10-Q 1 nov10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 \For the Quarter Ended November 30, 2001 Commission File Number 0-17249 AURA SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Delaware 95-4106894 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2335 Alaska Ave. El Segundo, California 90245 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 643-5300 Former name, former address and former fiscal year, if changed since last report: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 14, 2002 Common Stock, par value 350,410,344 Shares $.005 per share
AURA SYSTEMS, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Statement Regarding Financial Information 2 Condensed Consolidated Balance Sheets as of November 30, 2001 and February 28, 2001 3 Condensed Consolidated Statement of Operations for the Three Months and Nine Months Ended November 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 11 ITEM 2. Changes in Securities 11 ITEM 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12
AURA SYSTEMS, INC. AND SUBSIDIARIES QUARTER ENDED NOVEMBER 30, 2001 PART I. FINANCIAL INFORMATION The financial statements included herein have been prepared by Aura Systems, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As contemplated by the SEC under Rule 10-01 of Regulation S-X, the accompanying financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K/A for the year ended February 28, 2001 as filed with the SEC (file number 0-17249) on August 14, 2001.
AURA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) November 30, February 28, 2001 2001* ------------- --------------- ASSETS Current assets: Cash and equivalents $ 33,975 $ 1,265,912 Receivables-net 889,518 1,062,041 Inventories 10,780,094 9,756,399 Notes receivable 1,415,462 1,405,857 Other current assets 571,116 452,940 --------------- --------------- Total current assets 13,690,165 13,943,149 --------------- --------------- Property and equipment, at cost 39,322,465 41,289,011 Less accumulated depreciation and amortization (23,000,369) (20,966,852) ---------------- ---------------- Net property and equipment 16,322,096 20,322,159 Long-term investments 1,883,835 1,883,835 Long-term receivables 2,390,814 2,516,139 Patents and trademarks- net 3,139,016 3,370,263 Other assets 3,277,327 3,242,498 --------------- --------------- Total $ 40,703,253 $ 45,278,043 ============== =============== Liabilities and Stockholder's Equity Current liabilities: Notes payable $ 5,545,116 $ 14,300,594 Accounts payable 3,406,978 3,463,146 Accrued expenses 1,271,006 1,284,754 --------------- --------------- Total current liabilities 10,223,100 19,048,494 --------------- ------------ Notes payable and other liabilities 20,866,232 24,184,514 --------------- --------------- COMMITMENTS AND CONTINGENCIES Stockholders' equity Common stock par value $.005 per share and additional paid in capital. Issued and outstanding 343,402,688 and 291,089,582 shares respectively. 281,591,836 264,787,864 Accumulated deficit (271,977,915) (262,742,829) ----------------- ---------------- Total stockholders' equity 9,613,921 2,045,035 ------------- --------------- Total $ 40,703,253 $ 45,278,043 ============ ===============
See accompanying notes to condensed consolidated financial statements. *Amounts at February 28, 2001 have been derived from audited financial statements
AURA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED NOVEMBER 30, 2001 AND 2000 (Unaudited) Three Months Nine Months 2001 2000 2001 2000 ---- ---- ---- ---- Net Revenues $ 306,126 $ 501,803 $ 4,043,968 $ 1,270,209 Cost of goods 168,874 224,756 1,922,671 744,239 ----------- ----------- --------- --------------- Gross Profit 137,252 277,047 2,121,297 525,970 Expenses Engineering expenses 1,727,078 2,157,907 6,280,076 6,708,843 Selling, general and administrative 2,113,016 2,307,128 7,675,279 9,055,140 Research and development 168,385 246,384 679,594 332,335 ------------- ------------- --- ------- -------------- Total costs and expenses 4,008,479 4,711,419 14,634,949 16,096,318 -------------- -------------- --- ---------- -------------- Loss from operations (3,871,227) (4,434,372) (12,513,652) (15,570,348) Other (income) and expense (Gain) loss on disposition of assets 65,823 -- (333,366) (1,756,746) Other (income) expense 69,670 (207,185) (118,832) (580,638) Legal settlements (2,000,000) 367,872 (2,750,000) 720,834 Interest expense-net 620,045 557,960 1,455,820 1,616,982 ---------------- ---------------- --------- ----------------- Loss before extraordinary item (2,626,765) (5,153,019) (10,767,274) (15,570,780) Extraordinary item Gain on extinguishment of debt obligations, net of income taxes of $0 1,532,188 500,000 1,532,188 1,581,175 --------- ------- --------- --------- Net loss $ (1,094,577) $ (4,653,019) $(9,235,086) $(13,989,605) =============== =============== ============= ============= Net loss per common share - basic $ (.003) $ (.02) $ (.03) $ (.06) =============== ================= ================== ================ Loss from continuing operations per share $ (.008) (.02) $ (.035) $(.06) ================= ===== ========== ================ Extraordinary income per share $ .005 -- $ .005 $ -- ================= ===== ================== =========== Weighted average shares used to compute net loss per share - basic 334,634,968 274,403,680 317,626,223 253,849,598 =========== =========== =========== ================
See accompanying notes to condensed consolidated financial statements.
AURA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED NOVEMBER 30, 2001 AND 2000 (Unaudited) 2001 2000 ------------------ ----------- Net cash (used) in operations $(7,038,896) $ (9,012,671) ----------- ----------- Cash flows from investing activities: Proceeds from sale of assets 399,189 64,311 Additions to property and equipment (228,383) (17,123) Note receivable 115,720 1,363,551 --------------- --------------- Net cash provided by (used) in investing activities 286,526 1,410,739 Cash flows from financing activities: Repayment on line of credit (1,984,000) (400,000) Repayment of debt (3,182,655) (1,718,977) Net proceeds from sale of stock 10,659,313 9,884,315 Proceeds from exercise of stock options 775 -- Proceeds from exercise of warrants 27,000 -- ---- ------ ---------------- Net cash provided (used) by financing activities: 5,520,433 7,765,338 --------- --------- Net increase (decrease) in cash and cash equivalents (1,231,937) 163,406 Cash and cash equivalents at beginning of year 1,265,912 260,437 --------------- --------------- Cash and cash equivalents at end of period $ 33,975 $ 423,843 =============== =============== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $1,422,542 $ 1,519,221 Income Tax 0 0 ============== ==============
Supplemental disclosure of noncash investing and financing activities: In the nine months ended November 30, 2001, $413,009 of notes payable and accrued interest were converted into 750,927 shares of the Company's common stock. The Company also issued 14,868,866 shares of common stock to satisfy liabilities in the amount of $5,778,786. In the nine months ended November 30, 2000, $2,363,019 of notes payable and accrued interest were converted into 5,648,917 shares of the Company's common stock. The Company issued 12,042,627 shares of common stock to satisfy liabilities of $6,509,189. Effective March 1, 2000, the Company sold the assets of its Ceramics subsidiary for $3.5 million in the form of a note receivable of $2.5 million, a cash down payment of $64,311, included above, and the payment of $800,000 to third parties in satisfaction of liabilities. See accompanying notes to condensed consolidated financial statements. AURA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1) Basis of Presentation The condensed consolidated financial statements include the accounts of Aura Systems, Inc. ("the Company") and subsidiaries from the effective dates of acquisition. All material inter-company transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) and reclassifications for comparability necessary to present fairly the financial position of Aura Systems, Inc. at November 30, 2001 and the results of its operations for the three and nine months ended November 30, 2001 and 2000. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. In connection with the audit for the year ended February 28, 2001, we received a report from our independent certified public accountants that includes an explanatory paragraph describing uncertainty in our ability to continue as a going concern. Our consolidated financial statements included herein contemplate our ability to continue as a going concern and as such do not include any adjustments that might result from this uncertainty. 2) Capital In the quarter ended November 30, 2001, common stock outstanding increased by a total of 17,334,687 shares from the quarter ended August 31, 2001 as follows: 4,000,000 shares were sold for gross proceeds of $1,520,000, an additional 280,000 shares were issued as finders fees for private placements, options were exercised for 2,500 shares resulting in proceeds of $775, 4,103,646 shares were issued to satisfy liabilities in the amount of $1,559,385 and a total of 8,948,541 shares were issued as a result of repricing agreements. 3) Inventories Inventories, stated at the lower of cost (first in, first out) or market, consist of the following:
November 30, February 28, 2001 2001 ---- ---- Raw materials $ 4,241,066 $ 3,516,826 Finished goods 6,830,432 6,530,977 Reserved for potential product obsolescence (291,404) (291,404) -------------- --------- $ 10,780,094 $ 9,756,399 ============== =============
Inventories consist primarily of components and completed units for the Company's AuraGen product. The reserve for potential product obsolescence consists solely of parts for the Company's actuator products. 4) Significant Customers In the nine months ended November 30, 2001, the Company sold AuraGen related products to five (5) significant customers for a total of approximately $3.3 million or 83% of net revenues. None of these customers are related to or affiliated with the Company. 5) Recently issued accounting pronouncements In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company has not determined if SFAS Nos. 141 and 142 will have a significant impact on the Company's financial statements when adopted. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of long-lived assets, except for certain obligations of lessees. This statement is not applicable to the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business, and amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company does not expect adoption of SFAS No. 144 to have a material impact, if any, on its financial position or results of operations. 6) Contingencies The Company is engaged in various legal proceedings. See the Company's Form 10-K/A, Item 3 - Legal Proceedings, for the year ended February 28, 2001 as filed with the SEC (file number 0-17249) on August 14, 2001 for a description of the legal proceedings. To the extent that judgment has been rendered, appropriate provision has been made in the financial statements. Securities and Exchange Commission The Company has been informed by the Staff of the SEC that it intends to recommend that the Commission bring a civil action against Aura, NewCom Inc. (a former subsidiary of Aura), Zvi Kurtzman, Steven Veen and Gerald Papazian for violations of the antifraud and books and records provisions of the securities laws. This grew out of an investigation into the Company's financial statements for various transactions during fiscal years 1996 through 1999. The Company originally disclosed the investigation by press release in January 1999. The Staff advised the Company that it would recommend that the SEC seek civil penalties and enjoin the companies and the individuals from future violations. In addition, the SEC Staff would recommend that the SEC impose director and officer bars against Messrs. Kurtzman and Veen and a bar against Mr. Veen to prohibit his practicing as an accountant before the SEC. The Company is informed that in order to avoid potential lengthy and costly litigation the individuals have agreed to propose to settle with the SEC without admitting or denying any of the Staff's allegations. The Company has engaged in conversations with the Staff of the SEC regarding settlement of the matter, but no agreements have yet been reached. Although Aura believes that it will reach a settlement in a manner that will not have a material adverse effect on the Company's business, it cannot predict with certainty when or if such a settlement will occur or what the actual effects of such a settlement would be. The Audit Committee of the Board will conduct a full review of the Company's accounting controls and procedures. Excalibur v. Aura (Settled) On November 12, 1999, a lawsuit was filed by three investors against Aura and others, in Los Angeles Superior Court entitled Excalibur Limited Partnership v. Aura Systems, Inc. (Case No. BC220054), arising out of two NewCom, Inc. financings consummated in December 1998. The NewCom financings comprised (1) a $3 million investment into NewCom in exchange for NewCom Common Stock, Warrants for NewCom Common Stock, and certain "Repricing Rights" which entitled the investors to receive additional shares under certain circumstances, and (2) a loan to NewCom of $1 million in exchange for a Promissory Note and Warrants to purchase NewCom Common Stock. The Plaintiffs alleged in their complaint that Aura breached its agreements and sought damages of not less than $4.5 million. Aura alleged cross-claims against the Plaintiffs, contending that Plaintiffs violated their contractual obligations to Aura by engaging in unlawful "short sales" of NewCom stock. Aura also asserted claims against Plaintiffs for damages based on alleged breaches of Plaintiffs' contractual obligations to Aura and on Plaintiffs' alleged misrepresentations to Aura On October 2, 2001, the parties entered into a General Release and Settlement Agreement ("Settlement"), finally resolving the entire matter. As part of the Settlement, Aura received $2,000,000. The Plaintiffs received repricing shares sought as part of its underlying contract claims. Kerry Morgan, et. al. vs. NewCom, Inc. (Settled) In December 1999, a lawsuit was filed against NewCom, Inc. which, as currently amended also includes Aura Systems, Inc., Steven Veen, Sultan Khan, Asif Khan and Zvi Kurtzman, Deutsche Financial Services, Inc., Best Buy Co., Inc., Circuit City Stores, Inc. a/k/a Compusa, the Computer Super Store, and Staples, Inc., in the Circuit Court for the County of Wayne Michigan (Case No. 98-838563 CP). The plaintiff's sixth amended complaint purported to be a class action on behalf of a class alleged to consist of approximately two hundred thousand persons who purchased a NewCom Inc., a/k/a Atlas Peripherals computer product from Best Buy Co., Inc., Circuit City Stores, Inc., Computer City, and/or Staples, Inc. The complaint alleged that plaintiffs did not receive a rebate of between twenty to fifty dollars on NewCom products, as advertised and promoted by the above mass retailer. Plaintiffs further alleged that the mass retailers without any justification, failed to pay NewCom for product received and sold. The plaintiffs sought, among other remedies, to recover all or part of the amount that the retailers failed to pay. Circuit City and Deutsche Financial Services filed cross-complaints. No date for trial had been set. In August 2001, based upon discussions of the parties under court supervision, all litigants entered into a settlement Memorandum of Understanding which limited the total Aura defendants portion to $400,000, payable in monthly installments of $10,000 to the Plaintiffs. The parties have since entered into a definitive Settlement Agreement incorporating the terms of the Memorandum, which received preliminary approval of the trial court in December 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview This Report may contain forward-looking statements, which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such statements. Certain factors could also cause actual results to differ materially from those discussed in such forward-looking statements, including factors discussed in the Company's Form 10-K/A for the period ended February 28, 2001, and factors discussed in this Report. Results of Operations Net revenue for the three and nine month periods ended November 30, 2001 decreased by $195,677 and increased by $2,773,759 to $306,126 and $4,043,968 from the corresponding periods in the prior year. Cost of goods for the three and nine months ended November 30, 2001 decreased by $55,882 and increased by $1,178,432 in comparison with the corresponding periods in the prior year as a result of the change in the level of sales. General and administrative expenses decreased for the three and nine month periods by $194,112 and $1,379,861 respectively, due primarily to a reduction in legal expenses of approximately $785,000 and accounting expenses of approximately $235,000 during the nine month period. Included in engineering expenses and selling, general and administrative expenses for the three and nine months ended November 30, 2001, is depreciation and amortization of $1.7 million and $5.0 million, respectively, compared to $1.7 million and $5.0 million in the prior year periods. Research and development costs decreased for the three and increased for the nine months ended November 30, 2001 by $77,999 and $347,259, respectively. The Company has recently begun to increase its research and development activities in order to expand its line of AuraGen products and expects these activities and expenses to continue to grow as the Company's cash flow from operations allows the Company to develop more variations on the Company's basic 5KW AuraGen, including, but not limited to, the 6KW, 8KW, 10KW, 25KW, AC/DC versions, inverter and battery charger versions, and marine and other applications. In the nine months ended November 30, 2001, the Company recorded a gain on the disposition of assets of $333,366 compared to a gain of $1,756,746 in the prior year which was recorded on the disposition of the assets of its ceramics facility. Legal settlements for the three and nine months ended November 30, 2001 provided income of $2,000,000 and $2,750,000 respectively, compared to expenses of $367,872 and $720,834 in the prior year periods. Net interest expense increased for the three months and decreased for the nine month periods by $62,085 and $161,162 compared to the prior year period. Liquidity and Capital Resources In the nine months ended November 30, 2001, cash decreased by $1,231,937 to $33,975 from $1,265,912 at February 28, 2001. Accounts payable and accrued expenses decreased by $69,916 from February 28, 2001. Inventories increased by $1,023,695 and accounts receivable decreased by $172,523. Cash flows used in operations in the nine months ended November 30, 2001 decreased by $1,973,775 compared to the prior year period. The decrease is due primarily to the decrease in the loss for the current year period, partially offset by a lower level of reduction in accounts payable and accrued expenses. Working capital was $3,467,065 at November 30, 2001 as compared to $(5,105,345) at the 2001 fiscal year end, with the current ratio improving to 1.34:1 from .73:1. In the nine months ended November 30, 2001, the Company received net proceeds of $10,687,088 from the sale of its common stock and the exercise of options and warrants. In the past the Company's cash flow generated from operations has not been sufficient to completely fund its working capital needs. Accordingly, the Company has also relied upon external sources of financing to maintain its liquidity. In order to finance its existing operations it will be necessary for the Company to obtain additional working capital from external sources. The Company is presently seeking additional sources of financing, including debt and equity financing. No assurances can be provided that these funding sources will be available at the times and in the amounts required. The inability of the Company to obtain sufficient working capital at the times and in the amounts required would have a material adverse effect on the Company's business and operations. For additional information regarding the Company's financial condition, see the Company's Form 10-K/A, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended February 28, 2001 as filed with the SEC (file number 0-17249) on August 14, 2001. Forward Looking Statements Except for the historical information contained in this document, the matters discussed herein are by their nature forward-looking. Readers are cautioned that forward-looking statements or projections made by the Company, including those made in this document, reflect the Company's current plans and expectations based on information currently available to it, and rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties. The Company wishes to caution readers that important factors, in some cases, have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the fourth quarter of Fiscal 2002, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company. Such factors include, but are not limited to, the following risks and uncertainties: changed business conditions in the industries targeted by the Company and the overall economy; increased marketing and manufacturing competition and accompanying price pressures; and inefficiencies, delays and increased depreciation costs in connection with the start of production in potential new plants and expansions. Relating to the above are potential difficulties or delays in the development, production, testing and marketing of products, including, but not limited to, a failure to ship new products and technologies when anticipated. Manufacturing economies may fail to develop when planned, products may be defective and/or customers may fail to accept them in the marketplace. In addition to the above, risks and contingencies may exist as to the amount and rate of growth in the Company's selling, general and administrative expenses, and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. The possibility of a single large system order to the Company could entail fluctuating results from quarter to quarter. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and social and economic conditions, such as trade restrictions, impose yet other risks and uncertainties with respect to any Company forward-looking statements. The events of September 11, 2001 and the advent of a war on terrorism may or may not impact sales in the mobile power business. The cost and other effects of legal and administrative cases and proceedings present another factor which may or may not have an impact. PART II - OTHER INFORMATION ITEM 1 Legal Proceedings For information regarding pending legal proceedings, see Note 6 to the Company's Condensed Consolidated Financial Statements appearing elsewhere herein. ITEM 2 Changes in Securities During the third quarter of Fiscal 2002, 4,000,000 shares of common stock were issued in connection with a private placement to three investors, resulting in aggregate proceeds of approximately $1,520,000. During the third quarter of Fiscal 2002, 2,500 shares of common stock were issued upon exercise of outstanding options for proceeds of $775. During the third quarter of Fiscal 2002, 8,948,541 shares of common stock were issued under repricing agreements with previously issued shares. During the third quarter of Fiscal 2002, 280,000 shares of common stock were issued as finders fees for private placements. During the third quarter of Fiscal 2002, 4,103,646 shares were issued to satisfy liabilities in the amount of $1,559,385. All of the foregoing transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as amended (the "Securities Act") as these offerings were private placements to a limited number of "accredited investors" (as defined in the Securities Act). ITEM 6 Exhibits and Reports on Form 8-K a) Exhibits: None b) Reports On Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AURA SYSTEMS, INC. --------------------------------------------------- (Registrant) Date: January 15, 2002 By: /s/Steven C. Veen ------------------ -------------------------------------------- Steven C. Veen Senior Vice President Chief Financial Officer (Principal Financial and Accounting Officer) (Duly Authorized Officer)