increasing our own
input costs. In addition, this downturn has had, and may continue to have, an unprecedented negative impact on the global credit
markets. Credit has tightened significantly in the last several months, resulting in financing terms that are less
attractive to borrowers, and in many cases, the unavailability of certain types of debt financing. These risks, as well as industrial
accidents or work stoppages, could also severely disrupt our manufacturing operations, which could have a material adverse effect
on our financial performance.
Our
ability to obtain adequate supplies or to control our costs may be adversely affected by events affecting international commerce
and businesses located outside the United States, including natural disasters, changes in international trade, central bank actions,
changes in the relationship of the U.S. dollar versus other currencies, labor availability and cost, and other governmental policies
of the U.S. and the countries from which we import our merchandise or in which we operate facilities. The inability to import
products from certain foreign countries or the imposition of significant tariffs could have a material adverse effect on our results
of operations.
Acquisitions,
joint ventures, and strategic alliances may have an adverse effect on our business.
We
expect to continue entering into joint ventures and strategic alliances as part of our long-term business strategy. In March 2017,
we entered into a joint venture agreement with a Chinese partner. This joint venture arrangement and other transactions and arrangements
involve significant challenges and risks, including that they do not advance our business strategy, that we get an unsatisfactory
return on our investment, that we have difficulty integrating and retaining new employees, business systems, and technology, or
that they distract management from our other businesses. If an arrangement fails to adequately anticipate changing circumstances
and interests of a party, it may result in early termination or renegotiation of the arrangement. The success of these transactions
and arrangements will depend in part on our ability to leverage them to enhance our existing products and services or develop
compelling new ones. It may take longer than expected to realize the full benefits from these transactions and arrangements, such
as increased revenue, enhanced efficiencies, or increased market share, or the benefits may ultimately be smaller than we expected.
These events could adversely affect our operating results or financial condition.
We
rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may
not be able to grow effectively.
Our
performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends
on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Our
continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing
employees. The incentives to attract, retain and motivate employees provided by our option grants or by future arrangements
may not be as effective as in the past. If we do not succeed in attracting excellent personnel or retaining or motivating
existing personnel, we may be unable to grow effectively.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None
ITEM
2. PROPERTIES
As
part of downsizing due to financial distress experienced by the Company as further described in “Business—Business
Arrangements”, our current facilities consist of approximately 20,000 square feet in Stanton California and an additional
storage facility in Canyon Country, California for existing inventory. The Stanton facility is currently used for some assembly
and testing of AuraGen/VIPER systems. The facility is rented on a month-to-month basis. The rent for the Stanton facility is $10,000
per month and the storage facility is additional $5,000 per month. The current Stanton facility is not sufficient to support the
expected operations should the Company’s operations return to pre-2014 production levels. Accordingly, the Company is currently
looking for a new facility of approximately 45,000 square feet that would be used for production, testing, and engineering all
related to the AuraGen/VIPER mobile power solution as well as needed office space for support staff. Prior to the middle of 2015,
we occupied a 69,000 square foot facility in Redondo Beach, California. The Redondo Beach facility was used for assembly and testing
using components that are produced by various suppliers as well as for general offices, engineering and warehousing. The rent
for the Redondo Beach facility was approximately $60,000 per month.
ITEM
3. LEGAL PROCEEDINGS
We
are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have
not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these
claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the
loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is
subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more
of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s
consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain
matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial
condition or operating results.
In
2016, the Company was sued by a former employee for a work-related injury. The plaintiff is seeking $45,000. The Company has made
the plaintiff a settlement offer which, as of the date of this filing,has not been accepted.
In
November 2016, the Company was sued by a former customer for approximately $111,712 relating to an alleged failure by the Company
to partially deliver against an advanced payment. In connection with its claims, the plaintiff has asserted that by virtue of
the Company’s failure to fully deliver upon the contracted order, the plaintiff has obtained a perpetual worldwide license
to utilize the Company’s actuator technology. The Company disputes the plaintiff’s claims and believes that it holds
various claims against the plaintiff. In April 2017, the plaintiff’s action was involuntarily dismissed by the court although
plaintiff sought to have the dismissal set aside on the grounds of attorney error. In June 2017, the court granted plaintiff’s
motion and the Company intends to oppose this action and file a counterclaim.
Subsequent
to year end, the Company’s former COO has been awarded approximately $238,000 in accrued salary and related charges by the
California labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and
is exploring all its options and available remedies and is working toward an offer to settle this matter.
The
Company and the Company’s Chief Executive Officer, Melvin Gagerman, are among several defendants named in a lawsuit filed
by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January
2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. However, because secured
creditors holding in excess of 97% of the issuable stock upon conversion have executed the agreement, the agreement is binding
on all of the secured creditors, including the two plaintiffs. That agreement, among other provisions, waives all past events
of default. It is the Company’s position that the two plaintiffs are not entitled to any payment or other relief at this
time and therefore that they have no valid claim against the Company or Mr. Gagerman. In March 2017, plaintiffs moved for partial
summary adjudication against the Company and Mr. Gagerman; however, the Court denied plaintiff’s motion. Thereafter, the
Court sustained demurrers by Mr. Gagerman and the Company but granted plaintiffs leave to amend. In response to the plaintiffs’
second amended complaint, both the Company and Mr. Gagerman intend to further demurrer seeking dismissal of this action.
In
June 2015, the landlord of the Company’s primary facility in Redondo Beach, California initiated litigation against us seeking
to terminate the Company’s lease and require the Company to vacate the premises prior to the scheduled lease end. As a result
of that litigation, the Company was forced to vacate its primary facility and relocate to its present facility in Stanton, California.
To date, no action seeking damages or any other amount has been filed against the Company by the landlord, nor does the Company
believe it has any further liability to the landlord.
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. See “Liquidity and Capital Resources” in “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K for
additional information regarding the transactions under dispute with Mr. Kopple.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
shares are quoted on the OTC Bulletin Board under the symbol “AUSI”. Set forth below are high and low bid prices for
our common stock for each quarterly period in the two most recent fiscal years. Such quotations reflect inter-dealer prices, without
retail mark-up, markdown or commissions and may not necessarily represent actual transactions in the common stock. We had 6,279
stockholders of record as of August 21, 2017.
Period
|
|
High
|
|
|
Low
|
|
Fiscal 2016
|
|
|
|
|
|
|
First Quarter ended May 31, 2015
|
|
$
|
0.130
|
|
|
$
|
0.0450
|
|
Second Quarter ended August 31, 2015
|
|
$
|
0.070
|
|
|
$
|
0.0340
|
|
Third Quarter ended November 30, 2015
|
|
$
|
0.078
|
|
|
$
|
0.0039
|
|
Fourth Quarter ended February 29, 2016
|
|
$
|
0.180
|
|
|
$
|
0.0382
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
First Quarter ended May 31, 2016
|
|
$
|
0.190
|
|
|
$
|
0.051
|
|
Second Quarter ended August 31, 2016
|
|
$
|
0.120
|
|
|
$
|
0.055
|
|
Third Quarter ended November 30, 2016
|
|
$
|
0.100
|
|
|
$
|
0.035
|
|
Fourth Quarter ended February 28, 2017
|
|
$
|
0.210
|
|
|
$
|
0.015
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
First Quarter ended May 31, 2017
|
|
$
|
0.200
|
|
|
$
|
0.085
|
|
Second Quarter ended August 31, 2017
|
|
$
|
0.17
|
|
|
$
|
0.06
|
|
On
August 30, 2017, the reported closing sales price for our common stock was $0.08.
Dividend
Policy
We
have not paid any dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable
future.
Sales
of Unregistered Securities
During
the year ended February 28, 2017, we issued 950,000 shares of common stock in settlement of a note payable in the amount of $150,000
plus accrued interest of $15,288. Funds raised were for general corporate working capital purposes. All such securities were issued
and sold in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, and the certificates
representing such securities contain a restrictive legend reflecting the limitations on future transfer of those securities. The
offer and sale of these securities was made without public solicitation or advertising. The investors represented to us that they
were knowledgeable and sophisticated, and were experienced in business and financial matters so as to be capable of evaluating
an investment in our securities and were an “accredited investor” within the meaning of Regulation D promulgated under
the Securities Act of 1933. Each of these investors was afforded full access to information regarding our business.
Repurchases
of Equity Securities
We
did not repurchase any shares of our common stock during the fourth quarter of fiscal 2017.
ITEM
6. SELECTED FINANCIAL DATA
As
a smaller reporting company, we are not required to provide disclosure under this Item 6.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward
Looking Statements.
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements.
For cautions about relying on such forward-looking statements, please refer to the section entitled “Forward Looking Statements”
at the beginning of this Report immediately prior to “Item 1”.
Overview
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.
Reverse
Stock Split
– The Company intends to file a proxy statement and hold an annual meeting of stockholders during 2017,
seeking, among other things, stockholder approval of the Reverse Split. Currently the aggregate number of shares of our common
stock outstanding, when combined with the number of shares of our common stock issuable upon the exercise of outstanding warrants
or options or upon the conversion of convertible debt exceeds the authorized number of shares of our common stock provided for
in our certificate of incorporation. Since the Reverse Split would not affect the authorized number of shares of our common stock,
all outstanding warrants, options and convertible debt could be exercised or converted, as applicable, and we could also issue
additional shares of common stock in the future.
The
Company is planning to restart operations with a new board of directors and a new management team as soon as the Company holds
its stockholders meeting to elect the new board and approve the Reverse Split. Currently the Company has a contractual agreement
for $1.25 million of orders for the Auragen/VIPER product to fill during the next eight months and anticipates that is may receive
significant additional orders once the Company is back in operation.
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. After
suspending engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial
obligations in fiscal 2017, we expect modest engineering activities budgeted at approximately $400,000 during the fiscal 2018
year.
(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.
Critical
Accounting Policies and Estimates
Our
management’s discussion and analysis of our financial conditions 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
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 collect-ability is reasonably assured. Payments received before all
of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
We
recognize revenue for product sales upon shipment and when title is transferred to the customer. When Aura performs the installation
of the product, revenue and cost of sales are recognized when the installation is complete. We have in the past earned a portion
of our revenues from license fees and recorded those fees as income when we fulfilled our obligations under the particular agreement.
Terms
of our sales generally provide for Shipment from our facilities to customers free on board (FOB) point of shipment. Title passes
to customers at the time the products leave our warehouse.
The
Company does not offer a general right of return on any of its sales and considers all sales as final. While some sales are for
evaluative purposes, such sales are deemed final by the Company. The customers’ evaluation is for such customers to determine
if there is a benefit to them to outfit additional vehicles in their fleets.
The
only potential post-delivery obligation the Company might have is for the installation of the unit. However, the unit is typically
delivered at the time of installation, and the billing is done when the installation is complete. The Company does not utilize
bill and hold. The Company does provide customers with a warranty; however, due to the low sales volume to date, the amount has
not been material and is expensed as incurred.
Inventory
Valuation and Classification
Inventories
are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory
on a regular basis for excess or obsolete inventory based on estimated future usage and sales. 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 February 28, 2016 and February 28, 2017.
Valuation
of Long-Lived Assets
Long-lived
assets, consisting primarily of property and equipment, and patents and trademarks, comprise a small portion of our total assets.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values
may 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.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”,
which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair
value based method and the recording of such expense in the consolidated statements of operations.
The
Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, “Equity
Based Payments to Non-Employees”, whereas the fair value of the equity based compensation is based upon the measurement
date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the
date at which the necessary performance to earn the equity instruments is complete.
For
the past, several years and in accordance with established public company accounting practice, the Company has consistently utilized
the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily
to management, employees, and directors. The Black-Scholes option-pricing model is a widely-accepted method of valuation
that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances.
Research
and Development
Research
and development costs are expensed as incurred.
Specific
asset categories are treated as follows:
Accounts
Receivable: We record an allowance for doubtful accounts based on management’s 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.
Patents
and trademarks: As our business depends on using new technology to create new products, impairments in patents can be triggered
by changed expectations regarding the foreseeable commercial production of products underlying such patents.
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
Fiscal
2017 compared to Fiscal 2016
Revenues
Net
revenues in fiscal 2017 decreased to $0 from $183,032 in fiscal 2016. The decrease is attributable to a lack of financial resources
causing us to substantially curtail operational activities.
Cost
of Goods
Cost
of goods sold in fiscal 2017 decreased to $0 from $170,996 in fiscal 2016. The decrease is attributable to the curtailment of
our activities as noted above.
Engineering,
Research and Development
Engineering,
research and development costs decreased $361,517 to $34,210 in fiscal 2017 from $395,727 in fiscal 2016. While we had planned
for an increase in engineering, research and development in fiscal 2017, the lack of resources noted above prevented us from implementing
our plan.
Selling,
General and Administrative Expense
Selling,
general and administrative increased $540,566 to $3,522,347 in fiscal 2017 from $2,981,781 in fiscal 2016. The increase is due
to the expensing of approximately $2.25 million in rent expense related to the facility the company vacated, which offset the
reduction in expenses due to the curtailment of activities resulting from our lack of financial resources.
Non-Operating
Income and Expense
Net
interest expense increased $948,777 to $4,246,831 in fiscal 2017 from $3,298,054 in fiscal 2016 due to increased interest accrual.
Net
Income/Loss
The
increase in our net loss of $1,126,366 to $7,731,333 in fiscal 2017 from $6,604,967 in fiscal 2016 is a result of the curtailment
of corporate activities as noted above, offset by the expensing of future rent due resulting from the vacating of our former facility
as noted above.
Fiscal
2016 compared to Fiscal 2015
Revenues
Net
revenues in fiscal 2016 decreased $972,779 to $183,032 from $1,155,811 in fiscal 2015, a decrease of 84%. The decrease is attributable
to a lack of financial resources causing us to substantially curtail activities.
Cost
of Goods
Cost
of goods sold in fiscal 2016 decreased $319,383 to $170,996 from $490,379 in fiscal 2015. The decrease is attributable to the
curtailment of our activities as noted above.
Engineering,
Research and Development
Engineering, research and
development costs decreased $449,408 to $395,727 in fiscal 2016 from $845,135 in fiscal 2015. While we had planned for an increase
in engineering, research and development in fiscal years 2017 and 2018, the lack of resources noted above prevented us from implementing
our plan.
Selling,
General and Administrative Expense
Selling,
general and administrative expenses decreased $5,916,385 to $2,981,781 in fiscal 2016 from $8,898,166 in fiscal 2015. The decrease
is due to the curtailment of corporate activities as noted above.
Non-Operating
Income and Expenses
Net
interest expense increased to $3,298,054 in fiscal 2016 from $3,214,963 in fiscal 2015, an increase of $83,091 due to our increased
debt levels. Other income increased to $58,559 in fiscal 2016 from $5,580 in fiscal 2015.
Net
Income/Loss
Our
net loss in fiscal 2016 decreased to $6,604,967 from $12,287,252 in fiscal 2015, a decrease of $5,682,285, primarily as a result
of the curtailment of corporate activities as noted above.
Liquidity
and Capital Resources
In
fiscal 2017, we incurred losses of approximately $7.7 million and had negative cash flows from operations of $1.1 million. As
of February 28, 2017, the total amount owing to Mr. Kopple, a Board member, is $5,567,624 plus accrued interest of $1,658,661.
We also owe approximately $15 million plus accrued interest of $8.68 million to Mr. Breslow, another board member. We do not currently
have the resources to repay any of the above.
At
February 28, 2017, we had cash of approximately $256,000, compared to cash of approximately $22,000 at February 29, 2016. Working
capital at February 28, 2017 was a negative $52.8 million as compared to a negative $41.3 million at the end of the prior fiscal
year. Accrued expenses increased $0.5 million due to an increase in accrued interest of approximately $0.5 million. At February
28, 2017, we had no accounts receivable, compared to approximately $22,000 at February 29, 2016. In fiscal 2017 we made no acquisitions
of property and equipment.
During
the year ended February 28, 2017, we issued 950,000 shares of common stock in settlement of a note payable in the amount of $150,000
plus accrued interest of $15,288.
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.
Currently, we have binding commitments from third parties to provide $2.1 million in financing in the form of equity as soon as
the stockholders meeting is held. We cannot assure you that additional financing will be available at the times or in the amounts
required. Based on a cash flow analysis performed by management, we estimate that the Company will need an additional $2.5 million
to support the Company’s operations for the fiscal year ending February 28, 2018. The issuance of additional shares of equity
in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial.
If we cannot raise the 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.
Amendment
to 2013 Securities Purchase Agreement
– On January 30, 2017, the Company entered into an agreement with five of
our secured creditors (the “Signatories”), pursuant to which a Securities Purchase Agreement dated May 6, 2013 (the
“2013 Purchase Agreement”) among the Company, the Signatories, and two other parties was amended (the “Amended
Agreement”).
Pursuant
to the 2013 Purchase Agreement, we offered and sold convertible notes (the “Original Notes”) and warrants (the “Original
Warrants”) to the Signatories and the two other parties (collectively, the “Buyers”). The Buyers purchased an
aggregate of approximately $4.9 million principal amount of convertible notes and warrants to purchase shares of common stock.
As part of the 2013 transaction, we entered into a security agreement dated on or about May 7, 2013 (the “Original Security
Agreement”) with 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 in order to secure performance of the convertible notes.
The
2013 Purchase Agreement, as well as the related transaction documents can be amended by a written instrument signed by the Company
and those Buyers holding or having the right to acquire at least 75% of the shares of Company’s common stock issuable upon
conversion of the convertible notes and exercise of the warrants and any such amendment is binding equally on 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.” Pursuant to the Amended Agreement,
the Company is obligated to file with the SEC a preliminary proxy statement for a stockholders meeting at which the Company will
seek stockholder approval of resolutions to (i) elect a new board of at least five directors, (ii) approve a reverse stock split
of up to 1-for-7 (the “Reverse Split”), and (iii) if, and to the extent required by applicable law, to approve the
issuances granted to the Buyers under the Amended Agreement. The Company is obligated to use its best efforts to solicit stockholder
approval of these resolutions, and must hold the stockholder meeting promptly following the mailing of the definitive proxy statement.
In addition, the Amendment 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.
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 the Reverse 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 the Reverse Split, there shall be a mandatory conversion of 80% of the
then-unpaid principal of and all of the then accrued but unpaid interest on the Amended Notes. After the effectiveness of the
Reverse Split, and so long as any portion of the Amended Notes are outstanding, the holders thereof may voluntarily convert the
unpaid principal and interest thereon into the Company’s common stock at the conversion price of $1.40 per share.
The Signatories hold or have the right to acquire at least 97%
of the shares of Company’s common stock issuable upon conversion of the Original Notes and exercise of the Original Warrants.
Two secured creditors, who together hold or have the right to acquire 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. However,
in that secured creditors holding in excess of 97% of the shares of Company’s common stock issuable upon conversion of the
Original Notes and exercise of the Original Warrants under the 2013 Purchase Agreement have executed the amendment, the 2013 Purchase
Agreement provides that the Amendment is binding on all of the secured creditors, including the two plaintiffs in the lawsuit.
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. See “Item 3. Legal Proceedings” above.
Establishment
of the Special Committee of the Board
- In September 2016, our Board of Directors appointed a special committee
comprised of disinterested directors to negotiate with Mr. Breslow and Mr. Kopple, who at the time were both interested board
members, in an effort to reach a settlement on the obligations that Messrs. Breslow and Kopple claim are due to them, as
discussed in more detail below. The Special Committee was granted full power and authority to act in the name of the entire
Board in negotiating with Mssrs. Breslow and Kopple in the best interest, and for the benefit of, the Company’s
stockholders, and in approving (or rejecting) the terms of any proposed transactions with these individuals.
Breslow
Debt Refinancing Agreement
- Warren Breslow served as a director of the Company from 2006 to 2017. He resigned his
position on our board in March 2017. During the period from 2006 through 2016, Mr. Breslow and his affiliates made various temporary
advances to the Company of $15,930,041 aggregate amount advanced over the years (the “Original Advances”). Interest
on the Original Advances was at a rate of 10% per annum. As of January 24, 2017, there was an outstanding balance of $23,603,852
which represents outstanding principal in the amount of $14,930,041 together with accrued and unpaid interest in the amount of
$8,673,811.
On
January 24, 2017, the Special Committee approved, and the Company entered into, a Debt Refinancing Agreement (the “Breslow
Refinancing Agreement”) with Warren Breslow and the Survivor’s Trust under the Warren L. Breslow Trust (collectively,
the “Breslow Parties”), and issued an unsecured convertible promissory note (the “Breslow Note”). At the
time of the Original Advances and the entering into of the Breslow Refinancing Agreement and at all times in between, Breslow
was a director of the Company and, in addition, beneficially owns approximately 6% of Company’s common stock. Mr. Breslow
is also a trustee of the Survivor’s Trust under the Warren L. Breslow Trust.
Pursuant
to the Breslow Refinancing Agreement, the parties agreed that, as of the date thereof, the Company owed the Breslow Parties outstanding
principal in the amount of $14,930,041, together with accrued and unpaid interest in the amount of $8,673,811, or a total of $23,603,852.
Pursuant
to the Breslow Refinancing Agreement, the Breslow Parties have canceled and forgiven all accrued interest through the date of
the Breslow Refinancing Agreement, have waived all existing events of default relating to the outstanding indebtedness, and have
agreed that all instruments or other agreements evidencing or pertaining to the outstanding indebtedness shall be cancelled and
shall be superseded and replaced in their entirety by a new promissory note (the “New Breslow Note”) issued by the
Company concurrently with, and as a condition of, the Breslow Refinancing Agreement. The New Breslow Note was issued in the principal
amount of $14,930,041 (the “Restructured Principal”), bears interest on the Restructured Principal at a rate equal
to 0% for the first six months, and 5% per annum thereafter. However, in the event of an event of default (as defined in the New
Breslow) Note, the interest rate shall become 18% per annum. The entire unpaid balance of the Note is due on the 60
th
month anniversary of the date of issuance, and may be prepaid or redeemed in whole or in part without premium or penalty. With
certain exceptions, if an event of default occurs and is continuing, the holder of the New Breslow Note may, without notice, declare
the outstanding Restructured Principal and accrued and unpaid interest thereon to be immediately due and payable.
If
stockholder approval of the Reverse Split and, if required, the transactions with the Breslow Parties, are not obtained within
twelve months after the date of the Breslow Refinancing Agreement, the Breslow Refinancing Agreement and the New Breslow Note
shall be rescinded and shall be of no further force or effect; provided however, that if the Breslow Parties fail to vote
all of the voting securities of the Company beneficially owned by them in favor of such proposals such rescission will not apply.
Immediately
upon the Reverse Split becoming effective, $11,930,041 of the Restructured Principal shall automatically be converted into 7,948,097
shares of the Company’s common stock. In addition, at any time after the effective date of the Reverse Split, and so long
as any portion of the New Breslow Note remains outstanding, the holder thereof shall be entitled to convert any portion thereof
then outstanding (together with accrued and unpaid interest) into shares of our common stock, at a conversion price of $1.40 per
share, subject to adjustment from time to time in the event of any stock split, reverse stock split or similar subdivision or
combination, other than the Reverse Split. To date, the shareholders have not approved the Reverse Stock Split.
Kopple
Debt
-
Robert Kopple, who has been a director of the Company since September 2013, claims that the Company owes him and
certain affiliated parties an aggregate of approximately $3.46 million in principal and interest, in excess of $1.57 million in
accrued interest, and warrants to purchase 22,917,200 shares of our common stock at a price of $0.10 per share, as a result of
various loans made by Mr. Kopple and his affiliates (collectively, the “Kopple Parties”) to the Company between 2013
and 2016. Mr. Kopple has served as Vice Chairman of the Board since his appointment in 2013.
On
or about March 23, 2013, the Kopple Parties made various cash advances to the Company in the aggregate original principal amount
of
$2,500,000, evidenced by an unsecured convertible note (the “Original Kopple Note”)
with the right to convert outstanding principal and accrued and unpaid interest at $0.50 per share. On or around June 20, 2014,
$500,000 of the Original Kopple Note was reclassified as a short-term note, the principal amount of the Original Kopple Note was
reduced from $2.5 million to $2.0 million and the Original Kopple Note
was amended to provide that an event of default
under the June 2014 Agreement (as described and defined below) would also constitute an event of default under the Original Kopple
Note.
Also
in June 2014, the Company entered into a Financing Letter of Agreement (the “June 2014 Agreement”) with two affiliate
entities of Mr. Kopple, KF Business Ventures and the Kopple Family Partnership (the “Additional Kopple Parties”),
pursuant to which the Additional Kopple Parties loaned us an additional $1,000,000 (the “June 2014 Loan”). In connection
with the June 2014 Loan, Mr. Kopple also added $202,205 in penalties and accrued interest, credited the Company with $200,000
for amounts previously repaid by the Company and consolidated several earlier advances into a single new note (the “June
2014 Kopple Note”) in the principal amount of $2,915,206 and bearing simple interest at a rate of 10% per annum. The Company
was also required to obtain a subordination agreement from the Breslow Parties in favor of the Kopple Parties with respect to
the June 2014 Kopple Note.
Pursuant
to the June 2014 Agreement, the Kopple Parties also placed various restrictions on our ability to raise additional capital, hire
qualified personnel and pay certain expenses without his prior approval for so long as the principal amount of his note remained
outstanding. The June 2014 Kopple Note also required us to issue Mr. Kopple a stock purchase warrant (the “June 2014 Kopple
Warrant”) to purchase approximately 5.8 million shares of our common stock at an exercise price of $0.10 per share, to be
exercisable for seven years. Additionally, if we borrowed funds, issued capital stock or rights to acquire or convert into capital
stock, or granted rights in respect to territories to any person for cash consideration of more than $5 million in the aggregate
after the date of the June 2014 Kopple Note, we would be required to pay the entire amount of such cash consideration in excess
of $5 million as a mandatory prepayment of the June 2014 Kopple Note. Additionally, Mr. Kopple required a default provision providing
that in the event that the entire outstanding balance of the June 2014 Kopple Note was not paid in full prior to October
1, 2014, then for each consecutive calendar month during the period beginning October 1, 2014 and ending March 31, 2015, the Company
would issue to Mr. Kopple additional stock purchase warrants, each to purchase 2,915,206 shares of our common stock, up to a maximum
aggregate of approximately 17.5 million shares of our common stock, at $0.10 per share (the “Kopple Penalty Warrants”),
the Kopple Penalty Warranties to be exercisable for seven years from the time of their respective issuances. In addition to the
Kopple Penalty Warrants, the default provision under the June 2014 Kopple Note provides for a 5% late charge on the total amount
due plus 15% per year interest. The Company did not repay the Kopple Parties the amounts loaned to the Company, and the Company
has not yet done so. Additionally, the Company has not issued any of the Kopple Penalty Warrants and management believes that
Mr. Kopple is not entitled to receive them. The Company has also cancelled the June 2014 Kopple Warrant.
See
“Item 3. Legal Proceedings” included elsewhere in this Annual Report on Form 10-K for information regarding the dispute
with Mr. Kopple regarding these transactions.
Unsecured
Creditor Agreements
- During the period from 2013 through 2015, a number of investors made various temporary advances
to the Company in the aggregate amount of $3,273,057 (the “Original Advances”). Interest on the Original Advances
was at a rate of 10% per annum. As of February 28, 2017, there was an outstanding balance of $3,940,444 which represents outstanding
principal in the amount of $3,273,057 together with accrued and unpaid interest in the amount of $667,387. Subsequent to fiscal
year end, the Company entered into several Debt Refinancing Agreements (collectively, the “Refinancing Agreements”)
with debt holders holding $2,811,520 outstanding principal, plus accrued interest in the amount of $612,888, or a total outstanding
obligation in the amount of $3,424,408. The Refinancing Agreements waive all events of default, cancel and forgive all accrued
interest and provide for new five-year 5% convertible notes (the “Refinancing Notes”) in the aggregate principal amount
of $2,811,520, with no interest for first six months and 5% per year thereafter. Upon the approval of the Reverse Split by the
stockholders the Refinancing Notes will be converted into 1,940,415 shares of our common stock. The Refinancing Notes also contain
various default provisions related to the timely payment of the principal and interest when due, and in case of the Company filing
for bankruptcy protection. The default provisions call for default interest rate of 18% per annum and acceleration of the Notes.
We
consider the transactions described above with Mr. Breslow and Mr. Kopple to be related transactions.
Going
Concern.
Our
independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent
on our ability to implement our business plan, raise capital and generate revenues. See Report of Independent Registered Public
Accounting Firm on page F-1, together with the Company’s audited consolidated financial statements for the fiscal year ended
February 28, 2017.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
As
a smaller reporting company, we are not required to provide the information required by this Item 7A.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Index to Consolidated Financial Statements at page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the specified time periods.
For the last 3 fiscal years, these control and procedures broke down due to insufficient capital to maintain such controls and
procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated
and communicated to its management, including its principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered
by this report, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation,
the Company’s Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures were ineffective
for the last 3 fiscal years in ensuring that information requiring disclosure is recorded, processed, summarized and reported
within the time periods specified by the SEC’s rules and forms.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal
quarter ended February 28, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
The
Company does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent
all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute
assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure
also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have
a material effect on the financial statements.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of February 28, 2017. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework. Based on this assessment, and on those criteria, management concluded that, due to the material weaknesses identified
below, the Company’s internal control over financial reporting was ineffective as of February 28, 2017.
A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.
The specific material weaknesses identified by our management relate to limited resources and inadequate number of personnel in
our accounting and financial reporting group due to insufficient capital to maintain such resources. Management has determined
that our internal audit function is also significantly deficient due to insufficient resources to perform internal audit functions.
This was further evidenced by our inability to timely file our annual reports on Form 10-K for the fiscal years ended February
28, 2015, February 29, 2016 and February 28, 2017 and our quarterly reports on Form 10-Q for the fiscal quarters ended May 31,
2015, August 31, 2015, November 30, 2015, May 31, 2016, August 31 2016, November 30, 2016 and May 31, 2017.
Management plans to remediate these weaknesses
by prioritizing the allocation of financial and personnel resources to ensure that the Company’s accounting and financial
reporting groups are sufficiently able to effectuate information requiring disclosure being recorded, processed, summarized and
reported within the time periods specified by the SEC’s rules and forms. Since February 28, 2017, the Company has engaged
a registered public accounting firm to complete the required audit of the Company’s financial statements and is in the process
of filing all outstanding periodic reports with the SEC.
ITEM
9B. OTHER INFORMATION
None
NOTES
TO FINANCIAL STATEMENTS
FEBRUARY
29, 2016
NOTE
1 - ORGANIZATION AND OPERATIONS
Aura
Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage in
the development, commercialization, and sales of products, systems, and components, using its patented and proprietary electromagnetic
technology. Aura develops and sells AuraGen
®
axial flux mobile induction power systems to the industrial, commercial,
and defense mobile power generation markets. In addition, we also sell our developed and patented High Force Electromagnetic Linear
Actuators.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 collect-ability is reasonably assured. Payments received before all
of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
We
recognize revenue for product sales upon shipment and when title is transferred to the customer. When Aura performs the installation
of the product, revenue and cost of sales are recognized when the installation is complete. We have in the past earned a portion
of our revenues from license fees and recorded those fees as income when we fulfilled our obligations under the particular agreement.
Terms
of our sales generally provide for Shipment from our facilities to customers FOB point of shipment. Title passes to customers
at the time the products leave our warehouse.
The
Company does not offer a general right of return on any of its sales and considers all sales as final. However, if a customer
determines that a different system configuration would better suit their application, we will allow them to exchange the system
and bill them the incremental cost, or credit them if there is a decrease in the system cost. While some sales are for evaluative
purposes, they are still considered final sales. The customers’ evaluation is for them to determine if there is a benefit
to them to outfit additional vehicles in their fleets.
The
only potential post delivery obligation the Company might have is for the installation of the unit. However, the unit is typically
delivered at the time of installation, and the billing is done when the installation is complete. Any discounts that are offered
are done as a reduction of the invoiced amount at the time of billing. The Company does not utilize bill and hold. The Company
does provide customers with a warranty; however, due to the low sales volume to date, the amount has not been material and is
expensed as incurred.
Cash
and Cash Equivalents
Cash
and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less. We have not experienced any losses in such accounts and believe we are not exposed
to any significant risk on cash and cash equivalents.
Accounts
Receivable
The
Company grants credit to its customers generally in the form of short-term trade accounts receivable. Accounts receivable
are stated at the amount that management expects to collect from outstanding balances. When appropriate, management provides
for probable uncollectible amounts through an allowance for doubtful accounts. Management primarily determines the allowance
based on the aging of accounts receivable balances, historical write-off experience, customer concentrations, customer creditworthiness
and current industry and economic trends. Balances that are still outstanding after management has used reasonable collection
efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.
Inventories
Inventories
are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory
on a regular basis for excess or obsolete inventory based on estimated future usage and sales. As further described in Note 3,
due to historical reasons, we are holding inventories in excess of what we expect to sell in the next fiscal year. 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 its demand and market value and as a result have elected to
reserve it in its entirety as of February 28, 2017 and February 29, 2016.
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:
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.
Maintenance
and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.
Patents
and Trademarks
We
capitalize the cost of obtaining or acquiring patents and trademarks. Amortization of patent and trademark costs is provided for
by the straight-line method over the estimated useful lives of the assets.
Valuation
of Long-Lived Assets
The
Company accounts for the impairment of long-lived assets, such as fixed assets, patents and trademarks, under the provisions of
Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, “Property, Plant,
and Equipment”, which establishes the accounting for impairment of long-lived tangible and intangible assets other than
goodwill and for the disposal of a business. Pursuant to FASB ASC 360, we review for impairment when facts or circumstances indicate
that the carrying value of long-lived assets to be held and used may not be recoverable. If such facts or circumstances are determined
to exist, an estimate of the undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets,
is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is
measured based on various valuation techniques, including a discounted value of estimated future cash flows. We report impairment
costs as a charge to operations at the time it is recognized. As of the year ended February 28, 2017, all long-lived assets have
been fully depreciated.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”,
which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair
value based method and the recording of such expense in the consolidated statements of operations.
The
Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, “Equity
Based Payments to Non-Employees”, whereas the fair value of the equity based compensation is based upon the measurement
date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the
date at which the necessary performance to earn the equity instruments is complete.
For
the past several years and in accordance with established public company accounting practice, the Company has consistently utilized
the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily
to management, employees, and directors. The Black-Scholes option-pricing model is a widely-accepted method of valuation
that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances.
Fair
Value of Financial Instruments
We
measure our financial assets and liabilities in accordance with the requirements of FASB ASC 825 “Financial Instruments”.
The carrying values of accounts receivable, accounts payable, current notes payable, accrued expenses and other liabilities approximate
fair value due to the short-term maturities of these instruments. The carrying amounts of long-term convertible notes payable
approximate their respective fair values because of their current interest rates payable and other features of such debt in relation
to current market conditions.
Shipping
and handling expenses
We
record all shipping and handling billings to a customer as revenue earned for the goods provided in accordance with FASB ASC 605-45-45-19,
“Shipping and Handling Fees and Costs”. We include shipping and handling expenses in selling, general and administrative
expense. Shipping and handling expenses amounted to $0 and $30,079 for the years ended February 28, 2017 and February 29, 2016,
respectively.
Advertising
Expense
Advertising
costs are charged to expense as incurred and were immaterial for the years ended February 28, 2017 and February 29, 2016.
Research
and Development
Research
and development costs are expensed as incurred. These costs include the expenses incurred in the development of products such
as the 375amp ECU, the TanGen (dual generator), the eight inch generator, the 30 kW unit and the refrigeration system.
Income
Taxes
We
account for income taxes in accordance with FASB ASC 740, “Income Taxes”. Under FASB ASC 740, deferred income taxes
are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their
financial statement 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. The provision for income taxes represents the tax expense for the period,
if any, and the change during the period in deferred tax assets and liabilities.
We
have significant income tax net operating losses; however, due to the uncertainty of the realize-ability of the related deferred
tax asset and other deferred tax assets, a valuation allowance equal to the amount of deferred tax assets has been established
at February 28, 2017 and February 29, 2016.
FASB
ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax
benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable
based on its technical merit.
Earnings
(Loss) per Share
We
utilize FASB ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss)
available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share
is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common shares
available upon exercise of stock options and warrants using the treasury stock method, except for periods of operating loss for
which no common share equivalents are included because their effect would be anti-dilutive.
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.
Major
Customers
During
the year ended February 28, 2017, we did not have any sales to customers. During the year ended February 29, 2016, we conducted
business with two major customers whose sales comprised 55.9% and 22% of net sales, respectively. As of February 29, 2016, these
customers accounted for more than 90% of net accounts receivable.
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.
NOTE
3 - INVENTORIES
Inventories
at February 28, 2017 and February 29, 2016 consisted of the following:
|
|
2017
|
|
|
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
|
|
Inventories
consist primarily of components and completed units for 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, most of which was then assembled
into finished AuraGen
®
units. Since sales did not meet such expectations, we have been selling product from this
inventory for several years. Management has analyzed its inventories based on its current business plan, current potential orders
for future delivery, and pending proposals with prospective customers and has determined we do not expect to realize all of its
inventories within the next year. As described in Note 2 above while the Company believes the inventory has significant value
it has elected to fully reserve the inventory due to the inability of determining the demand and, therefore, fair market value
at February 28, 2017 and February 29, 2016.
NOTE
4 - OTHER CURRENT ASSETS
Other
current assets of $2,895 and $16,283 are primarily comprised of vendor advances of $2,895 and $16,283 as of February 28, 2017
and February 29, 2016, respectively.
NOTE
5 - PROPERTY, PLANT, AND EQUIPMENT
Property,
plant, and equipment at February 28, 2017 and February 29, 2016 consists of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
964,111
|
|
|
$
|
964,111
|
|
Furniture and fixtures
|
|
|
163,302
|
|
|
|
163,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,127,413
|
|
|
|
1,127,413
|
|
Less accumulated depreciation and amortization
|
|
|
(1,127,413
|
)
|
|
|
(1,127,413
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Depreciation
and amortization expense was $0 and $945 for the years ended February 28, 2017 and February 29, 2016,
respectively.
NOTE
6 - NOTES PAYABLE
Notes
payable consisted of the following:
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
|
|
|
|
|
Demand notes payable, at 10% and 16%
|
|
$
|
3,782,468
|
|
|
$
|
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.
|
|
|
972,632
|
|
|
|
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.
|
|
|
483,951
|
|
|
|
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 notes carry an interest rate of 12% with interest due on the last day of the month. The note was not repaid when originally due.
|
|
|
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 when originally due.
|
|
|
325,000
|
|
|
|
325,000
|
|
Convertible notes dated April 2016 thru February 2017. The notes carry an interest rate of 5% and might be converted into the company shares of common if the shareholders approve a 7:1 reverse stock split.
|
|
|
994,470
|
|
|
|
-
|
|
|
|
|
8,994,221
|
|
|
|
8,015,090
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
$
|
8,994,221
|
|
|
$
|
6,648,168
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
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 and warrants to Kenmont Capital
Partners. This new 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 of common stock, 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 will be amortized over the life of the 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 and warrants to LPD Investments, Ltd. This new 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 of common stock, 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 will be amortized over the life of the note.
On
May 7, 2013, the Company entered into an agreement with an individual for the sale of a secured convertible note payable in the
original principal amount of $750,000 and warrants. This 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 of common stock,
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
will be amortized over the life of the note.
On
June 20, 2013, the Company entered into an agreement with four individuals for the sale of secured convertible notes payable in
the original amount of $325,000 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 of common stock,
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 will
be amortized over the life of the notes.
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 unsecured
convertible notes payable and warrants. These notes carry a base interest rate of 9.5%, have a 4-year maturity date and are convertible
into shares of common stock at the conversion price of $0.50 per share. The warrants entitle the holder to acquire 5,000,000 shares
of common stock, have an initial exercise price of $0.75 per share and have a 7-year term. The Company recorded $667,118 as a
discount, which will be amortized over the life of the note.
All
convertible notes payable are due within twelve months or have not been paid when originally due.
CONVERTIBLE
PROMISSORY NOTES
At
February 28, 2013, the three other unsecured convertible promissory notes payable amounted to $1,447,938, net of discounts of
$402,063. These convertible notes bear interest at 7% per annum, and are convertible into common stock of the Company at $0.76
per share (as well as variable conversion rates as described below). These notes are due on August 10, 2017, October 2, 2017,
and January 4, 2013. On May 7, 2013, the note due on January 4, 2013 was converted into a portion of the note due June 15, 2013,
which carries an interest rate of 12%.
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 original principal amount of $1,000,000. This convertible promissory note is due and payable on August 10, 2017 and
bears a interest rate is 7% per annum. Interest on the unpaid principal amount of this note is payable monthly in arrears
on the tenth day of each calendar month commencing September 10, 2012. Interest is computed on the actual number of days elapsed
over a 360-day year. The Holder has the right to convert any outstanding and unpaid principal portion of this convertible promissory
note into shares of common stock. The company recorded $310,723 as a debt discount, which will be amortized over the life of the
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 original principal amount of $500,000. This convertible promissory note is due and payable on October 2, 2017 and
bears an interest rate is 7% per annum. Interest on the unpaid principal amount of this note is payable monthly in
arrears on the second day of each calendar month commencing November 2, 2012. Interest is computed on the actual number of days
elapsed over a 360-day year. The Holder has the right to convert any outstanding and unpaid principal portion of this convertible
promissory note into shares of common stock. The company recorded $137,583 as a debt discount, which will be amortized over the
life of the note
.
On
January 30, 2017 the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven of
its secured creditors. These creditors hold a security interest in all of the Company’s assets except for its patents and other
intellectual properties. The original agreement dated May 7, 2013 provided that if the holders of at least 75% of the stock issuable
upon conversion of the convertible notes votes to amend the agreement, then such amendments will be binding on all the secured
creditors. The five secured creditors signing the amendment total in excess of 95% of the issuable stock upon conversion and,
therefore the agreement is binding on all seven of the secured creditors. The amended agreement provided that all accrued and
unpaid interest will be added to the principal amount, the amended note will bear no interest from November 1, 2016 to May 1,
2016 and 16% per annum thereafter. Upon stockholder approval of a 1-for-7 reverse stock split and the election of a new Board
of Directors, 80% of the total secured debt, including accrued interest, will be converted into shares of common stock; a new
five-year unsecured convertible promissory note bearing 5% interest per annum will be issued for the remaining 20% balance. The
amended note also provides for early payoff under certain conditions and contains various default provisions. The agreement was
further amended subsequent to year end to extend the time for the Company to file a preliminary proxy statement.
On
February 21, 2017 the Company entered into debt refinancing agreements with several debt holder relating to aggregate unsecured
debt totaling $2,237,456 including interest of $489,466. This refinancing agreements waives any past events of default and provides
for new five-year convertible notes which bear no interest for the first six months and 5% annually thereafter. Upon stockholder
approval of a 1-for-7 reverse stock split, these notes will be converted into a total of 1,164,555 shares of common stock. The
notes also provide various default provisions.
As
of February 28, 2017, the shareholders have not approved any reverse stock split.
NOTE
7 - RELATED PARTIES TRANSACTIONS
On
January 24, 2017 the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a Director of the Company. Pursuant to
this 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 any past events of default and sign a new,
five-year unsecured convertible note, in the amount of $14,930,041. This new note bears no interest for the first six months and
interest of 5% per annum thereafter, payable monthly in arrears. This new note also provides various default provisions. The refinancing
agreement further provides that $11,982,041 of Mr. Breslow’s new note will be converted into 7,403,705 shares of common
stock upon stockholder approval of a 1-for-7 reverse stock split within one year of entering into that agreement; the remaining
balance may thereafter be converted at any time. In the absence of stockholder approval of a 1-for-7 reverse stock split within
one year, the refinancing 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. As of February 28, 2017, the shareholders have
not approved the reverse stock split.
At
February 28, 2017, the balance in Notes Payable and accrued interest-related party, current, includes $14,982,041 of unsecured
notes payable plus accrued interest of $8,890,574 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 years ended February 28, 2017 and February 29, 2016, interest amounting to $993,647 and $1,459,374 respectively, was incurred
on these notes. Related Parties Transactions also includes $82,000 of unsecured notes payable plus accrued interest of $29,141
and $23,704 to our CEO pursuant to a demand note entered into on April 5, 2014and an unsecured note payable to Mr. Kopple, another
member of our Board of Directors in the total amount of $3,587,322 and $3,418,738 plus accrued interest of $2,098,616 and $784,934
pursuant to 10% demand note payable as of February 28, 2017 and February 29, 2016, respectively. At February 28, 2017, the balance
in Convertible note payable and accrued interest-related party, long term, includes $2,000,000 of secured convertible notes payable
plus accrued interest of $920,172 to Mr. Kopple.
NOTE
8 - ACCRUED EXPENSES
Accrued
expenses at February 28, 2017 and February 28, 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
3,099,842
|
|
|
$
|
3,148,841
|
|
Accrued rent
|
|
|
202,036
|
|
|
|
218,025
|
|
Accrued interest
|
|
|
2,562,375
|
|
|
|
1,933,017
|
|
Other
|
|
|
75,000
|
|
|
|
90,000
|
|
Total
|
|
$
|
5,939,252
|
|
|
$
|
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
9 - COMMITMENTS & CONTINGENCIES
Leases
In
September, 2014, we entered into lease for a facility of approximately 69,000 square feet. The lease is for a term of seven years,
has an option to extend for five years, and carries an initial base rent of $46,871.72. In accordance with the terms of the lease,
the Company is responsible for common area charges. Rent expense charged to operations amounted to $674,876and $603,440 for the
years ended February 29,2016 and February 28, 2015, respectively. The Company moved out of the facility in June 2015 to a much
smaller facility in Stanton California. In the new Stanton California facility, the Company is on a month-to-month lease. During
the next 12 months, the Company plans to move to a new, larger facility.
Joint
Venture
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
is owned 49% by the Company and 51% by the Chinese company. The Company has contributed $250,000 and a license to specific technology
and the Chinese company is required to contribute $9,750,000. 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. Additionally, the Chinese company will purchase a minimum
of $1,250,000 of product supported by letters of credit for distribution until the joint venture factory is built, equipped, and
staffed. In order to assure proper training of joint venture personnel, Aura has also committed to supply instructional personnel
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.
Contingencies
We
are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have
not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these
claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the
loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is
subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more
of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s
consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain
matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial
condition or operating results.
Subsequent
to year end, the Company was sued in 2016 by a former employee for a work-related injury. The plaintiff is seeking $45,000. The
Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.
Subsequent
to year end, the Company was sued by a customer for an alleged failure to partially deliver against an advanced payment of approximately
$120,000. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.
Subsequent
to year end, the Company’s former COO has been awarded approximately $238,000 in accrued salary and related charges by the
California labor board. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been
accepted.
Subsequent
to year end, the Company and the Company’s Chief Executive Officer, Melvin Gagerman, are among several defendants named
in a lawsuit filed by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary
damages. In January 2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs which
became binding on all of the secured creditors, including the two plaintiffs. That agreement, among other provisions, waives all
past events of default. It is the Company’s position that the two plaintiffs are not entitled to any payment or other relief
at this time and therefore that they have no valid claim against the Company or Mr. Gagerman. In March 2017, plaintiffs moved
for partial summary adjudication against the Company and Mr. Gagerman which was denied by the Court. Thereafter, the Court sustained
demurrers by Mr. Gagerman and the Company but granted plaintiffs leave to amend. In response to the plaintiffs’ second amended
complaint, both the Company and Mr. Gagerman intend to further demurrer seeking dismissal of this action.
In
June 2015, the landlord of the Company’s primary facility in Redondo Beach, California initiated litigation against us seeking
to terminate the Company’s lease and require the Company to vacate the premises prior to the scheduled lease end. As a result
of that litigation, the Company was forced to vacate its primary facility and relocate to its present facility in Stanton, California.
To date, no action seeking damages or any other amount has been filed against the Company by the landlord, nor does the Company
believe it has any further liability to the landlord.
NOTE
10 - STOCKHOLDERS’ DEFICIT
Common
Stock
At
February 28, 2017 and February 29, 2016, we had 150,000,000 shares of $0.0001 par value common stock authorized for issuance.
During the year ended February 28, 2017 we issued 950,000 shares of common stock in settlement of a note payable in the amount
of $150,000 plus accrued interest of $15,288. During the year ended February 29, 2016, we did not issue any shares of common stock.
Employee
Stock Options
In
September, 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan, subject to shareholder approval, which was
obtained at a special shareholders meeting in 2011. Under the Plan, the Company may grant options for up to the greater of Three
Million (3,000,000) or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. The exercise price
of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may
not be greater than ten years, and they typically vest over a three-year period.
During
the year ended February 28, 2017, no employee options were granted by the Company.
The
Company incurred stock options related expenses of $0 and $0, during the years ended February 28, 2017 and February 29, 2016,
respectively.
Activity
in this plan is as follows:
|
|
2006 Plan
|
|
|
|
Weighted-Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Number of Options
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, February 28, 2015
|
|
$
|
0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,777,000
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
$
|
0.75
|
|
|
|
|
|
|
|
(553,000
|
)
|
Outstanding, February 29, 2016
|
|
$
|
0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,224,000
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
$
|
0.75
|
|
|
|
|
|
|
|
-
|
|
Outstanding, February 28, 2017
|
|
$
|
0.75-$1.00
|
|
|
|
|
|
|
|
7,224,000
|
|
The
exercise prices for the options outstanding at February 28, 2017, 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 years
|
|
|
$
|
0.79
|
|
|
3 years
|
|
|
7,224,000
|
|
|
$
|
0.79
|
|
The
weighted average fair values of the options on the date of grant for the year ended February 29, 2016 and February 28, 2015 were
nil per share and $0.0 per share, respectively.
Warrants
Activity
in issued and outstanding warrants is as follows:
|
|
Number of Shares
|
|
|
Exercise Prices
|
|
Outstanding, February 29, 2016
|
|
|
35,626,208
|
|
|
$
|
0.10-$1.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(9,172,187
|
)
|
|
$
|
1.50
|
|
Outstanding, February 28, 2017
|
|
|
26,454,021
|
|
|
$
|
0.10-$1.00
|
|
The
exercise prices for the warrants outstanding at February 28, 2017, 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
|
|
|
|
18,381,012
|
|
|
|
18,381,012
|
|
|
|
49 months
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
$
|
0.75
|
|
|
|
1,082,734
|
|
|
|
1,082,734
|
|
|
|
48 months
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$
|
0.75
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
38 months
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$
|
0.75-$1.00
|
|
|
|
5,990,275
|
|
|
|
5,990,275
|
|
|
|
33 months
|
|
|
$
|
0.77
|
|
|
$
|
0.77
|
|
|
$
|
0.00
|
|
|
|
|
|
|
26,454,021
|
|
|
|
26,454,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
11 - GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
During the years ended February 28, 2017 and February 29, 2016, the Company incurred losses of $7,731,333 and $6,604,967,
respectively and had negative cash flows from operating activities of $965,790 and $1,675,745, 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.
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
12 - INCOME TAXES
The
Company did not record any income tax expense due to the net loss during the years ended February 28, 2017 and February 29, 2016.
The actual tax benefit differs from the expected tax benefit computed by applying the combined United States corporate tax rate
and the State of California tax rate of 40% to loss before income taxes as follows for the years ended February 28, 2017 and February
29, 2016:
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Provision
|
|
$
|
800
|
|
|
$
|
800
|
|
The
provision for income tax is included with other expense in the accompanying consolidated financial statements.
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected tax benefit
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
6.0
|
|
|
|
6.0
|
|
Changes in valuation allowance
|
|
|
(40.0
|
)
|
|
|
(40.0
|
)
|
Total
|
|
|
-
|
%
|
|
|
-
|
%
|
The
following table summarizes the significant components of our deferred tax asset at February 28, 2017 and February 29, 2016:
|
|
2017
|
|
|
2016
|
|
Deferred tax asset
|
|
|
|
|
|
|
Primarily relating to net operating loss carry-forwards, but also reserves for inventory and accounts receivable, stock-based compensation and other
|
|
|
115,000,000
|
|
|
|
113,000,000
|
|
Valuation allowance
|
|
|
(115,000,000
|
)
|
|
|
(113,000,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
We
recorded an allowance of 100% for deferred tax assets due to the uncertainty of its realization.
At
February 28, 2017, we had operating loss carry-forwards of approximately $338,000,000 for federal purposes, which expire through
2037, and $55,000,000 for state purposes, which expire through 2022.
We
follow FASB ASC 740 related to uncertain tax positions. Under FASB ASC 740, the impact of an uncertain tax position on the income
tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. At
February 29, 2016 and February 28, 2015, we have no unrecognized tax benefits.
Our
continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of February
28, 2017 and February 29, 2016, we have no accrued interest and penalties related to uncertain tax positions.
We
are subject to taxation in the U.S. and California. Our tax years for 2012 and forward are subject to examination by our tax authorities.
We are not currently under examination by any tax authority.
NOTE
13 - EMPLOYEE BENEFIT PLANS
We
sponsor two employee benefit plans: The Employee Stock Ownership Plan (the “ESOP”) and a 401(k) plan.
The
ESOP is a qualified discretionary employee stock ownership plan that covers substantially all employees. We did not make any contributions
to the ESOP during the years ended February 28, 2017 and February 29, 2016, respectively.
We
sponsor a voluntary, defined contribution 401(k) plan. The plan provides for salary reduction contributions by employees and matching
contributions by us of 100% of the first 4% of the employees’ pre-tax contributions. The matching contributions included in expense
were $0 and $0 for the years ended February 28, 2017 and February 29, 2016, respectively.
NOTE
14 - 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 years ended February 28, 2017 and February 29, 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
-
|
|
|
$
|
13,341
|
|
Canada
|
|
|
|
|
|
|
2,800
|
|
Europe
|
|
|
|
|
|
|
210
|
|
Other
|
|
|
|
|
|
|
55,979
|
|
Asia
|
|
|
|
|
|
|
137,384
|
|
Total
|
|
$
|
-
|
|
|
$
|
183,032
|
|
NOTE
15 - SUBSEQUENT EVENTS:
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.
F-20