Forward Looking Statements
This Report contains forward-looking statements within the meaning of the
federal securities laws. Statements other than statements of historical fact
included in this Report, including the statements under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," regarding future events or prospects are forward-looking
statements. The words "approximates," "believes," "forecasts," "expects,"
"anticipates," "estimates," "intends," "plans" "would," "could," "should,"
"seek," "may," or other similar expressions in this Report, as well as other
statements regarding matters that are not historical fact, constitute
forward-looking statements. We caution investors that any forward-looking
statements presented in this Report are based on the beliefs of, assumptions
made by, and information currently available to, us. Such statements are based
on assumptions and the actual outcome will be affected by known and unknown
risks, trends, uncertainties and factors that are beyond our control or ability
to predict. Although we believe that our assumptions are reasonable, they are
not guarantees of future performance and some will inevitably prove to be
incorrect. As a result, our actual future results may differ from our
expectations, and those differences may be material. Accordingly, investors
should use caution in relying on forward-looking statements to anticipate future
results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied
by forward-looking statements include the following:
? Our ability to generate positive cash flow from operations;
? Our ability to obtain additional financing to fund our operations;
? The impact of economic, political and market conditions on us and our
customers;
? The impact of unfavorable results of legal proceedings;
? Our exposure to potential liability arising from possible errors and omissions,
breach of fiduciary duty, breach of duty of care, waste of corporate assets
and/or similar claims that may be asserted against us;
? Our ability to compete effectively against competitors offering different
technologies;
? Our business development and operating development;
? Our expectations of growth in demand for our products; and
? Other risks described under the heading "Risk Factors" in Part II, Item 1A of
this Quarterly Report on Form 10-Q and those risks discussed in our other
filings with the Securities and Exchange Commission, including those risks
discussed under the caption "Risk Factors" in our Annual Report on Form 10-K
for the year ended February 28, 2021, issued on June 1, 2021 (as the same may
be updated from time to time in subsequent quarterly reports), which discussion
is incorporated herein by this reference.
We do not intend to update or revise any forward-looking statements, whether
because of new information, future events or otherwise except to the extent
required by law. You should interpret all subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf as
being expressly qualified by the cautionary statements in this Report. As a
result, you should not place undue reliance on these forward-looking statements.
14
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,
distributors. In North America, our primary focus is in (a) mobile exportable
power applications, (b) EV applications and (c) U.S. Military 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 )
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. Mr. Kopple claims that he and his
affiliates are presently owed approximately $11.5 million. We dispute Mr.
Kopple's claims. See "Item 3. Legal Proceedings" included in our Annual Report
on Form 10-K for Fiscal 2021 and Part II, Other Information, contained in this
Quarterly Report for information regarding the dispute with Mr. Kopple regarding
these transactions. As of the filing of this Quarterly Report, 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 n 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.
In Fiscal 2019, we effectuated a one-for-seven reverse stock split and began
increasing our engineering and manufacturing activities.
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 2021 (February 28, 2021), we shipped more than 140 units to
customers (more than a ten-fold increase over Fiscal 2019). Although our
operations were impacted in Fiscal 2021 by the COVID-19 pandemic, during Fiscal
2021 we continued to expand our engineering and manufacturing capabilities. Our
engineering, research and development costs for the six-months ended August 31,
2021 was approximately $163,000 as compared to $97,000 for the same period of
Fiscal 2021. 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.
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.
15
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 $44,000 and $54,000 for the six-months ended August
31, 2021 and 2020, respectively.
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
customer (i.e., point-in-time sale), which also corresponds to the passage of
legal title to the customer and the satisfaction of our single performance
obligation 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 as
of August 31 and February 28, 2021, respectively; however, we expect warranty
claims to eventually be nil, therefore, we have not delayed the recognition of
revenue during Fiscal 2022 and 2021.
Inventory Valuation and Classification
Inventories are valued at the lower of cost (first-in, first-out) or market, 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. 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 demand and fully reserved all
inventory in Fiscal 2019. Beginning with Fiscal 2020, production has increased,
and fully reserved inventory has been used in current production. We classify
all of our inventory as either raw material and finished goods inventory.
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, 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.
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. During the six-month period ended August 31, 2020, our Board of
Directors awarded a total of 1,250,000 stock options to the five members of the
board, which resulted in an aggregate fair value of $193,500 of which
appro$174,000 was recorded as stock-based compensation in the six-months ended
August 31, 2020. During Fiscal 2021, the board approved the aggregate grant of
1,500,000 stock options to board members, which resulted in an aggregate fair
value of $383,000, of which approximately $242,000 was recorded as stock-based
compensation cost in the six-months ended August 31, 2021.
Operating Leases
We adopted ASC 842, Leases, in Fiscal 2020, which required that public companies
evaluate all operating leases in accordance with ASC 842 and recognize a lease
liability on the balance sheet by determining the present value of the remaining
lease payments for each lease using a discount rate based on the Company's
incremental borrowing rate. A corresponding right-of-use asset is also
recognized that is amortized over the remaining term of the lease. Throughout
Fiscal 2020 and the majority of Fiscal 2021, we did not implement the new
guidance to our existing leases because the guidance does not require
application of the standard for leases that are less than 12 months with lease
renewal unlikely. All of the facility leases were month-to-month with
management's intention of exiting the leases and facilities as soon as
practical. In February 2021, we entered into a 66-month facility lease in Lake
Forest, CA that began on March 1, 2021, which resulted in the application of ASC
842 for the fiscal year ended February 28, 2021. As of February 28, 2020, we
recognized a lease liability and a right-of-use asset of $1.2 million,
respectively. During Fiscal 2022 and beyond, we will be applying the new lease
standard to this lease and any other operating leases we enter into in the
future.
16
Impact of COVID-19
The COVID-19 global pandemic has negatively affected the global economy,
disrupted global supply chains, and created extreme volatility and disruptions
to capital and credit markets in the global financial markets. We began to see
the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese
joint venture's manufacturing facilities being required to close and many of our
customers suspending their own operations due to the COVID-19 pandemic. As a
result, net sales and production levels during the fourth quarter of Fiscal
2020, the entirety of Fiscal 2021 and the first two quarters of Fiscal 2022 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 related expenses including temporary furloughs during the
first quarter of Fiscal 2021.
? Deferral of capital expenditures and other discretionary expenditures
? Safety programs including disinfecting activities in our facilities
? Recommend vaccinations for all employees
The extent of the impact of the COVID-19 pandemic on our business, financial
results and liquidity will depend largely on current and future developments,
including the containment of COVID-19 within the U.S. and globally, the timing
and effectiveness of vaccine rollout, the possible spread of Covid-19 variants
and the impact on capital and financial markets and the related impact on our
customers, especially in the commercial vehicle markets. These future
developments are outside of our control, are highly uncertain and cannot be
predicted. If the impact is prolonged, then it can further increase the
difficulty of planning for operations and may require us to take further actions
as it relates to costs and liquidity. These and other potential impacts of the
COVID-19 pandemic have adversely impacted our results for the entirety of Fiscal
2021, the first two quarters of fiscal year 2022, and could be impactful for the
balance of Fiscal 2022.
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the twelve-month period ended
February 28, 2021 and the six-month period ended August 31, 2021, the Company
reported net loss of approximately $2.1 million and had negative cash flows from
operating activities of approximately $1.3 million. In the event the Company is
unable to generate profits and is unable to obtain financing for its working
capital requirements, it may have to curtail its business further or cease
business altogether. These factors raise substantial doubts about the Company's
ability to continue as a going concern.
Substantial additional capital resources will be required to fund continuing
expenditures related to our research, development, manufacturing and business
development activities. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to retain its current financing, to obtain
additional financing, and ultimately to attain profitability.
During the next twelve months we intend to continue to attempt to increase the
Company's operations and focus on the sale of our AuraGen®®/VIPER products both
domestically and internationally and to add to our existing management team. In
addition, we expect to complete the move to our new facility for operations,
rebuild the engineering and sales teams, and to the extent appropriate, utilize
third party contractors to support the operation. We anticipate being able to
obtain new sources of funding to support these actions in the upcoming fiscal
year.
17
Results of Operations
Three-months ended August 31, 2021 compared to three-months ended August 31,
2020
Net revenue was approximately $2,200 for the three-months ended August 31, 2021
(the "Three-Months FY2022") compared to approximately $5,000 for the
three-months ended August 31, 2020 (the "Three-Months FY2021"). During the
current quarter of 2022, we shipped miscellaneous parts. Revenue year-on-year
has been negatively impacted by the COVID-19 pandemic. We cannot project with
confidence the timing or amount of revenue that we can expect until the pandemic
is under control globally.
Cost of goods sold was approximately $46,900 in the Three-Months FY2022 compared
to approximately $3,400 in the Three-Months FY2021 resulting in a gross loss of
$44,700 and a negative gross margin in excess of 1000%; as compared to $1,600
gross profit in the Three-Months FY2021 and a gross margin of 32%. The gross
loss and related gross margin loss for the Three-Months FY2022 were largely
influenced by increases in start-up costs related to the new facility. The gross
margin of 32% in the Three-Months FY2021 was also influenced by the reduced
demand for generator sets caused by the onset of Covid-19.
Engineering, research and development expenses were approximately $82,000 in the
Three-Months FY2022, compared to approximately $63,000 in the Three-Months
FY2021, or an increase of 30%. The higher costs are in relation to the
development of a new ECU.
Selling, general and administration ("SG&A") expense increased by approximately
$63,000 (15%) to approximately $495,000 in the Three-Months FY2022 from
approximately $432,000 in the Three-Months FY2021. During Three-Months FY2022,
we recorded increased expense for (i) $80,000 of higher compensation expense
related primarily to addition of business development consultants and increase
in selling headcount (ii) $54,000 in higher facilities cost related to the
physical consolidate our operations in Lake Forest, CA, and (iii) reduced other
costs of $18,000, partially offset by (i) reduced legal and professional fees of
$29,000 related to the annual audit having occurred in the second quarter of
Fiscal 2021 due to Covid-19 (ii) non-recurring costs of $60,000 related to the
consolidation of operations that occurred in Fiscal 2021.
Interest expense in the Three-Months FY2022 increased approximately $65,000 or
20%, to approximately $392,000 from approximately $327,000 in the Three-Months
FY2021 due to the additional interest of $55,000 in connection with unpaid
payroll.
Other income/expense in the Three-Months FY2022 was zero, as compared to other
income of $3.5 million in the same period of Fiscal 2021 due to the cancellation
of liabilities.
Net loss for the Three-Months FY2022 decreased by approximately $3.7 million, to
$1.0 million loss from net income of $2.7 million in the Three-Months FY2021 due
primarily to the one-time nature of the $3.5 million gain recognized in the
prior year related to the cancellation of liabilities.
Six-months ended August 31, 2021 compared to six-months ended August 31, 2020
Net revenue was approximately $26,000 for the six-months ended August 31, 2021
(the "Six-months FY2022") compared to approximately $54,000 for the six-months
ended August 31, 2020 (the "Six-months FY2021"). During the current six month
period of 2022, we delivered 2 generator unit as compared to 9 units delivered
in the same period in the prior year. Revenue year-on-year has been negatively
impacted by the COVID-19 pandemic. We cannot project with confidence the timing
or amount of revenue that we can expect until the pandemic is under control
globally including a successful rollout of the vaccine programs now underway.
Cost of goods sold was approximately $96,000 in the Six-months FY2022 compared
to approximately $46,700 in the
Six-months FY2021 resulting in a gross loss of $70,000, or a gross margin loss
of 269%, and a $7,300 gross profit in the Six-months FY2021 and a gross margin
of 14%, respectively. The gross loss and related gross margin loss for the
Six-months FY2022 were largely influenced by the low volume of shipments in the
quarter, generally, and start-up costs incurred in connection with production
activity transferred to a new facility in March 2021. During the Six-months
FY2022, cost of goods sold includes direct labor and overhead of $77,000 as
compared to $34,000 in the same period of FY2021. The gross margin of 14% in the
Six-months FY2021 was also influenced by the reduced demand for generator sets
caused by the onset of Covid-19.
Engineering, research and development expenses were approximately $163,000 in
the Six-months FY2022, compared to approximately $99,000 in the Six-months
FY2021, or an increase of 65%. The higher costs are in relation to the
development of a new ECU.
Selling, general and administration ("SG&A") expense increased by approximately
$532,000 (69%) to approximately $1,308,000 in the Six-months FY2022 from
approximately $776,000 in the Six-months FY2021. During Six-months FY2022, we
recorded increased expense for (i) $242,000 of higher compensation expense
related to addition of business development consultants and an increase in
selling headcount in the amount of $76,000 (ii) $105,000 in higher facilities
cost related to the physical consolidate our operations in Lake Forest, CA (iii)
higher legal fees of $104,000 related to various litigation matters (iv) higher
stock-based compensation cost of $68,000 based upon 1,500,000 stock options
granted in the fourth quarter of FY2021 and (v) other expense increases of
$37,000, partially offset by reduced impact of non-recurring costs of $24,000
related to the consolidation of operations that occurred primarily in Fiscal
2021 and was concluded in March 2021.
18
Interest expense in the Six-months FY2022 increased approximately $45,000 or 7%,
to approximately $662,000 from approximately $617,000 in the Six-months FY2021
due primarily to the additional interest of $55,000 related to an unpaid labor
claim.
Other income in the Six-Months FY2022 was approximately $80,000, as compared to
other income of approximately $3.6 million in the same period of Fiscal 2021
with the decline of $3.5 million due to the cancellation of $3.6 million of
liabilities occurring in August 2020 and the forgiveness of the PPP Loan of
$75,000 occurring in April of 2021.
Net loss for the Six-months FY2022 increased by approximately $4.2 million to
$2.1 million from net income of $2.1 million in the Six-months FY2021 attributed
to (i) reduced other income of $3.5 million partially (ii) reduced gross profit
of $0.1 million and (iii) increased operating expenses of $0.6 million.
Liquidity and Capital Resources
Net cash used in operations for the six-months ended August 31, 2021, was
approximately $1,287,000, an increase of $455,000 from the comparable period in
the prior fiscal year. Net cash provided by financing activities during the
six-months ended August 31, 2021, was approximately $1,019,000 consisting of (i)
cash proceeds from issuance of common stock of $988,000, (ii) proceeds of
$91,000 related to the U.S. federal Paycheck Protection Program Second Draw
("PPP2") loan program related to COVID-19, partially offset by $60,000 principal
payments on a note payable. 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.
There was acquisition of property and equipment in the amount of $23,000 during
the three-months ended August 31, 2021. There was no acquisition of property and
equipment during the corresponding period of Fiscal 2021.
The Company had a deficit of $20.1 million in shareholders' equity as of August
31, 2021, compared to $19.7 million as of February 28, 2021 with the net
negative change of $0.4 million attributed to (i) negative effect of net loss
year-to-date of approximately $2.1 million (ii) positive effect of the net
issuance of approximately 4.4 million shares valued at approximately $1.0
million for cash (iii) positive effect of the issuance of approximately 1.6
million shares in connection with debt settlements of $0.5 million and (iv)
positive effect of stock-based compensation cost of $0.2 million.
On April 23, 2020, we obtained a PPP loan in the amount of approximately $74,400
pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES
Act"). Interest on the loan is at the rate of 1% per year, loan payments are
deferred for 10 months following the last day of the covered period or June 23,
2020, balance is payable in 24 monthly installments if not forgiven in
accordance with the CARES Act and the terms of the promissory note executed by
the Company in connection with the loan. The promissory note contains events of
default and other provisions customary for a loan of this type. As required, the
Company used the PPP loan proceeds for payroll, healthcare benefits, rent and
other qualifying expenses. The program provides that the use of PPP Loan amount
shall be limited to certain qualifying expenses and may be partially or wholly
forgiven in accordance with the requirements set forth in the CARES Act. On
April 1, 2021, we received notification that our application for loan
forgiveness was accepted and approximately $75,100 of accrued interest and
principal was forgiven.
On July 1, 2020, we obtained an EIDL loan in the amount of $149,900 administered
by the SBA. As required under this program, the proceeds of the loan are to be
used for payments of ordinary working capital needs negatively impacted by the
COVID-19 pandemic. Interest accrues from the date of the loan of July 1, 2020 at
a rate of 3.75% per annum, a loan term of 30 years, no prepayment penalties or
fees, and there is a one-year deferral period during which interest accrues but
no payments are required to be made. Following the deferral period for a period
of 29 years, an estimated monthly payment of $734 is required to fully amortize
the principal and accrued interest over the term of the loan. The Company
pledged the assets of the Company as collateral for the loan. In January 2021,
the SBA announced that the deferral period was being extended for another
one-year period to July 2022. No other terms were adjusted; the monthly payment
would become $778 per month over the remaining term.
On March 3, 2021, we received proceeds of $91,235 from a Second Draw PPP loan
("PPP2") with the same terms and conditions that were applicable to the April
2020 PPP loan.
In the past, in order to generate 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. The issuance of additional shares of equity in
connection with any 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.
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