ITEM 1. FINANCIAL STATEMENTS
AURA SYSTEMS, INC.
BALANCE SHEETS
(Unaudited)
|
|
As of
May 31,
|
|
|
As of February 28,
|
|
|
|
2018
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
197,156
|
|
|
$
|
748,008
|
|
Accounts receivable - net
|
|
|
30,751
|
|
|
|
-
|
|
Other current assets
|
|
|
38,558
|
|
|
|
42,165
|
|
Total current assets
|
|
|
266,465
|
|
|
|
790,173
|
|
|
|
|
|
|
|
|
|
|
Investment in Joint Venture
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
516,465
|
|
|
$
|
1,040,173
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,960,480
|
|
|
$
|
5,377,259
|
|
Accrued expenses
|
|
|
3,248,800
|
|
|
|
3,211,635
|
|
Customer advances
|
|
|
436,542
|
|
|
|
503,632
|
|
Shares to be issued
|
|
|
2,280,964
|
|
|
|
2,280,964
|
|
Notes payable
|
|
|
777,537
|
|
|
|
777,537
|
|
Convertible note payable and accrued interest-related party, net of discount
|
|
|
3,418,524
|
|
|
|
3,342,685
|
|
Convertible notes payable, net of discount
|
|
|
575,000
|
|
|
|
625,000
|
|
Notes payable and accrued interest- related party
|
|
|
5,475,445
|
|
|
|
5,353,980
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,173,292
|
|
|
|
21,472,692
|
|
|
|
|
|
|
|
|
|
|
Note payable-related party
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Convertible notes payable
|
|
|
1,232,977
|
|
|
|
1,232,977
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,406,269
|
|
|
|
25,705,669
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 150,000,000 shares authorized at May 31 and February 28, 2018; 41,437,035 and 41,437,035 issued and outstanding at May 31 and February 28, 2018, respectively
|
|
|
4,144
|
|
|
|
4,144
|
|
Subscription receivable
|
|
|
(800,000
|
)
|
|
|
(1,300,000
|
)
|
Additional paid-in capital
|
|
|
438,559,164
|
|
|
|
438,247,091
|
|
Accumulated deficit
|
|
|
(462,653,112
|
)
|
|
|
(461,616,731
|
)
|
Total stockholders’ deficit
|
|
|
(24,889,804
|
)
|
|
|
(24,665,496
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
516,465
|
|
|
$
|
1,040,173
|
|
The
accompanying notes are an integral part of these financial statements.
AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MAY 31, 2018 AND 2017
(Unaudited)
|
|
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net Revenues
|
|
$
|
37,400
|
|
|
$
|
0
|
|
Cost of goods sold
|
|
|
14,677
|
|
|
|
0
|
|
Gross Profit
|
|
|
22,723
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Engineering, research and development expenses
|
|
|
132,853
|
|
|
|
0
|
|
Selling, general and administrative expenses
|
|
|
1,001,966
|
|
|
|
567,996
|
|
Total operating expenses
|
|
|
1,134,819
|
|
|
|
567,996
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,112,095
|
)
|
|
|
(567,996
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) and expense:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
277,217
|
|
|
|
1,028,228
|
|
Other (income) expense, net
|
|
|
(352,931
|
)
|
|
|
787,136
|
|
Total other (income) expense
|
|
|
(75,714
|
)
|
|
|
1,815,364
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,036,382
|
)
|
|
$
|
(2,383,360
|
)
|
|
|
|
|
|
|
|
|
|
Total basic and diluted loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
Weighted average shares used to compute basic and diluted loss per share
|
|
|
41,437,035
|
|
|
|
17,513,475
|
|
* Basic and diluted weighted average
number of shares is 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, 2018 AND 2017
(Unaudited)
|
|
Three Months Ended
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,036,382
|
)
|
|
$
|
(2,383,360
|
)
|
Adjustments to reconcile Net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
43,417
|
|
FMV of warrants issued for services
|
|
|
312,072
|
|
|
|
177,737
|
|
Stock issued for services
|
|
|
-
|
|
|
|
990,205
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(30,751
|
)
|
|
|
-
|
|
Other current assets and deposit
|
|
|
3,608
|
|
|
|
(2,694
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable, customer deposit and accrued expenses
|
|
|
(249,400
|
)
|
|
|
37,826
|
|
Net cash used in operations
|
|
|
(1,000,852
|
)
|
|
|
(1,136,869
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
Payment to note payable
|
|
|
(50,000
|
)
|
|
|
(197,970
|
)
|
Proceeds from convertible notes payable
|
|
|
-
|
|
|
|
653,640
|
|
Proceeds from subscription receivable
|
|
|
500,000
|
|
|
|
-
|
|
Investor Advance
|
|
|
-
|
|
|
|
650,000
|
|
Net cash provided by financing activities:
|
|
|
450,000
|
|
|
|
2,105,670
|
|
|
|
|
|
|
|
|
|
|
Net increase(decrease) in cash & cash equivalents
|
|
|
(550,852
|
)
|
|
|
718,801
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
748,008
|
|
|
|
255,869
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
197,156
|
|
|
$
|
974,669
|
|
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, 2018 filed on June 13, 2018 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 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 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.
Reclassifications
Certain reclassifications have been made
to the comparative financial statements to conform to the current period presentation.
NOTE 2 – GOING CONCERN
The accompanying
financial
statements have been prepared assuming that the Company will continue as a going concern. During the three months ended May
31, 2018 and May 31, 2017, the Company incurred losses of $1,036,382 and $2,383,360, respectively and had negative cash flows
from operating activities of $1,000,852 and $1,136,869, 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 annual meeting the shareholders will vote for five board candidates. The new board intends to
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 operations. 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,
2018
|
|
|
February 28, 2018
|
|
|
|
|
|
|
|
|
Notes payable, at 10% and 5%
|
|
$
|
3,777,537
|
|
|
$
|
3,777,537
|
|
Convertible Promissory Note dated August 10, 2012 with
an interest rate of 5% per annum. On January 30, 2017, this note was amended providing, among other things, for the
conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence
of certain future events the last of which was completed on February 14, 2018. Further details are provided below.
|
|
|
264,462
|
|
|
|
264,462
|
|
Convertible Promissory Note dated October 2, 2012 with an interest rate of 5% per annum. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. Further details are provided below.
|
|
|
133,178
|
|
|
|
133,178
|
|
Senior secured convertible notes dated May 7, 2013 with
an interest rate of 5% per annum., On January 30, 2017, this note was amended providing, among other things, for the
conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence
of certain future events the last of which was completed on February 14, 2018. Further details are provided below.
|
|
|
757,155
|
|
|
|
757,155
|
|
Senior secured convertible notes dated June 20, 2013 with an interest are of 5% per annum On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. Further details are provided below.
|
|
|
203,182
|
|
|
|
203,182
|
|
Convertible notes dated April 2016 thru February 2017 with an an interest rate of 5% per annum. Although the notes could have been converted into shares of common stock upon shareholder approval of the 7:1 reverse stock split that occurred on February 14, 2018, the note holder elected not to convert and to have the note paid over an eleven-month period. The first payment of $50,000 was paid in April 2018.
|
|
|
450,000
|
|
|
|
500,000
|
|
|
|
|
5,585,514
|
|
|
|
5,635,514
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
$
|
1,352,537
|
|
|
$
|
1,402,537
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
4,232,977
|
|
|
$
|
4,232,977
|
|
CONVERTIBLE DEBT
On May 7, 2013, the Company transferred
4 notes payable with a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured
convertible note with a principal value of $1,087,000 (“New Kenmont Note”) and warrants to Kenmont Capital Partners.
The New Kenmont Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75
per share. The warrants were subsequently exercised. The Company recorded $342,020 as a discount, which was amortized over the
life of the note. There is a remaining balance of $304,081 as of May 31, 2018.
On May 7, 2013, the Company transferred
2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with
a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. The New LPD Note had a 1-year
maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently
exercised. The Company recorded $175,793 as a discount, which will be amortized over the life of the note. There is a remaining
balance of $163,677 as of May 31, 2018.
On May 7, 2013, the Company entered into
an agreement with an individual for the sale of $750,000 of secured convertible note payable (the “Note”) and warrants.
The Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share.
The warrants entitle the holder to acquire 1,000,000 shares and have an initial exercise price of $0.75 per share and have a 7-year
term. The Company recorded $235,985 as a discount, which will be amortized over the life of the note. There is a remaining balance
of $232,194 as of May 31, 2018.
On January 30, 2017,
the Company entered into an amendment to the agreements described immediately above with five of seven secured creditors holding
a security interest in all of the Company’s assets except for its patents and other intellectual properties. The original
agreements, dated May 7, 2013, provided that if at least 75% of the stock issuable upon conversion of the convertible notes votes
to amend the agreement and/or waive any conditions or defaults, then any such amendments or waivers shall be binding on all secured
creditors. The five secured creditors signing the amendment totaled in excess of 95% of the issuable stock upon conversion and,
therefore the amendment is binding on all seven of the secured creditors. The amendment provided that all accrued and unpaid interest
will be added to the principal amount. The amended notes provided for no interest from November 1, 2016 to February 14, 2018, the
date on which the 1-for-7 reverse stock split became effective and at which time 80% of the total debt, including accrued interest,
was converted into shares of common stock and a new five year 5% per annum convertible note was issued for the remainder. The amendment
also provides that if the Company enters into a “Qualified Financing” (defined as receipt by the Company of not less
than $4,000,000 in aggregate gross proceeds from the sale of securities in one or a series of related transactions after the execution
date), then the Company shall remit to the holder the “Cash Payment Amount” as set forth in the amendment.
On June 20, 2013, the Company entered into
an agreement with four individuals for the sale of $325,000 of secured convertible notes payable (the “Notes”) and
warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50
per share. The warrants were subsequently exercised. The Company recorded $63,622 as a discount, which will be amortized over the
life of the notes. There is a remaining balance of $203,182 as of May 31, 2018.
On August 19, 2013, the Company entered
into an agreement with a member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “BOD
Notes”) and warrants. The BOD Notes carry a base interest rate of 9.5%, had a 4-year maturity date and are convertible into
shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded
$667,118 as a discount, which will be amortized over the life of the note. There is a balance of $3,396,858 as of May 31, 2018.
On February 21, 2017, the Company entered
into several Refinancing Agreements with a debt holder totaling $2,237,456 including interest of $489,466. The agreements waived
all events of default and provided for new five-year 5% convertible notes with no interest for the first six months. Upon the effective
date of February 14, 2018 of the 1 for 7 reverse stock split, the notes were converted into 1,164,555 shares of common stock.
NOTE 4 – ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
May 31,
2018
|
|
|
February 28,
2018
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
2,767,565
|
|
|
$
|
2,775,312
|
|
Accrued interest
|
|
|
481,235
|
|
|
|
401,323
|
|
Other
|
|
|
-
|
|
|
|
35,000
|
|
Total
|
|
$
|
3,248,800
|
|
|
$
|
3,211,635
|
|
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, 2018,
we did not issue any shares of 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.
Employee Stock Options
During the three months ended May 31, 2018,
there were no stock options granted to employees and 742,857 stock options with an exercise price of $1.40 per share granted to
directors, which are set forth below under “Warrants.”
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, 2018
|
|
|
$5.25-$7.00
|
|
|
$
|
0.00
|
|
|
|
1,032,000
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, May 31, 2018
|
|
|
$5.25-$7.00
|
|
|
$
|
0.00
|
|
|
|
1,032,000
|
|
The exercise prices for the options outstanding at May 31, 2018,
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
|
|
$5.25-$7.00
|
|
|
1,032,000
|
|
|
|
1.75 years
|
|
|
$
|
5.55
|
|
|
1.75 years
|
|
|
1,032,000
|
|
|
$
|
5.55
|
|
Warrants
Activity in issued and outstanding warrants is as follows:
|
|
Number of Shares
|
|
|
Exercise Prices
|
|
Outstanding, February 28, 2018
|
|
|
8,743,505
|
|
|
|
$.70-$7.00
|
|
Granted
|
|
|
742,857
|
|
|
$
|
1.40
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
|
|
|
|
|
Outstanding, May 31, 2018
|
|
|
9,486,362
|
|
|
|
$0.70-$7.00
|
|
The exercise prices for the warrants outstanding at May 31,
2018, 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
|
|
$1.40
|
|
|
742,857
|
|
|
|
742,857
|
|
|
58 months
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
$1.40
|
|
|
5,154,646
|
|
|
|
5,154,646
|
|
|
57 months
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
$0.70-4.55
|
|
|
2,783,002
|
|
|
|
2,783,002
|
|
|
34 months
|
|
$
|
2.85
|
|
|
$
|
2.85
|
|
|
$
|
0.00
|
|
$5.25
|
|
|
154,666
|
|
|
|
154,666
|
|
|
33 months
|
|
$
|
5.25
|
|
|
$
|
5.25
|
|
|
$
|
0.00
|
|
$5.25
|
|
|
651,191
|
|
|
|
651,191
|
|
|
20 months
|
|
$
|
5.25
|
|
|
$
|
5.25
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,486,362
|
|
|
|
9,486,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 – RELATED PARTIES TRANSACTIONS
On January 24,
2017, the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a former Director of the Company. Pursuant to the
agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $23,872,614 including $8,890,574
of accrued interest. Mr. Breslow agreed to cancel and forgive all interest due, waive all events of default and sign a new five-year
convertible note in the amount of $14,982,041 providing for no interest for six months and interest of 5% per annum thereafter
payable monthly in arrears. The note also provides various default provisions. In accordance with the agreement, on February 14,
2018, the effective date of the 1 for 7 reverse stock split, $11,982,041 of the note was converted into 7,403,705 shares of common
stock and the then accrued interest of $9,388,338 was forgiven. A new $3,000,000 note representing the remaining balance was entered
into due and payable in five years bearing interest at 5% per annum payable monthly in arrears.
At
May 31, 2018, the balance in Notes Payable and accrued interest-related party, current, includes $3,268,081 plus accrued interest
of $2,083,203 to Mr. Kopple (a former Board member), a 10% shareholder. Related Parties Transactions also includes $82,000 of unsecured
notes payable plus accrued interest of $40,104 to our CEO pursuant to a demand note entered into on April 5, 2014. At May 31,
2018, the balance in Convertible note payable and accrued interest-related party, long term, includes $2,000,000 of unsecured
convertible notes payable plus accrued interest of $1,396,858 and an unsecured convertible note of $20,000 plus accrued interest
of $1,666 to Mr. Kopple. Subscriptions receivable at May 31, 2018 includes $1,300,000 for the issuance of 2,653,061 shares of
common stock issued to Mr. Lowy, a 30% shareholder (as of June 5, 2018, $1,000,000 was received by the Company). The balance in
notes payable - long term, includes $3,000,000 to Mr. Breslow, a 20% shareholder.
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
In March 2017, the Company entered into
a joint venture with a Chinese partner to form Jiangsu Shengfeng Mobile Power Technology Co., Ltd. (“Jiangsu Shengfeng”)
to address the Chinese market. Under the Jiangsu Shengfeng joint venture agreement, Aura owns 49% of the venture and our Chinese
partner owns 51%. The Chinese partner contributed approximately $9.25 million to the venture –– principally in the
form of facilities and equipment as wells as approximately $500,000 in cash. The Company contributed to the venture in the form
of $250,000 in cash as well as a limited license to the joint venture to manufacture, sell and service the AuraGen
®
products within China. The limited license contributed to the Jiangsu Shengfeng joint venture, however, does not permit Jiangsu
Shengfeng to manufacture the AuraGen
®
rotor; rather, the joint venture is required to purchase all rotor subassemblies
as well as certain software elements directly from the Company. Jiangsu Shengfeng’s board of directors consists of three
members appointed by the Company and three appointed by our Chinese partner; Jiangsu Shengfeng’s CEO is appointed by our
Chinese partner while its CFO and director for quality assurance and control are appointed by Aura.
In addition, the
Chinese company invested $2,000,000 in Aura common stock at $1.40 per share for a total of 1,428,571 shares of common stock and
is required to purchase a minimum of $1,250,000 of product from the Company supported by letters of credit for distribution until
their factory is built, equipment installed, and staff hired and properly trained by Aura personnel. Aura has also committed to
supply personnel for six months at no cost other than to reimburse for travel, room and board. This commitment has been fulfilled
and Aura is under no further obligation to supply personnel at no cost. The agreement was subject to the approval of the Chinese
Government which was received in April 2017.
Contingencies
We are
subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not
been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims
and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is
estimable and the loss is probable.
The Company is one of several defendants
named in a lawsuit filed by two of seven secured creditors demanding repayment of loans totaling $125,000 plus accrued interest
and exemplary damages. The Company entered into an amended agreement with the five other secured creditors and based on the original
agreement, which provided that if the agreement was amended by creditors whose debt totaled equaled 75% or more of the secured
creditor debt convertible into the Company’s common stock, the amended agreement becomes binding on all seven creditors including
the suing creditors. The five secured creditors who entered into the amendment agreement totaled in excess of 95% of the secured
creditors debt convertible into the Company’s common stock and therefore became binding on the suing creditors as well.
The Company is presently engaged in a dispute
with one of its former directors, Robert Kopple, relating to approximately $5.4 million and approximately 3.14 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 Mr. Gagerman (currently not a director) and director 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.
In April 2018, the Company filed suit against
its former counsel, Kilpatrick Townsend& Stockton LLP relating to various acts of malpractice and breach of fiduciary duty
committed by the firm in connection with its representation of Aura.
The Company has a dispute with its former
landlord and vacated its former premises prior to the end of its lease. The premises have been released to a third party and no
action has been filed against the Company, nor does the Company believe it has any liability. Further while the Company believes
it has claims against the landlord based on their actions, the Company has nonetheless elected to accrue the amount due for unpaid
rent.
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, 2018 (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
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
and fiscal 2018, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating
numerous financial obligations.
In fiscal 2018, the
Company successfully eliminated approximately 68% of its total indebtedness.
Specifically, in fiscal
2018, our secured creditors converted approximately $5.73 million of secured debt into approximately 4.1 million shares of the
Company’s common stock. The converted debt represents approximately 80% of the total secured debt of the Company. The balance
of the secured debt (the remaining approximate 20%), is to be paid to the secured creditors in cash if the Company raises at least
$4.0 million in proceeds through new equity offerings. Additionally, in fiscal 2018, approximately 12.77 million of unsecured debt
was converted into approximately 9.3 million shares of the Company’s common stock and approximately $12.3 million of unsecured
debt was forgiven. In total, during fiscal 2018, the Company therefore eliminated a total of approximately $30.23 million of debt.
As of the date of this
Report, Robert Kopple, the Company’s former Vice Chairman of the Board, is the only significant unsecured note holder that
has not agreed to restructure his debt. Mr. Kopple claims that he and his affiliates are owed approximately $5.35 million on terms
significantly preferable to other similarly-situated unsecured creditors. The Company disputes Mr. Kopple’s claims. See “Item
3. Legal Proceedings” included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2018 for
information regarding the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted the Company’s
numerous offers to restructure this debt.
On February 14, 2018,
the Company effectuated a one-for-seven reverse stock split.
The Company is planning
to restart operations with a new management team and is presently in the process of identifying candidates for Chief Financial
Officer and Chief Executive Officer. Currently, the Company has a contractual agreement for $1.25 million of orders for the AuraGen
®
product to fill during the next eight months and anticipates that it may receive significant additional orders once the Company
is back in operation.
Our business is based
on the exploitation of our patented mobile power solution known as the AuraGen for commercial and industrial applications and the
VIPER for military applications. Our business model consists of three major components; (i) sales and marketing, (ii) engineering,
and (iii) customer service and support.
(i) Our sales and marketing
approach is composed of direct sales in North America and the use of agents, distributors and joint ventures for sales internationally.
In North America, our primary focus is in (a) transport refrigeration, and (b) U.S. Military applications.
(ii) The second
component of our business model is focused on the engineering support for the sales activities described above. The
engineering support consists of the introduction of new features for our AuraGen
®
solution such as higher
power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for
different platforms. After suspending engineering, manufacturing, sales, and marketing activities to focus on renegotiating
numerous financial obligations in fiscal 2017 and 2018, we expect modest engineering activities budgeted at approximately
$750,000 during the fiscal 2019 year.
(iii) The third
component of our business model is customer service. In fiscal 2019, we expect to rehire several previously trained field
engineers to support our product in North America. In addition, we are working closely with our Chinese Joint Venture partner
to train their staff to support our products overseas.
Critical Accounting Policies and Estimates
Our 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, 2018 compared
to three months ended May 31, 2017
Net revenues were $37,400
for the three months ended May 31, 2018 (the “First Quarter FY2019”) compared to $0 for the three months ended May
31, 2017 (the “First Quarter FY2018”). The Company has only recently begun to ship small amounts of product following
its reorganization.
Cost of goods sold
were $14,677 in the First Quarter FY2019 compared to $0 in the First Quarter FY2018.
Engineering, research
and development expenses were $132,853 in the First Quarter FY2019, compared to $0 in the First Quarter FY 2018. The expense in
the current year period is primarily due to the Company redesigning the ECU for the Auragen system.
Selling, general and
administrative expense increased $433,970 (76%) to $1,001,966 in the First Quarter FY2019 from $567,996 in the First Quarter FY2019.
The increase is primarily due to a non-cash charge of $312,000 for warrants issued to the Board of Directors and an increase of
approximately $160,000 in legal expenses, partially offset by a slight reduction in other expenses.
Net interest expense
in the First Quarter FY2019 decreased $751,011 (73%) to $277,217 from $1,028,228 in the First Quarter FY2018. The decrease is due
to the reduction in outstanding debt as a result of the conversion of debt to equity in the restructuring that occurred in the
fourth quarter of the prior fiscal year.
Our net loss for the
First Quarter FY2019 decreased to $1,036,382 from $2,383,360 in the First Quarter FY2018.
Liquidity and Capital Resources
We had cash of approximately
$197,000 and $748,000 as of May 31, 2018, and February 28, 2018, respectively. We had a working capital deficit at May 31,
2018, and February 28, 2018 of $20,906,827 and $20,682,519, respectively. The working capital deficit includes notes payable and
accrued interest to related parties of $8,893,969 and $8,696,665 as of November 30 and February 28, 2018, respectively.
Net cash used in operations
for the three months ended May 31, 2018, was $1,000,852, a decrease of $136,017 from the comparable period in the prior fiscal
year. Net cash provided by financing activities during the three months ended May 31, 2018, was $450,000, resulting from net proceeds
from subscriptions receivable of $500,000 partially offset by a payment of $50,000 on a note payable.
There were no acquisitions
of property and equipment during the First Quarter FY2019 or the First Quarter FY2018.
Accrued expenses as of
May 31, 2018 increased $37,165 to $3,248,800 from $3,211,635 as of February 28, 2018. Approximately $2,250,000 of accrued expenses
is salaries accrued but unpaid to certain current and former employees due to a lack of resources, and approximately $500,000 is
accrued but unused vacation earned by employees.
The Company had a deficit
of $24,889,804 in shareholders’ equity as of May 31, 2018, compared to $24,665,496 as of February 28, 2018.
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, 2018 we did not issue any shares of 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.
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.