AUSI 10-Q Quarterly Report Nov. 30, 2009 | Alphaminr
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AUSI 10-Q Quarter ended Nov. 30, 2009

Balance Sheet
Cash Flow
Income Statement
AURA SYSTEMS INC
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10-Q 1 form10q-nov09a.htm form10q-nov09a.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q


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

For the quarterly period ended.................................................November 30, 2009
OR

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

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

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

1310 E. Grand Ave.
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: 2330 Utah Avenue, El Segundo, CA 90245

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 [ X ]  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 [ X ]  NO [   ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act).

Large Accelerated Filer ¨
Accelerated Filer ¨
Non-accelerated filer ¨
Smaller Reporting Company 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 January  7, 2010
Common Stock, par value $0.0001 per share
50,715,001 shares





AURA SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Index
Page No.
PART I.
FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
Statement Regarding Financial Information
4
Unaudited Condensed Consolidated Balance Sheets as of November 30, 2009 and February 28, 2009
5
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended November 30, 2009 and 2008
6
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2009 and 2008
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15
ITEM 4T.
Controls and Procedures
19
PART II.
OTHER INFORMATION
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
ITEM 6.
Exhibits
20
SIGNATURES AND CERTIFICATIONS
21






AURA SYSTEMS, INC. AND SUBSIDIARIES

NINE MONTHS ENDED NOVEMBER 30, 2009

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, 2009 as filed with the SEC (file number 000-17249).




AURA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Unaudited)
As at November 30, 2009
As at February 28, 2009
ASSETS
Current assets:
Cash and cash equivalents
$
21,224
$
317,256
Accounts receivable, net of allowance for doubtful accounts of $60,000
608,542
319,249
Current inventories
1,500,000
1,500,000
Other current assets
363,373
255,620
Total current assets
2,493,139
2,392,125
Property, plant, and equipment, net
579,143
353,444
Non-current inventories net of allowance for obsolete inventories of $2,544,547 and $2,425,994
2,330,376
2,545,978
Total assets
$
5,402,658
$
5,291,547
Current liabilities:
Accounts payable
$
1,350,707
$
1,075,202
Current portion of notes payable, net of debt discount
897,500
225,000
Notes payable- related party
4,400,000
1,800,000
Customer advances
335,033
418,612
Accrued expenses
2,018,908
1,037,917
Total current liabilities
9,002,148
4,556,731
Convertible notes payable, net of current portion
500,000
500,000
Total liabilities
9,502,148
5,056,731
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.0001par value, 75,000,000 and 50,000,000 shares authorized, 49,380,431 and 46,344,470 issued and outstanding at November 30, 2009 and February 28, 2009
4,938
4,634
Additional paid-in capital
373,416,442
364,222,963
Subscription  receivable
(27,416
)
(27,416
)
Accumulated deficit
(377,493,454
)
(363,965,365
)
Total stockholders' equity (deficit)
(4,099,490
)
234,816
Total liabilities and stockholders' equity
$
5,402,658
$
5,291,547
See accompanying notes to these un-audited condensed consolidated financial statements.





AURA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
(Unaudited)

Three Months
Nine Months
2009
2008
2009
2008
Net Revenues
$
1,160,577
$
1,065,172
$
2,425,383
$
1,891,157
Cost of goods sold
563,148
492,837
1,384,184
1,276,508
Gross Profit
597,429
572,335
1,041,199
614,649
Operating Expenses
Engineering, research and development expenses
562,082
556,779
1,626,357
1,494,894
Selling, general and administrative expenses
1,828,847
2,040,489
5,560,397
5,819,237
Stock option compensation expense
162,900
73,749
6,807,418
280,913
Total operating expenses
2,553,829
2,671,017
13,994,172
5,785,942
Loss from operations
(1,956,400,)
(2,098,682)
(12,952,973)
(5,326,402)
Other income and (expense)
Interest expense, net
(217,032)
(422,306)
(553,265)
(548,328)
Other income (expense), net
-
229
(21,850)
144,003
Total other income (expense)
(217,032)
(422,078)
(575,115)
(404,325)
Net Loss
$
(2,173,432)
$
(2,520,759)
$
(13,528,088)
$
(7,384,720)
Total basic and diluted loss per share
$
(0.05)
$
(0.06)
$
(0.29)
$
(0.18)
Weighted average shares used to
compute basic and diluted income (loss) per share
48,171,882
43,011,743
47,412,895
40,628,425
Basic and diluted weighted average number of shares outstanding are equivalent because the effect of dilutive securities is anti-dilutive
See accompanying notes to these un-audited condensed consolidated financial statements.





AURA SYSTEMS, INC. AND SUBSIDIARI,S
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
(Unaudited)

2009
2008
Cash flow from operating activities:
Net Loss
$
(13,528,088
)
$
(7,384,720
)
Adjustments to reconcile Net loss to net cash used in operating activities
Depreciation Expense
92,452
36,319
Issuance of stock as per employment agreement
-
100,000
Amortization of debt discount
220,289
-
Beneficial conversion feature expense
-
368,900
Loss on settlement of debt
22,750
-
Stock options and warrants expense
6,807,417
280,913
(Increase) decrease in:
Accounts receivable
(289,293
)
304,312
Inventory
343,820
269,665
Other current assets and deposit
(107,753
)
9,571
Increase (decrease) in:
Accounts payable, customer deposits and accrued expenses
1,291,101
741,997
Net cash used in operations
(5,147,305)
(5,273,043
)
Investing activities:
Acquisition of plant and equipment
(318,151
)
(119,211
)
Net cash used in investing activities
(318,151
)
(119,211
)
Financing activities:
Issuance of common stock
1,667,496
1,877,077
Proceeds from notes payable, net
3,407,500
1,063,863
Collections on (increase in) subscriptions receivable
-
245,750
Exercise of warrants
94,428
2,205,277
Net cash provided by financing activities:
5,169,424
5,391,966
Net decrease in cash & cash equivalents
(296,032
)
(287)
Cash and cash equivalents at beginning of period
317,256
37,532
Cash and cash equivalents at end of period
$
21,224
$
37,245
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
$
26,088
$
120,601
Income taxes
$
-
$
-
Un-audited supplemental disclosure of non-cash investing and financing activities:
During the nine months ended November 30, 2009, $273,227 of notes payable and accrued interest were converted into 333,231 shares of common stock, $108,175 of accounts payables were converted into 153,005 shares of common stock and $128,218 of inventory was acquired through the issuance of notes payable.
See accompanying notes to these un-audited condensed consolidated financial statements.




AURA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2009
(Unaudited)
1)           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 November 30, 2009 and the results of its operations for the three and nine months ended November 30, 2009 and 2008.
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.
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.
Comprehensive Income
We utilize Statement of Financial Accounting Standards ("SFAS") No. 130 (ASC 220) , "Reporting Comprehensive Income." This statement establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Comprehensive income is not presented in our financial statements since we did not have any of the items of comprehensive income in any period presented.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104(ASC 605). 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 collect-ability 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.

Terms of our sales generally provide for Shipment from our facilities to customers FOB point of shipment. Title passes to customers at the time the products leave our warehouse.

The Company does not offer a general right of return on any of its sales and considers all sales as final. However, if a customer determines that a different system configuration would better suit their application, we will allow them to exchange the system and bill them the incremental cost, or credit them if there is a decrease in the system cost. While some sales are for evaluative purposes, they are still considered final sales. The customer’s evaluation is for them to determine if there is a benefit to them to outfit additional vehicles in their fleets.

The only potential post delivery obligation the Company might have is for the installation of the unit. However, the unit is typically delivered at the time of installation, and the billing is done when the installation is complete. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. The Company does not utilize bill and hold. The Company does provide customers with a warranty; however, due to the low sales volume to date, the amount has not been material and is expensed as incurred.
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 un-collectible amounts. Allowance for doubtful debts on un-collectible amounts as of November 30, 2009 and February 28, 2009, amounted to $60,000.
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
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(ASC 740), "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.
Going Concern
The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the nine month periods ended November 30, 2009 and 2008, the Company incurred losses of $13,528,088 and $7,384,720, respectively and had negative cash flows from operating activities of $5,147,305 and $5,273,043, respectively, during the nine month periods ended November 30, 2009 and 2008.

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

The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 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.
Recently Issued Accounting Pronouncements
In March 2008, the FASB issued FASB Statement No. 161 (ASC  815), Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Management is currently evaluating the effect of this pronouncement on financial statements.
In May of 2008, FASB issued SFASB No.162 (ASC 105), “The Hierarchy of Generally Accepted Accounting Principles”. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. Management is currently evaluating the effect of this pronouncement on financial statements.
In December 2007, the FASB issued SFAS No. 141(R) (ASC  805), “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 non-controlling 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) (ASC  805),  will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning March 1, 2010. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) (ASC  805),  will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after February 28, 2010.
In May 2009, the FASB issued SFAS No. 165(ASC 855), "Subsequent Events" . SFAS 165(ASC 855) sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 (ASC 855) will be effective for interim or annual period ending after June 15, 2009 and will be applied prospectively. The Company will adopt the requirements of this pronouncement for the quarter ended November 30, 2009. The Company does not anticipate the adoption of SFAS 165 (ASC 855) will have an impact on its consolidated results of operations or consolidated financial position.
In June 2009, the FASB issued SFAS 168(ASC 105), The FASB Accounting Standard Codification and the Heirarchy of Generally Accepted Accounting Principles—a Replacement of FASB Statement No. 162 (the Codification) as a single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (GAAP) to be launched July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is effective for the Company in the interim period ending September 30, 2009, and at that time all references made to U.S. GAAP will use the new Codification numbering system prescribed by the FASB. However, as the Codification is not intended to change existing GAAP, it is not expected to have any impact on the Company’s financial position or cash flows.


Reclassifications
Certain reclassifications have been made to the 2008 financial statements to conform to the 2009 presentation.
3)         Inventories
Inventories, stated at the lower of cost (first in, first out) or market, consist of the following:
November 30, 2009
February 28, 2009
Raw materials
$
2,835,998
$
2,642,833
Finished goods
3,538,925
3,829,139
Reserved for potential product obsolescence
(2,390,088
)
(2,271,535
)
3,984,835
4,200,437
Non-current portion
(2,330,376
)
(2,545,978
)
Discount on long term inventory
(154,459
)
(154,459
)
Current portion
$
1,500,000
$
1,500,000
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 November 30, 2010. Because of this, we have assessed the net realize-ability of these assets, the proper classification of the inventory, and the potential obsolescence of inventory.  The net inventories as of November 30 and February 28, 2009, 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 $2,390,088 and $2,271,535 at November 30 and February 28, 2009.
4)           Property, Plant & Equipment
Property, plant, and equipment at November 30, 2009 and February 28, 2009 consisted of the following:
November 30, 2009
February 28, 2009
Machinery and equipment
$
1,060,519
$
1,054,422
Furniture and fixtures
1,468,603
1,438,312
Leasehold Improvements
481,887
200,124
3,011,009
2,692,858
Less accumulated depreciation and amortization
2,431,866
2,339,414
Property, plant and equipment, net
$
579,143
$
353,444
Depreciation and amortization expense was $92,452 and $36,319 for the nine month periods ended November 30, 2009, and 2008.








5)           Accrued expenses
Accrued expenses at November 30, 2009 and  February 28, 2009 consisted of the following:
November 30, 2009
February 28, 2009
Accrued payroll and related expenses
$
1,609,726
$
904,849
Other
409,182
133,068
Total
$
2,018,908
$
1,037,917

6)         Notes Payable and Other Liabilities
Notes payable and other liabilities consist of the following:
November 30, 2009
February 28, 2009
Demand notes payable  (a)
$
140,000
$
225,000
Convertible notes payable (b)
1,257,500
500,000
1,397,500
725,000
Less: Current portion
897,500
225,000
Long-term portion
$
500,000
$
500,000



(a)
Consists of one demand note payable, with interest at an annual rate of 10%, on which $5,857 in interest was accrued during the nine months ended November 30, 2009, and one demand note with an original balance of $140,000 and a remaining balance of $90,000 with a flat interest fee of $10,000, which has already been paid. During the nine month period ended November 30, 2009, the Company settled $35,000 of the notes in 58,333 shares of the common stock of the Company. The Company recorded a loss on settlement of  debt of $22,750 on the partial settlement.

(b)
Consists of a convertible note payable totaling $500,000, bearing interest at a rate of 7%, due in 2013. The note is convertible into our common stock at a price of $3.00 per share. The Company paid interest of $26,088 on the note during the nine months ended November 30, 2009. In April 2009, the Company arranged a debt financing aggregating $192,500 from unrelated parties in exchange for the issuance of 120 day 10% secured convertible promissory notes and 30,800 warrants at an exercise price of $1.25 for the first year. The performance of the notes is secured by all the inventory of the Company specifically pertaining to the WePower purchase order including all the proceeds arising from the sale or lease of all or any part thereof. The notes are convertible into our common stock at a price of $0.75 per share. The Company accrued interest of $11,732 on the notes during the nine months ended November 30, 2009. Also consists of six convertible notes entered into during the second quarter of fiscal 2010 totaling $565,000. The notes carry an interest rate of 10%, are for a term of 180 days, and are convertible into common stock of the company at $0.75 per share. The company accrued interest of $26,211 on the notes during the nine months ended November 30, 2009.
The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants using the Black Scholes method assuming a volatility of the stock of 107%, term of five years and a discount of 2.625% was determined to be $ 18,661 which was recorded as debt discount, a reduction of the carrying amount of the debt. The beneficial conversion feature on the notes was $57,161 which was also recorded as debt discount. The debt discount will be amortized over the term of the note and charged to interest expense. During the nine month period ended November 30, 2009 $75,822 was expensed.

Future maturities of notes payable at November 30, 2009 are as follows:
Year Ending February 28,
2010
$
897,500
2011
-
2012
-
2013
500,000
Total
$
1,397,500

7)           Notes Payable- Related Party
Consists of notes payable to a member of our Board of Directors, payable on demand, bearing interest at a rate of 10% per annum. During the nine month period ended November 30, 2009, the Company received additional financing of $2,600,000 from the related party, also at an interest rate of 10%, and $238,080 accrued and unpaid interest for the period was included in accrued expenses.
8)         Capital
During the nine months ended November 30, 2009, we issued 2,288,630 shares of Common Stock for cash consideration of $1,667,496. We also issued 94,428 shares of common Stock upon the exercise of 94,428 warrants, for cash consideration of $94,428, and issued 333,231 shares of Common Stock for the conversion of $273,227 of notes payable and accrued interest.  We also issued 153,005 shares of common stock for the conversion of $108,175 of accounts payable. We also issued 166,667 shares of common stock for consultancy fees of $125,000.
During the nine months ended November 30, 2008, we issued 1,915,000 shares of  Common Stock for cash consideration of $1,877,077. We also issued 400,000 shares of Common Stock for the acquisition of $400,000 worth of inventory and supplies in connection with the acquisition of the assets of Emerald Commercial Leasing, and 100,000 shares of Common Stock pursuant to an employment agreement we entered into with our Vice President. 2,205,277 shares of Common Stock were issued upon the exercise of warrants for total consideration of $2,205,277, 430,329 shares of Common Stock were issued for the exercise of warrants in lieu of payments on our secured notes payable, and 1,603,912 shares of Common Stock upon the conversion of $1,603,912 of secured notes payable and associated accrued interest. We also issued 41,855 shares of Common Stock in settlement of accounts payable.

Employee Stock Options
In September, 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan. Activity in this plan is as follows:
2006 Plan
Weighted-Average Exercise Price
Aggregate Intrinsic Value
Number of Options
Outstanding, February 28, 2009
$2.00-3.00
$0.00
1,913,000
Issued
$1.50
$0.00
6,915,500
Cancelled
$2.00-3.00
(1,913,000)
Outstanding, November 30, 2009
$1.50
$0.00
6,915,500
The exercise prices for the options outstanding at November 30, 2009, and information relating to these options is as follows:
Options Outstanding
Exercisable Options
Range of Exercise
Price
Number
Weighted Average Remaining Life
Weighted Average Exercise Price
Weighted Average Remaining Life
Number
Weighted Average Exercise Price
$1.50
6,915,500
4.50 years
$
1.50
4.50 years
6,110,615
$
1.50
During the second quarter of fiscal 2010, the Board of Directors determined that, in order to provide incentives to its employees, it was in the best interest of the Company to cancel and replace the outstanding employee options that had been granted.  With the employees consent, the company cancelled all outstanding employee options that previously had exercise prices ranging from $2.00 to $3.00, and issued new options with a grant date of June 18, 2009 and an exercise price of $1.50. Employees were given credit towards the three year vesting period extending from the date of their original hire.
Warrants
Activity in issued and outstanding warrants is as follows:
Number of Shares
Exercise Prices
Outstanding, February 28, 2009
3,452,511
$2.00-4.00
Issued
3,185,996
$1.25-1.50
Exercised
(94,428)
$1.00
Outstanding, November 30, 2009
6,544,079
$1.25-4.00
The exercise prices for the warrants outstanding at November 30, 2009, and information relating to these warrants is as follows:
Range of Exercise Prices
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
Intrinsic Value
$1.25
1,285,996
1,285,996
56 months
$1.25
$1.25
$0.00
$1.50
1,900,000
1,900,000
55 months
$1.50
$1.50
$0.00
$2.00-$3.00
1,934,991
1,782,908
15 months
$2.44
$2.49
$0.00
$3.50
805,589
805,589
25months
$3.50
$3.50
$0.00
$4.00
617,503
617,503
14 months
$4.00
$4.00
$0.00
6,544,079
6,391,996

9)           Segment Information
We are a United States based company providing advanced technology products to various industries. The principal markets for our products are North America, Europe, and Asia.  All of our operating long-lived assets are located in the United States. We operate in one segment.
Total net revenues from customer geographical segments are as follows for the nine month periods ended November 30, 2009 and 2008:
2009
2008
United States
$
1,737,148
$
1,201,522
Canada
231,849
253,930
Asia
439,495
429,566
Europe
16,891
6,139
Total
$
2,425,383
$
1,891,157
10)           Significant Customers
In the six months ended November 30, 2009, we sold AuraGen related products to three significant customers whose sales comprised 25%, 17% and 12% of net sales, respectively.  These customers are not related to or affiliated with us.
At November 30, 2009, we held accounts receivable from these customers for totaling 16%, 0% and 13%, respectively, of net accounts receivable.
11)
Subsequent Events

Subsequent to the end of the quarter, we issued 400,000 shares of common stock upon the conversion of $300,000 of notes payable, 308,077 shares of common stock for the satisfaction of $282,000 of outstanding accounts payable, and 626,493 shares of common stock for cash proceeds of $469,870.
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, 2009.
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.
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.
Our financial statements included in this report have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as a result of our losses from operations, there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from our possible inability to continue as a going concern.
Our ability to continue as a going concern is dependent upon the successful achievement of profitable operations, and the ability to generate sufficient cash from operations and obtain financing resources to meet our obligations.  There is no assurance that such efforts will be successful.
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.
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. 104, "Revenue Recognition," and related guidance. Because sales are currently in limited volume and many sales are for evaluative purposes, we have not booked a general reserve for returns.  We will consider an appropriate level of reserve for product returns when our sales increase to commercial levels.
Inventory Valuation and Classification
Inventories consist primarily of components and completed units for our AuraGen ® product. Inventories are valued at the lower of cost (first-in, first-out) or market. Provision is made for estimated amounts of current inventories that will ultimately become obsolete due to changes in the product itself or vehicle engine types that go out of production. 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 realize-ability of the asset. Factors that could trigger a review include significant changes in the manner of an asset’s use or our overall strategy.
Specific asset categories are treated as follows:
Accounts Receivable: We record an allowance for doubtful accounts based on our expectation of collect-ability of current and past due accounts receivable.
Property, Plant and Equipment: We depreciate our property and equipment over various useful lives ranging from five to ten years. Adjustments are made as warranted when market conditions and values indicate that the current value of an asset is less than its net book value.
When we determine that an asset is impaired, we measure any such impairment by discounting an asset’s realizable value to the present using a discount rate appropriate to the perceived risk in realizing such value. When we determine that an impaired asset has no foreseeable realizable value, we write such asset down to zero.
Results of Operations

Three months ended November 30, 2009 compared to three months ended November 30, 2008

Net revenues for the three months ended November 30, 2009 (the “Third Quarter FY2010”) increased $95,405 to $1,160,577 from $1,065,172 in the three months ended November 30, 2008 (the “Third Quarter FY2009”), an increase of 9%.

Cost of goods increased $70,311 (14%) to $563,148 in the Third Quarter FY2010 from $492,837 in the Third Quarter FY2009. In the prior year period, there was a charge of $270,000 for inventory items that were scrapped as obsolete. Excluding this charge, cost of goods in the prior year would have been $222,837 resulting in a current year increase in cost of goods of $340,311, or 152%.

Engineering, research and development expenses increased $5,303 (1%) to $562,083 in the Third Quarter FY2010 from $556,779 in the Third Quarter FY 2009. We believe these expenses should remain relatively stable for the near future based on the projects the Company currently is working on.

Selling, general and administrative expense decreased $211,642 (10%) to $1,828,847 in the Third Quarter FY2010 from $2,040,489 in the Third Quarter FY2009. These expenses have decreased as we have reduced personnel in this area and reduced the use of outside personnel, and made a concerted effort to control other costs.

Stock option compensation expense increased $89,151over the prior year period as a result of the non-cash charges for the issuance of employee stock options in the current year period, which was determined utilizing  the Black Scholes method assuming a volatility of the stock of 107%, term of five years and a discount of 2.625%. During the second quarter of fiscal 2010, the Board of Directors determined that, in order to provide incentives to its’ employees, it was in the best interest of the company to cancel and replace the outstanding employee options that had been granted.  With the employees consent, the company cancelled all outstanding employee options that previously had exercise prices ranging from $2.00 to $3.00, and issued new options with a grant date of June 18, 2009 and an exercise price of $1.50. Employees were given credit towards the three year vesting period extending from the date of their original hire.

Net interest expense in the Third Quarter FY2010 decreased $205,274 (49%) to $217,032 from $422,306 in the Third Quarter FY2009. The decrease is due to the inclusion in the prior year of $368,900 of interest expense for the beneficial conversion of convertible notes, partially offset by increased interest expense associate with our higher levels of debt, primarily the 10% demand note due to one of our board members, which has increased from $1.3 million in the prior year period to $4.4 million in the current year period.

Our net loss for the Third Quarter FY2010 decreased $347,327 to $2,173,432 from $2,520,759 in the Third Quarter FY2009, due to the higher gross profit recorded as a result of higher sales levels, the reduction in selling, general and administrative expenses, and the reduction in the third quarter interest charges.

Nine months FY 2010 compared to Nine months FY 2009

Net revenues for the nine months ended November 30, 2009 (the “Nine Months FY2010”) increased $534,226 to $2,425,383, from $1,891,157 in the nine months ended November 30, 2008 (the “Nine Months FY2009”), an increase of 28%. The increase is primarily due to the current year sales to a single customer in the refrigeration trucking industry. Sales in this industry did not begin until the second quarter of fiscal 2009. These sales are expected to continue to increase as we expand our business in the refrigeration trucking industry.

Cost of goods increased $107,676 to $1,384,184 in the Nine Months FY2010, from $1,276,508 in the Nine Months FY2009, an increase of 8%. In the prior year period, there was a charge of $270,000 for inventory items that were scrapped as obsolete. Excluding this charge, cost of goods in the prior year would have been $1,006,508 resulting in a current year increase in cost of goods of $377,676, or 37%.

Engineering, research and development expenses increased $131,463 (9%) to $1,626,357 in the Nine Months FY2010 from $1,494,894 in the Nine Months FY2009. These expenses have increased primarily as a result of an increase in personnel in the engineering area, that occurred in last years second and third quarter, as we began to work to expand the applications of the AuraGen.

Selling, general and administrative expenses decreased $258,840 (4%) to $5,560,397 in the Nine Months FY2010 from $5,819,237 in the Nine Months FY2009.    We do not expect these expenses to increase significantly in the near future, as we feel we have sufficient resources in this area for our anticipated near term growth projections.

Stock option compensation expense increased $6,526,505  over the prior year period as a result of the non-cash charges for the issuance of employee stock options in the current year period, which was determined utilizing  the Black Scholes method assuming a volatility of the stock of 107%, term of five years and a discount of 2.625%.

Net interest expense in the nine Months FY2010 increased $4,937 (1%) to $553,265 from $548,328 in the Nine Months FY2009. The increase is attributable to the increased level of debt we currently have, primarily the 10% demand note from a member of our Board of Directors, which has increased from $1,800,000 at February 28, 2009, to $4,400,000 at November 30, 2009. The prior year also included a charge of $368,900 related to the beneficial conversion of convertible notes payable.

Other income (expense) in the current period is net expense of $21,850 compared to income  of $144,003 in the prior year period. The prior year income was primarily a  result of a favorable purchase of inventory items that a vendor had manufactured without an order from us. This predated our bankruptcy filing and the vendor allowed us to purchase the items for approximately 6% of the actual cost of the goods.

Our net loss for the Nine Months FY2010 increased $6,143,368 to $13,528,088 from $7,384,720 in the Nine Months FY2009 primarily as a result of the non-cash charge for the amortization of expenses associated with the employee stock option plan in the current year.
Liquidity and Capital Resources
We had cash of approximately $21,000 and $317,000 at November 30, 2009, and February 28, 2009, respectively.  We had a working capital deficit at November 30, 2009, and February 28, 2009 of $(6,509,009) and $(2,164,606), respectively.  At November 30, 2009, we had accounts receivable, net of allowance for doubtful accounts, of $608,542 compared to $319,249 at February 28, 2009.
Net cash used in operations for the nine months ended November 30, 2009, was $(5,147,305), a decrease of approximately $125,000 from the comparable nine months in the prior fiscal year. Net cash provided by financing activities during the nine months ended November 30, 2009, was $5,169,424, resulting primarily from proceeds from notes payable of approximately $3.4 million, of which $2,600,000 was from a member of our Board, along with proceeds from the exercise of outstanding warrants and sales of Common Stock totaling approximately $1,760,000.
We paid $318,151 for acquisitions of property and equipment, which is primarily the cost of the build-out of our new facility, in the nine months FY2010 compared to acquisitions of property and equipment totaling $119,211 in the nine months FY2009.
Accrued expenses and accounts payable at November 30, 2009, increased approximately $1,250,000 from the February 28, 2009 balance. The increase is primarily due to an increase in accrued payroll and payroll related expenses resulting from the deferral of salaries by several members of senior management, until such time as cash flow allows these amounts to be paid, and an increase in accrued interest.
Net proceeds from the issuance of debt totaled $3,407,500 in the nine months FY 2010, compared with net proceeds  of $1,063,863 in the nine months FY 2009. Included in the debt proceeds in the nine months  FY2010 was a total of $2,600,000 from a member of our Board. As of January 11, 2009, the total amount of the 10% demand note owing this board member is $4,650,000. The Company also entered into six convertible notes during the second quarter of fiscal 2010 totaling $565,000. The notes carry an interest rate of 10%, are for a term of 180 days, and are convertible into common stock of the company at $0.75 per share.
The Company had a deficit in shareholders’ equity at November 30, 2009 of $4,009,490, compared to stockholders’ equity of $234,816 at February 28, 2009. The deficit is attributable to the nine months FY 2010 loss of $13,528,008, partially offset by proceeds from the sale of common stock and the exercise of warrants of approximately $1,760,000, and the increase in paid in capital of approximately $6.8 million from the expense related to the employee stock options.
The Company anticipates the need for approximately $7.5 million to fund our operations for the upcoming twelve months, and is expecting to raise this funding through a private placement of common stock we are currently engaged in. The offering is for units consisting of one share of common stock, and a warrant to purchase one-half share of common stock, with a price of $0.75 per unit. The warrants are five year warrants and are exercisable at a price of $1.25 per share for the first twelve months, $1.50 per share for the second twelve months, and $2.00 per share for the remaining life of the warrant.
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 indebtedness. We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. We  commenced a private placement for up to $7.5 million of common stock in September, 2009, of which $204,000 of subscriptions have been received as of October 14, 2009. The company intends to use the proceeds from this offering for general working capital purposes and the repayment of a portion of its short-term debt obligations. We anticipate that the $7.5 million would be sufficient to implement our current business plan. However, we cannot assure you that we will be able to complete this private placement or that additional financing will be available at the times or in the amounts required to fund our working capital needs or to repay outstanding indebtedness as it comes due. 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.
Capital Transactions
During the first quarter fiscal 2010, we issued 799,582 shares of Common Stock for cash consideration of $465,000. We also issued 94,428 shares of common Stock upon the exercise of 94,428 warrants, for cash consideration of $94,428, and issued 58,333 shares of Common Stock for the conversion of $35,000 of notes payable. During the second quarter fiscal 2010, we issued 465,000 shares of Common Stock for cash consideration of $320,000. During the third quarter fiscal 2010, we issued 1,190,415 shares of Common Stock for cash consideration of $882,496. We also issued 427,903 shares of Common Stock upon the conversion of $346,401 of notes payable and accounts payable.
During the first quarter fiscal 2009, we issued 200,000 shares of Common Stock for consideration of $250,000. We also issued 1,402,062 shares of Common Stock upon the exercise of 1,402,062 warrants, for consideration of $1,402,062, and issued 430,329 shares of Common Stock for the exercise of warrants in lieu of payments on our secured notes payable. During the second quarter fiscal 2009, we issued  425,000 shares of Common Stock for cash consideration of $418,370, 400,000 shares of Common Stock for the acquisition of $400,000 worth of inventory and supplies in connection with the acquisition of the assets of Emerald Commercial Leasing, 100,000 shares of Common Stock pursuant to an employment agreement we entered into with our Vice President, and 803,215 shares of Common Stock upon the exercise of warrants for total consideration of $803,215. During the third quarter fiscal 2009, we issued 1,208,707 shares of Common Stock for cash consideration of $1,290,000. We also issued 1,603,912 shares of Common Stock upon the conversion of $1,603,912 of notes payable and 41,855 shares of Common Stock upon the conversion of $41,855 of accounts payable.
ITEM 4T.                      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 November 30, 2009, that they were effective.


Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our fiscal quarter ended November 30, 2009, 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 November 30, 2009, we issued 1,190,415 shares of Common Stock for cash consideration of $882,496. We also issued 427,903 shares of common stock upon the conversion of $346,401 of notes payable and accounts payable.
All of the sales of unregistered securities are believed to be 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 qualified 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.








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: January 14, 2010
By:         /s/ Melvin Gagerman
Melvin Gagerman
Acting Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)










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