Company Quick10K Filing
Aura Systems
Price0.25 EPS-0
Shares54 P/E-2
MCap13 P/FCF-6
Net Debt5 EBIT-5
TEV19 TEV/EBIT-4
TTM 2019-05-31, in MM, except price, ratios
10-Q 2019-11-30 Filed 2020-01-14
10-Q 2019-08-31 Filed 2019-11-14
10-Q 2019-05-31 Filed 2019-10-29
10-K 2019-02-28 Filed 2019-06-13
10-Q 2018-11-30 Filed 2019-01-22
10-Q 2018-08-31 Filed 2018-10-22
10-Q 2018-05-31 Filed 2018-07-11
10-K 2018-02-28 Filed 2018-06-13
10-Q 2017-11-30 Filed 2018-01-19
10-Q 2017-08-31 Filed 2017-10-25
10-Q 2017-05-31 Filed 2017-10-25
10-K 2017-02-28 Filed 2017-09-18
10-Q 2016-11-30 Filed 2017-09-18
10-Q 2016-08-31 Filed 2017-09-18
10-Q 2016-05-31 Filed 2017-09-18
10-K 2016-02-29 Filed 2017-09-18
10-Q 2015-11-30 Filed 2017-09-18
10-Q 2015-08-31 Filed 2017-09-18
10-Q 2015-05-31 Filed 2017-09-18
10-K 2015-02-28 Filed 2017-09-18
10-Q 2014-11-30 Filed 2015-01-16
10-Q 2014-08-31 Filed 2014-10-15
10-Q 2014-05-31 Filed 2014-07-15
10-K 2014-02-28 Filed 2014-06-13
10-Q 2013-11-30 Filed 2014-01-21
10-Q 2013-08-31 Filed 2013-10-21
10-Q 2013-05-31 Filed 2013-07-22
10-K 2013-02-28 Filed 2013-06-12
10-Q 2012-11-30 Filed 2013-01-14
10-Q 2012-08-31 Filed 2012-10-15
10-Q 2012-05-31 Filed 2012-07-13
10-K 2012-02-29 Filed 2012-05-29
10-Q 2011-11-30 Filed 2012-01-17
10-Q 2011-08-31 Filed 2011-10-17
10-Q 2011-05-31 Filed 2011-07-15
10-K 2011-02-28 Filed 2011-06-14
10-Q 2010-11-30 Filed 2011-01-19
10-Q 2010-08-31 Filed 2010-10-20
10-Q 2010-05-31 Filed 2010-07-16
10-K 2010-02-28 Filed 2010-06-16
10-Q 2009-11-30 Filed 2010-01-15
8-K 2020-01-10 Accountant, Exhibits
8-K 2019-10-18 Amendment
8-K 2019-07-11 Officers
8-K 2019-07-09 Officers
8-K 2019-06-04 Other Events, Exhibits
8-K 2018-08-15 Sale of Shares
8-K 2018-07-03 Officers
8-K 2018-04-05 Officers
8-K 2018-03-30 Officers
8-K 2018-03-28
8-K 2018-03-28
8-K 2018-03-26 Leave Agreement, Exhibits
8-K 2018-03-23
8-K 2018-03-22
8-K 2018-03-15
8-K 2018-02-14 Shareholder Rights, Amend Bylaw, Other Events, Exhibits
8-K 2018-02-13 Officers
8-K 2018-02-12
8-K 2018-01-11 Officers, Shareholder Vote

AUSI 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization and Operations
Note 2 - Accounting Policies
Note 3 - Going Concern
Note 4 - Notes Payable
Note 5 - Accrued Expenses
Note 6 - Inventory
Note 7 - Shareholders' Equity (Restated)
Note 8 - Related Parties Transactions
Note 9 - Commitments & Contingencies
Note 10 - Financial Statement Restatements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 f10q1119ex31-1_aura.htm
EX-31.2 f10q1119ex31-2_aura.htm
EX-32.1 f10q1119ex32-1_aura.htm

Aura Systems Earnings 2019-11-30

Balance SheetIncome StatementCash Flow
3.3-9.4-22.0-34.7-47.3-60.02012201420172020
Assets, Equity
1.1-1.1-3.3-5.6-7.8-10.02012201420172020
Rev, G Profit, Net Income
4.22.40.6-1.3-3.1-4.92012201420172020
Ops, Inv, Fin

10-Q 1 f10q1119_aurasystems.htm QUARTERLY REPORT

 

 

 

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 November 30, 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 December 31, 2019
Common Stock, par value $0.0001 per share   55,480,787 shares

 

 

 

 

 

 

 

AURA SYSTEMS, INC.

 

INDEX

 

Index     Page No.
     
PART I. FINANCIAL INFORMATION
       
  ITEM 1. Financial Statements (Unaudited) 1
       
    Balance Sheets as of November 30, 2019 and February 28, 2019 1
       
    Statements of Operations for the Nine months ended November 30, 2019 and 2018 2
       
    Statements of Cash Flows for the Nine months ended November 30, 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
       
  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 25
       
  ITEM 4. Mine Safety Disclosures 25
       
  ITEM 5. Other Information 25
       
  ITEM 6. Exhibits 26
       
  SIGNATURES AND CERTIFICATIONS 27

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AURA SYSTEMS, INC.
BALANCE SHEETS

(Unaudited)

 

   November 30,
2019
   February 28,
2019
 
   (Unaudited)     
Assets        
Current assets        
Cash and cash equivalents  $122,876   $358,209 
Inventory   53,163    - 
Other current assets   51,492    59,849 
Total current assets   227,531    418,058 
Investment in joint venture   250,000    250,000 
Total assets  $477,531   $668,058 
           
Liabilities & Shareholders’ Deficit          
Current liabilities          
Accounts payable  $2,213,927   $2,635,664 
Accrued expenses   1,066,260    2,197,129 
Customer advances   0    1,136,542 
Accrued expense-related party   -    1,008,328 
Notes payable, current portion   1,167,536    847,537 
Convertible notes payable and accrued interest-related party, net of discount   3,873,151    3,644,354 
Notes payable and accrued interest-related party   6,551,591    6,156,375 
Total current liabilities   14,872,465    17,625,929 
Notes payable-related party   3,000,000    3,000,000 
Note payable   546,181    215,181 
Convertible notes payable   1,402,971    1,421,647 
Total liabilities   19,821,617    22,262,757 
           
Commitments and contingencies   -    - 
           
Shareholders’ deficit          
Common stock: $0.0001 par value; 150,000,000 shares authorized at November 30 and February 28, 2019; 55,230,787 and 53,714,145 issued and outstanding at November 30 and February 28, 2019, respectively   5,522    5,371 
Additional paid-in capital   444,185,896    442,519,092 
Accumulated deficit   (463,535,504)   (464,119,161)
Total shareholders’ deficit   (19,344,086)   (21,594,699)
Total liabilities and shareholders’ deficit  $477,531   $668,058 

  

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

 

1

 

 

AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THREE AND NINE MONTHS ENDED NOVEMBER 30, 2019 AND 2018

  

   Three-months ended
November 30,
   Nine-months ended
November 30,
 
   2019   2018   2019   2018 
   (unaudited)   (unaudited)   (unaudited)   (restated) 
Net revenue  $396,775   $-   $744,850   $39,274 
Cost of goods sold   115,655    37,032    147,752    110,026 
Gross profit (loss)   281,119    (37,032)   597,097    (70,752)
Operating expenses                    
Engineering, research & development   30,472    138,417    123,024    302,293 
Selling, general & administration   407,652    790,985    915,934    2,797,711 
Total operating expenses   438,124    929,402    1,038,958    3,100,004 
Loss from operations   (157,005)   (966,434)   (441,861)   (3,170,756)
Other expense:                    
Interest expense, net   283,928    295,221    885,731    848,593 
Other (inome) expense   (1,911,249)   48,789    (1,911,249)   (304,142)
Total other (income) expense   (1,627,321)   344,010    (1,025,518)   544,451 
Net income (loss)  $1,470,317   $(1,310,444)  $583,657   $(3,715,207)
                     
Net income (loss) per share  $0.03   $(0.03)  $0.01   $(0.08)
Basic weighted average shares outstanding   55,296,222    48,801,770    54,012,831    44,356,148 
Diluted income (loss) per share  $0.03   $(0.03)  $0.01   $(0.08)
Dilutive weighted average shares outstanding   55,296,222    48,801,770    54,012,831    44,356,148 

 

See accompanying notes to these unaudited financial statements.

 

2

 

  

AURA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2019 AND 2018
 

 

   November 30, 
   2019   2018 
   (unaudited)   (restated) 
Net Income (loss)  $583,658   $(3,715,207)
Adjustments to reconcile net income (loss) to cash used in operating activities          
Fair Market Value of warrants issued for services   -    438,826 
Gain on settlement of debt   (1,911,141)   - 
Stock issued for services   -    510 
Decrease in          
Inventory   (53,163)   - 
Other current assets   8,357    (8,804)
Increase in          
Accts payable, customer deposits and accrued expenses   881,711    1,382,524 
Cash used in operating activities   (490,578)   (1,902,151)
           
Cash flows from financing activities          
Issuance of common stock   295,245    - 
Payment on notes payable   (40,000)   (50,000)
Proceeds from subscription receivable   -    1,225,000 
Cash provided by financing activities   255,245    1,175,000 
           
Net decrease in cash and cash equivalents   (235,333)   (727,151)
Beginning cash   358,209    748,008 
Ending cash  $122,876   $20,857 
Cash paid in the period for:          
Interest  $-   $37,500 
Income taxes  $-   $- 
Supplemental schedule of non-cash transactions:          
Notes payable converted into shares of common stock  $13,159   $- 
Convertible notes converted into shares of common stock  $20,501   $- 
Gain on cancellation of related party liability  $1,005,620   $- 

 

See accompanying notes to these unaudited financial statements.

 

3

 

 

AURA SYSTEMS INC.
STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2019
(Unaudited)

  

   Common Stock Shares   Common Stock Amount   Additional Paid-In Capital   Accumulated Deficit   Total Shareholders’
Deficit
 
Balance, February 28, 2019   53,714,145   $5,371   $442,519,092   $(464,119,162)  $(21,594,699)
Shares issued for cash   1,383,015    139    295,215    -    295,354 
Shares cancelled   (1,065,051)   (107)   -    -    (107)
Shares issued for debt   1,198,678    120    365,970    -    366,090 
Gain on cancellation of debt-related party   -    -    1,005,620    -    1,005,620 
Net income   -    -    -    583,657    583,657 
Balance, November 30, 2019   55,230,787   $5,523   $444,185,897   $(463,535,505)  $(19,344,085)

 

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 nine-months ended November 30, 2019 and the impact was none on the Condensed 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

 

 

Re-classifications

 

Certain reclassifications have been made to the comparative financial statements to conform to the current period presentation. The balance sheet as of February 28, 2019, presented herein, includes a reclassification of $1,008,328 for accrued expense in relation to a related party obligation from accrued expenses to a separate caption accrued expenses-related party.

 

NOTE 3 – GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the nine months ended November 30, 2019 and 2018, the Company reported net income of $583,657 and a loss of $3,715,207, respectively, and had negative cash flows from operating activities of $490,578 and $1,902,151, respectively. During the three-months ended November 30, 2019, the Company recorded a non-recurring gain to other income on the Statement of Operations of approximately $1.9 million consisting of the cancellation of accounts payable of $0.3 million, cancellation of customer advances of $0.4 million and cancellation of unpaid wages and salaries of $1.5 million. In addition, approximately $1.0 million of unpaid compensation owed to a former CEO and a related party was cancelled and accounted for as a capital transaction and reclassified from accrued expense-related party to additional paid-in-capital. These amounts were incurred in prior years and were cancelled as the related statute of limitations periods have since expired. The Company reclassified in the three-months ended November 30, 2019 approximately $0.3 million related to the shares issued to the Company’s president in August 2019 as other expense (see Note 5).

 

If the Company is unable to generate profits on a sustained basis 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 and third quarters of fiscal 2020, the Company recognized approximately $745,000 in revenue as compared to approximately $39,000 of revenue in the nine-month period ended November 30, 2018. We plan to lease or acquire a new facility of approximately 50,000 square feet to support operations sometime during the next six months.

 

6

 

 

NOTE 4 – NOTES PAYABLE

 

Notes payable consisted of the following:

 

    November 30,
2019
      February 28,
2019
 
             
Demand promissory notes payable with six individuals, carrying an interest rate of 10% (see Demand Promissory Notes below)   $ 768,537     $ 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 $0.50 per 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.     59,506       78,182

 

 

  $ 1,402,971     $ 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.     245,180       285,000

 

 

 

 

 

 

                 

On November 20, 2019, the Company entered into a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture (see Note 9) , to return $700,000 previously advanced to the Company in September 2018 and recorded as part of customer advance on the balance sheet as of February 28, 2019. Following this agreement which consists of a non-interest bearing promissory note and a payment plan pursuant to which the $700,000 is paid over a 12-month period beginning March 15, 2020 through February 15, 2021. In the balance sheet as of November 30, 2019, the amount of $700,000 was reclassified to notes payable.

 

    700,000       -  
    $ 6,116,688     $ 5,484,184  
Less: Current portion   $ 1,167,536     $ 847,537  
Long-term portion   $ 4,949,152     $ 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. At February 28, 2019, 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 (see Note 8). In November 2019, the principle and accrued interest owed to Messrs. Howsmon and Diaz, respectively, in the amounts of $4,500 and $2,079, respectively, were settled by the issuance of 32,895 shares of common stock to each person by applying a price of $0.20 per share.

 

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 principle balance of $549,954 as of November 30, 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 principle balance of $163,677 as of November 30, 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 principle balance of $232,194 as of November 30, 2019.

 

Dresner and Lempert

 

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and Mr. Lempert, a current board member, 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 principle balance of $59,506 as of November 30, 2019. On November 27, 2019, the principle amount owed to Mr. Lempert of $18,676 and accrued interest of $1,825 were settled by the issuance of 102,503 shares of common stock to Mr. Lempert at the price of $0.20 per share (see Note 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 Messrs. 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 Messrs. 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. There is a remaining principle balance of approximately $245,000 as of November 30, 2019.

 

 

8

 

 

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”) that were subsequently adjusted in 2014 to $2,000,000 of convertible notes and related 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 $3.50 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 November 30, 2019, the balance of the $2,000,000 note including interest is $3,849,978, and the balance of the demand note payable including interest is $23,173. The total owed under these two notes is $3,873,151.

 

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 principle balance of $264,462 as of November 30, 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 principle balance of $133,178 as of November 30, 2019.

 

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 $1,092,542 at November 30, 2019, plus any outstanding accrued interest. 

 

9

 

 

NOTE 5 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

   November 30,
2019
   February 28,
2019
 
         
Accrued payroll and related expenses  $338,818   $1,723,691 
Accrued interest   681,586    428,625 
Other   51,839    44,812 
Total  $1,072,243   $2,197,128 

 

Accrued payroll and related expenses consist primarily of salaries and vacation time accrued but not paid to employees due to our lack of financial resources. During the third quarter of fiscal 2020, approximately $1.5 million of unpaid salaries and related expenses were reclassified as other income on the statement of operations for the three-months ended November 30, 2019 as the related statute of limitations periods have expired. Also, 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. This amount was recorded as a reduction of accrued payroll expense in the second quarter but determined in the third quarter of 2020 to be an offset (other expense) to the gain amount of $1.5 million.

 

NOTE 6 – INVENTORY

 

During fiscal 2019 and at February 28, 2019, the Company fully reserved its usable inventory on the basis that production and revenues during the fiscal years 2017 to 2019 were nil and future production requirements were uncertain. During fiscal 2020, the Company has increased production of its AuraGen product and has generated approximately $745,000 in current year revenues. As a result, the Company recognized approximately $53,000 of inventory on its balance sheet as of November 30, 2019 consisting of $44,500 of raw materials, $4,600 of work in process and $3,900 of finished goods inventory.

 

NOTE 7 – SHAREHOLDERS’ EQUITY (restated)

 

Common Stock

 

During the nine months ended November 30, 2019, the Company issued 2,581,875 shares of common stock for $658,737, of which 1,030,385 was issued in satisfaction of amounts owed to Cipora Lavut of $329,723, 168,475 shares were issued to three persons in settlement of $33,660 of debt principle and accrued interest, and 1,383,015 shares and 10,000 warrants were issued for cash in the amount of $295,354. The aggregate 10,000 warrants were issued to three investors with immediate vesting, an exercise price of $1.40, and a 5-year term. In October 2019, 1,065,051 shares previously issued in error to a former debtholder were cancelled.

 

During the nine-months ended November 30, 2019, the Company cancelled an obligation to pay Melvin Gagerman, a former officer of the Company and a related party, approximately $1.0 million in unpaid compensation due to expiration of the statute of limitations. Accordingly, the Company accounted for this transaction as a capital transaction and reclassified the amount to additional paid-in-capital.

 

During the six months ended August 31, 2018 (restated), the Company issued 7,364,735 shares of common stock, valued at $2,280,964, in fulfillment of a contractual obligation owed to BetterSea, LLC. The number of shares issued was 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 related to legal expense associated with the Company’s delays in the issuance of the stock.

 

During the nine months ended November 30, 2018, the Company issued 742,857 warrants to a member of its board of directors. The warrants have a term of five years and an exercise price of $1.40. The Company recorded an expense of $312,072 for the issuance of these warrants. During the nine months ended November 30, 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 nine-month period ended November 30, 2019. Activity in the plan for the nine-month period ended November 30, 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, November 30, 2019   572,000   $1.40   $- 

 

Information regarding the options outstanding and exercisable as of November 30, 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    .25 Yr   $1.40   .25 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 nine-month period ended November 30, 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, November 30, 2019   7,415,273   $1.40 

 

11

 

 

Information regarding the warrants outstanding and exercisable as of November 30, 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    2.76 Yrs.   $1.40   $1.40 

 

NOTE 8 – 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 nine 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 November 30, 2019, the balance in notes payable and accrued interest-related party, current of $6,551,591, consists primarily of the Kopple (a former Board member) note of $6,415,109 and the Gagerman note of $136,482 (see below). The Kopple note has a principle balance of $3,587,322 plus accrued interest of $2,827,787.. At November 30, 2019, the balance in convertible notes payable and accrued interest-related party consists of $2,000,000 of unsecured convertible notes payable plus accrued interest of $1,849,978 and an unsecured convertible note of $20,000 plus accrued interest of $3,173 to Mr. Kopple.

 

Gagerman Note

 

The notes payable and accrued interest-related party, currrent balance also includes $82,000 of unsecured notes payable plus accrued interest of $54,482 owed to Melvin Gagerman, the Company’s former CEO and CFO, pursuant to a demand note entered into on April 5, 2014. See note 7 for disclosures with respect to cancellation of Gagerman’s unpaid compensation of $1.0 million.

 

Other Related Party Transactions

 

In November 2019, two members of the board of directors, Messrs. Diaz-Verson and Lempert, agreed to cancel their outstanding debt with the Company in the amounts of $6,579 and $20,500, respectively, in exchange for 32,895 and 102,503 shares of common stock at a conversion price of $0.20 per share. On the dates of the exchange, November 26 and November 27, 2019, respectively, the closing prices of the Company’s common stock was $0.21 and $0.22 per share, respectively (see Note 4). The loss on extinguishment of debt of approximately $2,700 was recorded as part of additional paid-in-capital.

 

NOTE 9 – 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.

 

12

 

 

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 nine-month period ended November 30, 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.

 

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 nine 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. On November 20, 2019, the Company reached a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture regarding the return of $700,000 previously advanced to the Company in September 2018 and previously recorded as a customer advance on the balance sheet as of February 28, 2019. The preliminary agreement reached consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 is paid over a 12-month period beginning March 15, 2020 and February 15, 2021. In the balance sheet as of November 30, 2019, the amount of $700,000 was reclassified to notes payable.

 

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. 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 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 a relative of Scholnick, 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 10 – 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 nine-months ended November 30, 2018.

 

i.Selling, general & administrative expense was overstated by $1,991,740 in the statement of operations for the three and nine-months ended November 30, 2108 due to an incorrect fair value associated with common shares issued during August 2018 to BetterSea. The basic and diluted loss per share was also overstated by $0.05 per share for the nine-months ended November 30, 2018.

 

AURA SYSTEMS, INC.

STATEMENT OF OPERATIONS (RESTATED)

FOR THE NINE-MONTHS ENDED NOVEMBER 30, 2018

  

   Nine-months ended November 30, 2018 
   Previously Reported   Restatement Adjustment   Restated 
             
Net revenue  $39,274   $-   $39,274 
Cost of goods sold   110,026    -    110,026 
Gross loss   (70,752)   -    (70,752)
Operating expenses               
Engineering, research & development   302,293    -    302,293 
Selling, general & administration   4,789,451    (1,991,740)i.  2,797,711 
Total operating expenses   5,091,744    (1,991,740)   3,100,004 
Income (loss) from operations   (5,162,496)   1,991,740    (3,170,756)
Other expense               
Interest expense, net   848,593    -    848,593 
Other income   (304,142)   -    (304,142)
Total other expense   544,451    -    544,451 
Net income (loss)  $(5,706,947)  $1,991,740   $(3,715,207)
                
Basic income (loss) per share  $(0.13)  $0.04i. $(0.08)
Basic weighted average shares outstanding   44,356,148    44,356,148    44,356,148 
Diluted income (loss) per share  $(0.13)  $0.04i. $(0.08)
Dilutive weighted average shares outstanding   44,356,148    44,356,148    44,356,148 

 

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AURA SYSTEMS, INC.

STATEMENT OF CASH FLOWS (RESTATED)

FOR THE NINE-MONTHS ENDED NOVEMBER 30, 2018

  

   Nine-months ended November 30, 2018 
   Previously Reported   Restatement Adjustment   Restated 
             
Net loss  $(5,706,947)  $1,991,740 i. $(3,715,207)
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   (8,804)   -    (8,804)
Increase (decrease) in               
Accts payable, customer deposits and accrued expenses   1,382,524    -    1,382,524 
Cash used in operating activities   (1,902,151)   -    (1,902,151)
                
Cash flows from financing activities               
Issuance of common stock        -    - 
Payment on notes payable   (50,000)   -    (50,000)
Proceeds from subscription receivable   1,225,000    -    1,225,000 
Cash provided by financing activities   1,175,000    -    1,175,000 
                
Net incr (decr) in cash and cash equivalents   (727,151)   -    (727,151)
Beginning cash   748,008    -    748,008 
Ending cash  $20,857   $-   $20,857 
Cash paid in the period for:               
Interest  $37,500   $-   $37,500 
Income taxes  $-   $-   $- 

 

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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.

 

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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 $10.3 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.

 

During the three-months ended November 30, 2019, we recorded a one-time gain to other income on the Statement of Operations of approximately $1.9 million consisting of the cancellation of accounts payable of $0.3 million, cancellation of customer advances of $0.4 million and cancellation of unpaid wages and salaries of $1.5 million. In addition, $1.0 million of unpaid compensation owed to a former CEO and a related party was cancelled and accounted for as a capital transaction and reclassified from accrued expense-related party to additional paid-in-capital. These amounts were incurred in prior years and were cancelledas the related statue of limitation periods have since expired. The Company reclassified in the three-months ended November 30, 2019 approximately $0.3 million related to the shares issued to the Company’s president in August 2019 as other expense (see Notes 3 and 7 to the Condensed Financial Statements).

 

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. Afterreducing 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 $200,000 during the fiscal 2020 year.

 

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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 we were forced to move from our facilities in Redondo Beach, California to a smaller facility in Stanton, California. During fiscal years 2017 to 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, were 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 nine-months ended November 30, 2020, we increased production and recognized approximately $745,000 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 Note 3 to the Condensed Financial Statements). 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 elected to fully reserve our inventory it in its entirety as of February 28, 2019. During fiscal year 2020, we increased production and, accordingly, we have assigned a value of $53,000 to our physical and book inventory as of November 30, 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

 

Nine-months ended November 30, 2019 compared to nine-months ended November 30, 2018

 

Net revenues were $744,850 for the nine-months ended November 30, 2019 (the “Nine-Months FY2020”) compared to $39,274 for the nine-months ended November 30, 2018 (the “Nine-Months FY2019”), or an increase of 1,796% compared to the same period of fiscal 2019. During the second and third quarters of 2020, we delivered 116 generator units to a distribution customer as compared to 6 units in the same period in the prior year for a military application.

 

Cost of goods sold were $147,752 in the Nine-Months FY2020 compared to $110,026 in the Nine-Months FY2019 resulting in a gross profit of $597,097 and a loss of $70,752, respectively, and gross margins of 80.0% and negative 180.2%, respectively. Gross profit and related gross margin for the Nine-Months FY2020 shipments were high due to the utilization of inventory previously fully reserved. We do not expect gross margins above 80% 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 $123,024 in the Nine-Months FY2020, compared to $302,293 in the Nine-Months FY2019, or a decline of 59.3%. Beginning fiscal 2021, we expect to increase spend of research and development to include additional technical personnel, test and evaluation components, capital equipment, larger space allocation to an annualized spend of $700,000.

 

Selling, general and administrative expense was $915,934 for the nine-months ended November 30, 2019 as compared to $2,797,711 during the comparable period of fiscal year 2019, or a decline of $1,881,777 (67%). During Nine-Months FY2019, we incurred an 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 Nine-Months FY2020 increased $37,138 or 4%, to $885,731 from $848,593 in the Nine-Months FY2019.

 

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Our net income for the Nine-Months FY2020 increased $4,298,864, or 116%, to $583,657 from a net loss of $3,715, 207 in the Nine-Months FY2019 due primarily to (i) the recording of a total of $1.9 million in gains, as compared to $0.3 million in the same period of fiscal 2018, on cancellation of accounts payables, customer advances and unpaid salaries and related expenses following expiration of applicable statute of limitations periods (ii) increased gross profit contribution of $0.7 million on higher levels of shipments and (iii) reduced operating expenses of $2.1 million.

 

Three months ended November 30, 2019 compared to three months ended November 30, 2018

 

Net revenues were $396,775 for the three-months ended November 30, 2019 (the “Three-Months FY2020”) compared to $0 for the three-months ended November 30, 2018 (the “Three-Months FY2019”). During the second quarter of 2020, we delivered 64 generator units to a distribution customer as compared to 0 units in the same period in the prior year.

 

Cost of goods sold were $116,655 in the Three-Months FY2020 compared to $37,032 in the Three-Months FY2019 resulting in a gross profit of $281,119 and a loss of $37,032, respectively, and gross margins of 70.8% and a meaningless gross margin, respectively. Gross profit and related gross margin for the Three-Months FY2020 shipments were high due to the utilization of inventory previously fully reserved. We do not expect gross margins above 80% 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 $30,472 in the Three-Months FY2020, compared to $138,417 in the Three-Months FY2019, or a decrease of 78%

 

Selling, general and administrative expense decreased $383,000 (48%) to $407,652 in the Three-Months FY2020 from $790,985 in the Three-Months FY2019. During Three-Months FY2020, we incurred less cost for administrative headcount and consultancy cost by $250,000 and $150,000 in reduced legal fees.

 

Net interest expense in the Three-Months FY2020 decreased $11,293 or 4%, to $283,928 from $295,221 in the Three-Months FY2019.

 

Net income for the Three-Months FY2020 increased $2,780,761, or 212%, to $1,470,317 from a loss of $1,310,444 in the Three-Months FY2019 due primarily to (i) the recording of a total of $1.9 million in gains on cancellation of accounts payables, customer advances and unpaid salaries and related expenses following expiration of the applicable statute of limitation periods (ii) increased gross profit contribution of $0.3 million on higher levels of shipments (iii) reduced operating expenses of $0.5 million and (iv) other expense of $0.1 million.

 

Liquidity and Capital Resources

 

Net cash used in operations for the nine months ended November 30, 2019, was $490,578, a decrease of $1,411,573 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the nine-months ended November 30, 2019, was $255,245 consisting of (i) cash proceeds from issuance of common stock of $295,245 partially and (ii) offset by $40,000 of principle payments on a note payable as compared to cash provided by financing of $1,175,000 in the same period of fiscal 2019 consisting of (i) proceeds from a subscription receivable of $1,225,000 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 Nine-Months FY2020 or the Nine-Months FY2019.

 

Accrued expenses as of November 30, 2019 decreased $1.1 million to $1,066,260 from $2,197,129 as of February 28, 2019 due to the one-time cancellation of accounts payable, customer deposits and unpaid salaries and related expenses discussed above. Accrued expense-related party decreased by $1.0 million to $0 associated with the cancellation of the related party obligation as discussed above.

 

The Company had a deficit of $19.3 million in shareholders’ equity as of November 30, 2019, compared to $21.6 million as of February 28, 2019 with the net change attributed to net income of approximately $1.6 million and the issuance of shares of $0.7 million.

 

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. 

 

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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 Principal Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Principal 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 November 30, 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.

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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.

 

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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. 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 toBetterSea, LLC. 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 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 relative, 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 nine-months ended November 30, 2019, we issued 1,383,015 shares of common stock for cash proceeds of $295,354.

 

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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.

  

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.

 

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ITEM 6.  Exhibits

 

31.1   Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
     
31.2   Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
     
32.1   Certification of PrincipalExecutive Officier and Chief Financial Officer  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

 

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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: January 14, 2020 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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