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AURA SYSTEMS INC - Quarter Report: 2007 May (Form 10-Q)

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended ______________________ May 31, 2007
 
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________

AURA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)

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

2330 Utah Avenue.
El Segundo, California 90245
(Address of principal executive offices)

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

Former name, former address and former fiscal year, if changed since last report: None

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 o NO x
     
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
 
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x
 
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes x No ¨
 
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.

Class
 
Outstanding June 30, 2007
Common Stock, par value $0.0001 per share
 
30,539,962 shares


AURA SYSTEMS, INC. AND SUBSIDIARIES
 
INDEX
 
Index
 
Page No.
PART I.
FINANCIAL INFORMATION 
 
 
 
 
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
Statement Regarding Financial Information
 
3
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of May 31, 2007 (Unaudited) and February 28, 2007
 
4
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three Months Ended May 31, 2007 (Unaudited) and 2006 (Unaudited)
 
5
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2007 (Unaudited) and 2006 (Unaudited)
 
6
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
7
 
 
 
 
 
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
13
         
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
  16
         
 
ITEM 4.
Controls and Procedures
 
17
 
 
 
 
 
PART II.
OTHER INFORMATION 
 
 
 
 
 
 
 
 
ITEM 2.
Unregistered Sale of Equity Securities and Use of Proceeds
 
17
         
 
ITEM 6.
Exhibits
 
17
 
 
 
 
 
 
SIGNATURES AND CERTIFICATIONS
 
18

2

AURA SYSTEMS, INC. AND SUBSIDIARIES
 
QUARTER ENDED MAY 31, 2007
 
PART I.  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
The consolidated financial statements included herein have been prepared by Aura Systems, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").  As contemplated by the SEC under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America.  However, the Company believes that the disclosures are adequate to make the information presented not misleading.  These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended February 28, 2007 as filed with the SEC (file number 000-17249).
 
3
 
AURA SYSTEMS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
May 31, 2007
  
February 28, 2007
  
   
(Unaudited)
      
Assets 
          
Current assets:
  
 
     
Cash and cash equivalents
  
$
784,258
  
$
1,051,259
  
Receivables, net
    
591,102
   
249,984
 
Current inventories
    
1,556,136
   
750,000
 
Other current assets
    
141,709
   
243,854
 
 
              
       Total current assets
    
3,073,205
   
2,295,097
 
 
             
Property and equipment, at cost
    
2,372,290
   
2,302,653
 
Less accumulated depreciation and amortization
    
2,251,720
   
2,244,136
 
 
              
       Net property and equipment
    
120,570
   
58,517
 
 
             
Non-current inventories
    
2,384,684
   
3,195,523
 
 
              
       Total assets
  
$
5,578,459
  
$
5,549,137
  
 
             
Liabilities and Stockholder's Equity
          
Current liabilities:
          
Accounts payable
  
$
104,381
  
$
216,226
  
Current portion of notes payable
    
622,173
   
611,411
 
Accrued expenses
    
445,911
   
470,092
 
Deferred income
    
164,625
   
164,625
 
 
              
Total current liabilities
    
1,337,090
   
1,462,354
 
 
             
Notes payable, net of current portion
    
1,823,481
    
1,983,118
  
COMMITMENTS AND CONTINGENCIES
          
Common stock par value $0.0001 per share and additional paid in capital.  50,000,000 shares authorized, 30,539,962 and 28,695,638 shares issued and outstanding at May 31 and February 28, 2007, respectively.
    
3,054
   
2,870
 
       Additional paid-in capital
    
348,939,379
   
347,261,713
 
       Accumulated deficit
    
(346,524,545
)
  
(345,160,917
)
 
              
             Total stockholders’ equity
    
2,417,888
   
2,103,666
 
 
              
             Total liabilities and stockholders’ equity
  
$
5,578,459
  
$
5,549,137
  
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
4
 
AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2007 AND 2006
(Unaudited)
 
   
2007
  
2006
  
           
Net Revenues
  
$
663,918
  
$
244,462
  
               
       Cost of goods
    
447,326
   
231,156
 
               
Gross Profit
    
216,592
   
13,306
 
               
Expenses
              
       Engineering, research and development expenses
    
208,418
   
291,005
 
       Selling, general and administrative
    
1,363,362
   
787,285
 
               
       Total costs and expenses
    
1,571,780
   
1,078,290
 
               
Loss from operations
    
(1,355,188
)
  
(1,064,984
)
               
Other (income) and expense
              
    Interest expense, net
   
34,333
   
28,081
 
Gain on disposition of assets
    
-
    
(4,800
)
Other income, net
    
(25,893
)
  
(6,303
)
               
Net Loss
 
$
(1,363,628
)
$
(1,081,962
)
               
      Total basic and diluted loss per share
  
$
(0.05
)
$
(0.05
)
               
Weighted average shares used to compute basic and diluted loss per share
    
30,093,387
   
24,282,710
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
5

AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2007 AND 2006
(Unaudited)

   
2007
  
2006
  
           
Net cash used in operations
  
$
(1,726,338
)
$
(1,400,190
)
               
Investing activities:
              
               
Payments on other receivables
    
-
    
2,654,864
  
Acquisition of plant and equipment
    
(69,637
)
  
(19,153
)
               
Net cash (used in) provided by investing activities
    
(69,637
)
  
2,635,711
  
               
Financing activities:
              
               
Issuance of common stock
    
1,677,850
    
-
  
Repayment of debt
    
(148,876
)
  
-
  
               
Net cash provided by financing activities:
    
1,528,974
   
-
 
               
Net increase (decrease) in cash
    
(267,001
)
  
1,235,521
  
               
Cash and cash equivalents at beginning of period
    
1,051,259
   
472,482
 
               
Cash and cash equivalents at end of period
  
$
784,258
  
$
1,708,003
  
               
Supplemental disclosures of cash flow information
              
Cash paid during the period for:
              
Interest
  
$
46,611
  
$
0
  
Income taxes
  
$
0
  
$
0
  
 
Unaudited supplemental disclosure of non-cash investing and financing activities:
 
During the three months ended May 31, 2006, $44,714 in accrued and unpaid interest was added to notes payable.
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
6
 
AURA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2007
(Unaudited)
 
1) General
 
Basis of Presentation
 
          The condensed consolidated financial statements include the accounts of Aura Systems, Inc. and subsidiaries ("the Company").  All inter-company balances and inter-company transactions have been eliminated.
 
          In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications for comparability necessary to present fairly the financial position of Aura Systems, Inc. and subsidiaries at May 31, 2007 and the results of its operations for the three months ended May 31, 2007 and 2006.
 
          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.
 
Chapter 11 reorganization
 
On June 24, 2005 we filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, in the United States Bankruptcy Court, Central District of California, (Case Number LA 05-24550-SB). We secured a Debtor in Possession (“DIP”) loan from Blue Collar Films LLC (“BCF”) for one million dollars and secured an additional $1.2 million DIP loan from AGP Lender LLC. In addition a group of individual investors provided an additional $1.16 million in DIP financing. We submitted a reorganization plan that was approved by the court and voted and approved by the DIP lenders, the secured creditors, the unsecured creditors, the shareholders and the new money investors. Under the reorganization plan (i) the secured creditor retained $2.5 million in a secured note payable over 48 months at 7% annual interest with the first payment starting 12 months after the reorganization, (ii) the Series B Preferred Stock holders received new common shares calculated by dividing the total cash invested in the Series B Placement by $3.37, (iii) the Series A Preferred Stock holders converted their 1.8 Series A Preferred Stock for one new common share, (iv) the common shareholders converted 338 of their shares for one new share, and (v) the DIP loans converted their loans into approximately 6.07 million new shares of common stock, and (vi) all the unsecured creditors received new shares of common stock valued at one share per $1.75 in claim. An additional 5.89 million shares of common stock were issued for the new money and reorganization related fees.254,127 additional shares were issued to shareholders to settle their claims in excess of the bankruptcy court approval.
 
All of the outstanding litigation and disputes were settled during the bankruptcy. The real estate was sold to an unrelated third party in December 2005 for gross proceeds of $8,750,000. After satisfaction of the mortgage liabilities and payment of the costs of the sale, approximately $2.9 million was due us. From this amount, $1.9 million was paid to the minority shareholder, approximately $470,000 was used to satisfy outstanding legal bills, and the balance of $595,000 was received by the Company in March of 2006. All disputes regarding the real estate were settled.
 
We emerged from the Chapter 11 effective January 31, 2006.
 
7
 
2) Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Aura and subsidiary, Aura Realty, Inc.. Investments in affiliated companies are accounted for by the equity or cost method, as appropriate. Significant inter-company amounts and transactions have been eliminated in consolidation.
 
Revenue Recognition
 
The Company’s revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
 
We recognize revenue for product sales upon shipment and when title is transferred to the customer. When Aura performs the installation of the product, revenue and cost of sales are recognized when the installation is complete. We have in the past earned a portion of our revenues from license fees and recorded those fees as income when we fulfilled our obligations under the particular agreement.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
 
Accounts Receivable
 
Accounts receivable consist primarily of amounts due from customers. We have provided for an allowance for doubtful accounts, which management believes to be sufficient to account for all uncollectible amounts.
 
Inventories
 
Inventories are valued at the lower of cost (first-in, first-out) or market. Due to continuing lower than projected sales, we are holding inventories in excess of what we expect to sell in the next fiscal year.
 
Property, Plant, and Equipment
 
Property, plant, and equipment, including leasehold improvements, are recorded at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets as follows:
 
Buildings
  
40 years
Machinery and equipment
  
5 to 10 years
Furniture and fixtures
  
7 years
 
8
 
Improvements to leased property are amortized over the lesser of the life of the lease or the life of the improvements. Amortization expense on assets acquired under capital leases is included with depreciation and amortization expense on owned assets.
 
Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.
 
Income Taxes
 
We utilize SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
Estimates
 
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Recently Issued Accounting Pronouncements
 
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measuring and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the 2008 fiscal year. Management is currently evaluating the effect of this pronouncement on financial statements.
 
In September 2006, FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
 
 
·
A brief description of the provisions of this Statement
 
9
 
 
·
The date that adoption is required
 
 
·
The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
 
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Management is currently evaluating the effect of this pronouncement on financial statements.
 
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.
 
The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on financial statements.
 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
 
3) Inventories
 
          Inventories, stated at the lower of cost (first in, first out) or market, consist of the following:
 
   
May 31, 2007
 
February 28, 2007
  
   
(unaudited)
      
Raw materials
  
$
3,082,863
  
$
2,939,395
  
Finished goods
    
4,126,331
   
4,274,502
 
Reserved for potential product obsolescence
    
(3,268,374
)
  
(3,268,374
)
               
     
3,940,820
   
3,945,523
 
Non-current portion
    
2,384,684
   
3,195,523
 
               
Current portion
  
$
1,556,136
  
$
750,000
  
 
10
 
          Inventories consist primarily of components and completed units for the Company's AuraGen product. 
 
          We do not expect to realize all of our inventories within the 12-month period ending May 31, 2008.  Because of this, we have assessed the net realizability of these assets, the proper classification of the inventory, and the potential obsolescence of inventory.  The net inventories as of May 31, 2007 and February 28, 2007, which are not expected to be realized within a 12-month period, have been reclassified as long term.  We have also recorded a reserve for obsolescence of $3,268,374 at May 31, 2007 and February 28, 2007.
 
4) Property, Plant & Equipment
 
Property, plant, and equipment at May 31, 2007 and February 28, 2007 consisted of the following:
 
   
May 31, 2007
 
February 28, 2007
 
   
(unaudited)
      
 
          
Machinery and equipment
   
964,720
    
903,017
  
Furniture and fixtures
   
1,407,570
    
1,399,636
  
 
              
 
   
2,372,290
    
2,302,653
  
Less accumulated depreciation and amortization
   
2,251,720
    
2,244,136
  
 
              
Property, plant and equipment, net
 
$
120,570
  
$
58,517
  
 
Depreciation and amortization expense was $7,583, for the three month period ended May 31, 2007, and $30,948 for the year ended February 28, 2007.
 
5) Accrued expenses
 
Accrued expenses at May 31, 2007 and February 28, 2007 consisted of the following:
 
 
 
May 31, 2007
 
February 28, 2007
 
   
(unaudited)
      
 
          
Accrued payroll and related expenses
 
$
191,365
  
$
324,636
  
Other
   
254,546
    
145,456
  
 
              
Total
 
$
445,911
  
$
470,092
  
 
11
 
6) Notes Payable and Other Liabilities
 
          Notes payable and other liabilities consist of the following:
 
   
May 31, 2007
  
February 28, 2007
  
   
(unaudited)
      
           
Note payable (a)
  
$
2,445,654
    
2,594,529
  
Less: current portion
    
622,173
    
611,411
  
               
Long-term portion
  
$
1,823,481
  
$
1,983,118
  

(a) Represents notes payable dated January 31, 2006, bearing interest at a rate of 7% per annum and secured by substantially all our assets. The notes carry a term of five years with interest accruing the first twelve months, principal and interest payments beginning the thirteenth month, and continuing through month sixty.
 
7) Capital
 
         During the quarter ended May 31, 2007, we issued 1,844,324 shares of Common Stock for consideration of $1,677,850. We did not issue shares of Common Stock during the quarter ended May 31, 2006.
 
 Warrants
 
As of February 29, 2004, the aggregate number of outstanding options, warrants, and common share equivalents was significantly in excess of the authorized but unissued number of shares of our common stock. Management intends to seek shareholder approval of an increase in the Company's authorized shares sufficient to satisfy all existing commitments and create available shares for potential future investments. However, such approval has not been granted. Hence, the management determined that the value of the warrants is required to be classified as a liability under the provisions of EITF 00-19 - Accounting for Derivative Financial Instruments Indexed To and Potentially Settled In a Company's Own Stock. As of February 28, 2005, we reclassified the value of the warrants to a derivative liability. There is no longer a derivative liability at May 31, 2007.
 
The warrants granted during bankruptcy settlement were valued using the following black schools assumptions:
 
Risk free interest rate - 5.25%
 
Dividend Yield - 0.0%
 
Volatility - 50%
 
Expected term - 5 years
 
Activity in issued and outstanding warrants was as follows:
 
   
Number of Shares
  
Exercise Prices
  
Outstanding, February 29, 2005
    
574,684
  
$
6.76-858.52
  
Cancelled
    
(574,684
)
$
6.76-858.52
  
Issued
    
5,022,948
  
$
2.00-3.00
  
Exercised
    
-
  
$
-
  
Outstanding February 28, 2006
    
5,022,948
  
$
3.50
  
Issued
    
1,155,589
  
$
2.00-3.50
  
Exercised
    
-
    
-
  
Outstanding February 28, 2007
    
6,178,537
  
$
2.00-3.50
  
Issued
    
401,672
  
$
3.00
  
Exercised
    
-
    
-
  
Outstanding May 31, 2007
    
6,580,209
  
$
2.00-3.50
  
 
There was no aggregate intrinsic value of the warrants as of May 31, 2007.
 
12
 
8) Significant Customers
 
          In the three months ended May 31, 2007, we sold AuraGen related products to three significant customers for a total of approximately $342,000, or 51% of net revenues.  These customers are not related to or affiliated with us.
 
          At May 31, 2007, we held accounts receivable from two significant customers for a total of approximately $200,000, or 34% of net receivables.  Neither of these customers are related to or affiliated with us.
 
In the three months ended May 31, 2006, we sold AuraGen related products to one significant customer for a total of approximately $45,000, or 18% of net revenues.  This customer is not related to or affiliated with us.
 
          At May 31, 2006, we held accounts receivable from two significant customers for a total of approximately $46,000, or 76% of net receivables.  Neither of these customers are related to or affiliated with us.
 
9) Contingencies
 
Barovich/Chiau et. al. v. Aura Systems, Inc. et. al. (Case No. CV -95-3295).
 
As previously reported in our fiscal 2000 report on Form 10-K, we settled shareholder litigation in the referenced matter in January 1999. On November 20, 1999, the parties entered into an Amended Stipulation of Settlement, requiring that we make payment of $2,260,000 (plus interest) in thirty-six equal monthly installments of $70,350. On October 22, 2002, after we had failed to make certain monthly payments, Plaintiffs applied for and obtained a judgment against us for $935,350, representing the balance due. We have subsequently made only two monthly payments of $70,350 each, reducing the amount owed to $794,650 (plus interest) as of February 28, 2005. Subsequent to year end, the bankruptcy court (see footnote 18) approved the settlement of this claim in the amount of approximately $820,000, to be satisfied by the issuance of approximately 465,000 shares of common stock in the recapitalized company. Plaintiffs appealed the settlement claiming they are a secured creditor entitled to full payment in cash over a period of five years. The appellate court upheld the settlement provisions, and Plaintiffs have appealed this decision. The appeal is pending.
 
10) Subsequent events
 
Subsequent to May 31, 2007, we issued 5,614,650 shares of common stock for net proceeds of $5,377,080. We also issued 183,532 shares of common stock upon conversion of $183,532 of secured notes payable.
 
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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,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would “should,” “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;
     
 
·
Our business development and operating development; and
     
 
·
Our expectations of growth in demand for our products.

For further information regarding these and other risks and uncertainties, we refer you to Part I, Item 1A of our Form 10-K for the fiscal year ended February 28, 2007.
 
We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements.
 
Overview 
 
We design, assemble and sell the AuraGen®, our patented mobile power generator that uses the engine of a vehicle to generate power. The AuraGen® delivers on-location, plug-in electricity for any end use, including industrial, commercial, recreational and military applications. We began commercializing the AuraGen® in late 1999. To date, AuraGen® units have been sold in numerous industries, including recreational, utilities, telecommunications, emergency/rescue, public works, catering, oil and gas, transportation, government and the military.
 
Since fiscal 2002 sales and support of the AuraGen® have provided substantially all of our operating revenues.
 
We have not yet achieved a level of AuraGen® sales sufficient to generate positive cash flow. Accordingly, we have depended on repeated infusions of cash in order to maintain liquidity as we have sought to develop sales.
 
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Our current level of sales reflects our efforts to introduce a new product into the marketplace. Many purchases of the product are being made for evaluation purposes. We seek to achieve profitable operations by obtaining market acceptance of the AuraGen® as a competitive - if not superior - product providing mobile power, thereby causing sales to increase dramatically to levels which support a profitable operation. There can be no assurance that this success will be achieved.
 
Results of Operations 

          For the three month period ended May 31, 2007

           Our net loss for the three months ended May 31, 2007 (the "First Quarter FY2008") was $1,363,628 compared to a net loss of $1,081,962 for the three months ended May 31, 2006 (the "First Quarter FY2007"). Net operating revenues and gross profit were $663,918 and $216,592 respectively, in the First Quarter FY2008 and $244,462 and $13,306, respectively, in First Quarter FY2006. 
 
          Net revenues for the First Quarter FY2007 increased to $663,918 from $244,462 in the First Quarter FY2006.  This represents an increase of $419,456 (172%) from the First Quarter FY2006. The increase is due primarily to orders from one new customer and from increased reorders from another customer.
 
          Cost of goods increased to $447,326 in the First Quarter FY2007 from $231,156 in the First Quarter FY2007. This is a result of the increase in sales in the current year quarter over the prior year quarter. 
 
          Engineering, research and development expenses decreased by $82,587 (28%) to $208,418 in the First Quarter FY2007, from $291,005 in the First Quarter FY2006. The level of these expenses are expected to begin to increase as our sales increase, after having been reduced for the last several years. 
 
          Selling, general and administrative ("SG&A") expenses increased to $1,363,362 in the First Quarter FY2007 from $787,285 in the First Quarter FY2006; an increase of $576,077 (73%). This is a result of our beginning to increase staff in various areas as we anticipate increases in our sales volume.
 
          Net interest expense for the First Quarter FY2007 increased $6,252 to $34,333 from $28,081 in the First Quarter FY2006.
 
Critical Accounting Policies and Estimates 
 
          Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements.
 
Revenue Recognition 
 
          We are required to make judgments based on historical experience and future expectations, as to the reliability of shipments made to our customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," and related guidance. Because sales are currently in limited volume and many sales are for evaluative purposes, we have not booked a general reserve for returns. We will consider an appropriate level of reserve for product returns when our sales increase to commercial levels.
 
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Inventory Valuation and Classification 
 
          Inventories consist primarily of components and completed units for our AuraGen® product. Inventories are valued at the lower of cost (first-in, first-out) or market. Provision is made for estimated amounts of current inventories that will ultimately become obsolete due to changes in the product itself or vehicle engine types that go out of production. Due to continuing lower than projected sales, we are holding inventories in excess of what we expect to sell in the next fiscal year. The net inventories which are not expected to be realized within a 12-month period based on current sales forecasts have been reclassified as long term. Management believes that existing inventories can, and will, be sold in the future without significant costs to upgrade it to current models and that the valuation of the inventories, classified both as current and long-term assets, accurately reflects the realizable values of these assets. The AuraGen® product being sold currently is not technologically different from those in inventory. Existing finished goods inventories can be upgraded to the current model with only a small amount of materials and manpower. We make these assessments based on the following factors: i) existing orders, ii) age of the inventory, iii) historical experience and iv) our expectations as to future sales. If expected sales volumes do not materialize, there would be a material impact on our financial statements.
 
Valuation of Long-Lived Assets 
 
          Long-lived assets, consisting primarily of property and equipment, and patents and trademarks, comprise a portion of our total assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Recoverability of assets is measured by a comparison of the carrying value of an asset to the future net cash flows expected to be generated by those assets. Net cash flows are estimated based on expectations as to the realizability of the asset. Factors that could trigger a review include significant changes in the manner of an asset’s use or our overall strategy.
 
          Specific asset categories are treated as follows:
 
          Accounts Receivable: We record an allowance for doubtful accounts based on our expectation of collectibility of current and past due accounts receivable.
 
          Property, Plant and Equipment: We depreciate our property and equipment over various useful lives ranging from five to ten years. Adjustments are made as warranted when market conditions and values indicate that the current value of an asset is less than its net book value.
 
          When we determine that an asset is impaired, we measure any such impairment by discounting an asset’s realizable value to the present using a discount rate appropriate to the perceived risk in realizing such value. When we determine that an impaired asset has no foreseeable realizable value, we write such asset down to zero.
 
Liquidity and Capital Resources
 
We had cash of approximately $780,000 and $1,050,000 at May 31 and February 28, 2007, respectively.  For the three months ended May 31, 2007 and the year ended February 28, 2007, we incurred a net loss of $1,363,628 and $6,168,447 respectively, on net revenues of $663,918 and $1,624,074, respectively.  We had working capital at May 31 and February 28, 2007 of $1,736,115 and $832,744, respectively. 
 
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          The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when, or if, operating cash flow will be sufficient to fund our working capital needs. In the past, in order to maintain liquidity we have relied upon external sources of financing, principally equity financing and private and bank indebtedness. We have no bank line of credit.    
 
Since 2002 substantially all of our revenues from operations have been derived from sales of the AuraGen®. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs. Since fiscal 2002 we were forced to scale back operations due to inadequate working capital and in June 2005 we were forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code, from which we emerged under a court-approved plan of reorganization in January 2006.
 
In the past, in order to maintain liquidity we have relied upon external sources of financing, principally equity financing and private and bank indebtedness. We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. We are seeking to raise additional capital. However, we have no firm commitments from third parties to provide additional financing and we cannot assure you that financing will be available at the times or in the amounts required. 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 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.
 
        At May 31, 2007, we had accounts receivable, net of allowance for doubtful accounts, of $591,102 compared to $249,984 at February 28, 2007. 
 
          We paid $69,637 for acquisitions of property and equipment in the First Quarter FY2007 and $19,153 in the First Quarter FY2006.  We have no material capital projects that would require funding. Our current plant and equipment is sufficient to support its current level of sales.
 
          Debt repayments of $148,876 were made in First Quarter FY2007. No debt repayments were made in First Quarter FY2006.
 
Capital Transactions  
 
              During the quarter ended May 31, 2007, we issued 1,844,324 shares of Common Stock for consideration of $1,677,850. We did not issue shares of Common Stock during the quarter ended May 31, 2006.
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. We consider our exposure to market risks to be immaterial. Historically, we have not entered into derivative financial instrument transactions to manage or reduce market risk or for speculative purposes. Our long term debt obligations all bear interest at fixed rates and, therefore, have no exposure to interest rate fluctuations. Our risk related to foreign currency fluctuations is not material at this time, as any accounts we have in foreign denominations are not in themselves material.

As we anticipate needing to use the cash we hold within a short period, we have it invested it in money market accounts, and we do not expect that the amount of fluctuation in interest rates will expose us to any significant risk due to market fluctuation.

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ITEM 4.    Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures and have concluded, as of May 31, 2007, that they were not effective in view of our delinquent filings.

As of May 31, 2007, we were delinquent in filing all quarterly and annual SEC reports due since November 30, 2004. We did not have adequate financial resources to engage our outside auditors and ensure the timely filing of Form 10-K for the fiscal year ended February 28, 2005. In June 2005 our financial condition required us to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. The commencement of the bankruptcy proceeding placed additional demands on our then existing accounting personnel, including the filing of monthly financial reports with the bankruptcy court and the SEC. Our limited financial and personnel resources did not allow us to fully address our reporting obligations under the Securities Exchange Act of 1934 until we emerged from bankruptcy on January 31, 2006. We continued to be hampered by other events which further delayed the filing of our delinquent SEC reports. Specifically, the integrity of our financial records was severely disrupted as a result of errors made by temporary file personnel in December 2005 in the course of moving our principal office from 2335 Alaska Avenue to our Utah Avenue location. This problem was compounded by a change in accounting personnel in February 2006.

In February 2006, when we successfully emerged from bankruptcy under a plan of reorganization, we retained a new Chief Financial Officer and other accounting personnel. In May 2006we engaged new auditors to audit our financial statements for fiscal years from and after February 2005 and to review our interim quarterly financial statements for all subsequent quarters. We continue to work diligently towards the completion and filing of delinquent quarterly and annual reports. However, delays are unavoidable due to the impact of the factors discussed above and the number of financial reporting periods involved. We expect that once we become current in our SEC filings our disclosure controls and procedures will be adequate to ensure timely disclosure under SEC rules and regulations.

Changes in Internal Control over Financial Reporting 
 
There have been no changes in our internal control over financial reporting during our fiscal quarter ended May 31, 2007, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
 PART II - OTHER INFORMATION
 
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
During the quarter ended May 31, 2007, we issued 1,844,324 shares of Common Stock for consideration of $1,677,850.
 
All of the sales of unregistered securities were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as these offerings were a private placement to a limited number of accredited investors without public solicitation or advertising.
 
ITEM 6.  Exhibits

31.1
Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
   
31.2
Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
   
32.1
Certification of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the  Sarbanes-Oxley Act of 2002.
 
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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.
 
     
  AURA SYSTEMS, INC.
  (Registrant)
 
 		  
 		  
 
Date: March __, 2008 By:   /s/ Mevin Gagerman
 
Melvin Gagerman
Acting Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
 
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