What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-18 compared with 2022-01-18 · 266 added, 292 removed, 91 unchanged (86% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

42 unchanged sentences

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.

Kopple claims that he and his affiliates are presently

owed approximately $11.5 million.

We dispute Mr.

Kopple’s claims.

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

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.

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.

marketing approaches are composed of direct sales in North America and the use of agents and distributors in other areas.

In North America,

our primary focus is in (a) mobile exportable power applications, (b) EV applications, (c) U.S.

Military applications and (d) industrial

applications.

The second component of our business model is focused on the design of new products and engineering support for the sales

activities described above.

The engineering support consists of the introduction of new features for our AuraGen ® /VIPER solution

such as higher power/torque solutions, and different input and output voltages (DC and AC input and output versions).

In Fiscal 2020 stockholders of the Company successfully

16 unchanged sentences

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.

Although our operations were impacted in Fiscal 2022 and Fiscal

2021 by the COVID-19 pandemic, during these periods we continued to expand our engineering and manufacturing capabilities.

Impact of the COVID-19 Pandemic” included in our Annual Report on Form 10-K for fiscal 2022 for information regarding

the impact of COVID-19 on our operations.

Our engineering, research and development costs for the three months ended May 31, 2022 and

the three months ended May 31, 2021 were approximately $155,000 and $81,000, respectively.

During the three months ended May 31, 2021,

we relocated all administrative offices and operations to a new state-of-the-art facility consisting of approximately 18,000 square feet

in Lake Forest, California.

This new facility is wholly occupied by Aura.

During Fiscal 2018 and Fiscal 2019, the Company’s

engineering, manufacturing, sales, and marketing activities were reduced while we focused on renegotiating numerous financial obligations.

During this time, the Company’s agreements with numerous customers, third party vendors, and organizations and entities material

to the operation of the Company business were canceled, delayed or terminated.

During Fiscal 2018, the Company successfully restructured

in excess of $30 million of debt.

Robert Kopple, our former Vice Chairman of the Board, was the only significant unsecured note holder

that did not executed formal agreements regarding the restructure of his debt.

Legal Proceedings” included in

our Annual Report on Form 10-K for Fiscal 2022 filed with the SEC on June 21, 2022 and Part II, Other Information Item 1, contained in

this Quarterly Report for information regarding the dispute and settlement with Mr.

Kopple regarding these transactions.

In March 2022,

the Company reached a settlement that resolves the various claims asserted against us by Mr.

Kopple and his affiliated entities (collectively

the “Kopple Parties”).

Under the terms of the settlement, we have agreed to pay an aggregate amount of $10 million over a

period of seven years;

$3 million of which is to be paid within approximately four months of the settlement date, after which, interest

will accrue on the unpaid balance at a rate of 6%, compounded annually.

All amounts, including all accrued interest, are to be paid no

later than eight years from the date of the initial payment.

The Kopple Parties have also received seven-year warrants to purchase up

to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share.

The settlement also provides for

standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases

in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains

in uncured default in its payment obligations under the settlement.

In Fiscal 2019, we effectuated a one-for-seven

reverse stock split and began increasing our engineering and manufacturing activities.

Critical Accounting Policies and Estimates

15 unchanged sentences

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.

commercial terms and conditions do not include a right of return for reasons other than a defect in performance or quality.

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

The Company recognizes revenue in accordance with

Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue

from Contracts with Customers.

In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at time of product

delivery to the domestic distributor (i.e.

point-in-time), which also corresponds to the passage of legal title to the customer and the

satisfaction of our performance obligations to the customer.

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

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.

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.

first-out) or net realizable value, on an average cost basis.

We review the components of inventory on a regular basis for excess or obsolete

inventory based on estimated future usage and sales.

When evidence exists that the net realizable value of inventory is lower than its

cost, the difference is recognized as a loss in the period in which it occurs.

Once inventory has been written down, it creates a new

cost basis for inventory that may not be subsequently written up.

The Company determines whether a contract is,

or contains, a lease at inception.

Right-of-use assets represent the Company’s right to use an underlying asset during the lease

term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Right-of-use assets

and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease

The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present

value of unpaid lease payments.

Share-Based Compensation

The Company periodically issues stock options

and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing

Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized

as expense over the requisite service period.

Recognition of compensation expense for non-employees is in the same period and manner as

if the Company had paid cash for services.

The Company periodically issues stock options and warrants, and shares of common stock to employees

and non-employees in non-capital raising transactions for services and for financing costs.

Share-based compensation cost is measured

at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.

of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services.

Derivative Financial Instruments

The Company evaluates its financial instruments

to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.

For derivative financial instruments

that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each

reporting date, with changes in the fair value reported in the statements of operations.

The classification of derivative instruments,

including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the

derivative instrument could be required within 12 months of the balance sheet date.

The Company uses Level 2 inputs for its valuation

methodology for the derivative liabilities as their fair values were determined by using a Binomial pricing model.

The Company’s

derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded

in the statement of operations.

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.

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.

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, Fiscal 2022 and the

first quarter of Fiscal 2023 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

of payroll costs through temporary furloughs;

cleaning and disinfection procedures at our facilities, temperature checks for our workers, promotion of social distancing at our facilities

and requirements for employees to work from home where possible;

of capital expenditures;

● Deferral of discretionary spending.

The extent of the impact of the COVID-19

pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread

of the COVID-19 outbreak within the U.S.

and globally, the impact on capital and financial markets and the related impact on our customers,

especially in the commercial vehicle markets.

These future developments are outside of our control, are highly uncertain, and cannot be

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 and Fiscal 2022, the first quarter of fiscal year 2023, and could be impactful for the balance

of Fiscal 2023.

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.

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.

During the three-month period ended May 31, 2022,

the Company reported a net loss of approximately $552,000 and used cash in operating activities of approximately $722,000, respectively.

These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that

the financial statements are issued.

In addition, the Company’s independent registered public accounting firm, in its report on

the Company’s February 28, 2022, financial statements, raised substantial doubt about the Company’s ability to continue as

a going concern.

The financial statements do not include any adjustments that might be necessary if the Company is unable to continue

as a going concern.

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

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 plan to source new suppliers for manufacturing 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.

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.

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.

Three months ended May 31, 2022 compared to

three months ended May 31, 2021

Net revenue was approximately $6,300 for the three-months

ended May 31, 2022 (“Fiscal Q1 2023”) compared to approximately $23,900 for the three-months ended May 31, 2021 (“Fiscal

During Fiscal Q1 2023, we delivered 1 generator unit as compared to 3 units delivered in the same quarter in the prior

Revenues continue to be negatively impacted by both the COVID-19 pandemic, as well as a generally low level of resources.

project with confidence the timing or amount of revenue that we can expect despite improvements in the pandemic being under more control

globally including a successful rollout of the vaccine programs.

To increase revenues which were impacted by the economic effects of the

pandemic, the Company needs to augment its marketing and sales efforts substantially.

As the Company’s focus has been on new product

engineering and development, the current limited resources prevent executing the increased selling efforts in the near term.

Cost of goods sold was approximately $13,400 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

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

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

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

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.

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.

Fiscal Q1 2023 compared to approximately $49,300 in Fiscal Q1 2022.

This resulted in a gross loss of approximately $7,100, or a gross

margin loss of 113%, and approximately $25,400 gross loss and a gross margin loss of 106%, in Fiscal Q1 2023 and Fiscal Q1 2022, respectively.

The gross loss and related gross margin loss for both the three-month periods were largely influenced by the low volume of shipments in

each quarter which reduced our ability to fully absorb fixed operating costs including higher operating costs related to the new facility.

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

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

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.

were approximately $167,000 in Fiscal Q1 2023, compared to approximately $81,000 in the Fiscal Q1 2022, or an increase of 107%.

Q1 2022 began to see higher level of costs than several of the prior years as the Company restarted its new product development program

beginning with the development of a new electronic control unit (“ECU”).

Fiscal Q1 2023 reflects the continuation of the increased

development program, including costs for engineering several new designs as well as increased testing.

Selling, general and administration (“SG&A”)

expense increased by approximately $113,400 or 15% to approximately $850,400 in the Fiscal Q1 2023 period from approximately $737,000

in the Fiscal Q1 2022 period.

The increase during Fiscal Q1 2023 was principally associated with (i) higher legal costs of $220,700 related

to the settlement of the Kopple litigation, (ii) additional salary expense of $76,500, including the addition of the Company’s Chief

Financial Officer and (iii) all other expense net increases of approximately $18,900, partially offset by a reduction of approximately

$163,200 in share-based compensation costs related to the vesting options granted in fiscal 2020 and a net reduction of approximately

$39,500 in selling expenses which included the write-off of deferred sales compensation costs determined not to be recoverable in Fiscal

Q1 2022 period.

Interest expense in Fiscal Q1 2023 decreased approximately

$188,300 or 70%, to approximately $81,800 from approximately $269,600 in the Fiscal Q1 2022 period due principally to the settlement of

the Kopple litigation which resulted in the conversion of the Kopple notes payable into a new note.

The new note does not begin to accrue

interest until July 2022.

Other income in the Fiscal Q1 2023 period was

approximately $553,400 which represents the favorable change in the fair value of the derivative warrant liability for the three-months,

measured as of May 31, 2022.

Comparatively, the revaluation of the derivative warrant liability in Fiscal Q1 2022, measured as of May

31, 2021, resulted in a favorable change in the fair value of approximately $82,800 for the three-month period.

Fiscal Q1 2022 also included

a gain on the extinguishment of derivative liability of $44,620 associated with warrants that expired during the three-month period.

addition, Fiscal Q1 2022 included an approximately $75,100 gain on extinguishment of debt in connection with the forgiveness of 100% of

the principal and accrued interest related to the initial PPP loan obtained by the Company in April 2020.

Net loss for the three-month period of Fiscal

Q1 2023 decreased by approximately $353,500, to a loss of approximately $552,200 from a restated net loss of approximately $905,700 in

the three-month period of Fiscal Q1 2022.

This was attributed to (i) additional net gain related to derivative liability valuation of

approximately $426,000 and (ii) less interest expense of approximately $188,300, which were partially offset by (i) increased operating

loss of $181,400 and (ii) a $75,100 gain on forgiveness of debt, and (iii) an approximately $4,300 gain on debt settlement.

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.

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”).

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.

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

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.

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.

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.

For the three-month period ended May 31, 2022,

we recorded a net loss of approximately $552,200 and used cash in operations of approximately $722,500 and at May 31, 2022, had a stockholders’

deficit of approximately $20.1 million.

These conditions raise substantial doubt regarding our ability to continue as a going concern

for a period of at least one year from the date of issuance of these financial statements.

In addition, the Company’s independent

registered public accounting firm, in their report on the Company’s February 28, 2022, audited financial statements, raised substantial

doubt about the Company’s ability to continue as a going concern.

The net loss of approximately $552,200 in Fiscal

Q1 2023 as compared to the Fiscal Q1 2022 restated net loss of approximately $905,700 was due to Fiscal Q1 2023 having a significantly

higher non-cash benefit from the change in fair value of the derivative warrant liability and substantially lower interest expense, partially

offset by an increased operating loss, as noted above.

A significant factor in both periods contributing to the negative operating cash

flows is the low level of operating activities caused principally by the COVID-19 pandemic.

As a result of the impacts of the COVID-19

pandemic, we may be required to raise additional capital and our access to and cost of financing will depend on, among other things, global

economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, and our future prospects.

At May 28, 2022, we had cash of approximately

$20,800, compared to cash of approximately $150,200 at February 28, 2022.

Subsequent to May 31, 2022, the Company issued 1,490,000 shares

of common stock in exchange for cash proceeds of approximately $446,900.

Working capital deficit at May 21, 2022 was a $12.4 million deficit

as compared to an $21.7 million deficit at February 28, 2022.

The primary reason for the decrease in the deficit was the reclassification

of approximately $8.1 million in notes payable-related party, including accrued interest, related to Kopple from current liabilities to

The reclassification resulted from the Company reaching an agreement with Mr.

Robert Kopple, a related party note holder, to

resolve all litigation between the parties related to notes payable and accrued interest carried at a value of $12.1 million as of February

At May 31, 2022 and February 28, 2022, we had no accounts receivable.

Prior to Fiscal 2020, in order to maintain liquidity,

we relied upon external sources of financing, principally equity financing and private indebtedness.

We have no bank line of credit and

will require additional debt or equity financing to fund ongoing operations.

Based on a cash flow analysis performed by management, we

estimate that we will need an additional $5 million to maintain existing operations for Fiscal 2023 and increase the volume of shipments

to customers.

We cannot assure the reader that additional financing will be available nor that the commercial targets will be met in the

amounts required to keep the business operating.

The issuance of additional shares of equity in connection with such financing could dilute

the interests of our existing stockholders, and such dilution could be substantial.

If we cannot raise the needed funds, we would also

be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our

current business plan and ultimately our viability as a company.

In March 2022, the Company reached a settlement

with the Kopple Parties that resolves all claims asserted against the Company without any admission, concession or finding of any fault,

liability or wrongdoing on the part of the Company.

Under the terms of the settlement, we have agreed to pay an aggregate amount of $10

million over a period of seven years;

$3 million of which was originally to be paid in June 2022, and subsequently extended to July 2022,

after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually.

All amounts, including all accrued interest,

are to be paid no later than eight years from the date of the initial payment.

The Kopple Parties have also received seven-year warrants

to purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share.

The settlement also

provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain

increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company

remains in uncured default in its payment obligations under the settlement.

As of the date of this report, the Company has not yet paid

the full $3,000,000 installment due to Kopple;

having only made a partial payment in June 2022.

We consider the transactions described above with Mr.

related party transactions.

Legal Proceedings” and

“Part IV, Item 15, Note 19 to the Financial Statements” included in the Company’s Annual Report on Form 10-K filed with

the SEC on June 21,2022 for information regarding the dispute and settlement with Mr.

Kopple regarding these transactions.

Quantitative and Qualitative Disclosures

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What changed 10-Q

Item 2. Management’s Discussion and Analysis