UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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the quarterly period ended
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Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
| Class | Outstanding October 4, 2021 | |
AURA SYSTEMS, INC.
INDEX
| Index | Page No. | ||
| PART I. FINANCIAL INFORMATION | |||
| ITEM 1. | Financial Statements (Unaudited) | 1 | |
| Condensed Balance Sheets as of August 31, 2021 and February 28, 2021 | 1 | ||
| Condensed Statements of Operations for the Three and Six-months Ended August 31, 2021 and 2020 | 2 | ||
| Condensed Statements of Cash Flows for the Six-months Ended August 31, 2021 and 2020 | 3 | ||
| Statements of Changes in Shareholders’ Deficit | 4 | ||
| Notes to Financial Statements | 5 | ||
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 | |
| ITEM 4. | Controls and Procedures | 20 | |
| PART II. OTHER INFORMATION | |||
| ITEM 1. | Legal Proceedings | 21 | |
| ITEM 1A. | Risk Factors | 22 | |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 | |
| ITEM 3. | Defaults Upon Senior Securities | 22 | |
| ITEM 4. | Mine Safety Disclosures | 23 | |
| ITEM 5. | Other Information | 23 | |
| ITEM 6. | Exhibits | 23 | |
| SIGNATURES AND CERTIFICATIONS | 24 | ||
i
ITEM 1. FINANCIAL STATEMENTS
AURA SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
| August
31, 2021 | February
28, 2021 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Fixed Assets, net | ||||||||
| Right-of-use asset | ||||||||
| Deposit | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities & Shareholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Customer advances | ||||||||
| Operating lease liability | ||||||||
| Notes payable, current portion | ||||||||
| Notes payable and accrued interest-related party | ||||||||
| Total current liabilities | ||||||||
| Convertible note payable-related party | ||||||||
| Notes payable, non-current | ||||||||
| Convertible notes payable | ||||||||
| Operating lease liability, non-current | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
| Shareholders’ deficit | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
See accompanying notes to these unaudited financial statements.
1
AURA SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three-Months Ended | Six-Months Ended | |||||||||||||||
| August 31, | August 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross loss | ( | ) | ( | ) | ||||||||||||
| Operating expenses | ||||||||||||||||
| Engineering, research & development | ||||||||||||||||
| Selling, general & administration | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Gain on debt settlement | - | - | ( | ) | ( | ) | ||||||||||
| Gain on extinguishment of debt | ( | ) | ||||||||||||||
| Forgiveness of PPP loan | - | ( | ) | - | ||||||||||||
| Other income | ( | ) | - | ( | ) | |||||||||||
| Loss before tax provision | ( | ) | ( | ) | ||||||||||||
| Income tax provision | - | |||||||||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic income (loss) per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic weighted-average shares outstanding | ||||||||||||||||
| Diluted income (loss) per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted weighted-average shares outstanding | ||||||||||||||||
See accompanying notes to these unaudited financial statements.
2
AURA SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six-Months Ended | ||||||||
| August 31, | ||||||||
| 2021 | 2020 | |||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to cash used | ||||||||
| in operating activities | ||||||||
| Depreciation | ||||||||
| Gain on write-off of liabilities | ( | ) | ( | ) | ||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Changes in working capital assets and liabilities: | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued interest on notes payable | ||||||||
| Operating lease liability | ||||||||
| Cash used in operating activities | ( | ) | ( | ) | ||||
| Cash used in investing activities: | ||||||||
| Purchase of property, plant and equipment | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Issuance of common stock | ||||||||
| Payments of notes payable | ( | ) | ( | ) | ||||
| Proceeds from Federal PPP loans | ||||||||
| Cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | )# | ||||||
| Beginning cash | ||||||||
| Ending cash | $ | $ | ||||||
| Cash paid in the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash transactions: | ||||||||
| Accounts payable converted into shares of common stock | $ | $ | ||||||
| Accrued expenses converted into shares of common stock | $ | $ | ( | ) | ||||
| Notes payable converted into shares of common stock | $ | $ | ||||||
See accompanying notes to these unaudited financial statements.
3
AURA SYSTEMS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Unaudited)
| Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Total Shareholders’ Deficit | ||||||||||||||||
| Balance, February 29, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, May 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Shares issued for cash | - | |||||||||||||||||||
| Shares issued for settlement | - | |||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance, August 31, 2020 | ( | ) | ( | ) | ||||||||||||||||
| Balance, February 28, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, May 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Shares issued for cash | ||||||||||||||||||||
| Shares issued for settlement | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, August 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to these unaudited financial statements.
4
AURA
SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aura Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage in the development, commercialization, and sale of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen® axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets.
Basis of Presentation
In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. However, the results of operations included in such financial statements may not necessary be indicative of annual results.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021 (“Fiscal 2021”) filed with the Securities and Exchange Commission (“SEC”) on June 1, 2021 (“2021 Form 10-K.”).
Our fiscal year ends on the last day of February. Accordingly, the current fiscal year is ending on February 28, 2022; we refer to the current fiscal as Fiscal 2022. The prior fiscal year is Fiscal 2021.
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in our financial statements included in Company’s 2021 Form 10-K.
5
Use of 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this amendment on its financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the effect of adopting this ASU on its consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its financial statements.
NOTE 2 – GOING CONCERN
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the
twelve-month period ended February 28, 2021 and the six-month period ended August 31, 2021, the Company reported net loss of
approximately $
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.
During the next twelve months we intend to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen®®/VIPER products both domestically and internationally and to add to our existing management team. In addition, we plan to complete the move to our new facility for operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. We anticipate being able to obtain new sources of funding to support these actions in the upcoming fiscal year.
6
NOTE 3 – NOTES PAYABLE
Non-related party and related party notes payable principal and accrued interest amounts consisted of the following:
| Non-Related Party Promissory Notes (see below) | August 31, 2021 | February 28, 2021 | ||||||
| Demand promissory notes payable with Mr. Zeitlen as of May 31, 2021 and February 22, 2021, respectively, carrying an interest rate of | $ | $ | ||||||
| Messrs. Abdou note payable | ||||||||
| U.S. Payroll Protection Plan loan program | ||||||||
| U.S. Small Business Administration-Economic Injury Disaster Loan | ||||||||
| Total Demand and Notes Payable | ||||||||
| Convertible Promissory Note originally dated August 10, 2012, due | ||||||||
| Convertible Promissory Note originally dated October 2, 2012, due | ||||||||
| Senior secured convertible notes originally dated May 7, 2013, due | ||||||||
| Senior secured convertible notes originally dated June 20, 2013, due | ||||||||
| Total Convertible Promissory Notes | ||||||||
| Accrued Interest - convertible, demand and notes payable | ||||||||
| Total Non-Related Party | ||||||||
| Notes Payable-Related Party | ||||||||
| Convertible Note payable and accrued interest – related party, carrying an interest rate of 5% - see Note 6, Breslow Note, for further details | ||||||||
| Kopple Notes Payable-related party, see Kopple Notes, Note 6: | ||||||||
| Mel Gagerman Note Payable, see Gagerman, Note 6: | ||||||||
| On November 20, 2019, the Company entered into an agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture. Payment terms consist of a non-interest bearing promissory note and a payment plan pursuant to which the $ | ||||||||
| Total Related Party | ||||||||
| Total notes payable and accrued interest | ||||||||
| Less: Current portion | $ | ( | ) | $ | ( | ) | ||
| Long-term portion | $ | $ | ||||||
7
Demand Promissory Note and Notes Payable
Demand
promissory note in the amount of $
Abdou and Abdou
On
June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $
Paycheck Protection Plan Loans
During
April 2020, the Company ceased operations for approximately 6 weeks in compliance with State of California and the County of Orange public
health pronouncements associated with the COVID-19 pandemic. On April 23, 2020,
On March 3, 2021, the Company received $91,235 pursuant to Paycheck Protection Program Second Draw (“PPP2”) in accordance with legislation approved in December 2020. The terms and conditions of this loan is the same as PPP with the principal amount of $91,235 recognized as part of notes payable, non-current on the balance sheet as of August 31, 2021.
Economic Injury Disaster Loan
Convertible Notes Payable
Kenmont Capital Partners
On
May 7 and September 25, 2013, the Company entered into Securities Purchase Agreements for senior convertible notes in the aggregate amount
of approximately $
8
LPD Investments
On
May 7, 2013, the Company transferred 2 note payables with a total principal value of $
Guenther
On
May 7, 2013, the Company entered into an agreement with an individual, Mr. Guenther, for the sale of $
Dresner and Lempert
On
June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and Dr. Lempert, for the sale of $
Dalrymple – August 2012
On
August 10, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $
Dalrymple – October 2012
On
October 2, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $
On
January 30, 2017, the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven secured
creditors holding a security interest in all of the Company’s assets except for its patents and other intellectual properties.
9
NOTE 4 – ACCRUED EXPENSES
Accrued expenses and other current liabilities consisted of the following as of the periods referenced below:
| August 31, 2021 | February 28, 2021 | |||||||
| Accrued payroll and related expenses | ||||||||
| Accrued interest | ||||||||
| Accrued interest-related party | ||||||||
| Other accrued expenses | ||||||||
| $ | $ | |||||||
Accrued
payroll and related expenses consist primarily of salaries and vacation time accrued in prior years but not paid to employees due to
our lack of financial resources (see Note 7). Accrued interest consists of amounts due (see Note 3) to holders of convertible promissory
notes of $
NOTE 5 – SHAREHOLDERS’ EQUITY
Common Stock
During
the three and six-months ended August 31, 2021, the Company issued approximately
During
the three and six-months ended August 31, 2020, the Company issued approximately
The 2011 Director and Executive Officers Stock Option Plan
In
October 2011, shareholders approved the 2011 Director and Executive Officers Stock Option Plan at the Company’s annual meeting.
Under the 2011 Plan, the Company may grant options for up to
The
aggregate fair value of the
On
February 25, 2021 and during the fourth quarter of Fiscal 2021, the Board approved the grant of
The
aggregate fair value of the
10
The following tables provide additional information regarding stock options outstanding and exercisable under the 2011 Director and Executive Officers Stock Option Plan for the six-months ended August 31, 2021:
Directors and Officers 2011 plan
| Number of Options | Exercise Price | Weighted Average Intrinsic Value | ||||||||||
| Outstanding, February 28, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exrecised | ||||||||||||
| Cancelled | ( | ) | ||||||||||
| Outstanding, August 31, 2021 | $ | $ | ||||||||||
| Range of Exercise Price | Stock
Options Outstanding | Stock
Options Exercisable | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price of Options Outstanding | Weighted Average Exercise Price of Optipons Exercisable | |||||||||||||||
| $ | $ | $ | ||||||||||||||||||
Warrants
Historically,
warrants have been issued to investors and others for services and enticements to invest funds with the Company. Generally, these warrants
fully vest immediately or within a 90-day period from the date of grant and have an expiration date of five-years from the date of grant.
With grants dated prior to Fiscal 2021, an exercise price of $
Activity in issued and outstanding warrants is as follows for the six-months ended August 31, 2021:
Warrants outstanding
| Number of Warrants | Exercise Price | |||||||
| Outstanding and exercisable, February 28, 2021 | $ | |||||||
| Granted | ||||||||
| Exrecised | ||||||||
| Cancelled | ( | ) | ||||||
| Outstanding and exercisable, August 31, 2021 | $ | |||||||
The weighted
average remaining contractual life was
11
NOTE 6 – RELATED PARTIES TRANSACTIONS
Notes
payable-related party, non-current - $
Breslow Note
On
January 24, 2017, the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a former Director of the Company. Pursuant
to the agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $
Notes
payable and accrued interest-related party, current - $
Kopple Notes
As
of November 30, and February 28, 2021, the principal amount owed to Robert Kopple (former Vice-Chairman of our Board) of $
On
August 19, 2013,
Gagerman Note
On
August 31, 2021, the Gagerman note consisted of $
Jiangsu Shengfeng Note
On
November 20, 2019, the Company entered into an agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture,
to return $
NOTE 7 – COMMITMENTS & CONTINGENCIES
Leases
12
Contingencies
We are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially adversely affected.
In
2017, the Company’s former COO was awarded approximately $
On
March 26, 2019,
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Report contains forward-looking statements within the meaning of the federal securities laws. Statements other than statements of historical fact included in this Report, including the statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding future events or prospects are forward-looking statements. The words “approximates,” “believes,” “forecasts,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would,” “could,” “should,” “seek,” “may,” or other similar expressions in this Report, as well as other statements regarding matters that are not historical fact, constitute forward-looking statements. We caution investors that any forward-looking statements presented in this Report are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
| ● | Our ability to generate positive cash flow from operations; |
| ● | Our ability to obtain additional financing to fund our operations; |
| ● | The impact of economic, political and market conditions on us and our customers; |
| ● | The impact of unfavorable results of legal proceedings; |
| ● | Our exposure to potential liability arising from possible errors and omissions, breach of fiduciary duty, breach of duty of care, waste of corporate assets and/or similar claims that may be asserted against us; |
| ● | Our ability to compete effectively against competitors offering different technologies; |
| ● | Our business development and operating development; |
| ● | Our expectations of growth in demand for our products; and |
| ● | Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2021, issued on June 1, 2021 (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 because 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.
14
Overview
Our business is based on the exploitation of our Axial Flux Induction solution known as the AuraGen® for commercial and industrial applications and the VIPER for military applications. Our business model consists of two major components: (i) sales and marketing, (ii) design and engineering. Our sales and marketing approaches are composed of direct sales in North America and the use of agents, distributors. In North America, our primary focus is in (a) mobile exportable power applications, (b) EV applications and (c) U.S. Military applications. The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen®/VIPER solution such as higher power/torque solutions, and different input and output voltages (DC and AC input and output versions )
During Fiscal 2018 and Fiscal 2019, the Company’s engineering, manufacturing, sales, and marketing activities were reduced while we focused on renegotiating numerous financial obligations. During this time, the Company’s agreements with numerous customers, third party vendors, and organizations and entities material to the operation of the Company business were canceled, delayed or terminated. During Fiscal 2018, the Company successfully restructured in excess of $30 million of debt. Robert Kopple, our former Vice Chairman of the Board, was the only significant unsecured note holder that did not executed formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are presently owed approximately $11.5 million. We dispute Mr. Kopple’s claims. See “Item 3. Legal Proceedings” included in our Annual Report on Form 10-K for Fiscal 2021 and Part II, Other Information, contained in this Quarterly Report for information regarding the dispute with Mr. Kopple regarding these transactions. As of the filing of this Quarterly Report, Mr. Kopple has not accepted our numerous offers to settle this debt and continues to demand that as part of any such resolution, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion n of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.
In Fiscal 2019, we effectuated a one-for-seven reverse stock split and began increasing our engineering and manufacturing activities.
In Fiscal 2020 stockholders of the Company successfully removed Ronald Buschur, William Anderson and Si Ryong Yu from the Company’s Board of Directors and elected Ms. Cipora Lavut, Mr. David Mann and Dr. Robert Lempert as directors of the Company in their stead. See Item 3, Legal Proceedings for more information. Also, in Fiscal 2020, Melvin Gagerman –– Aura’s CEO and CFO since 2006 –– was replaced. In July 2019 Ms. Lavut succeeded Mr. Gagerman as President and Mr. Mann succeeded Mr. Gagerman as CFO. Dr. Lempert was appointed as Secretary of the Company by the Board of Directors also in July 2019. In the second half of Fiscal 2020, the Company began significantly increasing its engineering, manufacturing and marketing activities. From July 8, 2019 through the end of Fiscal year 2021 (February 28, 2021), we shipped more than 140 units to customers (more than a ten-fold increase over Fiscal 2019). Although our operations were impacted in Fiscal 2021 by the COVID-19 pandemic, during Fiscal 2021 we continued to expand our engineering and manufacturing capabilities. Our engineering, research and development costs for the six-months ended August 31, 2021 was approximately $163,000 as compared to $97,000 for the same period of Fiscal 2021. Subsequent to the end of Fiscal 2021, we relocated all administrative offices and operations to a new state-of-the-art facility consisting of approximately 18,000 square feet in Lake Forest, California. This new facility is wholly occupied by Aura.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial conditions and results of operations are based upon our 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. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. The full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated for these key estimates and assumptions. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are differences between these estimates and actual results, our financial statements may be materially affected.
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Revenue Recognition
The core principle of ASC 606, Revenue from Contracts with Customers (“ASC 606”), is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied.
Our primary source of revenue is the manufacture and delivery of AuraGen/VIPER sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $44,000 and $54,000 for the six-months ended August 31, 2021 and 2020, respectively.
In accordance with ASC 606, we recognize the entirety of the revenue, net of discounts, for our AuraGen/VIPER sets at time of product delivery to the customer (i.e., point-in-time sale), which also corresponds to the passage of legal title to the customer and the satisfaction of our single performance obligation to the customer. Our payment terms are cash payment due upon delivery and typically includes a 2.5% price discount in accordance with this policy. Our commercial terms and conditions do not include a right of return for reasons other than a defect in performance or quality. We offer 18 months assurance-type warranty covering material and manufacturing defects, which we account for under the guidance of ASC 460, Guarantees. We have a limited history of shipments, and, as such, we have not recorded a warranty liability on our balance sheets as of August 31 and February 28, 2021, respectively; however, we expect warranty claims to eventually be nil, therefore, we have not delayed the recognition of revenue during Fiscal 2022 and 2021.
Inventory Valuation and Classification
Inventories are valued at the lower of cost (first-in, first-out) or market, on an average cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. From Fiscal 2015 through 2019 we minimally operated and therefore only produced minimal product. As a result, while we believed that a portion of the inventory had value, we were unable to substantiate demand and fully reserved all inventory in Fiscal 2019. Beginning with Fiscal 2020, production has increased, and fully reserved inventory has been used in current production. We classify all of our inventory as either raw material and finished goods inventory.
Stock-Based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair value-based method and the recording of such expense in the statements of operations.
We account for stock option and warrant grants issued and vesting to non-employees, such as consultants and third parties, in accordance with FASB ASC 718, “Compensation – Stock Compensation”, where appropriate, whereas the fair value of the equity-based compensation is based upon the measurement date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.
In accordance with established public company accounting practice, we have consistently utilized the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily to management, employees, and directors. The Black-Scholes option-pricing model is a widely accepted method of valuation that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances. During the six-month period ended August 31, 2020, our Board of Directors awarded a total of 1,250,000 stock options to the five members of the board, which resulted in an aggregate fair value of $193,500 of which appro$174,000 was recorded as stock-based compensation in the six-months ended August 31, 2020. During Fiscal 2021, the board approved the aggregate grant of 1,500,000 stock options to board members, which resulted in an aggregate fair value of $383,000, of which approximately $242,000 was recorded as stock-based compensation cost in the six-months ended August 31, 2021.
Operating Leases
We adopted ASC 842, Leases, in Fiscal 2020, which required that public companies evaluate all operating leases in accordance with ASC 842 and recognize a lease liability on the balance sheet by determining the present value of the remaining lease payments for each lease using a discount rate based on the Company’s incremental borrowing rate. A corresponding right-of-use asset is also recognized that is amortized over the remaining term of the lease. Throughout Fiscal 2020 and the majority of Fiscal 2021, we did not implement the new guidance to our existing leases because the guidance does not require application of the standard for leases that are less than 12 months with lease renewal unlikely. All of the facility leases were month-to-month with management’s intention of exiting the leases and facilities as soon as practical. In February 2021, we entered into a 66-month facility lease in Lake Forest, CA that began on March 1, 2021, which resulted in the application of ASC 842 for the fiscal year ended February 28, 2021. As of February 28, 2020, we recognized a lease liability and a right-of-use asset of $1.2 million, respectively. During Fiscal 2022 and beyond, we will be applying the new lease standard to this lease and any other operating leases we enter into in the future.
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Impact of COVID-19
The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese joint venture’s manufacturing facilities being required to close and many of our customers suspending their own operations due to the COVID-19 pandemic. As a result, net sales and production levels during the fourth quarter of Fiscal 2020, the entirety of Fiscal 2021 and the first two quarters of Fiscal 2022 were significantly reduced, thus impacting our results of operations during these quarters.
In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety. These measures included the following:
| ● | Reduction of payroll related expenses including temporary furloughs during the first quarter of Fiscal 2021. | |
| ● | Deferral of capital expenditures and other discretionary expenditures | |
| ● | Safety programs including disinfecting activities in our facilities | |
| ● | Recommend vaccinations for all employees |
The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on current and future developments, including the containment of COVID-19 within the U.S. and globally, the timing and effectiveness of vaccine rollout, the possible spread of Covid-19 variants and the impact on capital and financial markets and the related impact on our customers, especially in the commercial vehicle markets. These future developments are outside of our control, are highly uncertain and cannot be predicted. If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require us to take further actions as it relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic have adversely impacted our results for the entirety of Fiscal 2021, the first two quarters of fiscal year 2022, and could be impactful for the balance of Fiscal 2022.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the twelve-month period ended February 28, 2021 and the six-month period ended August 31, 2021, the Company reported net loss of approximately $2.1 million and had negative cash flows from operating activities of approximately $1.3 million. In the event the Company is unable to generate profits and is unable to obtain financing for its working capital requirements, it may have to curtail its business further or cease business altogether. These factors raise substantial doubts about the Company’s ability to continue as a going concern.
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.
During the next twelve months we intend to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen®®/VIPER products both domestically and internationally and to add to our existing management team. In addition, we expect to complete the move to our new facility for operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. We anticipate being able to obtain new sources of funding to support these actions in the upcoming fiscal year.
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Results of Operations
Three-months ended August 31, 2021 compared to three-months ended August 31, 2020
Net revenue was approximately $2,200 for the three-months ended August 31, 2021 (the “Three-Months FY2022”) compared to approximately $5,000 for the three-months ended August 31, 2020 (the “Three-Months FY2021”). During the current quarter of 2022, we shipped miscellaneous parts. Revenue year-on-year has been negatively impacted by the COVID-19 pandemic. We cannot project with confidence the timing or amount of revenue that we can expect until the pandemic is under control globally.
Cost of goods sold was approximately $46,900 in the Three-Months FY2022 compared to approximately $3,400 in the Three-Months FY2021 resulting in a gross loss of $44,700 and a negative gross margin in excess of 1000%; as compared to $1,600 gross profit in the Three-Months FY2021 and a gross margin of 32%. The gross loss and related gross margin loss for the Three-Months FY2022 were largely influenced by increases in start-up costs related to the new facility. The gross margin of 32% in the Three-Months FY2021 was also influenced by the reduced demand for generator sets caused by the onset of Covid-19.
Engineering, research and development expenses were approximately $82,000 in the Three-Months FY2022, compared to approximately $63,000 in the Three-Months FY2021, or an increase of 30%. The higher costs are in relation to the development of a new ECU.
Selling, general and administration (“SG&A”) expense increased by approximately $63,000 (15%) to approximately $495,000 in the Three-Months FY2022 from approximately $432,000 in the Three-Months FY2021. During Three-Months FY2022, we recorded increased expense for (i) $80,000 of higher compensation expense related primarily to addition of business development consultants and increase in selling headcount (ii) $54,000 in higher facilities cost related to the physical consolidate our operations in Lake Forest, CA, and (iii) reduced other costs of $18,000, partially offset by (i) reduced legal and professional fees of $29,000 related to the annual audit having occurred in the second quarter of Fiscal 2021 due to Covid-19 (ii) non-recurring costs of $60,000 related to the consolidation of operations that occurred in Fiscal 2021.
Interest expense in the Three-Months FY2022 increased approximately $65,000 or 20%, to approximately $392,000 from approximately $327,000 in the Three-Months FY2021 due to the additional interest of $55,000 in connection with unpaid payroll.
Other income/expense in the Three-Months FY2022 was zero, as compared to other income of $3.5 million in the same period of Fiscal 2021 due to the cancellation of liabilities.
Net loss for the Three-Months FY2022 decreased by approximately $3.7 million, to $1.0 million loss from net income of $2.7 million in the Three-Months FY2021 due primarily to the one-time nature of the $3.5 million gain recognized in the prior year related to the cancellation of liabilities.
Six-months ended August 31, 2021 compared to six-months ended August 31, 2020
Net revenue was approximately $26,000 for the six-months ended August 31, 2021 (the “Six-months FY2022”) compared to approximately $54,000 for the six-months ended August 31, 2020 (the “Six-months FY2021”). During the current six month period of 2022, we delivered 2 generator unit as compared to 9 units delivered in the same period in the prior year. Revenue year-on-year has been negatively impacted by the COVID-19 pandemic. We cannot project with confidence the timing or amount of revenue that we can expect until the pandemic is under control globally including a successful rollout of the vaccine programs now underway.
Cost of goods sold was approximately $96,000 in the Six-months FY2022 compared to approximately $46,700 in the
Six-months FY2021 resulting in a gross loss of $70,000, or a gross margin loss of 269%, and a $7,300 gross profit in the Six-months FY2021 and a gross margin of 14%, respectively. The gross loss and related gross margin loss for the Six-months FY2022 were largely influenced by the low volume of shipments in the quarter, generally, and start-up costs incurred in connection with production activity transferred to a new facility in March 2021. During the Six-months FY2022, cost of goods sold includes direct labor and overhead of $77,000 as compared to $34,000 in the same period of FY2021. The gross margin of 14% in the Six-months FY2021 was also influenced by the reduced demand for generator sets caused by the onset of Covid-19.
Engineering, research and development expenses were approximately $163,000 in the Six-months FY2022, compared to approximately $99,000 in the Six-months FY2021, or an increase of 65%. The higher costs are in relation to the development of a new ECU.
Selling, general and administration (“SG&A”) expense increased by approximately $532,000 (69%) to approximately $1,308,000 in the Six-months FY2022 from approximately $776,000 in the Six-months FY2021. During Six-months FY2022, we recorded increased expense for (i) $242,000 of higher compensation expense related to addition of business development consultants and an increase in selling headcount in the amount of $76,000 (ii) $105,000 in higher facilities cost related to the physical consolidate our operations in Lake Forest, CA (iii) higher legal fees of $104,000 related to various litigation matters (iv) higher stock-based compensation cost of $68,000 based upon 1,500,000 stock options granted in the fourth quarter of FY2021 and (v) other expense increases of $37,000, partially offset by reduced impact of non-recurring costs of $24,000 related to the consolidation of operations that occurred primarily in Fiscal 2021 and was concluded in March 2021.
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Interest expense in the Six-months FY2022 increased approximately $45,000 or 7%, to approximately $662,000 from approximately $617,000 in the Six-months FY2021 due primarily to the additional interest of $55,000 related to an unpaid labor claim.
Other income in the Six-Months FY2022 was approximately $80,000, as compared to other income of approximately $3.6 million in the same period of Fiscal 2021 with the decline of $3.5 million due to the cancellation of $3.6 million of liabilities occurring in August 2020 and the forgiveness of the PPP Loan of $75,000 occurring in April of 2021.
Net loss for the Six-months FY2022 increased by approximately $4.2 million to $2.1 million from net income of $2.1 million in the Six-months FY2021 attributed to (i) reduced other income of $3.5 million partially (ii) reduced gross profit of $0.1 million and (iii) increased operating expenses of $0.6 million.
Liquidity and Capital Resources
Net cash used in operations for the six-months ended August 31, 2021, was approximately $1,287,000, an increase of $455,000 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the six-months ended August 31, 2021, was approximately $1,019,000 consisting of (i) cash proceeds from issuance of common stock of $988,000, (ii) proceeds of $91,000 related to the U.S. federal Paycheck Protection Program Second Draw (“PPP2”) loan program related to COVID-19, partially offset by $60,000 principal payments on a note payable. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs.
There was acquisition of property and equipment in the amount of $23,000 during the three-months ended August 31, 2021. There was no acquisition of property and equipment during the corresponding period of Fiscal 2021.
The Company had a deficit of $20.1 million in shareholders’ equity as of August 31, 2021, compared to $19.7 million as of February 28, 2021 with the net negative change of $0.4 million attributed to (i) negative effect of net loss year-to-date of approximately $2.1 million (ii) positive effect of the net issuance of approximately 4.4 million shares valued at approximately $1.0 million for cash (iii) positive effect of the issuance of approximately 1.6 million shares in connection with debt settlements of $0.5 million and (iv) positive effect of stock-based compensation cost of $0.2 million.
On April 23, 2020, we obtained a PPP loan in the amount of approximately $74,400 pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Interest on the loan is at the rate of 1% per year, loan payments are deferred for 10 months following the last day of the covered period or June 23, 2020, balance is payable in 24 monthly installments if not forgiven in accordance with the CARES Act and the terms of the promissory note executed by the Company in connection with the loan. The promissory note contains events of default and other provisions customary for a loan of this type. As required, the Company used the PPP loan proceeds for payroll, healthcare benefits, rent and other qualifying expenses. The program provides that the use of PPP Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. On April 1, 2021, we received notification that our application for loan forgiveness was accepted and approximately $75,100 of accrued interest and principal was forgiven.
On July 1, 2020, we obtained an EIDL loan in the amount of $149,900 administered by the SBA. As required under this program, the proceeds of the loan are to be used for payments of ordinary working capital needs negatively impacted by the COVID-19 pandemic. Interest accrues from the date of the loan of July 1, 2020 at a rate of 3.75% per annum, a loan term of 30 years, no prepayment penalties or fees, and there is a one-year deferral period during which interest accrues but no payments are required to be made. Following the deferral period for a period of 29 years, an estimated monthly payment of $734 is required to fully amortize the principal and accrued interest over the term of the loan. The Company pledged the assets of the Company as collateral for the loan. In January 2021, the SBA announced that the deferral period was being extended for another one-year period to July 2022. No other terms were adjusted; the monthly payment would become $778 per month over the remaining term.
On March 3, 2021, we received proceeds of $91,235 from a Second Draw PPP loan (“PPP2”) with the same terms and conditions that were applicable to the April 2020 PPP loan.
In the past, in order to generate liquidity, we have relied upon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. The issuance of additional shares of equity in connection with any such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise needed funds, we would also be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide disclosure under this Item 3.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the specified time periods. For the last 3 Fiscal years, these control and procedures broke down due to insufficient capital to maintain such controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company’s management evaluated, with the participation of the Company’s Principal Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Principal Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective as of the end of the period covered by this report in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There have been no other changes in our internal control over financial reporting during our fiscal quarter ended August 31, 2021, not previously identified in our Annual Report on Form 10-K, for the Fiscal year ended February 28, 2021 and issued on June 1, 2021 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
We are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially adversely affected. The Company settled certain matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.
In 2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California labor board. In August 2021, the Company reached a settlement by which the Company agreed to pay approximately $330,000, representing the principal award plus accrued interest. As of the time of this filing, the Company has paid approximately $79,000 toward the settlement amount. The remaining balance of approximately $251,000 is to be paid no later than September 1, 2022 and accrues interest of 10% per annum until paid.
The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $11.7 million (representing approximately $5.4 million loaned to the Company over the course of 2013 to 2016; approximately $170,000 Mr. Kopple claims to have advanced or paid to third parties on Aura’s behalf; and approximately $6.1 million Mr. Kopple claims to be owed for interest, loan fees and late payment fees) and approximately 3.33 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well as against current director Mr. Diaz-Verson and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, our former CEO and a former director in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman, and as a result of these successful demurrers, all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.
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On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company. On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.
On June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $125,000 of secured convertible notes payable (the “Notes”) and warrants. In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by the Messrs. Abdou demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than Mr. W. Abdou and Mr. M. Abdou. In September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the Messrs. Abdou. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with the Messrs. Abdou to implement a payment plan in accordance with the 2018 judgment. As of August 31, 2021 the outstanding balance was $60,181.
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 Fiscal 2021 Annual Report on Form 10-K issued on July 1, 2021.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the six-months ended August 31, 2021, we issued 4,652,000 shares of common stock for cash proceeds of $988,000. In the three-months ended August 31, 2021, we issued 1,571,429 shares of common stock for settlement of debt of $550,000.
ITEM 3. Defaults Upon Senior Securities. (not updated as of August 31, 2021)
As of the date of this filing, Robert Kopple, our former Vice Chairman of the Board, is the only significant unsecured note holder that has not executed formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are owed approximately $11.7 million (representing approximately $5.4 million loaned to the Company over the course of 2013 to 2016; approximately $170,000 Mr. Kopple claims to have advanced or paid to third parties on Aura’s behalf; and approximately $6.1 million Mr. Kopple claims to be owed for interest, loan fees and late payment fees) on terms significantly preferable to other similarly situated unsecured creditors as well as warrants to purchase approximately 3.3 million shares of our common stock. We dispute Mr. Kopple’s claims and we are currently in a legal dispute regarding these claims. See “Item 1. Legal Proceedings” included elsewhere in this Quarterly Report on Form 10-Q for information regarding the dispute with Mr. Kopple regarding these transactions as well as “Note 3 – Notes Payable” and “Note 5 – Related Parties Transactions” to the Company’s condensed financial statements, “Liquidity and Capital Resources” in “Item 2 and 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. Mr. Kopple has not accepted our numerous offers to settle this debt and continues to demand that as part of any such resolution, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.
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In June 2014, we entered into a Financing Letter of Agreement (the “June 2014 Agreement”) with two affiliate entities of Mr. Kopple, KF Business Ventures and the Kopple Family Partnership (the “Additional Kopple Parties”), pursuant to which the Additional Kopple Parties loaned us an additional $1,000,000 (the “June 2014 Loan”). In connection with the June 2014 Loan, Mr. Kopple also added $202,205 in penalties and accrued interest, credited us with $200,000 for amounts previously repaid by us and several earlier advances into a single new note (the “June 2014 Kopple Note”) in the principal amount of $2,715,2067 and bearing simple interest at a rate of 10% per annum.
Pursuant to the June 2014 Agreement, the Kopple Parties also placed various restrictions on our ability to raise additional capital, hire qualified personnel and pay certain expenses without his prior approval for so long as the principal amount of his note remained outstanding. The June 2014 Kopple Note also required us to issue Mr. Kopple a stock purchase warrant (the “June 2014 Kopple Warrant”) to purchase approximately 771,000 shares of our common stock at an exercise price of $0.70 per share, to be exercisable for seven years. Additionally, if we borrowed funds, issued capital stock or rights to acquire or convert into capital stock, or granted rights in respect to territories to any person for cash consideration of more than $5 million in the aggregate after the date of the June 2014 Kopple Note, we would be required to pay the entire amount of such cash consideration in excess of $5 million as a mandatory prepayment of the June 2014 Kopple Note. Additionally, Mr. Kopple required a default provision providing that in the event that the entire outstanding balance of the June 2014 Kopple Note was not paid in full prior to October 1, 2014, then for each consecutive calendar month during the period beginning October 1, 2014 and ending March 31, 2015, we would issue to Mr. Kopple additional stock purchase warrants, each to purchase 416,458 shares of our common stock, up to a maximum aggregate of approximately 2.5 million shares of our common stock, at $0.70 per share (the “Kopple Penalty Warrants”), the Kopple Penalty Warranties to be exercisable for seven years from the time of their respective issuances. In addition to the Kopple Penalty Warrants, the default provision under the June 2014 Kopple Note provides for a 5% late charge on the total amount due plus 15% per year interest. We have not repaid the Kopple Parties in full for the amounts loaned to us. Additionally, we have not issued any of the Kopple Penalty Warrants and management believes that Mr. Kopple is not entitled to receive them. We have also cancelled the June 2014 Kopple Warrant.
We consider the transactions described above with Mr. Kopple to be related party transactions.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits
| 31.1 | Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | |
| 31.2 | Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | |
| 32.1 | Certification of Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: October 14, 2021 | AURA SYSTEMS, INC. | |
| (Registrant) | ||
| ||
| By: | /s/ Cipora Lavut | |
| Cipora Lavut | ||
| President | ||
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