10-Q 1 f10q0516_aurasystemsinc.htm QUARTERLY REPORT

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 May 31, 2016

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

For the transition period from______________ to ______________

AURA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

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

10541 Ashdale St.

Stanton, CA 90680

(Address of principal executive offices and zip code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES ☐ NO ☒

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

Class		Outstanding August 31, 2017
Common Stock, par value $0.0001 per share		126,608,391 shares

AURA SYSTEMS, INC.

INDEX

Index			Page No.

PART I.	FINANCIAL INFORMATION		1

	ITEM 1.	Financial Statements (Unaudited)	1

		Balance Sheets as of May 31, 2016 and February 29, 2016	1

		Statements of Operations for the Three months Ended May 31, 2016 and 2015	2

		Statements of Cash Flows for the Three months Ended May 31, 2016 and 2015	3

		Notes to Financial Statements	4

	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	18

	ITEM 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION		19

	ITEM 1.	Legal Proceedings.	19

	ITEM 1A.	Risk Factors.	19

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

	ITEM 3.	Defaults Upon Senior Securities	20

	ITEM 4.	Mine Safety Disclosures	20

	ITEM 5.	Other Information	20

	ITEM 6.	Exhibits	20

	SIGNATURES AND CERTIFICATIONS		21

ITEM 1. FINANCIAL STATEMENTS

AURA SYSTEMS, INC.
BALANCE SHEETS

(Unaudited)

	As of May 31,			As of February 29,
	2016			2016
ASSETS
Current assets:
Cash and cash equivalents	$	357,311		$	22,175
Accounts receivable,		-			2,115
Other current assets		9,677			16,282
Total current assets		366,988			40,572

Deposits		-			90,213

Total assets	$	366,988		$	130,785

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	2,293,268		$	1,823,776
Accrued expenses		5,587,418			5,389,883
Customer advances		641,751			641,751
Notes payable		4,182,468			3,927,468
Convertible note payable and accrued interest-related party, net of discount		-			-
Convertible notes payable, net of discount		2,720,700			2,720,700
Notes payable and accrued interest- related party		27,356,841			26,869,911

Total current liabilities		42,782,446			41,373,489

Convertible note payable, net of discount		1,389,337			1,366,922
Convertible note payable and accrued interest-related party, net of discount		2,676,913			2,560,425

Total liabilities		46,848,696			45,300,836

Commitments and contingencies

Stockholders' deficit:
Common stock, $0.0001 par value; 150,000,000 shares authorized at May 31 and February 28, 2015; 113,951,432 and 113,041,432 issued and outstanding at May 31 and February 29, 2016, respectively		11,399			11,304
Additional paid-in capital		410,499,597			410,404,692
Accumulated deficit		(456,992,704	)		(455,586,047	)

Total stockholders' deficit		(46,481,708	)		(45,170,051	)

Total liabilities and stockholders' deficit	$	366,988		$	130,785

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

AURA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MAY 31, 2016 AND 2015
(Unaudited)

	May 31,
	2016			2015
Net Revenues	$	0		$	106,327
Cost of goods sold		0			73,562
Gross Profit		0			32,765

Operating expenses:
Engineering, research and development expenses		33,788			137,487
Selling, general and administrative expenses		616,977			1,455,689
Total operating expenses		650,765			1,593,176

Loss from operations		(650,765	)		(1,560,411	)

Other (income) and expense:
Interest expense, net		827,947			740,700
Gain on debt settlement		(70,288	)		-
Other income, net		(1,767	)		(59,500	)
Total other (income) expense		755,892			681,200

Net Loss	$	(1,406,657	)	$	(2,241,611	)

Total basic and diluted loss per share	$	(0.01	)	$	(0.02	)
Weighted average shares used to compute basic and diluted loss per share		113,848,171			113,041,432

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

See accompanying notes to these unaudited financial statements.

AURA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2016 AND 2015
(Unaudited)

	Three Months Ended May 31,
	2016			2015
Cash flow from operating activities:
Net Loss	$	(1,406,657	)	$	(2,241,611	)
Adjustments to reconcile Net loss to net cash used in operating activities
Depreciation Expense		-			713
Amortization of debt discount		64,110			64,110
Gain on debt settlement		(70,288	)		-
(Increase) decrease in:
Accounts receivable		2,115			54,352
Other current assets and deposit		96,819			39,623
Increase (decrease) in:
Accounts payable, customer deposit and accrued expenses		1,215,829			1,767,075
Net cash used in operations		(98,072	)		(315,740	)

Financing activities:
Proceeds from convertible notes payable		-			-
Proceeds from notes payable-net		405,000			24,000
Proceeds from notes payable-related party, net		28,208			310,000

Net cash provided by financing activities:		433,208			334,000

Net increase (decrease) in cash & cash equivalents		335,136			18,260

Cash and cash equivalents at beginning of period		22,175			34,855

Cash and cash equivalents at end of period	$	357,311		$	53,115
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	-		$	-
Income taxes		-			-

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

None

See accompanying notes to these unaudited financial statements.

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

NOTE 1 – ACCOUNTING POLICIES

Accounting principles

In the opinion of management, the accompanying balance sheets and related interim statements of income and comprehensive income, and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended February 29, 2016 filed on September 18, 2017 with the U.S. Securities and Exchange Commission.

Estimates

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

Recently Issued Accounting Pronouncements

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

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

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

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

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

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

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

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

Reclassifications

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

NOTE 2 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the Three months ended May 31, 2016 and May 31, 2015, the Company incurred losses of $1,406,657 and $2,241,611, respectively and had negative cash flows from operating activities of $98,072 and $315,740, respectively.

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

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

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

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

NOTE 3 – INVENTORIES

Inventories, stated at the lower of cost (first in first out), or market consisted of the following:

	May 31, 2016			February 29, 2016
Raw materials	$	1,872,720		$	1,858,347
Finished goods		1,568,188			1,558,554
		3,440,908			3,416,901
Inventory reserve		(3,440,908	)		(3,416,901	)
	$	0		$	0

The Company has not operated and therefore has not produced product since late 2015. As a result, while the Company believes that a significant portion of the inventory has value, we are unable to substantiate its demand and market value and as a result have elected to reserve it in its entirety as of May 31, 2016 and February 29, 2016.

NOTE 4 – OTHER CURRENT ASSETS

Other assets of $9,677 and $16,283 are comprised of vendor advances of $2,895 and $16,283 as of May 31, 2016 and February 29, 2016.

NOTE 5 – PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

	May 31, 2016			February 29, 2016
Machinery and equipment	$	964,111		$	964,111
Furniture and fixtures		163,302			163,302
		1,127,413			1,127,413
Less accumulated depreciation		(1,127,413	)		(1,127,413	)
Property, plant and equipment, net	$	0		$	0

Depreciation expense was $0 and $713 for the Three months ended May 31, 2016 and May 21, 2015, respectively.

NOTE 6 – NOTES PAYABLE

Notes payable consisted of the following:

	May 31, 2016		February 29, 2016

Demand notes payable, at 10% and 16%	$	4,182,468	$	3,927,468
Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 10^th of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.		926,024		910,488
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 2^nd of each month with the principal payment due on the maturity date. To-date, the Company has not made any interest payments as set forth in this note.		463,313		456,434
Senior secured convertible notes dated May 7, 2013, due May 7, 2014, convertible into shares of our common stock at a price of $0.75 per share. The note was not repaid.		2,395,700		2,395,700
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50 per share. The note was not repaid.		325,000		325,000
Convertible notes dated April thru May, 2016. The notes carry an interest rate of 5% and might be converted into shares of Company’s common stock if the shareholders approve a 7:1 reverse stock split.		400,000		-

		8,292,505		8,015,090

Less: Current portion	$	6,903,168	$	6,648,168

Long-term portion	$	1,389,337	$	1,366,922

CONVERTIBLE DEBT

On May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note with a principal value of $1,087,000 (“New Kenmont Note”) and warrants to Kenmont Capital Partners (“Kenmont”). The New Kenmont Note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,449,333 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $342,020 as a discount, which is being amortized over the life of the note. As of the date of filing, the Company has not made any interest payments under the Kenmont Note.

On May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. (“LPD”). The New LPD Note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 744,933 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $175,793 as a discount, which is being amortized over the life of the note. As of the date of filing, the Company has not made any interest payments under the New LPD Note.

On May 7, 2013, the Company entered into an agreement with an individual for the sale of a $750,000 of secured convertible note payable and warrants. The note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares 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 is being amortized over the life of the note. As of the date of filing, the note has not been repaid and is currently accruing interest at the rate of 16%.

On June 20, 2013, the Company entered into an agreement with four individuals for the sale of $325,000 of secured convertible notes payable and warrants. These notes have a 1-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants entitle the holders to acquire 433,334 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $63,622 as a discount, which is being amortized over the life of these notes. As of the date of filing, these notes have not been repaid and are currently accruing interest at the rate of 16%.

On August 19, 2013, the Company entered into an agreement with a member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Director Note”) and warrants. The Director Note carries a base interest rate of 9.5%, has a 4-year maturity date and is convertible into shares of common stock at the conversion price of $0.50 per share. The warrant entitles the holder to acquire 5,000,000 shares at an initial exercise price of $0.75 per share for a 7-year exercise period. The Company recorded $667,118 as a discount, which is being amortized over the life of the Director Note. On June 20, 2013, $500,000 of this Director Note was converted to a demand note payable.

Future maturities of notes payable at May 31, 2016 are as follows:

Year Ending February 28,
2017	$	1,389,337
Total	$	1,389,337

7% Convertible Promissory Notes:

On August 10, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory note in the amount of $1,000,000. The note’s balance together with all accrued interest thereon shall be due and payable on August 10, 2017 and the annual interest rate is 7% per annum and is due to be repaid 5 years from the closing date. The note holder will receive interest on the unpaid principal amount payable monthly in arrears on the tenth day of each calendar month commencing September 10, 2012. Interest shall be computed on the actual number of days elapsed over a 360-day year. The note holder has the right from and after the date of issuance, and until any time until the note is fully paid, to convert any outstanding and unpaid principal portion of the note into shares of the Company’s common stock. The company recorded $310,723 as a debt discount, which is being amortized over the life of the note. As of the date of filing, no payments of interest or principal have been made by the Company on this note.

On October 2, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory note in the amount of $500,000. The note’s balance together with all accrued interest thereon shall be due and payable on October 2, 2017 and the annual interest rate is 7% per annum and is due to be repaid 5 years from the closing date. The note holder will receive interest on the unpaid principal amount payable monthly in arrears on the second day of each calendar month commencing November 2, 2012. Interest shall be computed on the actual number of days elapsed over a 360-day year. The note holder has the right from and after the date of issuance, and until any time until the note is fully paid, to convert any outstanding and unpaid principal portion of the note into shares of the Company’s common stock. The company recorded $137,583 as a debt discount, which is being amortized over the life of the note. As of the date of filing, no payments of interest or principal have been made by the Company on this note.

NOTE 7 – ACCRUED EXPENSES

Accrued expenses consisted of the following:

	May 31, 2016		February 29, 2016

Accrued payroll and related expenses	$	3,146,841	$	3,148,841
Accrued rent		214,774		218,025
Accrued interest		2,135,804		1,933,017
Other		90,000		90,000
Total	$	5,587,419	$	5,389,883

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

NOTE 8 – SHAREHOLDERS’ EQUITY

Common Stock

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

During the three months ended May 31, 2015, we did not issue any shares of common stock.

Employee Stock Options

During the Three months ended May 31, 2016, there were no stock options granted to employees.

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

	2006 Plan
	Weighted- Average Exercise Price		Aggregate Intrinsic Value		Number of Options
Outstanding, February 29, 2016		$0.75-$1.00	$	0.00		7,224,000
Cancelled		-		-		-
Granted		-		-		-
Outstanding, May 31, 2016		$0.75-$1.00	$	0.00		7,224,000

The exercise prices for the options outstanding at May 31, 2016, and information relating to these options is as follows:

Options Outstanding

Exercisable Options

Range of Exercise
Price

Number

Weighted
Average
Remaining
Life

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Life

Number

Weighted
Average
Exercise
Price

$0.75-$1.00

7,224,000

3.75 years

0.79

3.75 years

7,224,000

0.79

Warrants

Activity in issued and outstanding warrants is as follows:

	Number of Shares			Exercise Prices
Outstanding, February 29, 2016		36,726,208			$0.10-$1.50
Granted		-			-
Exercised		-			-
Cancelled		(1,657,188	)		$1.00-$1.50
Outstanding, May 31, 2016		35,069,020			$0.10-$1.50

There were no warrants issued in the three months ended May 31,2016.

The exercise prices for the warrants outstanding at May 31, 2016, and information relating to these warrants is as follows:

Range of Exercise Prices	Stock Warrants Outstanding		Stock Warrants Exercisable		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price of Warrants Outstanding		Weighted- Average Exercise Price of Warrants Exercisable		Intrinsic Value
$0.10-$0.75		19,481,012		19,481,012	58 months	$	0.56	$	0.56	$	0.00
$0.75		1,082,734		1,082,734	57 months	$	0.75	$	0.75	$	0.00
$0.75		1,000,000		1,000,000	47 months	$	0.75	$	0.75	$	0.00
$0.75-$1.00		5,990,275		5,990,275	42 months	$	0.77	$	0.77	$	0.00
$1.00-$1.25		795,000		795,000	4 months	$	1.05	$	1.05	$	0.00
$1.00		6,719,999		6,719,999	3 months	$	1.00	$	1.00	$	0.00

		35,069,020		35,069,020

NOTE 9 – INCOME TAXES

Our effective tax rates were approximately 0.0% for the three months ended May 31, 2016 and 2015. Our effective tax rate was lower than the U.S. federal statutory rate primarily due to the fact that we record a full valuation allowance against our deferred tax assets, which is primarily comprised of net operating losses.

NOTE 10 – SEGMENT INFORMATION

We are a United States based company providing advanced technology products to various industries. The principal markets for our products are North America, Europe, and Asia. All of our operating long-lived assets are located in the United States. We operate in one segment.

Total net revenues from customer geographical segments are as follows for the three months ended May 31, 2016 and 2015:

	2016		2015

United States	$	0	$	30,124
Canada		-		-
Europe		-		210
Asia		-		20,014
Other		-		55,979
Total	$	0	$	106,327

NOTE 11 – SIGNIFICANT CUSTOMERS

Concentration Risk

In the three months ended May 31, 2016, we did not have any sales to customers. In the Three months ended May 31, 2015, we sold AuraGen related products to three significant customers whose sales comprised 45%, 32% and 17% of sales, respectively. Net accounts receivable from these customers at May 31, 2015 were $0, $0 and $0 respectively. These customers are not related to or affiliated with us.

NOTE 12 – RELATED PARTIES TRANSACTIONS

At May 31, 2016, the balance reflected in Notes Payable and accrued interest-related party, current, includes $14,903,252 of unsecured notes payable plus accrued interest of $8,054,541 to Mr. Brelow, a member of our Board of Directors, payable on demand, bearing interest at a rate of 10% per annum. The balance of $14,880,372 plus accrued interest of $7,680,164 as of February 29, 2016. During the three months ended May 31, 2015 and May 31, 2015, interest amounting to $374,378 and $359,762 respectively, was incurred on these notes. The balance also includes $82,000 of unsecured notes payable plus accrued interest of $25,748 and $23,704 to our CEO pursuant to a demand note entered into on April 5, 2013 and an unsecured note payable to Mr. Kopple, another member of our Board of Directors in the total amount of $3,424,064 and $3,418,738 plus accrued interest of $867,234 and $784,934 with interest at a rate of 10% per annum as of May 31, 2016 and February 29, 2016, respectively.

At May 31, 2016, the balance reflected in Convertible note payable and accrued interest-related party, long term, includes $1,880,851 of secured convertible notes payable net of discounts of $119,149 plus accrued interest of $796,063 to Mr. Kopple, a member of our Board of Directors.

NOTE 13 – COMMITMENTS

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

NOTE 14 – SUBSEQUENT EVENTS:

On January 24, 2017 the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a 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 $14,930,041 providing for no interest for six months and interest of 5% per annum thereafter payable monthly in arrears. The note also provides various default provisions. The agreement further provides that $11,982,041 of the note will be converted into 7,403,705 shares of common stock concurrent with the stockholders approving a 1 for 7 reverse stock split within one year of entering this agreement and the remaining may be converted at any time thereafter post reverse split. In the absence of the approval within one year, this agreement will become null and void. The Company has elected to continue to accrue interest on this agreement until such time as the 1 for 7 reverse stock split has been approved.

On January 30, 2017, the Company entered into an agreement with five of our secured creditors (the “Secured Creditors”), pursuant to which a Securities Purchase Agreement dated May 6, 2013 (the “2013 Purchase Agreement”) among the Company, the Secured Creditors, and two other parties was amended (the “Amended Agreement”). As part of the 2013 transaction, we entered into a security agreement with the Secured Creditors and two other parties (collectively the “Buyers”) pursuant to which the Buyers were granted a security interest in all of Company’s assets except for its patents and other intellectual properties. The Secured Creditors have the right to amend the 2013 Purchase Agreement on behalf of all Buyers. The Amended Agreement amends the 2013 Purchase Agreement and the original security agreement, replaces the convertible notes with “Amended Notes” and replaces the warrants with “Amended Warrants.” The Amended Notes provide that all accrued and unpaid interest on the original notes through October 31, 2016 be added to the principal amount of the Amended Notes. The Amended Notes bear interest at the rate of 0% until May 1, 2017 and 5% per annum thereafter, subject to reduction to comply with applicable law, and mature in 60 months from the effective date of a 1 for 7 reverse stock split. Upon certain financings, the Company is obligated to make a payment to the holders of the Amended Notes in the amount of 20% of the outstanding Notes. Immediately upon the effectiveness of a 1 for 7 reverse stock split, 80% of the then-unpaid principal of and all of the then accrued but unpaid interest on the Amended Notes is automatically converted. In addition, the Amended Agreement waives any and all events of default under the 2013 Purchase Agreement and related transaction documents existing on or prior to January 30, 2017 and amends the defaults and remedies section of the 2013 Purchase Agreement. Two Buyers, who together represent less than 3% of the Company’s common stock issuable upon conversion of the original notes and exercise of the original warrants, did not sign the amendment and have named the Company and the Company’s Chief Executive Officer among several defendants in a lawsuit demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. Management believes that the two plaintiffs have no valid claim against the Company or our Chief Executive Officer. In March 2017, plaintiffs moved for partial summary adjudication against the Company and our Chief Executive Officer; however, the Court denied plaintiffs’ motion. Both the Company and Mr. Gagerman have filed demurrers seeking dismissal of this action, which remain pending at this time.

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

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

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

Forward Looking Statements

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

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

	●	Our ability to generate positive cash flow from operations;

	●	Our ability to obtain additional financing to fund our operations;

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

	●	The impact of unfavorable results of legal proceedings;

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

	●	Our ability to compete effectively against competitors offering different technologies;

	●	Our business development and operating development;

	●	Our expectations of growth in demand for our products; and

●

Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 29, 2016 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.

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

Overview

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

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

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

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

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

The Company has been successful in restructuring its secured debt and has reached an agreement with its secured creditors whereby all defaults and penalties have been waived and 80% of the secured debt will be converted into shares of the Company’s common stock as soon as the Company holds an annual meeting of stockholders to elect a new board of directors. The balance (the remaining 20%), is to be paid to the secured creditors in cash if the Company raises at least $4.0 million in proceeds through new equity offering. Upon conversion, the converting secured creditors will receive approximately 3.9 million new common shares in exchange for approximately $5.73 million of converting debt.

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

Our financial statements included in this report have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as a result of our losses from operations, there is substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on the Company’s financial statements for the year ended February 29, 2016 expressed substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from our possible inability to continue as a going concern.

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

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Inventory Valuation and Classification

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

Valuation of Long-Lived Assets

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

Specific asset categories are treated as follows:

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

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

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

Results of Operations

Three months ended May 31, 2016 compared to three months ended May 31, 2015

Net revenues for the three months ended May 31, 2016 (the “First Quarter FY2017”) decreased $106,327 to $0 from $106,327 in the three months ended May 31, 2015 (the “First Quarter FY2016”). The Company has virtually ceased operations due to a lack of funding.

Cost of goods decreased $73,562 to $0 in the First Quarter FY2017 from $73,562 in the First Quarter FY2016 as a result of the virtual cessation of operations as noted above.

Engineering, research and development expenses decreased $103,699 (75%) to $33,788 in the First Quarter FY2017 from $137,487 in the First Quarter FY2016. The decline is attributable to a lack of funds resulting in the virtual cessation of operations as noted above.

Selling, general and administrative expense decreased $838,712 (58%) to $616,977 in the First Quarter FY2017 from $1,455,689 in the First Quarter FY2016. As noted above, the decrease is primarily attributable to the curtailment of activities due to a lack of financial resources.

Net interest expense in the First Quarter FY2017 increased $87,246 (12%) to $827,947 from $740,701 in the First Quarter FY2016 due to our increased debt levels.

Our net loss for the First Quarter FY2017 decreased $834,954 to $1,406,657 from $2,241,611 in the First Quarter FY2016, as a result of the overall decrease in operations due to the lack of financial resources.

Liquidity and Capital Resources

We had cash of approximately $357,000 and $22,000 as of May 31, 2016, and February 29, 2016, respectively. We had a working capital deficit at May 31, 2016, and February 29, 2016 of $42,415,458 and $41,332,917, respectively. The working capital deficit includes notes payable and accrued interest to related parties of $27,356,841 and $26,869,911 as of May 31 and February 29, 2016, respectively. As of May 31, 2016, we had accounts receivable, net of allowance for doubtful accounts, of $0 compared to $2,115 as of February 29, 2016.

Net cash used in operations for the Three months ended May 31, 2016, was $98,072, a decrease of $217,668 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the Three months ended May 31, 2016, was $433,208, resulting from net proceeds from notes payable.

There were no acquisitions of property and equipment in the Three months FY 2017 or the Three months FY 2016.

Accrued expenses as of May 31, 2016 increased $197,535 to $5,587,418 from $5,389,883 as of February 29, 2016. Approximately $1,335,000 of accrued expenses is salaries accrued but unpaid to certain employees and ex-employees due to a lack of resources, and approximately $518,000 is accrued but unused vacation time earned by employees.

Net proceeds from the issuance of debt totaled $443,208 in the Three months FY 2017, compared with $334,008 in the Three months FY 2016. As of May 31, 2016, the total amount owing a board member is $14,903,252 plus accrued interest of approximately $8,055,000. We also owe another Board member a total of $5,304,457, net of discounts of $119,150 plus accrued interest of approximately $1,663,296. If the Board members were to demand repayment, we do not currently have the resources to make the payments.

The Company had a deficit of $46,481,708 in shareholders’ equity as of May 31, 2016, compared to $45,170,051 as of February 29, 2016.

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

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

Capital Transactions

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

During the quarter ended May 31, 2015, we did not issue any shares of common stock.

Inventories

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

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

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

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

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

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

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

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended May 31, 2016, which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

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

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

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

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

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

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

ITEM 1A. Risk Factors.

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

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

During the quarter ended May 31, 2016, we did not issue any shares of common stock.

All of the sales of unregistered securities are believed to be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as these offerings were a private placement to a limited number of qualified investors without public solicitation or advertising.

ITEM 3. Defaults Upon Senior Securities.

We have commitments to pay investors and lenders $40,553,920 comprising principal and accrued interest on various convertible notes, non-convertible notes and loans payable through May 31, 2016. Due to our lack of financial resources, the Company was unable to make various required principal and interest payments under a number of notes payable, and was in potential default on $13,535,679 of such debt as of May 31, 2016.

In 2017, the Company has been successful in restructuring a total of approximately $33.7 million of debt (the “Restructured Debt”) through agreements reached with all of the Company’s secured creditors and the majority of the Company’s unsecured creditors. Pursuant to these restructuring agreements, any and all defaults and penalties with respect to the Restructured Debt have been waived, approximately $9.3 million in accrued interest has been forgiven, and approximately $20.9 million will be converted into approximately 14.1 million shares of the Company’s common stock upon stockholder approval of a 1-for-7 reverse stock split and the election a new board of directors. Of the $13,535,679 of notes payable in potential default as of May, 31, 2016, $6,245,841 was subsequently restructured in 2017 and any potential defaults with respect to this amount have been resolved.

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

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits

31.1	Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

31.2	Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

32.1	Certification of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Schema Document

101.CAL	XBRL Calculation Linkbase Document

101.DEF	XBRL Definition Linkbase

101.LAB	XBRL Label Linkbase Document

101.PRE	XBRL Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AURA SYSTEMS, INC.
(Registrant)

Date: September 18, 2017

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