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 November 30, 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 January 8, 2003
Common Stock, par value 430,973,150 Shares
$0.005 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 November 30, 2002 3
(Unaudited) and February 28, 2002
Condensed Consolidated Statements of Operations for the Three Months and 4
Nine Months Ended November 30, 2002 (Unaudited) and 2001 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended 5
November 30, 2002 (Unaudited) and 2001 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of 11
Operations
ITEM 4. Controls and Procedures 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 2. Changes in Securities 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES AND CERTIFICATIONS 18
AURA SYSTEMS, INC. AND SUBSIDIARIES
QUARTER ENDED NOVEMBER 30, 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
November 30,
2002 February 28,
Assets (Unaudited) 2002
- ------- ------------------------ -----------------
Current assets:
Cash and equivalents $ 76,772 $ 1,143,396
Receivables, net 357,389 67,491
Inventories, net 4,664,534 5,006,424
Notes receivable 206,122 168,792
Other current assets 430,982 228,758
------------- ----------
Total current assets 5,735,799 6,614,861
Property and equipment, at cost 16,170,350 16,309,956
Less accumulated depreciation and amortization (8,663,017) (5,935,475)
-------------- -----------
Net property and equipment 7,507,333 10,374,481
Non-current inventories 4,500,000 4,500,000
Long term investments 1,000,000 1,700,000
Long term receivables 2,060,271 2,347,346
Patents and trademarks, net 2,830,686 3,061,932
Other assets 148,941 163,370
--------------- ----------------
Total $ 23,783,030 $28,761,990
============ ===========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 2,615,642 $ 3,032,134
Notes payable 4,209,078 3,913,623
Convertible notes 1,750,000 --
Accrued expenses 2,263,273 2,181,657
------------- ---------
Total current liabilities 10,837,993 9,127,414
Notes payable and other liabilities 6,438,956 6,981,843
COMMITMENTS AND CONTINGENCIES
Stockholders' equity
Common stock par value $0.005 per share and additional paid in
capital. Issued and outstanding 430,973,150 shares at November
30, 2002 and 387,690,068 shares at February 28, 2002. 306,172,595 300,332,457
Accumulated deficit (299,666,514) (287,679,724)
------------- --------------
Total stockholders' equity 6,506,081 12,652,733
-------------- ----------
Total $ 23,783,030 $28,761,990
============ ===========
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
Three Months Nine Months
------------ -----------
2002 2001 2002 2001
---- ---- ---- ----
Net Revenues $ 423,066 $ 306,126 $ 879,783 $ 4,043,968
Cost of goods 199,154 168,874 425,259 1,922,671
----------- ---------- ----------- ---------
Gross Profit 223,912 137,252 454,524 2,121,297
Expenses
Engineering expenses 782,417 1,727,078 2,676,432 6,280,076
Selling, general and administrative 1,542,284 2,113,016 5,830,328 7,675,279
Research and development 132,474 168,385 410,433 679,594
Asset impairment loss -- -- 2,300,000 --
--------------- -------------- --------- ----------------
Total costs and expenses 2,457,175 4,008,479 11,217,194 14,634,949
----------- ------------ ---------- ----------
Loss from operations (2,233,263) (3,871,227) (10,762,670) (12,513,652)
Other (income) and expense
Asset impairment -- -- 700,000 --
(Gain) loss on disposition of assets, net -- 65,823 (12,671) (333,366)
Other (income) expense, net (61,992) 69,670 (94.472) (118,832)
Legal settlements, net -- (2,000,000) -- (2,750,000)
Interest expense, net 163,273 620,045 631,263 1,455,820
------------ ------- ------------- ---------------
Loss before extraordinary item (2,334,550) (2,626,765) (11,986,790) (10,767,274)
----------- ----------- ------------ ------------
Extraordinary item
Gain on extinguishment of debt obligations,
net of income taxes of $0 -- 1,532,188 -- 1,532,188
---------------- --------- ------------------ ------------
Net loss $(2,334,550) $(1,094,577) $(11,986,790) $ (9,235,086)
============ ============ ============= =============
Net loss per common share-basic $ (0.006) $ (0.003) $ (0.029) $ (0.029)
================ ================ ================== ==================
Loss from continuing operations per share
Extraordinary income per share $ (0.006) $ (0.008) $ (0.029) $ (0.034)
================ ================ ========= ================
$ -- $ 0.005 $ -- $ .005
============= ========== ===== ===
Weighted average shares used to
compute net loss per share 421,086,112 334,634,968 410,794,584 317,626,223
============ =========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
Net cash used in operations $ (8,567,844) $ (7,038,896)
Investing activities:
Proceeds from sale of assets 85,000 399,189
Additions to property and equipment (6,491) (228,383)
Note receivable 249,746 115,720
--------------- ----------------
Net cash provided by investing activities 328,254 286,526
Financing activities:
Issuance of debt 2,628,750 --
Repayment on line of credit -- (1,984,000)
Repayment of debt (1,126,182) (3,182,655)
Net proceeds from sale of stock 5,670,398 10,659,313
Net proceeds from exercise of stock options -- 775
Proceeds from exercise of warrants -- 27,000
---------------- -----------------
Net cash provided by financing activities: 7,172,966 5,520,433
---------------- -----------------
Net increase (decrease) in cash (1,066,624) (1,231,937)
Cash and cash equivalents at beginning of period 1,143,396 1,265,912
---------------- -----------------
Cash and cash equivalents at end of period $ 76,772 $ 33,975
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 378,065 $1,422,542
Supplemental disclosure of noncash investing and financing activities:
Nine months ended November 30, 2002:
In the nine months ended November 30, 2002, 659,175 shares of the Company's
Common Stock were issued in satisfaction of $169,740 in liabilities and
contractual obligations.
Nine months ended November 30, 2001:
In the nine months ended November 30, 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 14,868,866 shares of its Common Stock to satisfy
liabilities in the amount of $5,778,786.
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 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 November 30, 2002 and the results of its
operations for the three and nine months ended November 30, 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. Except as otherwise disclosed, the consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern. For the nine months ended November
30, 2002 and the year ended February 28, 2002, the Company incurred a net loss
of approximately $12,000,000 and $24,900,000, respectively, on net revenues of
approximately $900,000 and $3,100,000, respectively. The Company had working
capital deficiencies at November 30, and February 28, 2002 of approximately
$5,300,000 and $2,500,000, respectively. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The Company
requires additional debt or equity financing to fund ongoing operations in its
fiscal year ending February 28, 2003 ("Fiscal 2003"). The Company is seeking to
raise additional capital; however, there can be no assurance that the Company
will raise sufficient capital to fund ongoing operations in Fiscal 2003. The
issuance of additional shares of equity in connection with such financing could
dilute the interests of existing stockholders of the Company. The inability to
secure additional funding could have a material adverse effect on the Company,
including the possibility that the Company could have to cease operations.
3) Capital
In the nine months ended November 30, 2002, Common Stock outstanding
increased by a total of 43,283,082 shares as follows: 42,623,907 shares were
sold for gross proceeds of $5,694,001 and 659,175 shares were issued to satisfy
liabilities and contractual obligations in the amount of $169,740.
4) Inventories
Inventories, stated at the lower of cost (first in, first out) or market,
consist of the following:
November 30, February 28,
2002 2002
Raw materials $4,027,446 $ 4,043,697
Finished goods 6,885,088 7,258,138
Reserved for potential product obsolescence (1,748,000) (1,795,411)
-------------- -------------
$ 9,164,534 $ 9,506,424
============= =============
Inventories consist primarily of components and completed units for the
Company's AuraGen product. $4,500,000 of net inventories as of November 30, and
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 nine months ended November 30, 2002, the Company sold AuraGen
related products to two significant customers for a total of approximately
$308,000 or 35% of net revenues. None of these customers are related to or
affiliated with the Company.
At November 30, 2002, held accounts receivable from three significant
customers for a total of approximately $297,000 or 83% of net receivables. 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 had received bona-fide
offers which indicated there was a significant decrease in the market price of
the assets. As a result, the current market value was 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 was less than the net book value, the Company recorded an
asset impairment charge of $2,300,000 in the second quarter of Fiscal 2003. The
Company accounted for this charge in accordance with FASB No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets"; as such, the expense was
recorded as part of the loss from operations. This sale was completed on
December 1, 2002; see Note 9 below.
7) Contingencies
The Company is engaged in certain material legal proceedings (as described
in Item 1 of Part II of this document). Refer also 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:
November 30, February 28,
------------------- ------------------
2002 2002
Litigation payable (a) $ 1,991,221 $ 2,327,300
Notes payable-equipment (b) 15,752 20,371
Notes payable-buildings (c) 5,083,257 5,157,138
Trade debt (d) 2,679,054 3,140,657
Related party note payable (e) -- 250,000
Real estate sale advances (f) 878,750 --
--------------- -----------------
10,648,034 10,895,466
Less: current portion 4,209,078 3,913,623
--------------- -----------------
Long-term portion $ 6,438,956 $ 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) During the third quarter of Fiscal 2003, the Purchasers intending to
purchase the Company's interest in Aura Realty and lease back its
facilities to the Company advanced $878,750 against the purchase price.
(See Note 9).
Convertible notes payable are due at 180 day maturity dates in January
through April 2003. Interest accrues at 8% simple interest due in arrears. If
upon equity funding for an amount of at least $2,000,000 prior to maturity date,
the notes will convert mandatorily into Common Stock at contractual conversion
rates of $0.07 - $0.11 per share or the average of the new equity sale rate,
whichever is less.
9) Subsequent Events
(a) Sale of Aura Realty
On December 1, 2002, the Company consummated the initial closing under an
Agreement for Sale and Leaseback, (together with the agreements contemplated
thereby, the "Agreement") with a group of individuals (the "Purchasers")
pursuant to which the Company agreed to sell its Aura Realty, Inc. ("Aura
Realty") subsidiary to Purchasers and enter into a new 10-year lease of the
properties owned by Aura Realty (the "Lease"). As a result of the revaluation of
Aura Realty's assets in the second quarter of Fiscal 2003 (see Note 6), the
Company will not record a material gain or loss from this transaction.
The Agreement provides for the $7,350,000 purchase price for the Aura
Realty stock, arrived at in arm's length negotiations, to be partially funded by
Purchasers' assumption or refinancing of the current mortgage note secured by
the Properties. Net of the principal balance of this mortgage note of
approximately $5,083,000, certain security deposits and prepayments totaling
$564,000, the partial payment of past due amounts owed to certain of the
individual purchasers, as described below, of approximately $135,000 and
Purchasers' fees of $105,000, the Company received approximately $1,463,000.
$878,750 of this amount was advanced to the Company by the Purchasers prior to
the December 1, 2002 closing under the Agreement and is reflected in the
November 30, 2002 balance sheet as Notes Payable - Current.
The assets and liabilities of Aura Realty included in the Condensed
Consolidated Balance Sheets at November 30, 2002 consist of the following:
Current assets $ 43,281
Property and equipment
Land 3,187,997
Buildings 8,706,803
Accumulated depreciation (4,947,288)
------------
Net property and equipment 6,947,512
Other assets 139,980
------------
Total assets $ 7,130,774
Current liabilities
Notes payable $ 104,199
Accrued expenses 24,762
Notes payable and other liabilities 4,979,058
-----------
Total liabilities $ 5,108,019
At the December 1, 2002 closing under the Agreement, the Company
transferred 49.9% of its stock in Aura Realty to Purchasers, delivered a
$1,000,000 note payable to Purchasers and granted Purchasers a security interest
in one of the Company's note receivables to secure certain aspects of its
performance under the Agreement and the Lease. A second closing will occur after
the current mortgage note holder consents to transfer of the stock to Purchasers
and execution of the Lease. At that time, the Company will deliver its remaining
Aura Realty stock to Purchasers in exchange for the return and cancellation of
the Company's $1,000,000 note payable. If the current mortgage note holder does
not consent to the transfer of the stock to Purchasers and execution of the
Lease, Purchasers will obtain a substitute mortgage note through a refinancing.
In the event that such a refinancing is required, the Company would be required
to pay certain additional costs. The Company believes that the Purchasers will
be successful in obtaining the consent of the mortgage holder and has not
accrued any additional costs associated with this transaction.
The Purchasers also received warrants to purchase 15,000,000 shares of
common stock of the Company within five years from December 1, 2002 at exercise
prices ranging from $0.15 to $0.25 per share. Further, the Purchasers subscribed
to purchase and paid for 21,366,347 of the Company's common shares for
$1,493,000 at an average price of $0.07 per share under the Agreement. All of
these shares were purchased during the third quarter of Fiscal 2003. The Company
has agreed to file a registration statement with the Securities and Exchange
Commission within 60 days of acceptance of the subscription agreement and will
be required to issue up to 1,300,000 additional shares to the Purchasers if it
fails to do so.
Of the sixteen Purchasers, five are current consultants to the Company and
members of the Company's former management who separated from the Company at the
end of February 2002 (the "Consultants"). The Company paid a fee of $50,000 to
the Consultants in connection with the Agreement. The Company also paid to the
Consultants approximately $135,000 from the funds it received at closing
representing a portion of unpaid consulting fees contractually due to the
Consultants at December 1, 2002.
(b) Investor Advance
On December 30, 2002, the Company received $500,000 from a current investor
in exchange for a demand note, bearing interest at 5% per annum.
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 nine month period ended November 30, 2002
Net revenues for the nine month period ended November 30, 2002 decreased to
$879,783 from $4,043,968 in the prior year. This represents a decrease of
$3,164,185 (78%) 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 $1,300,000 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 $1,497,412 (78%) to $425,259 in the nine month
period ended November 30, 2002 from $1,922,671 in the nine month period ended
November 30, 2001 commensurate with the reduction in revenues. Cost of goods
includes the direct material and labor costs incurred.
Gross margins of 52% for the nine month period were basically unchanged
from in the same period in the prior year. 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 $3,603,644 (57%) to $2,676,432 in the
nine month period ended November 30, 2002 from $6,280,076 in the prior year
comparable period. The decrease was primarily due to the elimination of the
tooling depreciation. Depreciation and amortization for the nine month period
ended November 30, 2002 totaled approximately $124,000 compared to approximately
$5,000,000 for the nine month period ended November 30, 2001. Engineering cost
also decreased due to actions taken in the first quarter of Fiscal 2003 relative
to a reduction in force.
Selling, general and administrative (SG&A) expenses decreased to $5,809,504
in the nine month period ended November 30, 2002 from $7,675,279 in the nine
month period ended November 30, 2001; a $1,865,775 (24%) reduction. The SG&A
expenses were lower due primarily to lower litigation expenses incurred and due
to the reduction in force that occurred in the first quarter of Fiscal 2003. In
addition, sales and marketing costs were lower (or higher). 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 $269,161 (40%) to $410,433 in
the nine month period ended November 30, 2002from $679,594 in the nine month
period ended November 30, 2001. 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 had received bona-fide offers
which indicated a significant decrease in the market price of the assets. As a
result, the current market value was less than the net book value. As the land
and buildings are held for sale and the amount to be realized from the sale was
less than the net book value, the Company recorded an asset impairment charge of
$2,300,000 in the second quarter of Fiscal 2003. The Company accounted for this
charge in accordance with FASB No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets"; as such, the expense was recorded as part of the
loss from operations.
In the quarter 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.
The Company recorded a net gain of $333,366 on the sale of assets and a
gain of $2,750,000 on the legal settlements with Excalibur and Deutsche
Financial Services in the previous year period. There were asset sales in the
current period ending November 30, 2002 for a net gain of $12,671.
Other income, net for the nine month period ended November 30, 2002 of
$94,472 consists primarily of the reimbursement of prior period legal expenses
and lease rental income, net of the recognition of an impaired investment. Other
income and expense for the nine month period ended November 30, 2001 of $118,832
consisted primarily of settlement of accounts payable.
Net interest expense for the nine month period ended November 30, 2002,
decreased $824,557 (57%) to $631,263 from $1,455,820in the current year due to
the continuing reduction in the debt level of the Company. Current interest
income was approximately $145,000 primarily from the long-term note receivable.
During the nine months ended November 30, 2001, the Company recognized
extraordinary income from the extinguishment of debt obligations of $1,532,188.
There was no such extraordinary item in first nine months of Fiscal 2003.
For the nine month period ended November 30, 2002 Aura's net loss increased
to $11,986,790 as compared to the same nine month period in the prior year which
had a net loss of $9,235,086; an increase of $2,751,704 (30%). If not for the
$3,000,000 of asset impairment charges recognized in first nine months of Fiscal
2003 ($2,300,000 pertaining to the valuation of the Company's owned real estate
and $700,000 related to investments held), the Company would have posted a
slight improvement to its net loss, primarily due to the cost reductions
undertaken at the beginning of Fiscal 2003 and reductions in depreciation and
interest expense.
For the three month period ended November 30, 2002
Net revenues for the three month period ended November 30, 2002 increased
to $423,066 from $306,126 in the prior year quarter. This represents an increase
of $116,940 (38%) from the prior year comparable quarter. Revenues are higher in
Fiscal 2003 because of the positive impact of sales initiatives into new market
segments begun earlier in Fiscal 2003 and because significant merchandise
returns experienced in the third quarter of Fiscal 2002 did not recur this year.
Cost of goods increased to $199,154 in the three month period ended
November 30, 2002 from $168,874 in the quarter ended November 30, 2001 due to
the increase in net revenues noted above. Cost of goods includes only the direct
material and labor costs incurred.
Gross margins increased to 53% in the third quarter of Fiscal 2003 from 45%
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 $944,661 (55%) to $782,417 in the three
month period ended November 30, 2002 from $1,727,078 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 November 30, 2002
totaled approximately $40,000 compared to approximately $1,700,000 for the three
month period ended November 30, 2001. The lower costs in the current quarter
also reflect the benefit of the reduction in force that occurred in the first
quarter of Fiscal 2003.
SG&A expenses decreased to $1,540,660 in the three month period ended
November 30, 2002 from $2,113,016 in the three month period ended November 30,
2001; a reduction of $572,356 (27%). The SG&A expenses were lower due primarily
to lower litigation expenses incurred. The lower costs in the current quarter
also reflect the benefit 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.
Research and development expense decreased $35,911 (21%) to $132,474 in the
three month period ended November 30, 2002 from $168,385 in the three month
period ended November 30, 2001. 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.
The Company recorded a net loss of $65,823 on the sale of assets in the
third quarter of Fiscal 2002 and had no asset sales in the third quarter of
Fiscal 2003. The Company recorded a $2,000,000 gain related to the Excalibur
settlement in the three month period ended November 30, 2001 while there was no
similar transaction in the three month period ended November 30, 2002.
Net interest expense for the three month period ended November 30, 2002
decreased $456,772 (74%) to $163,273 in the third quarter of Fiscal 2003 from
$620,045 in the same quarter of the prior year due to the continuing reduction
in the debt level of the Company. Current interest income for the quarter was
approximately $42,000 primarily from the long-term note receivable.
The net loss for the three months ended November 30, 2002 was $2,334,550
compared to a net loss of $1,094,577 for the same period in the prior year; an
increase of $1,239,973 (113%). Excluding the impact of the $2,000,000 legal
settlement gain recorded in the third quarter of Fiscal 2002, the net loss for
the third quarter of Fiscal 2003 would have improved by approximately $900,000
primarily due to the cost reductions undertaken at the beginning of Fiscal 2003
and reductions in depreciation and interest
Financial Position, Liquidity and Capital Resources
The Company continues to experience acute liquidity challenges. At November
30, 2002, the Company had cash of $76,772 as compared to a cash level of
$1,143,396 at February 28, 2002. For the nine months ended November 30, 2002 and
the year ended February 28, 2002, the Company incurred a net loss of
approximately $12,000,000 and $24,900,000, respectively, on net revenues of
approximately $900,000 and $3,100,000, respectively. The Company had working
capital deficiencies at November 30, and February 28, 2002 of approximately
$5,300,000 and $2,500,000, respectively. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The Company
requires additional debt or equity financing to fund ongoing operations in its
fiscal year ending February 28, 2003 ("Fiscal 2003"). The Company is seeking to
raise additional capital; however, there can be no assurance that the Company
will raise sufficient capital to fund ongoing operations in Fiscal 2003. The
issuance of additional shares of equity in connection with such financing could
dilute the interests of existing stockholders of the Company. The inability to
secure additional funding could have a material adverse effect on the Company,
including the possibility that the Company could have to cease operations.
In the nine months ended November 30, 2002, the Company received gross
proceeds of $5,694,001 from the sale of 42,623,907 shares of the Company's
Common Stock. The Company also satisfied liabilities and contractual obligations
of approximately $169,740 through the issuance of 659,175 shares of Common
Stock.
In the second and third quarters of Fiscal 2003, the Company received
$1,750,000 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.
On December 1, 2002, the Company consummated the initial closing under an
Agreement for Sale and Leaseback, with a group of individuals pursuant to which
the Company agreed to sell its Aura Realty, Inc. subsidiary to Purchasers and
enter into a new 10-year lease of the properties owned by Aura Realty. Net of
the principal balance of the mortgage note to be assumed by the Purchasers of
approximately $5,083,000, certain security deposits and prepayments totaling
$564,000, the partial payment of past due amounts owed to the Consultants of
approximately $135,000 and Purchasers' fees of $105,000, the Company received
approximately $1,463,000; $878,750 of this amount was advanced to the Company by
the Purchasers during the third quarter of Fiscal 2003. Additionally during the
third quarter of Fiscal 2003, the Purchasers purchased 21,366,347 of the
Company's common shares for $1,493,000 at an average price of $0.07 per share
under the Agreement. (See Note 9 to the Company's Condensed Consolidated
Financial Statements)
On December 30, 2002, the Company received $500,000 from a current investor
in exchange for a demand note, bearing interest at 5% per annum.
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
the remainder of Fiscal 2003 and Fiscal 2004. 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 third party
financings such as the Convertible Preferred. 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 January 8, 2003, there were
430,973,150 common shares outstanding and common shares required for stock
options, warrants, and convertible notes outstanding exceed the amount of
unissued authorized shares.
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 its ability to continue its operations.
Certain persons to whom Aura has outstanding financial obligations have
recently taken measures to enforce their claims against Aura, such as seeking or
obtaining judgments against Aura. Although only three such outstanding financial
obligations are the subject of a material legal proceeding (see Note 7 to the
Company's Condensed Consolidated Financial Statements appearing elsewhere
herein), Aura believes that the taking of such measures by such persons may be a
trend that could continue in the future. Aura does not currently have sufficient
liquidity to satisfy all such outstanding financial obligations, and measures
taken by such persons could materially and adversely affect our ability to
operate in the best interests of stockholders.
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
Creditor Litigation
Barovich/Chiau et. al. v. Aura Systems, Inc. et. al. (Case No. CV
-95-3295). As previously reported in its Fiscal 2000 report on Form 10K,
the Company settled shareholder litigation in the referenced matter in
January, 1999. On November 20, 1999, the parties entered into an Amended
Stipulation of Settlement, providing that the Company make payment of
$2,260,000 (plus interest) in thirty-six equal monthly installments of
$70,350. On October 22, 2002, after the Company had failed to make certain
monthly payments, Plaintiffs applied for and obtained a judgment against
the Company for $935,350, representing the balance due with respect to the
original principal amount of $2,260,000. The Company has subsequently made
two monthly payments of $70,350 each, reducing the amount owed to $794,650
(plus interest). The Company has made appropriate provisions in its
financial statements to fully reflect this liability.
Frankston v. Aura Systems, Inc., et. al. (CV 91-6232 LGB). In 1991,
Michael Frankston brought the referenced civil action in the United States
District Court for the Central District of California against the Company,
its founding management members who are no longer employees of the Company,
and two of its former subsidiaries. The substance of the suit concerned
approximately 40,000 shares of Aura Common Stock and Mr. Frankston's claims
of intentional and negligent conduct in connection with the shares.
Following a trial in 1997, a jury awarded damages against the Company of
$61,000, and against its former subsidiaries Innovative Information
Systems, Inc. ($7,833) and Cypher Master, Inc. ($156,200). The Company,
following an appeal, paid to Mr. Frankston its portion of the judgment in
full. Mr. Frankston in March of 2000 moved to amend the judgments to make
the Company liable for the damages awarded against the former subsidiaries.
Mr. Frankston's motion and other related motions were denied by the trial
court. The Ninth Circuit reversed and remanded the matter in May, 2002 and
on September 27, 2002 the trial court issued an order holding the Company
liable for the judgments against its former subsidiaries. Plaintiff then
moved on December 2, 2002 for an order Assigning Rights and Authorizing
Levy in Aid of Execution. The trial court granted on December 20, 2002 the
order on the assignment of rights but not the levy. The Company has made
appropriate provisions in its financial statements to fully reflect this
liability.
Waltco Engineering Co. v. Aura Systems, Inc. et. al. (YC045396). On
December 11, 2002, Plaintiff, Walto Engineering Co. ("Waltco"), filed a
suit in California Superior Court for Breach of Written Agreement against
the Company and related common counts. Waltco asserted that the Company
breached the terms of a payment plan. Waltco claimed damages of
$283,296.41. On December 20, 2002, Waltco made an offer of settlement for
$182,000. The Company has made appropriate provisions in its financial
statements to fully reflect its estimated liability in this case.
Other Legal Action
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 its financial statements.
ITEM 2 Changes in Securities
During the three months ended November 30, 2002, the Company conducted
a private offering to a group of accredited investors for the sale of
21,366,347 shares of Common Stock for total gross proceeds of approximately
$1,493,000. The Company also issued $1,000,000 of convertible notes. These
convertible notes payable are due at six month maturity dates in March and
April 2003. Interest accrues at 8% simple interest due in arrears. If Aura
receives equity funding for an amount of at least $2,000,000 prior to
maturity date, the notes will convert mandatorily into Common Stock at
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:
10.34 Convertible Notes Term Sheets
10.34.1 Convertible Note Term Sheet dated July 10, 2002
10.34.2 Convertible Note Term Sheet dated August 7, 2002
10.34.3 Convertible Note Term Sheet dated September 6, 2002
10.34.4 Convertible Note Term Sheet dated September 17, 2002
10.34.5 Convertible Note Term Sheet dated October 8, 2002
10.34.6 Convertible Note Term Sheet dated October 17, 2002
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:
Form 8-K dated December 1, 2002, reporting sale and leaseback of
the Company's facilities
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: January 14, 2003 By: /s/David A. Rescino
------------------- -----------------------------------------------
David A. Rescino
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
January 14, 2003
CERTIFICATION
I, David A. Rescino, 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/ David A. Rescino
---------------------
David A. Rescino
Chief Financial Officer
January 14, 2003
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 November 30, 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
January 14, 2003
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 November 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, David A. Rescino,
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/ David A. Rescino
---------------------
David A. Rescino
Chief Financial Officer
January 14, 2003