AURA SYSTEMS, INC.
BALANCE SHEETS
(Unaudited)
|
|
As of
August 31,
|
|
|
As of February 28,
|
|
|
|
2018
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,688
|
|
|
$
|
748,008
|
|
Other current assets
|
|
|
23,841
|
|
|
|
42,165
|
|
Total current assets
|
|
|
76,529
|
|
|
|
790,173
|
|
|
|
|
|
|
|
|
|
|
Investment in Joint Venture
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
326,529
|
|
|
$
|
1,040,173
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,174,727
|
|
|
$
|
5,377,259
|
|
Accrued expenses
|
|
|
3,310,439
|
|
|
|
3,211,635
|
|
Customer advances
|
|
|
436,542
|
|
|
|
503,632
|
|
Shares to be issued
|
|
|
-
|
|
|
|
2,280,964
|
|
Notes payable
|
|
|
777,537
|
|
|
|
777,537
|
|
Convertible note payable and accrued interest-related party, net of discount
|
|
|
3,493,519
|
|
|
|
3,342,685
|
|
Convertible notes payable, net of discount
|
|
|
575,000
|
|
|
|
625,000
|
|
Notes payable and accrued interest- related party
|
|
|
5,595,557
|
|
|
|
5,353,980
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,363,321
|
|
|
|
21,472,692
|
|
|
|
|
|
|
|
|
|
|
Note payable-related party
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Convertible notes payable
|
|
|
1,232,977
|
|
|
|
1,232,977
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,596,298
|
|
|
|
25,705,669
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 150,000,000 shares
authorized at August 31 and February 28, 2018; 48,801,770 and 41,437,035 issued and outstanding at August 31 and February
28, 2018, respectively
|
|
|
4,881
|
|
|
|
4,144
|
|
Subscription receivable
|
|
|
(175,000
|
)
|
|
|
(1,300,000
|
)
|
Additional paid-in capital
|
|
|
442,958,394
|
|
|
|
438,247,091
|
|
Accumulated deficit
|
|
|
(466,058,044
|
)
|
|
|
(461,616,731
|
)
|
Total stockholders’ deficit
|
|
|
(23,224,957
|
)
|
|
|
(24,665,496
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
326,529
|
|
|
$
|
1,040,173
|
|
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, 2018 AND 2017
(Unaudited)
|
|
Three Months ended
August
31,
|
|
|
Six
Months ended
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
1,874
|
|
|
$
|
-
|
|
|
$
|
39,724
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
58,317
|
|
|
|
-
|
|
|
|
72,994
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
(56,443
|
)
|
|
|
-
|
|
|
|
(33,720
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research and development expenses
|
|
|
31,023
|
|
|
|
-
|
|
|
|
163,876
|
|
|
|
-
|
|
Selling, general and administrative expenses
|
|
|
3,041,313
|
|
|
|
362,807
|
|
|
|
4,043279
|
|
|
|
930,803
|
|
Total costs and expenses
|
|
|
3,072,336
|
|
|
|
362,807
|
|
|
|
4,207,155
|
|
|
|
930,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,128,779
|
)
|
|
|
(362,807
|
)
|
|
|
(4,240,875
|
)
|
|
|
(930,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
276,155
|
|
|
|
797,823
|
|
|
|
553,372
|
|
|
|
1,826,051
|
|
Other (income) expense, net
|
|
|
|
|
|
|
10,000
|
|
|
|
(553,372
|
)
|
|
|
797,136
|
|
Total other (income) expense
|
|
|
276,155
|
|
|
|
807,823
|
|
|
|
200,441
|
|
|
|
2,623,187
|
|
Net Loss
|
|
$
|
(3,404,933
|
)
|
|
$
|
(1,170,630
|
)
|
|
$
|
(4,441,316
|
)
|
|
$
|
(3,553,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic and diluted loss per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.20
|
)
|
Weighted average shares used to compute basic and diluted
income (loss) per share
|
|
|
42,877,964
|
|
|
|
17,951,199
|
|
|
|
42,157,498
|
|
|
|
17,677,133
|
|
*
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.
AURA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2018 AND 2017
(Unaudited)
|
|
Six Months Ended
August
31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,441,316
|
)
|
|
$
|
(3,553,990
|
)
|
Amortization of debt discount
|
|
|
-
|
|
|
|
43,417
|
|
FMV of warrants issued for services
|
|
|
438,826
|
|
|
|
177,737
|
|
Stock issued for services
|
|
|
1,992,250
|
|
|
|
990,205
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Other current assets and deposit
|
|
|
18,324
|
|
|
|
(24,694
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable, customer deposit and accrued expenses
|
|
|
221,596
|
|
|
|
262,265
|
|
Net cash used in operations
|
|
|
(1,770,320
|
)
|
|
|
(2,105,060
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
Payments on notes payable
|
|
|
(50,000
|
)
|
|
|
-
|
|
Proceeds from subscription receivable
|
|
|
1,125,000
|
|
|
|
-
|
|
Proceeds from notes payable-net
|
|
|
-
|
|
|
|
959,454
|
|
Proceeds from notes payable-related party, net
|
|
|
-
|
|
|
|
204,034
|
|
Investor Advance
|
|
|
-
|
|
|
|
1,000,000
|
|
Net cash provided by financing activities:
|
|
|
1,075,000
|
|
|
|
3,163,488
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash & cash equivalents
|
|
|
(695,320
|
)
|
|
|
808,428
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
748,008
|
|
|
|
255,869
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
52,688
|
|
|
$
|
1,064,297
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
37,500
|
|
|
$
|
-
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Unaudited supplemental disclosure of non-cash investing and
financing activities:
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 six months ended August 31, 2018 and
August 31, 2017, the Company incurred losses of $4,441,316 and $3,553,990, respectively and had negative cash flows from operating
activities of $1,770,320 and $2,105,060, 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:
|
|
August 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 $1.38per
share. As of the 1 for 7 reverse split, 80% of this note was converted into stock at a price of $1.38 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 August 31, 2018 and February 28, 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 $1.38 per share. As of the 1 for 7 reverse
split, 80% of this note was converted into stock at a price of $1.38 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 August 31, 2018 and February 28, 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 $1.38per share.
As of the 1 for 7 reverse split, 80% of this note was converted into stock at a price of $1.38 per share.The warrants entitle
the holder to acquire 1,000,000 shares and have an initial exercise price of $1.38 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 August 31, 2018 and February 28, 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
five secured creditors signing the amendment represented in excess of 95% of the total,secured debt. 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 August 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 August 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:
|
|
August 31,
2018
|
|
|
February 28,
2018
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
2,780,688
|
|
|
$
|
2,775,312
|
|
Accrued interest
|
|
|
484,939
|
|
|
|
401,323
|
|
Other
|
|
|
44,812
|
|
|
|
35,000
|
|
Total
|
|
$
|
3,310,439
|
|
|
$
|
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 six months ended August 31,
2018, we issued 2,256,444 shares of common stock, valued at $2,280,964 to BetterSea LLC, a greater than 15% shareholder as part
of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued at $1,992,251 to BetterSea LLC
as a settlement for disputes.
During the six months ended August 31,
2018, we issued 742,857 warrants to members of our board of directors. The warrants have a term of five years and an exercise
price of $1.40. The company recorded an expense of $312,072 for the issuance of these warrants. During the six months ended August
31, 2018, we re-priced to $1.40 all outstanding employee options and warrants that had a previous exercise price greater than
$1.40. The company recorded an expense of $105,352 as a result of the re-pricing.
Duringthe six months ended August 31,
2017, we issued 5,000,000 (714,268 shares post reverse split) shares of common stock for $1,000,000 in conjunction with our Chinese
Joint Venture, we issued 5,116,959 (730,995 shares post reverse split) shares of common stock valued at $665,204 as part of a
settlement agreement, and we issued 2,500,000 (357,142 shares post reverse split) shares of common stock valued at $325,000 in
connection with a consulting agreement.
Employee Stock Options
During the six months ended August 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
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
|
|
1,032,000
|
|
Cancelled
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, August 31, 2018
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
|
|
1,032,000
|
|
The exercise prices for the options outstanding at August 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
|
|
$1.40
|
|
|
1,032,000
|
|
|
1.5 years
|
|
$
|
1.40
|
|
|
1.5 years
|
|
|
1,032,000
|
|
|
$
|
1.40
|
|
Warrants
Activity in issued and outstanding warrants is as follows:
|
|
Number of Shares
|
|
|
Exercise Prices
|
|
Outstanding, February 28, 2018
|
|
|
8,743,505
|
|
|
|
$0.70-$1.40
|
|
Granted
|
|
|
742,857
|
|
|
$
|
1.40
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
|
|
|
|
|
Outstanding, August 31, 2018
|
|
|
9,486,362
|
|
|
|
$0.70-$1.40
|
|
The exercise prices for the warrants outstanding at August
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
|
|
|
55 months
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
$1.40
|
|
|
5,154,646
|
|
|
|
5,154,646
|
|
|
54 months
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
$0.70-$1.40
|
|
|
2,783,002
|
|
|
|
2,783,002
|
|
|
31 months
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
|
$
|
0.00
|
|
$1.40
|
|
|
154,666
|
|
|
|
154,666
|
|
|
30 months
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
0.00
|
|
$1.40
|
|
|
651,191
|
|
|
|
651,191
|
|
|
17 months
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
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
August 31, 2018, the balance in Notes Payable and accrued interest-related party, current, includes $3,268,081 plus accrued interest
of $2,201,280 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 $44,196 to our CEO pursuant to a demand note entered into on April 5, 2014. At
August 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 $1,471,606 and an unsecured convertible note of $20,000 plus accrued
interest of $1,913 to Mr. Kopple. Subscriptions receivable at August 31, 2018 includes $175,000 for the issuance of 357,143 shares
which were previously issued.. The balance in notes payable - long term, includes $3,000,000 to Mr. Breslow, a 20% shareholder.
During thesix months ended August 31,
2018, we issued 2,256,444 shares of common stock, valued at $2,280,964 to BetterSea LLC, a greater than 15% shareholder as part
of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued at $1,992,251 to BetterSea LLC
as a settlement for disputes.
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,
our Chinese partner 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.
In June 2016, the Company becameone 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 representing
in excess of 95% of the total secured debt.In August 2018 the two secured creditors who brought suit against the Company were
awarded approximately $240,000 at trial. The Company intends to appeal this award.
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, Jr. together with former
directors Mr. Breslow and Mr. Howsmon in connection with these allegations. Mssrs. Diaz-Verson, Jr., Breslow and Howsmon have
each been dismissed from this suit.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. In June 2018, Kilpatrick Townsend &Stockton LLP
filed a cross-complaint against the Company claiming approximately $400,000 in allegedly unpaid legal fees. The Company believes
that it has valid defenses to these claims and intends to vigorously defend against these claims.
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
Six months ended August 31, 2018 compared
to six months ended August 31, 2017
Net revenues were
$39,724 for the six months ended August 31, 2017 (the “Six Months FY2019”),compared to $0 for the six months ended
August 31, 2016 (the “Six Months FY2018”). The Company has only recently begun to ship small amounts of product following
its reorganization.
Cost of goods
sold in the Six Months FY2019 were $72,994, compared to $0 in the Six Months FY2017.
Engineering, research
and development expenses were $163,876 in the Six Months FY2019, compared to $0 in the Six Months FY 2018. The expense in the
current year is primarily due to the Company redesigning the ECU for the Auragen system.
Selling, general and
administrative expense increased $3,067,643 (330%) to $3,998,446 in the Six Months FY2019 from $930,803 in the Six Months FY2018.
The increase is primarily attributable to an increase in legal expense of approximately $432,000 and the expense associated with
re-pricing outstanding options and warrants of approximately $417,000 and a settlement with BetterSea LLC whereby we issued 5,037,221
shares of the company’s stock valued at $1,992,251.
Net interest expense
in the Six Months FY2019 decreased $1,272,679 (70%) to $553,372 from $1,826,051 in the Six Months 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.
Other income/expense
was income of $308,118 in the Six Months FY2019 due primarily to the elimination of certain accrued liabilities, compared to expense
of $797,136 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 FY2019 increased $887,326 to $4,441,316 from $3,553,990 in the Six Months FY2018.
Three months ended August 31, 2018 compared to three months
ended August 31, 2017
Net revenues for the
three months ended August 31, 2018 (the “Second Quarter FY2019”) and the three months ended August 31, 2017 (the “Second
Quarter FY2018”) were $1,874 and $0, respectively. The Company has only recently begun to ship small amounts of product
following its reorganization.
Cost of goods in the
Second Quarter FY2019 and the Second Quarter FY2018 were $58,317 and $0, respectively.
Engineering, research
and development expenses were $31,023 in the Second Quarter FY2019 compared to $0 in the Second Quarter FY 2018.The expense in
the current year is primarily due to the Company redesigning the ECU for the Auragen system.
Selling, general and
administrative expense increased $2,633,693 (726%) to $2,996,500 in the Second Quarter FY2019 from $362,807 in the Second Quarter
FY2018. The increase is primarily attributable to an increase in legal expenses and the expense associated with re-pricing outstanding
options and warrantsand a settlement with BetterSea LLC whereby we issued 5,037,221 shares of the company’s stock valued
at $1,992,251.
Net interest expense
in the Second Quarter FY2019 decreased $521,668 (65%) to $276,155 from $797,823 in the Second 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
Second Quarter FY2019 increased $2,234,303 to $3,404,933 from $1,170,630 in the Second Quarter FY2018.
Liquidity and Capital Resources
We had cash of approximately
$53,000 and $748,000 as of August 31, 2018, and February 28, 2018, respectively. We had a working capital deficit at August
31, 2018, and February 28, 2018 of $19,241,980 and $20,682,519, respectively. The working capital deficit includes notes payable
and accrued interest to related parties of $9,089,076 and $8,696,665 as of November 30 and February 28, 2018, respectively.
Net cash used in operations
for the six months ended August 31, 2018, was $1,770,320, a decrease of $334,740 from the comparable period in the prior fiscal
year. Net cash provided by financing activities during the six months ended August 31, 2018, was $1,075,000, resulting from net
proceeds from subscriptions receivable of $1,125,000 partially offset by a payment of $50,000 on a note payable.
There were no acquisitions
of property and equipment during the Six months FY2019 or the Six months FY2018.
Accrued expenses as
of August 31, 2018 increased $98,804 to $3,310,439 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 $23,224,957 in shareholders’ equity as of August 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 six
months ended August 31, 2018, we issued 2,256,444 shares of common stock, valued at $2,280,964 to BetterSea LLC, a greater
than 15% shareholder as part of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued
at $1,992,251 to BetterSea LLC as a settlement for disputes. During the six months ended August 31, 2018, we issued 742,857
to members of our board of directors. The warrants have a term of five years and an exercise price of $1.40. The company
recorded an expense of $312,072 for the issuance of these warrants.
During the six months
ended August 31, 2017, we issued 5,000,000 (714,286 post split) shares of common stock for $1,000,000 in conjunction with our
Chinese Joint Venture, we issued 5,116,959(730,994 post split) shares of common stock valued at $665,204 as part of a settlement
agreement, and we issued 2,500,000 (357,143 post split) 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.