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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 August 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 Ave.
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 October 10, 2002
Common Stock, par value 417,170,294 Shares
$.005 per share
AURA SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information 2
Condensed Consolidated Balance Sheets as of August 31, 2002 3
(unaudited) and February 28, 2002
Condensed Consolidated Statements of Operations for the Three Months and Six 4
Months Ended August 31, 2002 (unaudited) and 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Six Months Ended 5
August 31, 2002 (unaudited) and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
ITEM 4. Controls and Procedures 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES AND CERTIFICATIONS 16
AURA SYSTEMS, INC. AND SUBSIDIARIES
QUARTER ENDED AUGUST 31, 2002
PART I. FINANCIAL INFORMATION
The consolidated financial statements included herein have been prepared by Aura
Systems, Inc. (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
consolidated financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
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
August 31,
2002 February 28,
Assets (Unaudited) 2002
----------- -------------
Current assets:
Cash and equivalents $ 169,304 $1,143,396
Receivables, net 180,288 67,491
Inventories, net 4,743,625 5,006,424
Notes receivable 202,053 168,792
Other current assets 533,837 228,758
------------- ------------
Total current assets 5,829,107 6,614,861
Property and equipment, at cost 16,163,742 16,309,956
Less accumulated depreciation and amortization (8,504,505) (5,935,475)
------------- ------------
Net property and equipment 7,659,237 10,374,481
Non-current inventories 4,500,000 4,500,000
Long term investments 1,000,000 1,700,000
Long term receivables 2,113,351 2,347,346
Patents and trademarks, net 2,907,768 3,061,932
Other assets 150,645 163,370
------------- -----------
Total $ 24,160,108 $28,761,990
============== ===========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 2,599,502 $3,032,134
Notes payable 3,559,195 3,913,623
Convertible notes 1,000,000 ---
Accrued expenses 2,711,474 2,181,657
------------- -----------
Total current liabilities 9,870,171 9,127,414
Notes payable and other liabilities 6,648,406 6,981,843
COMMITMENTS AND CONTINGENCIES
Stockholders' equity
Common stock par value $.005 per share and additional paid in
capital. Issued and outstanding 413,140,294 shares at August 31,
2002 and 387,690,068 shares at 304,973,495 300,332,457
February 28, 2002.
Accumulated deficit (297,331,964) (287,679,724)
------------- -------------
Total stockholders' equity 7,641,531 12,652,733
------------- -------------
Total $ 24,160,108 $28,761,990
============== =============
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED AUGUST 31, 2002 AND 2001
(Unaudited)
Three Months Six Months
------------ ----------
2002 2001 2002 2001
----- ----- ----- -----
Net Revenues $ 272,978 $ 863,273 $ 456,717 $ 3,737,842
Cost of goods 145,120 313,174 226,105 1,753,797
--------- --------- ---------- -----------
Gross Profit 127,858 550,099 230,612 1,984,045
Expenses
Engineering expenses 797,245 2,251,713 1,894,015 4,552,998
Selling, general and administrative 2,108,369 3,307,802 4,268,844 5,562,263
Research and development 141,912 239,403 277,960 511,209
Asset impairment loss 2,300,000 --- 2,300,000 ---
---------- --------- --------- --------
Total costs and expenses 5,347,526 5,798,918 8,740,819 10,626,470
--------- --------- --------- ----------
Loss from operations (5,219,668) (5,248,819) (8,510,207) (8,642,425)
Other (income) and expense
Asset impairment --- --- 700,000 ---
(Gain) loss on disposition of assets, net (12,671) --- (12,671) (399,189)
Other (income) expense, net 82,092 (44,250) (32,480) (188,502)
Legal settlements, net --- 400,000 --- (750,000)
Interest expense, net 385,750 430,242 467,984 835,775
---------- --------- --------- ----------
Net loss before taxes (5,674,839) (6,034,811) (9,633,040) (8,140,509)
Income tax expense (19,200) --- (19,200) ---
---------- --------- --------- ----------
Net loss $(5,694,039) $(6,034,811) $(9,652,240) $(8,140,509)
=========== =========== =========== =============
Net loss per common share-basic $ (.01) $ (.02) $ (.02) $ (.03)
=========== =========== =========== =============
Weighted average shares used to
compute net loss per share 411,461,450 320,872,132 406,925,606 310,736,279
============ ============ =========== ============
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2002 AND 2001
(Unaudited)
2002 2001
------ ------
Net cash used in operations $(6,519,826) $(6,104,484)
Investing activities:
Proceeds from sale of assets 85,000 399,189
Additions to property and equipment --- (188,219)
Note receivable 200,734 76,375
---------- ----------
Net cash provided by investing activities 285,734 287,345
Financing activities:
Issuance of debt 1,000,000 ---
Repayment on line of credit --- (1,984,000)
Repayment of debt (250,000) (2,274,083)
Net proceeds from sale of stock 4,510,000 8,951,432
Proceeds from exercise of warrants --- 27,000
---------- ----------
Net cash provided by financing activities: 5,260,000 4,720,349
---------- ----------
Net increase (decrease) in cash (974,092) (1,096,790)
Cash and cash equivalents at beginning of period 1,143,396 1,265,912
---------- ----------
Cash and cash equivalents at end of period $ 169,304 $ 169,122
========= ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 305,000 $ 885,033
Income Tax $ 19,200 $ ---
Supplemental disclosure of noncash investing and financing activities:
Six months ended August 31, 2002:
In the six months ended August 31, 2002, 292,508 shares of the Company's
common stock were issued in satisfaction of $92,140 in liabilities.
Six months ended August 31, 2001:
In the six months ended August 31, 2001, $413,009 of notes payable and
accrued interest was converted into 750,927 shares of the Company's common
stock. The Company also issued 10,765,220 shares of its common stock to satisfy
liabilities in the amount of $4,219,401. In the six months ended August 31,
2001, a settlement was reached resolving a dispute requiring payments totaling
$400,000 over a period of 40 months. As of August 31, 2001, an initial payment
of $10,000 had been made.
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2002
(Unaudited)
1) Basis of Presentation
The condensed consolidated financial statements include the accounts of
Aura Systems, Inc. and subsidiaries ("the Company"). All inter-company balances
and inter-company transactions have been eliminated.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (which include normal recurring
adjustments) and reclassifications for comparability necessary to present fairly
the financial position of Aura Systems, Inc. at August 31, 2002 and the results
of its operations for the three and six months ended August 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 amount 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
In connection with the audit for the year ended February 28, 2002, the
Company received a report from its independent auditors that includes an
explanatory paragraph describing uncertainty as to the Company's ability to
continue as a going concern. The consolidated financial statements included
herein contemplate the ability to continue as such and do not include any
adjustments that might result from this uncertainty.
3) Capital
In the six months ended August 31, 2002, common stock outstanding increased
by a total of 25,450,226 shares as follows: 25,157,718 shares were sold for
gross proceeds of $4,510,000, and 292,508 shares were issued to satisfy
liabilities in the amount of $92,140.
4) Inventories
Inventories, stated at the lower of cost (first in, first out) or market,
consist of the following:
August 31, February 28,
2002 2002
---------- -------------
Raw materials $3,948,609 $ 4,043,697
Finished goods 7,093,016 7,258,138
Reserved for potential product obsolescence (1,798,000) (1,795,411)
----------- --------------
$ 9,243,625 $ 9,506,424
=========== ===============
Inventories consist primarily of components and completed units for the
Company's AuraGen product. The net inventories as of February 28, 2002 which are
not expected to be realized within a 12 month period have been classified as
long-term.
5)Significant Customers
In the six months ended August 31, 2002, the Company sold AuraGen related
products to three significant customers for a total of approximately $162,000 or
35% of net revenues. None of these customers are related to or affiliated with
the Company.
6) Asset Impairment
Subsequent to the quarter ended May 31, 2002 Aura became aware of financial
difficulties relative to its investment in Algo Technologies, Inc. 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.
In the second quarter of fiscal 2003, the Company's Board of Directors
approved a plan to sell the land and buildings which are currently used as
Aura's headquarters and operating location. The Company has received bona-fide
offers which indicate there is a significant decrease in the market price of the
assets. The current market value is less than the recorded net book value. As
the land and buildings are held for sale and the amount to be realized from the
sale is less than the net book value, the Company has recorded an asset
impairment charge. The estimated charge is $2,300,000. This amount will change
in the future once a final transaction is completed. The Company has accounted
for this charge in accordance with FASB No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". As such, the expense is recorded as part of
the loss from operations.
7) Contingencies
The Company is not engaged presently in any on-going litigation which
management expects to have a material impact on the financial position of Aura.
Refer to 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.
8) Notes Payable and Other Liabilities
Notes payable and other liabilities consist of the following:
August 31, February 28,
2002 2002
------------------- ------------------
Litigation payable (a) $ 2,189,207 $ 2,327,300
Notes payable-equipment (b) 17,324 20,371
Notes payable-buildings (c) 5,107,260 5,157,138
Trade debt (d) 2,893,810 3,140,657
Related party note payable (e) -- 250,000
Convertible notes (f) 1,000,000 --
----------------- ----------------
11,207,601 10,895,466
Less: current portion 4,559,195 3,913,623
----------------- ----------------
Long-term portion $ 6,648,406 $ 6,981,843
================ ================
(a) The litigation payable represents the legal settlements
entered into by Aura with various parties. These settlements call for
payment terms with 8% interest rate to the plaintiffs through fiscal
2004.
(b) Notes payable-equipment consists of a note maturing in
February 2005 with an interest rate of 8.45%.
(c) Notes payable-buildings consists of a 1st Trust Deed on two
buildings in California bearing interest at the rate of 7.625%. A
final balloon payment is due in fiscal 2009.
(d) Trade debt was restructured with payment terms over a
three-year period with interest at 8% per annum commencing in January
2000. The Company has failed to make every monthly payment due. As
such, the maturity date of January 2003 will most likely be extended.
(e) In the fourth quarter of fiscal 2002, the Company entered
into a short term loan agreement with a member of the Board of
Directors for $250,000. The note accrued interest at a rate of 10% and
was repaid in March 2002.
(f) Convertible notes payable are due at six month maturity dates
in January to February 2003. Interest accrues at 8% simple interest
due in arrears. If upon equity funding for an amount of at least $2
million prior to maturity date, the notes will convert mandatorily
into common stock either at the contractual conversion rates of $0.07
- $0.11 per share, respectively, or the average of the new equity sale
rate, whichever is less. In September and October 2002, the amount
increased by an additional $375,000 and $125,000, respectively, with
the same terms.
9) Subsequent Event
In September and October 2002, the Company received $500,000 from two
significant shareholders in the form of convertible notes. The notes are due in
180 days from the date of issuance and carry an interest rate of 8% due at
maturity. If Aura receives equity funding for an amount of at least $2 million
prior to the maturity date, the notes will mandatorily convert into common stock
either at the contractual conversion rates of $0.07-$0.11 per share,
respectively, or the average of the new equity sale rate, whichever is less.
In September and October 2002, the Company conducted a private offering to
a group of accredited investors for the sale of 4,030,000 shares of common stock
for a total of $285,500.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This Form 10-Q 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
For the six month period ended August 31, 2002
Net revenues for the six month period ended August 31, 2002 decreased to
$456,717 from $3,737,842 in the prior year. This represents a decrease of
$3,281,125 from the prior year comparable period. Revenues are lower because the
Company did not ship significant quantities to its distributors as was done in
the prior year. Revenue of $1.3 million was recognized in the prior year first
quarter relative to shipments made to CRS Emergency which were later returned
and revenues reversed.
Cost of goods decreased to $226,105 in the six month period ended August
31, 2002 from $1,753,797 in the six month period ended August 31, 2001 due to
the decrease in net revenues noted above. Cost of goods includes the direct
material and labor costs incurred.
Gross margins decreased to 50% from 53% in the prior year as a result of
customer and product mix. 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 $2,658,983 to $1,894,015 in the six month
period ended August 31, 2002 from $4,552,998 in the prior year comparable
period. The decrease was primarily due to the elimination of the tooling
depreciation. Depreciation and amortization for the six month period ended
August 31, 2002 totaled $84,273 compared to $2,396,684 for the six month period
ended August 31, 2001. Engineering cost also decreased due to actions taken in
the first quarter of fiscal 2003 relative to a reduction in force. 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 to $4,268,844
in the six month period ended August 31, 2002 from $5,562,263 in the six month
period ended August 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. SG&A costs also decreased due to the reduction in force that occurred in
the first quarter of fiscal 2003. In addition, sales and marketing costs were
lower. However, sales and marketing costs are expected to increase in the
future. The lower SG&A costs were partially offset by consulting expenses
recognized for the former management of the Company in the first quarter, as
well as the one-time severance expense recognized in the second quarter for the
former CEO.
Research and development expense decreased from $511,209 in the six month
period ended August 31, 2001 to $277,960 in the six month period ended August
31, 2002. In the prior year the Company had expanded its efforts in developing
variations of the 5 kW AuraGen, 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 plans to
continue its efforts and expend costs relative to the AuraGen and other
proprietary intellectual property in the future.
In the second quarter of fiscal 2003, the Company's Board of Directors
approved a plan to sell the land and buildings which are now the Aura
headquarters and operating location. The Company has received bona-fide offers,
which indicate a significant decrease in the market price of the assets. The
current market value is less than the net book value. As the land and buildings
are held for sale and the amount to be realized from the sale is less than the
net book value, the Company has recorded an asset impairment charge. The
estimated impairment is $2,300,000. This amount will change in the future once a
final transaction is completed. The Company has accounted for this charge in
accordance with FASB No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". As such, the expense is recorded as part of the loss from
operations.
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 six month
period ended August 31, 2001. There were asset sales in the current period
ending August 31, 2002 for a net gain of $12,671.
Other income and expense for the six month period ended August 31, 2001
consisted primarily of settlement of accounts payable. Other income and expense
for the six month period ended August 31, 2002 consists primarily of the
recognition of an impaired investment, reimbursement of prior period legal
expenses and lease rental income. In the six month period ended August 31, 2002,
Aura became aware of significant financial difficulties relative to Algo
Technologies, 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 six month period ended August 31, 2002,
decreased from $835,775 to $467,984 in the current year due to the continuing
reduction in the debt level of the Company. Current interest income was
approximately $103,000 primarily from the long-term note receivable.
For the six month period ended August 31, 2002 Aura's net loss increased to
$9,652,240 as compared to the same six month period in the prior year which had
a net loss of $8,140,509. The loss increased due to the lower gross profit
resulting from lower revenue, an asset impairment charge amounting to $700,000
relative to investments held, and for the $2,300,000 impairment loss on the
Company owned real estate. The loss was partially offset due to lower
depreciation and labor costs incurred. At the beginning of fiscal 2003, the
Company put into place cost savings controls that included a reduction in force.
The Company's headcount has decreased from 109 at February 28, 2002 to 76 at
August 31, 2002. The loss was also lower due to a reduced net interest expense
as a result of significant debt being paid off at the end of fiscal 2002.
For the three month period ended August 31, 2002
Net revenues for the three month period ended August 31, 2002 decreased to
$272,978 from $863,273 in the prior year quarter. This represents a decrease of
$590,295 from the prior year comparable quarter. Revenues are lower because the
Company did not ship significant quantities to its distributors as was done in
the prior year. However, the second quarter net revenue did increase from the
prior two quarters. Management expects the revenue trend to continue to increase
in future quarters. Management believes its plan to improve revenues is
succeeding through a combination of strategic business initiatives, outside
military and government consulting, and the addition of sales and marketing
professionals to its organization.
Cost of goods decreased to $145,120 in the three month period ended August
31, 2002 from $313,174 in the quarter ended August 31, 2001, due to the decrease
in net revenues noted above. Cost of goods includes only the direct material and
labor costs incurred.
Gross margins decreased to 47% from 64% in the prior year quarter as a
result of the product and customer mix. Margins can vary quarter to quarter as a
result of product mix, options and accessories purchased, and system sales.
Engineering expenses decreased by $1,454,468 to $797,245 in the three month
period ended August 31, 2002 from $2,251,713 in the prior year quarter. The
decrease was primarily due to the elimination of the tooling depreciation.
Depreciation and amortization for the three month period ended August 31, 2002
totaled $41,800 compared to $1,197,234 for the three month period ended August
31, 2001. The lower costs in the current quarter also reflect the full savings
benefit as a result of the reduction in force that occurred in the first quarter
of fiscal 2003.
SG&A expenses decreased to $2,108,369 in the three month period ended
August 31, 2002 from $3,307,802 in the three month period ended August 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. The lower costs in the
current quarter also reflect the full savings benefit as a result of the
reduction in force that occurred in the first quarter of fiscal 2003. 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 the severance expense incurred for the former CEO
of the Company.
Research and development expense decreased from $239,403 in the three month
period ended August 31, 2001 to $141,912 in the three month period ended August
31, 2002. In the prior year the Company had expanded its efforts in developing
variations of the 5 kW AuraGen, 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 plans to
continue its efforts and expend costs relative the AuraGen and other proprietary
intellectual property in the future.
In the second quarter of fiscal 2003, the Company's Board of Directors
approved a plan to sell the land and buildings which are now the Aura
headquarters and operating location. The Company has received bona-fide offers
which indicate a significant decrease in the market price of the assets. The
current market value is less than the net book value. As the land and buildings
are held for sale and the amount to be realized from the sale is less than the
net book value, the Company has recorded an asset impairment charge. The
estimated impairment is $2,300,000. This amount will change in the future once a
final transaction is completed. The Company has accounted for this charge in
accordance with FASB No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". As such, the expense is recorded as part of the loss from
operations.
Other income and expense for the three month period ended August 31, 2001
consists primarily of settlement of accounts payable. Other income and expense
for the three month period ended August 31, 2002 consists primarily of
reimbursement of prior period legal expenses and sub-lease rental income. The
Company recorded a net gain of $12,671 on the sale of assets in the current year
while there were no asset sales in the same period last year. The Company
recorded a loss of $400,000 relative to a NewCom class action lawsuit in the
three month period ended August 31, 2001 while there was no similar loss in the
three month period ended August 31, 2002.
Net interest expense for the three month period ended August 31, 2002,
decreased from $430,242 to $385,750 in the current year quarter due to the
continuing reduction in the debt level of the Company. Current interest income
was approximately $49,000 primarily from the long-term note receivable.
The net loss for the three months ended August 31, 2002 was $5,694,039
compared to a net loss of $6,034,811 for the same period in the prior year. This
decrease in the net loss was primarily due to lower depreciation expense, a
reduced labor force, and implementation of cost saving strategies. In addition,
the Company's net interest expense was higher in the prior year due to a higher
debt balance. Aura also recognized a $400,000 legal settlement accrual in the
prior year. The lower net loss was partially offset by a lower gross profit
recognized due to lower revenue in the current year quarter, and by the
impairment charge relative to the Company's real estate assets.
The Company 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
The Company continues to experience acute liquidity challenges. At August
31, 2002, the Company had cash of $169,304 as compared to a cash level of
$1,143,396 at February 28, 2002. The Company's working capital deficit increased
by $1,528,511 from $2,512,553 at February 28, 2002 to $4,041,064 at August 31,
2002. The deficit increased as a result of the convertible debt financing
proceeds received in the period amounting to $1,000,000. A majority of the
Company's current payables relate to liabilities incurred in prior fiscal years.
As such, the Company's credit availability is very limited.
Cash flows used in operations increased by $415,342 in the current year to
$6,519,826 as compared to $6,104,484 in the six months ended August 31, 2001.
The increase in operating cash used is primarily a result of lower revenue in
fiscal 2003. The Company continues to focus on improving its 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
under utilized non-operating assets in order to fund the operating, sales and
marketing activities. The Company has sold several excess vehicles and intends
to proceed with a sale-leaseback transaction on the Company's headquarter
properties. The expected gross proceeds to the Company are approximately
$3,300,000.
In the six months ended August 31, 2002, the Company received gross
proceeds of $4,510,000 from the sale of 25,067,974 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 the second quarter ending August 31, 2002 and in the third quarter of
fiscal 2003, the Company received $1,000,000 and $500,000, respectively, from
two significant shareholders in the form of convertible notes. The notes are due
180 days from their issuance and carry an interest rate of 8% due at maturity.
Upon equity funding of at least $2,000,000 prior to maturity, the notes and
accrued interest are convertible at $0.07-$0.11 per share, respectively, 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. The Company expects to fund the operating cash shortfall in the
current fiscal year from a combination of increased revenues, monetization of
under utilized assets, and from third party financings. 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 financings involve the issuance of equity
securities, existing stockholders are likely to suffer dilution in net tangible
book value per share. The Company is limited to issuing 500,000,000 shares of
common stock and 10,000,000 shares of preferred stock unless and until
shareholders approve the authorization of additional shares. As of October 10,
2002, there were 417,170,294 common shares outstanding and substantially all of
the remaining authorized common shares have been reserved for stock options,
warrants, and convertible notes outstanding. As of October 10, 2002, there were
no preferred shares outstanding. The Company is currently in the process of
monetizing certain of its long-term under utilized assets in order to fund the
operating, sales and marketing activities. The Company has entered into a letter
of intent for the sale of Aura Realty, Inc., which includes the headquarters
building, and the subsequent leaseback of the property. The letter of intent,
which is non-binding, provides that the purchaser, in conjunction with the
sale-leaseback, will also invest in the Company by purchasing Aura Systems, Inc.
common stock. The total gross proceeds expected to be received approximate
$3,300,000. The Company has also decided to attempt to sublease one floor of
offices at its headquarters in order to realize savings from its facility
expenses.
The limited availability of funds and sources of raising additional 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 third
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: the Company's on-going liquidity concerns; changed business
conditions in the industries targeted by the Company and the overall economy;
increased marketing and manufacturing competition and accompanying price
pressures; inefficiencies, delays and increased costs in connection with the
start of production 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.
Manufacturing economies may fail to develop when planned, products may be
defective and/or customers may fail to accept them in the 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 on-going
evaluation of its business strategies, asset valuations and organizational
structures. The possibility of a single large system order to the Company 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 events of September
11, 2001 and advent of a war on terrorism may or may not impact sales in the
mobile power business. The cost and other effects of legal and administrative
cases and proceedings present another factor which may or may not have an
impact.
ITEM 4 Controls and Procedures
(a) The Company's chief executive officer and its chief financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a
date within 90 days of the filing date of this quarterly report (the "Evaluation
Date") have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them timely by others within those entities.
(b) There were no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's disclosure
controls and procedures subsequent to the Evaluation Date, nor were there any
significant deficiencies or material weaknesses in such disclosure controls and
procedures requiring corrective actions. As a result, no corrective actions were
taken.
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 second quarter ended August 31, 2002, the Company conducted a
private offering to a group of accredited investors for the sale of 5,357,718
shares of common stock for total gross proceeds of approximately $390,000. The
Company also issued $1,000,000 of convertible notes. These convertible notes
payable are due at six month maturity dates in January to February 2003.
Interest accrues at 8% simple interest due in arrears. If Aura receives equity
funding for an amount of at least $2 million prior to maturity date, the notes
will convert mandatorily into common stock either at the contractual conversion
rates of $0.07 - $0.11 per share, respectively, or the average of the new equity
sale rate, whichever is less.
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:
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K:
During the quarter ended August 31, 2002 the Company did not file a current
report on Form 8-K.
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: October 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)
CERTIFICATION
I, Neal F. Meehan, Chairman and Chief Executive Officer of Aura Systems,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aura Systems,
Inc. and,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Neal F. Meehan
---------------------
Neal F. Meehan
Chairman & Chief Executive Officer
October 15, 2002
CERTIFICATION
I, Steven M. Burdick, Chief Financial Officer of Aura Systems, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aura Systems,
Inc. and,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Steven M. Burdick
----------------------
Steven M. Burdick
Chief Financial Officer
October 15, 2002
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Aura Systems, Inc. (the
"Company") on Form 10-Q for the period ending August 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
I, Neal F. Meehan, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
for the periods indicated.
/s/ Neal F. Meehan
--------------------
Neal F. Meehan
Chairman & Chief Executive Officer
October 15, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Aura Systems, Inc. (the
"Company") on Form 10-Q for the period ending August 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
I, Steven M. Burdick, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
for the periods indicated.
/s/ Steven M. Burdick
----------------------
Steven M. Burdick
Chief Financial Officer
October 15, 2002