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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 2002 Commission File Number: 000-17249
AURA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-4106894
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2335 Alaska Avenue
El Segundo, California 90245
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 643-5300
Former name, former address and former fiscal year, if changed since
last report: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO
-------------- --------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 9, 2002
------- ---------------------------
Common stock, par value 408,782,576 Shares
$.005 per share
AURA SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information 1
Condensed Consolidated Balance Sheets as of
May 31, 2002 (unaudited) and February 28, 2002 2
Condensed Consolidated Statements of Operations for the Three
Months Ended May 31, 2002 (unaudited) and 2001 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended May 31, 2002 (unaudited) and 2001 (unaudited) 4
Notes to Condensed Consolidated Financial Statements
5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in securities 10
ITEM 6. Exhibits and reports on Form 8-K 10
SIGNATURES 11
AURA SYSTEMS, INC. AND SUBSIDIARIES
QUARTER ENDED MAY 31, 2002
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared by Aura Systems,
Inc. ("Aura" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). As
contemplated by the SEC under Rule 10-01 of Regulation S-X, the accompanying
financial statements and footnotes have been condensed and therefore do not
contain all disclosures required by accounting principles generally accepted in
the United States. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended February 28, 2002
as filed with the SEC (file number 000-17249).
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31,
2002 February 28,
(Unaudited) 2002
Assets
Current assets
Cash and equivalents $ 1,099,471 $ 1,143,396
Receivables, net 91,668 67,491
Inventories, net 4,856,286 5,006,424
Notes receivable 172,191 168,792
Other current assets 522,170 228,758
----------------- -----------------
Total current assets 6,741,786 6,614,861
Property and equipment, at cost 16,309,956 16,309,956
Less accumulated depreciation and amortization (6,125,975) (5,935,475)
------------------ ------------------
Net property and equipment 10,183,981 10,374,481
Non-current inventories 4,500,000 4,500,000
Long term investments 1,000,000 1,700,000
Long term receivables 2,303,003 2,347,346
Patents and trademarks, net 2,984,851 3,061,932
Other assets 157,005 163,370
----------------- -----------------
Total $ 27,870,626 $ 28,761,990
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,410,860 $ 3,032,134
Notes payable 3,324,034 3,913,623
Accrued expenses 2,321,633 2,181,657
----------------- -----------------
Total current liabilities 8,056,526 9,127,414
Notes payable and other liabilities 6,891,031 6,981,843
COMMITMENTS AND CONTINGENCIES
Stockholders' equity
Common stock par value $.005 per share and additional paid
in capital. Issued and outstanding 408,782,576 shares at May
31, 2002 and 387,690,068 shares at February 28, 2002. 304,560,994 300,332,457
Accumulated deficit (291,637,925) (287,679,724)
------------------ -----------------
Total stockholders' equity 12,923,069 12,652,733
----------------- ----------------
Total $ 27,870,626 $ 28,761,990
================= =================
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MAY 31, 2002 AND 2001
(Unaudited)
2002 2001
Net Revenues $ 183,739 $ 2,874,569
Cost of goods 80,985 1,440,623
-------------- --------------
Gross Profit 102,753 1,433,946
Operating Expenses
Engineering expenses 1,096,770 2,301,285
Selling, general and administrative 2,160,475 2,254,461
Research and development 136,048 271,806
--------------- --------------
Total expenses 3,393,292 4,827,552
-------------- --------------
Loss from operations (3,290,539) (3,393,606)
Other (income) and expense
(Gain) on sale of assets -- (399,189)
(Gain) on settlement with Deutsche Financial Services -- (1,150,000)
Other (income) expense 585,429 (144,252)
Interest expense, net 82,234 405,533
-------------- --------------
Net loss $ (3,958,201) $ (2,105,698)
=============== ===============
Net loss per common share-basic $ (.01) $ (.01)
=============== ==============
Weighted average shares used
to compute net loss per share 398,236,320 300,710,598
=============== ==============
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2002 AND 2001
(Unaudited)
2002 2001
Net cash used in operations $ (3,969,869) $ (4,174,294)
----------------- -----------------
Cash flows from investing activities:
Proceeds from sale of assets -- 399,189
Payments from notes receivable 40,944 37,807
Purchase of property and equipment -- (107,434)
---------------- -----------------
Net cash provided by investing activities 40,944 329,562
Cash flows from financing activities:
Repayment on line of credit -- (1,300,000)
Proceeds from exercise of warrants -- 27,000
Repayment of debt (250,000) (629,966)
Net proceeds from issuance of common stock 4,135,000 5,697,900
---------------- ----------------
Net cash provided by financing activities 3,885,000 3,794,934
--------------- ----------------
Net increase (decrease) in cash and equivalents (43,925) (49,798)
Cash and equivalents at beginning of period 1,143,396 1,265,912
---------------- ----------------
Cash and equivalents at end of period $ 1,099,471 $ 1,216,114
================ ================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 43,167 $ 447,291
Income Tax $ 0 $ 0
The unaudited supplemental disclosure of non-cash investing and financing
activities:
In the quarter ended May 31, 2002 there were 292,508 shares of the Company's
common stock issued in satisfaction of $92,140 in liabilities. In the quarter
ended May 31, 2001, $4,330,994 of liabilities were satisfied with the issuance
of 10,851,381 shares of the Company's common stock.
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2002
(Unaudited)
1) Basis of Presentation
The condensed consolidated financial statements include the accounts of
Aura Systems, Inc. ("the Company" or "Aura") and subsidiaries. All material
inter-company balances and inter-company transactions have been eliminated.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which include only
normal recurring adjustments) and reclassifications for comparability necessary
to present fairly the financial position of Aura Systems, Inc. at May 31, 2002
and the results of its operations and cash flows for the three months ended May
31, 2002 and 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
2) Going Concern
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the uncertainty as to the Company's
ability to continue as a going concern. These condensed consolidated financial
statements contemplate the ability to continue as such and do not include any
adjustments that might result from this uncertainty.
3) Capital
In the quarter ended May 31, 2002, common stock outstanding increased
by a total of 21,092,508 shares as follows: 20,800,000 shares were sold for
gross proceeds of $4,160,000 and 292,508 shares were issued to satisfy
liabilities of $92,140.
4) Inventories
Inventories, stated at the lower of cost (first in, first out) or market, consist of the following:
May 31, February 28,
2002 2002
------------------ -----------------
Raw materials $ 3,971,566 $ 4,043,697
Finished goods 7,179,275 7,258,138
Reserve for potential product obsolescence (1,795,411) (1,795,411)
---------------- --------------
$ 9,355,430 $ 9,506,424
=============== ==============
Inventories consist primarily of components and completed units for
the Company's AuraGen(R) product.
5) Asset Impairment
Subsequent to the quarter ended May 31, 2002 Aura became aware of
financial difficulties relative to one of its investments. Aura recognized
a $700,000 impairment charge as the Company concluded there was an other
than temporary decline in the value of the investment. It is now recorded
at its estimated fair market value of approximately $500,000.
6) Significant Customers
In the quarter ended May 31, 2002, the Company sold AuraGen(R) related
products to four significant customers for a total of approximately
$106,000 or 55% of net revenues. None of the above customers are related to
or affiliated with the Company.
7) Contingencies
The Company is not presently engaged in any material litigation. See
the Company's Form 10-K, Item 3 Legal Proceedings for the year ended
February 28, 2002 as filed with the SEC (file number 000-17249) for a
further discussion of the legal activities. In the case of a judgment or
settlement, appropriate provisions have been made in the financial
statements. The following are summaries of changes in litigation issues
since February 28, 2002:
Securities and Exchange Commission Settlement
On June 11, 2002 the Securities and Exchange Commission filed a
settled civil enforcement action in U.S. District Court in the Central
District of California against Aura, a former subsidiary, and former
officers of both companies. The SEC settled action alleged violations of
the anti-fraud and books and records provisions of the securities laws
during Aura's 1997 and 1998 fiscal years (See Litigation Release No. 17557,
SEC vs. Aura Systems, Inc. et. al., USDC No. 02-4555 NM (MANx)). No person
who is now an employee, officer or director of Aura Systems is alleged to
have engaged in any wrongdoing. The settlement was without any penalty or
fine imposed on Aura and will not require that Aura restate its financials.
It did not include any admission of wrongdoing. As part of the settlement,
the court papers included a consent and undertaking and final judgment
reflecting the Company's agreement to be enjoined from committing
securities violations of the anti-fraud and books and records provisions,
thus ending the matter. The Audit Committee of the Board will conduct a
full review of the Company's accounting controls and procedures.
Other Legal Actions
The Company is also engaged in other legal actions. In the opinion of
management the ultimate resolution of these matters will not have a
material adverse effect on financial conditions, results of operations or
cash flow.
8) Subsequent Event
In July 2002 the Company received $500,000 from two significant
shareholders in the form of a convertible note. The note is due in 180 days
and carries an interest rate of 8% due at maturity. Upon equity funding of
at least $2 million prior to the note's maturity, the principal and accrued
interest are convertible into common stock at $.11 per share or the average
equity sale rate, whichever is less.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This report may contain forward-looking statements, which involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such statements. Certain factors could also cause actual
results to differ materially from those discussed in such forward-looking
statements, including factors discussed in the Company's Form 10-K for the
period ended February 28, 2002, and factors discussed in this report.
Results of Operations
Net revenues for the quarter ended May 31, 2002 decreased to $183,739 from
$2,874,569 in the prior year quarter. This represents a decrease of $2,690,830
from the prior year comparable quarter. Revenues are lower because the Company
did not ship any significant quantities to its distributors as was done in the
prior year. In addition, revenue of $1.3 million was recognized in the prior
year first quarter relative to shipments made to CRS Emergency, which were later
returned.
Cost of goods decreased to $80,985 in the quarter ended May 31, 2002 from
$1,440,623 in the quarter ended May 31, 2001, due to the decrease in sales noted
above. Cost of goods sold includes only the direct material costs incurred.
Gross margins increased to 56% from 50% in the prior year quarter as a
result of a combination of price increases and cost reductions for the Company's
products. Margins can vary quarter to quarter as a result of product mix,
options and accessories purchased and system sales as opposed to individual
component sales.
Engineering expenses decreased by $1,204,515 to $1,096,770 in the quarter
ended May 31, 2002 from $2,301,285 in the prior year fiscal quarter. The
decrease was primarily due to the elimination of the tooling depreciation.
Depreciation and amortization for the quarter ended May 31, 2001 totaled
$1,477,199 compared to $273,828 for the quarter ended May 31, 2002. In fiscal
2001, the Company reclassified certain costs that had been characterized as
overhead costs and included in cost of goods. These items were primarily
engineering and facility related and have now been classified as engineering
expenses in the operating expense category. This was done to more accurately
reflect the actual cost of the product sold and provide a gross profit
presentation based on the sale of the product itself.
Selling, general and administrative (SG&A) expenses decreased slightly to
$2,160,475 in the quarter ended May 31, 2002 from $2,254,461 in the quarter
ended May 31, 2001. The SG&A expenses were lower due primarily to lower
litigation expenses incurred. A majority of the lawsuits which existed in the
prior year have been settled or dismissed, thus requiring less in legal fees. In
addition, sales and marketing costs were lower in the current year quarter.
Sales and marketing costs are expected to increase in the future. The lower SG&A
costs were partially offset by consulting expenses incurred for the former
management of the Company.
Research and development expense decreased from $271,806 in the quarter
ended May 31, 2001 to $136,048 in the quarter ended May 31, 2002. In the prior
year the Company had expanded its efforts in developing variations of the 5 kW
AuraGen(R), such as the 8.5 kW, 10 kW, 12.5 kW, and the inverter option. In the
current year, much of that initial activity is complete, and the headcount for
the R&D staff has been reduced.
The Company recorded a gain of $399,189 on the sale of assets and a gain of
$1.2 million on the settlement with Deutsche Financial Services in the quarter
ended May 31, 2001 while there were no asset sales or other similar gains in the
quarter ended May 31, 2002.
Other income and expense for the quarter ended May 31, 2001 consists
primarily of settlement of accounts payable. Other income and expense for the
quarter ended May 31, 2002 consists primarily of the recognition of an impaired
investment, reimbursement of prior period legal expenses and sub-lease rental
income. In the quarter ended May 31, 2002 Aura became aware of significant
financial difficulties relative to Algo Technology, Inc. Aura recognized a
$700,000 impairment charge as the Company concluded there is an other than
temporary decline in the value of Algo Technologies, Inc. The investment is now
recorded as its estimated fair market value of approximately $500,000.
Net interest expense for the quarter ended May 31, 2002, decreased from
$405,533 to $82,234 in the current year quarter due to the continuing reduction
in the debt level of the Company. Current interest income was approximately
$52,000 primarily from the long-term note receivable.
The Company has received correspondence from Daewoo Electronics Co.,
Limited ("Daewoo") relative to its Technology License Agreement in the form of a
request to grant transfer of the License to a major public industrial
corporation in the Republic of South Korea. The Technology License Agreement
between Aura and Daewoo provides for Aura's consent to any transfer and contains
rights to Aura in any sublicense. The Company has had preliminary discussions
with Daewoo that could possibly affect materially the Company's results of
operations in subsequent reports. However, no assurances can be given as to the
outcome of the discussions or whether they will lead to consummating a consent
or sublicense. The Company has previously reported that it had retained interest
in the Company's other proprietary technology besides the AuraGen, including its
Actuated Mirror Array ("AMA"), but that Daewoo had been in a financial crisis
and negotiating about the future of the AMA technology.
Financial Position, Liquidity and Capital Resources
At May 31, 2002, the Company had cash of $1,099,471 as compared to a
cash level of $1,143,396 at February 28, 2002. Inventories at May 31, 2002
decreased by $150,138 from February 28, 2002.
Cash flows used in operations decreased by $204,425 as compared to the
fiscal quarter ended May 31, 2001. The Company's working capital was a negative
$1,314,740 at May 31, 2002, as compared to a negative $2,512,553 at the fiscal
year ended February 28, 2002. The Company continues to focus on improving the
financial position through cost control measures and by decreasing the long and
short-term debt owed by Aura. Aura continues to implement actions for the
purpose of monetizing non-operating assets in order to utilize the cash to fund
the operating, sales and marketing activities.
In the fiscal quarter ended May 31, 2002, the Company received gross
proceeds of $4,160,000 from the sale of 20,800,000 shares of the Company's
common stock. The Company also satisfied liabilities of approximately $92,140
through the issuance of 292,508 shares of common stock.
In July 2002 the Company received $500,000 from two significant
shareholders in the form of a convertible note. The note is due in 180 days and
carries an interest rate of 8% due at maturity. Upon equity funding of at least
$2 million prior to maturity, the notes and accrued interest are convertible at
$.11 per share or the average equity sale rate, whichever is less.
The cash flow generated from the Company's operations to date has not
been sufficient to fund its working capital needs, and the Company does not
expect that operating cash flow will be sufficient to fund its working capital
needs in fiscal 2003. In the past, in order to maintain liquidity the Company
has relied upon external sources of financing, principally equity financing and
private and bank indebtedness. The Company expects to fund any operating
shortfall in the current fiscal year from cash on hand and third party
financings in order to continue its operations. Currently, the Company has no
commitments from third parties to provide additional financing. The Company has
no assurances that third party funding will be available at the times or in the
amounts required. If future financing involves the issuance of equity
securities, existing stockholders may suffer dilution in net tangible book value
per share. The limited availability of funds could have a material adverse
effect on the Company's financial statements, results of operations and the
ability to continue or expand operations.
For additional information regarding the Company's financial condition,
see the Company's Form 10K, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended February 28,
2002 as filed with the SEC (file number 000-17249).
Forward Looking Statements
The Company wishes to caution readers that important factors, in some
cases, have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for the second
quarter of Fiscal 2003, and beyond, to differ materially from those expressed in
any forward-looking statements made by, or on behalf of the Company.
Such factors include, but are not limited to, the following risks and
contingencies: changed business conditions in the automotive industry and the
overall economy; increased marketing and manufacturing competition and
accompanying price pressures; inefficiencies, delays and increased depreciation
costs in connection with the start of production in new plants and expansions.
Relating to the above are potential difficulties or delays in the
development, production, testing and marketing of products, including, but not
limited to, a failure to ship new products and technologies when anticipated.
There might exist a difficulty in obtaining raw materials, supplies, power and
natural resources and any other items needed for the production of Company and
other products, creating capacity constraints, limiting the amounts of orders
for certain products and thereby causing effects on the Company's ability to
ship its products. Manufacturing economies may fail to develop when planned,
products may be defective and/or customers may fail to accept them in the
consumer marketplace.
In addition to the above, risks and contingencies may exist as to the
amount and rate of growth in the Company's selling, general and administrative
expenses, and the impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, asset valuations and organizational
structures. Furthermore, any financing or other financial incentives by the
Company under or related to major infrastructure contracts could result in
increased bad debt or other expenses or fluctuation of profit margins from
period to period. The focus by some of the Company's businesses on any large
system order could entail fluctuating results from quarter to quarter.
The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions
impose yet other constraints on any Company statements. The cost and other
effects of legal and administrative cases and proceedings impose another factor
which may or may not have an impact.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
For information regarding pending legal proceedings, see Note 7 to the
Company's condensed consolidated financial statements appearing elsewhere
herein.
Item 2: Changes in Securities
During the first quarter of Fiscal 2003, the Company conducted a
private offering to a group of accredited investors and two Directors for the
sale of 20,800,000 shares of common stock for total gross proceeds of
approximately $4.16 million.
During the first quarter of Fiscal 2003, 292,508 shares of common
stock were issued to a creditor for approximately $92,140 of liabilities.
All of the foregoing transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933 as these offerings were a
private placement to a limited number of accredited investors.
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits:
None
b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AURA SYSTEMS, INC.
-----------------------------------------
(Registrant)
Date: July 15, 2002 By: /s/Steven M. Burdick
------------------------ -----------------------------
Steven M. Burdick
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)