UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended August 31, 2019

 

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, a 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   ☐   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 ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
         
         
         

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 

Class   Outstanding October 28, 2019
Common Stock, par value $0.0001 per share   54,362,494 shares

 

 

 

 

 

AURA SYSTEMS, INC.

 

INDEX

 

Index     Page No.
     
PART I. FINANCIAL INFORMATION
       
  ITEM 1. Financial Statements (Unaudited) 1
       
    Balance Sheets as of August 31, 2019 and February 28, 2019 1
       
    Statements of Operations for the Six months ended August 31, 2019 and 2018 2
       
    Statements of Cash Flows for the Six months ended August 31, 2019 and 2018 3
       
    Notes to Financial Statements 5
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
       
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
       
  ITEM 4. Controls and Procedures 22
       
PART II. OTHER INFORMATION 23
       
  ITEM 1. Legal Proceedings 23
       
  ITEM 1A. Risk Factors 24
       
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
       
  ITEM 3. Defaults Upon Senior Securities 24
       
  ITEM 4. Mine Safety Disclosures 25
       
  ITEM 5. Other Information 25
       
  ITEM 6. Exhibits 25
       
SIGNATURES AND CERTIFICATIONS 26

 

i

 

 

ITEM 1. FINANCIAL STATEMENTS

 

AURA SYSTEMS, INC.
BALANCE SHEETS

(Unaudited)

 

    August 31,     February 28,  
    2019     2019  
  (Unaudited)        
Assets            
Current assets            
Cash and cash equivalents   $ 94,785     $ 358,209  
Other current assets     51,492       59,849  
Total current assets     146,277       418,058  
Investment in joint venture     250,000       250,000  
Total assets   $ 396,277     $ 668,058  
                 
Liabilities & Shareholders' Deficit                
Current liabilities                
Accounts payable   $ 2,395,781     $ 2,635,664  
Accrued expenses     3,161,300       3,205,456  
Customer advances     1,136,542       1,136,542  
Notes payable, current portion     907,536       847,537  
Convertible notes payable and accrued interest-related party, net of dis     3,796,062       3,644,354  
Notes payable and accrued interest-related party     6,423,509       6,156,375  
Total current liabilities     17,820,730       17,625,929  
Notes payable-related party     3,000,000       3,000,000  
Note payable     155,181       215,181  
Convertible notes payable     1,421,647       1,421,647  
Total liabilities     22,397,559       22,262,757  
Commitments and contingencies     -       -  
Shareholders' deficit                
Common stock: $0.0001 par value; 150,000,000 shares authorized at August 31 and February 28, 2019; 55,402,545 and 53,714,145 issued and outstanding at August 31 and February 28, 2019, respectively     5,539       5,371  
Additional paid-in capital     442,998,999       442,519,092  
Accumulated deficit     (465,005,820 )     (464,119,161 )
Total shareholders' deficit     (22,001,282 )     (21,594,699 )

Total liabilities and shareholders' deficit

  $ 396,277     $ 668,058  

 

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

 

1

 

 

AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THREE AND SIX MONTHS ENDED AUGUST 31, 2019 AND 2018

 

    Three-months ended August 31,     Six-months ended August 31,  
    2019     2018     2019     2018  
    (unaudited)     (restated)     (unaudited)     (restated)  
Net revenue   $ 348,075     $ 1,874     $ 348,075     $ 39,724  
Cost of goods sold     29,208       58,317       32,097       73,444  
Gross profit (loss)     318,867       (56,443 )     315,978       (33,720 )
Operating expenses                                
Engineering, research & development     34,359       31,023       92,552       163,876  
Selling, general & administration     211,059       1,049,573       508,282       2,051,539  
Total operating expenses     245,418       1,080,596       600,834       2,215,415  
Income (loss) from operations     73,449       (1,137,039 )     (284,856 )     (2,249,135 )
Other expense                                
Interest expense, net     284,788       276,155       601,803       553,372  
Other (expense)     -       -       -       (352,931 )
Total other expense     284,788       276,155       601,803       200,441  
Net loss   $ (211,339 )   $ (1,413,194 )   $ (886,659 )   $ (2,449,576 )
                               
Net loss per share   $ (0.00 )   $ (0.03 )   $ (0.02 )   $ (0.06 )
Basic weighted average shares outstanding     54,102,025       42,877,964       53,982,813       42,157,498  
Diluted loss per share   $ (0.00 )   $ (0.03 )   $ (0.02 )   $ (0.06 )
Dilutive weighted average shares outstanding     54,102,025       42,877,964       53,982,813       42,157,498  

 

See accompanying notes to these unaudited financial statements.

 

2

 

 

AURA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2019 AND 2018
 

    August 31,  
    2019     2018  
    (unaudited)     (restated)  
Net loss   $ (886,659 )   $ (2,449,576 )
Adjustments to reconcile net loss to cash used in operating activities                
FMV of warrants issued for services     -       438,826  
Stock issued for services     -       510  
(Increase) decrease in                
Other current assets     8,357       18,324  
Increase (decrease) in             -  
Accts payable, customer deposits and accrued expenses     464,525       221,596  
Cash used in operating activities     (413,777 )     (1,770,320 )
                 
Cash flows from financing activities                
Issuance of common stock     150,353       -  
Payment on notes payable     -       (50,000 )
Proceeds from subscription receivable     -       1,125,000  
Cash provided by financing activities     150,353       1,075,000  
                 
Net incr (decr) in cash and cash equivalents     (263,424 )     (695,320 )
Beginning cash     358,209       748,008  
Ending cash   $ 94,785     $ 52,688  
Cash paid in the period for:                
Interest   $ -     $ 37,500  
Income taxes   $ -     $ -  

 

See accompanying notes to these unaudited financial statements.

  

3

 

 

AURA SYSTEMS INC.
STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED AUGUST 31, 2019
(Unaudited)

 

    Common     Common     Additional                 Total  
    Stock     Stock     Paid-In     Subscription     Accumulated     Shareholders'  
    Shares     Amount     Capital     Receivable     Deficit     Deficit  
                                   
Balance, February 28, 2019     53,714,145     $ 5,371     $ 442,519,092     $             -     $ (464,119,162 )   $ (21,594,699 )
                                                 
Shares issued for cash     658,015       66       150,287                       150,353  
Shares issued for debt     1,030,385       103       329,620                       329,723  
Net loss                                     (886,659 )     (886,659 )
Balance, August 31, 2019     55,402,545     $ 5,540     $ 442,998,999     $ -     $ (465,005,822 )   $ (22,001,283 )

 

See accompanying notes to these unaudited financial statements.

 

4

 

 

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

 

NOTE 1 – ORGANIZATION AND OPERATIONS

 

Aura Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage in the development, commercialization, and sales of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen® axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets. In addition, the Company has also developed and patented High Force Electromagnetic Linear Actuators which it has sold in prior years.

 

NOTE 2 – 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 Amended Annual Report on Form 10-K/A for the year ended February 28, 2019 filed on October 24, 2019 with the United States Securities and Exchange Commission (“SEC”).

 

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 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. The Company evaluated the impact of the adoption of Topic 842 effective for the six-months ended August 31, 2019 and the impact was none on the Condensed 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.

 

The Company adopted Accounting Standards Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The Company has assessed the impact of the guidance by performing the following five steps analysis:

 

Step 1: Identify the contract

 

Step 2: Identify the performance obligations

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price

 

Step 5: Recognize revenue

 

5

 

 

Reclassifications

 

Certain reclassifications have been made to the comparative financial statements to conform to the current period presentation.

 

NOTE 3 – GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the six months ended August 31, 2019 and 2018, the Company incurred losses of $886,659 and $2,449,576, respectively, and had negative cash flows from operating activities of $413,777 and $1,770,320, 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.

 

Beginning with the second quarter of fiscal year 2020, we increased operations of our AuraGen®/VIPER business and during the second quarter we recognized approximately $348,000 in revenue. We plan to lease or acquire a new facility of approximately 50,000 square feet to support operations during the remainder of fiscal 2020.

 

6

 

 

NOTE 4 – NOTES PAYABLE

 

Notes payable consisted of the following:

 

    August 31,
2019 		    February 28,
2019 		 
             
Demand promissory notes payable with six individuals, carrying an interest rate of 10% (see Demand Promissory Notes below)   $ 777,537     $ 777,537  
                 
Note payable – related party, carrying an interest rate of 5% - see note 6, Breslow Note, for further details     3,000,000       3,000,000  
                 
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. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See 7% Convertible Promissory Notes – Dalrymple August 2012 for further details.     264,462       264,462  
                 
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. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See 7% Convertible Promissory Notes – Dalrymple October 2012 for further details.     133,178       133,178  
                 
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 notes carry an interest rate of 12% with interest due on the last day of the month. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Kenmont Capital Partners, LPD Investments and Guenther for further details.     945,825       945,825  
                 
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50per share. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Dresner and Lempert for further details.     78,182       78,182  
    $ 1,421,647     $ 1,421,647  
In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants 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. In September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the two secured creditors. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for an aggregate principle amount of $315,000, including $80,000 of plaintiff’s legal expenses, and initial payment of $20,000, a payment schedule for monthly repayments of $10,000 commencing on October 15, 2019 and continuing for 12 months, and a final payment due on November 15, 2020. The creditors also committed to selling their shares in the Company of approximately 111,000 shares and applying the proceeds from the sale of $30,000 as a reduction of the principle amount of the note.     285,000       285,000  
    $ 5,484,184     $ 5,484,184  
Less: Current portion   $ 907,536     $ 847,537  
Long-term portion   $ 4,576,648     $ 4,636,647  

 

7

 

 

DEMAND PROMISSORY NOTES

 

The Demand Promissory Notes are six individual notes issued in 2015 that are payable on demand with an interest rate of 10% per annum. The principal amount of each note and the person/entity they are payable to are as follows: $10,000 Mr. Zeitlin, a former director of the Company; $30,000 Mr. Sook; $461,537 Mr. Macleod, a former president of the Company; $4,500 Mr. Howsmon, a former director of the Company; $4,500 El Pais, an entity controlled by Salvador Diaz, a current director of the Company.

 

In February 2018, the Company issued 192,641 shares of its common stock to Steven Veen in satisfaction of $267,000 in debt. Despite this issuance, Mr. Veen claims to continue to be entitled to repayment of the $267,000 debt. Mr. Veen has, to-date, not surrendered the shares issued to him in fulfillment of the debt he claims to be still owed and continues to own the 192,641 shares as of the date of this filing. The Company’s new management team is in the process of investigating the circumstances surrounding Mr. Veen.

 

CONVERTIBLE DEBT

 

Kenmont Capital Partners

 

On May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note with a principal value of $1,087,000 (“New Kenmont Note”) and warrants to Kenmont Capital Partners LP. The New Kenmont Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $342,020 as a discount, which has been fully amortized. There is a remaining balance of $549,954 as of August 31, 2019.

 

LPD Investments

 

On May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. The New LPD Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $175,793 as a discount, which has been fully amortized. There is a remaining balance of $163,677 as of August 31, 2019.

 

Guenther

 

On May 7, 2013, the Company entered into an agreement with an individual, Mr. Guenther, for the sale of $750,000 of secured convertible note payable (the “Note”) and warrants. The Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares and 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 has been fully amortized. There is a remaining balance of $232,194 as of August 31, 2019.

 

Dresner and Lempert

 

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and Mr. Lempert, for the sale of $200,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $39,152 as a discount, which has been fully amortized. There is a remaining balance of $78,182 as of August 31, 2019.

 

8

 

 

Abdou and Abdou

 

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $125,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $24,470 as a discount, which has been fully amortized. There is a remaining balance of $125,000 as of February 28, 2018. In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by the Mssrs. Abdou 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 Mr. W. Abdou and Mr. M. Abdou. In September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the Mssrs. Abdou. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for an aggregate principle amount of approximately $315,000.

 

Kopple Notes

 

On August 19, 2013, the Company entered into an agreement with Robert Kopple, a former member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Kopple Notes”) and warrants. The Kopple 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 were subsequently exercised. The Company recorded $667,118 as a discount, which has been fully amortized. The Company also entered into a demand note payable with this individual in the amount of $20,000, which bears interest at a rate of 5%. As of August 31, 2019, the balance of the $2,000,000 note including interest is $3,621,944, and the balance of the demand note payable including interest is $22,410. The total owed under these two notes is $3,644,354.

 

7% Convertible Promissory Notes:

 

Dalrymple – August 2012

 

On August 10, 2012 the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $1,000,000 of unsecured Convertible Promissory Note. The Convertible Promissory Note balance together with all accrued interest thereon was due and payable on August 10, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date.   The Company recorded $310,723 as a debt discount, which will be amortized over the life of the note. There is a remaining balance of $264,462 as of August 31, 2019

 

Dalrymple – October 2012

 

On October 2, 2012 the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $500,000 of unsecured Convertible Promissory Note. This Convertible Promissory Note balance together with all accrued interest thereon was due and payable on October 2, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date. The Company recorded $137,583 as a debt discount, which will be amortized over the life of the note. There is a remaining balance of $133,178 as of August 31, 2019.

 

9

 

 

On January 30, 2017 the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven secured creditors holding a security interest in all of the Company’s assets except for its patents and other intellectual properties. These creditors are the seven listed above under Convertible Debt and include the following: Kenmont Capital Partners, LPD Investments, Guenther, Dresner, Lempert and Mr. M. Abdou and Mr. W. Abdou. All of the creditors entered into the January 30, 2017 agreement with the exception of the Messrs. Abdou. The original agreement dated May 7, 2013 provided that if at least 75% of the stock issuable upon conversion of the convertible notes votes to amend the agreement and/or waive any conditions or defaults, then any such amendments or waivers shall be binding on all 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 agreement provided that all accrued and unpaid interest will be added to the principal amount. The amended note provided for no interest from November 1, 2016 to February 14, 2018, the date at which the 1-for-7 reverse stock split became effective at which time 80% of the total debt including accrued interest was converted into shares of common stock and a new five year 5% per annum convertible note was issued for the remainder. The new amended and restated senior convertible notes have a maturity date of January 30, 2022. The five creditors and the Company entered into a Second Amendment to Transaction Documents on March 14, 2017 and a Third Amendment to Transaction Documents on April 8, 2017, both of which extended the required date of the stockholder approval of the 1-for-7 reverse stock split, which was completed on February 14, 2018. The amended and restated senior convertible notes also require the Company to make a “Required Cash Payment” as defined in the agreement if the Company receives at least $4,000,000 in aggregate gross proceeds from the sale of equity securities (including securities convertible into equity securities) of the Company in one or a series of related transactions. The Required Cash Payment is equal to the current outstanding balance of the notes, which was $1,149,007 at August 31, 2019, plus any outstanding accrued interest. 

 

NOTE 5 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

    August 31,
2019 		    February 28,
2019 		 
             
Accrued payroll and related expenses   $ 2,552,490     $ 2,732,019  
Accrued interest     608,810       428,625  
Other     -       44,812  
Total   $ 3,161,300     $ 3,205,456  

 

Accrued payroll and related expenses consist of salaries and vacation time accrued but not paid to employees due to our lack of financial resources. On August 28, 2019, the board approved a stock issuance of 1,030,385 to Cipora Lavut, the Company’s president, at a fair value of $329,723, for full satisfaction of prior amounts owed to her for unpaid salaries up to August 28, 2019.

 

NOTE 6 – SHAREHOLDERS’ EQUITY (restated)

 

Common Stock

 

During the six months ended August 31, 2019, the Company issued 1,688,223 shares of common stock for $480,076, of which 1,030,385 was issued in satisfaction of amounts owed to Cipora Lavut of $329,723, and 658,015 shares were issued for cash in the amount of $150,353, including the issuance of an aggregate 10,000 warrants to three investors, immediate vesting, an exercise price of $1.40, and a 5-year term.

 

During the six months ended August 31, 2018 (restated), the Company issued 7,364,735 shares of common stock, valued at $2,280,964 to BetterSea LLC, a greater than 15% shareholder as part of a restructuring agreement in fulfillment of a contractual obligation. The issuance of the shares was previously reported by the Company.

 

During the six months ended August 31, 2018, the Company issued 742,857 warrants to member of its board of directors. The warrants have a term of five years and an exercise price of $1.40. The Company recorded and expense of $312,072 for the issuance of these warrants. During the six months ended August 31, 2018, the Company re-priced to $1.40 all outstanding employee stock options and warrants that had a previous exercise price greater than $1.40. The Company recorded an expense of $105,352 as a result of the re-pricing.

 

10

 

 

Employee Stock Options

 

The 2006 Employee Stock Option Plan

 

In September 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan, subject to shareholder approval, which was obtained at a special shareholders meeting in 2009. Under the 2006 Plan, the Company may grant options for up to the greater of Three Million (3,000,000) or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. The shares of Common Stock available under the 2006 Plan was increased to the greater of Ten Million shares (10,000,000) or 15% of the number of shares of Common Stock of Aura from time to time outstanding at the October 2011 shareholders meeting. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may not be greater than ten years, and they typically vest over a three-year period. No options were issued during the three-month period ended August 31, 2019. Activity in the plan for the six-month period ended August 31, 2019 is as follows:

 

                Weighted  
    Number of     Exercise     Average
Intrinsic 		 
    Shares     Prices     Value  
Outstanding, February 28, 2019     647,000     $ 1.40     $      -  
Granted     -       -       -  
Exercised     -       -       -  
Cancelled     (75,000 )     1.40       -  
Outstanding, August 31, 2019     572,000     $ 1.40     $ -  

 

Information regarding the options outstanding and exercisable as of August 31, 2019 follows:

 

Options Outstanding     Exercisable Options  
            Weighted     Weighted     Weighted           Weighted  
Range of           Average     Average     Average           Average  
Exercise           Remaining     Exercise     Remaining           Exercise  
Price     Number     Life     Price     Life     Number     Price  
$ 1.40       572,000       .5 Yr     $ 1.40       .5 Yr       572,000     $ 1.40  

 

The 2011 Director and Executive Officers Stock Option Plan

 

In October 2011 shareholders approved the 2011 Director and Executive Officers Stock Option Plan at the Company’s annual meeting. Under the 2011 Plan, the Company may grant options for up to 15% of the number of shares of Common Stock of the Company from time to time outstanding. Pursuant to this plan, the Board or a committee of the Board may grant an option to any person who is elected or appointed a director or executive officer of the Company. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may not be greater than five years. Activity in the plan for the six-month period ended August 31, 2019 is as follows:

 

Warrants

 

Activity in issued and outstanding warrants is as follows:

 

    Number of     Exercise  
    Shares     Prices  
Outstanding, February 28, 2019     7,490,987     $ 1.40  
Granted     10,000       1.40  
Exercised     -       -  
Cancelled     (85,714 )     -  
Outstanding, August 31, 2019     7,415,273     $ 1.40  

 

11

 

 

Information regarding the warrants outstanding and exercisable as of August 31, 2019 follows 

 

Range of Exercise
Price 		    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  
$ 1.40       7,415,273       7,415,273       3.0 Yrs.     $ 1.40     $ 1.40  

 

NOTE 7 – RELATED PARTIES TRANSACTIONS

 

Breslow Note

 

On January 24, 2017 the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a former Director of the Company. Pursuant to the agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $23,872,614 including $8,890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest due, waive all events of default and sign a new five-year convertible note in the amount of $14,982,041 providing for no interest for six months and interest of 5% per annum thereafter payable monthly in arrears. The note also provides various default provisions. In accordance with the agreement, on February 14, 2018, the effective date of the 1-for-7 reverse stock split, $11,982,041 of the note was converted into 7,403,705 shares of common stock and the then accrued interest of $9,388,338 was forgiven. A new $3,000,000 five-year note representing the remaining balance was entered into. The note bears interest at a rate of 5% per annum payable monthly in arrears.

 

Kopple Note

 

At August 31, 2019, the balance in Notes Payable and accrued interest-related party, current of $6,423,509, consists of $3,587,322 plus accrued interest of $2,836,187 to Mr. Kopple (a former Board member), a 10% shareholder. At August 31, 2019, the balance in Convertible note payable and accrued interest-related party includes $2,000,000 of unsecured convertible notes payable plus accrued interest of $1,773,178 and an unsecured convertible note of $20,000 plus accrued interest of $2,923 to Mr. Kopple.

 

Gagerman Note

 

Related party transactions also include $82,000 of unsecured notes payable plus accrued interest of $52,437 owed to Melvin Gagerman, the Company’s former CEO, pursuant to a demand note entered into on April 5, 2014.

 

NOTE 8 – COMMITMENTS & CONTINGENCIES

 

Leases

 

Our facilities consist of approximately 20,000 square feet in Stanton, California and an additional storage facility in Santa Clarita, California. The Stanton facility is used for some assembly and testing of AuraGen®/VIPER systems and is rented on a month-to-month basis. The rent for the Stanton facility is $10,000 per month and the storage facility is an additional $5,000 per month, both on a month-to-month basis. Our current Stanton facility is not sufficient to support the expected operations and the Company is evaluating new facility options to be used for limited production, testing, warehousing and engineering, as well as needed office space for support staff. The Company also rents temporary storage space on a month-to-month basis. Commencing in February 2019, the Company began renting approximately 300 square feet of office space in Irvine, California at a cost of $ 2,350 per month on a month-to-month basis. In July 2019, the Company ceased renting this office space.

 

Following the adoption of Topic 842, Leases, as of the start of fiscal year 2020, the Company determined that there was no impact on its Condensed Financial Statements during the six-month period ended August 31, 2019. The standard requires entities to evaluate all lease transactions including leases previously classified as operating leases, and, if required under Topic 842, a right-to-use asset and a corresponding lease liability may be recorded on the balance sheet in the period in which a lease commences.

 

12

 

 

Joint Venture

 

In March 2017 the Company entered into a joint venture with a Chinese partner to form Jiangsu Shengfeng Mobile Power Technology Co., Ltd. (“Jiangsu Shengfeng”) to address the Chinese market. Under the Jiangsu Shengfeng joint venture agreement, Aura owns 49% of the venture and our Chinese partner owns 51%. The Chinese partner is to contribute approximately $9.25 million to the venture –– principally in the form of facilities and equipment as wells as approximately $500,000 in cash. The Company contributed to the venture in the form of $250,000 in cash as well as a limited license to the joint venture to manufacture, sell and service the AuraGen® products within China. The limited license sold to the Jiangsu Shengfeng joint venture, however, does not permit Jiangsu Shengfeng to manufacture the AuraGen® rotor; rather, the joint venture is required to purchase all rotor subassemblies as well as certain software elements directly from the Company. Jiangsu Shengfeng’s board of directors consists of three members appointed by the Company and three appointed by our Chinese partner; Jiangsu Shengfeng’s CEO is appointed by our Chinese partner while its CFO and director for quality assurance and control are appointed by Aura.

 

In addition, Jiangsu Shengfeng is required to purchase a minimum of $1,250,000 of product from the Company supported by letters of credit for distribution until their factory is built, equipment installed, and staff hired and properly trained by Aura personnel. During fiscal 2019, Jiangsu Shengfeng placed a $1,000,000 order with the Company including a $700,000 advance payment. Aura has also committed to supply personnel for six months at no cost other than to be reimbursed for travel, room and board. This commitment has been fulfilled and Aura is under no further obligation to supply personnel at no cost. The agreement was subject to the approval of the Chinese Government which was received in April 2017. Mr. Song, the majority shareholder of the Chinese partner of the joint venture, invested $2,000,000 in Aura’s common shares at a price of $1.40 per share.

 

Contingencies

 

We are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. 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 2017, the Company’s former COO was 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 is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $10 million and approximately 3.15 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 director Mr. Diaz-Verson and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, the former CEO (not a director) in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers, all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. 

 

13

 

 

In April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend & Stockton LLP alleging various acts of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018, Kilpatrick Townsend & Stockton LLP filed a cross-complaint against the Company claiming in excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached a settlement with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

 

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC (“BetterSea”), one of the Company’s long-standing technical consultants. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillment of this contractual obligation based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company also paid $20,000 in legal fees on behalf of BetterSea related to legal expense associated with the Company’s delays in the issuance of the stock.

 

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’s father, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that any amount is now owed to Scholnick.

 

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Mr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr.

 

14

 

 

NOTE 9- FINANCIAL STATEMENT RESTATEMENTS

 

The Company issued an amended report on Form 10-K/A on October 24, 2019 for the fiscal year ended February 28, 2019 that corrected misstatements of its financial statements as of February 28, 2019. The following tables describe one of those misstatements, which should have been recorded in the three and six-months ended August 31, 2018.

 

i. Selling, general & administrative expense was overstated by $1,991,740 in the statement of operations for the three and six-months ended August 31, 2108 due to an incorrect fair value associated with common shares during August 2018 to BetterSea, a technical consultant to the Company. The basic and diluted loss per share was also overstated by $0.05 per share for the three and six-months ended August 31, 2018.

 

AURA SYSTEMS, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX-MONTHS ENDED AUGUST 31, 2018

 

    Three-Months Ended August 31, 2018     Six-months ended August 31, 2018  
    Previously     Restatement             Previously     Restatement        
    Reported     Adjustment       Restated     Reported     Adjustment     Restated  
Net revenue   $ 1,874     $ -       $ 1,874     $ 39,724     $ -     $ 39,724  
Cost of goods sold     58,317       -         58,317       73,444       -       73,444  
Gross profit (loss)     (56,443 )     -         (56,443 )     (33,720 )     -       (33,720 )
Operating expenses                                                  
Engineering, research & development     31,023       -         31,023       163,876       -       163,876  
Selling, general & administration     3,041,313       (1,991,740 ) i.     1,049,573       4,043,279       (1,991,740 ) i.   2,051,539  
Total operating expenses     3,072,336       (1,991,740 )       1,080,596       4,207,155       (1,991,740 )     2,215,415  
Income (loss) from operations     (3,128,779 )     1,991,740         (1,137,039 )     (4,240,875 )     1,991,740       (2,249,135 )
Other expense                                                  
Interest expense, net     276,155       -         276,155       553,372       -       553,372  
Other (expense)     -       -         -       (352,931 )     -       (352,931 )
Total other expense     276,155       -         276,155       200,441       -       200,441  
Net income (loss)   $ (3,404,934 )   $ 1,991,740       $ (1,413,194 )   $ (4,441,316 )   $ 1,991,740     $ (2,449,576 )
                                                   
Net loss per share   $ (0.08 )   $ 0.05   i   $ (0.03 )   $ (0.11 )   $ 0.05   i $ (0.06 )
Basic weighted average shares outstanding     42,877,964       42,877,964         42,877,964       42,157,498       42,157,498       42,157,498  
Diluted loss per share   $ (0.08 )   $ 0.05   i.   $ (0.03 )   $ (0.11 )   $ 0.05   i. $ (0.06 )
Dilutive weighted average shares outstanding     42,877,964       42,877,964         42,877,964       42,157,498       42,157,498       42,157,498  

 

15

 

 

AURA SYSTEMS, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX-MONTHS ENDED AUGUST 31, 2018

 

    Six-months ended August 31, 2018  
    Previously Reported     Restatement Adjustment     Restated  
Net loss   $ (4,441,316 )   $ 1,991,740   i  $ (2,449,576 )
Adjustments to reconcile net loss to cash used in operating activities                        
FMV of warrants issued for services     438,826       -       438,826  
Gain on settlement of debt     -       -       -  
Stock issued for services     1,992,250       (1,991,740 )  i   510  
(Increase) decrease in                        
Accounts receivable     -       -       -  
Other current assets     18,324       -       18,324  
Increase (decrease) in                        
Accts payable, customer deposits and accrued expen     221,596       -       221,596  
Cash used in operating activities     (1,770,320 )     -       (1,770,320 )
                         
Cash flows from financing activities                        
Issuance of common stock     -       -       -  
Payment on notes payable     (50,000 )     -       (50,000 )
Proceeds from subscription receivable     1,125,000       -       1,125,000  
Cash provided by financing activities     1,075,000       -       1,075,000  
Net incr (decr) in cash and cash equivalents     (695,320 )     -       (695,320 )
Beginning cash     748,008       -       748,008  
Ending cash   $ 52,688     $ -     $ 52,688  
Cash paid in the period for:                        
Interest   $ 37,500     $ -     $ 37,500  
Income taxes   $ -     $ -     $ -  

 

16

 

  

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/A  for the year ended February 28, 2019, issued on October 24, 2019 (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.

 

17

 

 

Overview

 

Beginning with fiscal 2017 through 2018, we reduced our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations and minimizing expenditures while we attempted to raise additional funding and pursue some initial engineering activities 

 

In fiscal 2018, we successfully eliminated approximately 68% of our total indebtedness. Specifically, our secured creditors converted approximately $5.73 million of secured debt into approximately 4.1 million shares of our common stock. The converted debt represented approximately 80% of the total secured debt of the Company. The balance of the secured debt (approximately $960,000) is to be paid to the secured creditors in cash if we raise at least $4.0 million in proceeds through new equity offerings in one or a series of related offerings. Additionally, in fiscal 2018, approximately $12.77 million of unsecured debt was converted into approximately 9.3 million shares of the Company’s common stock and approximately $12.3 million of unsecured debt was forgiven. In total, during fiscal 2018, we eliminated a total of approximately $30.23 million of debt.

 

As of the date of this filing, Robert Kopple, our former Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.1 million on terms significantly preferable to other similarly situated unsecured creditors. We dispute Mr. Kopple’s claims. See “Part II-Other Information, Item 1. Legal Proceedings” included elsewhere in this Quarterly Report on Form 10-Q for information regarding the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted our numerous offers to restructure this debt.

 

On February 14, 2018, we effectuated a one-for-seven reverse stock split.

 

In fiscal 2019, we began increasing our engineering and manufacturing activities. We utilized contractors for these services in order to minimize our expense while we continued to pursue new sources of financing. In July 2019, we began significantly increasing our sales, engineering, manufacturing and marketing activities under our new management team.

 

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 two major components; (i) sales and marketing, (ii) design and engineering. 

 

(i) Our sales and marketing approaches are 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) mobile exportable power applications, (b) transport refrigeration, and (c) U.S. Military applications.

 

(ii) The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen® solution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms. After suspending the majority of our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscal 2018 and 2019, we expect modest engineering activities budgeted at approximately $750,000 during the fiscal 2020 year.

 

18

 

 

Operations.

 

During the first half of fiscal 2016, we significantly reduced operations due to lack of financial resources. During the second half of fiscal 2016, our operations were further disrupted when the we were 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, fiscal 2018 and fiscal 2019, the Company reduced its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. During this time, our agreements with numerous customers, third party vendors, and organizations and entities material to the operation of the Company business were canceled, delayed or terminated. During fiscal 2018, we successfully restructured in excess of $30 million of debt. During fiscal 2019, we continued to address our financial needs, was able to ship a small quantity of product during fiscal 2019 and shipped a small amount to customers and maintained a small inventory of finished product. During the six-months ended August 31, 2020, we have increased production and have recognized approximately $348,000 of revenue. Our marketing strategy during fiscal 2020 includes the following key activities:

 

(i) One element of our business plan is focused on electric transport refrigeration. The market is well understood and both social and economic forces are providing an unprecedented opportunity to gain significant market share. Our immediate focus is on 20-k BTU/hr. midsize trucks and the 50-k BTU/hr. trailers.

 

(ii) Another element of our business plan is focused on our mobile power solution for military applications around the globe.

 

(iii) We also plan to seek joint venture opportunities similar to the agreement we entered in China to explore other international opportunities.

 

Going Concern.

 

Our independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Report of Independent Registered Public Accounting Firm on page F-1, together with the Company’s audited consolidated financial statements for the fiscal year ended February 28, 2019 on Form 10-K/A issued on October 24, 2019.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial conditions 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 adopted Accounting Standards Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

We have assessed the impact of the guidance by performing the following five steps analysis: 

 

Step 1: Identify the contract

 

Step 2: Identify the performance obligations

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price

 

Step 5: Recognize revenue

 

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Inventory Valuation and Classification

 

Inventories are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. We have minimally operated and therefore have only produced minimal product since late 2015. As a result, while we believe that a portion of the inventory has value, we are unable to substantiate its demand and market value and as a result we have elected to reserve it in its entirety as of August 31 and February 28, 2019.

 

Stock-Based Compensation

 

We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair value-based method and the recording of such expense in the consolidated statements of operations.

 

We account for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”, whereas the fair value of the equity-based compensation is based upon the measurement date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

 

For the past, several years and in accordance with established public company accounting practice, we have consistently utilized the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily to management, employees, and directors.  The Black-Scholes option-pricing model is a widely-accepted method of valuation that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances.

 

Results of Operations

 

Six-months ended August 31, 2019 compared to six-months ended August 31, 2018

 

Net revenues were $348,075 for the six-months ended August 31, 2019 (the “Six-Months FY2020”) compared to $39,724 for the six-months ended August 31, 2018 (the “Six-Months FY2019”), or an increase of 776% compared to the same period of fiscal 2019. During the second quarter of 2020, we delivered 52 generator units to distribution customers as compared to 6 units in the same period in the prior year for a military application.

 

Cost of goods sold were $32,097 in the Six-Months FY2020 compared to $73,444 in the Six-Months FY2019 resulting in a gross profit of $315,978 and a loss of $33,720, respectively, and gross margins of 90.8% and negative 84.9%, respectively. Gross profit and related gross margin for the Six-Months FY2020 shipments were high due to the high utilization of inventory previously fully reserved. We do not expect gross margins above 90% to continue for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory will decline.

 

Engineering, research and development expenses were $92,552 in the Six-Months FY2020, compared to $163,876 in the Six-Months FY2019, or a decline of 43.5%.

 

Selling, general and administrative expense decreased $1,543,312 (75%) to $508,227 in the Six-Months FY2020 from $2,051,539 in the Six-Months FY2019. During Six-Months FY2019, we incurred higher legal expense of expense of $417,000 related to the repricing of warrants and options, $432,000 of higher legal expenses, higher consulting expense and administrative headcount cost.

 

Net interest expense in the Six-Months FY2020 increased $48,461 or 9%, to $601,833 from $553,372 in the Six-Months FY2019.

 

Our net loss for the Six-Months FY2020 decreased $1,562,917, or 63%, to $886,659 from $2,449,576 in the Six-Months FY2019.

 

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Three months ended August 31, 2019 compared to three months ended August 31, 2018

 

Net revenues were $348,075 for the three-months ended August 31, 2019 (the “Three-Months FY2020”) compared to $1,874 for the three-months ended August 31, 2018 (the “Three-Months FY2019”). During the second quarter of 2020, we delivered 52 generator units to distribution customers as compared to 0 units in the same period in the prior year for a military application.

 

Cost of goods sold were $29,208 in the Three-Months FY2020 compared to $58,317 in the Three-Months FY2019 resulting in a gross profit of $318,867 and a loss of $56,443, respectively, and gross margins of 91.7% and negative 3,012%, respectively. Gross profit and related gross margin for the Three-Months FY2020 shipments were high due to the high utilization of inventory previously fully reserved. We do not expect gross margins above 90% to continue for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory will decline.

 

Engineering, research and development expenses were $34,359 in the Three-Months FY2020, compared to $31,023 in the Three-Months FY2019, or an increase of 10.8%.

 

Selling, general and administrative expense decreased $838,569 (80%) to $211,004 in the Three-Months FY2020 from $1,049,573 in the Three-Months FY2019. During Three-Months FY2020, we incurred less cost for administrative headcount and consultancy cost by $250,000, $400,000 in reduced legal fees associated with legal action directed at Kilpatrick Townsend & Stockton LLP, our prior legal counsel, and reduced other costs of $150,000 than in Three-Months FY2019.

 

Net interest expense in the Three-Months FY2020 increased $8,633 or 3%, to $284,788 from $276,155 in the Three-Months FY2019.

 

Our net loss for the Three-Months FY2020 decreased $1,201,855 or 85%, to $211,339 from $1,413,194 in the Three-Months FY2019.

 

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Liquidity and Capital Resources

 

Net cash used in operations for the six months ended August 31, 2019, was $397,436, a decrease of $1,356,598 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the six-months ended August 31, 2019, was $150,297 from the issuance of common stock as compared to a total of $1,075,000 provided by financing activities in the same period of fiscal 2019 consisting of (i) proceeds from a subscription receivable of $1,150,000 and offset by (ii) principle payment of $50,000 on a note payable. 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.

 

There were no acquisitions of property and equipment during the Six-Months FY2020 or the Six-Months FY2019.

 

Accrued expenses as of August 31, 2019 increased $43,856 to $3,161,600 from $3,205,456 as of February 28, 2019. At August 31, 2019, approximately $2.6 million of accrued expenses is salaries accrued but unpaid to certain current and former employees due to a lack of resources, and approximately $0.6 million is accrued but unused vacation earned by employees.

 

The Company had a deficit of $22.0 million in shareholders’ equity as of August 31, 2019, compared to $21.6 million as of February 28, 2019 with the net change attributed to net loss of approximately $886,000 offset by issuance of shares of $480,000.

 

In the past, in order to generate 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.

  

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 as of the end of the period covered by this report in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. The Company continues to remediate the findings contained in our Annual Report on Form 10-K/A, for the fiscal year ended February 28, 2019, issued on October 24, 2019.

 

Changes in Internal Control over Financial Reporting

 

There have been no other changes in our internal control over financial reporting during our fiscal quarter ended August 31, 2019, not previously identified in our Annual Report on Form 10-K/A, for the fiscal year ended February 28, 2019 and issued on October 24, 2019 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

22

 

 

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 2017, the Company’s former COO was 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. 

 

In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants 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. In September 2018 the court entered a judgment of approximately $235,000 in favor of the two secured creditors. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors (see note 14)

 

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $9 million and approximately 3.15 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 director Mr. Diaz-Verson and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, the former CEO (not a director) in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers, all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. If the settlement negotiation is unsuccessful, the Company intends to vigorously defend against these claims. See “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the transactions under dispute with Mr. Kopple.

 

In April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend & Stockton LLP alleging various acts of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018, Kilpatrick Townsend & Stockton LLP filed a cross-complaint against the Company claiming in excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached a settlement with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

 

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC (“BetterSea”), one of the Company’s long-standing technical consultants. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillment of this contractual obligation based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company also paid $20,000 in legal fees on behalf of BetterSea related to legal expense associated with the Company’s delays in the issuance of the stock.

 

23

 

 

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’s father, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that any amount is now owed to Scholnick.

 

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Mr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr.

 

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 issued on June 13, 2019 and the Amended Annual Report on Form 10-K/A for the year ended February 28, 2019, issued on October 24, 2019.

 

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

 

During the six-months ended August 31, 2019, we issued 658,015 shares of common stock for $150,353.

 

ITEM 3. Defaults Upon Senior Securities.

 

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 $5.3 million plus interest and approximately 3.14 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 3 – Notes Payable” and “Note 5 – Related Parties Transactions” 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.

 

In June 2014, we entered into a Financing Letter of Agreement (the “June 2014 Agreement”) with two affiliate entities of Mr. Kopple, KF Business Ventures and the Kopple Family Partnership (the “Additional Kopple Parties”), pursuant to which the Additional Kopple Parties loaned us an additional $1,000,000 (the “June 2014 Loan”). In connection with the June 2014 Loan, Mr. Kopple also added $202,205 in penalties and accrued interest, credited us with $200,000 for amounts previously repaid by us and consolidated several earlier advances into a single new note (the “June 2014 Kopple Note”) in the principal amount of $2,715,2067 and bearing simple interest at a rate of 10% per annum. We were also required to obtain a subordination agreement from the Breslow Parties in favor of the Kopple Parties with respect to the June 2014 Kopple Note.

 

24

 

 

Pursuant to the June 2014 Agreement, the Kopple Parties also placed various restrictions on our ability to raise additional capital, hire qualified personnel and pay certain expenses without his prior approval for so long as the principal amount of his note remained outstanding. The June 2014 Kopple Note also required us to issue Mr. Kopple a stock purchase warrant (the “June 2014 Kopple Warrant”) to purchase approximately 771,000 shares of our common stock at an exercise price of $0.70 per share, to be exercisable for seven years. Additionally, if we borrowed funds, issued capital stock or rights to acquire or convert into capital stock, or granted rights in respect to territories to any person for cash consideration of more than $5 million in the aggregate after the date of the June 2014 Kopple Note, we would be required to pay the entire amount of such cash consideration in excess of $5 million as a mandatory prepayment of the June 2014 Kopple Note. Additionally, Mr. Kopple required a default provision providing that in the event that the entire outstanding balance of the June 2014 Kopple Note was not paid in full prior to October 1, 2014, then for each consecutive calendar month during the period beginning October 1, 2014 and ending March 31, 2015, we would issue to Mr. Kopple additional stock purchase warrants, each to purchase 416,458 shares of our common stock, up to a maximum aggregate of approximately 2.5 million shares of our common stock, at $0.70 per share (the “Kopple Penalty Warrants”), the Kopple Penalty Warranties to be exercisable for seven years from the time of their respective issuances. In addition to the Kopple Penalty Warrants, the default provision under the June 2014 Kopple Note provides for a 5% late charge on the total amount due plus 15% per year interest. We have not repaid the Kopple Parties for the amounts loaned to us. Additionally, we have not issued any of the Kopple Penalty Warrants and management believes that Mr. Kopple is not entitled to receive them. We have also cancelled the June 2014 Kopple Warrant.

 

We consider the transactions described above with Mr. Kopple to be related party transactions.

 

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

 

25

 

 

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.

 

Date: November 13, 2019 AURA SYSTEMS, INC.
  (Registrant)
     
  By: /s/ David Mann
    David Mann
    Chief Financial Officer
    (Principal Financial and Accounting Officer and
    Duly Authorized Officer)

 

 

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