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 C4I 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:
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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.
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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.
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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.
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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 (200oF) active cooling must be added, since the magnets are demagnetized
at approximately 176oF. 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.
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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.
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Batteries
.
Batteries convert stored chemical energy to electrical.
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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. Alternators provide 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 (200oF+). In order to apply such devices for automotive applications one must add expensive
and cumbersome active cooling since the magnets are demagnetized at approximately (176oF). 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.
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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,
to develop additional products and additional uses for existing products, to stay current with changes in vehicle manufacture
and design and to maintain an ongoing advantage over potential competition. Our engineering, research and development costs for
fiscal 2016 were approximately $0.4 million compared to approximately $0.8 million in fiscal 2015.
We
stopped practically all research and development in the last two years due to severe cash shortfall, however we did redesign all
the Electronic Control Unit (“ECU”) to the latest state of the art in power electronics and processors. It is expected
that once the Company restarts operations, we will initially set a modest budget of $400,000 for research and development during
the first year after restart. We believe that ongoing research and development is important to the success of our product in order
to utilize the most recent technology, to develop additional products and additional uses for existing products, to stay current
with changes in vehicle manufacture and design and to maintain an ongoing advantage over potential competitors.
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
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 68% of net accounts receivable. During the year ended February
28, 2015, we conducted business with two major customers whose sales comprised 31.6%, and 16.4% of net sales, respectively. As
of February 28, 2015, these customers accounted for 39.5% 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 be 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 Compan’y 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.
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 maintain cash deposits at a bank located in California. Deposits at this
bank are insured by the Federal Deposit Insurance Corporation up to $250,000. 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 29, 2016 and February 28, 2015.
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. During the years ended February 29, 2016 and February 28, 2015,
we determined that there was no impairment of long-lived assets.
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 $30,079 and $61,346 for the years ended February 29, 2016 and February 28,
2015, respectively.
Advertising
Expense
Advertising
costs are charged to expense as incurred and were immaterial for the years ended February 29, 2016 and February 28, 2015.
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 375 amp ECU, the TanGen (dual generator), the eight inch generator, the 30 kW unit and the refrigeration system. Additionally,
we are exploring the possibility of developing a 125kW 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 29, 2016 and February 28, 2015.
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 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. During the year
ended February 28, 2015, we conducted business with two major customers whose sales comprised 31.6%, and 16.4% of net sales, respectively.
As of February 28, 2015, these customers accounted for 39.5% 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 29, 2016 and February 28, 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,858,347
|
|
|
$
|
1,772,869
|
|
Finished goods
|
|
|
1,558,554
|
|
|
|
1,565,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,416,901
|
|
|
|
3,338,059
|
|
Inventory reserve
|
|
|
(3,416,901
|
)
|
|
|
(3,338,059
|
)
|
|
|
|
|
|
|
|
|
|
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 $16,283 and $60,597 are primarily comprised of vendor advances of $16,283 and $38,179 as of February 29, 2016
and February 28, 2015, respectively.
NOTE
5 - PROPERTY, PLANT, AND EQUIPMENT
Property,
plant, and equipment at February 29, 2016 and February 28, 2015consists of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
(1,126,468
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
-
|
|
|
$
|
945
|
|
Depreciation
and amortization expense was $945 and $7,010 for the years ended February 29, 2016 and February 28, 2015, respectively.
NOTE
6 - NOTES PAYABLE
Notes
payable consisted of the following:
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
|
|
|
|
|
|
|
Demand notes payable, at 10% and 16%
|
|
$
|
3,927,468
|
|
|
$
|
1,942,990
|
|
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.
|
|
|
910,488
|
|
|
|
848,344
|
|
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.
|
|
|
456,434
|
|
|
|
428,917
|
|
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 $0.50per share. The note was not repaid when originally due.
|
|
|
325,000
|
|
|
|
325,000
|
|
|
|
|
8,014,999
|
|
|
|
5,940,951
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
$
|
6,648,077
|
|
|
$
|
4,663,690
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
1,366,922
|
|
|
$
|
1,277,261
|
|
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.
Future
maturities of notes payable at February 29, 2016 are as follows:
Year Ending February 28,
|
|
|
|
2016
|
|
|
-
|
|
2017
|
|
|
1,366,922
|
|
Total
|
|
$
|
1,366,922
|
|
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
.
NOTE
7 - RELATED PARTIES TRANSACTIONS
At
February 29, 2016, the balance in Notes Payable and accrued interest-related party, current, includes $14,880,372 of unsecured
notes payable plus accrued interest of $7,680,164 to Mr. Breslow, a member of our Board of Directors, payable on demand, bearing
interest at a rate of 10% per annum. The payable balance of $14,235,960 plus accrued interest of $6,220,790 as of February 28,
2015. During the years ended February 28, 2015 and February 28, 2014, interest amounting to $1,459,374 and $1,395,855 respectively,
was incurred on these notes. The balance also includes $82,000 of unsecured notes payable plus accrued interest of $23,704 and
$15,594 to our CEO pursuant to a demand note entered into on April 5, 2014 and an unsecured note payable to Mr. Kopple, another
member of our Board of Directors in the total amounts of $3,418,738 and $3,047,856 plus accrued interest of $784,934 and $302,874
pursuant to 10% demand note payable as of February 28, 2016 and 2015 respectively.
At
February 29, 2016, the balance in Convertible note payable and accrued interest-related party, long term, includes $1,839,156
of secured convertible notes payable net of discounts of $160,844 plus accrued interest of $721,268 to Mr. Kopple, a member of
our Board of Directors. On June 20, 2014, $500,000 of the original note was converted into a portion of a 10% demand note.
NOTE
8 - ACCRUED EXPENSES
Accrued
expenses at February 29, 2016 and February 28, 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
3,148,841
|
|
|
$
|
3,130,414
|
|
Accrued rent
|
|
|
218,025
|
|
|
|
216,547
|
|
Accrued interest
|
|
|
1,933,017
|
|
|
|
1,177,873
|
|
Other
|
|
|
90,000
|
|
|
|
85
|
|
Total
|
|
$
|
5,389,883
|
|
|
$
|
4,524,919
|
|
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 $674,876 and
$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.
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 29, 2016 and February 28, 2015, we had 150,000,000 shares of $0.0001 par value common stock authorized for issuance,
respectively. During the years ended February 29, 2016 and February 28, 2015, we issued nil and 24,126,933 shares of common stock,
respectively.
During
the year ended February 29, 2016, the Company did not issue any shares of common stock.
During
the year ended February 28, 2015, we issued 2,800,000 shares of Common Stock for services rendered valued at $420,000, 17,334,533
shares of common stock upon the exercise of warrants for proceeds of $1,773,453 and we sold 3,992,400 shares of common stock for
proceeds of $631,460.
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 29, 2016, no employee options were granted by the Company.
The
Company incurred stock options related expenses of $0 and $0, during the years ended February 29, 2016 and February 28, 2015,
respectively.
Activity
in this plan is as follows:
|
|
2006 Plan
|
|
|
|
Weighted-Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Number of Options
|
|
Outstanding, February 28, 2014
|
|
$
|
0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
8,602,333
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled
|
|
$
|
0.75
|
|
|
|
|
|
|
|
(825,833
|
)
|
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
|
|
|
|
|
|
|
|
7,224,000
|
|
The
exercise prices for the options outstanding at February 29, 2016, and information relating to these options is as follows:
Options Outstanding
|
|
|
Exercisable Options
|
|
Range of Exercise
Price
|
|
|
Number
|
|
|
Weighted Average Remaining Life
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Life
|
|
Number
|
|
|
Weighted Average Exercise Price
|
|
|
$0.75-$1.00
|
|
|
|
7,224,000
|
|
|
4 years
|
|
$
|
0.79
|
|
|
4 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
$0.0 per share and nil per share, respectively.
Warrants
Activity
in issued and outstanding warrants is as follows:
|
|
Number of Shares
|
|
|
Exercise Prices
|
|
|
|
|
|
|
|
|
Outstanding, February 28, 2015
|
|
|
37,546,048
|
|
|
$
|
0.10-$1.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(1,919,840
|
)
|
|
$
|
0.75-$1.50
|
|
Outstanding, February 29, 2016
|
|
|
35,626,208
|
|
|
$
|
0.10-$1.50
|
|
The
exercise prices for the warrants outstanding at February 29, 2016, and information relating to these warrants is as follows
: 1,012
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
|
|
|
61 months
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
$
|
0.75
|
|
|
|
1,082,734
|
|
|
|
1,082,734
|
|
|
60 months
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$
|
0.75
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
50 months
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$
|
0.75-$1.00
|
|
|
|
5,990,275
|
|
|
|
5,990,275
|
|
|
45 months
|
|
$
|
0.77
|
|
|
$
|
0.77
|
|
|
$
|
0.00
|
|
$
|
1.00-$1.25
|
|
|
|
795,000
|
|
|
|
795,000
|
|
|
7 months
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
$
|
0.00
|
|
$
|
1.00
|
|
|
|
8,272,187
|
|
|
|
8,272,187
|
|
|
5 months
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
0.00
|
|
$
|
1.50
|
|
|
|
105,000
|
|
|
|
105,000
|
|
|
1 months
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,626,208
|
|
|
|
3,5262,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 29, 2016 and February 28, 2015, the Company incurred losses of $6,604,967 and $12,287,252,
respectively and had negative cash flows from operating activities of $1,675,745 and $3,769,985, 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.
Subsequent
to the year ended February 28, 2017, 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 29, 2016 and February 28,
2015. 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 29,
2016 and February 28, 2015:
|
|
2016
|
|
|
2015
|
|
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.
|
|
2016
|
|
|
2015
|
|
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 29, 2016 and February 28,
2015:
|
|
2016
|
|
|
2015
|
|
Deferred tax asset
|
|
|
|
|
|
|
Primarily relating to net operating loss carry-forwards, but also reserves for inventory and accounts receivable, stock-based compensation and other
|
|
|
113,000,000
|
|
|
|
120,000,000
|
|
Valuation allowance
|
|
|
(113,000,000
|
)
|
|
|
(120,000,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
We
recorded an allowance of 100% for deferred tax assets due to the uncertainty of its realization.
At
February 29, 2016, we had operating loss carry-forwards of approximately $333,000,000 for federal purposes, which expire through
2035, and $59,000,000 for state purposes, which expire through 2021.
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 26, 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
29, 2016 and February 28, 2015, 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 2011 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 29, 2016 and February 28, 2015, 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 $31,766 for the years ended February 29, 2016 and February 28, 2015, 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 29, 2016 and February 28, 2015:
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
13,341
|
|
|
$
|
585,688
|
|
Canada
|
|
|
2,800
|
|
|
|
91,217
|
|
Europe
|
|
|
210
|
|
|
|
33,588
|
|
Other
|
|
|
55,979
|
|
|
|
62,061
|
|
Asia
|
|
|
137,384
|
|
|
|
383,257
|
|
Total
|
|
$
|
183,032
|
|
|
$
|
1,155,811
|
|
NOTE
15 - SUBSEQUENT EVENTS:
From
April 2016 to February 2017, the Company issued convertible notes payable to certain note-holders. The notes carry an interest
rate of 5% and might be converted into the company shares of common stock if the stockholders approve a 1-for-7 reverse stock
split.
On
January 24, 2017 the Company entered into a debt refinancing agreement with Warren Breslow, a Director of the Company. Pursuant
to the agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $23,872,614 including
$890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest, waive all events of default, and sign
a new five-year convertible note in the amount of $14,930,041 providing for no interest for six months and interest of 5% per
annum thereafter payable monthly in arrears. The note also provides various default provisions. The agreement further provides
that $11,982,041 of the note will be converted into 7,403,705 shares of common stock upon stockholders approving a 1 for 7 reverse
stock split within one year of entering this agreement; the remaining balance may be converted at any time thereafter. In the
absence of stockholder approval of a reverse stock split within one year, this agreement will become null and void. The Company
has elected to continue to accrue interest on this agreement until such time as the 1 for 7 reverse stock split has been approved.
On
January 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 within the Peoples Republic of China. The Company owns
49% of the JV and contributed $250,000 and a license to specific technology. The Chinese company owns 51% of the JV and is required
to contribute $9,750,000. In addition, the Chinese company has invested $2,000,000 in Aura at $0.20 per share for a total of 10,000,000
shares of common stock and is required to purchase a minimum of $1,250,000 of product supported by letters of credit for distribution
until the JV factory is fully built and staffed. In order to properly train JV personnel in the workings of Aura’s products,
Aura has also committed to supply limited technical staff to the JV for a period of six months at no cost to the JV other than
to reimbursement for travel, room and board. The agreement was subject to the approval of the Chinese Government which was received
in April, 2017.
On
January 30, 2017 the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven secured
creditors holding 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 at least 75% of the stock issuable upon conversion of the convertible
notes votes to amend the agreement, the agreement is binding on all seven of the secured creditors. The total debt at October
31, 2016 was approximately $4,095,700 including interest of $1,606,884. 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 agreement provided that all accrued and unpaid interest will be added to the principal amount. The amended note bears 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 debt including accrued interest will be converted into shares of
common stock and a new five-year 5% per annum convertible note to be issued for the remaining balance. The 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 proxy statement.
On
February 21, 2017 the Company entered into several debt refinancing agreements with debt holders relating to an aggregate debt
totaling $2,237,456 including interest of $489,466. Pursuant to these agreements, all past events of default are waived and new
five-year 5% convertible notes with no interest for the first six months have replaced the original debt instruments. Upon stockholder
approval of a 1 for 7 reverse stock split, these new notes will be converted into an aggregate total of 1,164,555 shares of stock.
The notes also provide various default provisions.
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-21