UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended November 30, 2019May 31, 2020

 

OR

 

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

 

For the transition period from ______________ to ______________

 

AURA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

10541 Ashdale St.Street

Stanton, CA 90680

(Address of principal executive offices and zip code)

 

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

 

 

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

 

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

 

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

 

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

 

Large Accelerated Filer Accelerated Filer
Non-accelerated filer    Smaller Reporting Company
  Emerging growth company 

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
     

 

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

 

Class Outstanding December 31, 2019July 15, 2020
Common Stock, par value $0.0001 per share 55,480,78759,625,872 shares

 

 

 

 

 

AURA SYSTEMS, INC.

 

INDEX

 

Index  Page No.
PART I. FINANCIAL INFORMATION
    
 ITEM 1.Financial Statements (Unaudited)1
    
  Balance Sheets as of November 30, 2019May 31, 2020 and February 28, 201920201
    
  Statements of Operations for the NineThree months ended November 30,May 31, 2020 and 2019 and 20182
    
  Statements of Cash Flows for the NineThree months ended November 30,May 31, 2020 and 2019 and 20183
    
  Statements of Changes in Shareholders’ Deficit4
Notes to Financial Statements5
    
 ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1715
    
 ITEM 3.Quantitative and Qualitative Disclosures About Market Risk19
ITEM 4.Controls and Procedures20
PART II. OTHER INFORMATION21
ITEM 1.Legal Proceedings21
ITEM 1A.Risk Factors22
    
 ITEM 4.2.ControlsUnregistered Sales of Equity Securities and ProceduresUse of Proceeds22
    
PART II. OTHER INFORMATIONITEM 3.Defaults Upon Senior Securities22
    
 ITEM 1.4.Legal ProceedingsMine Safety Disclosures23
    
 ITEM 1A.5.Risk FactorsOther Information23
ITEM 6.Exhibits24
    
 ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds24
ITEM 3.Defaults Upon Senior Securities25
ITEM 4.Mine Safety Disclosures25
ITEM 5.Other Information25
ITEM 6.Exhibits26
SIGNATURES AND CERTIFICATIONS2725

 

i

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AURA SYSTEMS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

 

 November 30,
2019
  February 28,
2019
 
 (Unaudited)     May 31,
2020
  February 29,
2020
 
Assets          
Current assets          
Cash and cash equivalents $122,876  $358,209  $138,174  $19,807 
Inventory  53,163   -   89,106   90,037 
Other current assets  51,492   59,849   417   1,487 
Total current assets  227,531   418,058   227,697   111,330 
Investment in joint venture  250,000   250,000 
Non-Current Assets  -   - 
Total assets $477,531  $668,058  $227,697  $111,330 
                
Liabilities & Shareholders’ Deficit                
Current liabilities                
Accounts payable $2,213,927  $2,635,664  $2,515,819  $2,537,061 
Accrued expenses  1,066,260   2,197,129   2,023,207   1,946,290 
Customer advances  0   1,136,542   440,331   440,331 
Accrued expense-related party  -   1,008,328   1,008,328   1,008,328 
Accrued interest-notes payable-related party  300,719   262,911 
Accrued interest-notes payable  541,106   498,698 
Notes payable, current portion  1,167,536   847,537   1,002,653   983,717 
Convertible notes payable and accrued interest-related party, net of discount  3,873,151   3,644,354 
Notes payable and accrued interest-related party  6,551,591   6,156,375   11,543,432   11,333,960 
Total current liabilities  14,872,465   17,625,929   19,375,595   19,011,296 
Notes payable-related party  3,000,000   3,000,000   3,000,000   3,000,000 
Note payable  546,181   215,181   45,470   0 
Convertible notes payable  1,402,971   1,421,647   1,402,971   1,402,971 
Total liabilities  19,821,617   22,262,757   23,824,036   23,414,267 
                
Commitments and contingencies  -   - 
Commitments and contingencies (note 7)  -   - 
                
Shareholders’ deficit                
Common stock: $0.0001 par value; 150,000,000 shares authorized at November 30 and February 28, 2019; 55,230,787 and 53,714,145 issued and outstanding at November 30 and February 28, 2019, respectively  5,522   5,371 
Common stock: $0.0001 par value; 150,000,000 shares authorized at May 31 and February 29, 2020; 57,759,207 and 56,400,874 issued and outstanding at May 31 and February 29, 2020, respectively  5,774   5,639 
Additional paid-in capital  444,185,896   442,519,092   443,729,916   443,417,452 
Accumulated deficit  (463,535,504)  (464,119,161)  (467,332,029)  (466,726,027)
Total shareholders’ deficit  (19,344,086)  (21,594,699)  (23,596,339)  (23,302,937)
Total liabilities and shareholders’ deficit $477,531  $668,058  $227,697  $111,330 

 

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


AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS
FOR THREE AND NINE MONTHS ENDED NOVEMBER 30, 2019 AND 2018

(Unaudited)

 

 Three-months ended
November 30,
  Nine-months ended
November 30,
  Three-Months Ended
May 31,
 
 2019  2018  2019  2018  2020  2019 
 (unaudited) (unaudited) (unaudited) (restated)      
Net revenue $396,775  $-  $744,850  $39,274  $48,633  $- 
Cost of goods sold  115,655   37,032   147,752   110,026   40,393   2,889 
Gross profit (loss)  281,119   (37,032)  597,097   (70,752)  8,240   (2,889)
Operating expenses                        
Engineering, research & development  30,472   138,417   123,024   302,293   33,994   58,193 
Selling, general & administration  407,652   790,985   915,934   2,797,711   343,559   297,223 
Total operating expenses  438,124   929,402   1,038,958   3,100,004   377,553   355,416 
Loss from operations  (157,005)  (966,434)  (441,861)  (3,170,756)  (369,313)  (358,305)
Other expense:                        
Interest expense, net  283,928   295,221   885,731   848,593   289,688   317,015 
Other (inome) expense  (1,911,249)  48,789   (1,911,249)  (304,142)
Total other (income) expense  (1,627,321)  344,010   (1,025,518)  544,451 
Net income (loss) $1,470,317  $(1,310,444) $583,657  $(3,715,207)
Other income  7,000   - 
Gain on debt settlement  46,000   - 
Loss before income tax provision  (606,001)  (675,321)
Income tax provision  -   - 
Net loss $(606,001) $(675,321)
                        
Net income (loss) per share $0.03  $(0.03) $0.01  $(0.08)
Basic weighted average shares outstanding  55,296,222   48,801,770   54,012,831   44,356,148 
Diluted income (loss) per share $0.03  $(0.03) $0.01  $(0.08)
Dilutive weighted average shares outstanding  55,296,222   48,801,770   54,012,831   44,356,148 
Basic and dilutive loss per share $(0.01) $(0.01)
Weighted average shares outstanding  57,072,794   53,863,602 

 

See accompanying notes to these unaudited financial statements.

 

2

 

  

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2019 AND 2018

(Unaudited)

 

 November 30,  Three-Months Ended
May 31,
 
 2019  2018  2020  2019 
 (unaudited) (restated)      
Net Income (loss) $583,658  $(3,715,207)
Adjustments to reconcile net income (loss) to cash used in operating activities        
Fair Market Value of warrants issued for services  -   438,826 
Gain on settlement of debt  (1,911,141)  - 
Stock issued for services  -   510 
Net loss $(606,001) $(675,321)
Adjustments to reconcile net loss to cash used in operating activities        
Stock-based compensation expense  77,599   - 
Decrease in              - 
Inventory  (53,163)  -   931   - 
Other current assets  8,357   (8,804)  1,070   12,763 
Increase in                
Accts payable, customer deposits and accrued expenses  881,711   1,382,524   345,364   265,122 
Cash used in operating activities  (490,578)  (1,902,151)  (181,037)  (397,436)
                
Cash flows from financing activities                
Issuance of common stock  295,245   -   235,000   50,000 
Payment on notes payable  (40,000)  (50,000)  (10,000)  - 
Proceeds from subscription receivable  -   1,225,000 
Proceeds from Federal PPP note  74,405   - 
Cash provided by financing activities  255,245   1,175,000   299,405   50,000 
                
Net decrease in cash and cash equivalents  (235,333)  (727,151)  118,368   (347,436)
Beginning cash  358,209   748,008   19,807   358,209 
Ending cash $122,876  $20,857  $138,174  $10,773 
Cash paid in the period for:                
Interest $-  $37,500  $-  $- 
Income taxes $-  $-  $-  $- 
Supplemental schedule of non-cash transactions:        
Notes payable converted into shares of common stock $13,159  $- 
Convertible notes converted into shares of common stock $20,501  $- 
Gain on cancellation of related party liability $1,005,620  $- 

 

See accompanying notes to these unaudited financial statements.


AURA SYSTEMS INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2019

(Unaudited)

 

  CommonStock Shares  Common StockAmount  Additional Paid-InCapital  AccumulatedDeficit  Total Shareholders’
Deficit
 
Balance, February 28, 2019  53,714,145  $5,371  $442,519,092  $(464,119,162) $(21,594,699)
Shares issued for cash  1,383,015   139   295,215   -   295,354 
Shares cancelled  (1,065,051)  (107)  -   -   (107)
Shares issued for debt  1,198,678   120   365,970   -   366,090 
Gain on cancellation of debt-related party  -   -   1,005,620   -   1,005,620 
Net income  -   -   -   583,657   583,657 
Balance, November 30, 2019  55,230,787  $5,523  $444,185,897  $(463,535,505) $(19,344,085)
  Common
Stock
Shares
  Common
Stock
Amount
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Total
Shareholders’
Deficit
 
Balance, February 28, 2019  53,714,145  $5,371  $442,519,092  $(464,119,162) $(21,594,699)
Shares issued for cash  156,250   15   49,985       50,000 
Net loss  -   -   -   (675,321)  (675,321)
Balance, May 31, 2019  53,870,395  $5,386  $442,569,077  $(464,794,483) $(22,220,020)
                     
Balance, February 29, 2020  56,400,874   5,639   443,417,452   (466,726,027)  (23,302,937)
Shares issued for cash  1,358,333   135   234,865   -   235,000 
Stock-based compensation expense  -   -   77,599   -   77,599 
Net loss  -   -   -   (606,001)  (606,001)
Balance, May 31, 2020  57,759,207   5,774   443,729,916   (467,332,029)  (23,596,339)

 

See accompanying notes to these unaudited financial statements.

 


4

 

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

 

NOTE 1 – ORGANIZATIONNATURE OF OPERATIONS AND OPERATIONSSUMMARY 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 sales of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen®axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets. In addition, the Company has also developed and patented High Force Electromagnetic Linear Actuators which it has sold in prior years.

 

NOTE 2 – ACCOUNTING POLICIES

Accounting principlesBasis of Presentation

 

In the opinion of management, the accompanying balance sheets and relatedunaudited interim condensed financial statements of income and comprehensive income, and cash flows includereflect all adjustments consisting only of a normal recurring items,nature that are necessary for theira fair presentation of the results for the interim periods presented. However, the results of operations included in conformitysuch 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”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with informationthe Company’s audited financial statements and notes thereto included in the Company’s Amended Annual Report on Form 10-K/A10-K for the year ended February 28, 201929, 2020 filed on October 24, 2019 with the United States Securities and Exchange Commission (“SEC”) on July 13, 2020 (“2020 Form 10-K.”).

 

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 2020 Form 10-K. During the three months ended May 31, 2020, there were no significant changes made to the Company’s significant accounting policies.


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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company evaluated the impact of the adoption of Topic 842 effective for the nine-months ended November 30, 2019 and the impact was none on the Condensed Financial Statements.

The Company adopted Accounting Standards Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The Company has assessed the impact of the guidance by performing the following five steps analysis:

Step 1: Identify the contract

Step 2: Identify the performance obligations

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognize revenue

5

Re-classificationsReclassifications

 

Certain reclassificationsprior period amounts have been made to the comparative financial statementsreclassified to conform to the current periodyear presentation.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through several ASUs. The balance sheet ascollective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of February 28, 2019, presented herein, includesall contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts. ASC 326 is effective for annual and interim fiscal reporting periods beginning after December 15, 2022, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is continuing to evaluate the expected impact of this ASC 326 but does not expect it to have a reclassification of $1,008,328 for accrued expense in relation to a related party obligation from accrued expenses to a separate caption accrued expenses-related party.material impact on its financial statements upon adoption.

 

NOTE 32 – GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the nine months ended November 30, 2019 and 2018,The unaudited condensed financial statements of the Company reported net incomedo not include any adjustments relating to the recoverability and classification of $583,657recorded assets, or the amounts and a lossclassifications of $3,715,207, respectively, and had negative cash flows from operating activities of $490,578 and $1,902,151, respectively. During the three-months ended November 30, 2019,liabilities that might be necessary should the Company recorded a non-recurring gainbe unable to other income on the Statement of Operations of approximately $1.9 million consisting of the cancellation of accounts payable of $0.3 million, cancellation of customer advances of $0.4 million and cancellation of unpaid wages and salaries of $1.5 million. In addition, approximately $1.0 million of unpaid compensation owed to a former CEO and a related party was cancelled and accounted forcontinue as a capital transaction and reclassified from accrued expense-related party to additional paid-in-capital. These amounts were incurred in prior years and were cancelled as the related statute of limitations periods have since expired. The Company reclassified in the three-months ended November 30, 2019 approximately $0.3 million related to the shares issued to the Company’s president in August 2019 as other expense (see Note 5).going concern.

 

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

 

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

 

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

Beginning with the second quarter of fiscal year 2020, we increased operations of our AuraGen®/VIPER business and duringrevenue for the second and third quarters of fiscalthree-months ended May 31, 2020 the Company recognized approximately $745,000 in revenuewas $49,000 as compared to approximately $39,000 of$0 revenue in the nine-monthcomparable period ended November 30, 2018. We plan to lease or acquire a new facility of approximately 50,000 square feet to support operations sometime during the next six months.fiscal 2020.


NOTE 43 – NOTES PAYABLE

 

NotesNon-related party and related party notes payable transaction consisted of the following:

 

  November 30,
2019
    February 28,
2019
 
       
Demand promissory notes payable with six individuals, carrying an interest rate of 10% (see Demand Promissory Notes below) $768,537  $777,537 
         
Note payable – related party, carrying an interest rate of 5% - see note 6, Breslow Note, for further details  3,000,000   3,000,000 
         
Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 10th of each month with the principal payment due on the maturity date. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See 7% Convertible Promissory Notes – Dalrymple August 2012 for further details.  264,462   264,462 

Convertible Promissory Note dated October 2, 2012, due October 2, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 2nd of each month with the principal payment due on the maturity date. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See 7% Convertible Promissory Notes – Dalrymple October 2012 for further details.  133,178   133,178 
         
Senior secured convertible notes dated May 7, 2013, due May 7, 2014, convertible into shares of our common stock at a price of $0.75 per share. The notes carry an interest rate of 12% with interest due on the last day of the month. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Kenmont Capital Partners, LPD Investments and Guenther for further details.  945,825   945,825 
         
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50 per share. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Dresner and Lempert for further details.  59,506   78,182

 

 

 $1,402,971  $1,421,647

 

 

 

In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. In September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the two secured creditors. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for an aggregate principle amount of $315,000, including $80,000 of plaintiff’s legal expenses, and initial payment of $20,000, a payment schedule for monthly repayments of $10,000 commencing on October 15, 2019 and continuing for 12 months, and a final payment due on November 15, 2020.  245,180   285,000

 

 

 

 

 

 

         

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

 

  700,000   - 
  $6,116,688  $5,484,184 
Less: Current portion $1,167,536  $847,537 
Long-term portion $4,949,152  $4,636,647 
Non-Related Party Promissory Notes (see below) May 31,
2020
  February 29,
2020
 
       
Demand promissory notes payable with 4 individuals, carrying an interest rate of 10% (see Demand Promissory Notes below) $768,537  $768,537 
Messrs. Abdou notes payable  205,181   215,181 
U.S. Payroll Protection Plan loan program  74,405   - 
Total Demand and Notes Payable  1,048,123   983,718 
Convertible Promissory Note originally dated August 10, 2012, due January 11, 2023, convertible into shares of our common stock at a price of $0.76 per share, carrying interest rate of 5%. See Convertible Promissory Notes – Dalrymple August 2012 for further details.  264,462   264,462 
Convertible Promissory Note originally dated October 2, 2012, due January 11, 2023, convertible into shares of our common stock at a price of $0.76 per share, carrying interest rate of 5%. See Convertible Promissory Notes – Dalrymple October 2012 for further details.  133,178   133,178 
Senior secured convertible notes originally dated May 7, 2013, due January 11, 2023, convertible into shares of our common stock at a price of $0.75 per share, carrying interest rate of 5%. See Convertible Debt – Kenmont Capital Partners, LPD Investments and Guenther for further details.  945,825   945,825 
Senior secured convertible notes originally dated June 20, 2013, due January 11, 2023, convertible into shares of our common stock at a price of $0.50 per share, carrying interest rate of 5%. See Convertible Debt – Dresner and Lempert for further details.  59,506   59,506 
Total Convertible Promissory Notes  1,402,971   1,402,971 
Accrued Interest - notes payable  541,106   498,698 
Total Non-Related Party  2,992,200   2,885,387 
         
Notes Payable-Related Party (see Note 6)        
Convertible Note payable – related party, carrying an interest rate of 5% - see Note 6, Breslow Note, for further details  3,000,000   3,000,000 
Kopple Notes Payable-related party , see Kopple Notes, Note 6:  10,702,338   10,494,933 
Mel Gagerman Notes Payable, see Gagerman, Note 6:  141,093   139,026 
On November 20, 2019, the Company entered into a preliminary  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 $700,000 is paid over a 12-month period beginning March 15, 2020 through February 15, 2021.  700,000   700,000 
Accrued Interest - notes payable- related party  300,719   262,911 
Total Related Party  14,844,150   14,596,871 
Total notes payable and accrued interest  17,836,350   17,482,258 
Less: Current portion $(13,387,910) $(13,079,287)
Long-term portion $4,448,441  $4,402,971 

 


DEMAND PROMISSORY NOTESDemand Promissory Notes and Notes Payable

 

The Demand Promissory Notes are sixfour individual notes issued in 2015 that are payable on demand with an interest rate of 10% per annum. At

As of February 28, 2019,29 and May 31, 2020, the aggregate principal amount owed to these persons is $768,537; the principal amount of each note and the person/entity they are payable to are as follows: $10,000 Mr. Zeitlin, a former director of the Company; $30,000 Mr. Sook; $461,537 Mr. Macleod, a former president of the Company; $4,500and $267,000 Mr. Howsmon, a former director of the Company; $4,500 El Pais, an entity controlled by Salvador Diaz, a current director of the Company (see Note 8). In November 2019, the principle and accrued interest owed to Messrs. Howsmon and Diaz, respectively, in the amounts of $4,500 and $2,079, respectively, were settled by the issuance of 32,895 shares of common stock to each person by applying a price of $0.20 per share.

Veen. In February 2018, the Company issued 192,641 shares of its common stock to Steven Veen in satisfaction of $267,000 in debt. Despite this issuance, Mr. Veen claims to continue to be entitled to repayment of the $267,000 debt. Mr. Veen has to-date, not surrendered the shares issued to him in fulfillment of the debt he claims to be still owed and continues to own the 192,641 shares as of the date of this filing.

Abdou and Abdou

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $125,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $24,470 as a discount, which has been fully amortized. There is a remaining balance of $125,000 as of February 28, 2019. In 2016, the Company and the Company’s new management team isformer Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by 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 of in favor of the Messrs. Abdou. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for a principal amount of $325,000, of which approximately $205,000 and $215,000 were outstanding as of May 31 and February 29, 2020, respectively.

Paycheck Protection Plan Loan

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, we obtained a Paycheck Protection Program (“PPP”) loan in the processamount of investigatingapproximately $74,400 pursuant to the circumstances surrounding Mr. Veen.Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Interest on the loan is at the rate of 1% per year, and all loan payments are deferred for six months, at which time the balance is payable in 18 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 intends to use 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. While we intend to apply for the forgiveness of the PPP Loan, there is no assurance that we will obtain forgiveness of the PPP Loan in whole or in part. As of May 31, 2020, $45,470 was classified as notes payable, non-current and $28,935 was classified as part of notes payable, current portion.


Convertible Notes Payable

 

CONVERTIBLE DEBT

Kenmont Capital Partners

On May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note with a principal value of $1,087,000 (“New Kenmont Note”) and warrants to Kenmont Capital Partners LP. The New Kenmont Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $342,020 as a discount, which has been fully amortized. There iswas a remaining principle balance of $549,954 as of November 30, 2019.May 31 and February 29, 2020, respectively.

 

LPD Investments

On May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. The New LPD Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $175,793 as a discount, which has been fully amortized. There is a remaining principle balance of $163,677 as of November 30, 2019.May 31 and February 29, 2020, respectively.

 

Guenther

 

On May 7, 2013, the Company entered into an agreement with an individual, Mr. Guenther, for the sale of $750,000 of secured convertible note payable (the “Note”) and warrants. The Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares and have an initial exercise price of $0.75 per share and have a 7-year term. The Company recorded $235,985 as a discount, which has been fully amortized. There is a remaining principle balance of $232,194 as of November 30, 2019.May 31 and February 29, 2020, respectively.

 

Dresner and Lempert

 

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and Mr.Dr. Lempert, a current board member, for the sale of $200,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $39,152 as a discount, which has been fully amortized. There is a remaining principleDuring fiscal 2020, Dr. Lempert convert his share of the amount outstanding into common shares and the balance outstanding of $59,506 as of November 30, 2019. On November 27, 2019, the principle amount owed to Mr. Lempert of $18,676May 31 and accrued interest of $1,825 were settled by the issuance of 102,503 shares of common stock to Mr. Lempert at the price of $0.20 per share (see Note 8).  

Abdou and Abdou

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou,February 29, 2020, respectively, is for the sale of $125,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $24,470 as a discount, which has been fully amortized. There is a remaining balance of $125,000 as of February 28, 2018. In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by the Messrs. Abdou demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than Mr. W. Abdou and Mr. M. Abdou. In September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the Messrs. Abdou. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for an aggregate principle amount of approximately $315,000. There is a remaining principle balance of approximately $245,000 as of November 30, 2019.

Dresner exclusively

 


9

 

Kopple Notes

On August 19, 2013, the Company entered into an agreement with Robert Kopple, a former member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the ���Kopple Notes”) that were subsequently adjusted in 2014 to $2,000,000 of convertible notes and related warrants. The Kopple Notes carry a base interest rate of 9.5%, have a 4-year maturity date and are convertible into shares of common stock at the conversion price of $3.50 per share. The warrants were subsequently exercised. The Company recorded $667,118 as a discount, which has been fully amortized. The Company also entered into a demand note payable with this individual in the amount of $20,000, which bears interest at a rate of 5%. As of November 30, 2019, the balance of the $2,000,000 note including interest is $3,849,978, and the balance of the demand note payable including interest is $23,173. The total owed under these two notes is $3,873,151.

7% Convertible Promissory Notes:

Dalrymple – August 2012

 

On August 10, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $1,000,000 of unsecured Convertible Promissory Note. The Convertible Promissory Note balance together with all accrued interest thereon was due and payable on August 10, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date. On January 11, 2018, the note was renegotiated with a final payment date of January 11, 2023 with an annual interest rate of 5%.  The Company recorded $310,723 as a debt discount, which will be amortized over the life of the note.There is a remaining principle balance of $264,462 as of November 30, 2019May 31 and February 29, 2020, respectively.

 

Dalrymple – October 2012

 

On October 2, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $500,000 of unsecured Convertible Promissory Note. This Convertible Promissory Note balance together with all accrued interest thereon was due and payable on October 2, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date. On January 11, 2018, the note was renegotiated with a final payment date of January 11, 2023 with an annual interest rate of 5%. The Company recorded $137,583 as a debt discount, which will be amortized over the life of the note.There is a remaining principle balance of $133,178 as of November 30, 2019.May 31 and February 29, 2020, respectively.

 

On January 30, 2017, the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven secured creditors holding a security interest in all of the Company’s assets except for its patents and other intellectual properties. These creditors are the seven listed above under Convertible Debt and include the following: Kenmont Capital Partners, LPD Investments, Guenther, Dresner, Lempert and Mr. M. Abdou and Mr. W. Abdou. All of the creditors entered into the January 30, 2017 agreement with the exception of the Messrs.Mr. W. Abdou and Mr. M. Abdou. The original agreement dated May 7, 2013 provided that if at least 75% of the stock issuable upon conversion of the convertible notes votes to amend the agreement and/or waive any conditions or defaults, then any such amendments or waivers shall be binding on all secured creditors. The five secured creditors signing the amendment total in excess of 95% of the issuable stock upon conversion and, therefore the agreement is binding on all seven of the secured creditors. The agreement provided that all accrued and unpaid interest will be added to the principal amount. The amended note provided for no interest from November 1, 2016 to February 14, 2018, the date at which the 1-for-7 reverse stock split became effective at which time 80% of the total debt including accrued interest was converted into shares of common stock and a new five year 5% per annum convertible note was issued for the remainder. The new amended and restated senior convertible notes have a maturity date of January 30, 2022. The five creditors and the Company entered into a Second Amendment to Transaction Documents on March 14, 2017 and a Third Amendment to Transaction Documents on April 8, 2017, both of which extended the required date of the stockholder approval of the 1-for-7 reverse stock split, which was completed on February 14, 2018. The amended and restated senior convertible notes also require the Company to make a “Required Cash Payment” as defined in the agreement if the Company receives at least $4,000,000 in aggregate gross proceeds from the sale of equity securities (including securities convertible into equity securities) of the Company in one or a series of related transactions. The Required Cash Payment is equal to the current outstanding balance of the notes, which was $1,092,542 at November 30, 2019,approximately $1,005,000 as of May 31 and February 29, 2020, respectively, plus any outstanding accrued interest.

9

 

NOTE 54 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:following as of the period referenced below:

 

  November 30,
2019
  February 28,
2019
 
       
Accrued payroll and related expenses $338,818  $1,723,691 
Accrued interest  681,586   428,625 
Other  51,839   44,812 
Total $1,072,243  $2,197,128 
  May 31,
2020
  February 29,
2020
 
Accrued payroll and related expenses $1,914,845  $1,868,928 
Accrued legal expenses  30,000   - 
Other accrued expenses  78,362   77,362 
  $2,023,207  $1,946,290 

 

Accrued payroll and related expenses consist primarily of salaries and vacation time accrued but not paid to employees due to our lack of financial resources. During the third quarter of fiscal 2020, approximately $1.5 million of unpaid salaries and related expenses were reclassified as other income on the statement of operations for the three-months ended November 30, 2019 as the related statute of limitations periods have expired. Also, on August 28, 2019, the board approved a stock issuance of 1,030,385 to Cipora Lavut, the Company’s President, at a fair value of $329,723, for full satisfaction of prior amounts owed to her for unpaid salaries up to August 28, 2019. This amount was recorded as a reduction of accrued payroll expense in the second quarter but determined in the third quarter of 2020 to be an offset (other expense) to the gain amount of $1.5 million.

 


NOTE 6 – INVENTORY

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

NOTE 75 – SHAREHOLDERS’ EQUITY (restated)

 

Common Stock

 

During the ninethree months ended November 30, 2019,May 31, 2020, the Company issued 2,581,8751,358,333 shares of common stock for $658,737, of which 1,030,385 was issued$235,000 in satisfaction of amounts owed to Cipora Lavut of $329,723, 168,475 shares were issued to three persons in settlement of $33,660 of debt principle and accrued interest, and 1,383,015 shares and 10,000 warrants were issued for cash in the amount of $295,354. The aggregate 10,000 warrants were issued to three investors with immediate vesting, an exercise price of $1.40, and a 5-year term. In October 2019, 1,065,051 shares previously issued in error to a former debtholder were cancelled.

cash. During the nine-monthsthree months ended November 30,May 31, 2019, the Company cancelled an obligation to pay Melvin Gagerman, a former officer of the Company and a related party, approximately $1.0 million in unpaid compensation due to expiration of the statute of limitations. Accordingly, the Company accounted for this transaction as a capital transaction and reclassified the amount to additional paid-in-capital.

During the six months ended August 31, 2018 (restated), the Company issued 7,364,735156,250 shares of common stock valued at $2,280,964,for $50,000 in fulfillment of a contractual obligation owed to BetterSea, LLC. The number of shares issued was based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company also paid $20,000 in legal fees related to legal expense associated with the Company’s delays in the issuance of the stock.

During the nine months ended November 30, 2018, the Company issued 742,857 warrants to a member of its board of directors. The warrants have a term of five years and an exercise price of $1.40. The Company recorded an expense of $312,072 for the issuance of these warrants. During the nine months ended November 30, 2018, the Company re-priced to $1.40 all outstanding employee stock options and warrants that had a previous exercise price greater than $1.40. The Company recorded an expense of $105,352 as a result of the re-pricing.

10

cash.

 

Employee Stock Options and Warrants

 

The 2006 Employee Stock Option Plan

 

In September 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan, subject to shareholder approval, which was obtained at a special shareholders meeting in 2009. Under the 2006 Plan, the Company may grant options for up to the greater of Three Million (3,000,000)three million or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. The sharesAs of Common Stock available under the 2006 Plan was increased to the greater of Ten Million shares (10,000,000) or 15% of the number of shares of Common Stock of Aura from time to time outstanding at the October 2011 shareholders meeting. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of theFebruary 29, 2020, and May 31, 2020, there were no stock options may not be greater than ten years, and they typically vest over a three-year period. No options were issued during the nine-month period ended November 30, 2019. Activity in the plan for the nine-month period ended November 30, 2019 is as follows:outstanding.

 

        Weighted 
  Number of  Exercise  Average
Intrinsic
 
  Shares  Prices  Value 
Outstanding, February 28, 2019  647,000  $1.40  $- 
Granted  -   -      - 
Exercised  -   -   - 
Cancelled  (75,000)  1.40   - 
Outstanding, November 30, 2019  572,000  $1.40  $- 

Information regarding the options outstanding and exercisable as of November 30, 2019 follows:

Options Outstanding  Exercisable Options
      Weighted  Weighted  Weighted    Weighted 
Range of     Average  Average  Average    Average 
Exercise      Remaining  Exercise  Remaining    Exercise 

Price

  Number  Life  Price  Life Number  Price 
$1.40   572,000   .25 Yr  $1.40  .25 Yr  572,000  $1.40 

The 2011 Director and Executive Officers Stock Option Plan

 

In October 2011, shareholders approved the 2011 Director and Executive Officers Stock Option Plan at the Company’s annual meeting. Under the 2011 Plan, the Company may grant options for up to 15% of the number of shares of Common Stock of the Company from time to time outstanding. Pursuant to this plan,outstanding, with a contractual option term of five-years, and a vesting period not less than six-months and one day following date of grant. In the three-months ended May 31, 2020, the Board or a committee of the Board may grantDirectors approved grants of 250,000 stock options to each board member for an option to any person who is elected or appointed a director or executive officeraggregate of the Company. The1,250,000, with an exercise price of each$0.25 per option shall beand at least equal to the faira market valueprice of such shares$0.16 on March 19, 2020, the date of grant. The termfollowing table provided the assumptions required to apply the Black-Scholes Merton option model to determine the fair value of the stock options may not be greater than five years. Activityas of the grant date:

  Options
Issued
During the
Three-Months
ended
May 31,
2020
 
    
Exercise Price $0.25 
Share Price $0.16 
Volatility %  225%
Risk-free rate  0.57%
Expected term (yrs.)  4.0 

The aggregate fair value of the 1,250,000 options granted in March 2020 is $194,000, or $0.155 per option, with $77,599 recorded as part of sales, general and administration expense during the three-months ended May 31, 2020.

The following tables provide additional information regarding stock options outstanding and exercisable under the 2011 Director and Executive Officers Stock Option Plan:

  Number of Shares  Exercise Price  Weighted Average Intrinsic Value 
Outstanding, February 29, 2020  1,040,001  $1.40  $            - 
Granted  1,250,000   0.25   - 
Exrecised  -   -   - 
Cancelled  -   -   - 
Outstanding, May 31, 2020  2,290,001  $0.77  $- 


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
 
$0.25 to $1.40  2,290,001   1,040,001  3.75 Yrs. $0.77  $1.40 

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 year 2021, an exercise price of $1.40 has been used with all warrants. No warrants were issued in the plan for the nine-month periodthree months ended November 30, 2019 is as follows:

WarrantsMay 31, 2020.

 

Activity in issued and outstanding warrants is as follows:follows for the three months ended May 31, 2020:

 

  Number of  Exercise 
  Shares  Prices 
Outstanding, February 28, 2019  7,490,987  $1.40 
Granted  10,000   1.40 
Exercised  -   - 
Cancelled  (85,714)  - 
Outstanding, November 30, 2019  7,415,273  $1.40 


  Number of Shares  Exercise
Price
 
Outstanding, February 29, 2020  5,816,939  $1.40 
Granted  -   - 
Exrecised  -   - 
Cancelled  -   - 
Outstanding, May 31, 2020  5,816,939  $1.40 

 

Information regardingOther information related to the warrants outstanding and exercisable as of November 30, 2019 follows May 31, 2020 follows:

 

Range of Exercise PriceRange 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 Range of
Exercise Price
 Stock Warrants Outstanding Stock Warrants Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Warrants Outstanding Weighted Average Exercise Price of Warrants Exercisable 
$1.40   7,415,273   7,415,273   2.76 Yrs.  $1.40  $1.40 1.40   5,816,939   5,816,939   2.49 Yrs. $1.40  $1.40 

 

NOTE 86 – RELATED PARTIES TRANSACTIONS

Notes payable-related party, non-current - $3,000,000 on the condensed balance sheets as of May 31 and February 29, 2020 consists of the Breslow Note as described below:

 

Breslow Note

 

On January 24, 2017, the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a former Director of the Company. Pursuant to the agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $23,872,614 including $8,890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest due, waive all events of default and sign a new five-year convertible note in the amount of $14,982,041 providing for no interest for ninesix months and interest of 5% per annum thereafter payable monthly in arrears. The note also provides various default provisions. In accordance with the agreement, on February 14, 2018, the effective date of the 1-for-7 reverse stock split, $11,982,041 of the note was converted into 7,403,705 shares of common stock and the then accrued interest of $9,388,338 was forgiven. A new $3,000,000 convertible five-year note representing the remaining balance was entered into.into at a conversion rate of $1.40. The note bears interest at a rate of 5% per annum payable monthly in arrears.arrears with accrued interest of $300,719 and $262,911 recorded as accrued interest-related party (see Note 4) as of May 31 and February 29, 2020, respectively.

 


Kopple Note

At November 30, 2019, the balance in notesNotes payable and accrued interest-related party, current - $11,543,432 on the condensed balance sheet as of $6,551,591,May 31 and $11,333,960 as of February 29, 2020 consists primarily of the Kopple (a former Board member) note of $6,415,109Notes, the Gagerman Note and the Gagerman noteJiangsu Shengfeng Note as set forth below:

Kopple Notes

As of $136,482 (see below). TheMay 31, and February 29, 2020, the principal amount owed to Robert Kopple note has a principle balance(former Vice-Chairman of $3,587,322 plusour Board) of $5,607,323 was unchanged. As of May 31, 2020, additional accrued interest of $2,827,787.. At November 30, 2019,$5,095,015 was owed to Mr. Kopple for a total balance of $10,702,338. As of February 29, 2020, additional accrued interest of $4,887,610 was owed to Mr. Kopple for a total balance of $10,494,933.

On August 19, 2013, the balance inCompany entered into an agreement with Robert Kopple, a former member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Kopple Notes”) and accrued interest-related party consistswarrants. The Kopple Notes carried a base interest rate of $2,000,0009.5%, have a 4-year maturity date and were convertible into shares of unsecured convertible notescommon stock at the conversion price of $3.50 per share (conversion feature expired in 2017). The warrants were subsequently exercised. The Company recorded $667,118 as a discount, which has been fully amortized. The Company also entered into a demand note payable plus accrued interest of $1,849,978 and an unsecured convertible notewith this individual in the amount of $20,000, plus accruedwhich bears interest at a rate of $3,173 to Mr. Kopple.5% per annum.

 

Gagerman Note

 

The notes payable and accrued interest-related party, currrent balance also includesOn May 31, 2020, the Gagerman note consisted of $82,000 of unsecured notesnote payable plus accrued interest of $54,482$59,093 for a total owed to Melvin Gagerman, the Company’s former CEO and CFO, pursuant to a demand note entered into on April 5, 2014. See note 7 for disclosures with respectInterest accrues at 10% per annum. On February 29, 2020, the amount owed to cancellation of Gagerman’s unpaid compensation of $1.0 million.Gagerman was $139,026.

 

Other Related Party TransactionsJiangsu Shengfeng Note

InOn November 20, 2019, two members of the board of directors, Messrs. Diaz-Verson and Lempert, agreedCompany entered into a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture, to cancel their outstanding debt withreturn $700,000 previously advanced to the Company in the amounts of $6,579September 2018 and $20,500, respectively, in exchange for 32,895 and 102,503 shares of common stock at a conversion price of $0.20 per share. On the dates of the exchange, November 26 and November 27, 2019, respectively, the closing prices of the Company’s common stock was $0.21 and $0.22 per share, respectively (see Note 4). The loss on extinguishment of debt of approximately $2,700 was recorded as part of additional paid-in-capital.customer advance on the balance sheet as of February 28, 2019. Following this agreement which consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 is paid over a 12-month period beginning March 15, 2020 through February 15, 2021. Principal loan amount on May 31, 2020 and February 29, 2020 was $700,000, respectively, and is classified as part of notes payable and accrued interest-related party, current on the balance sheets as of May 31, 2020.

 

NOTE 97 – COMMITMENTS & CONTINGENCIES

 

Leases

 

Our facilities consist of approximately 20,000 square feet in Stanton, California and an additional storage facility in Santa Clarita, California. The Stanton facility is used for some assembly and testing of AuraGen®AuraGen®/VIPER systems and is rented on a month-to-month basis. The rent for the Stanton facility is $10,000 per month and the storage facility is an additional $5,000 per month, both on a month-to-month basis.month. In May 2020, the Company provided notice of its intention to vacate this storage facility in Santa Clarita by July 31, 2020. Our current Stanton facility is not sufficient to support the expected operations and the Company is evaluatingsearching for a new facility options to be used for limited production, testing, warehousing and engineering as well as neededand office space for support staff. The Company also rents temporary storage space on a month-to-month basis. Commencing in February 2019 and ending in July 2019, the Company began rentingrented approximately 300 square feet of office space in Irvine, California at a cost of $ 2,350 per month on a month-to-month basis. In July 2019, the Company ceased renting this office space.


 

Following the adoption of Topic 842, Leases, as of the start of fiscal year 2020, the Company determined that there was no impact on its Condensed Financial Statements during the nine-month period ended November 30, 2019.May 31, 2020. The standard requires entities to evaluate all lease transactions including leases previously classified as operating leases, and, if required under Topic 842, a right-to-use asset and a corresponding lease liability may be recorded on the balance sheet in the period in which a lease commences.

Joint Venture

In March 2017 the Company entered into a joint venture with a Chinese partner to form Jiangsu Shengfeng Mobile Power Technology Co., Ltd. (“Jiangsu Shengfeng”) to address the Chinese market. Under the Jiangsu Shengfeng joint venture agreement, Aura owns 49% of the venture and our Chinese partner owns 51%. The Chinese partner is to contribute approximately $9.25 million to the venture –– principally in the form of facilities and equipment as wells as approximately $500,000 in cash. The Company contributed to the venture in the form of $250,000 in cash as well as a limited license to the joint venture to manufacture, sell and service the AuraGen® products within China. The limited license sold to the Jiangsu Shengfeng joint venture, however, does not permit Jiangsu Shengfeng to manufacture the AuraGen®rotor; rather, the joint venture is required to purchase all rotor subassemblies as well as certain software elements directly from the Company. Jiangsu Shengfeng’s board of directors consists of three members appointed by the Company and three appointed by our Chinese partner; Jiangsu Shengfeng’s CEO is appointed by our Chinese partner while its CFO and director for quality assurance and control are appointed by Aura.

In addition, Jiangsu Shengfeng is required to purchase a minimum of $1,250,000 of product from the Company supported by letters of credit for distribution until their factory is built, equipment installed, and staff hired and properly trained by Aura personnel. During fiscal 2019, Jiangsu Shengfeng placed a $1,000,000 order with the Company including a $700,000 advance payment. Aura has also committed to supply personnel for nine months at no cost other than to be reimbursed for travel, room and board. This commitment has been fulfilled and Aura is under no further obligation to supply personnel at no cost. The agreement was subject to the approval of the Chinese Government which was received in April 2017. Mr. Song, the majority shareholder of the Chinese partner of the joint venture, invested $2,000,000 in Aura’s common shares at a price of $1.40 per share. On November 20, 2019, the Company reached a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture regarding the return of $700,000 previously advanced to the Company in September 2018 and previously recorded as a customer advance on the balance sheet as of February 28, 2019. The preliminary agreement reached consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 is paid over a 12-month period beginning March 15, 2020 and February 15, 2021. In the balance sheet as of November 30, 2019, the amount of $700,000 was reclassified to notes payable.

 

Contingencies

 

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

 


In 2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring all its options and available remedies and is working toward an offer to settle this matter.

 

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $10$10.6 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 3.15$5 million Mr. Kopple claims to be owed for interest, loan fees and late payment charges) 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, theour former CEO (notand a director)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. 


In April 2018,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 filed suit against its former counsel, Kilpatrick Townsend & Stockton LLP alleging various actsto seek his approval for the hiring of malpracticenearly all personnel, all to the exclusion of the Company’s management team and breachstockholder-elected Board of fiduciary duty committed by the firm in connection with its representationDirectors. The Company believes that allowing Mr. Kopple such level of Aura. In June 2018, Kilpatrick Townsend & Stockton LLP filed a cross-complaint againstoperational control over the Company claiming in excess of $400,000 in allegedly unpaid legal fees. In January 2019,without any accountability would be highly detrimental to the Company reached a settlement with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillment of this contractual obligation based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company also paid $20,000 in legal fees related to legal expense associatedis incompatible with the Company’s delays in the issuanceBoard of the stock.Directors’ duties to shareholders and creditors as a whole.

 

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by a relative of Scholnick, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that anyIn April 2020, Aura and Scholnick entered into a Confidential Settlement and Release Agreement wherein (i) the 2018 action initiated by Scholnick against Aura was resolved with no amounts owing by Aura and the complaint and cross-complaint were subsequently dismissed with prejudice; and (ii) the amount is now owedowing to Scholnick.Aura pursuant to the judgment against J.B. Moving and Delivery was compromised and resolved through a single lump-sum payment to Aura.

 

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr.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 Mr.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.


NOTE 10 – FINANCIAL STATEMENT RESTATEMENTS

The Company issued an amended report on Form 10-K/A on October 24, 2019 for the fiscal year ended February 28, 2019 that corrected misstatements of its financial statements as of February 28, 2019. The following tables describe one of those misstatements, which should have been recorded in the nine-months ended November 30, 2018.

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

AURA SYSTEMS, INC.

STATEMENT OF OPERATIONS (RESTATED)

FOR THE NINE-MONTHS ENDED NOVEMBER 30, 2018

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

AURA SYSTEMS, INC.

STATEMENT OF CASH FLOWS (RESTATED)

FOR THE NINE-MONTHS ENDED NOVEMBER 30, 2018

  Nine-months ended November 30, 2018 
  Previously Reported  Restatement Adjustment  Restated 
          
Net loss $(5,706,947) $1,991,740 i.$(3,715,207)
Adjustments to reconcile net loss to cash used in operating activities            
FMV of warrants issued for services  438,826   -   438,826 
Gain on settlement of debt  -   -   - 
Stock issued for services  1,992,250   (1,991,740)i. 510 
(Increase) decrease in            
Accounts receivable  -   -   - 
Other current assets  (8,804)  -   (8,804)
Increase (decrease) in            
Accts payable, customer deposits and accrued expenses  1,382,524   -   1,382,524 
Cash used in operating activities  (1,902,151)  -   (1,902,151)
             
Cash flows from financing activities            
Issuance of common stock      -   - 
Payment on notes payable  (50,000)  -   (50,000)
Proceeds from subscription receivable  1,225,000   -   1,225,000 
Cash provided by financing activities  1,175,000   -   1,175,000 
             
Net incr (decr) in cash and cash equivalents  (727,151)  -   (727,151)
Beginning cash  748,008   -   748,008 
Ending cash $20,857  $-  $20,857 
Cash paid in the period for:            
Interest $37,500  $-  $37,500 
Income taxes $-  $-  $- 

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/A10-K  for the year ended February 28, 2019,29, 2020, issued on October 24, 2019July 13, 2020 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.

 

We do not intend to update or revise any forward-looking statements, whether as a resultbecause 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.

 

17


Overview

 

Beginning withDuring fiscal 2017 through 2018, we reduced our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations and minimizing expenditures while we attempted to raise additional funding and pursue some initial engineering activities activities.

 

In fiscal 2018, we successfully eliminated approximately 68% of our total indebtedness. Specifically, our secured creditors converted approximately $5.73 million of secured debt into approximately 4.1 million shares of our common stock. The converted debt represented approximately 80% of the total secured debt of the Company. The balance of the secured debt (approximately $960,000) is to be paid to the secured creditors in cash if we raise at least $4.0 million in proceeds through new equity offerings in one or a series of related offerings. Additionally, in fiscal 2018, approximately $12.77 million of unsecured debt was converted into approximately 9.3 million shares of the Company’s common stock and approximately $12.3 million of unsecured debt was forgiven. In total, during fiscal 2018, we eliminated a total of approximately $30.23$30.8 million of debt.

 

As The Company is presently engaged in a dispute with one of the date of this filing,its former directors, Robert Kopple, our former Vice Chairmanrelating to approximately $10.6 million (representing approximately $5.4 million loaned to the Company over the course of the Board, is the only significant unsecured note holder that has not agreed2013 to restructure his debt.2016; approximately $170,000 Mr. Kopple claims that heto have advanced or paid to third parties on Aura’s behalf; and approximately $5 million Mr. Kopple claims to be owed for interest, loan fees and late payment charges) and approximately 3.33 million warrants which Mr. Kopple claims to be owed to him and his affiliates are owed approximately $10.3 million on terms significantly preferable to other similarly situated unsecured creditors. We dispute Mr. Kopple’s claims. See “Part II-Other Information, Item 1. Legal Proceedings” included elsewhere in this Quarterly Report on Form 10-Q for information regardingby the dispute withCompany. In July 2017, Mr. Kopple regarding these transactions.filed suit against the Company as well as against current director Mr. Kopple has not acceptedDiaz-Verson and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, our numerous offers to restructure this debt.

During the three-months ended November 30, 2019, we recorded a one-time gain to other income on the Statement of Operations of approximately $1.9 million consisting of the cancellation of accounts payable of $0.3 million, cancellation of customer advances of $0.4 million and cancellation of unpaid wages and salaries of $1.5 million. In addition, $1.0 million of unpaid compensation owed to a former CEO and a related party was cancelledformer director, in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and accounted forMr. Gagerman and as a capital transactionresult 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 reclassified from accrued expense-related partymanagement functions such as, but not limited to, additional paid-in-capital. These amounts were incurred in prior yearsthe right to unilaterally direct the Company’s ordinary business expenditures and were cancelledasrequiring the related statueCompany to seek his approval for the hiring of limitation periods have since expired.nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company reclassified inbelieves that allowing Mr. Kopple such level of operational control over the three-months ended November 30, 2019 approximately $0.3 million relatedCompany without any accountability would be highly detrimental to the shares issuedCompany and is incompatible with the Board of Directors’ duties to the Company’s president in August 2019shareholders and creditors as other expense (see Notes 3 and 7 to the Condensed Financial Statements).a whole.

 

On February 14, 2018, we effectuated a one-for-seven reverse stock split.

 

In fiscal 2019, we began increasing our engineering and manufacturing activities. We utilized contractors for these services in order to minimize our expense while we continued to pursue new sources of financing. In July 2019 under our new management team, we began significantly increasing our sales, engineering, manufacturing and marketing activities under our new management team.activities.

 

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

 

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

 

(ii) The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGenAuraGen®/VIPER® solution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms. AfterreducingAfter suspending the majority of our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscal 2018 and 2019, we expectincurred modest engineering activities budgeted atexpenses of approximately $200,000$34,000 and $58,000 during the fiscalthree-months ended May 31 2020 year.and 2019, respectively.

 

18

Operations.

During the first half of fiscal 2016, we significantly reduced operations due to lack of financial resources. During the second half of fiscal 2016, our operations were further disrupted when we were forced to move from our facilities in Redondo Beach, California to a smaller facility in Stanton, California. During fiscal years 2017 to 2019, the Company reduced its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. During this time, our agreements with numerous customers, third party vendors, and organizations and entities material to the operation of the Company business were canceled, delayed or terminated. During fiscal 2018, we successfully restructured in excess of $30 million of debt. During fiscal 2019, we continued to address our financial needs, were able to ship a small quantity of product during fiscal 2019 and shipped a small amount to customers and maintained a small inventory of finished product. During the nine-months ended November 30, 2020, we increased production and recognized approximately $745,000 of revenue. Our marketing strategy during fiscal 2020 includes the following key activities:

(i) One element of our business plan is focused on electric transport refrigeration. The market is well understood and both social and economic forces are providing an unprecedented opportunity to gain significant market share. Our immediate focus is on 20-k BTU/hr. midsize trucks and the 50-k BTU/hr. trailers.

(ii) Another element of our business plan is focused on our mobile power solution for military applications around the globe.

(iii) We also plan to seek joint venture opportunities similar to the agreement we entered in China to explore other international opportunities.

Going Concern.

Our independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues (see Note 3 to the Condensed Financial Statements). See Report of Independent Registered Public Accounting Firm on page F-1, together with the Company’s audited consolidated financial statements for the fiscal year ended February 28, 2019 on Form 10-K/A issued on October 24, 2019.

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial conditions and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on-going basis,In preparing our financial statements, we evaluatehave made our best estimates including, but not limited to, those related to revenue recognition.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. ActualThe 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, could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements.statements may be materially affected.


Revenue Recognition

 

Revenue Recognition

We adopted Accounting Standards Codification (“ASC”) 606.The core principle of ASC 606, Revenue from Contracts with Customers establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires(“ASC 606”), is that an entity to recognizerecognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that itto which the entity expects to be entitled to receive in exchange for those goods or services recognized asservices. 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.

 

We have assessedOur primary source of revenue is the impactmanufacture and delivery of AuraGen/VIPER sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $49,000 and $0 for the guidance by performing the following five steps analysis: three-months ended May 31 2020 and 2019, respectively. Our current principle sales channel is sales to a domestic distributor.

 

Step 1: IdentifyIn accordance with ASC 606, we recognize the contract

Step 2: Identifyentirety of the revenue, net of discounts, for our AuraGen/VIPER sets at time of product delivery to the 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

Step 3: Determine to the transactioncustomer. Our payment terms are cash payment due upon delivery and typically includes a 2.5% price

Step 4: Allocate 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 transaction priceguidance 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 at May 31, 2020 and February 29, 2020, respectively; however, we expect warranty claims to eventually be nil, therefore, we have not delayed the recognition of revenue during fiscal years 2021 and 2020.

Step 5: Recognize revenue

19

 

Inventory Valuation and Classification

Inventories are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. We haveFrom fiscal 2015 through 2019 we minimally operated and therefore have only produced minimal product since late 2015.product. As a result, while we believebelieved that a portion of the inventory hashad value, we arewere unable to substantiate its demand and market valuefully reserved all inventory in fiscal 2019. Beginning with fiscal 2020, production has increased, and as a result we elected to fully reservereserved inventory has been used in current production. We classify all of our inventory it in its entirety as of February 28, 2019. During fiscal year 2020, we increased productionraw material and accordingly, we have assigned a value of $53,000 to our physical and book inventory as of November 30, 2019.work-in-process.

 

Stock-Based Compensation

 

We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair value-based method and the recording of such expense in the consolidated statements of operations.

  

We account for stock option and warrant grants issued and vesting to non-employees, such as consultants and third parties, in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”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.

 

For the past, several years and inIn 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-acceptedwidely 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 three-month period ended May 31, 2020, our Board of Directors awarded a total of 1,250,000 stock options to the five members of the board, with a five-year term, an exercise price of $0.25 per option, and a vesting period of not less than six-months and one day. Using the Black-Scholes option model, we determined an aggregate fair value of $194,000 of which $77,599 was recorded in the three-months ended May 31, 2020.

17

Impact of COVID-19

 

ResultsThe 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 Operations

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

Net revenues were $744,850 for the nine-months ended November 30, 2019 (the “Nine-Months FY2020”) compared to $39,274 for the nine-months ended November 30, 2018 (the “Nine-Months FY2019”), or an increase of 1,796% compared to the same periodCOVID-19 during our fourth quarter of fiscal 2019. During the second2020 with our Chinese joint venture’s manufacturing facilities being required to close and third quartersmany of 2020, we delivered 116 generator units to a distribution customer as compared to 6 units in the same period in the prior year for a military application.

Cost of goods sold were $147,752 in the Nine-Months FY2020 compared to $110,026 in the Nine-Months FY2019 resulting in a gross profit of $597,097 and a loss of $70,752, respectively, and gross margins of 80.0% and negative 180.2%, respectively. Gross profit and related gross margin for the Nine-Months FY2020 shipments were highour customers suspending their own operations due to the utilizationCOVID-19 pandemic. As a result, net sales and production levels during the fourth quarter of inventory previously fully reserved. We do not expect gross margins above 80%fiscal 2020 and the first quarter of fiscal 2021 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 costs through temporary furloughs;

Enhanced cleaning and disinfection procedures at our facilities, temperature checks for our workers, promotion of social distancing at our facilities and requirements for employees to work from home where possible;
Reduction of capital expenditures; and

Deferral of discretionary spending.

The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, 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 will adversely impact our results for the first quarter of fiscal 2021, as well as the full fiscal year, and that impact could be material.

Going Concern

The financial statements contained herein in Item I. Financial Statement have been prepared assuming we will continue as a going concern. During the three-months ended May 31, 2020 and 2019, we reported net losses of approximately $606,000 and $675,000, respectively, and had negative cash flows from operating activities of approximately $181,000 and $397,000, respectively.

If we are unable to generate profits on a sustained basis and is unable to continue to obtain financing for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory will decline.its working capital requirements, we may have to curtail its business sharply or cease business altogether.

 

Engineering,Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development expenses were $123,024 in the Nine-Months FY2020, comparedactivities. Our continuation as a going concern is dependent upon its ability to $302,293 in the Nine-Months FY2019, orgenerate sufficient cash flow to meet its obligations on a decline of 59.3%. Beginning fiscal 2021, we expecttimely basis, to increase spend of researchretain our current financing, to obtain additional financing, and developmentultimately to include additional technical personnel, test and evaluation components, capital equipment, larger space allocation to an annualized spend of $700,000.attain profitability.

 

Selling, general and administrative expense was $915,934 for the nine-months ended November 30, 2019 as compared to $2,797,711 during the comparable periodResults of fiscal year 2019, or a decline of $1,881,777 (67%). During Nine-Months FY2019, we incurred an expense of $417,000 related to the repricing of warrants and options, $432,000 of higher legal expenses, higher consulting expense and administrative headcount cost.Operations

 

Net interest expense in the Nine-Months FY2020 increased $37,138 or 4%, to $885,731 from $848,593 in the Nine-Months FY2019.


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

Three months ended November 30, 2019May 31, 2020 compared to three months ended November 30, 2018May 31, 2019

 

Net revenues were $396,775revenue was approximately $49,000 for the three-months ended November 30, 2019May 31, 2020 (the “Three-Months FY2020”FY2021”) compared to $0 for the three-months ended November 30, 2018May 31, 2019 (the “Three-Months FY2019”FY2020”). During the secondfirst quarter of 2020,2021, we delivered 648 generator units to a distribution customer as compared to 0 units in the same periodquarter in the prior year.

 

Cost of goods sold were $116,655was approximately $40,000 in the Three-Months FY2020FY2021 compared to $37,032approximately $3,000 in the Three-Months FY2019FY2020 resulting in a gross profit of $281,119$8,000, or a gross margin of 16%, and a $3,000 gross loss of $37,032, respectively, and gross margins of 70.8%in the Three-Months FY2020 and a meaningless gross margin, respectively.margin. Gross profit and related gross margin for the Three-Months FY2020FY2021 shipments were highinfluenced by two main factors: (i) the low volume of shipments attributed partly to the impact of COVID-19 causing temporary closure of operations, which reduced our ability to fully absorb fixed operating costs, and offset partially by (ii) a reduction of cost of goods sold due to the utilization of inventory previously fully reserved. We do not expect gross margins above 80% to continue for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory of approximately $4,000 used in the course of production. During the balance of this fiscal year, we believe we will decline.continue to utilize fully reserved inventory components to offset production costs for material and this will favorably benefit our operating results and related cash flows.

 

Engineering, research and development expenses were $30,472approximately $34,000 in the Three-Months FY2021, compared to approximately $58,000 in the Three-Months FY2020, compared to $138,417 in the Three-Months FY2019, or a decrease of 78%

41% Selling, general and administrative (“SG&A”) expense decreased $383,000 (48%increased approximately $42,000 (14%) to $407,652approximately $339,000 in the Three-Months FY2020FY2021 from $790,985approximately $297,000 in the Three-Months FY2019.FY2020. During Three-Months FY2020,FY2021, we incurred less cost for administrative$77,599 of stock-based compensation expense related to the grant of 1,250,000 to our five board members. Other SG&A expenses declined by approximately $35,000 due to reduced headcount and consultancy cost by $250,000 and $150,000 in reduced legal fees.expense.

 


Net interest expense in the Three-Months FY2020FY2021 decreased $11,293approximately $27,000 or 4%, to $283,928approximately $290,000 from $295,221approximately $317,000 in the Three-Months FY2019.FY2020.

Other income increased $53,000 in the Three-Months FY2021 due to a favorable $46,000 settlement of a legal matter and a one-time benefit of $7,000 related to the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration in response to the COVID-19 pandemic.

 

Net incomeloss for the Three-Months FY2020 increased $2,780,761,FY2021 decreased approximately $69,000, or 212%10%, to $1,470,317$606,000 from a loss of $1,310,444$675,000 in the Three-Months FY2019FY2020 due primarily to primarily to additional expense of $77,600 for stock-based compensation expense offset by (i) the recording of a total of $1.9 million in gains on cancellation of accounts payables, customer advances and unpaid salaries and related expenses following expiration of the applicable statute of limitation periods (ii) increasedhigher gross profit contributionon shipments of $0.3 million on higher levels$11,000 (ii) $53,000 of shipmentsone-time other income (iii) reduced operatingengineering, research and development expenses of $0.5 million and$24,000 (iv) otherreduced net interest expense of $0.1 million.$27,000 and (v) reduced headcount expense of $35,000

 

Liquidity and Capital Resources

 

Net cash used in operations for the nine monthsthree-months ended November 30, 2019,May 31, 2020, was $490,578,approximately $181,000, a decrease of $1,411,573$216,000 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the nine-monthsthree-months ended November 30, 2019,May 31, 2020, was $255,245$299,000 consisting of (i) cash proceeds from issuance of common stock of $295,245$235,000, (ii) proceeds of $74,405 related to the PPP COVID-19 program and partially and (ii) offset by $40,000 of(iii) a $10,000 principle paymentspayment on a note payable aspayable; compared to cash provided by financing of $1,175,000$50,000 in the same period of fiscal 20192020 consisting of (i)cash proceeds from a subscription receivablethe issuance of $1,225,000 and offset by (ii) principle payment of $50,000 on a note payable.common shares. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs.

 

There were no acquisitions of property and equipment during the Nine-Months FY2020 or the Nine-Months FY2019.three-months ended May 31, 2020 and 2019.

 

Accrued expenses and other current liabilities as of November 30, 2019 decreased $1.1May 31, 2020 increased by approximately $0.1 million to $1,066,260$4.3 million from $2,197,129approximately $4.2 million as of February 28, 201929, 2020 due to the one-time cancellation(i) increased accrued legal expenses of accounts payable, customer deposits$30,000 (ii) increased accrued payroll of $46,000 and unpaid salaries and related expenses discussed above. Accrued expense-related party decreased by $1.0 million to $0 associated with the cancellation(iii) increased accrued interest cost of the related party obligation as discussed above.$80,000.

 

The Company had a deficit of $19.3$20.4 million in shareholders’ equity as of November 30, 2019,May 31, 2020, compared to $21.6$20.1 million as of February 28, 201929, 2020 with the net change attributed to net incomeloss of approximately $1.6$0.7 million andoffset partially by (i) the issuance of shares of $0.7 million.approximately $0.2 million for cash and (ii) the granting of options to board members totaling 1,250,000 with an aggregate fair value of $194,000, of which $77,599 was recognized during the first quarter of fiscal 2021.

On April 23, 2020, we obtained a Paycheck Protection Program (“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, and all loan payments are deferred for six months, at which time the balance is payable in 18 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 intends to use 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. While we intend to apply for the forgiveness of the PPP Loan, there is no assurance that we will obtain forgiveness of the PPP Loan in whole or in part.

 

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. 


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 ineffectiveeffective as of the end of the period covered by this report in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. The Company continues to remediate the findings contained in our Annual Report on Form 10-K/A,10-K, for the fiscal year ended February 28, 2019,29, 2020, issued on October 24, 2019.July 13, 2020.

 

Changes in Internal Control over Financial Reporting

 

There have been no other changes in our internal control over financial reporting during our fiscal quarter ended November 30, 2019,May 31, 2020, not previously identified in our Annual Report on Form 10-K/A,10-K, for the fiscal year ended February 28, 201929, 2020 and issued on October 24, 2019July 13, 2020 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

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

 

In 2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring all its options and available remedies and is working toward an offer to settle this matter.

  

In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. In September 2018 the court entered a judgment of approximately $235,000 in favor of the two secured creditors. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors.


The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $10$10.6 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 3.15$5 million Mr. Kopple claims to be owed for interest, loan fees and late payment charges) 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, theour former CEO (notand a director)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. IfHowever, 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 settlement negotiation is unsuccessful,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 intends to vigorously defend against these claims. See “Liquidityseek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and Capital Resources” in “Item 2. Management’s Discussionstockholder-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 Analysisis incompatible with the Board of Financial ConditionDirectors’ duties to shareholders and Results of Operations” included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the transactions under dispute with Mr. Kopple.creditors as a whole.

 

In April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend & Stockton LLP alleging various acts of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018, Kilpatrick Townsend & Stockton LLP filed a cross-complaint against the Company claiming in excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached a settlement with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

In February 2018, the Company failed to issue shares of stock contractually owed toBetterSea, LLC. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillment of this contractual obligation based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company also paid $20,000 in legal fees related to legal expense associated with the Company’s delays in the issuance of the stock.


In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’sa relative of Scholnick, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that anyIn April 2020, Aura and Scholnick entered into a Confidential Settlement and Release Agreement wherein (i) the 2018 action initiated by Scholnick against Aura was resolved with no amounts owing by Aura and the complaint and cross-complaint were subsequently dismissed with prejudice; and (ii) the amount is now owedowing to Scholnick.Aura pursuant to the judgment against J.B. Moving and Delivery was compromised and resolved through a single lump-sum payment to Aura.

 

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr.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 Mr.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.

 

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 2020 Annual Report on Form 10-K issued on JuneJuly 13, 2019 and the Amended Annual Report on Form 10-K/A for the year ended February 28, 2019, issued on October 24, 2019.2020.

 

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

 

During the nine-monthsthree-months ended November 30, 2019,May 31, 2020, we issued 1,383,0151,358,333 shares of common stock for cash proceeds of $295,354.$235,000.


 

ITEM 3. Defaults Upon Senior Securities.

 

As of the date of this filing, Robert Kopple, the Company’sour former Vice Chairman of the Board, is the only significant unsecured note holder that has not agreedexecuted formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.6 million (representing approximately $5.4 million loaned to restructure his debt.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 $5 million Mr. Kopple claims to be owed approximately $5.3 million plusfor interest, loan fees and approximately 3.14 million warrantslate payment fees) on terms significantly preferable to other similarly-situatedsimilarly situated unsecured creditors. To-date,creditors as well  as warrants to purchase approximately 3.3 million shares of our common stock. We dispute Mr. Kopple has not accepted the Company’s multiple offers to restructure his debt. The Company is presently engagedKopple’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 relating to the debt and securities which Mr. Kopple claims to be owed to him and his affiliates by the Company. See,regarding these transactions as well as “Note 3 – Notes Payable” and “Note 5 – Related Parties Transactions” to the Company’s condensed financial statements, and “Liquidity and Capital Resources” in “Item 2.2 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.


In June 2014, we entered into a Financing Letter of Agreement (the “June 2014 Agreement”) with two affiliate entities of Mr. Kopple, KF Business Ventures and the Kopple Family Partnership (the “Additional Kopple Parties”), pursuant to which the Additional Kopple Parties loaned us an additional $1,000,000 (the “June 2014 Loan”). In connection with the June 2014 Loan, Mr. Kopple also added $202,205 in penalties and accrued interest, credited us with $200,000 for amounts previously repaid by us and consolidated several earlier advances into a single new note (the “June 2014 Kopple Note”) in the principal amount of $2,715,2067 and bearing simple interest at a rate of 10% per annum. We were also required to obtain a subordination agreement from the Breslow Parties in favor of the Kopple Parties with respect to the June 2014 Kopple Note.

  

Pursuant to the June 2014 Agreement, the Kopple Parties also placed various restrictions on our ability to raise additional capital, hire qualified personnel and pay certain expenses without his prior approval for so long as the principal amount of his note remained outstanding. The June 2014 Kopple Note also required us to issue Mr. Kopple a stock purchase warrant (the “June 2014 Kopple Warrant”) to purchase approximately 771,000 shares of our common stock at an exercise price of $0.70 per share, to be exercisable for seven years. Additionally, if we borrowed funds, issued capital stock or rights to acquire or convert into capital stock, or granted rights in respect to territories to any person for cash consideration of more than $5 million in the aggregate after the date of the June 2014 Kopple Note, we would be required to pay the entire amount of such cash consideration in excess of $5 million as a mandatory prepayment of the June 2014 Kopple Note. Additionally, Mr. Kopple required a default provision providing that in the event that the entire outstanding balance of the June 2014 Kopple Note was not paid in full prior to October 1, 2014, then for each consecutive calendar month during the period beginning October 1, 2014 and ending March 31, 2015, we would issue to Mr. Kopple additional stock purchase warrants, each to purchase 416,458 shares of our common stock, up to a maximum aggregate of approximately 2.5 million shares of our common stock, at $0.70 per share (the “Kopple Penalty Warrants”), the Kopple Penalty Warranties to be exercisable for seven years from the time of their respective issuances. In addition to the Kopple Penalty Warrants, the default provision under the June 2014 Kopple Note provides for a 5% late charge on the total amount due plus 15% per year interest. We have not repaid the Kopple Parties 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.

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ITEM 6.  Exhibits

 

31.1 Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
   
31.2 Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
   
32.1 Certification of PrincipalExecutive Officier and Chief Financial Officer  Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document
   
101.SCH   XBRL Schema Document
   
101.CAL   XBRL Calculation Linkbase Document
   
101.DEF   XBRL Definition Linkbase
   
101.LAB   XBRL Label Linkbase Document
   
101.PRE   XBRL Presentation Linkbase Document

 

2624

 

 

SIGNATURES

 

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

 

Date: January 14,July 20, 2020AURA SYSTEMS, INC.
 (Registrant)
   
 By:/s/ David MannCipora Lavut
  David MannCipora Lavut
  Chief Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)President

 

 

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