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AURA SYSTEMS INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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07/13/2020 | 05:29pm EDT

Forward Looking Statements.

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled "Forward Looking Statements" at the beginning of this Report immediately prior to "Item 1".




Overview



During fiscal 2017 through 2018, we reduced our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations and minimizing expenditures while we attempted to raise additional funding and pursue some initial engineering activities.

In fiscal 2018, we successfully eliminated approximately 68% of our total indebtedness. Specifically, our secured creditors converted approximately $5.7 million of secured debt into approximately 4.1 million shares of our common stock. The converted debt represented approximately 80% of the total secured debt of the Company. The balance of the secured debt (approximately $960,000) is to be paid to the secured creditors in cash if we raise at least $4.0 million in proceeds through new equity offerings in one or a series of related offerings. Additionally, in fiscal 2018, approximately $12.8 million of unsecured debt was converted into approximately 9.3 million shares of the Company's common stock and approximately $12.3 million of unsecured debt was forgiven. In total, during fiscal 2018, we eliminated a total of approximately $30.8 million of debt.

As of the date of this filing, Robert Kopple, our former Vice Chairman of the Board, is the only significant unsecured note holder that has not executed formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.6 million (representing approximately $5.4 million loaned to the Company over the course of 2013 to 2016; approximately $170,000Mr. Kopple claims to have advanced or paid to third parties on Aura's behalf; and approximately $5 millionMr. Kopple claims to be owed for interest, loan fees and late payment fees) on terms significantly preferable to other similarly situated unsecured creditors. We dispute Mr. Kopple's claims. See "Item 3. Legal Proceedings" included elsewhere in this Annual Report on Form 10-K for information regarding the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted our numerous offers to settle this debt and continues to demand that as part of any such resolution, he receive unilateral control over significant aspects of the Company's financial and management functions such as, but not limited to, the right to unilaterally direct the Company's ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company's management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors' duties to shareholders and creditors as a whole.

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

In fiscal 2019, we began increasing our engineering and manufacturing activities. We utilized contractors for these services in order to minimize our expense while we continued to pursue new sources of financing. In July 2019 (fiscal 2020) under our new management team, we began significantly increasing our sales, engineering, manufacturing and marketing activities.

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

(i) Our sales and marketing approaches are composed of direct sales in North America and the use of agents, distributors. In North America, our primary focus is in (a) mobile exportable power applications, and (c) U.S. Military applications.



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(ii) The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen®/VIPER solution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms. After suspending the majority of our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscal 2018 and 2019, we incurred modest engineering expenses of approximately $172,000 during the fiscal 2020 year and $494,000 during fiscal 2019.

Critical Accounting Policies and Estimates

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




Revenue Recognition



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

Our primary source of revenue is the manufacture and delivery of AuraGen/VIPER sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $822,000 and $39,000 for the fiscal years ended February 29, 2020 and February 28, 2019, respectively. Our current principle sales channel is sales to a domestic distributor.

In accordance with ASC 606, we recognize the entirety of the revenue, net of discounts, for our AuraGen/VIPER sets at time of product delivery to the distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer. Our payment terms are cash payment due upon delivery and typically includes a 2.5% price discount in accordance with this policy. Our commercial terms and conditions do not include a right of return for reasons other than a defect in performance or quality. We offer 18 months assurance-type warranty covering material and manufacturing defects, which we account for under the guidance of ASC 460, Guarantees. We have a limited history of shipments, and, as such, we have not recorded a warranty liability on our balance sheets at February 29, 2020 and February 28, 2019, respectively; however, we expect warranty claims to eventually be nil, therefore, we have not delayed the recognition of revenue during fiscal years 2020 and 2019.

Inventory Valuation and Classification

Inventories are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. From fiscal 2015 through 2019 we minimally operated and therefore only produced minimal product. As a result, while we believed that a portion of the inventory had value, we were unable to substantiate its demand and market value, we fully reserved it as of February 28, 2019. Following the management team change on July 8, 2019, revenues of $822,000 were recorded during the remainder of fiscal 2020 along with increased production levels giving rise to approximately $90,000 of inventory on-hand on February 29, 2020.



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Stock-Based Compensation


We account for stock-based compensation under the provisions of FASB ASC 718, "Compensation - Stock Compensation", which requires the measurement of all share-based payments to employees and non-employee directors, including grants of employee stock options, using a fair value-based method and the recording of such expense in the statements of operations.

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

For the past, several years and in accordance with established public company accounting practice, we have consistently utilized the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily to management, employees, and directors. The Black-Scholes option-pricing model is a widely accepted method of valuation that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances. No stock options were granted in fiscal 2020.




Impact of COVID-19



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

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



  ? Reduction of payroll costs through temporary furloughs;




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

  ? Reduction of capital expenditures; and




  ? Deferral of discretionary spending.



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



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Results of Operations


Fiscal 2020 compared to Fiscal 2019



Revenues


Beginning in July 2019, our new management team significantly began to increase sales, manufacturing and marketing operations. Since that date and through the remainder of fiscal 2020, we had revenues of $822,000, consisting primarily of our shipment of 132 AuraGen®/VIPER units, as compared to revenue of $39,274 in the fiscal year ended February 28, 2019.



 Cost of Goods


Cost of goods sold were $177,079 and $170,263 in the years ended February 29, 2020 and February 28, 2019, respectively. As described above within Critical Accounting Policies and Estimates, our inventory was fully reserved at February 28, 2019 due to uncertainty surrounding its eventual recovery through the sale of our principle product. During fiscal 2020, cost of goods sold consisted of direct material, outside manufacturing services, inbound freight costs, direct labor and indirect manufacturing labor costs. Approximately, $122,000 of previously reserved direct material was utilized in production to enable deliveries of 132 units which resulted in a reduction of cost of goods sold by the same amount. As production levels increase over time, the amount of recoverable inventory will decline and the amount of direct material recorded within cost of goods sold will increase, reducing the gross profit contribution of units of sales.

Engineering, Research and Development

Engineering, research and development costs decreased $0.3 million to $0.2 million in fiscal 2020 from approximately $0.5 million in fiscal 2018. The decrease is a result of reduced expenses incurred in the process of designing a new electronic control unit ("ECU") for our AuraGen®/VIPER products as well as sustaining engineering expenses related to the expansion of manufacturing capability.

Selling, General and Administrative Expense

Selling, general and administrative expenses decreased approximately $2.3 million to $1.3 million in fiscal 2020 from $3.6 million in fiscal 2018 due primarily to reduced scope of operations, expenses related to fewer headcount and use of consultants instead of full-time employees, and reduced legal expenses.




Impairment of Joint Venture



During fiscal 2020, we recorded an impairment charge of $250,000 in relation to the Chinese joint venture entered into in 2017 for the purpose of developing the Chinese market for our principle product. Due to the lack of operating activity, uncertainties surrounding expanding opportunities and related cash flows in the Chinese market, and public health considerations with respect to the COVID-19 pandemic, we recorded the impairment charge and wrote-off the carrying value of the same amount from the balance sheet at February 29, 2020.

Non-Operating Income and Tax Provision

Net interest expense increased to $1.2 million in fiscal 2020 from $1.1 million in fiscal 2019, an increase of $0.1 million, on approximately $11.8 and $11.2 million of principal amounts due at February 29, 2020 and February 28, 2019, respectively. We recorded a loss on debt settlement in fiscal 2020 of approximately $0.3 million and a gain of $2.7 million for the year ended February 28, 2019, as we determined that certain accounts payable items older than four years, for which collection efforts were abandoned and we did not have to be paid were removed from our balance sheet.



Net Loss


We had net losses of $2.6 million and $2.5 million in the fiscal years ended February 29, 2020 and February 28, 2019, respectively, or an increase of approximately $0.1 million due to (i) increased profit contribution of $0.8 million on sales of $0.8 million in 2020 (ii) reduced operating expenses of $2.6 million partially offset by (i) impairment expense of $0.3 million related to the Chinese joint venture and (ii) reduced gain on debt settlement of $3.2 million related primarily to the fiscal 2019 removal of old accounts payable amounts from our balance sheet at February 28, 2019.



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Liquidity and Capital Resources

In fiscal 2020, we had a loss of approximately $2.6 million and had negative cash flows from operations of approximately $0.8 million. The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. In the event that economic conditions remain impacted for longer than we expect due to the COVID-19 pandemic, our liquidity position could be severely impacted and there can be no assurance that lenders or investors will make additional financial commitments under current circumstances. As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional capital and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, and our future prospects.

At February 29, 2020, we had cash of approximately $20,000, compared to cash of approximately $358,000 at February 28, 2019. Working capital at February 29, 2020 was a $18.9 million deficit as compared to a $17.2 million deficit at the end of the prior fiscal year. Accounts payable decreased $0.1 million due primarily to the reduction in operating expenses in fiscal 2020 as compared to the prior year. At February 29, 2020 and February 28, 2019, we had no accounts receivable. In fiscal 2019 and 2020 we made no acquisitions of property and equipment.

At February 29, 2020 and 2019, we had 150,000,000 shares of $0.0001 par value common stock authorized for issuance. During the year ended February 29, 2020, we issued 2.5 million shares of common stock for cash totaling $525,000, 1.2 million shares for settlement of debt of $366,000, $50,000 shares of common stock for services rendered to we of $10,000 and a cancellation of $1.1 million shares outstanding upon execution in October 2019 of the 2018 B&H Tel LLC settlement agreement. For the year ended February 28, 2019, we issued 3.3 million shares of common stock for cash totaling $1.0 million and 9.0 million shares of common stock in settlement of $2.9 million of debt.

Prior to fiscal 2020, 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 will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis performed by management, we estimate that we will need an additional $2.5 million to maintain existing operations for the fiscal year 2021 and increase the volume of shipments to customers. We cannot assure the reader that additional financing will be available nor that the commercial targets will be met in the amounts required to keep the business operating The issuance of additional shares of equity in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise the needed funds, we would also be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.

Kopple Debt - Robert Kopple, who was Vice Chairman of our Board of Directors from September 2013 through January 11, 2018, claims that we owe him and certain affiliated parties an aggregate of approximately $10.2 million in principal and interest, and warrants to purchase 3,331,664 shares of our common stock at a price of $0.70 per share, as a result of various loans made by Mr. Kopple and his affiliates (collectively, the "Kopple Parties") to us between 2013 and 2016 as well as additional amounts he claims to have advanced on Aura's behalf.

On or about March 23, 2013, the Kopple Parties made various cash advances to us in the aggregate original principal amount of $2,500,000, evidenced by an unsecured convertible note (the "Original Kopple Note") with the right to convert outstanding principal and accrued and unpaid interest at $3.50 per share (post 1:7 reverse split). On or around June 20, 2014, $500,000 of the Original Kopple Note was reclassified as a short-term note, the principal amount of the Original Kopple Note was reduced from $2.5 million to $2.0 million and the Original Kopple Note was amended to provide that an event of default under the June 2014 Agreement (as described and defined below) would also constitute an event of default under the Original Kopple Note.

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



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

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

See "Item 3. Legal Proceedings" included elsewhere in this Annual Report on Form 10-K for information regarding the dispute with Mr. Kopple regarding these transactions.




Going Concern.



Our independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Report of Independent Registered Public Accounting Firm on page F-1, together with audited financial statements for the fiscal year ended February 29, 2020.

© Edgar Online, source Glimpses

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