AURA SYSTEMS INC 10-K

ITEM 1. BUSINESS Introduction Aura Systems, Inc., is a Delaware corporation that was founded in 1987. The Company designs, assembles, tests and sells our proprietary and patented axial flux (“AF”) induction machines known as the AuraGen ® for industrial and commercial applications and the AuraGen ® VIPER for military applications (collectively referred to as the “AuraGen ® ”). The AuraGen ® can be used either as an electric motor or generator depending on the rotational speed of the rotor relative to the rotational speed of the magnetic field produced by the stator; when the rotor rotates slower than the magnetic field the AuraGen ® acts as an electric motor and when the rotor rotates faster than the magnetic field, the AuraGen ® acts as a generator. Traditional induction machines use a radial flux (“RF”) design as opposed to the axial flux design of the AuraGen ® . These traditional RF machines have been the conventional workhorses of industry due to their robustness, attractive cost, and ease of control. However, RF machines are both heavy and bulky making them ill-suited for a variety of applications in which size and weight are paramount considerations, including most mobile applications. Although axial flux technology has long been recognized as having a higher energy density (more energy per unit volume or weight) than traditional RF induction machines, for many years, however, RF technology was considered the only solution because of perceived insurmountable technological impediments to the creation of a viable axial flux equivalent including: (i) challenges controlling the strong axial magnetic attraction force between the stator and the rotor, (ii) fabrication difficulties such as cutting the slots in laminated cores, (iii) high cost involved in manufacturing the laminated stator core, (iv) difficulties in assembling the machine and maintaining a uniform air gap and (v) providing a laminated rotor that can stand the large centrifugal forces. Aura, however, has overcome these barriers through a variety of technological innovations. The issue of a strong axial magnetic attraction force between the stator and the rotor was addressed by Aura’s patented approach of using a topology of two stators and a rotor sandwiched between them or two rotors and a stator sandwiched between. The issues related to the fabrication and the high cost of manufacturing of the laminated stator cores were resolved by Aura using a technique involving punching the slots while rolling the steel, resulting in a continuous punched steel ribbon at a cost less than traditional punched laminates. Using various modern techniques and instruments, Aura has also overcome the difficulties in assembling the machine and maintaining a uniform air gap. Aura has also developed a patented cast rotor that does not require any laminates and provides the structural integrity to withstand large centrifugal forces, while at the same time provides the proper electric and magnetic properties. Thus, although the general operating principals of the AuraGen ® are the same as a traditional RF machine, the novel design of the AuraGen ® and its unique performance characteristics offer perceivable advantages over traditional RF technology. ● A Smaller Footprint and a Lighter Weight Makes the AuraGen ® Uniquely Suited for Applications in which Fit, and Weight are Critical Factors. On average, the AuraGen ® system is approximately 50 percent lighter than comparable RF systems. Likewise, on average the AuraGen ® has a volume of approximately 35% of RF equivalent machines. As a result, the AuraGen ® is uniquely able to be installed in locations traditional RF technology cannot possibly due to size and weight. The use of an AuraGen ® motor or generator with a disc rotor can thus be adopted in the construction of various devices with advantages in size, weight, and function. In addition, Aura’s axial flux design readily lends itself to stacking multiple rotors and stators on the same shaft, thus designing a relatively compact system capable of very large outputs. ● AuraGen ® Provides Greater Output Efficiency as Compared to Traditional RF Technology . Aura’s Axial Flux rotor design has significantly less inertia than the rotor used in equivalent traditional RF machines. As a result, Aura’s systems require less input horsepower to rotate at the required rpm, resulting in an increase in output efficiency. In addition, Aura’s stators require approximately 60% less copper than used in equivalent RF machines with much shorter stator coil end turns and shorter flux return paths. As a result, Aura’s design provides lower copper losses (additional increase in output efficiency) and lower manufacturing cost. In addition, specific AuraGen ® geometry/symmetry results in magnetic flux paths that inherently avoid parasitic eddy currents without need for laminates All of the above contribute to an increase in efficiency. 1 ● Unlike Other electrical machines that are Dependent on Foreign Rare Earth Metals, the AuraGen ® is Not. The AuraGen ® , being an induction machine, does not use any permanent magnets (“PM”). Typical PM machines use NeFeB magnets (rare earths) that are mostly produced in China. In an article titled U.S. Needs a Strong Defense Against China’s Rare Earth weapon, written James Stavridis of Bloomberg opinion March 4, 2021 “China controls roughly 80% of the rare-earths market, between what it mines itself and processes in raw material from elsewhere. If it decided to wield the weapon of restricting the supply — something it has repeatedly threatened to do — it would create a significant challenge for manufacturers and a geopolitical predicament for the industrialized world. … In 2010, Beijing threatened to cut off exports to Japan over the disputed Senkaku Islands. Two years ago, Beijing was reportedly considering restrictions on exports to the U.S. generally, as well as against specific companies (such as defense giant Lockheed Martin Corp.) that it deemed in violation of its policies against selling advanced weapons to Taiwan. ● Most EVs use PM machines. In applications that require variable speed and variable loads, such as in EV applications, the magnetic B field should be adjusted over the operating range. Generally bucking B fields are required to adjust for the B field produced by the Permanent magnets . In contrast, Aura’s induction machines do not have any PM and B fields are easily adjustable. This means that at light loads the controller can reduce voltage such that magnetic losses are reduced, and efficiency is maximized. Thus, Aura’s induction machine when operated with an Aura smart controller has an advantage over a PM machine – magnetic and conduction losses can be traded such that efficiency is optimized. This advantage. becomes increasingly important as performance is increased. After a lengthy development period, the Company first began commercializing the AuraGen ® in late 1999 and early 2000. In 2001, the first commercial AuraGen ® product was a 4-pole machine which, when combined with our proprietary and patented electronic control unit (“ECU”), generated 5 kW of exportable 120/240 VAC power. We subsequently added a 6-pole configuration and introduced our patented bi-directional power supply that provided for 8.5 kW watts of exportable power with the capability of providing both alternating (“AC”) and direct (“DC”) power simultaneously. In Fiscal 2008, the Company introduced an AuraGen ® system that generated up to 17 kW of continuous power by combining two 8.5 kW systems on a single shaft. Starting in July 2019, we began to redesign and upgrade the ECU and develop new axial flux generator configurations. As a result of such efforts, our redesigned ECU allows us to replace the old 5 kW solution with a 6.5 kW solution using the same 4-pole generator as well as to upgrade the output of the 6-pole machine from 8.5 kW to 15 kW. Our recent efforts have also resulted in the development of a 15-kW solution specifically designed to address cell tower needs of 240 VAC and simultaneously 48 VDC as well as new 4 kW and 10 kW solutions. The new 4 kW as a motor is approximately 6.5 inches in diameter and approximately 5 inches deep and has efficiency above 90%. The new 10 kW design as a mobile generator is approximately 8 inches in diameter, and 5 inches in axial length and efficiency higher than 92%. To date, the Company has sold approximately 11,000 AuraGen ® solutions for numerous applications. During the first half of Fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second half of Fiscal 2016, the Company’s operations were further disrupted when the Company was forced to move from its facilities in Redondo Beach, California to a smaller shared facility in Stanton, California. During Fiscal 2017, the Company curtailed much of its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. During Fiscal 2018, the Company successfully restructured in excess of $30 million of debt and held its first stockholder meeting since 2011. During Fiscal 2019, the Company continued to focus on seeking new sources of financing and utilized a contract manufacturer for very limited manufacturing. During fiscal 2019 the Company sold 11 systems. 2 In March 2019, stockholders of the Company represented a majority of the outstanding shares of the Company’s common stock delivered signed written consents to the Company removing Ronald Buschur, William Anderson and Si Ryong Yu as members of the Company’s Board and electing Ms. Cipora Lavut, Mr. David Mann, and Dr. Robert Lempert as directors of the Company in their stead. Because of Aura’s refusal to recognize the legal effectiveness of the consents, in April 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. See Item 3, Legal Proceedings for more information. Following this ruling by the Court of Chancery, the newly confirmed Board of Directors terminated the employment of Melvin Gagerman, who had served as CEO and CFO of the Company since 2006, and installed Ms. Lavut as President, Mr. Mann as Chief Financial Officer and Dr. Lempert as Secretary of the Company. In February 2022, Mr. Steven Willett was appointed CFO. Upon assuming control in the second half of Fiscal 2020, the Company’s new management team began significantly increasing its engineering, manufacturing and marketing activities as well as rebuilding relationships with its vendors and suppliers. Through these efforts, since July 8, 2019, the Company has shipped more than one-hundred and forty units (a greater than ten-fold increase over Fiscal 2019) and recorded approximately $1.0 million in revenue. During Fiscal 2022 and Fiscal 2021, the Company’s revenues and operations were adversely affected by the COVID-19 pandemic which resulted in a decline in revenues and shipments to customers. Impact of the COVID-19 Pandemic 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 entirety of Fiscal 2021 were significantly reduced, thus impacting our results of operations during these fiscal periods. 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: ● Careful monitoring of operating expenses including wages and salaries; ● Enhanced cleaning and disinfection procedures at our facilities, 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. As of the filing of this Annual Report on Form 10-K on June 15, 2022, 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 effectiveness of vaccination programs 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 due, for example, to variant strains of the COVID-19 having an adverse impact, 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 current year, Fiscal 2023, and that impact could be material. 3 Business Arrangements 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. Also, during Fiscal 2018, the Company signed a joint venture agreement with a Chinese company to build, service and distribute AuraGen ® products in China. Under the Jiangsu Shengfeng joint venture agreement, the Chinese partner owns 51% of the joint venture and the Company owns 49%. The Chinese partner contributed a total of approximately $9.75 million to the venture principally in the form of facilities, equipment, and approximately $500,000 of working capital while the Company contributed $250,000 in cash as well as a limited license. The limited license sold to the joint venture, however, does not permit the venture to manufacture the AuraGen ® rotor; rather, the joint venture is required to purchase all rotor subassemblies as well as certain software elements directly from the Company. During Fiscal 2018, Jiangsu Shengfeng placed a $1,000,000 order with the Company including a $700,000 advance payment of which the Company has failed to deliver product in accordance with the order received. On November 20, 2019, the Company reached a preliminary agreement with Jiangsu Shengfeng regarding the return of $700,000 previously advanced to the Company. The preliminary agreement reached consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 is to be paid over a 11-month period beginning March 15, 2020, through February 15, 2021. The preliminary agreement was subject to the JV continuous operation. However, starting in January 2020 the JV was shut down by the Chinese authority due to the COVID-19 virus, and as of the date of this filing, the JV operation has not restarted. In February 29, 2020, the unpaid balance of $700,000 was reported as part of notes payables – related party in the accompanying financial statements. During Fiscal 2020, the Company recorded an impairment expense of $250,000 to fully write-off the Jiangsu Shengfeng investment due to the uncertainty of the operation. 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 February 2022, Mr. Steven Willett was appointed CFO. During 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 (a more than a ten-fold increase over Fiscal 2019). Recent Developments. Beginning in Fiscal 2020, a novel strain of coronavirus commonly referred to as COVID-19 emerged and spread rapidly across the globe, including throughout all major geographies in which we operate (North America, Europe, and Asia), resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. Governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such factors, among others, have resulted in a significant decline in spending and resource availability. Additionally, during this period of uncertainty, companies across a wide array of industries have implemented various initiatives to reduce operating expenses and preserve cash balances, including work furloughs, reduced pay, and severance actions, which could lower consumers’ disposable income levels or willingness to purchase discretionary items. As a result of the COVID-19 pandemic, we have experienced varying degrees of business disruptions and periods of closure of our corporate facilities as have our customers, suppliers, and vendors, resulting in significant adverse impacts to our operating results. Resurgences in certain parts of the world resulted in further business disruptions periodically throughout Fiscal 2022 and Fiscal 2021. Such disruptions have continued into the first quarter of Fiscal 2023, impacting our business. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. Accordingly, we cannot predict for how long and to what extent the pandemic will impact our business operations or the global economy as a whole. 4 The AuraGen ® /VIPER Product Overview: Markets Served by the AuraGen ® /VIPER Induction Motor Applications Aura’s axial flux induction machine can be used as either an electric motor or generator as described above. Due to the inherit advantages of Aura’s axial flux induction machine, such as (i) no rare earth or any other kind of permanent magnets, (ii) significantly less copper (60% less) than equivalent traditional induction motors (iii) higher energy density and (iv) fewer overall materials, we believe Aura’s axial flux induction motor can be used across a wide range of industries and applications. Because even a small percent increase in motor efficiency translates to a market-wide savings of tens of billions of dollars per year and because Aura’s axial flux motor design is more efficient than equivalent radial flux induction motors, we believe that with the proper financial resources, over time, we can capture a reasonable share of the global electric motor market. Electric motor are the main users of electricity, accounting for approximately 53% of the global demand for electricity. Over 65% of the energy used to support electric motors is used for industrial motor systems. 1 The industrial electric motor market is expected to grow from an estimated USD 113.3 billion in 2020 to USD 169.1 billion by 2026, at a CAGR of 6.9% during the forecast period 2 . The increase in global electricity consumption, and the use of electrical equipment and machines in different industries and the renewables sector are major factors driving growth in the electric motor market during the forecast period Electric motors are employed in infrastructure, major structures, and industries all around the world. Each year, approximal 30 million motors are sold for industrial use alone 3 . Electric motors find application in a variety of equipment throughout industry. Common industrial applications include: (i) compressors, (ii) fans and blowers, (iii) heavy duty equipment, (iv) HVAC systems, (v) pumps and (vi) machine tools (laths and mills etc.) Electric motors and generators are one of the most important tools in modern day life. Numerous studies show a high potential for energy efficiency improvement in motor systems. Specifically, system optimization approaches which address the entire motor system demonstrate high potential for energy savings. For most countries the saving potentials for energy efficiency improvements in motor systems with best available technology lie between 9 and 13 percent of the national industrial electricity demand 4 . Aura’s machines use approximately 60% less copper, are approximately 1/3 the size and weight and are more efficient than the equivalent traditional radial flux (“RF”) induction machine. When compared to radial and axial flux permanent magnet machines, Aura machines are less expensive to manufacture, do not use any rare earths, do not use any permanent magnets, are not dependent on supply from China, are more robust, have a higher operating speed range, have lower maintenance, have a longer lifetime, and are generally smaller, lighter and higher in efficiency. EV applications The universal global trend for electrification has created in addition to the industrial demand for motors also a very large demand for motors used in electric transportation for vehicles, planes, and boats (“EV”). In such applications, one or more electric motors are used for propulsion. The power to drive the electric motors is generally a battery system or fuel cell. Both batteries and fuel cells convert some form of fuel to electricity through some chemical process. EVs include, but are not limited to, road and off-road vehicles, surface and underwater vessels, electric aircraft, and electric spacecraft. 1 Identification of Technoeconomic Opportunities with the Use of Premium Efficiency Motors as Alternative for Developing Countries -Julio R. Gómez etc. Published: October 16, 2020 2 Markets & Markets Electric Motor Market Published Date: Nov 2020 | Report Code: EP 3882 3 Precedence Research October 6, 2021 4 Energy efficiency in electric motor systems- UN industrial Development Organization Venna 2012 5 It is rather interesting to note that, while electric motors have been around for more than 200 years, technical information on electric motors in EVs is very scarce and generally only found in niche technology sites. Most EV literature only notes the motor’s relative quietness, its torque response, its simplicity, and long-term low maintenance requirements. Most of the space dedicated to the powertrain (motor, motor- controller and some cases a gear box) is focuses, instead, on the battery—its size and weight, where it sits, the range, how long it takes to fully charge, etc. Yet, the only function of the battery system is to support the electric motors and its controller. In addition to the batteries, the electric motor and supporting power electronics are critical components of EV drivetrain. It is expected that over 100 million electric motors will be required per year by 2032 to meet the demand for the growing EV market 5 (where would all the rare earths come from to support 100 million motors per year?). The global Electric Vehicle Market size is projected to grow from 4 million units in 2021 to 34.76 million units by 2030 6 . The AC motor (most power by alternating current) is expected to witness the fastest growth in the electric motor market during the forecast period. The global electric powertrain market (electric motor, plus motor controller plus a gear box) size is projected to surpass around US$ 200 billion by 2027 and growing at a CAGR 13.8%. The motor/generator component expected to show lucrative growth over the analysis period attributed to the escalated penetration of plug-in hybrid battery electric vehicle (“PHEV”) and battery electric vehicle (“BEV”) across the globe 7 There are several key performance metrics for electric motors. Power and torque density enables improved driving dynamics in a smaller and lighter package, with weight and space being at a premium in EVs. Another critical area is efficiency. Improving efficiency means that less energy stored in the battery is wasted when accelerating the vehicle, resulting in improved range from the same battery capacity. Smaller motor system weight will also contribute to increase in range since less weight needs to be moved. Most electric motors currently used for electric mobility employ high energy permanent magnets 8 . The magnetic material is usually sintered neodymium–iron–boron (NdFeB) made or processed in China. Neodymium is one of the rare earth elements. China has around a third of all rare earth reserves and around 90% of global production 9 . In 1987 the Chinese President Deng Xiaoping famously said, “ the middle East has Oil; China has rare earths ”. An Oxford Analytics Expert briefing on July 30, 2020, states that “(i) Permanent Magnets will account for 3⁄4 of rare earth demand by 2030 up from 1⁄4 in 2020 and (ii)Electric vehicles and off shore wind will drive demand and be most vulnerable to supply shocks” . 5 Emerging Electric Motor Technologies for the EV Market Sep 28, 2021 Luke Gear 6 Market & market Electric Vehicle Market May 2021 Report code AT4907 7 Precedence research June 9, 2021 8 Will rare earth be eliminated in EV motor-Dr. James Edmondson Nov 2-2020 9 Vikendi December 29, 2021 6 Permanent magnet (“PM”) machines can be extremely light in weight and highly efficient. In PM machines the magnetic field B is fixed by the magnets and the only way to change this is with a bucking field. These bucking currents result in increase in temperature that could affect the magnetization of the permanent magnets. In PM machines the operating temperature must be kept at below 100 o C because at that temperature the magnets start to lose some of their magnetization and at 180 o C they become completely demagnetized. However, in EV applications at low speed, one needs to use a lot of current (generating high heat) to get the required torque; similarly, at high speeds one needs a lot of current for the bucking fields to reduce the B field. Thus, PM machines for mobility require a very complex cooling system. All the components in the machine are designed for maximum specifications but operationally the machine is limited by temperature requirements of the magnets. The cost of such machines is high due to (i) The permanent magnets ($50-$70 per kg), (ii) the complex cooling system and (iii) complex controller. In addition to the cost issues, the permanent magnets are subject to the economic and political control of China. There is always the possible situation that China economically weaponizes rare earth and stops sending the refined product to the U.S so they cannot be used in weapon systems or commercial applications such as electric vehicles 10 . In the past during political disputes China threatened to cease export of rare earths 11 . Unlike the PM machines, Aura’s axial flux induction machines do not use any permanent magnets and therefore the controller can change the B fields since B is proportionate to the voltage divided by the frequency (V/f). Thus, the Aura machine, when operated with a smart inverter, has an advantage over a PM machine. The Aura machine has a smaller volume, equal or better efficiency, more reliable and a large cost advantage. This advantage becomes increasingly important as performance is increased . Mobile and Remote Power Applications The global generator sales market was $20.3 billion in 2019 and is estimated to reach $27.16 billion by 2027 (Fortune Business Insight). Most industries dealing with construction and infrastructure rely on mobile generators to support modern computers, digital sensors and instruments as well as electrical driven tools. Current automotive alternators cannot supply the existing demanded power for many such applications and thus the common solution is the use of stand-alone gensets (often referred to a “Auxiliary Power Units” or simply “APUs”). These APUs, however, (i) consume large amounts of fuel, (ii) are heavy and bulky and accordingly must often be towed on trailers, and (iii) require constant maintenance. Additionally, traditional APUs are generally not considered to be environmentally friendly power solutions based on their high fuel consumption, loud operating noise levels, and the emissions they secrete into the air. In comparison, the AuraGen ® system is small and light enough to generally be integrated directly into existing vehicles, does not require significant maintenance, nor do they require any set-up or tear-down time. In addition, there are no heavy lifting required and to contact with hot surfaces. The AuraGen ® operation when integrated in a vehicle or a boat is completely seamless and transparent to the user . Likewise, for law enforcement, emergency responders and militaries alike, mobile power is generally a necessity. Indeed, one of the fastest growing segments for mobile power is the military marketplace for On-Board-Exportable-Power (OBEP), which is electric power on vehicles that can be used to support non-vehicle functions such as weapon systems and C 4 I functions (command, control, communication, computers and information). Currently, most on-board power is provided by APUs. Given the drawbacks of APUs, however, militaries, law enforcement and first responders all over the world are seeking more efficient integrated power solutions for their vehicles. In addition, numerous leisure users are increasingly demanding mobile power for use of air-conditioning, appliances and other amenities. 10 China Maintains Dominance in Rare Earth Production-National defense 9/8/21 by Stew Magnuson 11 Supercomputers Predict rare earth Market Vulnerability-National defense 9/9/21 by Stew Magnuson 7 Beside stand-alone gensets (often referred to “auxiliary power units” or simply “APU” s), all automotive users rely on integrated alternators in their vehicles for such things as navigation systems, electric seating, electric windows, sound/ phone systems and lights. In 2019 alone, 87.9 million passenger vehicles were sold globally 12 (each one used an alternator. The market for automotive alternators is presently dominated mainly by four companies: Denso, Valeo, Mitsubishi Electric, and Hitachi Automotive. These companies jointly control nearly 80% of the global market. The compact size and significant increase in efficiency of the AuraGen ® provides an ideal replacement (fit and form) for high output automotive alternators while offering higher efficiency, longer lifetime and the flexibility of multi types of voltage both AC and DC. Recently, the Company completed the design for a 10-kW alternator with diameter of less than 8 inches and axial length of less than 6 inches. The new 10 kW alternator will provide the full 10 kW power at alternator speeds of 2,500-13,000 rpm with efficiency higher than 92%. The AuraGen ® solution increase in efficiency over traditional generators, when combined with our load following architecture and the ability to provide both AC and -48VDC simultaneously makes our solution very attractive to cell towers operators that depend on diesel power. Our solution has the potential for a significant reduction in diesel fuel consumption for such an application. Competition The Company is involved in the application of its AuraGen ® technology to electric motors and mobile power. Therefore, it faces substantial competition from companies offering different technologies . Electric Motors There are four (4) basic approaches for electrical machines: (i) the rotor can be electrically excited such that it creates a magnetic field with constant orientation (as in synchronous machines) and usually uses brushes and or commutators; (ii) the shape of the rotor can induce reluctance variations in the stator (as in switched reluctance machines); (iii) the rotor can be permanently magnetized with permanent magnets (“PM “) as in brushless DC machines; and (iv) the rotor field can be induced from the stator due to the rotor’s structure as in induction machines. Our axial flux technology is an induction machine. Brushed machines are machines in which the rotor coil is supplied with current through brushes. Unlike commutators, brushes only transfer electric current to a moving rotor; commutators also provide switching of the current direction. Large, brushed machines which are run with DC to the stator windings at synchronous speed are the most common generator in power plants because they also supply reactive power to the grid. They can be started by the turbine and can generate power at constant speed without a controller. This type of machine is often referred to in the literature as a “synchronous machine”. Reluctance machines have no windings in the rotor, only a ferromagnetic material shaped so that “electromagnets” in the stator can “grab” the teeth in the rotor resulting in a slight movement. The electromagnets are then turned off, while another set of electromagnets is turned on to move the stator further. Reluctance machines are also sometimes referred to as “step motors” as a result of the step-like movement. These machines are suited for low speed and accurate position control. Reluctance machines can be supplied with PMs in the stator to improve performance. The “electromagnet” is then “turned off” by sending a negative current to the coil. When the current is positive the magnet and the current cooperate to create a stronger magnetic field, which will improve the reluctance machine’s maximum torque without increasing the currents maximum absolute value. PM machines have permanent magnets in the rotor which set up a magnetic field. The magnetic field is created by modern PMs (Neodymium Iron Boron magnets “NeFeB”), which means that PM machines have a higher torque/volume and torque/weight ratio than machines with rotor coils under continuous operation. In general, it is usually possible to overload electric machines for a short time until the current in the coils heats parts of the machine to a temperature which cause damage. However, PM machines are very sensitive to such overloads because too high of a current in the coils can create a magnetic field strong enough to demagnetize the magnets. The majority (85%) NeFeB magnets are produced in China. Magnax and many other are examples of Companies using such an approach. 12 Motor Intelligence. Automotive alternator market growth trends forecast 2021-2026) 8 AC induction machine (no PM) is the most common electrical machine in use today. A changing magnetic field in the stator induces a current in the rotor. The current in the rotor produces its own magnetic field, which then interacts with the magnetic field of the stator, causing the rotor to turn. The name induction comes from the fact that current is induced in the rotor by the changing magnetic field of the stator. Radial flux induction machines have been the workhorse of industry due to their robustness, attractive cost, and easy of control; however, they are relatively, heavy and bulky. On the other hand, Aura’s axial flux (“AF”) induction machines, have all of the advantages of the radial flux machines but with the advantage of higher energy density and higher efficiency resulting in a smaller and lighter machine with equivalent or better performance. Unlike the PM machines, induction machines do not use any permanent magnets and therefore the controller can change the B fields since B is proportionate to the voltage divided by the frequency (V/f). Although our axial flux induction technology provides significant advantages in both cost (significant less copper, steel and aluminum), size/weight and performance, most of our competitors have far greater financial, technical, and marketing resources than we have. They have larger budgets for research, new product development and marketing, and have long-standing customer relationships. Key players in the market are (i) Nidec Motor Corporation, (ii) ABB Ltd., (iii) Siemens AG, (iv) WEG Electric Corp, (v) Regal Beloit Corporation, (vi) Wolong, and (vii)Teco Westinghouse. Generators There are five basic approaches used in mobile generators Gensets AKA APU . Portable generators meet the large market need for auxiliary power. Millions of units per year are sold in North America alone, and millions more are sold across the world to meet market demands for 1 to 20 Kilowatts of portable power. The market for these power levels addresses the commercial, leisure and residential markets, and is essentially divided into: (a) higher power, higher quality and higher price commercial level units; and (b) lower power, lower quality and lower price level units. Gensets provide the strongest competition across the widest marketplace for auxiliary power. Onan, Honda, Generac and Kohler, among others, are well established and respected brand names in the genset market for higher reliability auxiliary power generation. There are over 40 registered genset-manufacturing companies in the United States. Some of the key suppliers are Caterpillar (US), Cummins (US), Rolls-Royce Holdings (UK), Atlas Copco (Sweden), Mitsubishi Heavy Industries, Ltd. (Japan), Yanmar (Japan), Generac (US), ABB (Switzerland), Siemens Energy (Germany), Weichai Group (China), Kohler Co. (US), Kirloskar Oil Engines Ltd. (India), Denyo (Japan), and Sterling & Wilson (India), High Output Alternators . There are many High Output Alternator manufacturers. Some of the better-known ones are Delco-Remy, Bosh, Nippon Densu, Hitachi, Mitsubishi and Prestolite. All alternators provide their rated power at very high RPM and significantly less power at lower RPM. In addition, alternators are generally only 30% efficient at the low RPM range and increase to 50% efficiency at the high RPM range. Inverters. There are many inverter manufacturers across the globe; the best known one is Xentrex. The pricing of industrial grade sine wave inverters is approximately $400 per kilowatt plus the cost of a high output alternator (estimated at $1,000) and a good throttle controller (estimated in the range of $250-500). Permanent-Magnet Alternators. A number of companies have introduced alternators using exotic rare earth Neodymium (NdFeB) magnets. These alternators tend to have higher power generation capabilities than regular alternators at lower RPM. Unfortunately, PM machines with NdFeB magnets are very sensitive to temperature and, unlike the AuraGen ® , cannot survive the typical under-the-hood environment (200 o F+). In order to apply such devices for automotive applications one must add an active cooling system to keep the magnets from demagnetizing at approximately 200 o F. In addition, most of the rare earth magnets (NeFeB) are manufactured in China and are subject to potential political and economic pressure. 9 In addition to the temperature challenges of such machines, there are other issues involving active control of the magnetic field. The main disadvantage of PM generators is the difficulty of output voltage regulation to compensate for speed and load variation due to the lack of a simple means of field control. Fuel Cells . Fuel cells are solid-state, devices that produce electricity by combining a fuel containing hydrogen with oxygen. They have a wide range of applications and can be used in place of the internal combustion engine and traditional lead-acid and lithium-ion batteries. These systems are generally more expensive. The most widely deployed fuel cells are estimated to cost significantly more per kilowatt than alternative solutions. Others Evans Electric in Australia has introduced an axial flux machine with a complete conductive rotor. Such a machine was first introduced by Brinner more than 20 years ago and was abandoned because the rotor lacked the required rigidity to withstand the magnetic and centrifugal forces. The Brinner machine is cited in Aura’s issued patents. Numerous companies are introducing axial flux machines; however, they generally use rare earth NeFeB magnets (made in China) and are thus not induction machines but rather permanent magnet machines. Some of the better-known companies are YASA, EVO, Magnax and Phi Power. Most of our competitors have far greater financial, technical, and marketing resources than we have. They have larger budgets for research, new product development and marketing, and have long-standing customer relationships. We also compete with many larger and more established companies in the hiring and retention of qualified personnel. Our financial condition has limited our ability to market the AuraGen ® . The AuraGen ® uses a different technology and because our product is radically different from traditionally available mobile power solutions, users may require lengthy evaluation periods to gain confidence in the product. OEMs and large fleet users also typically require considerable time to make changes to their planning and production. Competitive Advantages of the AuraGen ® Axial Flux Induction technology As a motor -Aura’s Axial Flux (“AF”) induction motor/generator is increasingly attracting attention from high impact potential users seeking advantages over conventional motors, particularly for Electric Vehicle applications. These advantages include (i) compact construction, (ii) better power to weight ratio, (iii) shorter axial length, (iv) better efficiency, (v) better torque to volume and weight ratio, (vi) very high utilization of active materials (less than 60% of the copper) and (vii) excellent ventilation and cooling. Induction machines (i) do not use any rare earth elements and have no permanent magnets. Due to their flat shape, lower weight and compact construction, Aura’s axial flux motors are ideal for pumps, fans, food processors, HVHC, etc. An axial flux machine is also preferred in applications where the rotor can be integrated with the rotating part of mechanical loads. The AuraGen ® motor’s operational range is between -40 and 340-degrees F; therefore, it is suitable to operate in a harsh environment. As an alternator. Aura’s induction machine provides significant advantages in power generation, particularly in mobile applications. Its smaller volume and higher efficiency, when combined with the geometric shape means it can be integrated with existing vehicles and boats. Such integrated solutions do not require set up time. There are no heavy weights to lift (gensets), usable cargo space is optimized and there is no need for separate fuel/containers. Remarkably, there is no scheduled maintenance required. The AuraGen ® alternator’s operational range is between -40- and 340-degrees F; therefore, it is suitable for operating under the hood of a vehicle where the ambient temperature can easily be above 200 degrees F. 10 Earth-Forward, Green Technology . The AuraGen ® system is significantly more environmentally friendly than traditional motors and generator. Because of its extreme efficiency and smaller size, the AuraGen ® system utilizes fewer resources and materials to manufacture (in particular less than 60% of the copper). When used in power generation, the AuraGen ® uses a vehicle’s primary automotive engine, which is already highly regulated for environmental protection. Traditional mobile power solutions, in comparison, use small, less efficient, auxiliary engines that produce significantly higher levels of emissions per unit of power output than the automobile engine. Durability; No Scheduled Maintenance . The AuraGen ® motor/generator solution does not require any scheduled maintenance. The historical failure rate for Aura’s machines over a 20-year period is less than 0.5%. The bearings are rated for 28,000 hours. Aura’s axial flux induction (no PM) can be summarized as ● Disruptive since it addresses the entire field of electrical motors and generators by providing a solution that is smaller, lighter, more efficient, cost less to manufacture and does not use any permanent magnets . ● Aura has demonstrated mass production of this technology with more than 11,000 machines. ● The market opportunity for industrial applications of Aura’s motors/generators is more than $100 billion per year. ● The EV powertrain business opportunity for the Aura’s is a significant percentage of the $200+ billion per year projected business. ● The economic value proposition is well defined in terms of cost, performance and size. ● The Aura solution provides significant global reduction in the use of raw materials such as copper, steel, and aluminum. ● The higher efficiency of Aura’s motor, when used in a manufacturing environment, can lead to a noticeable reduction in the global consumption of energy . ● When used for mobile power generation, Aura’s technology leads to a significant reduction in global pollution by being able to reduce and, in many situations, eliminate completely small diesel and gasoline engines used in power generation. ● When used for electric vehicles, the smaller size, weight, and increased efficiency could lead to an increase in range and/or reduced battery weight . ● When used in remote stand-alone diesel power generation such as cell towers, Aura’s increased efficiency, lower rotor inertia, voltages flexibility and load-following architecture results in a significant reduction in fuel usage (and, of course, reduced pollution). ● Aura’s significantly (65% less) lower rotor inertia and variable speed capabilities make Aura’s solution ideal for small hydro applications that are currently being ignored because of construction cost, low head, and slow flow situations. Targeted Market The Company is re-examining and identifying new key markets to focus on as the Company expands operations. The global drive for electrification is in search of better more effective electric motors. The recent realization by many potential users of such motors that permanent magnet motors are depending on NeFeB rare earth magnets from China has created a need for alternative to the PM motors. Our axial flux induction machine is a solution that does not use any magnets and has the required performance characteristic as well as fit and form for numerous applications. Electric motors Electric motors for industrial applications . We have completed the design of 4 kW and 10 kW machines. The designs show significantly increased efficiency as compared to equivalent other designs, and in addition they are a fraction of the size and weight, use approximately 50-60% less copper and cost less to manufacture. 11 Electric motors for electric delivery trucks . We are exploring the use of our axial flux induction machine to be integrated into electric delivery trucks. This application would require approximately 150-kW machine that will use 600-800VDC battery system. We started the design activities for this application and expect to complete the design over the next few months. Electric motors for high end electric cars. We are exploring the use of our axial flux induction machine to be integrated into high end electric cars. This application would require approximately 250-300-kW machine that will use 800VDC battery system and will operate at 20,000 RPM. Electric motors for flywheels. Our axial flux machine lends itself to multi stacking of rotors and stators on a single shaft to create motors in the 750kW range with a diameter of approximately 13-14 inches. Due to the solid rotor disk of our axial flux machine one can operate such machines safely in the 20,000 RPM range. Drive motors for electric boats - We started to explore the possibility of using our axial flux induction machine as a drive motor for small to medium electric boats. Mobile power generation Military market . One focused market for the Company’s VIPER solution is military applications. The global military land vehicles market is expected to grow by 29% through 2022, increasing to $30.33 billion by 2022 13 . While traditional markets for military vehicles such as the U.S. are choosing to upgrade and maintain existing fleets rather than replace aging vehicles, other regions are looking to purchase new units, which also provides maintenance and upgrade opportunities. The active number of military vehicles was estimated at over 408,000 in 2012 and is expected to increase to slightly over 418,000 by 2021. New vehicle procurement is expected to decline in western defense and increase in emerging markets of APAC and the Middle East. Automotive alternators . In 2019, 87.9 million units of passenger cars were sold globally, 14 each one used an alternator. The market for automotive alternators is dominated mainly by four companies: Denso, Valeo, Mitsubishi Electric, and Hitachi Automotive. These companies jointly control nearly 80% of the global market. The compact size and significant increase in efficiency of the AuraGen ® provides an ideal replacement (fit and form) for high output automotive alternators. Diesel based cell towers . According to Statista (Technology and telecommunication Thomas Alsop sept 22, 2020), in 2019, there were 395,562 mobile wireless cell sites in the United States, with a large amount of investment going toward 5G-ready cell sites and antennas as per the source. Phil Marshall, chief research officer at Tolaga Research, estimates the global number of base stations at 6.5 million sites, while Chinese equipment vendor Huawei puts the number at 7 million. Many of the cell sites are powered by diesel generators. The AuraGen ® solution increase in efficiency over traditional generators, when combined with our load following architecture and the ability to provide both AC and -48VDC simultaneously makes our solution very attractive to cell towers operators that depend on diesel power. Our solution has the potential for significant diesel fuel savings in such an application. Transport Refrigeration (“TRU”) . The main competitors for the all-electric TRU are traditional diesel-based solutions provided by Thermo-king and Carrier. The diesel based comparable systems provided by Thermo-king and Carrier are somewhat less expensive than our AuraGen ® all-electric solution, however the diesel solutions require frequent maintenance and the utilization of a separate diesel engine that consumes additional fuel every operating hour. In addition, the diesel solution emits harmful emissions that have been recognized by the U.S. Environmental Protection Agency, California’s Air Resource Board and others as dangerous pollutants and are increasingly subject to federal and state regulations. 13 John Keller July 10, 2014 Military and Aerospace Electronics 14 Motor Intelligence. Automotive alternator market growth trends forecast 2021-2026) 12 Facilities, Manufacturing Process and Suppliers During Fiscal 2021, our facilities consisted primarily of approximately 20,000 square feet in Stanton, California that we shared with ECS Corporation and an additional storage facility in Santa Clarita, California. The Stanton facility was under a month-to-month rental agreement for $10,000 per month. The monthly rent for the Santa Clarita storage facility was also under a month-to-month rental agreement for $5,000 per month and was terminated effective July 31, 2020. Following exit from the Santa Clarita facility in July 2020 through February 28, 2021, we rented temporary storage space for approximately $2,500 per month. In early Fiscal 2022 we consolidated all administrative offices and operations in a new modern stand-alone facility consisting of approximately 18,000 square feet in Lake Forest, California. This Lake Forest facility is subject to a lease agreement with a 66-month lease period effective from February 2021, through August 31, 2026. The monthly base lease rate for the Lake Forest Facility is currently $22,848 per month with a 3% annual escalation. As the Company continues to expand operations, we will need to renew relationships and contracts with our suppliers or locate suitable new suppliers for subassemblies and other components. Research and Development We believe that ongoing research and development is important to the success of our product in order to utilize the most recent technology, develop additional products and additional uses for existing products, stay current with changes in vehicle manufacture and design and to maintain an advantage over potential competition. Our engineering, research and development costs for Fiscal 2022 was approximately $0.6 million compared to approximately $0.2 million in Fiscal 2021. In Fiscal 2019 we began redesign work on our Electronic Control Unit (“ECU”) to include state-of-the-art power electronics and processors. Work on this redesign was temporarily suspended in mid-2019 when the Company’s then-management team reallocated significant resources to unsuccessfully oppose shareholders controlling a majority of the outstanding shares of the Company’s common stock who sought 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. With the new management team installed, starting in July 2019 work on the ECU redesign resumed and, in September 2019, we successfully tested and implemented this newly designed ECU. As a result of such efforts, our redesigned ECU allows us to replace the old 5 kW solution with a 6.5 kW solution using the same 4-pole generator as well as to upgrade the output of the 6-pole machine from 8.5 kW to 15 kW. Our recent efforts have also resulted in the development of a 15 kW solution specifically designed to address cell tower needs of 240 VAC and simultaneously 48 VDC as well as a new 4 kW solution that is 7.5 inches in diameter and 5 inches deep that is being configured both as a motor and automotive alternator. In Fiscal 2022 we delivered the initial units of our new ECU solution. Patents and Intellectual Property Our intellectual property portfolio consists of trademarks, proprietary know-how, trade secrets, and patents. Historically the Company obtained over 70 patents in electromagnetic and electrooptical technologies. In the area of electromagnetic technology, we have developed numerous magnetic systems and designs that result in a significant increase of magnetic field density per unit volume that can be converted into useful power energy or work. This increase in field density is a factor of three to four, which, when incorporated into mechanical devices, could result in a significant reduction in size and cost of production for the same performance. The applications of these technological advances are in machines used every day by industrial, commercial, and consumers. We have applied technology to numerous applications in industrial machines, such as generators, motors, actuators, and linear motors. We hold the following patents: Nos. 6,700,214; 6,700,802; 8,955,624; with expiration dates in 2024, 2024 and 2033, respectively. 13 At the end of Fiscal 2013 and the first quarter of Fiscal 2014, we filed five new patent applications related to the AuraGen ® . These new patent applications are specifically designed to cover the (i) integration of the AuraGen ® power solution with transport refrigeration, (ii) the interface kit of the AuraGen ® with prime movers, (iii) a water cooled AuraGen ® solution for situations where ventilation is not available, (iv) a unique cable system with safety protection to transfer high power between two moving objects, and (v) a unique clamping of power electronic components to heat sink to ensure good thermal conductivity. The patent application for the integration of the AuraGen ® power solution with transport refrigeration was specifically geared for U.S. trucks manufactured prior to 2015. This application was abandoned, and we expect to reexamine the patent ideas over the next 12 months as applied to both U.S. and foreign trucks for more up-to-date required configurations. The patent application for interface kit of the AuraGen ® with prime mover patent was issued (8,955,624). A provisional Patent (502,246,733 ) was issued for the water cooled AuraGen ® solution in 2013. The patent application for a unique cable system with safety protection to transfer high power between two moving objects was abandoned by prior management during the 2015-2019 period. The patent application for a unique clamping of power electronic components to heat sink to ensure good thermal conductivity was abandoned since Aura’s power electronic solution has since been completely redesigned and the old design issues are no longer relevant. Government Regulation We are subject to laws and regulations that affect the Company’s activities, which include, but are not limited to, the areas of labor, intellectual property and ownership and infringement, tax, import and export requirements, environmental, and health and safety. As we recommence operations, our operations will again be subject to federal, state and local laws and regulations governing the occupational health and safety of our employees and wage regulations. For example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee health and safety. We expect to expend resources to maintain compliance with OSHA requirements and industry best practices. Employees As of the date of this filing, the Company has a total of ten (10) full-time employees in research and development, sales, operations and administration. Additionally, the Company engages independent contractors, on an as-needed basis, to support various areas of the business. During Fiscal 2022 and Fiscal 2021 we engaged three independent contractors, two to support engineering developments, and one for accounting support. Significant Customers In fiscal 2022, there were four customers that accounted for over 10% individually of the Company’s revenues, however no customer is considered significant. In fiscal 2021, one significant customer, CBOL, accounted for 83% of revenues. Backlog As of the date of the filing of this Annual Report on Form 10-K, the Company has no significant backlog of orders. Raw Materials The most important raw materials we use in manufacturing our products are steel, copper, and aluminum. Raw materials are purchased both domestically and outside the United States. We have no significant long-term supply contracts. When possible, we maintain a number of sources for our raw materials, which we believe contribute to our ability to obtain competitive pricing. The cost of some of our raw materials and shipping costs are dependent on petroleum cost. Higher material prices, cost of petroleum, and costs of sourced products could have an adverse effect on margins. 14 We enter into standard purchase agreements with certain foreign and domestic suppliers to source selected products. The terms of these arrangements are customary for the industry and do not contain any long-term contractual obligations on our behalf. Available Information We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC” or the “Commission”). These materials can be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. On our website, www.aurasystems.com, we provide free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after they have been electronically filed or furnished to the SEC. Information contained on our website is not part of this Annual Report on Form 10-K or our other filings with the SEC.