ITEM 1. FINANCIAL STATEMENTS
AURA SYSTEMS, INC.
BALANCE SHEETS
(Unaudited)
|
|
As of
May 31,
|
|
|
As of February 28,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
974,669
|
|
|
$
|
255,869
|
|
Other current assets
|
|
|
5,588
|
|
|
|
2,894
|
|
Total current assets
|
|
|
980,257
|
|
|
|
258,763
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,500
|
|
|
|
3,500
|
|
Investment in Joint Venture
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,233,757
|
|
|
$
|
262,263
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,500,805
|
|
|
$
|
4,943,559
|
|
Accrued expenses
|
|
|
6,493,051
|
|
|
|
5,939,251
|
|
Customer advances
|
|
|
641,751
|
|
|
|
641,751
|
|
Investor advance
|
|
|
650,000
|
|
|
|
-
|
|
Notes payable
|
|
|
3,584,498
|
|
|
|
4,776,938
|
|
Convertible note payable and accrued interest-related party, net of discount
|
|
|
3,153,467
|
|
|
|
2,920,172
|
|
Convertible notes payable, net of discount
|
|
|
5,848,810
|
|
|
|
4,177,283
|
|
Notes payable and accrued interest- related party
|
|
|
29,383,178
|
|
|
|
29,669,693
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
54,255,560
|
|
|
|
53,068,647
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
54,255,560
|
|
|
|
53,068,647
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 150,000,000 shares authorized at May 31 and February 28, 2017; 126,608,391 and 113,991,432 issued and outstanding at May 31 and February 28, 2017, respectively
|
|
|
12,661
|
|
|
|
11,399
|
|
Additional paid-in capital
|
|
|
412,666,277
|
|
|
|
410,499,597
|
|
Accumulated deficit
|
|
|
(465,700,741
|
)
|
|
|
(463,317,380
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
|
(53,021,803
|
)
|
|
|
(52,806,384
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
1,233,757
|
|
|
$
|
262,263
|
|
The accompanying notes are an integral part
of these financial statements.
AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MAY 31, 2017 AND 2016
(Unaudited)
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Revenues
|
|
$
|
0
|
|
|
$
|
0
|
|
Cost of goods sold
|
|
|
0
|
|
|
|
0
|
|
Gross Profit
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Engineering, research and development expenses
|
|
|
0
|
|
|
|
33,788
|
|
Selling, general and administrative expenses
|
|
|
567,996
|
|
|
|
616,977
|
|
Total operating expenses
|
|
|
567,996
|
|
|
|
650,765
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(567,996
|
)
|
|
|
(650,765
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) and expense:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1,028,228
|
|
|
|
827,947
|
|
Gain on debt settlement
|
|
|
0
|
|
|
|
(70,288
|
)
|
Other (income) expense, net
|
|
|
787,136
|
|
|
|
(1,767
|
)
|
Total other (income) expense
|
|
|
1,815,364
|
|
|
|
755,892
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,383,360
|
)
|
|
$
|
(1,406,657
|
)
|
|
|
|
|
|
|
|
|
|
Total basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
Weighted average shares used to compute basic and diluted loss per share
|
|
|
121,821,466
|
|
|
|
113,848,171
|
|
*Basic
and diluted weighted average number of shares are equivalent since the effect of potential dilutive securities is anti-dilutive.
See accompanying notes to these unaudited
financial statements.
AURA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2017 AND 2016
(Unaudited)
|
|
Three Months Ended
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,383,360
|
)
|
|
$
|
(1,406,657
|
)
|
Depreciation Expense
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
43,417
|
|
|
|
64,110
|
|
Gain on debt settlement
|
|
|
-
|
|
|
|
(70,288
|
|
FMV of warrants issued for services
|
|
|
177,737
|
|
|
|
-
|
|
Stock issued for services
|
|
|
990,205
|
|
|
|
-
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
2,115
|
|
Other current assets and deposit
|
|
|
(2,694
|
)
|
|
|
96,819
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable, customer deposit and accrued expenses
|
|
|
111,046
|
|
|
|
1,215,829
|
|
Net cash used in operations
|
|
|
(1,063,649
|
)
|
|
|
(98,072
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Investment in Joint Venture
|
|
|
(250,000
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(250,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,000,000
|
|
|
|
-
|
|
Proceeds from notes payable-net
|
|
|
382,500
|
|
|
|
405,000
|
|
Proceeds from notes payable-related party, net
|
|
|
-
|
|
|
|
28,208
|
|
Investor Advance
|
|
|
650,000
|
|
|
|
-
|
|
Net cash provided by financing activities:
|
|
|
2,032,450
|
|
|
|
433,208
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash & cash equivalents
|
|
|
718,801
|
|
|
|
335,136
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
255,869
|
|
|
|
22,175
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
974,669
|
|
|
$
|
357,311
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Unaudited supplemental disclosure of non-cash investing and
financing activities:
None
See accompanying notes to these unaudited
financial statements.
AURA SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ACCOUNTING POLICIES
Accounting principles
In the opinion of management, the accompanying
balance sheets and related interim statements of income and comprehensive income, and cash flows include all adjustments, consisting
only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full
year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s
annual report on Form 10-K for the year ended February 28, 2017 filed on September 18, 2017 with the U.S. Securities and Exchange
Commission.
Estimates
The preparation of financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In April 2015, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation
of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements.
ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability
rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual
reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively
to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on
its balance sheets.
In January 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on
the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for
equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial
instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax
assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and
interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect
adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption
is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting
from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting
this guidance.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters
into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle
of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in
the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating
the impact of adopting ASU No. 2016-02 on our financial statements.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) that
clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies
that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer
and provides additional guidance about how to apply the control principle when services are provided and when goods or services
are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU 2014-09
as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those
years. The Company has not yet determined the impact of ASU 2016-08 on its financial statements.
In March 2016, the FASB issued ASU No.
2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification in this Update involve several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this
Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption
must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized,
minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition
method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted.
Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares
to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess
tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied
prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement
of cash flows using either a prospective transition method or a retrospective transition method. We are currently evaluating the
impact of adopting ASU No. 2016-09 on our financial statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides further guidance
on identifying performance obligations and improves the operability and understandability of licensing implementation guidance.
The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting
periods beginning after December 15, 2017, including interim periods within those years. In May 2016, the FASB issued ASU
2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients,” which
amends the guidance on transition, collectability, non-cash consideration, and the presentation of sales and other similar taxes.
ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue
must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability
threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the
standard’s contract criteria. The standard allows for both retrospective and modified retrospective methods of adoption. The
Company has not yet determined the impact of ASU 2016-10 on its financial statements.
In June 2016, the FASB issued ASU 2016-13,
"Measurement of Credit Losses on Financial Statements," which requires companies to measure credit losses utilizing a
methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information
to inform credit loss estimates. ASU 2016-13 is effective for annual reporting periods, and interim periods therein, beginning
after December 15, 2019 (fiscal year 2021 for the Company). The Company has not yet determined the potential effects of the adoption
of ASU 2016-13 on its Financial Statements.
In August 2016, the FASB issued ASU 2016-15,
"Classification of Certain Cash Receipts and Cash Payments," which aims to eliminate diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash
Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December
15, 2017 (fiscal year 2019 for the Company). The Company has not yet determined the potential effects of the adoption of ASU 2016-15
on its Financial Statements.
Reclassifications
Certain reclassifications have been made
to the comparative financial statements to conform to the current period presentation.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. During the Three months ended May
31, 2017 and May 31, 2016, the Company incurred losses of $2,383,360 and $1,406,657, respectively and had negative cash flows from
operating activities of $1,063,649 and $98,072, respectively.
If the Company is unable to generate profits
and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply
or cease business altogether.
Substantial additional capital resources
will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities.
The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations
on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that
could result from the outcome of this uncertainty.
During the next twelve months we intend
to restart operations of our AuraGen/VIPER business both domestically and internationally. At the next shareholders meeting the
shareholders will vote for an entire new slate of five board candidates. The new board when elected will hire a new management
team. In addition we plan to acquire a new facility of approximately 45,000 square feet for operations, as well as, rebuild the
engineering QA and sales teams to support the operation. We anticipate being able to fund these additions in the upcoming fiscal
year.
NOTE 3 – NOTES PAYABLE
Notes payable consisted of the following:
|
|
May 31,
2017
|
|
|
February 28,
2017
|
|
|
|
|
|
|
|
|
Demand notes payable, at 10% and 16%
|
|
$
|
3,584,498
|
|
|
$
|
3,782,468
|
|
Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 10
th
of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.
|
|
|
1,000,000
|
|
|
|
972,632
|
|
Convertible Promissory Note dated October 2, 2012, due October 2, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 2
nd
of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.
|
|
|
500,000
|
|
|
|
483,951
|
|
Senior secured convertible notes dated May 7, 2013, due May 7, 2014, convertible into shares of our common stock at a price of $0.75 per share. The note was not repaid.
|
|
|
2,395,700
|
|
|
|
2,395,700
|
|
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50 per share. The note was not repaid.
|
|
|
325,000
|
|
|
|
325,000
|
|
Convertible notes dated April thru June, 2016. The notes carry an interest rate of 5% and might be converted into shares of Company’s common stock if the shareholders approve a 7:1 reverse stock split.
|
|
|
1,628,110
|
|
|
|
994,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,433,308
|
|
|
|
8,994,221
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
$
|
9,433,308
|
|
|
$
|
8,994,221
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
CONVERTIBLE DEBT
On May 7, 2013, the Company transferred 4 notes payable with
a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note
with a principal value of $1,087,000 and warrants to Kenmont Capital Partners. This new note has a 1-year maturity date and is
convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire
1,449,333 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded
$342,020 as a discount, which will be amortized over the life of the note.
On May 7, 2013, the Company transferred 2 note payables with
a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value
of $558,700 and warrants to LPD Investments, Ltd. This new note has a 1-year maturity date and is convertible into shares of common
stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 744,933 shares of common stock, have
an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $175,793 as a discount, which will be
amortized over the life of the note.
On May 7, 2013, the Company entered into an agreement with an
individual for the sale of a secured convertible note payable in the original principal amount of $750,000 and warrants. This note
has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants
entitle the holder to acquire 1,000,000 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year
term. The Company recorded $235,985 as a discount, which will be amortized over the life of the note.
On June 20, 2013, the Company entered into an agreement with
four individuals for the sale of secured convertible notes payable in the original amount of $325,000 and warrants. These Notes
have a 1-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants
entitle the holders to acquire 433,334 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year
term. The Company recorded $63,622 as a discount, which will be amortized over the life of the notes.
On August 19, 2013, the Company entered into an agreement with
a member of its Board of Directors for the sale of $2,500,000 of unsecured convertible notes payable and warrants. These notes
carry a base interest rate of 9.5%, have a 4-year maturity date and are convertible into shares of common stock at the conversion
price of $0.50 per share. The warrants entitle the holder to acquire 5,000,000 shares of common stock, have an initial exercise
price of $0.75 per share and have a 7-year term. The Company recorded $667,118 as a discount, which will be amortized over the
life of the note.
All convertible notes payable are due
within twelve months or have not been paid when originally due.
CONVERTIBLE PROMISSORY NOTES
At February 28, 2013, the three other unsecured convertible
promissory notes payable amounted to $1,447,938, net of discounts of $402,063. These convertible notes bear interest at 7% per
annum, and are convertible into common stock of the Company at $0.76 per share (as well as variable conversion rates as described
below). These notes are due on August 10, 2017, October 2, 2017, and January 4, 2013. On May 7, 2013, the note due on January 4,
2013 was converted into a portion of the note due June 15, 2013, which carries an interest rate of 12%.
Between March 1, 2017 and May 31, 2017, the Company entered
into agreements with various individuals for the aggregate sale of $153,000 of unsecured convertible notes and warrants. Pursuant
to the terms of these notes, such notes will be converted in their entirety into shares of common stock of the Company at the conversion
price of $0.07 per share upon stockholder approval of a 1-for-7 reverse stock split. The warrants entitle the holders to acquire
up to an aggregate of 122,400 shares of common stock and have an initial exercise price of $0.20 per share, which will be adjusted
to $1.40 per share upon stockholder approval of a 1-for-7 reverse stock split.
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 an interest rate is 7% per annum. Interest
on the unpaid principal amount of this note is payable monthly in arrears on the tenth day of each calendar month commencing September
10, 2012. Interest is computed on the actual number of days elapsed over a 360-day year. The Holder has the right to convert any
outstanding and unpaid principal portion of this convertible promissory note into shares of common stock. The company recorded
$310,723 as a debt discount, which will be amortized over the life of the note.
On October 2, 2012 the Company entered
into an agreement with an individual for the sale of an unsecured convertible promissory note in the original principal amount
of $500,000. This convertible promissory note is due and payable on October 2, 2017 and bears an interest rate is 7% per annum. Interest
on the unpaid principal amount of this note is payable monthly in arrears on the second day of each calendar month commencing
November 2, 2012. Interest is computed on the actual number of days elapsed over a 360-day year. The Holder has the right to convert
any outstanding and unpaid principal portion of this convertible promissory note into shares of common stock. The company recorded
$137,583 as a debt discount, which will be amortized over the life of the note.
On January 30, 2017 the Company entered
into an agreement entitled First Amendment to Transaction Documents with five of seven of its secured creditors. These creditors
hold a security interest in all of the Company’s assets except for its patents and other intellectual properties. The original
agreement dated May 7, 2013 provided that if the holders of at least 75% of the stock issuable upon conversion of the convertible
notes votes to amend the agreement, then such amendments will be binding on all the secured creditors. The five secured creditors
signing the amendment total in excess of 95% of the issuable stock upon conversion and, therefore the agreement is binding on all
seven of the secured creditors. The amended agreement provides that all accrued and unpaid interest will be added to the principal
amount, the amended notes bear interest at the rate of 0% through the sooner of (i) January 15, 2018 or (ii) the fifth business
day following a stockholder meeting and 5% per annum thereafter, subject to reduction to comply with applicable law, and mature
in 60 months from the effective date of a proposed 1-for-7 reverse stock split (which may only be effected if approved by the stockholders
at the next annual meeting of stockholders). Upon certain financings, within five business days following stockholder approval
of a 1-for-7 reverse stock split, the Company is obligated to make a payment to the holders of the amended notes in the amount
of 20% of the outstanding secured notes. Upon the effectiveness of a proposed 1-for-7 reverse stock split, if approved by the stockholders
at the next annual meeting of stockholders, the remaining 80% balance of the amended notes is converted into shares of the Company’s
common stock. After the effectiveness of a proposed 1-for-7 reverse stock split, the secured note holders may voluntarily convert
the unpaid principal and interest thereon into the Company’s common stock at the conversion price of $1.40 per share.
On February 21, 2017 the Company entered into debt refinancing
agreements with several debt holder relating to aggregate unsecured debt totaling $2,237,456 including interest of $489,466. This
refinancing agreements waives any past events of default and provides for new five-year convertible notes which bear no interest
through the sooner of (i) January 15, 2018 or (ii) the fifth business day following a stockholder meeting and 5% per annum thereafter.
Upon stockholder approval of a 1-for-7 reverse stock split, these notes will be converted into a total of 1,164,555 shares of common
stock. The notes also provide various default provisions.
As of the date
of filing, the Company’s stockholders have not approved any reverse stock split.
NOTE 4 – ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
May 31,
2017
|
|
|
February 28,
2017
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
2,817,386
|
|
|
$
|
3,099,842
|
|
Accrued rent
|
|
|
202,036
|
|
|
|
202,036
|
|
Accrued interest
|
|
|
3,438,629
|
|
|
|
2,562,375
|
|
Other
|
|
|
35,000
|
|
|
|
75,000
|
|
Total
|
|
$
|
6,493,051
|
|
|
$
|
5,939,252
|
|
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 5 – SHAREHOLDERS’ EQUITY
Common Stock
During the three months ended May 31, 2017,
we issued 5,000,000 shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture, we issued 5,116,959 shares
of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 shares of common stock valued at
$325,000 in connection with a consulting agreement.
During the three months ended May 31, 2016,
we issued 950,000 shares of common stock were issued in settlement for a note payable balance $150,000 plus accrued interest of
$15,288.
Employee Stock Options
During the Three months ended May 31, 2017,
there were no stock options granted to employees.
In September, 2006, our Board of Directors
adopted the 2006 Employee Stock Option Plan. Activity in this plan is as follows:
|
|
2006 Plan
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number of
Options
|
|
Outstanding, February 28, 2017
|
|
|
$0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,224,000
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, May 31, 2017
|
|
|
$0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,224,000
|
|
The exercise prices for the options outstanding at May 31, 2017,
and information relating to these options is as follows:
Options Outstanding
|
|
Exercisable Options
|
Range of
Exercise
Price
|
|
Number
|
|
|
Weighted
Average
Remaining
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.75-$1.00
|
|
|
7,224,000
|
|
|
2.75 years
|
|
$
|
0.79
|
|
|
2.75 years
|
|
|
7,224,000
|
|
|
$
|
0.79
|
|
Warrants
Activity in issued and outstanding warrants is as follows:
|
|
Number of Shares
|
|
|
Exercise Prices
|
|
Outstanding, February 28, 2017
|
|
|
27,554,021
|
|
|
|
$0.10-$1.00
|
|
Granted
|
|
|
1,400,000
|
|
|
$
|
.20
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding, May 31, 2017
|
|
|
28,954,021
|
|
|
|
$0.10-$1.00
|
|
The exercise prices for the warrants outstanding
at May 31, 2017, and information relating to these warrants is as follows:
Range of
Exercise
Prices
|
|
Stock Warrants
Outstanding
|
|
|
Stock Warrants
Exercisable
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price of
Warrants
Outstanding
|
|
|
Weighted-
Average
Exercise
Price of
Warrants
Exercisable
|
|
|
Intrinsic
Value
|
|
$0.20
|
|
|
1,400,000
|
|
|
|
1,400,000
|
|
|
57 months
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.00
|
|
$0.10-$0.75
|
|
|
19,481,012
|
|
|
|
19,481,012
|
|
|
46 months
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
$0.75
|
|
|
1,082,734
|
|
|
|
1,082,734
|
|
|
45 months
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$0.75
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
35 months
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$0.75-$1.00
|
|
|
5,990,275
|
|
|
|
5,990,275
|
|
|
30 months
|
|
$
|
0.77
|
|
|
$
|
0.77
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,954,021
|
|
|
|
28,954,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 – RELATED PARTIES TRANSACTIONS
On January 24, 2017 the Company entered
into a Debt Refinancing Agreement with Mr. Warren Breslow, who served as a Director of the Company from 2006 to 2017. Mr. Breslow
resigned his position on our board in March 2017. Pursuant to this agreement, both Mr. Breslow and the Company acknowledged that
total debt owed to Mr. Breslow and his affiliates was $23,872,614 including $8,890,574 of accrued interest. Mr. Breslow agreed
to cancel and forgive all interest due, waive any past events of default and sign a new, five-year unsecured convertible note,
in the amount of $14,930,041. This new note bears no interest through the sooner of (i) January 15, 2018 or (ii) the fifth business
day following a shareholder meeting, and 5% per annum thereafter. This new note also provides various default provisions. The refinancing
agreement further provides that $11,982,041 of Mr. Breslow’s new note will be converted into 7,403,705 shares of common stock
upon stockholder approval of a 1-for-7 reverse stock split within eighteen months of entering into that agreement; the remaining
balance may thereafter be converted at any time. In the absence of stockholder approval of a 1-for-7 reverse stock split within
eighteen months, the refinancing agreement will become null and void. The Company has elected to continue to accrue interest on
this agreement until such time as the 1-for-7 reverse stock split has been approved. As of the date of filing, the stockholders
have not approved the reverse stock split.
At May 31, 2017, the balance in Notes
Payable and accrued interest-related party, current, includes $14,982,041 of unsecured notes payable plus accrued interest of $9,266,516
to Mr. Breslow, a member of our Board of Directors, payable on demand, bearing interest at a rate of 10% per annum. The balance
was $14,982,041 plus accrued interest of $8,890,574 as of February 28, 2017. During the periods ended May 31, 2017 and May 31,
2016, interest amounting to $375,942 and $374,378 respectively, was incurred on these notes. Related Parties Transactions also
includes $82,000 of unsecured notes payable plus accrued interest of $31,198 and $29,141 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 amount
of $3,587,322 and $3,418,738 plus accrued interest of $2,098,616 and $784,934 pursuant to 10% demand note payable as of February
28, 2017 and February 29, 2016, respectively. At May 31, 2017, the balance in Convertible note payable and accrued interest-related
party, long term, includes $2,000,000 of secured convertible notes payable plus accrued interest of $995,763 to Mr. Kopple.
NOTE 7 –
COMMITMENTS
Leases
Our facilities consist of approximately
20,000 rented square feet in Stanton, California. The Stanton facility is currently being used for small quantity assembly and
testing using components that are produced by various suppliers as well as for general offices, engineering and warehousing. The
rent for the Stanton facility is $10,000 per month. The facility is not sufficient for our near term anticipated needs and the
Company is actively looking for a new facility. The Company arrangements for the Stanton facility are on a month per month rent.
Joint Venture
On January 27,
2017, the Company entered into a joint venture (JV) agreement with a Chinese company to manufacture, market and distribute certain
mobile power products based on Aura’s patented technology solely for the Peoples Republic of China territories. The JV is
owned 49% by the Company and 51% by the Chinese company. The Company has contributed $250,000 and a license to specific technology
and the Chinese company is required to contribute $9,750,000. In addition, the Chinese company will invest $2,000,000 in Aura at
$0.20 per share for a total of 10,000,000 shares of common stock. Additionally, the Chinese company will purchase a minimum of
$1,250,000 of product supported by letters of credit for distribution until the joint venture factory is built, equipped, and staffed.
In order to assure proper training of joint venture personnel, Aura has also committed to supply instructional personnel for six
months at no cost other than reimbursement for travel, room and board. The agreement was subject to the approval of the Chinese
Government which was received in April, 2017.
NOTE 8 – SUBSEQUENT EVENTS:
The Company is presently engaged in a dispute
with one of its directors, Robert Kopple, relating to approximately $5.4 million and approximately 22 million warrants which Mr.
Kopple claims to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well
as against current Directors Mr. Gagerman and Mr. Diaz-Verson together with former Directors Mr. Breslow and Mr. Howsmon in connection
with these allegations. The Company believes that it has valid defenses in these matters and intends to vigorously defend against
these claims.
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Report contains
forward-looking statements within the meaning of the federal securities laws. Statements other than statements of historical fact
included in this Report, including the statements under the heading “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” regarding future events or prospects are forward-looking statements. The words “approximates,”
“believes,” “forecasts,” “expects,” “anticipates,” “estimates,” “intends,”
“plans” “would,” “could,” “should,” “seek,” “may,” or other
similar expressions in this Report, as well as other statements regarding matters that are not historical fact, constitute forward-looking
statements. We caution investors that any forward-looking statements presented in this Report are based on the beliefs of, assumptions
made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected
by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe
that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect.
As a result, our actual future results may differ from our expectations, and those differences may be material. Accordingly, investors
should use caution in relying on forward-looking statements to anticipate future results or trends.
Some of the risks and
uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied
by forward-looking statements include the following:
|
●
|
Our ability to generate positive cash flow from operations;
|
|
●
|
Our ability to obtain additional financing to fund our operations;
|
|
●
|
The impact of economic, political and market conditions on us and our customers;
|
|
●
|
The impact of unfavorable results of legal proceedings;
|
|
●
|
Our exposure to potential liability arising from possible errors and omissions, breach of fiduciary duty, breach of duty of care, waste of corporate assets and/or similar claims that may be asserted against us;
|
|
●
|
Our ability to compete effectively against competitors offering different technologies;
|
|
●
|
Our business development and operating development;
|
|
●
|
Our expectations of growth in demand for our products; and
|
|
●
|
Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2017 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.
|
We do not intend to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except to the
extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons
acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place
undue reliance on these forward-looking statements.
Overview
Our business is based
on the exploitation of our patented mobile power solution known as the AuraGen for commercial and industrial applications and the
VIPER for military applications. Our business model consists of three major components: (i) sales and marketing, (ii) engineering,
and (iii) customer service and support.
(i) Our
sales and marketing approach is composed of direct sales in North America and the use of agents, distributors and joint ventures
for sales internationally. In North America, our primary focus is in (a) transport refrigeration, and (b) U.S. Military applications.
(ii) The
second component of our business model is focused on the engineering support for the sales activities described above. The engineering
support consists of the introduction of new features for our AuraGen/VIPER solution such as higher power, different voltages, three
phase options, shore power systems, higher current solutions as well as interface kits for different platforms.
(iii) The
third component of our business model is customer service. In fiscal 2018, we expect to rehire several previously trained field
engineers to support our product in North America. In addition, we are working closely with our Chinese Joint Venture partner to
train their staff to support our products overseas.
During the first half
of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second half of fiscal
2016 the Company’s operations were disrupted when the Company was forced to move from its facilities in Redondo Beach, California
to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were sporadic. During fiscal 2017,
the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial
obligations.
The Company has been
successful in restructuring its secured debt and has reached an agreement with its secured creditors whereby all defaults and penalties
have been waived and 80% of the secured debt will be converted into shares of the Company’s common stock as soon as the Company
holds an annual meeting of stockholders to elect a new board of directors. The balance (the remaining 20%), is to be paid to the
secured creditors in cash within five business days following stockholder approval of a 1-for-7 reverse stock split provided that
certain financings milestones have been reached by the Company. Upon conversion, the converting secured creditors will receive
approximately 3.9 million new common shares in exchange for approximately $5.73 million of converting debt.
The Company has also
been successful in restructuring approximately $27.5 million of unsecured debt. Various unsecured creditors have agreed to waive
all defaults and penalties, to forgive an aggregate of approximately $9.3 million in debt, and convert an aggregate of approximately
$15.2 million of unsecured debt into approximately 10.2 million common shares. As of the date of this filing, Robert Kopple, the
Company’s Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his
debt. Mr. Kopple claims to be owed approximately $5.4 million on terms significantly preferable to other similarly-situated unsecured
creditors. Mr. Kopple has not accepted the Company’s offer to restructure this debt to-date.
Our financial statements
included in this report have been prepared on the assumption that we will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. However, as a result of our losses from operations,
there is substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on the Company’s
financial statements for the year ended February 28, 2017 expressed substantial doubt about the Company’s ability to continue
as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and classification of liabilities that may result from our possible
inability to continue as a going concern.
Our ability to continue
as a going concern is dependent upon the successful achievement of profitable operations, and the ability to generate sufficient
cash from operations and obtain financing resources to meet our obligations. There is no assurance that such efforts will be successful.
Our current level of
sales reflects our efforts to introduce a new product into the marketplace. Until recently, many purchases of the product were
for evaluation purposes. Recently we started to receive repeat orders for larger quantities as different organizations are integrating
our products into their vehicles. We seek to achieve profitable operations by obtaining market acceptance of the AuraGen
®
as a competitive - if not superior - product providing mobile power anywhere anytime. There can be no assurance that this success
will be achieved.
Critical Accounting Policies and Estimates
Our discussion and analysis
of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements
requires management to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate
our estimates, including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical
experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe
that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated
financial statements.
Revenue Recognition
We are required to make
judgments based on historical experience and future expectations, as to the reliability of shipments made to our customers. These
judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition," and related guidance. Because sales are currently in limited volume and many sales are
for evaluative purposes, we have not booked a general reserve for returns. We will consider an appropriate level of reserve for
product returns when our sales increase to commercial levels.
Inventory Valuation and Classification
Inventories consist
primarily of components and completed units for our AuraGen
®
product. Inventories are valued at the lower of cost
(first-in, first-out) or market. Provision is made for estimated amounts of current inventories that will ultimately become obsolete
due to changes in the product itself or vehicle engine types that go out of production. Management believes that existing inventories
can, and will, be sold in the future without significant costs to upgrade it to current models and that the valuation of the inventories
accurately reflects the realizable values of these assets. The AuraGen
®
product being sold currently is not technologically
different from those in current use. Existing finished goods inventories can be upgraded to the current model with only a small
amount of materials and manpower. We make these assessments based on the following factors: i) existing orders, ii) age of the
inventory, iii) historical experience and iv) our expectations as to future sales. If expected sales volumes do not materialize,
there would be a material impact on our financial statements.
Valuation of Long-Lived Assets
Long-lived assets, consisting
primarily of property and equipment, and patents and trademarks, comprise a portion of our total assets. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values August not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an asset to the future net cash flows expected to
be generated by those assets. Net cash flows are estimated based on expectations as to the realize-ability of the asset. Factors
that could trigger a review include significant changes in the manner of an asset’s use or our overall strategy.
Specific asset categories
are treated as follows:
Accounts Receivable:
We record an allowance for doubtful accounts based on our expectation of collect-ability of current and past due accounts receivable.
Property, Plant and
Equipment: We depreciate our property and equipment over various useful lives ranging from five to ten years. Adjustments are made
as warranted when market conditions and values indicate that the current value of an asset is less than its net book value.
When we determine that
an asset is impaired, we measure any such impairment by discounting an asset’s realizable value to the present using a discount
rate appropriate to the perceived risk in realizing such value. When we determine that an impaired asset has no foreseeable realizable
value, we write such asset down to zero.
Results of Operations
Three months ended May 31, 2017 compared
to three months ended May 31, 2016
Net revenues for the
three months ended May 31, 2017 (the “First Quarter FY2018”) and the three months ended May 31, 2016 (the “First
Quarter FY2017”) were $0. The Company has virtually ceased operations due to a lack of funding.
Cost of goods in the
First Quarter FY2018 and the First Quarter FY2017 were $0 as a result of the virtual cessation of operations as noted above.
Engineering, research
and development expenses decreased $0 in the First Quarter FY2018 from $33,788 in the First Quarter FY2017. The decline is attributable
to a lack of funds resulting in the virtual cessation of operations as noted above.
Selling, general and
administrative expense decreased $82,769 (13%) to $567,996 in the First Quarter FY2018 from $616,977 in the First Quarter FY2017.
Included in the current period expenses is a consulting arrangement whereby the company issued 2,500,00 shares of our common stock
valued at $325,000. As noted above, the decrease is primarily attributable to the curtailment of activities due to a lack of financial
resources.
Net interest expense
in the First Quarter FY2018 increased $200,281 (24%) to $1,028,228 from $827,947 in the First Quarter FY2017 due to our increased
debt levels.
Other expense increased
$788,903 in the First Quarter FY2018 due to a non-cash settlement with a shareholder whereby the company issued 5,116,959 shares
of stock valued at approximately $665,000, IRS penalties and interest assessed of approximately $20,000 due to the late filing
and payment of withholding taxes, and approximately $102,000 for settlements with two former employees and a labor board judgment
with another employee.
Our net loss for the
First Quarter FY2018 increased $976,703 to $2,383,360 from $1,406,657 in the First Quarter FY2017, as a result of the overall decrease
in operations due to the lack of financial resources.
Liquidity and Capital Resources
We had cash of approximately
$975,000 and $256,000 as of May 31, 2017, and February 28, 2017, respectively. We had a working capital deficit at May 31,
2017, and February 28, 2017 of $57,275,303 and $52,809,884, respectively. The working capital deficit includes notes payable and
accrued interest to related parties of $29,383,178 and $29,669,693 as of May 31 and February 28, 2017, respectively.
Net cash used in operations
for the Three months ended May 31, 2017, was $1,136,869, an increase of $1,038,797 from the comparable period in the prior fiscal
year. Net cash used in investing activities consists of our investment of $250,000 in our Chinese joint venture. Net cash provided
by financing activities during the Three months ended May 31, 2017, was $2,105,670, resulting from net proceeds from notes payable
of $455,670, the issuance of common stock for $1,000,000, and an investor advance of $650,000.
There were no acquisitions
of property and equipment in the Three months FY 2018 or the Three months FY 2017.
Accrued expenses as
of May 31, 2017 increased $725,721 to $6,664,492 from $5,939,251 as of February 28, 2017. Approximately $1,335,000 of accrued expenses
is salaries accrued but unpaid to certain employees and ex-employees due to a lack of resources, and approximately $518,000 is
accrued but unused vacation time earned by employees.
Net proceeds from the
issuance of debt totaled $455,670 in the Three months FY 2017, compared with $433,208 in the Three months FY 2016. As of May 31,
2017, the total amount owing a board member is $14,903,252 plus accrued interest of approximately $8,055,000. We also owe another
Board member a total of $5,304,457, net of discounts of $119,150 plus accrued interest of approximately $1,663,296. If the Board
members were to demand repayment, we do not currently have the resources to make the payments.
The Company had a deficit
of $53,021,803 in shareholders’ equity as of May 31, 2017, compared to $52,806,384 as of February 28, 2017.
Since 2002 substantially
all of our revenues from operations have been derived from sales of the AuraGen
®
. The cash flow generated from our
operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will
be sufficient to fund working capital needs.
In the past, in order
to maintain liquidity we have relied upon external sources of financing, principally equity financing and private indebtedness.
We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. The issuance of additional
shares of equity in connection with any such financing could dilute the interests of our existing stockholders, and such dilution
could be substantial. If we cannot raise needed funds, we would also be forced to make further substantial reductions in our operating
expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.
Capital Transactions
During the three months
ended May 31, 2017, we issued 5,000,000 shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture; we
issued 5,116,959 shares of common stock valued at $665,204 as part of a settlement agreement; and we issued 2,500,000 shares of
common stock valued at $325,000 in connection with a consulting agreement.
During the quarter
ended May 31, 2016, we issued 950,000 shares of common stock to settle a note payable balance of $150,000 plus accrued interest
of $15,588.
Inventories
Inventories consist
primarily of components and completed units of the Company’s AuraGen
®
product.
Early in our AuraGen
®
program, we determined it was most cost-effective to outsource production of components and subassemblies to volume-oriented manufacturers,
rather than produce these parts in house. As a result of this decision, and based on then anticipated sales, we purchased, prior
to fiscal 2001, a substantial inventory of components at volume prices. Since sales did not meet such expectations, we have been
selling product from this inventory for several years.
Most of our inventory
consists of a variety of (i) metallic, mechanical components, and (ii) electrical components including metallic chassis to hold
the assembled electrical systems. The vast majority of mechanical components are not aged and most of the electrical components
are also not aged. The components that are aged are related to the prime mover/Generator interface that may not be in demand any
longer.
In the past we have
offered and ship three different basic models of systems; (i) a 5 kW based systems, (ii) an 8.5 kW based system and (iii) a 16
kW based systems (two 8.5 kW systems configured in tandem back-to-back). Each of these systems can be configured with different
options such as 110 VAC only, 220 VAC only, 24 VDC only, 12 VDC only and AC/DC combinations of the same or different voltages.
In addition, the system can be configured with single phase, split phase or three-phase output.
A number of the mechanical
components are common to all three of the above configurations, while others are very specific. For example, the stators and rotors
for the 5 kW systems are different from the 8.5 kW systems, but the housings are the same. Similarly, the electrical components
consist of some parts that are geared for a specific configuration while others are generic and can be used for all of the configurations.
The electrical chassis are also interchangeable between the 5 kW and 8.5 kW configurations. Due to the nature and mix of the product
being sold, frequently, the 5 kW electrical systems are upgraded to 8.5 kW systems by replacing some components.
From the above description
one can understand that the inventory consists of numerous components and subassemblies but not finished systems; therefore, each
system that is sold and shipped to a customer is built from some components that are in inventory and others that need to be purchased
to be able to configure the required system.
8.5 kW systems represent
the majority of product previously shipped. These systems are built by using existing inventory subassemblies and parts, including
some that can be used for both 5 kW and 8.5 kW systems, and additional parts that are purchased to provide the required configuration.
Typically, such systems are built using approximately 20 to 25 percent of existing inventory and approximately 75% of additional
parts that are purchased.
However, most of the
systems sold to the Korean military consist of 5 kW systems. They have been purchasing approximately 100 systems per year and have
indicated to us that they will continue to do so for the next five years. To date we have shipped over 500 such systems (in this
case 100% of the rotors and stators are used from existing inventory and over 50% of the electrical parts are also from inventory).
In addition to the above,
we have encountered demand for different and unique configurations that require the purchase of additional parts.