AURA SYSTEMS INC 10-Q

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,” “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 2018, 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 and into Fiscal 2022, we continued to expand our engineering and manufacturing capabilities. Our engineering, research and development costs for the nine-months ended November 30, 2021 was approximately $352,000 as compared to $169,000 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 $85,000 and $61,000 for the nine-months ended November 30, 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 November 30 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 or 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 nine-month period ended November 30, 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 the entire amount was recorded as stock-based compensation in the nine-months ended November 30, 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 $336,000 was recorded as stock-based compensation cost in the nine-months ended November 30, 2021. 16 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. Impact of COVID-19 The COVID-19 global pandemic continues to negatively affect 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 three quarters of Fiscal 2022 were significantly reduced, thus impacting our results of operations and financial condition during these quarters. 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 new 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 three 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 November 30, 2021, the Company reported net loss of approximately $3.4 million and had negative cash flows from operating activities of approximately $2.0 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 expect 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 rebuild our 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 November 30, 2021 compared to three-months ended November 30, 2020 Net revenue was approximately $58,400 for the three-months ended November 30, 2021 (the “Three-Months FY2022”) compared to approximately $7,800 for the three-months ended November 30, 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 $58,000 in the Three-Months FY2022 compared to approximately $5,300 in the Three-Months FY2021 resulting in a gross profit of $400 and a gross margin of 0.7%; as compared to $2,500 gross profit in the Three-Months FY2021 and a gross margin of 32%. The minimal gross profit and for the Three-Months FY2022 were largely influenced by increases in start-up costs related to the new facility and the higher labor costs incurred delivering customized orders to our customers. 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 $208,000 in the Three-Months FY2022, compared to approximately $70,000 in the Three-Months FY2021, or an increase of 197%. The higher costs are in relation to the development of a new ECU. Selling, general and administration (“SG&A”) expense increased by approximately $509,000 (197%) to approximately $768,000 in the Three-Months FY2022 from approximately $259,000 in the Three-Months FY2021. During Three-Months FY2022, we recorded increased expense for (i) $138,000 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, (iii) higher legal costs of $150,000 related to ongoing legal matters, (iv) stock-based compensation costs of $74,000 and (v) all other cost increases totaling $93,000. Interest expense in the Three-Months FY2022 increased approximately $3,000 or 0.5%, to approximately $271,000 from approximately $268,000 in the Three-Months FY2021 due to the additional interest of $5,000 in connection with the September 2021 settlement with a former COO for unpaid payroll (See Part II. Other Information, Item 1. Legal Proceedings). Other income/expense in the Three-Months FY2022 was zero, as compared to other income of $4,000 in the same period of Fiscal 2021. Net loss for the Three-Months FY2022 decreased by approximately $0.7 million, to $1.3 million loss from net income of $0.6 million in the Three-Months FY2021 due primarily to increased operating expenses for engineering ($138,000) and selling, general and administrative expenses ($509,000). Nine-months ended November 30, 2021 compared to nine-months ended November 30, 2020 Net revenue was approximately $85,000 for the nine months ended November 30, 2021 (the “Nine-months FY2022”) compared to approximately $61,000 for the nine months ended November 30, 2020 (the “Nine-months FY2021”). During the current nine month period of 2022, we delivered 3 generator units and 4 ECU units 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 $154,000 in the Nine-months FY2022 compared to approximately $46,700 in the Nine-months FY2021 resulting in a gross loss of $69,000, or a gross margin loss of 82%, and a $14,700 gross profit in the Nine-months FY2021 and a gross margin of 24%, respectively. The gross loss and related gross margin loss for the Nine-months FY2022 were largely influenced by the low volume of shipments in the period, generally, and start-up costs incurred in connection with production activity transferred to a new facility in March 2021. During the Nine-months FY2022, cost of goods sold includes direct labor and overhead of 129,000 as compared to $38,000 in the same period of FY2021. The gross margin of 24% in the Nine months FY2021 was also influenced by the reduced demand for generator sets caused by the onset of Covid-19. 18 Engineering, research and development expenses were approximately $371,000 in the Nine-months FY2022, compared to approximately $169,000 in the Nine months FY2021, or an increase of 120%. The higher costs are in relation to the development of a new ECU. Selling, general and administration (“SG&A”) expense increased by approximately $1,041,000 (101%) to approximately $2,075,000 in the Nine-months FY2022 from approximately $1,035,000 in the Nine-months FY2021. During Nine-months FY2022, we recorded increased expense for (i) $284,000 of higher compensation expense related to addition of business development consultants and an increase in selling headcount in the amount of $96,000 (ii) $158,000 in higher facilities cost related to the physical consolidate our operations in Lake Forest, CA (iii) higher legal fees of $259,000 related to various litigation matters (iv) higher stock-based compensation cost of $143,000 based upon 1,500,000 stock options granted in the fourth quarter of FY2021 and (v) other expense increases of $87,000. Interest expense in the Nine-months FY2022 increased approximately $48,000 or 5%, to approximately $933,000 from approximately $885,000 in the Nine-months FY2021 due primarily to the additional interest of $60,000 related to the September 2021 settlement with a former COO for unpaid payroll (See Part II. Other Information, Item 1. Legal Proceedings). Other income/loss in the Nine-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 Nine-months FY2022 increased by approximately $4.9 million to $3.4 million from net income of $1.5 million in the Nine-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 $1.3 million. Liquidity and Capital Resources Net cash used in operations for the nine-months ended November 30, 2021, was approximately $2.0 million, an increase of $0.8 million from the comparable period in the prior fiscal year. Net cash provided by financing activities during the nine-months ended November 30, 2021, was approximately $1,019,000 consisting of (i) cash proceeds from issuance of common stock of $1,868,000, (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 $96,000 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 approximately $117,000 during the nine-months ended November 30, 2021. There was approximately $9,000 acquisition of property and equipment during the corresponding period of Fiscal 2021. The Company had a deficit of $20.3 million in shareholders’ equity as of November 30, 2021, compared to $19.7 million as of February 28, 2021 with the net negative change of $0.6 million attributed to (i) negative effect of net loss year-to-date of approximately $3.4 million (ii) positive effect of the net issuance of approximately 7.6 million shares valued at approximately $1.9 million for cash (iii) positive effect of the issuance of approximately 1.8 million shares in connection with debt settlements and services provided of $0.6 million and (iv) positive effect of stock-based compensation cost of $0.3 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. 19 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 October 2021, we purchased two CNC machines for approximately $233,000 and financed the acquisition with a vendor-sourced note payable in the initial principal amount of $209,700 with payment terms consisting of 36 equal monthly installments of approximately $6,100, a down payment of 10%, or $23,300, and a 2.9% interest rate per annum. On November 30, 2021, the outstanding loan balance was approximately $204,000 of which approximately $68,000 was classified as a current liability. 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. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide disclosure under this Item 3.