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 MayAugust 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 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 ☐ 

 

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 ☒

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

ClassOutstanding October 9, 2020
Common Stock, par value $0.0001 per share62,485,178 shares

 

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.

ClassOutstanding July 15, 2020
Common Stock, par value $0.0001 per share59,625,872 shares

 

 

 

 

AURA SYSTEMS, INC.

 

INDEX

 

Index  Page No.
PART I. FINANCIAL INFORMATION1
    
 ITEM 1.Financial Statements (Unaudited)1
    
  Balance Sheets as of MayAugust 31, 2020 and February 28,29, 20201
    
  Statements of Operations for the Three and Six months ended MayAugust 31, 2020 and 20192
    
  Statements of Cash Flows for the ThreeSix months ended MayAugust 31, 2020 and 20193
    
  Statements of Changes in Shareholders’ Deficit4
    
  Notes to Financial Statements5
    
 ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1516
    
 ITEM 3.Quantitative and Qualitative Disclosures About Market Risk1922
    
 ITEM 4.Controls and Procedures2023
    
PART II. OTHER INFORMATION2124
    
 ITEM 1.Legal Proceedings2124
    
 ITEM 1A.Risk Factors2225
    
 ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds2225
    
 ITEM 3.Defaults Upon Senior Securities2225
    
 ITEM 4.Mine Safety Disclosures2326
    
 ITEM 5.Other Information2326
    
 ITEM 6.Exhibits2426
    
 SIGNATURES AND CERTIFICATIONS2527

 

i

 

 

ITEM 1. FINANCIAL STATEMENTS

 

AURA SYSTEMS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

 

 August 31, February 29, 
 May 31,
2020
  February 29,
2020
  2020  2020 
Assets          
Current assets          
Cash and cash equivalents $138,174  $19,807  $191,731  $19,807 
Inventory  89,106   90,037   104,225   90,037 
Other current assets  417   1,487   4,583   1,487 
Total current assets  227,697   111,330   300,540   111,330 
Non-Current Assets  -   -   -   - 
Total assets $227,697  $111,330  $300,540  $111,330 
                
Liabilities & Shareholders’ Deficit                
Current liabilities                
Accounts payable $2,515,819  $2,537,061  $2,001,516  $2,537,061 
Accrued expenses  2,023,207   1,946,290   682,950   1,946,290 
Customer advances  440,331   440,331   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   338,527   262,911 
Accrued interest-notes payable  541,106   498,698   195,962   498,698 
Notes payable, current portion  1,002,653   983,717   231,516   983,717 
Notes payable and accrued interest-related party  11,543,432   11,333,960   11,752,402   11,333,960 
Total current liabilities  19,375,595   19,011,296   15,643,205   19,011,296 
Notes payable-related party  3,000,000   3,000,000   3,000,000   3,000,000 
Note payable  45,470   0 
Notes payable  183,911   0 
Convertible notes payable  1,402,971   1,402,971   1,402,971   1,402,971 
Total liabilities  23,824,036   23,414,267   20,230,087   23,414,267 
                
Commitments and contingencies (note 7)  -   -   -   - 
                
Shareholders’ deficit                
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 
Common stock: $0.0001 par value; 150,000,000 shares authorized at August 31 and February 29, 2020; 61,818,512 and 56,400,874 issued and outstanding at August 31 and February 29, 2020, respectively  6,180   5,639 
Additional paid-in capital  443,729,916   443,417,452   444,672,986   443,417,452 
Accumulated deficit  (467,332,029)  (466,726,027)  (464,608,713)  (466,726,027)
Total shareholders’ deficit  (23,596,339)  (23,302,937)  (19,929,547)  (23,302,937)
Total liabilities and shareholders’ deficit $227,697  $111,330  $300,540  $111,330 

 

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


AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 Three-Months Ended
May 31,
 
 2020  2019  Three-Months Ended
August 31,
  Six-months Ended
August 31,
 
      2020  2019  2020  2019 
Net revenue $48,633  $-  $5,000  $348,075  $53,633  $348,075 
Cost of goods sold  40,393   2,889   3,466   29,208   43,859   32,097 
Gross profit (loss)  8,240   (2,889)
Gross profit  1,534   318,867   9,774   315,978 
Operating expenses                        
Engineering, research & development  33,994   58,193   63,293   34,359   97,287   92,552 
Selling, general & administration  343,559   297,223   432,104   211,059   775,663   508,282 
Total operating expenses  377,553   355,416   495,397   245,418   872,950   600,834 
Loss from operations  (369,313)  (358,305)
Other expense:        
Profit (loss) from operations  (493,863)  73,449   (863,176)  (284,856)
Other (income) expense:                
Interest expense, net  289,688   317,015   327,123   284,788   616,810   601,803 
Other income  7,000   -   (2,672,414)  -   (2,679,414)  - 
Gain on debt settlement  46,000   - 
Loss before income tax provision  (606,001)  (675,321)
Gain on extinguishment of debt  (871,887)  -   (871,887)  - 
Gain on legal settlement  -   -   (46,000)  - 
Income (loss) before income tax provision  2,723,315   (211,339)  2,117,314   (886,659)
Income tax provision  -   -   -   -   -   - 
Net loss $(606,001) $(675,321)
Net income (loss) $2,723,315  $(211,339) $2,117,314  $(886,659)
                        
Basic and dilutive loss per share $(0.01) $(0.01)
Weighted average shares outstanding  57,072,794   53,863,602 
Basic income (loss) per share $0.05  $(0.00) $0.04  $(0.02)
Weighted average shares outstanding-basic  59,515,727   53,863,602   58,294,261   44,356,148 
Dilutive income (loss) per share $0.04  $(0.00) $0.04  $(0.02)
Weighted average shares outstanding-dilutive  63,561,907   53,863,602   62,340,440   44,356,148 

 

See accompanying notes to these unaudited financial statements.

 

2

 

 

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  Three-Months Ended
May 31,
 
  2020  2019 
       
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  931   - 
Other current assets  1,070   12,763 
Increase in        
Accts payable, customer deposits and accrued expenses  345,364   265,122 
Cash used in operating activities  (181,037)  (397,436)
         
Cash flows from financing activities        
Issuance of common stock  235,000   50,000 
Payment on notes payable  (10,000)  - 
Proceeds from Federal PPP note  74,405   - 
Cash provided by financing activities  299,405   50,000 
         
Net decrease in cash and cash equivalents  118,368   (347,436)
Beginning cash  19,807   358,209 
Ending cash $138,174  $10,773 
Cash paid in the period for:        
Interest $-  $- 
Income taxes $-  $- 

See accompanying notes to these unaudited financial statements.


AURA SYSTEMS INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited)

  Common
Stock
Shares
  Common
Stock
Amount
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Total
Shareholders’
Deficit
 
Balance, February 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)
  Six-Months Ended
August 31,
 
  2020  2019 
Net income (loss) $2,117,314  $(886,659)
Adjustments to reconcile net income (loss) to cash used in operating activities        
Fair Market Value of warrants issued for services  -   - 
Stock-based compensation expense  174,076   - 
Gain on write-off of expired liabilities  (3,540,826)  - 
Changes in working capital assets and liabilities:       
Inventory  (14,189)  - 
Other current assets  (3,097)  8,357 
Accrued interest on notes payable  579,971   569,590 
Accts payable, customer deposits and accrued expenses  (145,630)  (105,065)
Cash used in operating activities  (832,381)  (413,777)
         
Cash flows from financing activities        
Issuance of common stock  815,000   150,353 
Payment on notes payable  (35,000)  - 
Proceeds from Federal PPP & SBA notes  224,305   - 
Cash provided by financing activities  1,004,305   150,353 
         
Net decrease in cash and cash equivalents  171,924   (263,424)
Beginning cash  19,807   358,209 
Ending cash $191,731  $94,785 
Cash paid in the period for:        
Interest $2,500  $- 
Income taxes $-  $- 
Supplemental schedule of non-cash transactions:        
Note payable converted into shares of common stock $267,000  $- 

 

See accompanying notes to these unaudited financial statements.

  


4AURA SYSTEMS INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited)

 

     Common  Additional     Total 
  Common  Stock  Paid-In  Accumulated  Shareholders’ 
  Stock Shares  Amount  Capital  Deficit  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)
                     
Shares issued for cash  501,765   51   100,302   -   100,353 
Shares issued for settlement  1,030,385   103   329,620   -   329,723 
Net loss  -   -   -   (211,339)  (211,339)
Balance, August 31, 2019  55,402,545  $5,540  $442,998,999  $(465,005,822) $(22,001,283)
                     
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)
                     
Shares issued for cash  3,866,664   387   579,613   -   580,000 
Shares issued for settlement  192,641   19   266,981   -   267,000 
Stock-based compensation expense  -   -   96,476   -   96,476 
Net income  -   -   -   2,723,315   2,723,315 
Balance, August 31, 2020  61,818,512   6,180   444,672,986   (464,608,713)  (19,929,547)

 

See accompanying notes to these unaudited financial statements.


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

 

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

Aura Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage in the development, commercialization, and 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.

 

Basis of Presentation

 

In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. However, the results of operations included in such financial statements may not necessary be indicative of annual results.

 

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 29, 2020 (“Fiscal 2020”) filed with the Securities and Exchange Commission (“SEC”) on July 13, 2020 (“2020 Form 10-K.”).

Our fiscal year ends on the last day of February. Accordingly, the current fiscal year is ending on February 28, 2021; we refer to the current fiscal as (“Fiscal 2021”). The prior fiscal year is Fiscal 2020.

 

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 monthsand six-months ended MayAugust 31, 2020, there were no significant changes madethe Company recognized aggregate gains of approximately $2.7 million in connection with the cancellation of certain accounts payable balances and accrued payroll related to unpaid wages and salaries and approximately $0.9 million in connection with demand promissory notes with three persons for which the respective statute of limitations periods have expired.


Earnings Per Share

The following table sets forth the basic and dilutive earnings per share for the three and six-months ended August 31, 2020. The dilutive earning per share includes only the dilutive incremental effect of additional shares issued on an “as if converted basis” in relation to the Company’s significant accounting policies.convertible notes payable principle amounts outstanding as of August 31, 2020 (see Notes 3 and 6).

  Three-Months Ended August 31, 2020 
  Income  Shares  Per-share 
  (Numerator)  (denominator)  Amount 
Basic EPS         
Income available to common stockholders $

2,723,315

   59,515,727  $

0.05

 
             
Effect of Dilutive Securities            
Convertible notes payable $

48,559

   4,046,180  $

0.01

 
             
Dilutive EPS            
Income available to common stockholders plus assumed conversions $

2,771,874

   63,561,907  $0.04 

  Six-Months Ended August 31, 2020 
  Income  Shares  Per-share 
  (Numerator)  (denominator)  Amount 
Basic EPS         
Income available to common stockholders $2,117,314   58,294,261  $0.04 
             
Effect of Dilutive Securities            
Convertible notes payable $97,117   4,046,180  $0.02 
             
Dilutive EPS            
Income available to common stockholders plus assumed conversions $2,214,431   62,340,440  $0.04 


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.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current year 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 collective 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 all 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 material impact on its financial statements upon adoption.

 

NOTE 2 – GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The unaudited condensed financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a 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.

  

Beginning with the second quarter of fiscal year 2020, we increased operations of our AuraGen®/VIPER business and revenue for the three-monthsthree and six-months ended MayAugust 31, 2020 was $49,000$5,000 and $53,633, respectively, as compared to $0$348,075 of revenue in the comparable periodperiods of fiscalFiscal 2020.


NOTE 3 – NOTES PAYABLE

 

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

 

Non-Related Party Promissory Notes (see below) May 31,
2020
  February 29,
2020
  August 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 
Demand promissory notes payable with 1 and 4 individuals as of August 31, 2020 and February 29, 2020, respectively, carrying an interest rate of 10% (see Demand Promissory Notes below) $10,000  $768,537 
Messrs. Abdou notes payable  205,181   215,181   180,181   215,181 
U.S. Payroll Protection Plan loan program  74,405   -   74,405   - 
U.S. Small Business Administration-Economic Injury Disaster Loan  150,841   - 
Total Demand and Notes Payable  1,048,123   983,718   415,427   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   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   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   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   59,506   59,506 
Total Convertible Promissory Notes  1,402,971   1,402,971   1,402,971   1,402,971 
Accrued Interest - notes payable  541,106   498,698   195,962   498,698 
Total Non-Related Party  2,992,200   2,885,387   2,014,360   2,885,387 
                
Notes Payable-Related Party (see Note 6)        
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   3,000,000   3,000,000 
Kopple Notes Payable-related party , see Kopple Notes, Note 6:  10,702,338   10,494,933   10,909,742   10,494,933 
Mel Gagerman Notes Payable, see Gagerman, Note 6:  141,093   139,026   142,660   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   700,000   700,000 
Accrued Interest - notes payable- related party  300,719   262,911   338,527   262,911 
Total Related Party  14,844,150   14,596,871   15,090,930   14,596,871 
Total notes payable and accrued interest  17,836,350   17,482,258   17,105,289   17,482,258 
Less: Current portion $(13,387,910) $(13,079,287) $(12,518,407) $(13,079,287)
Long-term portion $4,448,441  $4,402,971  $4,586,882  $4,402,971 

 


Demand Promissory Notes and Notes Payable

 

The Demand Promissory Notes at August 31 and February 29, 2020 are for one and four individual notesindividuals, respectively, issued in September 2015 that are payable on demand with an interest rate of 10% per annum.

 

As of February 29 and MayAugust 31, 2020, the aggregate principalprinciple amount owed to these persons is $768,537; the principal amount of each note and the person/entity 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 presidentCompany, was $10,000.

In the second quarter of fiscal year 2021, liabilities with respect to $758,537 in principal plus $385,349 in accrued interest were reversed as the Company; and $267,000 Mr. Veen. In February 2018,related statute of limitations were determined to have expired. This reversal resulted in an aggregate reduction of current liabilities of $1,143,886, the Company issuedrecording of an issuance of 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 ofon 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 sharesCondensed Balance Sheet as of August 31, 2020, and the daterecognition of this filing.$871,887 as gain on extinguishment of debt on the Condensed Statements of Operations for the three and six-months ended August 31, 2020.

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 former 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$180,000 and $215,000 were outstanding as of MayAugust 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 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. As of MayAugust 31, 2020, $45,470$37,202 was classified as notes payable, non-current and $28,935$37,203 was classified as part of notes payable, current portion.

 

Economic Injury Disaster Loan

Entities negatively impacted by the COVID-19 pandemic were eligible to apply for loans sponsored by the United States Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EIDL Loan”) program. On July 1, 2020, the Company received cash proceeds of $149,900 under this program. The proceeds can be used to fund payroll, healthcare benefits, rent and other qualifying expenses, and the loan is not subject to a loan forgiveness provision. The standard EIDL Loan repayment terms include: interest accrues at 3.75% per annum effective July 1, 2020; the payment schedule contains a one-year deferral period on initial principle and interest payments; the loan term is thirty years; The Company pledged the assets of the Company as collateral for the loan; and there is no prepayment penalty or fees. As of August 31, 2020, the amount outstanding including accrued interest of $941 is $150,841 and is classified as part of notes payable, non-current on the August 31, 2020 balance sheet.


9

Convertible Notes Payable

 

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 was a remaining balance of $549,954 as of MayAugust 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 balance of $163,677 as of MayAugust 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 balance of $232,194 as of MayAugust 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 Dr. Lempert, 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. During fiscalFiscal 2020, Dr. Lempert convertconverted his share of the amount outstanding into common shares and the balance outstanding of $59,506 as of MayAugust 31 and February 29, 2020, respectively, is for Dresner exclusivelyexclusively.

 

9

 

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 noteThere is a remaining balance of $264,462 as of MayAugust 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 noteThere is a remaining balance of $133,178 as of MayAugust 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 Abdou and Abdou. All of the creditors entered into the January 30, 2017 agreement with the exception of 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 approval was completed on February 14,obtained in January 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 approximately $1,005,000 as of MayAugust 31 and February 29, 2020, respectively, plus any outstanding accrued interest.

 

NOTE 4 – ACCRUED EXPENSES

 

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

 

  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 

  August 31,  February 29, 
  2020  2020 
Accrued payroll and related expenses $600,508  $1,868,928 
Other accrued expenses  77,442   77,362 
  $682,950  $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. In the second quarter of fiscal year 2021, liabilities with respect to approximately $1.3 million in accrued payroll and related expenses were reversed as the related statute of limitation periods were determined to have expired.


NOTE 5 – SHAREHOLDERS’ EQUITY

 

Common Stock

 

During the three monthsand six-months ended MayAugust 31, 2020, the Company issued 1,358,3333,866,664 and 5,224,997 shares of common stock, respectively, for $235,000$580,000 and $815,000 in cash.cash, respectively. During the three monthsand six-months ended MayAugust 31, 2019, the Company issued 156,250501,765 and 658,015 shares of common stock, respectively, for $50,000$100,353 and $150,353 in cash.cash, respectively. During August 2019, 1,030,385 shares were issued for a settlement valued at $329,723 and during August 2020, 192,641 shares were issued in connection with the Veen settlement (see Note 3).

 

Employee 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 or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. As of February 29, 2020, and MayAugust 31, 2020, there were no stock options outstanding.

 


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, 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-monthssix-months ended MayAugust 31, 2020, the Board of Directors approved grants of 250,000 stock options to each board member for an aggregate of 1,250,000 options, with an exercise price of $0.25 per option and at a market price of $0.16 on March 19, 2020, the date of grant. The following table providedprovides the assumptions required to apply the Black-Scholes Merton option model to determine the fair value of the stock options as of the grant date:

 

 Options
Issued
During the
Three-Months
ended
May 31,
2020
 
    Options
Issued
During the
Six-Months
Ended
August 31,
2020
 
Exercise Price $0.25  $0.25 
Share Price $0.16  $0.16 
Volatility %  225%  225%
Risk-free rate  0.57%  0.57%
Expected term (yrs.)  4.0   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$96,477 and $174,076 recorded as part of sales, general and administration expense during the three-monthsthree and six-months ended MayAugust 31, 2020, respectively. No stock-based compensation expense was recorded during Fiscal 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  Number of Shares  Exercise
Price
  Weighted
Average
Intrinsic
Value
 
Outstanding, February 29, 2020  1,040,001  $1.40  $            -   1,040,001  $1.40  $     - 
Granted  1,250,000   0.25   -   1,250,000   0.25   - 
Exrecised  -   -   -   -   -   - 
Cancelled  -   -   -   -   -   - 
Outstanding, May 31, 2020  2,290,001  $0.77  $- 
Outstanding, August 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 
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   3.5 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 yearFiscal 2021, an exercise price of $1.40 has been used with all warrants. No warrants were issued in the three monthssix-months ended MayAugust 31, 2020.

 


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

 

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

 

Other information related to the warrants outstanding and exercisable as of MayAugust 31, 2020 follows:

 

Range of
Exercise Price
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 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   5,816,939   5,816,939   2.49 Yrs. $1.40  $1.40 1.40   5,816,939   5,816,939   2.19 Yrs.  $1.40  $1.40 

 

NOTE 6 – RELATED PARTIES TRANSACTIONS

 

Notes payable-related party, non-current - $3,000,000 on the condensed balance sheets as of MayAugust 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 six 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 at a conversion rate of $1.40. The note bears interest at a rate of 5% per annum payable monthly in arrears with accrued interest of $300,719$338,527 and $262,911 recorded as accrued interest-related party (see Note 4) as of MayAugust 31 and February 29, 2020, respectively.

 


Notes payable and accrued interest-related party, current - $11,543,432$11,752,402 on the condensed balance sheet as of MayAugust 31 and $11,333,960 as of February 29, 2020 consists of the Kopple Notes, the Gagerman Note and the Jiangsu Shengfeng Note as set forth below:

 

Kopple Notes

 

As of MayAugust 31, and February 29, 2020, the principal amount owed to Robert Kopple (former Vice-Chairman of our Board) of $5,607,323 was unchanged. As of MayAugust 31, 2020, additional accrued interest of $5,095,015$5,302,419 was owed to Mr. Kopple for a total balance of $10,702,338.$10,909,742. 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 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”Notes��) and warrants. The Kopple Notes carried a base interest rate of 9.5%, have a 4-year maturity date and were convertible into shares of common 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 with this individual in the amount of $20,000, which bears interest at a rate of 5% per annum.

 


Gagerman Note

 

On MayAugust 31, 2020, the Gagerman note consisted of $82,000 of unsecured note payable plus accrued interest of $59,093$60,660 for a total owed to Melvin Gagerman of $142,660, the Company’s former CEO and CFO, pursuant to a demand note entered into on April 5, 2014. Interest accrues at 10% per annum. On February 29, 2020, the amount owed to Gagerman was $139,026.

 

Jiangsu Shengfeng Note

 

On November 20, 2019, the Company entered into a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture, 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 would consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 iswould be paid over a 12-month period beginning March 15, 2020 through February 15, 2021.period. Principal loan amount on MayAugust 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 MayAugust 31, 2020.

Accrued expense-related party – In the second quarter of fiscal year 2021, liabilities with respect to approximately $1,008,000 in accrued payroll and related expenses to former officers of the Company were reversed to other income in the Condensed Statement of Operations for the three and six-months ended August 31, 2020 as the related statute of limitation periods were determined to have expired.

 

NOTE 7 – COMMITMENTS & CONTINGENCIES

 

Leases

 

Our facilities consist of approximately 20,000 square feet in Stanton, California and, prior to July 31, 2020, an additional storage facility in Santa Clarita, California. The Stanton facility is used for some assembly and testing of AuraGen®/VIPER systems and is rented on a month-to-month basis. The rent for the Stanton facility isbasis at $10,000 per month and the storage facility is $5,000 per month. In MayPrior to July 2020, the Company provided notice of its intention to vacate this storage facility inpaid $5,000 per month, on a month-to-month basis, for the Santa Clarita by July 31, 2020. Our current Stantonstorage facility. Following the closure of this facility, is not sufficient to support the expected operations and the Company is searching forcurrently renting on a new facility to be used for limited production, testing, warehousing and engineering and officemonth-to-month basis approximately 1,000 square feet of temporary offsite storage space for support staff. at a monthly cost of approximately $2,500.

Commencing in February 2019 and ending in July 2019, the Company rented approximately 300 square feet of office space in Irvine, California at a cost of $ 2,350 per month on a month-to-month basis.

 

Following the adoption of Topic 842, Leases, as of the start of fiscal yearFiscal 2020, the Company determined that there was no impact on its Condensed Financial Statements during the nine-month periodfiscal year ended MayFebruary 29, 2020, and as of August 31, 2020.2020, it is management’s intention to vacate the existing facilities and consolidate operations at a different location as soon as practical. 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 mayto be recorded on the balance sheet in the period in which a lease commences.

 

Contingencies

 

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

 


In 2017, the Company’s former COO was awarded approximately $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 $10.6 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 $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, our former CEO and a former director, in connection with these allegations. In 2018, the Court sustained demurrers bydismissed Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers, all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.

 

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. In 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 owing to 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, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.


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

 

Forward Looking Statements

 

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

 

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

 

 Our ability to generate positive cash flow from operations;

 

 Our ability to obtain additional financing to fund our operations;

 

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

 

 The impact of unfavorable results of legal proceedings;

 

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

 

 Our ability to compete effectively against competitors offering different technologies;

 

 Our business development and operating development;

 

 Our expectations of growth in demand for our products; and

 

 Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K  for the year ended February 29, 2020, issued on July 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 because of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements.

 


Overview

Our fiscal year ends on the last day of February. We refer to our fiscal years in this Quarterly Report on Form 10-Q as “Fiscal” and the calendar year in which the fiscal year ends. As such, the current fiscal year ending on February 28, 2021 is designated as Fiscal 2021. The prior fiscal year ended on February 29, 2020 is referred to as Fiscal 2020.

 

During fiscalFiscal 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.

 

In fiscalFiscal 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 fiscalFiscal 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 fiscalFiscal 2018, we eliminated a total of approximately $30.8 million of debt. In the second quarter of fiscal year 2021 approximately $3.8 million of unpaid salaries, accounts payables and demand notes was extinguished, representing a gain of approximately $3.5 million on the Condensed Statement of Operations for the three and six-months ended August 31, 2020, as the respective statute of limitation periods were deemed to have expired.

 

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $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 $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, our former CEO and a former director, in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers,demurrers; all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.

 

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

 

In fiscalFiscal 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.

 

Our business is based on the exploitation of our patented mobile power solution known as the AuraGen® for commercial and industrial applications and the VIPER for military applications. Our business model consists of two major 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. In North America, our primary focus is in (a) mobile exportable power applications, 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 AuraGen®/VIPER solution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms. After suspending the majority of our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscalFiscal 2018 and 2019, we incurred modest engineering expenses of approximately $50,000 and $84,000 during the three and six-months ended August 31 2020, respectively, and approximately $34,000 and $58,000$93,000 during the three-monthsthree and six-months ended MayAugust 31, 2020 and 2019, respectively.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. The full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated for these key estimates and assumptions. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are differences between these estimates and actual results, our financial statements may be materially affected.

 


Revenue Recognition

 

The core principle of ASC 606, Revenue from Contracts with Customers (“ASC 606”), is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied.

 

Our primary source of revenue is the manufacture and delivery of AuraGen/VIPER sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $49,000$5,000 and $0$54,000 for the three-monthsthree and six-months ended MayAugust 31, 2020, respectively, and $354,000 for the three and six-months ended August 31, 2019, respectively. Our current principle sales channel is sales to a domestic distributor.

 

In accordance with ASC 606, we recognize the entirety of the revenue, net of discounts, for our AuraGen/VIPER sets at time of product delivery to the distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer. Our payment terms are cash payment due upon delivery and typically includes a 2.5% price discount in accordance with this policy. Our commercial terms and conditions do not include a right of return for reasons other than a defect in performance or quality. We offer 18 months assurance-type warranty covering material and manufacturing defects, which we account for under the guidance of ASC 460, Guarantees. We have a limited history of shipments, and, as such, we have not recorded a warranty liability on our balance sheets at MayAugust 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 yearsFiscal 2021 and 2020.

 

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. From fiscalFiscal 2015 through 2019 we minimally operated and therefore only produced minimal product. As a result, while we believed that a portion of the inventory had value, we were unable to substantiate demand and fully reserved all inventory in fiscalFiscal 2019. Beginning with fiscalFiscal 2020, production has increased, and fully reserved inventory has been used in current production. We classify all of our inventory as raw material and 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 statements of operations.

  

We account for stock option and warrant grants issued and vesting to non-employees, such as consultants and third parties, in accordance with FASB ASC 718, “Compensation – Stock Compensation”, where appropriate, whereas the fair value of the equity-based compensation is based upon the measurement date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

 

In accordance with established public company accounting practice, we have consistently utilized the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily to management, employees, and directors.  The Black-Scholes option-pricing model is a widely accepted method of valuation that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances. During the three-monthsix-month period ended MayAugust 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$96,000 and $174,000 were recorded in the three-monthsthree and six-months ended MayAugust 31, 2020, respectively. No stock-based compensation expense was recorded during Fiscal 2020.

 

17

Impact of COVID-19

 

The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impact of COVID-19 during our fourth quarter of fiscalFiscal 2020 with our Chinese joint venture’s manufacturing facilities being required to close and many of our customers suspending their own operations due to the COVID-19 pandemic. As a result, net sales and production levels during the fourth quarter of fiscalFiscal 2020 and the first quartertwo quarters of fiscalFiscal 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,facility, promotion of social distancing at our facilitiesfacility 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 quartertwo quarters of fiscalFiscal 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-monthsthree and six-months ended MayAugust 31, 2020, and 2019, we reported net lossesprofit of approximately $606,000$2.7 million and $675,000,$2.1 million, respectively, and had negative cash flows from operating activities of approximately $181,000 and $397,000, respectively.$832,000 for the six-month period ended August 31, 2020. The profits in the current year are attributed to the recognizable non-operating income associated with the cancellation of certain liabilities due the expiration of the statute of limitations. This reduction is due to the debt being cancelled based on a cancellation of indebtedness due, supported by a statute of limitations.

 


If we are unable to generate operating profits on a sustained basis and is unable to continue to obtain financing for its working capital requirements, we 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. Our 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 our current financing, to obtain additional financing, and ultimately to attain profitability.

 

Results of Operations

 

Three months ended MayAugust 31, 2020 compared to three months ended MayAugust 31, 2019

 

Net revenue was approximately $49,000$5,000 for the three-months ended MayAugust 31, 2020 (the “Three-Months FY2021”) compared to $0$348,000 for the three-months ended MayAugust 31, 2019 (the “Three-Months FY2020”). During the firstcurrent quarter of 2021, we delivered 81 generator unitsunit to a distributionforeign customer as compared to 052 units delivered in the same quarter in the prior year. Revenue year-on-year has been negatively impacted by the COVID-19 pandemic. We cannot project with confidence the timing or amount of revenue that we can expect until the pandemic is under control or until an effective vaccine becomes widely available.

 

Cost of goods sold was approximately $40,000$3,500 in the Three-Months FY2021 compared to approximately $3,000$29,000 in the Three-Months FY2020 resulting in a gross profit of $8,000,$1,500, or a gross margin of 16%30%, and a $3,000$319,000 gross lossprofit in the Three-Months FY2020 and a meaningless gross margin.margin of 91%. Gross profit and related gross margin for the Three-Months FY2021 shipments were largely influenced by two main factors: (i) the low volume of shipments attributed partly toin the impact of COVID-19 causing temporary closure of operations,quarter which reduced our ability to fully absorb fixed operating costs, andcosts. The gross margin of 91% in the Three-Months FY2020 was achieved by taking advantage of inventory on-hand, previously fully reserved due to lack of estimable demand, to offset partially by (ii) a reduction ofthe unit cost of goods52 units sold duein that quarter. We do not expect gross margins above 90% to occur regularly for shipments of generator units in future quarters as the utilizationavailability 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 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.decline.

 

Engineering, research and development expenses were approximately $34,000$63,000 in the Three-Months FY2021, compared to approximately $58,000$34,000 in the Three-Months FY2020, or a decreasean increase of 41% 62%.

Selling, general and administrative (“SG&A”) expense increased approximately $42,000 (14%$221,000 (105%) to approximately $339,000$432,000 in the Three-Months FY2021 from approximately $297,000$211,000 in the Three-Months FY2020. During Three-Months FY2021, we incurred $77,599recorded (i) $96,000 of stock-based compensation expense related to the grant of 1,250,000 options to our five board members. Other SG&A expenses declined bymembers, (ii) incurred approximately $35,000$64,000 in one-time costs to physically close our offsite storage facility in Santa Clarita, CA and consolidate usable inventory into temporary storage facilities (iii) incurred additional salaries and consulting costs of approximately $80,000 due to change in executive management that occurred in the Three-Months FY2020, (iv) higher accounting fees of $38,000 due to the timing of the fiscal year end audit occurring in the second quarter of Fiscal 2021 due to COVID-19 delays, offset partially by (v) reduced headcount expense.travel expenses of $33,000.

 


Net interest expense in the Three-Months FY2021 decreasedincreased approximately $27,000$42,000 or 4%15%, to approximately $290,000$327,000 from approximately $317,000$285,000 in the Three-Months FY2020.FY2020 due largely to interest costs related to past due payables of $38,000.

 

Other income increased $53,000and gain on extinguishment of debt totals $3.5 million in the Three-Months FY2021, dueas compared to a favorable $46,000 settlement$0 in the same period of a legal matter and a one-time benefit of $7,000 relatedFiscal 2020. This amount was attributed to the Paycheck Protection Program (“PPP”) administered byextinguishment of approximately $2.3 million in accrued payroll and related expenses, $0.4 million in accounts payable, and three demand notes of approximately $0.8 million consisting of interest and principle, all of which represent liabilities with respect to which the U.S. Small Business Administration in responseapplicable statute of limitation periods have been deemed to have expired as of the COVID-19 pandemic.effective date of this filing.

 

Net lossprofit for the Three-Months FY2021 decreasedincreased by approximately $69,000, or 10%,$2.9 million, to $606,000approximately $2.7 million from a loss of $675,000$211,000 in the Three-Months FY2020 due primarily to primarily to additional expensethe $3.5 million in current liabilities extinguished partially offset by (i) lower gross profit on reduced number of $77,600 forshipments of $318,000 (ii) $96,000 of stock-based compensation expense, offset(iii) higher salaries and consulting costs of $94,000, (iv) one-time relocation of inventory costs of $64,000, and (v) higher interest costs and other expenses of $57,000.

Six months ended August 31, 2020 compared to six months ended August 31, 2019

Net revenue was $54,000 for the Six-Months ended August 31, 2020 (the “Six-Months FY2021”) compared to $348,000 for the Six-Months ended August 31, 2019 (the “Six-Months FY2020”). During Six-Months FY2021,


we delivered 9 generator units as compared to 52 units delivered in Six-Months FY2020. Revenue year-on-year has been negatively impacted by (i) higherthe COVID-19 pandemic. We cannot project with confidence the timing or amount of revenue that we can expect until the pandemic is under control or until an effective vaccine becomes widely available.

Cost of goods sold was approximately $44,000 in the Six-Months FY2021 compared to approximately $32,000 in the Six-Months FY2020 resulting in a gross profit onof $10,000, or a gross margin of 19%, and a $316,000 gross profit in the Six-Months FY2020 and a gross margin of 91%. Gross profit and related gross margin for the Six-Months FY2021 shipments were largely influenced by the low volume of shipments in the period which reduced our ability to fully absorb fixed operating costs. The gross margin of 91% in the Six-Months FY2020 was achieved by taking advantage of inventory on-hand, previously fully reserved due to lack of estimable demand, to offset the unit cost of 52 units sold year-to-date. We do not expect gross margins above 90% to occur regularly for shipments of $11,000 (ii) $53,000generator units in future periods as the availability of one-time other income (iii) reduced engineering,usable parts from fully reserved inventory will decline.

Engineering, research and development expenses were approximately $97,000 in the Six-Months FY2021, compared to approximately $92,000 in the Six-Months FY2020, or a decrease of $24,0003%

Selling, general and administrative (“SG&A”) expense increased approximately $267,000 (53%) to approximately $775,000 in the Six-Months FY2021 from approximately $508,000 in the Six-Months FY2020. During Six-Months FY2021, we recorded (i) $174,000 of stock-based compensation expense related to the grant of 1,250,000 options to our five board members, (ii) incurred approximately $64,000 in one-time costs to physically close our offsite storage facility in Santa Clarita, CA and consolidate usable inventory into temporary storage facilities (iii) incurred additional salaries and consulting costs of approximately $14,000, and (iv) reduced nethigher accounting fees of $37,000 due to the timing of the fiscal year end audit occurring in the second quarter of Fiscal 2021 due to COVID-19 delays.

Net interest expense in the Six-Months FY2021 increased approximately $15,000 or 3%, to approximately $617,000 from approximately $602,000 in the Six-Months FY2020 due largely to interest costs related to past due payables of $27,000$38,000.

Gain on debt settlement was $46,000 in the Six-Months FY2021 as compared to $0 in the same period of Fiscal 2020 due primarily to the settlement of a legal issue. Other income and gain on extinguishment of debt totals approximately $3.6 million in the Six-Months FY2021, as compared to $0 in the same period of Fiscal 2020. This amount was attributed to the extinguishment of approximately $2.3 million in accrued payroll and related expenses, $0.4 million in accounts payable, and three demand notes of approximately $0.8 million consisting of interest and principle, all of which represent liabilities with respect to which the applicable statute of limitation periods have been deemed to have expired as of the effective date of this filing.

Net income for the Six-Months FY2021 increased by approximately $3.0 million, to $2.1 million from a loss of $887,000 in the Six-Months FY2020 due primarily to the $3.5 million in cancellations of current liabilities partially offset by (i) lower gross profit on reduced number of shipments of $306,000 (ii) $174,000 of stock-based compensation expense, (iii) higher salaries and consulting costs of $31,000, (iv) one-time relocation of inventory costs of $64,000, and (v) reduced headcount expensehigher interest costs and other income/expenses of $35,000net $30,000.

 

Liquidity and Capital Resources

 

Net cash used in operations for the three-monthssix-months ended MayAugust 31, 2020, was approximately $181,000, a decrease$832,000, an increase of $216,000$418,000 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the three-monthssix-months ended MayAugust 31, 2020, was $299,000approximately $1,004,000 consisting of (i) cash proceeds from issuance of common stock of $235,000,$815,000, (ii) combined proceeds of $74,405$224,000 related to the PPPU.S. federal Paycheck Protection Program (“PPP”) loan program related to COVID-19 and the U.S. Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EIDL”) loan program, and partially offset by (iii) a $10,000$35,000 principle paymentpayments on a note payable; compared to cash provided by financing of $50,000$150,000 in the same period of fiscalFiscal 2020 consisting of cash proceeds from the issuance of 658,015 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 three-months ended MayAugust 31, 2020 and 2019.

 


AccruedThe total of accrued expenses and other current liabilitiesaccrued expenses-related party as of MayAugust 31, 2020 increaseddecreased by approximately $0.1$1.3 million to $4.3 million$683,000 from approximately $4.2 million$2,954,000 as of February 29, 2020 due (i) increased accrued legal expensesto the cancellation of $30,000 (ii) increased accrued payrollthe unpaid salaries of $46,000 and (iii) increased$2.3 million. During the same six-month period in Fiscal 2021, accrued interest coston all notes payable due to related parties and non-related parties, increased by approximately $579,000 for recurring interest costs offset by approximately $386,000 of $80,000.cancellations related to the three demand notes as a result of statute of limitations expiration. This reduction is due to the debt being cancelled based on a cancellation of indebtedness due, supported by a statute of limitations.

 

The Company had a deficit of $20.4$19.9 million in shareholders’ equity as of MayAugust 31, 2020, compared to $20.1$23.3 million as of February 29, 2020 with the net positive change of $2.9 million attributed to (i) net lossprofit year-to-date of approximately $0.7$2.1 million offset partially by (i)(ii) the issuance of approximately 5.2 million shares ofvalued at approximately $0.2$0.8 million for cash and (ii) the granting of options to board members totaling 1,250,000 options in March 2020 with an aggregate fair value of $194,000, of which $77,599approximately $174,000 was recognized as expense during the first quartertwo quarters of fiscalFiscal 2021.

 

On April 23, 2020, we obtained a Paycheck Protection Program (“PPP”)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.

On July 1, 2020, we obtained an EIDL loan in the amount of $149,900 administered by the SBA. As required under this program, the proceeds of the loan are to be used for payments of ordinary working capital needs negatively impacted by the COVID-19 pandemic. Interest accrues from the date of the loan of July 1, 2020 at a rate of 3.75% per annum, a loan term of 30 years, no prepayment penalties or fees, and there is a one-year deferral period during which interest accrues but no payments are required to be made. Following the deferral period for a period of 29 years, an estimated monthly payment of $734 is required to fully amortize the principle and accrued interest over the term of the loan. The Company pledged the assets of the Company as collateral for the loan.

 

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

 

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 fiscalFiscal years, these control and procedures broke down due to insufficient capital to maintain such controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company’s management evaluated, with the participation of the Company’s Principal Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Principal Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective as of the end of the period covered by this report in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. The Company continues to remediate the findings contained in our Annual Report on Form 10-K, for the fiscalFiscal year ended February 29, 2020, issued on 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 MayAugust 31, 2020, not previously identified in our Annual Report on Form 10-K, for the fiscalFiscal year ended February 29, 2020 and issued on July 13, 2020 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 


23

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

 

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

 

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 $10.6$10.9 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 $5$5.3 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, our former CEO and a former director, in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers,demurrers; all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.

 


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. In 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 owing to 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, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.

 

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 July 13, 2020.

 

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

 

During the three-monthssix-months ended MayAugust 31, 2020, we issued 1,358,3335,224,997 shares of common stock for cash proceeds of $235,000.$815,000.

 

ITEM 3. Defaults Upon Senior Securities.

 

As of the date of this filing, Robert Kopple, our former Vice Chairman of the Board, is the only significant unsecured note holder that has not executed formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.6$10.9 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 $5$5.3 million Mr. Kopple claims to be owed for interest, loan fees and late payment fees) on terms significantly preferable to other similarly situated unsecured creditors as well as warrants to purchase approximately 3.3 million shares of our common stock. stock. We dispute Mr. Kopple’s claims and we are currently in a legal dispute regarding these claims. See “Item 1. Legal Proceedings” included elsewhere in this Quarterly Report on Form 10-Q for information regarding the dispute with Mr. Kopple regarding these transactions as well as “Note 3 – Notes Payable” and “Note 5 – Related Parties Transactions” to the Company’s condensed financial statements, “Liquidity and Capital Resources” in “Item 2 and Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this quarterly report on Form 10-Q for additional information regarding amounts that may be owed under the Company’s notes payable and the recent restructuring of certain Company debt. Mr. Kopple has not accepted our numerous offers to settle this debt and continues to demand that as part of any such resolution, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.


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

  


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

 

We consider the transactions described above with Mr. Kopple to be related party transactions.

  

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

ITEM 5. Other Information.

 

None.


ITEM 6.  Exhibits

 

31.1 Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
   
31.2 Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
   
32.1 Certification of PrincipalExecutive OfficierPrincipal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS 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

 

24


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: July 20,October 23, 2020AURA SYSTEMS, INC.
 (Registrant)
  

 By:/s/ Cipora Lavut
  Cipora Lavut
  President

 

 

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