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
Our business is based on the exploitation of our Axial Flux Induction solution
known as the AuraGen® for commercial and industrial applications and the VIPER
for military applications. Our business model consists of two major components:
(i) sales and marketing, (ii) design and engineering. Our sales and marketing
approaches are composed of direct sales in North America and the use of agents
and distributors in other areas. In North America, our primary focus is in (a)
mobile exportable power applications, (b) EV applications, (c) U.S. Military
applications and (d) industrial applications. The second component of our
business model is focused on the design of new products and engineering support
for the sales activities described above. The engineering support consists of
the introduction of new features for our AuraGen®/VIPER solution such as higher
power/torque solutions, and different input and output voltages (DC and AC input
and output versions).
In Fiscal 2020 stockholders of the Company successfully removed Ronald Buschur,
William Anderson and Si Ryong Yu from the Company's Board of Directors and
elected Ms. Cipora Lavut, Mr. David Mann and Dr. Robert Lempert as directors of
the Company in their stead. See Item 3, Legal Proceedings for more information.
Also, in Fiscal 2020, Melvin Gagerman -- Aura's CEO and CFO since 2006 -- was
replaced. In July 2019 Ms. Lavut succeeded Mr. Gagerman as President and Mr.
Mann succeeded Mr. Gagerman as CFO. Dr. Lempert was appointed as Secretary of
the Company by the Board of Directors also in July 2019. In the second half of
Fiscal 2020, the Company began significantly increasing its engineering,
manufacturing and marketing activities. From July 8, 2019 through the end of
Fiscal year 2022 (February 28, 2022), we shipped more than 140 units to
customers (more than a ten-fold increase over Fiscal 2019). Although our
operations were impacted in Fiscal 2022 and Fiscal 2021 by the COVID-19
pandemic, during these periods we continued to expand our engineering and
manufacturing capabilities. See "Item 1. Business. Impact of the COVID-19
Pandemic" included elsewhere in this Annual Report on Form 10-K for information
regarding the impact of COVID-19 on our operations. Our engineering, research
and development costs for Fiscal 2022 and Fiscal 2021 were approximately
$611,000 and $237,000, respectively. Subsequent to the end of Fiscal 2021, we
relocated all administrative offices and operations to a new state-of-the-art
facility consisting of approximately 18,000 square feet in Lake Forest,
California. This new facility is wholly occupied by Aura.
During Fiscal 2018 and Fiscal 2019, the Company's engineering, manufacturing,
sales, and marketing activities were reduced while we focused on renegotiating
numerous financial obligations. During this time, the Company's agreements with
numerous customers, third party vendors, and organizations and entities material
to the operation of the Company business were canceled, delayed or terminated.
During Fiscal 2018, the Company successfully restructured in excess of $30
million of debt. Robert Kopple, our former Vice Chairman of the Board, was the
only significant unsecured note holder that did not executed formal agreements
regarding the restructure of his debt. See "Item 3. Legal Proceedings" included
elsewhere in this Annual Report on Form 10-K for information regarding the
dispute with Mr. Kopple regarding these transactions. In March 2022, the Company
reached a settlement that resolves the various claims asserted against us by Mr.
Kopple and his affiliated entities. In July 2017, Mr. Kopple and his affiliates
brought suit against the Company relating to more than $13 million and the
current equivalent of more than approximately 23 million warrants, exercisable
for seven years at a price of $0.10 per share, which Mr. Kopple and his
affiliated entities (collectively the "Kopple Parties") claimed to be owed to
them pursuant to various agreements with the Company entered into between
2013-2016. Under the terms of the settlement, we have agreed to pay an aggregate
amount of $10 million over a period of seven years; $3 million of which is to be
paid within approximately three months of the settlement date, after which,
interest will accrue on the unpaid balance at a rate of 6%, compounded annually.
All amounts, including all accrued interest, are to be paid no later than eight
years from the date of the initial payment. The Kopple Parties have also
received seven-year warrants to purchase up to an aggregate of approximately 3.3
million shares of our common stock at a price of $0.85 per share. The settlement
also provides for standard mutual general release provisions and includes
customary representations, warranties, and covenants, including certain
increases in the amount payable to the Kopple Parties and the right of such
parties to enter judgment against the Company if the Company remains in uncured
default in its payment obligations under the settlement. (See Part IV, Item 15,
Note 19 to the Financial Statements)
26
In Fiscal 2019, we effectuated a one-for-seven reverse stock split and began
increasing our engineering and manufacturing activities. We incurred engineering
expenses of approximately $494,000 during Fiscal 2019. Most corporate operations
were temporarily suspended, however, in Fiscal 2020 when the Company's
then-management team reallocated significant resources to unsuccessfully oppose
an action by shareholders controlling a majority of the outstanding shares of
the Company's common stock to replace certain members of the Company's Board of
Directors. On July 8, 2019 the Delaware Court of Chancery entered final judgment
confirming the validity of this stockholder action. See Item 3, Legal
Proceedings for more information. As a result, during Fiscal 2020 we incurred
only modest engineering expenses of approximately $172,000 (representing a
reduction of approximately 65% from the prior fiscal year). Also, in Fiscal
2020, Melvin Gagerman -- Aura's CEO and CFO since 2006 -- was replaced.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial conditions and results
of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of financial statements requires management to make
estimates and disclosures on the date of the financial statements. In preparing
our financial statements, we have made our best estimates and judgments of
certain amounts included in the financial statements. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. The full impact of the COVID-19 pandemic is unknown and cannot
be reasonably estimated for these key estimates and assumptions. However, we
made appropriate accounting estimates based on the facts and circumstances
available as of the reporting date. To the extent that there are differences
between these estimates and actual results, our financial statements may be
materially affected.
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standard
Board's ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue
from Contracts with Customers. To determine revenue recognition under ASC 606,
an entity performs the following five-steps (i) identifies the contract(s) with
a customer; (ii) identifies the performance obligations in the contract; (iii)
determines the transaction price; (iv) allocates the transaction price to the
performance obligations in the contract; and (v) recognizes revenue when (or as)
the entity satisfies a performance obligation. The Company only applies the
five-steps to contracts when it is probable that the entity will collect the
consideration it is entitled to in exchange for the goods or services it
transfers to the customer.
In accordance with ASC 606, we recognize revenue, net of discounts, for our
generator sets at time of product delivery to the domestic distributor (i.e.
point-in-time), which also corresponds to the passage of legal title to the
customer and the satisfaction of our performance obligations to the customer.
Our payment terms are cash payment due upon delivery and typically includes a 2%
price discount off the selling price 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 a 24 month
assurance-type warranty covering material and manufacturing defects, which we
account for under the guidance of ASC 460, Guarantee.
27
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net
realizable value, on an average cost basis. We review the components of
inventory on a regular basis for excess or obsolete inventory based on estimated
future usage and sales. When evidence exists that the net realizable value of
inventory is lower than its cost, the difference is recognized as a loss in the
period in which it occurs. Once inventory has been written down, it creates a
new cost basis for inventory that may not be subsequently written up.
Leases
The Company determines whether a contract is, or contains, a lease at inception.
Right-of-use assets represent the Company's right to use an underlying asset
during the lease term, and lease liabilities represent the Company's obligation
to make lease payments arising from the lease. Right-of-use assets and lease
liabilities are recognized at lease commencement based upon the estimated
present value of unpaid lease payments over the lease term. The Company uses its
incremental borrowing rate based on the information available at lease
commencement in determining the present value of unpaid lease payments.
Share-Based Compensation
The Company periodically issues stock options and warrants, and shares of common
stock to employees and non-employees in non-capital raising transactions for
services and for financing costs. Share-based compensation cost is measured at
the grant date, based on the estimated fair value of the award, and is
recognized as expense over the requisite service period. Recognition of
compensation expense for non-employees is in the same period and manner as if
the Company had paid cash for services. The Company periodically issues stock
options and warrants, and shares of common stock to employees and non-employees
in non-capital raising transactions for services and for financing costs.
Share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
requisite service period. Recognition of compensation expense for non-employees
is in the same period and manner as if the Company had paid cash for services.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments
are derivatives or contain features that qualify as embedded derivatives. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported in the
statements of operations. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as
equity, is evaluated at the end of each reporting period. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within 12 months of the balance sheet date.
The Company uses Level 2 inputs for its valuation methodology for the derivative
liabilities as their fair values were determined by using a Binomial pricing
model. The Company's derivative liabilities are adjusted to reflect fair value
at each period end, with any increase or decrease in the fair value being
recorded in the statement of operations.
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, Fiscal 2021 and Fiscal 2022 were significantly reduced, thus impacting our
results of operations during these periods.
28
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 continue to adversely impact our results for the first
quarter of Fiscal 2023, as well as the full Fiscal year, and that impact could
be material.
Results of Operations
Fiscal 2022 compared to Fiscal 2021
Revenues
Revenues in Fiscal 2022 were approximately $100,000 as compared to the Fiscal
2021 period of approximately $115,000, a reduction of approximately 13%. Fiscal
2022 revenues consisted principally of the delivery of 8 AurtaGen®/VIPER
systems, including the initial units of the Company's new design. Fiscal 2021
consisted of the delivery of 20 AuraGen®/VIPER units. We believe that the low
levels of revenue in both Fiscal 2022 and Fiscal 2021 were the result of being
impacted significantly by the COVID-19 pandemic and its impact on the global
economy.
Cost of Goods
Cost of goods sold was approximately $124,000 and $81,000 in the years ended
February 28, 2022 and February 28, 2021, respectively. During Fiscal 2022, we
benefited from the utilization of fully reserved inventory to deliver 8 units
and recorded material cost at 31% of sales value, direct labor at 41% of sales
value and other overheads at 16% of sales. Additionally, the Company recorded an
inventory write-down of $36,000 to cost of goods sold, which resulted in a
negative gross margin of approximately $24,000 in Fiscal 2022. During Fiscal
2021, we benefited from the utilization of fully reserved inventory to deliver
20 units and recorded material cost at 25% of sales value, direct labor at 45%
of sales value and other overheads at 3% of sales. The increase in direct
material costs as a percentage of sales in FY2022 is partly attributable to the
costs associated with newly acquired inventory for the Company's upgraded ECU
design. While both the FY 2022 and FY 2021 periods benefited from the
utilization of inventory that was previously fully reserved, the new design
units fabricated in FY2022 did include the costs of new electronics boards. 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.
29
Engineering, Research and Development
Engineering, research and development costs increased to approximately $611,000
in Fiscal 2022 from approximately $237,000 in Fiscal 2021. The approximately
158% increase is a result of (i) successfully recruiting a new Chief Scientist
to drive the Company's augmented engineering activities; (ii) increased expenses
incurred in the process of designing, fabricating and testing the new version of
our electronic control unit ("ECU") for our AuraGen®/VIPER products; as well as
(iii) sustaining engineering expenses related to the expansion of manufacturing
capability.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased approximately $1,218,000,
or 77%%, to $2,795,000 in Fiscal 2022 from $1,577,000 in Fiscal 2021 due to
several factors. Most notable of these were (i) increased net occupancy related
costs of approximately $266,000 including some residual expenses related to the
moving costs for consolidation of operations into the new facility in Lake
Forest, CA (ii) increased stock-based compensation expense of $160,000 related
to the vesting schedule of stock options granted to members of the Board of
Directors and advisors to the Board in FY 2021 (iii) increased legal fees of
$488,000 principally for the Koppel matter and (iv) increased employee related
expenses of $185,000 primarily associated with the Company's efforts to increase
global sales to offset some of the effects of the pandemic.
Non-Operating Income, Interest Expense and Tax Provision
Net interest expense decreased slightly to approximately $1,272,000 in Fiscal
2022 from approximately $1,280,000 in Fiscal 2021, a decrease of $8,000, or
0.6%, on approximately $11.2 and $11.2 million of principal amounts due at
February 28, 2022 and February 28, 2021, respectively. During Fiscal 2022, the
Company recorded other income of approximately $167,000 for the forgiveness of
principal and accrued interest on two Payroll Protection Program ("PPP") loans.
The PPP loans provided for up to 100% forgiveness of the debt if the proceeds
were used for specifically authorized expenditures. Both of the PPP loans were
forgiven at 100% of principal plus accrued interest. In Fiscal 2021, we recorded
other income of approximately $3.6 million on debt settlements of $0.7 million
of notes payable and cancellation of liabilities of $2.7 million following the
expiration of the statute of limitations for settlement.
Net Income (loss)
We recorded a net loss of approximately $3,992,000 and net income of
approximately $45,000 in the Fiscal years ended February 28, 2022 and February
28, 2021, respectively, or a decrease of income of approximately $4,037,000 due
to several factors: (i) Fiscal 2021 included gain on debt settlement of
approximately $733,000 (ii) approximately $2,683,000 gain related to the Fiscal
2021 cancellation of current liabilities due to the expiration of the statute of
limitations (iii) increased engineering and R&D expenses of approximately
$373,000 in Fiscal 2022 (iv) increased operating expenses in selling, marketing
and general and administrative of approximately $1,058,000 in Fiscal 2022 and
(v) higher non-cash stock-based compensation expenses of approximately $160,000
in FY 2022.
30
Liquidity and Capital Resources
For the year ended February 28, 2022, we recorded a net loss of approximately
$4.0 million and used cash in operations of approximately $2.6 million and at
February 28, 2022, had a stockholders' deficit of approximately $21.2 million,
and approximately $13 million of notes payable-related parties payable were in
default as of that date. These conditions raise substantial doubt regarding our
ability to continue as a going concern for a period of at least one year from
the date of issuance of these financial statements. In addition the Company's
independent registered public accounting firm, in their report on the Company's
February 28, 2022, audited financial statements, raised substantial doubt about
the Company's ability to continue as a going concern.
The net loss in Fiscal 2022 as compared to the Fiscal 2021 net income was due to
Fiscal 2021 having $3.5 million of non-cash gains on the cancellation of current
liabilities and certain debt instruments. Fiscal 2022 also included additional
expenditures to ramp up the Company's engineering, R&D, selling and
administrative activities. A significant factor in both periods contributing to
the negative operating cash flows is the low level of operating activities
caused principally by the COVID-19 pandemic. As a result of the impacts of the
COVID-19 pandemic, we may be required to raise additional capital and our access
to and cost of financing will depend on, among other things, global economic
conditions, conditions in the global financing markets, the availability of
sufficient amounts of financing, and our future prospects.
At February 28, 2022, we had cash of approximately $150,000, compared to cash of
approximately $391,000 at February 28, 2021. Subsequent to February 28, 2022,
the Company issued 1,153,666 shares of common stock in exchange for cash
proceeds of $346,100. In addition, subsequent to February 28, 2022, the Company
reached an agreement with a related party note holder (Kopple) to resolve all
litigation between them related to notes payable and accrued interest of $12.1
million. Working capital deficit at February 28, 2022 was a $21.7 million
deficit as compared to an $15.5 million deficit at the end of the prior fiscal
year. The principal reasons for the increase in the deficit were the
reclassification of $4.4 million in convertible notes payable from long-term to
current liabilities and approximately $0.8 million in additional interest
accrued on the related party note payable with Mr. Kopple. At February 28, 2022
and February 28, 2021, we had no accounts receivable.
Prior to fiscal 2020, in order to maintain liquidity, we relied upon external
sources of financing, principally equity financing and private indebtedness. We
have no bank line of credit and will require additional debt or equity financing
to fund ongoing operations. Based on a cash flow analysis performed by
management, we estimate that we will need an additional $5 million to maintain
existing operations for fiscal 2023 and increase the volume of shipments to
customers. We cannot assure the reader that additional financing will be
available nor that the commercial targets will be met in the amounts required to
keep the business operating. The issuance of additional shares of equity in
connection with such financing could dilute the interests of our existing
stockholders, and such dilution could be substantial. If we cannot raise the
needed funds, we would also be forced to make further substantial reductions in
our operating expenses, which could adversely affect our ability to implement
our current business plan and ultimately our viability as a company.
Since July 2017 the Company has been engaged in litigation with a former
director, Robert Kopple, relating to approximately $13 million of notes payables
and the current equivalent of the approximately 23 million warrants, exercisable
for seven years at a price of $0.10 per share, which Mr. Kopple and his
affiliated entities (collectively the "Kopple Parties") claimed should have been
originally issued to them pursuant to various agreements with the Company
entered to between 2013-2016. In March 2022, the Company reached a settlement
with the Kopple Parties that resolves all claims asserted against the Company
without any admission, concession or finding of any fault, liability or
wrongdoing on the part of the Company. Under the terms of the settlement, we
have agreed to pay an aggregate amount of $10 million over a period of seven
years; $3 million of which is to be paid on or before June 8, 2022, after which,
interest will accrue on the unpaid balance at a rate of 6%, compounded annually.
All amounts, including all accrued interest, are to be paid no later than eight
years from the date of the initial payment. The Kopple Parties have also
received seven-year warrants to purchase up to an aggregate of approximately 3.3
million shares of our common stock at a price of $0.85 per share. The settlement
also provides for standard mutual general release provisions and includes
customary representations, warranties, and covenants, including certain
increases in the amount payable to the Kopple Parties and the right of such
parties to enter judgment against the Company if the Company remains in uncured
default in its payment obligations under the settlement. As of June 8, 2022 and
the date of this report, the Company has not yet paid the $3,000,000 installment
due to Kopple. Pursuant to the agreement, the Company has 60 days to cure the
nonpayment of the $3,000,000 default. (See Part IV, Item 15, Note 19 to the
Financial Statements).
31
We consider the transactions described above with Mr. Kopple to be related party
transactions.
See "Item 3. Legal Proceedings" and "Part IV, Item 15, Note 19 to the Financial
Statements" included elsewhere in this Annual Report on Form 10-K for
information regarding the dispute and settlement with Mr. Kopple regarding these
transactions.
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