SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A

(Amendment No. 1)

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 31, 2017

 

OR

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from______________ to ______________

 

AURA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware		95-4106894
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

10541 Ashdale St.

Stanton, CA 90680

 (Address of principal executive offices and zip code)

 

Registrant's telephone number, including area code: (310) 643-5300

 

 

Former name, former address and former fiscal year, if changed since last report:

 

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 ☐   NO  ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☐ NO  ☒

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ☐  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 January 16, 2018
Common Stock, par value $0.0001 per share		126,608,391 shares

 

 

 

AURA SYSTEMS, INC.

Explanatory Note

  

This Amendment No. 1 on Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2017, originally filed with the U.S. Securities and Exchange Commission on October 25, 2017. This amendment is being filed to revise the following line items in the Company’s Balance Sheets under “Liabilities and Stockholders’ Deficit”: “Accrued expenses” at May 31, 2017 and “Notes payable” at May 31, 2017.

 

In the Company’s Statements of Cash Flows, the line item “Adjustments to reconcile Net loss to net cash used in operating activities” was added. Revisions were also made to the following line items under “Cash flow from operating activities” for the three months ended May 31, 2017: “Accounts payable, customer deposit and accrued expenses” and “Net cash used in operations.” Revisions were also made to the following line items under “Financing activities” for the three months ended May 31, 2017: “Payment to note payable” and “Proceeds from convertible notes payable.”

 

The Notes to the financial statements were also revised as follows: (i) in “Note 2 Going Concern”, the amount for negative cash flows from operating activities for the three months ended May 31, 2017 has been revised; (ii) in “Note 3 Notes Payable”, “Demand notes payable, at 10% and 16%” and “Less: Current portion” at May 31, 2017 has been revised; (iii) in “Note 4 Accrued Expenses”, “Accrued interest” and “Total” at May 31, 2017 have been revised; (iv) in “Note 5 Shareholders’ Equity - Warrants”, in the table disclosing activity in issued and outstanding warrants, under the column “Number of Shares”, the following line items have been revised: “Outstanding, February 28, 2017” and “Outstanding, May 31, 2017”; in Note 5 Shareholders’ Equity - Warrants, in the table disclosing the exercise prices of warrants outstanding at May 31, 2017, the fifth and sixth line items of both columns of “Stock Warrants Outstanding” and “Stock Warrants Exercisable” have been revised; (v) in “Note 6 Related Party Transactions”, the amount for the unsecured note payable to, and the amount for the accrued interest on, the unsecured note held by Mr. Kopple, as of May 31, 2017, have been revised.

 

Under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”, the following items were also revised: Net cash used in operations, Net proceeds from issuance of debt and Net Cash provided by financing activities for the three months ended May 31, 2017, and Accrued expenses and amount owed to board members at May 31, 2017.

 

This Amendment No. 1 has not been updated for events occurring after the filing of the Initial Report nor does it change the Company’s previous disclosures contained in the Initial Report.

 

 

 

AURA SYSTEMS, INC.

 

INDEX

  

Index			Page No.
PART I.	FINANCIAL INFORMATION		1
	ITEM 1.	Financial Statements (Unaudited)	1
		Balance Sheets as of May 31, 2017 and February 28, 2017	1
		Statements of Operations for the Three months Ended May 31, 2017 and 2016	2
		Statements of Cash Flows for the Three months Ended May 31, 2017 and 2016	3
		Notes to Financial Statements	4
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	16
	ITEM 4.	Controls and Procedures	16
PART II.	OTHER INFORMATION		17
	ITEM 1.	Legal Proceedings.	17
	ITEM 1A.	Risk Factors.	17
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
	ITEM 3.	Defaults Upon Senior Securities	18
	ITEM 4.	Mine Safety Disclosures	18
	ITEM 5.	Other Information	18
	ITEM 6.	Exhibits	18
	SIGNATURES AND CERTIFICATIONS		19

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AURA SYSTEMS, INC.
BALANCE SHEETS

(Unaudited)

   

		As of May 31,				As of February 28,
		2017				2017
ASSETS
Current assets:
Cash and cash equivalents		$	974,669			$	255,869
Other current assets			5,588				2,894
Total current assets			980,257				258,763
Deposits			3,500				3,500
Investment in Joint Venture			250,000				-
Total assets		$	1,233,757			$	262,263
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable		$	4,500,805			$	4,943,559
Accrued expenses			6,664,492				5,939,251
Customer advances			641,751				641,751
Investor advance			650,000				-
Notes payable			3,413,058				4,776,938
Convertible note payable and accrued interest-related party, net of discount			3,153,467				2,920,172
Convertible notes payable, net of discount			5,848,810				4,177,283
Notes payable and accrued interest- related party			29,383,178				29,669,693
Total current liabilities			54,255,560				53,068,647
Total liabilities			54,255,560				53,068,647
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.0001 par value; 150,000,000 shares authorized at May 31 and February 28, 2017; 126,608,391 and 113,991,432 issued and outstanding at May 31 and February 28, 2017, respectively			12,661				11,399
Additional paid-in capital			412,666,277				410,499,597
Accumulated deficit			(465,700,741	)			(463,317,380	)
Total stockholders' deficit			(53,021,803	)			(52,806,384	)
Total liabilities and stockholders' deficit		$	1,233,757			$	262,263

 

The accompanying notes are an integral part of these financial statements.

 

 

AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MAY 31, 2017 AND 2016
(Unaudited)

 

		May 31,
		2017				2016
Net Revenues		$	0			$	0
Cost of goods sold			0				0
Gross Profit			0				0
Operating expenses:
Engineering, research and development expenses			0				33,788
Selling, general and administrative expenses			567,996				616,977
Total operating expenses			567,996				650,765
Loss from operations			(567,996	)			(650,765	)
Other (income) and expense:
Interest expense, net			1,028,228				827,947
Gain on debt settlement			0				(70,288	)
Other (income) expense, net			787,136				(1,767	)
Total other (income) expense			1,815,364				755,892
Net Loss		$	(2,383,360	)		$	(1,406,657	)
Total basic and diluted loss per share		$	(0.02	)		$	(0.01	)
Weighted average shares used to compute basic and diluted loss per share			122,594,325				113,848,171

 

*

Basic and diluted weighted average number of shares are equivalent since the effect of potential dilutive securities is anti-dilutive.

 

See accompanying notes to these unaudited financial statements.

  

 

AURA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2017 AND 2016
(Unaudited)

  

		Three Months Ended May 31,
		2017				2016
Cash flow from operating activities:
Net Loss		$	(2,383,360	)		$	(1,406,657	)
Adjustments to reconcile Net loss to net cash used in operating activities			-				-
Depreciation Expense			-				-
Amortization of debt discount			43,417				64,110
Gain on debt settlement			-				(70,288	)
FMV of warrants issued for services			177,737				-
Stock issued for services			990,205				-
(Increase) decrease in:
Accounts receivable			-				2,115
Other current assets and deposit			(2,694	)			96,819
Increase (decrease) in:
Accounts payable, customer deposit and accrued expenses			37,826				1,215,829
Net cash used in operations			(1,136,869	)			(98,072	)
Investing Activities:
Investment in Joint Venture			(250,000	)			-
Net cash used in investing activities			(250,000	)			-
Financing activities:
Issuance of common stock			1,000,000				-
Payment to note payable			(197,970	)			-
Proceeds from convertible notes payable			653,640				-
Proceeds from  notes payable			-				405,000
Proceeds from notes payable-related party			-				28,208
Investor Advance			650,000				-
Net cash provided by financing activities:			2,105,670				433,208
Net increase in cash & cash equivalents			718,801				335,136
Cash and cash equivalents at beginning of period			255,869				22,175
Cash and cash equivalents at end of period		$	974,669			$	357,311
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	-			$	-
Income taxes			-				-

 

Unaudited supplemental disclosure of non-cash investing and financing activities:

 

None

 

See accompanying notes to these unaudited financial statements.

  

 

AURA SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 – ACCOUNTING POLICIES

 

Accounting principles

 

In the opinion of management, the accompanying balance sheets and related interim statements of income and comprehensive income, and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended February 28, 2017 filed on September 18, 2017 with the U.S. Securities and Exchange Commission.

 

Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Recently Issued Accounting Pronouncements  

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of adopting ASU No. 2016-02 on our financial statements.

 

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company has not yet determined the impact of ASU 2016-08 on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. We are currently evaluating the impact of adopting ASU No. 2016-09 on our financial statements.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years.  In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on transition, collectability, non-cash consideration, and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The standard allows for both retrospective and modified retrospective methods of adoption. The Company has not yet determined the impact of ASU 2016-10 on its financial statements.

 

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Statements," which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019 (fiscal year 2021 for the Company). The Company has not yet determined the potential effects of the adoption of ASU 2016-13 on its Financial Statements.

 

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017 (fiscal year 2019 for the Company). The Company has not yet determined the potential effects of the adoption of ASU 2016-15 on its Financial Statements.

  

 

NOTE 2 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  During the Three months ended May 31, 2017 and May 31, 2016, the Company incurred losses of $2,383,360 and $1,406,657, respectively and had negative cash flows from operating activities of $1,136,869 and $98,072, respectively.

 

If the Company is unable to generate profits and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

 

Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

 

During the next twelve months we intend to restart operations of our AuraGen/VIPER business both domestically and internationally. At the next shareholders meeting the shareholders will vote for an entire new slate of five board candidates. The new board when elected will hire a new management team. In addition we plan to acquire a new facility of approximately 45,000 square feet for operations, as well as, rebuild the engineering QA and sales teams to support the operation. We anticipate being able to fund these additions in the upcoming fiscal year.

 

NOTE 3 – NOTES PAYABLE

 

Notes payable consisted of the following:

    

		May 31, 2017				February 28, 2017
Demand notes payable, at 10% and 16%		$	3,413,058			$	3,782,468
Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 10th of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.			1,000,000				972,632
Convertible Promissory Note dated October 2, 2012, due October 2, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 2nd of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.			500,000				483,951
Senior secured convertible notes dated May 7, 2013, due May 7, 2014, convertible into shares of our common stock at a price of $0.75 per share. The note was not repaid.			2,395,700				2,395,700
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50 per share. The note was not repaid.			325,000				325,000
Convertible notes dated April thru June, 2016. The notes carry an interest rate of 5% and might be converted into shares of Company’s common stock if the shareholders approve a 7:1 reverse stock split.			1,628,110				994,700
			9,261,868				8,994,221
Less: Current portion		$	9,261,868			$	8,994,221
Long-term portion		$	-			$	-

 

 

CONVERTIBLE DEBT

 

On May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note with a principal value of $1,087,000 and warrants to Kenmont Capital Partners. This new note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,449,333 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $342,020 as a discount, which will be amortized over the life of the note.

 

On May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value of $558,700 and warrants to LPD Investments, Ltd. This new note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 744,933 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $175,793 as a discount, which will be amortized over the life of the note.

 

On May 7, 2013, the Company entered into an agreement with an individual for the sale of a secured convertible note payable in the original principal amount of $750,000 and warrants. This note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $235,985 as a discount, which will be amortized over the life of the note.

 

On June 20, 2013, the Company entered into an agreement with four individuals for the sale of secured convertible notes payable in the original amount of $325,000 and warrants. These Notes have a 1-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants entitle the holders to acquire 433,334 shares of common stock, have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $63,622 as a discount, which will be amortized over the life of the notes.

 

On August 19, 2013, the Company entered into an agreement with a member of its Board of Directors for the sale of $2,500,000 of unsecured convertible notes payable and warrants. These notes carry a base interest rate of 9.5%, have a 4-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants entitle the holder to acquire 5,000,000 shares of common stock, have an initial exercise price of $0.75 per share and have a 7-year term. The Company recorded $667,118 as a discount, which will be amortized over the life of the note.

 

All convertible notes payable are due within twelve months or have not been paid when originally due.

 

 

CONVERTIBLE PROMISSORY NOTES

 

At February 28, 2013, the three other unsecured convertible promissory notes payable amounted to $1,447,938, net of discounts of $402,063. These convertible notes bear interest at 7% per annum, and are convertible into common stock of the Company at $0.76 per share (as well as variable conversion rates as described below). These notes are due on August 10, 2017, October 2, 2017, and January 4, 2013. On May 7, 2013, the note due on January 4, 2013 was converted into a portion of the note due June 15, 2013, which carries an interest rate of 12%.

 

7% Convertible Promissory Notes:

 

On August 10, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory note in the original principal amount of $1,000,000. This convertible promissory note is due and payable on August 10, 2017 and bears a interest rate is 7% per annum.  Interest on the unpaid principal amount of this note is payable monthly in arrears on the tenth day of each calendar month commencing September 10, 2012. Interest is computed on the actual number of days elapsed over a 360-day year. The Holder has the right to convert any outstanding and unpaid principal portion of this convertible promissory note into shares of common stock. The company recorded $310,723 as a debt discount, which will be amortized over the life of the note.

 

On October 2, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory note in the original principal amount of $500,000. This convertible promissory note is due and payable on October 2, 2017 and bears an interest rate is 7% per annum.  Interest on the unpaid principal amount of this note is payable monthly in arrears on the second day of each calendar month commencing November 2, 2012. Interest is computed on the actual number of days elapsed over a 360-day year. The Holder has the right to convert any outstanding and unpaid principal portion of this convertible promissory note into shares of common stock. The company recorded $137,583 as a debt discount, which will be amortized over the life of the note.

 

On January 30, 2017 the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven of its secured creditors. These creditors hold a security interest in all of the Company’s assets except for its patents and other intellectual properties. The original agreement dated May 7, 2013 provided that if the holders of at least 75% of the stock issuable upon conversion of the convertible notes votes to amend the agreement, then such amendments will be binding on all the secured creditors. The five secured creditors signing the amendment total in excess of 95% of the issuable stock upon conversion and, therefore the agreement is binding on all seven of the secured creditors. The amended agreement provides that all accrued and unpaid interest will be added to the principal amount, the amended notes bear interest at the rate of 0% through the sooner of (i) January 15, 2018 or (ii) the fifth business day following a stockholder meeting and 5% per annum thereafter, subject to reduction to comply with applicable law, and mature in 60 months from the effective date of a 1-for-7 reverse stock split. Upon certain financings, within five business days following stockholder approval of a 1-for-7 reverse stock split, the Company is obligated to make a payment to the holders of the amended notes in the amount of 20% of the outstanding secured notes. Upon the effectiveness of a 1-for-7 reverse stock split, the remaining 80% balance of the amended notes is converted into shares of the Company’s common stock. After the effectiveness of a 1-for-7 reverse stock split, the secured note holders may voluntarily convert the unpaid principal and interest thereon into the Company’s common stock at the conversion price of $1.40 per share.

 

On February 21, 2017 the Company entered into debt refinancing agreements with several debt holder relating to aggregate unsecured debt totaling $2,237,456 including interest of $489,466. This refinancing agreements waives any past events of default and provides for new five-year convertible notes which bear no interest through the sooner of (i) January 15, 2018 or (ii) the fifth business day following a stockholder meeting and 5% per annum thereafter. Upon stockholder approval of a 1-for-7 reverse stock split, these notes will be converted into a total of 1,164,555 shares of common stock. The notes also provide various default provisions.

 

On January 11, 2018, the shareholders approved the reverse stock split.

  

NOTE 4 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

		May 31, 2017				February 28, 2017
Accrued payroll and related expenses		$	2,817,386			$	3,099,842
Accrued rent			202,036				202,036
Accrued interest			3,610,069				2,562,375
Other			35,000				75,000
Total		$	6,664,492			$	5,939,252

 

Accrued payroll and related expenses consists of salaries and vacation time accrued but not paid to employees due to our lack of financial resources.

 

NOTE 5 – SHAREHOLDERS’ EQUITY

 

Common Stock

 

During the three months ended May 31, 2017, we issued 5,000,000 shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture, we issued 5,116,959 shares of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 shares of common stock valued at $325,000 in connection with a consulting agreement.

 

During the three months ended May 31, 2016, we issued 950,000 shares of common stock were issued in settlement for a note payable balance $150,000 plus accrued interest of $15,288.

   

 

Employee Stock Options

 

During the Three months ended May 31, 2017, there were no stock options granted to employees.

 

In September, 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan. Activity in this plan is as follows:

 

		2006 Plan
		Weighted- Average Exercise Price				Aggregate Intrinsic Value				Number of Options
Outstanding, February 28, 2017			$0.75-$1.00			$	0.00				7,224,000
Cancelled			-				-				-
Granted			-				-				-
Outstanding, May 31, 2017			$0.75-$1.00			$	0.00				7,224,000

 

The exercise prices for the options outstanding at May 31, 2017, and information relating to these options is as follows:

 

Options Outstanding

Exercisable Options

Range of Exercise Price

Number

Weighted Average Remaining Life

Weighted Average Exercise Price

Weighted Average Remaining Life

Number

Weighted Average Exercise Price

$0.75-$1.00

7,224,000

2.75 years

$

0.79

2.75 years

7,224,000

$

0.79

 

Warrants

 

Activity in issued and outstanding warrants is as follows:

 

		Number of Shares				Exercise Prices
Outstanding, February 28, 2017			26,454,021				$0.10-$1.00
Granted			1,400,000			$	.20
Exercised			-				-
Cancelled			-				-
Outstanding, May 31, 2017			27,854,021				$0.10-$1.00

 

The exercise prices for the warrants outstanding at May 31, 2017, and information relating to these warrants is as follows:

 

Range of Exercise Prices		Stock Warrants Outstanding				Stock Warrants Exercisable				Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price of Warrants Outstanding				Weighted- Average Exercise Price of Warrants Exercisable				Intrinsic Value
$0.20			1,400,000				1,400,000			57 months		$	0.20			$	0.20			$	0.00
$0.10-$0.75			18,381,012				18,381,012			46 months		$	0.56			$	0.56			$	0.00
$0.75			1,082,734				1,082,734			45 months		$	0.75			$	0.75			$	0.00
$0.75			1,000,000				1,000,000			35 months		$	0.75			$	0.75			$	0.00
$0.75-$1.00			5,990,275				5,990,275			30 months		$	0.77			$	0.77			$	0.00
			27,854,021				27,854,021

 

 

NOTE 6 – RELATED PARTIES TRANSACTIONS

 

On January 24, 2017 the Company entered into a Debt Refinancing Agreement with Mr. Warren Breslow, who served as a Director of the Company from 2006 to 2017. Mr. Breslow resigned his position on our board in March 2017.. Pursuant to this agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow and his affiliates was $23,872,614 including $8,890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest due, waive any past events of default and sign a new, five-year unsecured convertible note, in the amount of $14,930,041. This new note bears no interest through the sooner of (i) January 15, 2018 or (ii) the fifth business day following a shareholder meeting, and 5% per annum thereafter. This new note also provides various default provisions. The refinancing agreement further provides that $11,982,041 of Mr. Breslow’s new note will be converted into 7,403,705 shares of common stock upon stockholder approval of a 1-for-7 reverse stock split within eighteen months of entering into that agreement; the remaining balance may thereafter be converted at any time. In the absence of stockholder approval of a 1-for-7 reverse stock split within eighteen months, the refinancing agreement will become null and void. The Company has elected to continue to accrue interest on this agreement until such time as the 1-for-7 reverse stock split has been approved. As of May 31, 2017, the shareholders have not approved the reverse stock split.

 

At May 31, 2017, the balance in Notes Payable and accrued interest-related party, current, includes $14,982,041 of unsecured notes payable plus accrued interest of $9,266,516 to Mr. Breslow, a member of our Board of Directors, payable on demand, bearing interest at a rate of 10% per annum. The balance was $14,982,041 plus accrued interest of $8,890,574 as of February 28, 2017. During the periods ended May 31, 2017 and May 31, 2016, interest amounting to $378,250 and $374,378 respectively, was incurred on these notes.

 

Related Parties Transactions also includes $82,000 of unsecured notes payable plus accrued interest of $31,198 and $29,141 to our CEO pursuant to a demand note entered into on April 5, 2014 and an unsecured note payable to Mr. Kopple, another member of our Board of Directors in the total amount of $3,029,930and $3,587,322 plus accrued interest of $1,814,637and $2,098,616 pursuant to 10% demand note payable as of May 31, 2017and February 28, 2017, respectively. At May 31, 2017, the balance in Convertible note payable and accrued interest-related party, long term, includes $2,000,000 of secured convertible notes payable plus accrued interest of $995,763 to Mr. Kopple.

 

NOTE 7 – COMMITMENTS

 

Leases

 

Our facilities consist of approximately 20,000 rented square feet in Stanton, California. The Stanton facility is currently being used for small quantity assembly and testing using components that are produced by various suppliers as well as for general offices, engineering and warehousing. The rent for the Stanton facility is $10,000 per month. The facility is not sufficient for our near term anticipated needs and the Company is actively looking for a new facility. The Company arrangements for the Stanton facility are on a month per month rent.

 

Joint Venture

 

On January 27, 2017, the Company entered into a joint venture (JV) agreement with a Chinese company to manufacture, market and distribute certain mobile power products based on Aura’s patented technology solely for the Peoples Republic of China territories. The JV is owned 49% by the Company and 51% by the Chinese company. The Company has contributed $250,000 and a license to specific technology and the Chinese company is required to contribute $9,750,000. In addition, the Chinese company will invest $2,000,000 in Aura at $0.20 per share for a total of 10,000,000 shares of common stock. Additionally, the Chinese company will purchase a minimum of $1,250,000 of product supported by letters of credit for distribution until the joint venture factory is built, equipped, and staffed. In order to assure proper training of joint venture personnel, Aura has also committed to supply instructional personnel for six months at no cost other than reimbursement for travel, room and board. The agreement was subject to the approval of the Chinese Government which was received in April, 2017.

 

NOTE 8 – SUBSEQUENT EVENTS:

 

The Company is presently engaged in a dispute with one of its directors, Robert Kopple, relating to approximately $5.4 million and approximately 22 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well as against current Directors Mr. Gagerman and Mr. Diaz-Verson together with former Directors Mr. Breslow and Mr. Howsmon in connection with these allegations. The Company believes that it has valid defenses in these matters and intends to vigorously defend against these claims.

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

This Report contains forward-looking statements within the meaning of the federal securities laws. Statements other than statements of historical fact included in this Report, including the statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding future events or prospects are forward-looking statements. The words “approximates,” “believes,” “forecasts,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would,” “could,” “should,” “seek,” “may,” or other similar expressions in this Report, as well as other statements regarding matters that are not historical fact, constitute forward-looking statements. We caution investors that any forward-looking statements presented in this Report are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:

 

●

Our ability to generate positive cash flow from operations;

 

●

Our ability to obtain additional financing to fund our operations;

 

●

The impact of economic, political and market conditions on us and our customers;

 

●

The impact of unfavorable results of legal proceedings;

 

●

Our exposure to potential liability arising from possible errors and omissions, breach of fiduciary duty, breach of duty of care, waste of corporate assets and/or similar claims that may be asserted against us;

 

●

Our ability to compete effectively against competitors offering different technologies;

 

●

Our business development and operating development;

 

●

Our expectations of growth in demand for our products; and

 

●

Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2017 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.

 

We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements.

 

Overview

 

Our business is based on the exploitation of our patented mobile power solution known as the AuraGen for commercial and industrial applications and the VIPER for military applications. Our business model consists of three major components: (i) sales and marketing, (ii) engineering, and (iii) customer service and support.

  

(i)      Our sales and marketing approach is composed of direct sales in North America and the use of agents, distributors and joint ventures for sales internationally. In North America, our primary focus is in (a) transport refrigeration, and (b) U.S. Military applications.

 

 

(ii)      The second component of our business model is focused on the engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen/VIPER solution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms.

 

(iii)      The third component of our business model is customer service. In fiscal 2018, we expect to rehire several previously trained field engineers to support our product in North America. In addition, we are working closely with our Chinese Joint Venture partner to train their staff to support our products overseas.

 

During the first half of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second half of fiscal 2016 the Company’s operations were disrupted when the Company was forced to move from its facilities in Redondo Beach, California to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were sporadic. During fiscal 2017, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations.

 

The Company has been successful in restructuring its secured debt and has reached an agreement with its secured creditors whereby all defaults and penalties have been waived and 80% of the secured debt will be converted into shares of the Company’s common stock as soon as the Company holds an annual meeting of stockholders to elect a new board of directors. The balance (the remaining 20%), is to be paid to the secured creditors in cash within five business days following stockholder approval of a 1-for-7 reverse stock split provided that certain financings milestones have been reached by the Company.. Upon conversion, the converting secured creditors will receive approximately 3.9 million new common shares in exchange for approximately $5.73 million of converting debt.

 

The Company has also been successful in restructuring approximately $27.5 million of unsecured debt. Various unsecured creditors have agreed to waive all defaults and penalties, to forgive an aggregate of approximately $9.3 million in debt, and convert an aggregate of approximately $15.2 million of unsecured debt into approximately 10.2 million common shares. As of the date of this filing, Robert Kopple, the Company’s Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his debt. Mr. Kopple claims to be owed approximately $5.4 million on terms significantly preferable to other similarly-situated unsecured creditors. Mr. Kopple has not accepted the Company’s offer to restructure this debt to-date.

 

Our financial statements included in this report have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as a result of our losses from operations, there is substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on the Company’s financial statements for the year ended February 28, 2017 expressed substantial doubt about the Company’s ability to continue as a going concern. 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 our possible inability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon the successful achievement of profitable operations, and the ability to generate sufficient cash from operations and obtain financing resources to meet our obligations. There is no assurance that such efforts will be successful.

 

Our current level of sales reflects our efforts to introduce a new product into the marketplace. Until recently, many purchases of the product were for evaluation purposes. Recently we started to receive repeat orders for larger quantities as different organizations are integrating our products into their vehicles. We seek to achieve profitable operations by obtaining market acceptance of the AuraGen^® as a competitive - if not superior - product providing mobile power anywhere anytime. There can be no assurance that this success will be achieved.

  

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

We are required to make judgments based on historical experience and future expectations, as to the reliability of shipments made to our customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," and related guidance. Because sales are currently in limited volume and many sales are for evaluative purposes, we have not booked a general reserve for returns. We will consider an appropriate level of reserve for product returns when our sales increase to commercial levels.

 

Inventory Valuation and Classification

 

Inventories consist primarily of components and completed units for our AuraGen^® product. Inventories are valued at the lower of cost (first-in, first-out) or market. Provision is made for estimated amounts of current inventories that will ultimately become obsolete due to changes in the product itself or vehicle engine types that go out of production. Management believes that existing inventories can, and will, be sold in the future without significant costs to upgrade it to current models and that the valuation of the inventories accurately reflects the realizable values of these assets. The AuraGen^® product being sold currently is not technologically different from those in current use. Existing finished goods inventories can be upgraded to the current model with only a small amount of materials and manpower. We make these assessments based on the following factors: i) existing orders, ii) age of the inventory, iii) historical experience and iv) our expectations as to future sales. If expected sales volumes do not materialize, there would be a material impact on our financial statements.

 

Valuation of Long-Lived Assets

 

Long-lived assets, consisting primarily of property and equipment, and patents and trademarks, comprise a portion of our total assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values August not be recoverable. Recoverability of assets is measured by a comparison of the carrying value of an asset to the future net cash flows expected to be generated by those assets. Net cash flows are estimated based on expectations as to the realize-ability of the asset. Factors that could trigger a review include significant changes in the manner of an asset’s use or our overall strategy.

 

Specific asset categories are treated as follows:

 

Accounts Receivable: We record an allowance for doubtful accounts based on our expectation of collect-ability of current and past due accounts receivable.

 

Property, Plant and Equipment: We depreciate our property and equipment over various useful lives ranging from five to ten years. Adjustments are made as warranted when market conditions and values indicate that the current value of an asset is less than its net book value.

 

When we determine that an asset is impaired, we measure any such impairment by discounting an asset’s realizable value to the present using a discount rate appropriate to the perceived risk in realizing such value. When we determine that an impaired asset has no foreseeable realizable value, we write such asset down to zero.

  

 

Results of Operations

 

Three months ended May 31, 2017 compared to three months ended May 31, 2016

 

Net revenues for the three months ended May 31, 2017 (the “First Quarter FY2018”) and the three months ended May 31, 2016 (the “First Quarter FY2017”) were $0. The Company has virtually ceased operations due to a lack of funding.

 

Cost of goods in the First Quarter FY2018 and the First Quarter FY2017 were $0 as a result of the virtual cessation of operations as noted above.

 

Engineering, research and development expenses decreased $0 in the First Quarter FY2018 from $33,788 in the First Quarter FY2017. The decline is attributable to a lack of funds resulting in the virtual cessation of operations as noted above.

 

Selling, general and administrative expense decreased $82,769 (13%) to $567,996 in the First Quarter FY2018 from $616,977 in the First Quarter FY2017. Included in the current period expenses is a consulting arrangement whereby the company issued 2,500,000 shares of our common stock valued at $325,000. As noted above, the decrease is primarily attributable to the curtailment of activities due to a lack of financial resources.

 

Net interest expense in the First Quarter FY2018 increased $200,281 (24%) to $1,028,228 from $827,947 in the First Quarter FY2017 due to our increased debt levels.

 

Other expense increased $788,903 in the First Quarter FY2018 due to a non-cash settlement with a shareholder whereby the company issued 5,116,959 shares of stock valued at approximately $665,000, IRS penalties and interest assessed of approximately $20,000 due to the late filing and payment of withholding taxes, and approximately $102,000 for settlements with two former employees and a labor board judgment with another employee.

 

Our net loss for the First Quarter FY2018 increased $976,703 to $2,383,360 from $1,406,657 in the First Quarter FY2017, as a result of the overall decrease in operations due to the lack of financial resources.

  

Liquidity and Capital Resources

 

We had cash of approximately $975,000 and $256,000 as of May 31, 2017, and February 28, 2017, respectively.  We had a working capital deficit at May 31, 2017, and February 28, 2017 of $57,275,303 and $52,809,884, respectively. The working capital deficit includes notes payable and accrued interest to related parties of $29,383,178 and $29,669,693 as of May 31 and February 28, 2017, respectively.

 

Net cash used in operations for the Three months ended May 31, 2017, was $1,136,869, an increase of $1,038,797 from the comparable period in the prior fiscal year. Net cash used in investing activities consists of our investment of $250,000 in our Chinese joint venture. Net cash provided by financing activities during the Three months ended May 31, 2017, was $2,105,670, resulting from net proceeds from notes payable of $455,670, the issuance of common stock for $1,000,000, and an investor advance of $650,000.

 

There were no acquisitions of property and equipment in the Three months FY 2018 or the Three months FY 2017.

 

Accrued expenses as of May 31, 2017 increased $725,721 to $6,664,492 from $5,939,251 as of February 28, 2017. Approximately $1,335,000 of accrued expenses is salaries accrued but unpaid to certain employees and ex-employees due to a lack of resources, and approximately $518,000 is accrued but unused vacation time earned by employees.

 

Net proceeds from the issuance of debt totaled $455,670 in the Three months FY 2017, compared with $433,208 in the Three months FY 2016. As of May 31, 2017, the total amount owing a board member is $14,903,252 plus accrued interest of approximately $8,055,000. We also owe another Board member a total of $5,304,457, net of discounts of $119,150 plus accrued interest of approximately $1,663,296. If the Board members were to demand repayment, we do not currently have the resources to make the payments.

 

The Company had a deficit of $53,021,803 in shareholders’ equity as of May 31, 2017, compared to $52,806,384 as of February 28, 2017.

  

 

Since 2002 substantially all of our revenues from operations have been derived from sales of the AuraGen^®. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs.

 

In the past, in order to maintain liquidity we have relied upon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. The issuance of additional shares of equity in connection with any such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise needed funds, we would also be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.

 

Capital Transactions

 

During the three months ended May 31, 2017, we issued 5,000,000 shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture, we issued 5,116,959 shares of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 shares of common stock valued at $325,000 in connection with a consulting agreement.

 

 During the quarter ended May 31, 2016, we issued 950,000 shares of common stock to settle a note payable balance of $150,000 plus accrued interest of $15,588.

  

Inventories

 

Inventories consist primarily of components and completed units of the Company’s AuraGen^® product.

 

Early in our AuraGen^® program, we determined it was most cost-effective to outsource production of components and subassemblies to volume-oriented manufacturers, rather than produce these parts in house. As a result of this decision, and based on then anticipated sales, we purchased, prior to fiscal 2001, a substantial inventory of components at volume prices. Since sales did not meet such expectations, we have been selling product from this inventory for several years.

 

Most of our inventory consists of a variety of (i) metallic, mechanical components, and (ii) electrical components including metallic chassis to hold the assembled electrical systems. The vast majority of mechanical components are not aged and most of the electrical components are also not aged. The components that are aged are related to the prime mover/Generator interface that may not be in demand any longer.

 

In the past we have offered and ship three different basic models of systems; (i) a 5 kW based systems, (ii) an 8.5 kW based system and (iii) a 16 kW based systems (two 8.5 kW systems configured in tandem back-to-back). Each of these systems can be configured with different options such as 110 VAC only, 220 VAC only, 24 VDC only, 12 VDC only and AC/DC combinations of the same or different voltages. In addition, the system can be configured with single phase, split phase or three-phase output.

 

A number of the mechanical components are common to all three of the above configurations, while others are very specific. For example, the stators and rotors for the 5 kW systems are different from the 8.5 kW systems, but the housings are the same. Similarly, the electrical components consist of some parts that are geared for a specific configuration while others are generic and can be used for all of the configurations. The electrical chassis are also interchangeable between the 5 kW and 8.5 kW configurations. Due to the nature and mix of the product being sold, frequently, the 5 kW electrical systems are upgraded to 8.5 kW systems by replacing some components.

 

From the above description one can understand that the inventory consists of numerous components and subassemblies but not finished systems; therefore, each system that is sold and shipped to a customer is built from some components that are in inventory and others that need to be purchased to be able to configure the required system.

 

8.5 kW systems represent the majority of product previously shipped. These systems are built by using existing inventory subassemblies and parts, including some that can be used for both 5 kW and 8.5 kW systems, and additional parts that are purchased to provide the required configuration. Typically, such systems are built using approximately 20 to 25 percent of existing inventory and approximately 75% of additional parts that are purchased.

  

 

However, most of the systems sold to the Korean military consist of 5 kW systems. They have been purchasing approximately 100 systems per year and have indicated to us that they will continue to do so for the next five years. To date we have shipped over 500 such systems (in this case 100% of the rotors and stators are used from existing inventory and over 50% of the electrical parts are also from inventory).

 

In addition to the above, we have encountered demand for different and unique configurations that require the purchase of additional parts.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide disclosure under this Item 3.

 

ITEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the specified time periods. For the last 3 fiscal years, these control and procedures broke down due to insufficient capital to maintain such controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures were ineffective for the last 3 fiscal years in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our fiscal quarter ended May 31, 2017, which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

   

 

PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

We are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.

 

In 2016, the Company was sued by a former employee for a work-related injury. The plaintiff is seeking $45,000. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.

 

In November 2016, the Company was sued by a former customer for approximately $111,712 relating to an alleged failure by the Company to partially deliver against an advanced payment. In connection with its claims, the plaintiff has asserted that by virtue of the Company’s failure to fully deliver upon the contracted order, the plaintiff has obtained a perpetual worldwide license to utilize the Company’s actuator technology. The Company disputes the plaintiff’s claims and believes that it holds various claims against the plaintiff. In April 2017, the plaintiff’s action was involuntarily dismissed by the court although plaintiff sought to have the dismissal set aside on the grounds of attorney error. In June 2017, the court granted plaintiff’s motion and the Company intends to oppose this action and file a counterclaim.

 

Subsequent to year end, the Company’s former COO has been awarded approximately $238,000 in accrued salary and related charges by the California labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring all its options and available remedies and is working toward an offer to settle this matter.

 

The Company and the Company’s Chief Executive Officer, Melvin Gagerman, are among several defendants named in a lawsuit filed by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. However, because secured creditors holding in excess of 97% of the issuable stock upon conversion have executed the agreement, the agreement is binding on all of the secured creditors, including the two plaintiffs. That agreement, among other provisions, waives all past events of default. It is the Company’s position that the two plaintiffs are not entitled to any payment or other relief at this time and therefore that they have no valid claim against the Company or Mr. Gagerman. In March 2017, plaintiffs moved for partial summary adjudication against the Company and Mr. Gagerman; however, the Court denied plaintiff’s motion. Thereafter, the Court sustained demurrers by Mr. Gagerman and the Company but granted plaintiffs leave to amend. In response to the plaintiffs’ second amended complaint, both the Company and Mr. Gagerman intend to further demurrer seeking dismissal of this action.

 

In June 2015, the landlord of the Company’s primary facility in Redondo Beach, California initiated litigation against us seeking to terminate the Company’s lease and require the Company to vacate the premises prior to the scheduled lease end. As a result of that litigation, the Company was forced to vacate its primary facility and relocate to its present facility in Stanton, California. To date, no action seeking damages or any other amount has been filed against the Company by the landlord, nor does the Company believe it has any further liability to the landlord.

 

The Company is presently engaged in a dispute with one of its directors, Robert Kopple, relating to approximately $5.4 million and approximately 22 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well as against current Directors Mr. Gagerman and Mr. Diaz-Verson together with former Directors Mr. Breslow and Mr. Howsmon in connection with these allegations. The Company believes that it has valid defenses in these matters and intends to vigorously defend against these claims.

 

ITEM 1A. Risk Factors.

 

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s annual report on Form 10-K for the year ended February 29, 2016.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended May 31, 2017, we issued 5,000,000 shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture, we issued 5,116,959 shares of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 shares of common stock valued at $325,000 in connection with a consulting agreement.

 

All of the sales of unregistered securities are believed to be 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 qualified investors without public solicitation or advertising.

  

 

ITEM 3. Defaults Upon Senior Securities.

 

We have commitments to pay investors and lenders $40,553,920 comprising principal and accrued interest on various convertible notes, non-convertible notes and loans payable through May 31, 2017. Due to our lack of financial resources, the Company was unable to make various required principal and interest payments under a number of notes payable, and in 2017, the Company has been successful in restructuring a total of approximately $33.7 million of debt (the “Restructured Debt”) through agreements reached with all of the Company’s secured creditors and the majority of the Company’s unsecured creditors. Pursuant to these restructuring agreements, any and all defaults and penalties with respect to the Restructured Debt have been waived, approximately $9.3 million in accrued interest has been forgiven, and approximately $20.9 million will be converted into approximately 14.1 million shares of the Company’s common stock upon stockholder approval of a 1-for-7 reverse stock split and the election a new board of directors. Prior to the restricting of the Restructured Debt, the Company was in potential default on $13,535,679 of debt. However, as of the date of filing, all notes payable other than $7,289,838 have been restructured and any potential defaults with respect to this restructured amount have been resolved.

 

As of the date of this filing, Robert Kopple, the Company’s Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his debt. Mr. Kopple claims to be owed approximately $5.4 million plus interest and approximately 22 million warrants on terms significantly preferable to other similarly-situated unsecured creditors. To-date, Mr. Kopple has not accepted the Company’s multiple offers to restructure his debt. The Company is presently engaged in a dispute with Mr. Kopple relating to the debt and securities which Mr. Kopple claims to be owed to him and his affiliates by the Company. See, “Note 6 – Notes Payable”, “Note 12 – Related Parties Transactions”, “Note 14 –Subsequent Events” to the Company’s condensed financial statements and “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this quarterly report on Form 10-Q for additional information regarding amounts that may be owed under the Company’s notes payable and the recent restructuring of certain Company debt.

  

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

ITEM 5. Other Information.

 

None.

  

ITEM 6.  Exhibits

 

31.1	Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.2	Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
32.1	Certification of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

 

 

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 19, 2018
By:	/s/ Melvin Gagerman
	Melvin Gagerman
	Acting Chief Financial Officer
	(Principal Financial and Accounting Officer and
	Duly Authorized Officer)