# Aura Systems Inc: Form 10-Q for the period ended Nov 30, 2018

- Company: [Aura Systems Inc](/companies/ausi.md) (CIK 826253)
- Form: 10-Q
- Filed: 2019-01-22
- Accepted by EDGAR: Jan 22, 2019, 19:17 ET
- Period: 2018-11-30
- Accession: 0001213900-19-001033
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/826253/000121390019001033/f10q1118_aurasystems.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/826253/000121390019001033/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-11-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 9 months, 2018-03-01 to 2018-11-30 | $39.3k | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-09-01 to 2018-11-30 | $37.0k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-03-01 to 2018-11-30 | $110.0k | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-09-01 to 2018-11-30 | $37.0k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-03-01 to 2018-11-30 | −$70.8k | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-09-01 to 2018-11-30 | $138.4k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-03-01 to 2018-11-30 | $302.3k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-09-01 to 2018-11-30 | $791.0k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-03-01 to 2018-11-30 | $4.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-09-01 to 2018-11-30 | −$966.4k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-03-01 to 2018-11-30 | −$5.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-09-01 to 2018-11-30 | $295.2k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-03-01 to 2018-11-30 | $848.6k | us-gaap:InterestExpense |
| Net income | 3 months, 2018-09-01 to 2018-11-30 | −$1.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-03-01 to 2018-11-30 | −$5.7m | us-gaap:NetIncomeLoss |
| Operating cash flow | 9 months, 2018-03-01 to 2018-11-30 | −$1.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2018-11-30 | $20.9k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-11-30 | $71.8k | us-gaap:AssetsCurrent |
| Total assets | at 2018-11-30 | $321.8k | us-gaap:Assets |
| Current liabilities | at 2018-11-30 | $20.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-11-30 | $24.8m | us-gaap:Liabilities |
| Long-term debt | at 2018-11-30 | $4.2m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-11-30 | $1.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-11-30 | −$24.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,305 characters.

### Forward Looking Statements

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

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

- *Our ability to generate positive cash flow from operations;*
- *Our ability to obtain additional financing to fund our operations;*
- *The impact of economic, political and market conditions on us and our customers;*
- *The impact of unfavorable results of legal proceedings;*
- *Our exposure to potential liability arising from possible errors and omissions, breach of fiduciary duty, breach of duty of care, waste of corporate assets and/or similar claims that may be asserted against us;*
- *Our ability to compete effectively against competitors offering different technologies;*
- *Our business development and operating development;*
- *Our expectations of growth in demand for our products; and*
- *Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2018 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.*

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

### Overview

During the first half of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second half of fiscal 2016, the Company’s operations were disrupted when the Company was forced to move from its facilities in Redondo Beach, California to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were sporadic. During fiscal 2017 and fiscal 2018, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations.

In fiscal 2018, the Company successfully eliminated approximately 68% of its total indebtedness.

Specifically, in fiscal 2018, our secured creditors converted approximately $5.73 million of secured debt into approximately 4.1 million shares of the Company’s common stock. The converted debt represents approximately 80% of the total secured debt of the Company. The balance of the secured debt (the remaining approximate 20%), is to be paid to the secured creditors in cash if the Company raises at least $4.0 million in proceeds through new equity offerings. Additionally, in fiscal 2018, approximately 12.77 million of unsecured debt was converted into approximately 9.3 million shares of the Company’s common stock and approximately $12.3 million of unsecured debt was forgiven. In total, during fiscal 2018, the Company therefore eliminated a total of approximately $30.23 million of debt.

As of the date of this Report, Robert Kopple, the Company’s former Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his debt. Mr. Kopple claims that he and his affiliates are owed approximately $5.35 million on terms significantly preferable to other similarly-situated unsecured creditors. The Company disputes Mr. Kopple’s claims. See “Item 3. Legal Proceedings” included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2018 for information regarding the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted the Company’s numerous offers to restructure this debt.

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

The Company is planning to restart operations with a new management team and is presently in the process of identifying candidates for Chief Financial Officer and Chief Executive Officer. Currently, the Company has a contractual agreement for $1.25 million of orders for the AuraGen® product to fill during the next eight months and anticipates that it may receive significant additional orders once the Company is back in operation.

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

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

(ii) The second component of our business model is focused on the engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen® 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 engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscal 2017 and 2018, we expect modest engineering activities budgeted at approximately $750,000 during the fiscal 2019 year.

(iii) The third component of our business model is customer service. In fiscal 2019, we expect to rehire several previously trained field engineers to support our product in North America. In addition, we are working closely with our Chinese Joint Venture partner to train their staff to support our products overseas.

### Critical Accounting Policies and Estimates

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

#### Revenue Recognition

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

#### Inventory Valuation and Classification

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

#### Valuation of Long-Lived Assets

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

Specific asset categories are treated as follows:

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

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

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

### Results of Operations

### Nine months ended November 30, 2018 compared to nine months ended November 30, 2017

Net revenues were $39,274 for the nine months ended November 30, 2018 (the “Nine Months FY2019”) compared to $0 for the nine months ended November 30, 2017 (the “Nine Months FY2018”).

Cost of goods were $110,026 in the Nine Months FY2019 compared to $0 for the Nine Months FY2018.

Engineering, research and development expenses increased $277,043 (1,097%) to $302,293 in the Nine Months FY2019 from $25,250 in the Nine Months FY 2018. All the expense in the current year period is due to the Company redesigning the ECU for the Auragen system.

Selling, general and administrative expense increased $3,036,032 (173%) to $4,789,451 in the Nine Months FY2019 from $1,753,419 in the Nine Months FY2018. The increase is primarily attributable to the value of the stock and warrants issued in the amount of $2,431,077 and an increase in legal expenses of approximately $260,000.

Net interest expense in the Nine Months FY2019 decreased $1,779,730 (68%) to $848,593 from $2,628,323 in the Nine Months FY2018 as a result of the restructuring in the fourth quarter of the prior year that eliminated a substantial amount of debt.

Our net loss for the Nine Months FY2019 increased $491,423 to $5,706,947 from $5,215,524 in the Nine Months FY2018.

### Three months ended November 30, 2018 compared to three months ended November 30, 2017

Net revenues were $0 for the three months ended November 30, 2018 (the “Third Quarter FY2019”) compared to $0 for the three months ended November 30, 2017 (the “Third Quarter FY2018”).

Cost of goods were $37,032 in the Third Quarter FY2019 compared to $0 for the Third Quarter FY2018.

Engineering, research and development expenses increased $113,167 to $138,417 in the Third Quarter FY2019 from $25,250 in the Third Quarter FY 2018. All the expense in the current year period is due to the Company redesigning the ECU for the Auragen system.

Selling, general and administrative expense decreased $121,287 (11%) to $790,985 in the Third Quarter FY2019 from $822,616 in the Third Quarter FY2018.

Net interest expense in the Third Quarter FY2019 decreased $507,051 (63%) to $295,221 from $802,272 in the Third Quarter FY2018 as a result of the restructuring in the fourth quarter of the prior year that eliminated a substantial amount of debt.

Our net loss for the Third Quarter FY2019 decreased $530,343 to $1,310,445 from $1,661,534 in the Third Quarter FY2018.

### Liquidity and Capital Resources

We had cash of approximately $21,000 and $748,000 as of November 30, 2018, and February 28, 2018, respectively. We had a working capital deficit at November 30, 2018, and February 28, 2018 of $20,452,425 and $20,682,519, respectively. The working capital deficit includes notes payable and accrued interest to related parties of $9,284,183 and $8,696,665 as of November 30 and February 28, 2018, respectively.

Net cash used in operations for the nine months ended November 30, 2018, was $1,902,151, a decrease of $162,189 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the nine months ended November 30, 2018, was $1,175,000, resulting from net proceeds from subscriptions receivable of $1,225,000 partially offset by a payment of $50,000 on a note payable.

There were no acquisitions of property and equipment during the Nine months FY2019 or the Nine months FY2018.

Accrued expenses as of November 30, 2018 increased $111,863 to $3,323,498 from $3,211,635 as of February 28, 2018. Approximately $2,225,000 of accrued expenses is salaries accrued but unpaid to certain current and former employees due to a lack of resources, and approximately $500,000 is accrued but unused vacation earned by employees.

The Company had a deficit of $24,435,402 in shareholders’ equity as of November 30, 2018, compared to $24,665,496 as of February 28, 2018.

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

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

#### Capital Transactions

During the nine months ended November 30, 2018, we issued 2,256,444 shares of common stock, valued at $2,280,964 to Harry Kurtzman on behalf of BetterSea LLC, a greater than 15% shareholder as part of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued at $1,992,251 to Harry Kurtzman on behalf of BetterSea LLC as a settlement for disputes. During the nine months ended November 30, 2018, we issued 742,857 warrants to members of our board of directors. The warrants have a term of five years and an exercise price of $1.40. The company recorded an expense of $312,072 for the issuance of these warrants.

During the nine months ended November 30, 2017, we issued 5,000,000 (714,286 post split) shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture, we issued 5,116,959(730,994 post split) shares of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 (357,143 post split) shares of common stock valued at $325,000 in connection with a consulting agreement.

#### Inventories

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

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

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

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

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

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

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

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

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

## Market risk

As filed, 1,100 characters.

As of the date of this filing, Robert Kopple, the Company’s former Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his debt. Mr. Kopple claims to be owed approximately $5.4 million plus interest and approximately 22 million warrants on terms significantly preferable to other similarly-situated unsecured creditors. To-date, Mr. Kopple has not accepted the Company’s multiple offers to restructure his debt. The Company is presently engaged in a dispute with Mr. Kopple relating to the debt and securities which Mr. Kopple claims to be owed to him and his affiliates by the Company. See, “Note 3 – Notes Payable” and “Note 5 – Related Parties Transactions” to the Company’s condensed financial statements and “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this quarterly report on Form 10-Q for additional information regarding amounts that may be owed under the Company’s notes payable and the recent restructuring of certain Company debt.

## Controls and procedures

As filed, 1,867 characters.

### Evaluation of Disclosure Controls and Procedures

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

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended November 30, 2018, which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

## Risk factors

As filed, 229 characters.

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended February 28, 2018.

Filed Jan 22, 2019.
Source: SEC EDGAR, the filing index for accession 0001213900-19-001033. Last ingested by Listed: Oct 24, 2026, 14:57 ET. No prices; not investment advice.