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Aura Systems Inc. – ‘10-Q’ for 5/31/22

On:  Monday, 7/18/22, at 7:29am ET   ·   For:  5/31/22   ·   Accession #:  1213900-22-39777   ·   File #:  0-17249

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 7/18/22  Aura Systems Inc.                 10-Q        5/31/22   88:4.9M                                   EdgarAgents LLC/FA

Quarterly Report   —   Form 10-Q

Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    594K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     29K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     29K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     26K 
10: R1          Document And Entity Information                     HTML     73K 
11: R2          Condensed Balance Sheets (Unaudited)                HTML    122K 
12: R3          Condensed Balance Sheets (Unaudited)                HTML     38K 
                (Parentheticals)                                                 
13: R4          Condensed Statements of Operations (Unaudited)      HTML     90K 
14: R5          Condensed Statements of Operations (Unaudited)      HTML     27K 
                (Parentheticals)                                                 
15: R6          Condensed Statements of Shareholders? Deficit       HTML     55K 
                (Unaudited)                                                      
16: R7          Condensed Statements of Cash Flows (Unaudited)      HTML    101K 
17: R8          Nature of Operations and Summary of Significant     HTML     61K 
                Accounting Policies                                              
18: R9          Restatement of Previously Issued Unaudited          HTML     79K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021                                        
19: R10         Inventories                                         HTML     30K 
20: R11         Prepaid and Other Current Assets                    HTML     30K 
21: R12         Property and Equipment, Net                         HTML     32K 
22: R13         Convertible Notes Payable                           HTML     30K 
23: R14         Convertible Note Payable-Related Party              HTML     30K 
24: R15         Notes Payable                                       HTML     38K 
25: R16         Notes Payable-Related Parties                       HTML     39K 
26: R17         Accrued Expenses                                    HTML     31K 
27: R18         Leases                                              HTML     38K 
28: R19         Derivative Warrant Liability                        HTML     35K 
29: R20         Stockholders' Deficit                               HTML     51K 
30: R21         Related Party Transactions                          HTML     29K 
31: R22         Contingencies                                       HTML     33K 
32: R23         Subsequent Events                                   HTML     29K 
33: R24         Accounting Policies, by Policy (Policies)           HTML     86K 
34: R25         Nature of Operations and Summary of Significant     HTML     42K 
                Accounting Policies (Tables)                                     
35: R26         Restatement of Previously Issued Unaudited          HTML     76K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021 (Tables)                               
36: R27         Inventories (Tables)                                HTML     30K 
37: R28         Prepaid and Other Current Assets (Tables)           HTML     29K 
38: R29         Property and Equipment, Net (Tables)                HTML     31K 
39: R30         Convertible Notes Payable (Tables)                  HTML     29K 
40: R31         Convertible Note Payable-Related Party (Tables)     HTML     29K 
41: R32         Notes Payable (Tables)                              HTML     31K 
42: R33         Notes Payable-Related Parties (Tables)              HTML     33K 
43: R34         Accrued Expenses (Tables)                           HTML     30K 
44: R35         Leases (Tables)                                     HTML     39K 
45: R36         Derivative Warrant Liability (Tables)               HTML     34K 
46: R37         Stockholders' Deficit (Tables)                      HTML     53K 
47: R38         Nature of Operations and Summary of Significant     HTML     40K 
                Accounting Policies (Details)                                    
48: R39         Nature of Operations and Summary of Significant     HTML     38K 
                Accounting Policies (Details) - Schedule of assets               
                and liabilities at fair value                                    
49: R40         Nature of Operations and Summary of Significant     HTML     35K 
                Accounting Policies (Details) - Schedule of                      
                anti-dilutive securities excluded from computation               
                of diluted net loss per share                                    
50: R41         Restatement of Previously Issued Unaudited          HTML     62K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021 (Details)                              
51: R42         Restatement of Previously Issued Unaudited          HTML     75K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021 (Details) - Schedule of                
                the company?s previously issued balance                          
52: R43         Restatement of Previously Issued Unaudited          HTML     63K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021 (Details) - Schedule of                
                the company?s previously issued statement of                     
                operations                                                       
53: R44         Restatement of Previously Issued Unaudited          HTML     96K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021 (Details) - Schedule of                
                the company?s previously issued statement of                     
                shareholder deficit                                              
54: R45         Restatement of Previously Issued Unaudited          HTML     65K 
                Condensed Financial Statements for the Three                     
                Months Ended May 31, 2021 (Details) - Schedule of                
                the company?s previously issued statement of cash                
                flows                                                            
55: R46         Inventories (Details) - Schedule of inventories     HTML     34K 
56: R47         Prepaid and Other Current Assets (Details) -        HTML     37K 
                Schedule of prepaid and other current assets                     
57: R48         Property and Equipment, Net (Details)               HTML     27K 
58: R49         Property and Equipment, Net (Details) - Schedule    HTML     44K 
                of property and equipment                                        
59: R50         Convertible Notes Payable (Details)                 HTML     40K 
60: R51         Convertible Notes Payable (Details) - Schedule of   HTML     31K 
                convertible notes payable                                        
61: R52         Convertible Note Payable-Related Party (Details)    HTML     35K 
62: R53         Convertible Note Payable-Related Party (Details) -  HTML     32K 
                Schedule of convertible note payable - related                   
                party                                                            
63: R54         Notes Payable (Details)                             HTML     32K 
64: R55         Notes Payable (Details) - Schedule of notes         HTML     46K 
                payable consisted                                                
65: R56         Notes Payable-Related Parties (Details)             HTML     65K 
66: R57         Notes Payable-Related Parties (Details) - Schedule  HTML     49K 
                of notes payable-related parties                                 
67: R58         Accrued Expenses (Details)                          HTML     29K 
68: R59         Accrued Expenses (Details) - Schedule of accrued    HTML     37K 
                expenses                                                         
69: R60         Leases (Details)                                    HTML     32K 
70: R61         Leases (Details) - schedule of lease expense and    HTML     35K 
                supplemental cash flow information related to                    
                leases                                                           
71: R62         Leases (Details) - schedule of supplemental         HTML     32K 
                balance sheet information related to leases                      
72: R63         Leases (Details) - Schedule of maturities of the    HTML     42K 
                Company?s lease liability                                        
73: R64         Derivative Warrant Liability (Details) - Schedule   HTML     42K 
                of derivative warrant liabilities                                
74: R65         Derivative Warrant Liability (Details) - Schedule   HTML     37K 
                of derivative outstanding warrant liabilities                    
75: R66         Stockholders' Deficit (Details)                     HTML     48K 
76: R67         Stockholders' Deficit (Details) - Schedule of       HTML     55K 
                stock options outstanding                                        
77: R68         Stockholders' Deficit (Details) - Schedule of       HTML     43K 
                exercise prices and information related to options               
78: R69         Stockholders' Deficit (Details) - Schedule of       HTML     45K 
                warrants                                                         
79: R70         Stockholders' Deficit (Details) - Schedule of       HTML     45K 
                exercise prices and information related to options               
80: R71         Stockholders' Deficit (Details) - Schedule of       HTML     38K 
                warrants issued                                                  
81: R72         Related Party Transactions (Details)                HTML     33K 
82: R73         Contingencies (Details)                             HTML     54K 
83: R74         Subsequent Events (Details)                         HTML     40K 
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‘10-Q’   —   Quarterly Report

Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Financial Statements (Unaudited)
"Condensed Balance Sheets as of May 31, 2022 and February 28, 2022
"Condensed Statements of Operations for the Three months ended May 31, 2022 and 202 1
"Condensed Statements of Changes in Shareholders' Deficit for the Three months ended May 31, 2022 and 2021
"Condensed Statements of Cash Flows for the Three months ended May 31, 2022 and 2021
"Condensed Notes to Financial Statements
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures About Market Risk
"Controls and Procedures
"Part Ii. Other Information
"Legal Proceedings
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Other Information
"Exhibits
"Signatures and Certifications

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form  i 10-Q

 

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

 

For the quarterly period ended  i May 31,  i 2022 / 

 

OR

 

 i  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)

 

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

 

 i 20431 North Sea Circle

 i Lake Forest,  i CA  i 92630

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code:  i (310)  i 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
 i Non-accelerated filer Smaller Reporting Company  i 
  Emerging growth company  i 

 

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  i 

 

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

 

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

  

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

 

Class   Outstanding July 12, 2022
 i Common Stock, par value $0.0001 per share    i 87,095,770 shares

 

 

 

 C: 

 

 

 

AURA SYSTEMS, INC.

 

INDEX

 

Index       Page No.
         
PART I. FINANCIAL INFORMATION    
         
  ITEM 1. Financial Statements (Unaudited)   1
         
    Condensed Balance Sheets as of May 31, 2022 and February 28, 2022   1
         
    Condensed Statements of Operations for the Three months ended May 31, 2022 and 2021   2
         
    Condensed Statements of Changes in Shareholders’ Deficit for the Three months ended May 31, 2022 and 2021   3
         
    Condensed Statements of Cash Flows for the Three months ended May 31, 2022 and 2021   4
         
    Condensed Notes to Financial Statements   5
         
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
         
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk   27
         
  ITEM 4. Controls and Procedures   27
         
PART II. OTHER INFORMATION  
         
  ITEM 1. Legal Proceedings   28
         
  ITEM 1A. Risk Factors   29
         
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds   29
         
  ITEM 3. Defaults Upon Senior Securities   29
         
  ITEM 4. Mine Safety Disclosures   29
         
  ITEM 5. Other Information   29
         
  ITEM 6. Exhibits   30
         
SIGNATURES AND CERTIFICATIONS   31

 

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ITEM 1. FINANCIAL STATEMENTS

 

AURA SYSTEMS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

  

   May 31,
2022
   February 28,
2022
 
   (Unaudited)     
Assets        
Current assets        
Cash and cash equivalents  $ i 20,830   $ i 150,217 
Inventories    i 163,677     i 144,257 
Prepaid and other current assets    i 202,571     i 255,453 
Total current assets    i 387,078     i 549,927 
Property and equipment, net    i 488,875     i 484,526 
Operating lease right-of-use asset    i 956,292     i 1,000,467 
Security deposit    i 132,996     i 159,595 
Total assets  $ i 1,965,241   $ i 2,194,515 
           
Liabilities and Shareholders’ Deficit          
Current liabilities          
Accounts payable (including $ i 208,507 and $ i 208,507 due to related party, respectively)  $ i 1,980,475   $ i 1,581,724 
Accrued expenses (including $ i 793,053 and $ i 750,322 due to related party, respectively)    i 1,594,997     i 1,692,173 
Customer advances    i 440,331     i 440,331 
Notes payable, current portion    i 89,326     i 97,958 
Convertible notes payable, current portion    i 1,402,971     i 1,402,971 
Convertible note payable-related party, current portion    i 3,000,000     i 3,000,000 
Notes payable-related parties, current portion    i 3,857,494     i 12,996,069 
Operating lease liability, current portion    i 186,117     i 179,450 
Derivative warrant liability    i 274,843     i 828,232 
Total current liabilities    i 12,826,554     i 22,218,908 
           
Notes payable    i 317,208     i 327,658 
Note payable-related party    i 8,089,169    - 
Operating lease liability    i 817,813     i 867,484 
Total liabilities    i 22,050,744     i 23,414,050 
           
Commitments and contingencies   
-
    
-
 
           
Shareholders’ deficit          
Common stock: $ i  i 0.0001 /  par value;  i  i 150,000,000 /  shares authorized;  i  i 85,235,769 /  and  i  i 83,119,104 /  issued and outstanding at May 31, 2022 and February 28, 2022, respectively.    i 8,524     i 8,312 
Additional paid-in capital    i 451,822,543     i 450,136,522 
Accumulated deficit   ( i 471,916,570)   ( i 471,364,369)
Total shareholders’ deficit   ( i 20,085,503)   ( i 21,219,535)
Total liabilities and shareholders’ deficit  $ i 1,965,241   $ i 2,194,515 

 

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

 

 C: 

 C: 1

 

 

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

  

   Three Months Ended 
   May 31,
2022
   May  31,
2021
 
       (As Restated) 
Net revenue  $ i 6,309   $ i 23,937 
Cost of goods sold    i 13,425     i 49,311 
Gross profit (loss)   ( i 7,116)   ( i 25,374)
Operating expenses:          
Engineering, research and development (including $ i 34,700 and $ i 36,000 to related party, respectively)    i 166,798     i 80,595 
Selling, general and administration    i 850,412     i 736,989 
Total operating expenses    i 1,017,210     i 817,584 
Loss from operations   ( i 1,024,326)   ( i 842,958)
Other income (expense):          
Interest expense, net   ( i 81,264)   ( i 269,575)
Gain on debt settlement   
-
     i 4,292 
Gain on extinguishment of PPP loans   
-
     i 75,104 
Gain on extinguishment of derivative warrant liability, net   
-
     i 44,620 
Change in fair value of derivative warrant liability    i 553,389     i 82,800 
Net loss  $( i 552,201)  $( i 905,717)
           
Basic and diluted loss per share  $( i 0.01)  $( i 0.01)
Basic and diluted weighted-average shares outstanding    i 84,273,089     i 71,932,434 

 

See accompanying notes to these unaudited financial statements.

 

 C: 

2

 

 

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, 2021 (As Restated)    i 71,103,009   $ i 7,109   $ i 446,249,272   $( i 467,372,506)  $( i 21,116,125)
Common shares issued for cash    i 1,865,333     i 186     i 282,815    
-
     i 283,001 
Share-based compensation   -    
-
     i 163,218    
-
     i 163,218 
Net loss   -    
-
    
-
    ( i 905,717)   ( i 905,717)
Balance, May 31, 2021 (unaudited) (As Restated)    i 72,968,342   $ i 7,295   $ i 446,695,305   $( i 468,278,223)  $( i 21,575,623)
                          
Balance, February 28, 2022    i 83,119,104   $ i 8,312   $ i 450,136,522   $( i 471,364,369)  $( i 21,219,535)
Common shares issued for cash    i 2,116,665     i 212     i 634,548    
-
     i 634,760 
Fair value of warrants issued for note settlement   -    
-
     i 1,051,473    
-
     i 1,051,473 
Net loss   -    
-
    
-
    ( i 552,201)   ( i 552,201)
Balance, May 31, 2022 (unaudited)    i 85,235,769   $ i 8,524   $ i 451,822,543   $( i 471,916,570)  $( i 20,085,503)

 

See accompanying notes to these unaudited financial statements.

 

 C: 

3

 

 

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended 
   May 31,
2022
   May 31,
2021
 
       (As Restated) 
         
Net loss  $( i 552,201)  $( i 905,717)
Adjustments to reconcile net loss to cash used in operating activities          
Depreciation and amortization    i 18,222     i 772 
Gain on extinguishment of PPP loan   
-
    ( i 75,104)
Gain on extinguishment of derivative warrant liability, net   
-
    ( i 44,620)
Change in fair value of derivative warrant liability   ( i 553,389)   ( i 82,800)
Gain on debt settlement   
-
    ( i 4,292)
Share-based compensation   
-
     i 163,218 
Changes in operating assets and liabilities:          
Inventory   ( i 19,420)   ( i 30,363)
Prepaid and other current assets    i 52,882     i 23,452 
Deposit    i 26,599    
-
 
Operating lease right-of-use asset    i 44,176     i 40,383 
Accounts payable and accrued expenses    i 244,321     i 108,392 
Accrued interest on notes payable    i 59,321     i 268,817 
Operating lease liability   ( i 43,005)    i 7,149 
Cash used in operating activities   ( i 722,494)   ( i 530,713)
           
Cash used in investing activities:          
Purchase of property and equipment   ( i 22,571)   ( i 16,522)
           
Cash flows from financing activities:          
Proceeds from issuance of common stock    i 634,760     i 283,000 
Principal payments of notes payable   ( i 19,082)   ( i 30,000)
Proceeds from government assistance loans – PPP loan   
-
     i 91,235 
Cash provided by financing activities    i 615,678     i 344,235 
           
Net decrease in cash and cash equivalents   ( i 129,387)   ( i 203,000)
Cash and cash equivalents-beginning of period    i 150,217     i 390,702 
Cash and cash equivalents-end of period  $ i 20,830   $ i 187,702 
Cash paid for:          
Interest  $ i 38,692   $
-
 
Income taxes  $
-
   $
-
 
           
Supplemental schedule of non-cash transactions:          
Fair value of warrants issued for note settlement  $ i 1,051,473   $
-
 

 

See accompanying notes to these unaudited financial statements.

 

 C: 

4

 

 

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

 

 i 

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

 

 i 

Nature of Operations

 

Aura Systems, Inc., (“Aura”, the “Company”) a Delaware corporation, is engaged in the development, commercialization, and sale of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen® axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets.

 

 i 

Basis of Presentation

 

The accompanying unaudited condensed financial statements as of and for the three months ended May 31, 2022 and 2021, have been prepared have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented. The Condensed Balance Sheet information as of February 28, 2022, was derived from the Company’s audited Financial Statements as of February 28, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on June 21, 2022. These financial statements should be read in conjunction with that report. The results of operations for the period ended May 31, 2022, may not necessarily be indicative of the results that may be expected for the full fiscal year ending February 28, 2023.

 

The Company’s fiscal year ends on the last calendar day of February. Accordingly, the current fiscal year will end on February 28, 2023 and is referred to as “Fiscal 2023”. Our prior fiscal years ended February 28, 2022 and 2021, and are referred to as “Fiscal 2022” or “Fiscal 2021”.

 

 i 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the three-month period ended May 31, 2022, the Company reported a net loss of approximately $ i 552,000 and used cash in operating activities of approximately $ i 722,000, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern within  i one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February 28, 2022, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In the event the Company is unable to generate profits and is unable to obtain financing for its working capital requirements, it may have to curtail its business further or cease business altogether. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.

 

During the next twelve months the Company intends to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen®/VIPER products both domestically and internationally and to add to our existing management team. In addition, the Company plans to source new suppliers for manufacturing operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. The Company anticipates being able to obtain new sources of funding to support these actions in the upcoming fiscal year.

 

 C: 

5

 

 

 i 

COVID-19

 

As of the date of this filing, there continues to be widespread concern regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which the Company operates. Although the impacts of the COVID-19 pandemic have not been material to date, a prolonged downturn in economic conditions could have a material adverse effect on our customers and demand for our services. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity.

 

 i 

Revenue Recognition

 

The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

 

Our primary source of revenue is the manufacture and delivery of generator sets used primarily in mobile power applications. Our principal sales channel is sales to a domestic distributor. In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.

 

 i 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates.

 

 i 

Share-Based Compensation

 

The Company periodically issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services.

 

 i 

Fair Value of Financial Instruments

 

The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets;

 

Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and

 

Level 3 – Unobservable inputs.

 

 C: 

6

 

 

The recorded amounts of inventory, other current assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature. The carrying amounts of notes payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation to current market conditions.

 

The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of May 31, 2022 and February 28, 2022:

 

 i 
   May 31, 2022 
   Level 1   Level 2   Level 3   Total 
Liabilities                
Derivative warrant liability  $
        -
   $ i 274,843   $
        -
   $ i 274,843 
Total liabilities  $
-
   $ i 274,843   $
-
   $ i 274,843 

 

 / 
   February 28, 2022 
   Level 1   Level 2   Level 3   Total 
Liabilities                
Derivative warrant liability  $
     -
   $ i 828,232   $
       -
   $ i 828,232 
Total liabilities  $
-
   $ i 828,232   $
-
   $ i 828,232 

 

The Company estimated the fair value of the derivative warrant liability using the Binomial Model.

 

 i 

Loss per share

 

The Company’s loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional shares of common stock were dilutive. Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method for convertible debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities were exercised.

 

For the three-months ended May 31, 2022 and May 31, 2021, the calculations of basic and diluted loss per share are the same because potentially dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:

 

 i 
   May 31,
2022
   May 31,
2021
 
Warrants    i 8,132,498     i 5,662,272 
Options    i 5,059,769     i 5,290,001 
Convertible notes    i 3,749,961     i 3,749,961 
Total    i 16,942,228     i 14,702,234 

 

 / 

 C: 

7

 

 

 i 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows (see Note 2).

 

 i 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective March 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted and effective March 1, 2022, the Company early adopted ASU 2020-06 using the modified retrospective approach. The adoption of ASU 2020-06 did not have any impact on the Company’s financial statement presentation or disclosures.

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective March 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures.

 

 i 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

 

 C: 

8

 

 

 i 

NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MAY 31, 2021

 

The unaudited condensed financial statements for the three months ended May 31, 2021 and certain balances as of February 28, 2021 have been restated. On May 31, 2022, our management determined the following:

 

that the Company erroneously did not recognize a derivative warrant liability associated with warrants issued by prior management in prior years that included a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. As such, the Company determined that the warrants fundamental transaction provision created a derivative liability pursuant to current accounting guidelines.

 

that the Company had issued common stock in exchange for a settlement of debt to a former employee during fiscal 2018 and had erroneously not accounted for it until Fiscal 2021.

 

that the Company had granted stock options during Fiscal 2021 which were erroneously not recorded.

 

The effects on the previously issued financial statements are as follows:

 

(A)In Fiscal 2022, the Company recognized that previously issued warrants by prior management had characteristics of derivative liabilities. The Company determined the fair value of the warrant derivative liability, including its initial recording and revaluation for changes in fair value and expiring warrants, as of February 28, 2021, was $ i 1,366,375, and recorded the liability and its associated expense as a prior period adjustment to Accumulated Deficit in the amount of $ i 1,366,375. Additionally, the warrant derivative liability was revalued at May 31, 2021 and the net decrease in fair value of $ i 127,420 was recorded as a reduction to the liability. The associated other income of $ i 127,420 was recorded to the statement of operations and consisted of a gain for the decrease in fair value of $ i 82,800 and a gain on expiring warrants of $ i 44,620.

 

(B)In Fiscal 2022, the Company recognized that during Fiscal 2021, the Company recorded the effect of issuing common stock for debt to a former employee when the issuance had occurred in Fiscal 2018. To correct the timing of recording the transaction, the Company calculated the gain on the extinguishment of debt as of the February 28, 2018, issuance date in the amount of $ i 256,044 and recorded the gain as a prior period adjustment to Accumulated deficit. Additionally, the interest expense associated with the debt of $ i 13,460 and gain on its extinguishment of $ i 133,500 recorded in Fiscal 2021 were reversed out of the statement of operations. The resulting net impact of these prior period adjustments for the Fiscal 2022 beginning balance is a decrease to Additional paid-in capital of $ i 136,004 and a corresponding $ i 136,004 decrease in Accumulated deficit.

 

(C)In Fiscal 2022, the Company recognized that certain stock options granted during Fiscal 2021 should have been fully or partially vested in the year of grant but had no share-based compensation expense recorded in Fiscal 2021. To correct the timing of the expense recognition, the Company computed the amount of expense associated with the vesting as of February 28, 2021 and recorded an additional $ i 258,636 of share-based compensation expense to the statement of operations. The resulting net impact of these prior period adjustments for the Fiscal 2022 beginning balance is an increase to Additional paid-in capital of $ i 258,636 and a corresponding $ i 258,636 increase in Accumulated deficit. Additionally, in order to correct the timing of the expense recognition as it continued into Fiscal 2022, the Company recorded an additional $ i 16,933 of share-based compensation expense to the statement of operations for the three-month period ended May 31, 2022.

 

(D)In Fiscal 2022, the Company recognized that certain stock options granted during Fiscal 2021 were being recorded as payroll compensation expense in Fiscal 2022. Restatement item (C) noted above properly recognizes the amount and timing of the share-based compensation expense, which results in the need to reverse the payroll compensation recorded in Fiscal 2022. For the three-month period ended May 31, 2021, payroll compensation expense of $ i 92,625 was reversed out of the statement of operations, and the associated liability in Accrued expenses was reduced by the same amount.

 

 C: 

9

 

 

Reclassifications

 

(1)In Fiscal 2021 and the three months ended May 31, 2021 (“Fiscal Q1 2022”), the Company presented interest accrued of $ i  i 5,125 /  on its Economic Injury Disaster Loan as additional note payable principle.  In the accompanying condensed financial statements, the Company has reclassified the cumulative accrued interest of $ i  i 5,125 /  recorded in fiscal 2021 fiscal Q1 2022 from notes payable to accrued interest.

 

  

The following table presents the effect of the restatements and reclassifications on the Company’s previously issued balance sheet:

 

 i 
   As of May 31, 2021 
   As Previously
Reported
   Adjustments   Reclassifications   As Restated   Notes 
Accrued expenses (including accrued interest)  $ i 1,529,273   $( i 92,625)  $ i 5,125   $ i 1,441,772    [D][1] 
Note payable    i 246,360    
-
    ( i 5,125)    i 241,235    [1]
Derivative warrant liability   
-
     i 1,238,955    
-
     i 1,238,955    [A] 
Common stock    i 7,297    
-
    ( i 2)    i 7,295      
Additional paid-in capital    i 446,555,737    ( i 136,004)    i 2     i 446,695,305    [B] 
          i 258,636    
-
         [C] 
          i 16,934              [C] 
Accumulated deficit  $( i 466,992,328)  $( i 1,238,955)  $
-
   $( i 468,278,223)   [A] 
          i 136,004    
-
         [B] 
         ( i 258,636)   
-
         [C] 
         ( i 16,934)   
-
         [C] 
          i 92,626    
-
         [D] 

 

 / 

The following table presents the effect of the restatements and reclassifications on the Company’s previously issued statement of operations:

 

 i 
   As of May 31, 2021 
   As Previously
Reported
   Adjustments   Reclassifications   As Restated   Notes 
Selling, general and administrative expense  $ i 812,681   $ i 16,934   $
           -
   $ i 736,989    [C]
         ( i 92,626)   
-
         [D] 
Gain on extinguishment of derivative warrant liability   
-
     i 44,620    
-
     i 44,620    [A] 
Change in fair value of derivative warrant liability   
-
     i 82,800    
-
     i 82,800    [A] 
Net loss  $( i 1,108,829)  $ i 203,112   $
-
   $( i 905,717)     
                          
Net loss per share, basic and diluted  $( i 0.02)            $( i 0.01)     

 

 / 

 C: 

10

 

 

The following table presents the effect of the restatements on the Company’s previously issued statement of shareholder deficit:

 

 i 
   Common Stock
Shares
   Common
Stock Amount
   Additional
Paid-In
Capital
   Accumulated
Deficit
   Total
Shareholders’
Deficit
 
Balance, February 28, 2021, as previously reported    i 71,107,442   $ i 7,109   $ i 446,126,640   $( i 465,883,499)  $( i 19,749,750)
Prior period revisions   
-
    
-
     i 122,632    ( i 1,489,007)   ( i 1,366,375)
Corrections of errors   ( i 4,433)                  
-
 
Balance, February 28, 2021, as restated    i 71,103,009   $ i 7,109   $ i 446,249,272   $( i 467,372,506)  $( i 21,116,125)
                          
Balance, May 31, 2021, as previously reported    i 72,972,775   $ i 7,297   $ i 446,555,737   $( i 466,992,328)  $( i 20,429,294)
Prior period revisions   
-
    ( i 2)    i 122,634    ( i 1,489,007)   ( i 1,366,375)
Share-based compensation addition   -    
-
     i 16,934    
-
     i 16,934 
Net loss reduction   -    
-
    
-
     i 203,112     i 203,112 
Corrections of errors   ( i 4,433)   
-
    
-
    
-
    
-
 
Balance, May 31, 2021, as restated    i 71,103,009   $ i 7,295   $ i 446,695,305   $( i 468,278,223)  $( i 21,575,623)

 

 / 

The following table presents the effect of the restatements and reclassifications on the Company’s previously issued statement of cash flows:

 

 i 
    As of May 31, 2021  
    As Previously
Reported
    Adjustments     Reclassifications     As Restated     Notes  
Cash flows from operating activities:                              
Net loss   $ ( i 1,108,829 )   $  i 203,112     $
-
    $ ( i 905,717 )     [A] [C] [D]  
Gain on extinguishment of derivative warrant liability    
-
      ( i 44,620 )    
-
      ( i 44,620 )     [A]  
Change in fair value of derivative warrant liability    
-
      ( i 82,800 )    
-
      ( i 82,800 )     [A]  
Share-based compensation expense      i 146,284        i 16,934      
-
       i 163,218       [C]  
Changes in working capital assets and liabilities:                                        
Operating lease right-to-use asset    
-
     
-
       i 40,383        i 40,383          
Accounts payable and accrued expenses      i 199,562       ( i 92,626 )      i 1,457        i 108,392         [1]
Accrued interest on notes payable      i 270,274      
-
      ( i 1,457 )      i 268,817         [1]
Operating lease liability      i 47,532      
-
      ( i 40,383 )      i 7,149          
 / 

 

 C: 

11

 

 

 i 

NOTE 3 – INVENTORIES

 

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, net of write downs, and consisted of the following:

 

 i 
   May 31,
2022
   February 28,
2022
 
Raw materials  $ i 158,256   $ i 129,836 
Work-in-process    i 5,421     i 14,421 
Finished goods   
-
    
-
 
Total inventory  $ i 163,677   $ i 144,257 
 / 

 

 i 

NOTE 4 – PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consisted of the following:

 

 i 
   May 31,
2022
   February 28,
2022
 
Prepaid annual software licenses  $ i 86,771   $ i 94,907 
Prepaid commissions    i 78,990     i 73,390 
Vendor advances    i 6,500     i 35,500 
Other prepaid expenses    i 30,311     i 51,656 
Total other current assets  $ i 202,571   $ i 255,453 
 / 

 

 i 

NOTE–5 - PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

 i 
   May 31,
2022
   February 28,
2022
 
Leasehold improvements  $ i 56,530   $ i 56,530 
Machinery and equipment    i 276,762     i 276,762 
Vehicle    i 96,334     i 96,334 
Computer equipment    i 72,642     i 59,816 
Furniture and fixtures    i 20,337     i 10,592 
     i 522,605     i 500,034 
Less accumulated depreciation and amortization   ( i 33,730)   ( i 15,508)
   $ i 488,875   $ i 484,526 

 

 / 

Depreciation expense for the three months ended May 31, 2022 and 2021 was $ i 18,222 and $ i 772, respectively:

 

 C: 

12

 

 

 i 

NOTE 6 – CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following:

  

 i 
  

May 31,

2022

  

February 28,

2022

 
         
Convertible notes payable  $ i 1,402,971   $ i 1,402,971 
Non-current   
-
    
-
 
Current  $ i 1,402,971   $ i 1,402,971 

 

 / 

In Fiscal 2013 and 2014, the Company issued six convertible notes payable in the aggregate of $ i 4,000,000. As of May 31, 2022 and February 28, 2022, the outstanding balance of the convertible notes payable amounted to $ i  i 1,402,971 / . The notes are unsecured, bear interest at  i 5% per annum and are convertible to shares of common stock at a conversion price of $ i 1.40 per share, as adjusted.  i The notes were originally due in 2014 to 2017, and were all amended in 2018 and the maturity date for all the notes was changed to January 11, 2023.

 

At May 31, 2022 and February 28, 2022, accrued interest on convertible notes payable totaled $ i 301,713 and $ i 284,063, respectively, and is included in accrued expenses (See Note 10).

 

 i 

NOTE 7 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY

 

Convertible note payable – related party consisted of the following:

 

 i 
  

May 31,

2022

  

February 28,

2022

 
         
Convertible note payable  $ i 3,000,000   $ i 3,000,000 
Non-current   
-
    
-
 
Current  $ i 3,000,000   $ i 3,000,000 

 

 / 

On January 24, 2017, the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company. As part of the agreement, the Company issued a $ i 3,000,000 convertible note. The convertible note is unsecured, bears interest at  i 5% per annum, is due February 2, 2023, and is convertible into shares of common stock at a conversion price of $ i 1.40 per share, as adjusted.

 

At May 31, 2022 and February 28, 2022, accrued interest on convertible notes payable-related party totaled $ i 600,719 and $ i 562,911, respectively, and is included in accrued expenses (See Note 10).

 

 C: 

13

 

 

 i 

NOTE 8 – NOTES PAYABLE

 

Notes payable consisted of the following:

  

 i 
  

May 31,

2022

  

February 28,

2022

 
Secured notes payable        
(a) Note payable-EID loan  $ i 150,000   $ i 150,000 
(b) Notes payable-vehicles and equipment    i 246,534     i 256,616 
           
Unsecured notes payable          
(c) Note payable-other    i 10,000     i 10,000 
Total  $ i 406,534   $ i 425,616 
Non-current    i 317,208     i 327,658 
Current    i 89,326     i 97,958 

 

 / 

(a) Economic Injury Disaster (EID) 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 (“EID Loan”) program.  i On July 1, 2020, the Company received a $150,000 loan 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 loan is due July 1, 2050, interest accrues at 3.75% per annum, and is secured by the assets of the Company.

  

(b) Notes payable-vehicle and equipment

 

During Fiscal 2022,  i the Company purchased two pieces of equipment and a vehicle for $329,297 as a part of its efforts to expand its operations and research and development capacities. The Company made down payments aggregating $41,300 with the balance financed by two notes payable aggregating $287,997. The notes are secured by the equipment and vehicle purchased. One note is due in 36 equal monthly payments of approximately $6,100 each, including interest at 2.9% per annum. The second note is due in 72 equal monthly payments of approximately $1,500 each, including interest at 10.9% interest per annum. As of May 31, 2022 and February 28, 2022, the balance of the notes was $246,534 and $265,616, respectively.

 

(c) Other notes payable

 

Demand promissory notes as of May 31, 2022 and February 28, 2022 are for one individual issued in September 2015 that is payable on demand with an interest rate of  i 10% per annum.

 

 C: 

14

 

 

 i 

NOTE 9 – NOTES PAYABLE-RELATED PARTIES

 

Notes payable-related parties consisted of the following:

   

 i 
   May 31,
2022
   February 28,
2022
 
Unsecured notes payable        
(a) Notes payable-Koppel (prior to restructuring)  $
-
   $ i 5,607,323 
Accrued interest-Koppel (prior to restructuring)   
-
     i 6,533,318 
Note payable-Kopple (restructured)    i 11,089,169    
-
 
Subtotal-Koppel    i 11,089,169     i 12,140,641 
           
(b) Note payable- Gagerman    i 82,000     i 82,000 
Accrued interest-Gagerman    i 75,494     i 73,428 
Subtotal-Gagerman    i 157,494     i 155,428 
           
(c) Note payable-Jiangsu Shengfeng    i 700,000     i 700,000 
           
Total  $ i 11,946,663   $ i 12,996,069 
Non-current    i 8,089,169    
-
 
Current  $ i 3,857,494   $ i 12,996,069 

 

 / 

(a) Kopple Notes

 

In fiscals 2013 through 2018, the Company issued notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate of $ i 6,107,323. Robert Kopple is the former Vice-Chairman of the Company’s Board of Directors and is a current shareholder in the Company. The notes were unsecured, bear interest at rates ranging from  i 5% and  i 15% per annum, and were due in fiscal 2014 through fiscal 2018. Kopple brought suit against the Company beginning in 2017 for repayment of the notes.

 

At February 28, 2022, the accrued interest due to Kopple totaled $ i 6,533,318. Due to its significance, the balance of accrued interest is added to the note payable principal for presentation on the accompanying balance sheet as of February 28, 2022. As of February 28, 2022, the outstanding balance of the Kopple notes payable and accrued interest amounted to $ i 12,140,641.

 

On March 14, 2022, the Company reached an agreement with Kopple to resolve all remaining litigation between them, including all amounts owed to Kopple under the notes. Under the terms of the settlement, the Company agreed to issue a new note and pay Kopple an aggregate amount of $ i 10,000,000, including $ i 3,000,000 to be paid in June 2022, which was subsequently extended to July 2022 (see Note 16), and granted Koppel warrants exercisable into  i 3,331,664 shares of the Company’s common stock at a price of $ i 0.85 per share. The Company used a Black-Scholes model to compute the fair value of the warrants which is estimated to be $ i 1,051,473. The settlement provides for certain increases in the amount payable to Kopple and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations.

 

The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply. Per ASC 470-60, the carrying value of the restructured note remains the same as before the restructuring, reduced only by the fair value of the warrants issued in connection with the transaction. The Company determined that the future undiscounted cash flows of the restructured new Kopple note exceeded the carrying value, and accordingly, no gain was recognized, and no adjustment was made to the carrying value of the debt, other than the adjustment for the fair value of the warrants. Interest expense on the new Kopple note will be computed using a new effective rate that equates the present value of the future cash payments specified by the new terms with the carrying value of the debt.

 

(b) Note payable-Gagerman

 

In April 2014, the Company issued a note payable to Gagerman, former CEO and CFO of the Company, for $ i 82,000. The note is an unsecured demand note and bears interest at a rate of  i 10% per annum. At May 31, 2022 and February 28, 2022, accrued interest on notes payable-Gagerman totaled $ i 75,494 and $ i 73,428, respectively, and is added to the note principal for presentation on the accompanying balance sheets. As of May 31, 2022 and February 28, 2022, the outstanding balance of the Gagerman notes payable and accrued interest amounted to $ i 157,494 and $ i 155,428, respectively.

 

(c) Jiangsu Shengfeng Note

 

On November 20, 2019, the Company reached an agreement with its joint venture partner Jiangsu Shengfeng regarding the return of $ i 700,000 that had been advanced to the Company, and the Company issued a non-interest-bearing promissory note for $ i 700,000 to be paid over a 11-month period beginning March 15, 2020, through February 15, 2021. As of May 31, 2022 and February 28, 2022, the principal due was $ i  i 700,000 / .

 

 C: 

15

 

 

 i 

NOTE 10 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

 i 
   May 31,
2022
   February 28,
2022
 
         
Accrued payroll and related expenses  $ i 421,683   $ i 431,597 
Accrued interest-convertible notes payable    i 301,713     i 284,063 
Accrued interest-convertible notes payable related party    i 600,719     i 562,911 
Accrued interest-notes payable    i 19,934     i 36,541 
Other accrued expenses    i 250,948     i 377,061 
   $ i 1,594,997   $ i 1,692,173 

 

 / 

As of May 31, 2022 and February 28, 2022, accrued expenses includes accrued interest, accrued payroll and accrued consulting fees in the aggregate of $ i 793,053 and $ i 750,322, respectively, which are due to officers and shareholders and are considered related party transactions.

 

 i 

NOTE 11 – LEASES

 

Our administrative, and production operations including warehousing, are housed in an approximately  i 18,000 square foot facility in Lake Forest, California. The Lake Forest lease is for 66-months effective February 2021 through August 31, 2026.  i The initial monthly base rental rate was approximately $22,000 per month and escalates 3% each year to approximately $26,000 per month in 2026. The lease liability was determined by discounting the future lease payments under the lease terms using a  i 10% per annum discount rate to arrive at the current lease liability.

 

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

 

The components of lease expense and supplemental cash flow information related to leases for the period are as follows:

 

 i 
   Three-Months
ended
May 31,
2022
   Three-Months
ended
May 31,
2021
 
Lease Cost        
Operating lease cost (included in general and administration in the Company’s statement of operations)  $ i 69,715   $ i 69,715 
           
Other Information          
Cash paid for amounts included in the measurement of lease liabilities  $ i 68,544   $ i 22,183 
Weighted average remaining lease term – operating leases (in years)    i 4.25     i 5.25 
Average discount rate – operating leases    i 10.0%    i 10.0%

 

 / 

 C: 

16

 

 

The supplemental balance sheet information related to leases for the period is as follows:

 

 i 
   At
May 31,
2022
 
Operating leases    
Long-term right-of-use assets  $ i 956,292 
      
Short-term operating lease liabilities  $ i 186,117 
Long-term operating lease liabilities    i 817,813 
Total operating lease liabilities  $ i 1,003,930 

 

 / 

Maturities of the Company’s lease liability is as follows:

 

 i 
  Operating
Lease
 
Years Ending February 28:     
2023 (9 months remaining)  $ i 205,632 
2024    i 282,396 
2025    i 290,868 
2026    i 299,604 
2027    i 154,296 
Total lease payments    i 1,232,796 
Less: Imputed interest/present value discount   ( i 228,866)
Present value of lease liabilities  $ i 1,003,930 
 / 

 

 i 

NOTE 12 – DERIVATIVE WARRANT LIABILITY

 

In prior years the Company issued warrants that include a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. The Company determined that the warrants do not satisfy the criteria for classification as equity instruments due to the existence of the cash settlement feature that is not within the sole control of the Company, and the warrants are accounted for as liabilities in accordance with ASC 815. The fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying statements of operations. The warrant liability will ultimately be converted into the Company’s equity when the warrants are exercised, or will be extinguished on the expiration of the outstanding warrants.

 

The following tables summarize the derivative warrant liability:

 

 i 
   May 31,
2022
   February 28,
2022
 
Stock price  $ i 0.298   $ i 0.41 
Risk free interest rate    i 2.1%    i 1.0%
Expected volatility    i 165%    i 170%
Expected life in years    i 0.73     i 0.98 
Expected dividend yield    i 0%    i 0%
Number of warrants    i 4,800,834     i 4,800,834 
Fair value of derivative warrant liability  $ i 274,843   $ i 828,232 

 

 / 
 i 
   Number of
Derivative Warrants
Outstanding
   Fair Value of Derivative Warrant Liability 
February 28, 2022    i 4,800,834   $ i 828,232 
Change in fair value of derivative warrant liability   
-
    ( i 553,389)
Gain on extinguishment on expiration of warrants   
-
    
-
 
May 31, 2022    i 4,800,834   $ i 274,843 
 / 

 

 C: 

17

 

 

 i 

NOTE 13 – STOCKHOLDERS’ DEFICIT

 

Common Stock

 

During the three-months ended May 31, 2022, the Company issued  i 2,116,665 shares of common stock for approximately $ i 635,000 in cash. During the three-months ended May 31, 2021 the Company issued  i 1,865,333 shares of common stock for approximately $ i 283,000.

 

Stock Options

 

A summary of the Company’s stock option activity for the three-months ended May 31, 2022 is as follows:

 

 i 
   Number of
Options
   Exercise
Price
   Weighted
Average
Intrinsic
Value
 
Outstanding, February 28, 2022    i 5,059,769   $ i 0.53   $ i 360,000 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Cancelled   
-
    
-
    
-
 
Outstanding, May 31, 2022    i 5,059,769   $ i 0.53   $ i 112,500 

 

 / 

The exercise prices and information related to options under the 2011 Plan outstanding on May 31, 2022 is as follows:

 

 i 
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
 
$ i 0.25 to $ i 1.40        i 5,059,769        i 5,059,769        i 3.00     $  i 0.53     $  i 0.53  

 

 / 

The Company granted no stock options under its stock option 2011 Plan for the three-month period ended May 31, 2022 and the three-month period ended May 31, 2021. As a result of stock options granted during the Fiscal 2021 year, the Company recognized $ i 163,218 in share-based compensation expense related to the fair value of vested stock options in the three-month period ended May 31, 2021.

 

Warrants

 

A summary of the Company’s warrant activity for the three-months ended May 31, 2022 is as follows:

 

 i 
   Number of
Warrants
   Exercise
Price
 
Outstanding, February 28, 2022    i 4,800,834   $ i 1.40 
Granted    i 3,331,664     i 0.85 
Exercised   
-
    
-
 
Cancelled   
-
    
-
 
Outstanding, May 31, 2022    i 8,132,498   $ i 1.17 

 

 / 

 C: 

18

 

 

There was no intrinsic value as of May 31, 2022, as the exercise prices of these warrants were greater than the market price of the Company’s stock. The exercise prices and information related to the warrants as of May 31, 2022 is as follows:

 

 i 
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
 
$ i 0.85 to $ i 1.40        i 8,132,498        i 8,132,498        i 3.21     $  i 1.17     $  i 1.17  

 

 / 

During March 2022, the Company reached a settlement agreement with its former Director, Robert Kopple who had been in litigation with the Company over unpaid notes payable and accrued interest since 2017 (See Note 9). As a part of the settlement, the Company issued to Mr. Kopple  i 3,331,664 warrants to purchase the Company’s common stock (the “Kopple Warrants”) with a term of  i 7 years and at an exercise price of $ i 0.85 per share. The Company determined the fair value of the Kopple Warrants was $ i 1,051,473 using a Black-Scholes model using the assumptions as set forth in the table below:

 

 i 
   Warrants Issued
During the
Three-Months Ended
May 31,
2022
 
Exercise Price  $ i 0.85 
Share Price  $ i 0.317 
Volatility %    i 225%
Risk-Free Rate    i 1.98%
Expected Term (yrs)    i 7.0 
Dividend Rate    i 0%
 / 

 

 i 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

As of May 31, 2022 and February 28, 2022, Bettersea LLC (“Bettersea”) was an  i 10.8% and  i 11.0%, respectively, shareholder in the Company. For the three-months ended May 31, 2022 and May 31, 2021, the Company incurred total fees to Bettersea of $ i 34,700 and $ i 36,000, respectively, for various consulting services. As of May 31, 2022 and February 28, 2022, a total of $ i 216,507 and $ i 218,507, respectively, was due to Bettersea and included in accounts payable and accrued expenses.

 

 i 

NOTE 15 – CONTINGENCIES

 

The Company is subject to legal proceedings and claims that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially adversely affected.

 

In 2017, the Company’s former COO was awarded approximately $ i 238,000 in accrued salary and related charges by the California labor board. In August 2021, the Company reached a settlement by which the Company agreed to pay approximately $ i 330,000, representing the principal award plus accrued interest. As of the time of this filing, the Company has paid approximately $ i 134,900 toward the settlement amount. The remaining balance of approximately $ i 195,100, included in accrued expenses, is to be paid no later than  i September 1, 2022 and accrues interest of  i 10% per annum until paid.

 

 C: 

19

 

 

Since July 2017 the Company has been engaged in litigation with a former director, Robert Kopple, relating to more than $ i 13 million and the current equivalent of the approximately  i 23 million warrants, exercisable for  i seven years at a price of $ i 0.10 per share, which Mr. Kopple and his affiliated entities (collectively the “Kopple Parties”) claimed should have been originally issued to them pursuant to various agreements with the Company entered to between 2013-2016. In March 2022, the Company reached a settlement with the Kopple Parties that resolves all claims asserted against the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company.  i Under the terms of the settlement, the Company has agreed to pay an aggregate amount of $10 million over a period of seven years; $3 million of which was originally to be paid in June 2022 and subsequently extended to July 2022 (see Note 16), after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement.

 

On March 26, 2019, various stockholders of the Company controlling a combined total of more than  i 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.

 

 i 

NOTE 16 – SUBSEQUENT EVENTS

 

In March 2022,  i the Company reached a settlement agreement with Kopple (see Note 9) to settle certain debt and accrued interest totaling $ i 12,140,641 for $10,000,000, including $3,000,000 due on or before June 28, 2022, and the issuance of warrants exercisable into 3,331,664 shares of the Company’s common stock. In June 2022, the Company entered into an amendment to the settlement agreement with Kopple (the “Amendment”). Pursuant to the Amendment, the Company agreed to pay an extension fee and make a partial payment towards the $3,000,000 installment. For the additional consideration and the partial payment, Kopple agreed to extend the due date for the balance of the installment to July 2022. In June 2022, the Company made a partial payment of the first installment and as of the date of this report, has not yet paid the full balance of the $3,000,000 due to Kopple / .

 

In July 2022, Melvin Gagerman, our former CEO and CFO, brought suit against the Company relating to a 2014 unsecured demand note in the original amount of $ i 82,000. With interest, Gagerman claims to now be owed a total of approximately $ i 150,000. The Company disputes that this note is presently enforceable against the Company and that the demanded amount is owed to Gagerman.

 

Subsequent to May 31, 2022, the Company issued  i 1,860,001 shares of common stock in exchange for cash proceeds of approximately $ i 558,000.

 

 C: 

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

 

Forward Looking Statements

 

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

 

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

 

  Our ability to generate positive cash flow from operations;

 

  Our ability to obtain additional financing to fund our operations;

 

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

 

  The impact of unfavorable results of legal proceedings;

 

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

 

  Our ability to compete effectively against competitors offering different technologies;

 

  Our business development and operating development;

 

  Our expectations of growth in demand for our products; and

 

  Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2022, issued on June 21, 2022 (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.

 

 C: 

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Overview

 

Our business is based on the exploitation of our Axial Flux Induction solution known as the AuraGen® for commercial and industrial applications and the VIPER for military applications. Our business model consists of two major components: (i) sales and marketing, (ii) design and engineering. Our sales and marketing approaches are composed of direct sales in North America and the use of agents and distributors in other areas. In North America, our primary focus is in (a) mobile exportable power applications, (b) EV applications, (c) U.S. Military applications and (d) industrial applications. The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen®/VIPER solution such as higher power/torque solutions, and different input and output voltages (DC and AC input and output versions).

 

In Fiscal 2020 stockholders of the Company successfully removed Ronald Buschur, William Anderson and Si Ryong Yu from the Company’s Board of Directors and elected Ms. Cipora Lavut, Mr. David Mann and Dr. Robert Lempert as directors of the Company in their stead. See Item 3, Legal Proceedings for more information. Also, in Fiscal 2020, Melvin Gagerman –– Aura’s CEO and CFO since 2006 –– was replaced. In July 2019 Ms. Lavut succeeded Mr. Gagerman as President and Mr. Mann succeeded Mr. Gagerman as CFO. Dr. Lempert was appointed as Secretary of the Company by the Board of Directors also in July 2019. In the second half of Fiscal 2020, the Company began significantly increasing its engineering, manufacturing and marketing activities. From July 8, 2019 through the end of Fiscal year 2022 (February 28, 2022), we shipped more than 140 units to customers (more than a ten-fold increase over Fiscal 2019). Although our operations were impacted in Fiscal 2022 and Fiscal 2021 by the COVID-19 pandemic, during these periods we continued to expand our engineering and manufacturing capabilities. See “Item 1. Business. Impact of the COVID-19 Pandemic” included in our Annual Report on Form 10-K for fiscal 2022 for information regarding the impact of COVID-19 on our operations. Our engineering, research and development costs for the three months ended May 31, 2022 and the three months ended May 31, 2021 were approximately $155,000 and $81,000, respectively. During the three months ended May 31, 2021, we relocated all administrative offices and operations to a new state-of-the-art facility consisting of approximately 18,000 square feet in Lake Forest, California. This new facility is wholly occupied by Aura.

 

During Fiscal 2018 and Fiscal 2019, the Company’s engineering, manufacturing, sales, and marketing activities were reduced while we focused on renegotiating numerous financial obligations. During this time, the Company’s agreements with numerous customers, third party vendors, and organizations and entities material to the operation of the Company business were canceled, delayed or terminated. During Fiscal 2018, the Company successfully restructured in excess of $30 million of debt. Robert Kopple, our former Vice Chairman of the Board, was the only significant unsecured note holder that did not executed formal agreements regarding the restructure of his debt. See “Item 3. Legal Proceedings” included in our Annual Report on Form 10-K for Fiscal 2022 filed with the SEC on June 21, 2022 and Part II, Other Information Item 1, contained in this Quarterly Report for information regarding the dispute and settlement with Mr. Kopple regarding these transactions. In March 2022, the Company reached a settlement that resolves the various claims asserted against us by Mr. Kopple and his affiliated entities (collectively the “Kopple Parties”). Under the terms of the settlement, we have agreed to pay an aggregate amount of $10 million over a period of seven years; $3 million of which is to be paid within approximately four months of the settlement date, after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement.

 

In Fiscal 2019, we effectuated a one-for-seven reverse stock split and began increasing our engineering and manufacturing activities.

 

 C: 

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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 Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.

  

Inventories

 

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, on an average cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not be subsequently written up.

 

Leases

 

The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments.

 

Share-Based Compensation

 

The Company periodically issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services. The Company periodically issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

The Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined by using a Binomial pricing model. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in the statement of operations.

 

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Impact of COVID-19

 

The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese joint venture’s manufacturing facilities being required to close and many of our customers suspending their own operations due to the COVID-19 pandemic. As a result, net sales and production levels during the fourth quarter of Fiscal 2020, the entirety of Fiscal 2021, Fiscal 2022 and the first quarter of Fiscal 2023 were significantly reduced, thus impacting our results of operations during these quarters.

 

In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety. These measures included the following:

 

Reduction of payroll costs through temporary furloughs;

 

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

 

Reduction of capital expenditures; and

 

Deferral of discretionary spending.

 

The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on our customers, especially in the commercial vehicle markets. These future developments are outside of our control, are highly uncertain, and cannot be predicted. If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require us to take further actions as it relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic have adversely impacted our results for the entirety of Fiscal 2021 and Fiscal 2022, the first quarter of fiscal year 2023, and could be impactful for the balance of Fiscal 2023.

 

Going Concern

 

During the three-month period ended May 31, 2022, the Company reported a net loss of approximately $552,000 and used cash in operating activities of approximately $722,000, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February 28, 2022, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In the event the Company is unable to generate profits and is unable to obtain financing for its working capital requirements, it may have to curtail its business further or cease business altogether. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.

 

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During the next twelve months we intend to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen®®/VIPER products both domestically and internationally and to add to our existing management team. In addition, we plan to source new suppliers for manufacturing operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. We anticipate being able to obtain new sources of funding to support these actions in the upcoming fiscal year.

 

Results of Operations

 

Three months ended May 31, 2022 compared to three months ended May 31, 2021

 

Net revenue was approximately $6,300 for the three-months ended May 31, 2022 (“Fiscal Q1 2023”) compared to approximately $23,900 for the three-months ended May 31, 2021 (“Fiscal Q1 2022”). During Fiscal Q1 2023, we delivered 1 generator unit as compared to 3 units delivered in the same quarter in the prior year. Revenues continue to be negatively impacted by both the COVID-19 pandemic, as well as a generally low level of resources. We cannot project with confidence the timing or amount of revenue that we can expect despite improvements in the pandemic being under more control globally including a successful rollout of the vaccine programs. To increase revenues which were impacted by the economic effects of the pandemic, the Company needs to augment its marketing and sales efforts substantially. As the Company’s focus has been on new product engineering and development, the current limited resources prevent executing the increased selling efforts in the near term.

 

Cost of goods sold was approximately $13,400 in Fiscal Q1 2023 compared to approximately $49,300 in Fiscal Q1 2022. This resulted in a gross loss of approximately $7,100, or a gross margin loss of 113%, and approximately $25,400 gross loss and a gross margin loss of 106%, in Fiscal Q1 2023 and Fiscal Q1 2022, respectively. The gross loss and related gross margin loss for both the three-month periods were largely influenced by the low volume of shipments in each quarter which reduced our ability to fully absorb fixed operating costs including higher operating costs related to the new facility.

 

Engineering, research and development expenses were approximately $167,000 in Fiscal Q1 2023, compared to approximately $81,000 in the Fiscal Q1 2022, or an increase of 107%. Fiscal Q1 2022 began to see higher level of costs than several of the prior years as the Company restarted its new product development program beginning with the development of a new electronic control unit (“ECU”). Fiscal Q1 2023 reflects the continuation of the increased development program, including costs for engineering several new designs as well as increased testing.

 

Selling, general and administration (“SG&A”) expense increased by approximately $113,400 or 15% to approximately $850,400 in the Fiscal Q1 2023 period from approximately $737,000 in the Fiscal Q1 2022 period. The increase during Fiscal Q1 2023 was principally associated with (i) higher legal costs of $220,700 related to the settlement of the Kopple litigation, (ii) additional salary expense of $76,500, including the addition of the Company’s Chief Financial Officer and (iii) all other expense net increases of approximately $18,900, partially offset by a reduction of approximately $163,200 in share-based compensation costs related to the vesting options granted in fiscal 2020 and a net reduction of approximately $39,500 in selling expenses which included the write-off of deferred sales compensation costs determined not to be recoverable in Fiscal Q1 2022 period.

 

Interest expense in Fiscal Q1 2023 decreased approximately $188,300 or 70%, to approximately $81,800 from approximately $269,600 in the Fiscal Q1 2022 period due principally to the settlement of the Kopple litigation which resulted in the conversion of the Kopple notes payable into a new note. The new note does not begin to accrue interest until July 2022.

 

Other income in the Fiscal Q1 2023 period was approximately $553,400 which represents the favorable change in the fair value of the derivative warrant liability for the three-months, measured as of May 31, 2022. Comparatively, the revaluation of the derivative warrant liability in Fiscal Q1 2022, measured as of May 31, 2021, resulted in a favorable change in the fair value of approximately $82,800 for the three-month period. Fiscal Q1 2022 also included a gain on the extinguishment of derivative liability of $44,620 associated with warrants that expired during the three-month period. In addition, Fiscal Q1 2022 included an approximately $75,100 gain on extinguishment of debt in connection with the forgiveness of 100% of the principal and accrued interest related to the initial PPP loan obtained by the Company in April 2020.

 

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Net loss for the three-month period of Fiscal Q1 2023 decreased by approximately $353,500, to a loss of approximately $552,200 from a restated net loss of approximately $905,700 in the three-month period of Fiscal Q1 2022. This was attributed to (i) additional net gain related to derivative liability valuation of approximately $426,000 and (ii) less interest expense of approximately $188,300, which were partially offset by (i) increased operating loss of $181,400 and (ii) a $75,100 gain on forgiveness of debt, and (iii) an approximately $4,300 gain on debt settlement.

 

Liquidity and Capital Resources

 

For the three-month period ended May 31, 2022, we recorded a net loss of approximately $552,200 and used cash in operations of approximately $722,500 and at May 31, 2022, had a stockholders’ deficit of approximately $20.1 million. These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s February 28, 2022, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

 

The net loss of approximately $552,200 in Fiscal Q1 2023 as compared to the Fiscal Q1 2022 restated net loss of approximately $905,700 was due to Fiscal Q1 2023 having a significantly higher non-cash benefit from the change in fair value of the derivative warrant liability and substantially lower interest expense, partially offset by an increased operating loss, as noted above. A significant factor in both periods contributing to the negative operating cash flows is the low level of operating activities caused principally by the COVID-19 pandemic. As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional capital and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, and our future prospects.

 

 At May 28, 2022, we had cash of approximately $20,800, compared to cash of approximately $150,200 at February 28, 2022. Subsequent to May 31, 2022, the Company issued 1,490,000 shares of common stock in exchange for cash proceeds of approximately $446,900. Working capital deficit at May 21, 2022 was a $12.4 million deficit as compared to an $21.7 million deficit at February 28, 2022. The primary reason for the decrease in the deficit was the reclassification of approximately $8.1 million in notes payable-related party, including accrued interest, related to Kopple from current liabilities to long-term. The reclassification resulted from the Company reaching an agreement with Mr. Robert Kopple, a related party note holder, to resolve all litigation between the parties related to notes payable and accrued interest carried at a value of $12.1 million as of February 28, 2022. At May 31, 2022 and February 28, 2022, we had no accounts receivable.

 

Prior to Fiscal 2020, in order to maintain liquidity, we relied upon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis performed by management, we estimate that we will need an additional $5 million to maintain existing operations for Fiscal 2023 and increase the volume of shipments to customers. We cannot assure the reader that additional financing will be available nor that the commercial targets will be met in the amounts required to keep the business operating. The issuance of additional shares of equity in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise the needed funds, we 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.

 

In March 2022, the Company reached a settlement with the Kopple Parties that resolves all claims asserted against the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company. Under the terms of the settlement, we have agreed to pay an aggregate amount of $10 million over a period of seven years; $3 million of which was originally to be paid in June 2022, and subsequently extended to July 2022, after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement. As of the date of this report, the Company has not yet paid the full $3,000,000 installment due to Kopple; having only made a partial payment in June 2022.

 

 C: 

26

 

 

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

 

See “Item 3. Legal Proceedings” and “Part IV, Item 15, Note 19 to the Financial Statements” included in the Company’s Annual Report on Form 10-K filed with the SEC on June 21,2022 for information regarding the dispute and settlement with Mr. Kopple regarding these transactions.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide disclosure under this Item 3.

 

ITEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of May 31, 2022. As of May 31, 2022, management’s assessment identified the following material weaknesses in the Company’s internal control over financial reporting: (1) ineffective controls over transactions for debt issuances to provide for review of all terms in a timely and accurate manner, to ensure reporting is in conformity with generally accepted accounting principles and properly reflected in the financial results; and (2) ineffective controls over transactions for issuances of common stock, options, and warrants to provide for review of all terms in a timely and accurate manner, to ensure reporting is in conformity with generally accepted accounting principles and properly reflected in the financial results.

 

Remediation Plan

 

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

 

We have increased our personnel resources and technical accounting expertise within the accounting function with the hiring of a new Chief Financial Officer as disclosed on Form 8-K filed with the Securities and Exchange Commission on February 17, 2022. We intend to hire one or more additional personnel for the finance and accounting function which will provide the manpower to perform timely and complete reviews of debt and equity transactions consistent with control objectives. We also plan to prepare written policies and procedures for accounting and financial reporting to establish a formal process to account for all transactions, including equity and debt transactions. We plan to test our updated controls and remediate our deficiencies in the fiscal year 2023.

 

The Company continues to remediate the findings contained in our Annual Report on Form 10-K, for the fiscal year ended February 28, 2022, issued on June 21, 2022.

 

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 May 31, 2022, not previously identified in our Annual Report on Form 10-K, for the fiscal year ended February 28, 2022 and issued on June 21, 2022 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

The Company is subject to legal proceedings and claims that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially adversely affected.

 

In 2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California labor board. In August 2021, the Company reached a settlement by which the Company agreed to pay approximately $330,000, representing the principal award plus accrued interest. As of the time of this filing, the Company has paid approximately $134,900 toward the settlement amount. The remaining balance of approximately $195,100 is to be paid no later than September 1, 2022, and accrues interest of 10% per annum until paid.

 

Since July 2017 the Company has been engaged in litigation with a former director, Robert Kopple, relating to more than $13 million and the current equivalent of the approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr. Kopple and his affiliated entities (collectively the “Kopple Parties”) claimed should have been originally issued to them pursuant to various agreements with the Company entered to between 2013-2016. In March 2022, the Company reached a settlement with the Kopple Parties that resolves all claims asserted against the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company. Under the terms of the settlement, we have agreed to pay an aggregate amount of $10 million over a period of seven years; $3 million of which was originally to be paid in June 2022, and subsequently extended to July 2022, after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement. As of the date of this report, the Company has not yet paid the full $3,000,000 installment due to Kopple; having made a partial payment in June 2022.

 

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company. On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.

 

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In July 2022, Melvin Gagerman, our former CEO and CFO, brought suit against the Company relating to a 2014 unsecured demand note in the original amount of $82,000. With interest, Gagerman claims to now be owed a total of approximately $150,000. The Company disputes that this note is presently enforceable against the Company and that the demanded amount is owed to Gagerman.

  

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 2022 Annual Report on Form 10-K issued on June 21, 2022.

 

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

 

During the three-months ended May 31, 2022, we issued 2,116,665 shares of common stock for cash proceeds of approximately $635,000. The proceeds from the sale were used for general working capital purposes.

 

ITEM 3. Defaults Upon Senior Securities.

 

None

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

ITEM 5. Other Information.

 

None.

 

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ITEM 6. Exhibits

 

31.1   Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
     
31.2   Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
     
32.1   Certification of Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   Inline XBRL Instance Document
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

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SIGNATURES

 

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

 

Date: July 18, 2022 AURA SYSTEMS, INC.
  (Registrant)
     
  By: /s/ Cipora Lavut
    Cipora Lavut
    President

 

 

31

 

 

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Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
8/31/26
3/1/24
2/28/23
2/2/23
1/11/23
1/1/23
9/1/22
Filed on:7/18/22
7/12/22
6/28/22
6/21/2210-K
For Period end:5/31/22NT 10-K
5/28/22
5/21/22
3/14/22
3/1/22
2/28/2210-K,  4,  NT 10-K
2/17/228-K
12/15/21
5/31/2110-Q
2/28/2110-K
2/15/21
7/1/20
3/15/20
11/20/19
7/8/19
4/8/19
3/27/19
3/26/19
2/28/1810-K,  3,  NT 10-K
1/24/178-K
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