Aura Systems Inc 10-Q for FY2024 Q2
Aura Systems Inc (AUSI)
About this 10-Q
Aura Systems Inc filed this 10-Q on October 18, 2023, covering the quarter ended August 31, 2023 (FY2024 Q2).
Headline figures
Quarter ended August 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $1.12M
- compared with a net loss of $766K a year earlier
- Diluted EPS
- -$0.01
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
For the quarterly period ended
OR
For the transition period from ______________ to ______________
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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: ☒ 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 ☐ ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| ☒ | Smaller Reporting Company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
| Class | Outstanding October 12, 2023 | |
AURA SYSTEMS, INC.
INDEX
i
ITEM 1. FINANCIAL STATEMENTS
AURA SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
| August 31, 2023 | February 28, 2023 | |||||||
| (amounts in thousands, except share data) | (Unaudited) | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Inventories | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Security deposit | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses (including $ | $ | $ | ||||||
| Accrued interest (including $ | ||||||||
| Customer advances | ||||||||
| Convertible notes payable, past due | ||||||||
| Convertible note payable-related party, past due | ||||||||
| Notes payable, current portion | ||||||||
| Notes payable-related parties, current portion | ||||||||
| Operating lease liability, current portion | ||||||||
| Derivative warrant liability | ||||||||
| Total current liabilities | ||||||||
| Notes payable, non-current portion | ||||||||
| Note payable-related party, non-current portion | ||||||||
| Operating lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders’ deficit | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
1
AURA SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three-Months Ended | Six-Months Ended | |||||||||||||||
| August 31, | August 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (amounts in thousands, except share and per share data) | ||||||||||||||||
| Net revenue | $ | - | $ | $ | $ | |||||||||||
| Cost of goods sold (includes inventory write-down of $ | ||||||||||||||||
| Gross loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses | ||||||||||||||||
| Engineering, research and development (including $ | ||||||||||||||||
| Selling, general & administration | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net (including $ | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative warrant liability | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
See accompanying notes to these unaudited financial statements.
2
AURA SYSTEMS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Unaudited)
Three Months and Six Months Ended August 31, 2023
| (amounts in thousands, except share data) | Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Total Shareholders’ Deficit | |||||||||||||||
| Balance, February 28, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common shares issued for cash | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, May 31, 2023 | ( | ) | ( | ) | ||||||||||||||||
| Common shares issued for cash | - | |||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||
| Balance, August 31, 2023 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
Three Months and Six Months Ended August 31, 2022
| (amounts in thousands, except share data) | Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Total Shareholders’ Deficit | |||||||||||||||
| Balance, February 28, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common shares issued for cash | ||||||||||||||||||||
| Fair value of warrants issued for note settlement | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, May 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Common shares issued for cash | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, August 31, 2022 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to these unaudited financial statements.
3
AURA SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| August 31, 2023 | August 31, 2022 | |||||||
| (amounts in thousands) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Inventory write-down | ||||||||
| Change in fair value of derivative warrant liability | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid and other current assets | ||||||||
| Operating lease right-of-use asset | ||||||||
| Accounts payable, accrued expenses and customer advances | ( | ) | ||||||
| Accrued interest on notes payable | ||||||||
| Customer advances | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Cash used in operating activities | ( | ) | ( | ) | ||||
| Cash used in investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Principal payments of notes payable | ( | ) | ( | ) | ||||
| Cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents-beginning of period | ||||||||
| Cash and cash equivalents-end of period | $ | $ | ||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash transactions: | ||||||||
| Reclassification of prepaid expense to property and equipment | $ | $ | ||||||
| Adjustment to interest expense to account for the effective interest rate of note payable | $ | $ | ||||||
| Fair value of warrants issued for note settlement | $ | $ | ||||||
See accompanying notes to these unaudited financial statements.
4
AURA SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aura Systems, Inc., (“Aura”, the “Company”) a Delaware corporation, is engaged 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
The accompanying unaudited condensed financial statements as of and for the three and six months ended August 31, 2023 and 2022, have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented. The Condensed Balance Sheet information as of February 28, 2023, was derived from the Company’s audited Financial Statements as of February 28, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on May 26, 2023. These financial statements should be read in conjunction with that report. The results of operations for the period ended August 31, 2023, may not necessarily be indicative of the results that may be expected for the full fiscal year ending February 28, 2024.
The Company’s fiscal year ends on the last calendar day of February. Accordingly, the current fiscal year will end on February 29, 2024 and is referred to as “Fiscal 2024”. Our prior fiscal years ended February 28, 2023, February 28, 2022 and 2021, and are referred to as “Fiscal 2023”, “Fiscal 2022” and “Fiscal 2021”, respectively.
Going Concern
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. During the six-month period ended August 31, 2023, the Company recognized
net loss of $
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. 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.
5
During the next twelve months the Company intends 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, the Company plans to source new suppliers for manufacturing operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. The Company anticipates being able to obtain new sources of funding to support these actions in the upcoming fiscal year.
Inflation
Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising energy prices create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company’s business in 2023 and the first six months of 2024 and will continue to impact the Company’s business in 2024 and 2025. The implications of higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses.
COVID-19
As of the date of this filing, the COVID-19 pandemic has been declared to be officially over. Despite this fact, there continues to be lingering impacts of the COVID-19 pandemic in the regions in which the Company operates. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results stemming from the outbreak and its lingering effects on the Company’s business or results of operations, financial condition, or liquidity.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates.
Vendor Concentration
As of August 31, 2023 and February 28, 2023, there
were four vendors who accounted for over
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.
Our primary source of revenue is the manufacture and delivery of generator sets used primarily in mobile power applications. Our principal sales channel is sales to a domestic distributor. In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligation to the customer.
Share-Based Compensation
The Company periodically issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services.
6
Fair Value of Financial Instruments
The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
| ● | Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets; |
| ● | Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and |
| ● | Level 3 – Unobservable inputs. |
The recorded amounts of inventory, other current assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature. The carrying amounts of notes payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation to current market conditions.
| (amounts in thousands) | August 31, 2023 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative warrant liability | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| February 28, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative warrant liability | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company estimated the fair value of the derivative warrant liability using the Binomial Model.
| (amounts in thousands, except share data) | Number of Derivative Warrants Outstanding | Fair Value of Derivative Warrant Liability | ||||||
| February 28, 2023 | $ | |||||||
| Change in fair value of derivative warrant liability | ( | ) | ||||||
| Gain on extinguishment on expiration of warrants | ||||||||
| August 31, 2023 | $ | |||||||
7
Reclassifications
Certain February 28, 2023 balances have been reclassified
to conform with the August 31, 2023 presentation. In presenting the Company’s consolidated balance sheet at February 28, 2023, the
Company originally presented accrued interest of $
Loss per share
The Company’s loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional shares of common stock were dilutive. Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method for convertible debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities were exercised.
| August 31, 2023 | August 31, 2022 | |||||||
| Warrants | ||||||||
| Options | ||||||||
| Convertible notes | ||||||||
| Total | ||||||||
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective March 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures.
8
In September 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning March 1, 2023, and early adoption is permitted. The Company adopted ASU 2021-04 effective March 1, 2023. The adoption of ASU 2016-13 did not have any impact on the Company’s financial statement presentation or disclosures.
Other recent accounting pronouncements and guidance issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 2 – CONVERTIBLE NOTES PAYABLE, PAST DUE
|
August 31, 2023 |
February 28, 2023 |
|||||||
| (amounts in thousands) | ||||||||
| Convertible notes payable – past due | $ | $ | ||||||
| Non-current | ||||||||
| Current | $ | $ | ||||||
In Fiscal 2013 and 2014,
the Company issued six convertible notes payable in the aggregate of $
As of August 31, 2023
and February 28, 2023, the outstanding balance of the convertible notes payable amounted to $
NOTE 3 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY, PAST DUE
|
August 31, 2023 |
February 28, 2023 |
|||||||
| (amounts in thousands) | ||||||||
| Convertible note payable – past due | $ | $ | ||||||
| Non-current | ||||||||
| Current | $ | $ | ||||||
On January 24, 2017,
the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company. As part of the agreement,
the Company issued a $
As of August 31, 2023
and February 28, 2023, the convertible note of $
9
NOTE 4 – NOTES PAYABLE
| (amounts in thousands) | August 31, 2023 | February 28, 2023 | ||||||
| Secured notes payable | ||||||||
| (a) Note payable-EID loan | $ | $ | ||||||
| (b) Notes payable-vehicles and equipment | ||||||||
| Unsecured notes payable | ||||||||
| (c) Note payable-other | ||||||||
| Total | $ | $ | ||||||
| Non-current | ||||||||
| Current | ||||||||
(a) Economic Injury Disaster (EID) Loan
On July 1, 2020, the Company received a $
(b) Notes payable-vehicle and equipment
During Fiscal 2022, the Company issued notes payable
to purchase two pieces of equipment and a vehicle for $
(c) Note payable-other
As of August 31, 2023 and February 28, 2023, the
Company has one note payable due to an individual issued in September 2015 that is payable on demand with an interest rate of
NOTE 5 – NOTES PAYABLE-RELATED PARTIES
| (amounts in thousands) | August 31, 2023 |
February 28, 2023 |
||||||
| Unsecured notes payable | ||||||||
| (a) Notes payable-Kopple (as restructured) | $ | $ | ||||||
| (b) Note payable- Gagerman | ||||||||
| Accrued interest-Gagerman | ||||||||
| Subtotal-Gagerman | ||||||||
| (c) Note payable-Jiangsu Shengfeng – past due | ||||||||
| Total | $ | $ | ||||||
| Non-current | ||||||||
| Current | $ | $ | ||||||
10
(a) Kopple Note
In fiscals 2013 through 2018, the Company issued
notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate principal amount of $
On March 14, 2022, the Company reached an agreement
with Kopple and resolved all remaining litigation between them, including all amounts owed to Kopple under the notes. Under the terms
of the settlement, the Company agreed to issue a new note and pay Kopple an aggregate amount of $
The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply. The carrying value of the restructured note remains the same as before the restructuring, reduced only by the fair value of the warrants issued in connection with the transaction. The Company determined that the future undiscounted cash flows of the restructured new Kopple note exceeded the carrying value, and accordingly, no gain was recognized, and no adjustment was made to the carrying value of the debt, other than the adjustment for the fair value of the warrants. Interest expense on the new Kopple note is computed using a new effective rate that equates the present value of the future cash payments specified by the new terms with the carrying value of the debt.
In June 2022, the first installment of $
In January 2023, pursuant to the terms of the amended
note payable, the Company started accruing interest on the outstanding note balance at a rate of
During the six months ended August 31, 2023, the note
was amended multiple times to extend the payment term of the remaining balance of $
Subsequent to August 31, 2023, the Company and Kopple
have agreed in principle for another extension of the deadline for payment of the $
11
The settlement agreement with Kopple provides for certain increases in the amounts payable to Kopple and the right of such parties to enter a judgement against the Company if the Company remains in unsecured default in its payment obligations. Pursuant to the settlement agreement, the Company is also subject to certain affirmative and negative covenants such as periodic submission of financial statements to Koppel and restrictions on future financing and investing activities, as defined in the agreement, including the covenant to not create any indebtedness that is senior in right of payment to the Kopple debt. Management believes such covenants are normal for this type of transaction and that management believes meeting these covenants will not affect operations and the Company was in compliance with all covenants as of August 31, 2023.
(b) Note payable-Gagerman
Melvin Gagerman, the
Company’s former CEO and CFO whose employment was permanently terminated in July 2019, claims that in April 2014 the Company issued
an unsecured demand promissory note to him in the amount of $
In June 2022, Gagerman brought suit against the Company for repayment of this alleged note. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when Gagerman was the Company’s CEO, CFO, Corporate Secretary and Chairman of the Company’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman. Additionally, the Company has filed a cross-complaint against Gagerman for, among things, conversion, violation of California Business & Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against the Company.
Although the Company
disputes Gagerman’s claims, under the guidance of ASC 450 – Contingencies, the Company has recorded the claimed notes
payable and accrued interest of approximately $
(c) Jiangsu Shengfeng Note
On November 20, 2019, the Company reached an agreement
with a former joint venture partner Jiangsu Shengfeng regarding the return of $
As of August 31, 2023 and February 28, 2023, the
principal due was $
NOTE 6 – ACCRUED INTEREST
| August 31, 2023 | February 28, 2023 | |||||||
| (amounts in thousands) | ||||||||
| Accrued interest-convertible notes payable (past due) | $ | $ | ||||||
| Accrued interest-convertible notes payable related party (past due) | ||||||||
| Accrued interest and fees- Kopple note payable (related party) | ||||||||
| Accrued interest-notes payable | ||||||||
| Accrued interest- other | ||||||||
| $ | $ | |||||||
12
NOTE 7 – LEASES
Our administrative and production operations including
warehousing, are housed in an approximately
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
| (amounts in thousands) | Six-Months ended August 31, 2023 | Six-Months ended August 31, 2022 | ||||||
| Lease Cost | ||||||||
| Operating lease cost (included in general and administration in the Company’s statement of operations) | $ | $ | ||||||
| Other Information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term – operating leases (in years) | ||||||||
| Average discount rate – operating leases | % | % | ||||||
| At August 31, 2023 | ||||
| Operating leases | ||||
| Long-term right-of-use assets | $ | |||
| Short-term operating lease liabilities | $ | |||
| Long-term operating lease liabilities | ||||
| Total operating lease liabilities | $ | |||
| Operating Lease | ||||
| Years Ending February 28: | ||||
| 2024 (6 months remaining) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total lease payments | ||||
| Less: Imputed interest/present value discount | ( | ) | ||
| Present value of lease liabilities | $ | |||
13
NOTE 8 – DERIVATIVE WARRANT LIABILITY
In prior years the Company issued warrants that include a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. The Company determined that the warrants do not satisfy the criteria for classification as equity instruments due to the existence of the cash settlement feature that is not within the sole control of the Company, and the warrants are accounted for as liabilities in accordance with ASC 815. The fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying statements of operations. The warrant liability will ultimately be converted into the Company’s equity when the warrants are exercised or will be extinguished upon the expiration of the outstanding warrants.
| (amounts in thousands, except share and per share data) | August 31, 2023 | February 28, 2023 | ||||||
| Stock price | $ | $ | ||||||
| Risk free interest rate | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life in years | ||||||||
| Expected dividend yield | % | % | ||||||
| Number of warrant shares | ||||||||
| Fair value of derivative warrant liability | $ | $ | ||||||
| Number of Derivative Warrants Outstanding | Fair Value of Derivative Warrant Liability | |||||||
| February 28, 2023 | $ | |||||||
| Change in fair value of derivative warrant liability | ( | ) | ||||||
| Gain on extinguishment on expiration of warrants | ||||||||
| August 31, 2023 | $ | |||||||
NOTE 9 – SHAREHOLDERS’ DEFICIT
Common Stock
During the six-months ended August 31, 2023, the
Company issued
During the six-months ended August 31, 2022 the
Company issued
Stock Options
| (amounts in thousands, except share and per share data) | Number of Options | Exercise Price | Weighted Average Intrinsic Value | |||||||||
| Outstanding, February 28, 2023 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Cancelled | ( | ) | ||||||||||
| Outstanding, August 31, 2023 | $ | $ | ||||||||||
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| 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 Options Exercisable | |||||||||||||||
| $ | $ | $ | ||||||||||||||||||
The Company granted no stock options under its stock option 2011 Plan for the six-month period ended August 31, 2023 and the six-month period ended August 31, 2022.
Warrants
| Number of Warrants | Exercise Price | |||||||
| Outstanding, February 28, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Outstanding, August 31, 2023 | $ | |||||||
There was no intrinsic value as of August 31, 2023, as the exercise prices of these warrants were greater than the market price of the Company’s stock. The exercise prices and information related to the warrants as of August 31, 2023 is as follows:
| Range of Exercise Price | Stock Warrants Outstanding | Stock Warrants Exercisable | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price of Warrants Outstanding | Weighted Average Exercise Price of Warrants Exercisable | |||||||||||||||
| $ | $ | $ | ||||||||||||||||||
In March 2022, pursuant to an agreement with a
note holder (see Note 5), the Company issued to Mr. Kopple
| Warrants issued during the Six-Months Ended August 31, 2022 | ||||
| Exercise Price | $ | |||
| Share Price | $ | |||
| Volatility % | % | |||
| Risk-Free Rate | % | |||
| Expected Term (yrs.) | ||||
| Dividend Rate | % | |||
15
NOTE 10 – RELATED PARTY TRANSACTIONS
As of August 31, 2023 and February 28, 2023, Bettersea
LLC (“Bettersea”) was an
For the six-months ended August 31, 2023 and August
31, 2022, the Company incurred total fees to Bettersea of $
As of August 31, 2023 and February 28, 2023, a
total of $
NOTE 11 – CONTINGENCIES
The Company is subject to legal proceedings and claims 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 $
Between July 2017 and March 2022, the Company
was engaged in litigation with a former director, Robert Kopple, relating to more than $
16
On March 26, 2019, various stockholders of the
Company controlling a combined total of more than
In June 2022, Melvin Gagerman, the Company’s
former CEO and CFO whose employment with Aura was permanently terminated in July 2019, brought suit against the Company for repayment
of an allegedly unsecured demand promissory note in the principal amount of $
NOTE 12 – SUBSEQUENT EVENTS
Subsequent to August 31, 2023, the Company issued
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
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, 2023, issued on May 26, 2023 (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.
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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 and distributors in other areas. In North America, our primary focus is in (a) mobile exportable power applications, (b) EV applications, (c) U.S. Military applications and (d) industrial 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).
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 2022 (February 28, 2022), we shipped more than 140 units to customers (more than a ten-fold increase over Fiscal 2019). Although our operations were impacted in Fiscal 2022 and Fiscal 2021 by the COVID-19 pandemic, during these periods we continued to expand our engineering and manufacturing capabilities. See “Item 1. Business. Impact of the COVID-19 Pandemic” included in our Annual Report on Form 10-K for fiscal 2022 for information regarding the impact of COVID-19 on our operations. Our engineering, research and development costs for the six months ended August 31, 2023, and the six months ended August 31, 2022 were approximately $494 and $411, respectively. During the three months ended May 31, 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.
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 $30,000 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. See “Item 3. Legal Proceedings” included in our Annual Report on Form 10-K for Fiscal 2022 filed with the SEC on June 21, 2022, and Part II, Other Information Item 1, contained in this Quarterly Report for information regarding the dispute and settlement with Mr. Kopple regarding these transactions. In March 2022, the Company reached a settlement that resolves the various claims asserted against us by Mr. Kopple and his affiliated entities (collectively the “Kopple Parties”). Under the terms of the settlement, we have agreed to pay an aggregate amount of $10,000 over a period of seven years; $3,000 of which is to be paid within approximately four months of the settlement date, after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of 3,331,664 shares of our common stock at a price of $0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement.
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. For these key estimates and assumptions, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are significant differences between these estimates and actual results, our financial statements may be materially affected. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates. There were no changes to our critical accounting policies described in the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023, that impacted our condensed financial statements and related notes included herein.
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Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, 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. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not be subsequently written up.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Inflation
Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising energy prices create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company’s business in 2023 and the first six months of 2024 and will continue to impact the Company’s business in 2024 and 2025. The implications of higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses.
COVID-19
As of the date of this filing, the COVID-19 pandemic has been declared to be officially over. Despite this fact, there continues to be lingering impacts of the COVID-19 pandemic in the regions in which the Company operates. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results stemming from the outbreak and its lingering effects on the Company’s business or results of operations, financial condition, or liquidity.
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Results of Operations
Three months ended August 31, 2023 compared to three months ended August 31, 2022
Net revenue was $0 for the three-months ended August 31, 2023 compared to $10 for the three-months ended August 31, 2022. Revenues continue to be negatively impacted due to a generally low level of resources on our legacy products as well as our shift to the development and production of the prototype for our new product line. We cannot project with confidence the timing or amount of revenue that we can expect until the prototype is completed which should be in Fiscal 2024.
Cost of goods sold was $80 in the three-months ended August 31, 2023 compared to $95 for the three-months ended August 31, 2022. This resulted in a gross loss of $80 compared to a gross loss of $85 for the three-months ended August 31, 2022. The gross loss and related gross margin loss for both the three-month periods were largely influenced by the low volume of shipments in this quarter which reduced our ability to fully absorb fixed operating costs. In addition, the gross margin loss in the three-months ended August 31, 2023 included an increase in the inventory reserve of $58.
Engineering, research and development expenses were $287 in the three-months ended August 31, 2023, compared to $244 for the three-months ended August 31, 2022. The increase was due to increased development by the engineering staff of the new prototype for our new product line.
Selling, general and administration (“SG&A”) expenses decreased by $213 or 38% to $342 in the three-month period ending August 31, 2023 compared to the three-months ended August 31, 2022. The decrease was principally attributed to lower legal costs of $73, lower audit fees of $42 and lower selling fees of $83 due to lower sales.
Interest expense increased $263 during the three-months ended August 31, 2023 compared to the three-months ended August 31, 2022 due principally to the settlement of the Kopple litigation which resulted in the conversion of the Kopple notes payable into a new note. The new note did not accrue interest until January 2023, so the three-months ended August 31, 2022 did not include any Kopple-based interest.
Six months ended August 31, 2023 compared to six months ended August 31, 2022
Net revenue was approximately $10 for the six-months ended August 31, 2023 (“Fiscal Q2 2024”) compared to approximately $17 for the six-months ended August 31, 2022 (“Fiscal Q2 2023”). Revenues continue to be negatively impacted by both the lingering effects of the COVID-19 pandemic, as well as a generally low level of resources. We cannot project with confidence the timing or amount of revenue that we can expect despite improvements in the pandemic being under more control globally including a successful rollout of the vaccine programs. To increase revenues which were impacted by the economic effects of the pandemic, the Company needs to augment its marketing and sales efforts substantially. As the Company’s focus has been on new product engineering and development, the current limited resources prevent executing the increased selling efforts in the near term.
Cost of goods sold was approximately $95 in Fiscal Q2 2024 compared to approximately $30 in Fiscal Q2 2023. This resulted in a gross loss of approximately $85 or a gross margin loss of 815%, and approximately $13 gross loss and a gross margin loss of 79%, in Fiscal Q2 2024 and Fiscal Q2 2023, respectively. The gross loss and related gross margin loss for both the six-month periods were largely influenced by the low volume of shipments in both quarters which reduced our ability to fully absorb fixed operating costs. In addition, the gross margin loss in Fiscal Q2 2024 included an increase in the inventory reserve of $58.
Engineering, research and development expenses were approximately $494 in Fiscal Q2 2024, compared to approximately $411 in the Fiscal Q2 2023, or an increase of 20%. Fiscal Q2 2024 includes a higher engineering staff level and a concentrated effort to optimize the Company’s several new designs of its generators and motors. Fiscal Q2 2023 reflects the Company’s initial efforts to increase its development program, including costs for engineering several new designs, as well as increased testing of its new electronic control unit (“ECU”).
21
Selling, general and administration (“SG&A”) expenses decreased by approximately $556 or 40% to approximately $850 in the Fiscal Q2 2024 period from approximately $1,406 in the Fiscal Q2 2023 period. The decrease during Fiscal Q2 2024 was principally attributed to lower legal costs of $406 almost exclusively related to the settlement of the Kopple litigation in the Fiscal Q1 2023 period. Accounting fees were also down by $63. Selling costs were down by $89 due to lower sales.
Interest expense in Fiscal Q2 2024 increased approximately $610 or 266%, to approximately $840 from approximately $229 in the Fiscal Q2 2023 period due principally to the settlement of the Kopple litigation which resulted in the conversion of the Kopple notes payable into a new note. The new note did not accrue interest until January 2023, so FQ2 2023 included no Kopple-based interest. In Fiscal Q2 2024, $315 of interest was accrued on the unpaid balance of the restructured Kopple note, and in addition, the Company recorded $390 of extension and forbearance fees, which are being categorized as interest.
Other income in the Fiscal Q2 2024 period was approximately $8 which represents the favorable change in the fair value of the derivative warrant liability for the six-months, measured as of August 31, 2023. Comparatively, the revaluation of the derivative warrant liability in Fiscal Q2 2023, measured as of August 31, 2022, resulted in a favorable change in the fair value of approximately $741 for the six-month period.
Net loss for the six-month period of Fiscal Q2 2024 increased by approximately $943, to a loss of approximately $2,261 from a net loss of approximately $1,318 in the six-month period of Fiscal Q2 2023. This was attributed to (i) a significantly lower net gain related to derivative liability valuation of approximately $733 and (ii) higher interest expense of approximately $610, which were partially offset by (i) a decreased operating loss of $400 principally attributable to the lower legal expenses related to the Kopple settlement.
Liquidity and Capital Resources
Going Concern
During the six-month period ended August 31, 2023, the Company reported a net loss of $2,261 and used cash in operating activities of approximately $1,532. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February 28, 2023, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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. 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 source new suppliers for manufacturing 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.
At August 31, 2023, we had cash of approximately $52, compared to cash of approximately $15 at February 28, 2023. Subsequent to August 31, 2023, the Company issued 796,970 shares of common stock in exchange for cash proceeds of approximately $263. Working capital deficit at August 31, 2023 was a $14,400 deficit as compared to an $13,700 deficit at February 28, 2023. At August 31, 2023 and February 28, 2023, we had no accounts receivable.
22
Prior to Fiscal 2020, in order to maintain liquidity, we relied upon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis performed by management, we estimate that we will need an additional $6,000 to maintain existing operations for Fiscal 2024 and increase the volume of shipments to customers. We cannot assure the reader that additional financing will be available nor that the commercial targets will be met in the amounts required to keep the business operating. The issuance of additional shares of equity in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise the needed funds, we will 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.
Between July 2017 and March 2022, the Company was engaged in litigation with a former director, Robert Kopple, relating to more than $13,000 and the current equivalent of the approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr. Kopple and his affiliated entities (collectively the “Kopple”) claimed should have been originally issued to them pursuant to various agreements with the Company entered to between 2013-2016. In March 2022, the Company reached a settlement (the “Binding Term Sheet”) with Kopple that resolves all claims asserted against the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company. Under the terms of the settlement, we have agreed to pay an aggregate amount of $10,000 over a period of seven years; $3,000 of which was originally to be paid in June 2022, and subsequently extended to August 1, 2023. Beginning in January 2023, interest began to accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest and deferred forbearance fees, are to be paid no later than eight years from the date of the initial payment. As of the date of this report, the Company has not yet paid the full $3,000 installment due to Kopple; having only made a partial payment of $150 in June 2022. The Company and Koppel have agreed in principle to another extension of the deadlines for payments owed by Aura to Plaintiffs and intend to memorialize such an agreement in writing on or before October 31, 2023. Such further amendment will also indicate that by such extension the Company is not in default on the Binding Term Sheet (See Part I, Note 5 to the Financial Statements).
See “Item 3. Legal Proceedings” and “Part IV, Item 15, Notes 9 and 17 to the Financial Statements” included in the Company’s Annual Report on Form 10-K filed with the SEC on May 26, 2023 for information regarding the dispute and settlement with Mr. Kopple regarding these transactions.
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
Our management, with the participation of our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of August 31, 2023.
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, 2023, not previously identified in our Annual Report on Form 10-K, for the fiscal year ended February 28, 2023 and issued on May 26, 2023 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
23
PART II - OTHER INFORMATION
(Amounts in thousands, except share and per share amounts)
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.
In 2017, the Company’s former COO was awarded approximately $238 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, representing the principal award plus accrued interest. As of the time of this filing, the Company has paid approximately $292 toward the settlement amount. The remaining balance of approximately $38 is to be paid no later than December 31, 2023 and accrues interest of 10% per annum until paid.
Between July 2017 and March 2022, the Company was engaged in litigation with a former director, Robert Kopple, relating to more than $13,000 and the current equivalent of the approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr. Kopple and his affiliated entities (collectively the “Kopple Parties”) claimed should have been originally issued to them pursuant to various agreements with the Company entered to between 2013-2016. In March 2022, the Company reached a settlement with the Kopple Parties that resolved all claims asserted against the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company. Under the terms of the settlement, the Company agreed to pay an aggregate amount of $10,000 over a period of seven years, including $3,000 initial payment to be paid in June 2022. $150 was paid in June 2022, and the balance of the initial payment of $2,850 was extended to August 1, 2023, In exchange for the extension, the Company was required to pay $195 in extension and forbearance fees in cash and $530 in accrued forbearance fees. Beginning in January 2023, interest accrues on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest and deferred fees, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of 3,331,664 shares of our common stock at a price of $0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement. As of the date of this report, the Company has not yet paid the full $3,000 installment due to Kopple, having made an initial payment of $150 in June 2022. The Company and Koppel have agreed in principle to another extension of the deadlines for payments owed by Aura to Plaintiffs and intend to memorialize such an agreement in writing on or before October 31, 2023. Such further amendment will also indicate that by such extension Aura is not in default on the Binding Term Sheet (See Part I, Note 5 to the Financial Statements).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.
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In June 2022, Melvin Gagerman, the Company’s former CEO and CFO whose employment with Aura was permanently terminated in July 2019, brought suit against the Company for repayment of an allegedly unsecured demand promissory note in the principal amount of $82 which he claims was entered into in April 2014 and bears interest at a rate of 10% per annum. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when he was the Company’s CEO, CFO, Corporate Secretary and Chairman of Aura’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman and has filed a cross-complaint against him for, among things, conversion, violation of California Business& Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against Aura, including without limitation, Gagerman’s actions in opposing the valid 2019 stockholder consent action.
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 2023 Annual Report on Form 10-K issued on May 26, 2023.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the six-months ended August 31, 2023, we issued 4,877,271 shares of common stock for cash proceeds of approximately $1,609. The proceeds from the sale were used for general working capital purposes.
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information.
None.
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ITEM 6. Exhibits
| 31.1 | Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | |
| 31.2 | Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | |
| 32.1 | Certification of 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). |
26
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 18, 2023 | AURA SYSTEMS, INC. | |
| (Registrant) | ||
| By: | /s/ Cipora Lavut | |
| Cipora Lavut | ||
| President | ||
27
Exhibit 31.1
CERTIFICATION
I, Cipora Lavut, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Aura Systems, Inc. for the fiscal quarter ended August 31, 2023; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(t) and 15d-15(t)) for the Registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and |
| 5. | The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. |
Date: October 18, 2023
| By: | /s/ Cipora Lavut | |
| Cipora Lavut | ||
| President |
Exhibit 31.2
CERTIFICATION
I, Gary Campbell, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Aura Systems, Inc. for the fiscal quarter ended August 31, 2023; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
| 4. | The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(t) and 15d-15(t)) for the Registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and |
| 5. | The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. |
| Date: October 18, 2023 | ||
| By: | /s/ Gary Campbell | |
| Gary Campbell | ||
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Cipora Lavut, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aura Systems, Inc. on Form 10-Q for the fiscal quarter ended August 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Aura Systems, Inc. at the dates and for the periods indicated.
Date: October 18, 2023
| By: | /s/ Cipora Lavut | |
| Cipora Lavut | ||
| President |
I, Gary Campbell, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aura Systems, Inc. on Form 10-Q for the fiscal quarter ended August 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Aura Systems Inc. at the dates and for the periods indicated.
Date: October 18, 2023
| By: | /s/ Gary Campbell | |
| Gary Campbell | ||
| Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to Aura Systems, Inc. and will be retained by Aura Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.