ITEM
1. FINANCIAL STATEMENTS
AURA
SYSTEMS, INC.
BALANCE SHEETS
(Unaudited)
|
|
As of
August 31,
|
|
|
As of February 28,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,064,297
|
|
|
$
|
255,869
|
|
Other current assets
|
|
|
27,588
|
|
|
|
2,894
|
|
Total current assets
|
|
|
1,091,885
|
|
|
|
258,763
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,500
|
|
|
|
3,500
|
|
Investment in Joint Venture
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,345,385
|
|
|
$
|
262,263
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,488,784
|
|
|
$
|
4,943,559
|
|
Accrued expenses
|
|
|
6,656,291
|
|
|
|
5,939,251
|
|
Customer advances
|
|
|
641,751
|
|
|
|
641,751
|
|
Investor advance
|
|
|
1,000,000
|
|
|
|
-
|
|
Notes payable
|
|
|
5,327,608
|
|
|
|
4,776,938
|
|
Convertible note payable and accrued interest-related party, net of discount
|
|
|
3,328,956
|
|
|
|
2,920,172
|
|
Convertible notes payable, net of discount
|
|
|
4,220,700
|
|
|
|
4,177,283
|
|
Notes payable and accrued interest- related party
|
|
|
29,873,727
|
|
|
|
29,669,693
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
55,537,817
|
|
|
|
53,068,647
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,537,817
|
|
|
|
53,068,647
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
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|
|
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|
|
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Stockholders' deficit:
|
|
|
|
|
|
|
|
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Common stock, $0.0001 par value; 150,000,000 shares authorized at August 31 and February 28, 2017; 126,608,391 and 113,991,432 issued and outstanding at August 31 and February 28, 2017, respectively
|
|
|
12,661
|
|
|
|
11,399
|
|
Additional paid-in capital
|
|
|
412,666,277
|
|
|
|
410,499,597
|
|
Accumulated deficit
|
|
|
(466,871,370
|
)
|
|
|
(463,317,380
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
|
(54,192,432
|
)
|
|
|
(52,806,384
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
1,345,385
|
|
|
$
|
262,263
|
|
The
accompanying notes are an integral part of these financial statements.
AURA
SYSTEMS, INC.
STATEMENTS
OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED AUGUST 31, 2017 AND 2016
(Unaudited)
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|
Three Months ended
August 31,
|
|
|
Six Months ended
August 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research and development expenses
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
33,888
|
|
Selling, general and administrative expenses
|
|
|
362,807
|
|
|
|
231,444
|
|
|
|
930,803
|
|
|
|
848,421
|
|
Total costs and expenses
|
|
|
362,807
|
|
|
|
231,544
|
|
|
|
930,803
|
|
|
|
882,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(362,807
|
)
|
|
|
(231,544
|
)
|
|
|
(930,803
|
)
|
|
|
(882,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
797,823
|
|
|
|
823,803
|
|
|
|
1,826,051
|
|
|
|
1,651,750
|
|
Gain on debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,288
|
|
Other (income) expense, net
|
|
|
10,000
|
|
|
|
-
|
|
|
|
797,136
|
|
|
|
(1,767
|
)
|
Total other (income) expense
|
|
|
807,823
|
|
|
|
823,803
|
|
|
|
2,623,187
|
|
|
|
1,579,695
|
|
Net Loss
|
|
$
|
(1,170,630
|
)
|
|
$
|
(1,055,347
|
)
|
|
$
|
(3,553,990
|
)
|
|
$
|
(2,462,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
Weighted average shares used to compute basic and diluted income (loss) per share
|
|
|
125,658,391
|
|
|
|
113,951,432
|
|
|
|
123,739,929
|
|
|
|
113,899,802
|
|
*Weighted
average number of shares used to compute basic and diluted loss per share is the same since the effect of the dilutive securities
is anti-dilutive.
See
accompanying notes to these unaudited financial statements.
AURA
SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2017 AND 2016
(Unaudited)
|
|
Six Months Ended
August 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,553,990
|
)
|
|
$
|
(2,462,004
|
)
|
Depreciation Expense
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
43,417
|
|
|
|
128,220
|
|
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
|
|
|
(24,694
|
)
|
|
|
96,819
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable, customer deposit and accrued expenses
|
|
|
262,265
|
|
|
|
2,075,512
|
|
Net cash used in operations
|
|
|
(2,105,060
|
)
|
|
|
(229,626
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
959,454
|
|
|
|
571,490
|
|
Proceeds from notes payable-related party, net
|
|
|
204,034
|
|
|
|
68,672
|
|
Investor Advance
|
|
|
1,000,000
|
|
|
|
-
|
|
Net cash provided by financing activities:
|
|
|
3,163,488
|
|
|
|
640,162
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash & cash equivalents
|
|
|
808,428
|
|
|
|
410,536
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
255,869
|
|
|
|
22,175
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,064,297
|
|
|
$
|
432,711
|
|
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 six months ended August 31, 2017 and August 31, 2016, the Company incurred losses of $3,553,990 and $2,462,004, respectively
and had negative cash flows from operating activities of $2,105,060 and $229,626, 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:
|
|
August 31,
2017
|
|
|
February 28,
2017
|
|
|
|
|
|
|
|
|
Demand notes payable, at 10% and 16%
|
|
$
|
3,584,498
|
|
|
$
|
3,782,238
|
|
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.
|
|
|
1,743,110
|
|
|
|
994,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,548,308
|
|
|
|
8,954,221
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
$
|
9,548,308
|
|
|
$
|
8,954,221
|
|
|
|
|
|
|
|
|
|
|
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%.
During
the quarter ended August 31, 2017, the company entered into agreements with various individuals for the aggregate sale of $165,000
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 132,000 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. As of the date of this filing, the Company’s stockholders have not approved the proposed 1-for-7 reserve 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, 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 holders relating to aggregate unsecured
debt totaling $2,237,456 including interest of $489,466. This refinancing agreement 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 shareholders have not approved any reverse stock split.
NOTE
4 – ACCRUED EXPENSES
Accrued
expenses consisted of the following:
|
|
August 31,
2017
|
|
|
February 28,
2017
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
2,801,386
|
|
|
$
|
3,099,842
|
|
Accrued rent
|
|
|
202,036
|
|
|
|
202,036
|
|
Accrued interest
|
|
|
3,617,869
|
|
|
|
2,562,375
|
|
Other
|
|
|
35,000
|
|
|
|
75,000
|
|
Total
|
|
$
|
6,656,291
|
|
|
$
|
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 six months ended August 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 six months ended August 31, 2016, we issued 950,000 shares of common stock were issued in settlement for a note payable balance
$150,000 plus accrued interest of $15,288.
Employee
Stock Options
During
the Six months ended August 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, August 31, 2017
|
|
|
$0.75-$1.00
|
|
|
$
|
0.00
|
|
|
|
7,224,000
|
|
The
exercise prices for the options outstanding at August 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
|
|
|
|
2.50 years
|
|
|
$
|
0.79
|
|
|
2.50 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, August 31, 2017
|
|
|
28,954,021
|
|
|
|
$0.10-$1.00
|
|
The
exercise prices for the warrants outstanding at August 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
|
|
|
|
54 months
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.00
|
|
$0.10-$0.75
|
|
|
19,481,012
|
|
|
|
19,481,012
|
|
|
|
43 months
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
$0.75
|
|
|
1,082,734
|
|
|
|
1,082,734
|
|
|
|
42 months
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$0.75
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
32 months
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.00
|
|
$0.75-$1.00
|
|
|
5,990,275
|
|
|
|
5,990,275
|
|
|
|
27 months
|
|
|
$
|
0.77
|
|
|
$
|
0.77
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,954,021
|
|
|
|
28,954,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
5 – 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 $14,982,041. 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
August 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 $9,638,285 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 August 31, 2017 and August 31, 2016, interest amounting to $747,711 and $747,020 respectively, was incurred on these
notes. Related Parties Transactions also includes $82,000 of unsecured notes payable plus accrued interest of $33,233 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 August 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 $1,070,510 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
Six
months ended August 31, 2017 compared to six months ended August 31, 2016
Net
revenues for the six months ended August 31, 2017 (the “Six Months FY2018”) and August 31, 2016 (the “Six Months
FY2017”) were $0. The Company has virtually ceased operations due to a lack of funding.
Cost
of goods in the Six Months FY2018 and the Six Months FY2017 were $0 as a result of the virtual cessation of operations as noted
above.
Engineering,
research and development expenses were $0 in the Six Months FY2018 compared to $33,888 in the Six Months FY 2017. The
decline is attributable to a lack of funds resulting in the virtual cessation of operations as noted above.
Selling,
general and administrative expense increased $82,382 (10%) to $930,803 in the Six Months FY2018 from $848,421 in the Six Months
FY2017.
Net
interest expense in the Six Months FY2018 increased $174,304 (10%) to $1,826,051 from $1,651,750 in the Six Months FY2017 primarily
as a result of warrants issued for debt guarantees valued at approximately $175,000.
Other
expense increased $798,903 in the Six Months 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 Six Months FY2018 increased $1,091,986 to $3,553,990 from $2,462,004 in the Six Months FY2017.
Three
months ended August 31, 2017 compared to three months ended August 31, 2016
Net
revenues for the three months ended August 31, 2017 (the “Second Quarter FY2018”) and the three months ended August
31, 2016 (the “Second Quarter FY2017”) were $0. The Company has virtually ceased operations due to a lack of funding.
Cost
of goods in the Second Quarter FY2018 and the Second Quarter FY2017 were $0 as a result of the virtual cessation of operations
as noted above.
Engineering,
research and development expenses were $0 in the Second Quarter FY2018 compared to $100 in the Second Quarter FY 2017.
Selling,
general and administrative expense increased $131,363 (57%) to $362,807 in the Second Quarter FY2018 from $231,444 in the Second
Quarter FY2017. The increase is primarily attributable to a non-cash consulting fee of $325,000 satisfied with 2,500,000 shares
of common stock and an increase in legal expense of approximately $70,000 partially offset by a decrease in rent expense and other
miscellaneous expenses.
Net
interest expense in the Second Quarter FY2018 decreased $25,980 (3%) to $797,823 from $823,803 in the Second Quarter FY2017.
Our
net loss for the Second Quarter FY2018 increased $115,283 to $1,170,630 from $1,055,347 in the Second Quarter FY2017.
Liquidity
and Capital Resources
We
had cash of approximately $1,064,000 and $256,000 as of August 31, 2017, and February 28, 2017, respectively. We had a working
capital deficit at August 31, 2017, and February 28, 2017 of $54,445,932 and $52,809,884, respectively. The working capital deficit
includes notes payable and accrued interest to related parties of $29,873,727 and $29,669,693 as of August 31 and February 28,
2017, respectively.
Net
cash used in operations for the Six months ended August 31, 2017, was $1,562,242, an increase of $1,332,616 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 Six months ended August 31, 2017, was $2,620,670, resulting from
net proceeds from notes payable of $620,670, the issuance of common stock for $1,000,000, and an investor advance of $1,000,000.
There
were no acquisitions of property and equipment in the Three months FY 2018 or the Three months FY 2017.
Accrued
expenses as of August 31, 2017 increased $938,479 to $6,877,730 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 $620,670 in the Six months FY 2018, compared with $640,162 in the Six months FY 2017.
As of August 31, 2017, the total amount owing a board member is $14,982,040 plus accrued interest of approximately $9,266,516.
We also owe another Board member a total of $5,288,081 plus accrued interest of approximately $2,834,867. 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 $54,192,432 in shareholders’ equity as of August 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 six months ended August 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 six months ended August 31, 2017, 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.