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Item 7. Management’s Discussion and Analysis

2023-05-26 compared with 2022-06-21 · 295 added, 296 removed, 44 unchanged (93% of the section changed)

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Forward Looking Statements.

This Management’s Discussion and Analysis

of Financial Condition and Results of Operations includes forward-looking statements.

For cautions about relying on such forward-looking

statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately

prior to “Item 1”.

Our business is based on the exploitation of our

Axial Flux Induction solution known as the AuraGen ® for commercial and industrial applications and the VIPER for military

applications.

This Management’s

Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements.

For cautions about relying

on such forward-looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of

this Report immediately prior to “Item 1”.

Our business is based on the

exploitation of our Axial Flux Induction Motor solution and mobile power known as the AuraGen ® for commercial and industrial

applications and the VIPER for military applications.

Our business model consists of two major components:

(i) sales and marketing, (ii) design and engineering.

Our sales and

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

In North America,

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

Military applications and (d) industrial

applications.

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

activities described above.

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

(i) sales and marketing, (ii)

design and engineering.

Our sales and marketing approaches are composed of direct sales in North America and the use of agents and distributors

in other areas.

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

Military applications and (d) industrial/commercial motor as well as mobile power 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 optimized power levels for electric motors and new features for our AuraGen ® /VIPER solution

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

In Fiscal 2020 stockholders of the Company successfully

removed Ronald Buschur, William Anderson and Si Ryong Yu from the Company’s Board of Directors and elected Ms.

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

Cipora Lavut, Mr.

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Robert Lempert as directors of the Company in their stead.

See Item 3, Legal Proceedings for more information.

in Fiscal 2020, Melvin Gagerman –– Aura’s CEO and CFO since 2006 –– was replaced.

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.

succeeded Mr.

Lavut succeeded Mr.

Gagerman as President and Mr.

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Gagerman as CFO.

Lempert was appointed as Secretary of the Company

by the Board of Directors also in July 2019.

In the second half of Fiscal 2020, the Company began significantly increasing its engineering,

manufacturing and marketing activities.

From July 8, 2019 through the end of Fiscal year 2022 (February 28, 2022), we shipped more than

140 units to customers (more than a ten-fold increase over Fiscal 2019).

Although our operations were impacted in Fiscal 2022 and Fiscal

Lempert was appointed as Secretary

of the Company by the Board of Directors also in July 2019.

In the second half of Fiscal 2020, the company began significantly increasing

its engineering, manufacturing and marketing activities.

From July 8, 2019, the date of the change in management, through the end of Fiscal

2023, the Company shipped approximately 150 units to.

Although our operations were impacted in Fiscal 2023, Fiscal 2022 and Fiscal 2021

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

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$850,000 and $611,000, respectively.

Subsequent to the end of Fiscal 2021, we relocated all administrative offices and operations to a

new state-of-the-art facility consisting of approximately 18,000 square feet in Lake Forest, California.

This new facility is wholly occupied

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 elsewhere

in this Annual Report on Form 10-K for information regarding the dispute with Mr.

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 elsewhere in this Annual Report on Form 10-K for information regarding the dispute with Mr.

Kopple regarding these transactions.

In March 2022,

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

Kopple and his affiliated entities.

Kopple and his affiliates brought suit against the Company relating to more than $13 million and the current equivalent of more

than approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr.

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”) claimed to be owed to them pursuant to various agreements with the Company entered

into between 2013-2016.

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

$3 million of which is to be paid within approximately three months of the settlement date, after which, interest will accrue on

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

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

years from the date of the initial payment.

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

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

The settlement also provides for standard mutual general

release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable

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

its payment obligations under the settlement.

(See Part IV, Item 15, Note 19 to the Financial Statements)

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

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

We incurred engineering expenses of approximately

$494,000 during Fiscal 2019.

Most corporate operations were temporarily suspended, however, in Fiscal 2020 when the Company’s then-management

team reallocated significant resources to unsuccessfully oppose an action by shareholders controlling a majority of the outstanding shares

of the Company’s common stock to replace certain members of the Company’s Board of Directors.

On July 8, 2019 the Delaware

Court of Chancery entered final judgment confirming the validity of this stockholder action.

See Item 3, Legal Proceedings for more information.

As a result, during Fiscal 2020 we incurred only modest engineering expenses of approximately $172,000 (representing a reduction of approximately

65% from the prior fiscal year).

Also, in Fiscal 2020, Melvin Gagerman –– Aura’s CEO and CFO since 2006 ––

was replaced.

In July 2017, Mr.

Kopple and his affiliates brought suit against the Company relating to more than $13 million and the current

equivalent of more than approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr.

and his affiliated entities (collectively the “Kopple Parties”) claimed to be owed to them pursuant to various agreements

with the Company entered into between 2013-2016.

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

million over a period of seven years, including $3 million initial payment to be paid in June 2022.

$150 was paid in June 2022, and the

balance of the initial payment of $2.85 million was extended to May 29, 2023.

In exchange for the extension, the Company was required

to pay $165,000 in extension and forbearance fees in cash and $430,000 in accrued forbearance fees.

Beginning in January 2023, interest

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

All amounts, including all accrued interest and deferred fees, are

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

The Kopple Parties have also received seven-year warrants to

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

The settlement also

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

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

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

(See Part IV, Item 15, Notes 9 and 17 to the Financial Statements)

Critical Accounting Policies and Estimates

Our management’s discussion and analysis

of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance

with accounting principles generally accepted in the United States of America.

The preparation of financial statements requires management

to make estimates and disclosures on the date of the financial statements.

In preparing our financial statements, we have made our best

estimates and judgments of certain amounts included in the financial statements.

We use authoritative pronouncements, historical experience

and other assumptions as the basis for making judgments.

The full impact of the COVID-19 pandemic is unknown and cannot be reasonably

estimated for these key estimates and assumptions.

However, we made appropriate accounting estimates based on the facts and circumstances

available as of the reporting date.

To the extent that there are differences between these estimates and actual results, our financial

statements may be materially affected.

Our management’s discussion

and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in

accordance with accounting principles generally accepted in the United States of America.

The preparation of financial statements requires

management to make estimates and disclosures on the date of the financial statements.

In preparing our financial statements, we have made

our best estimates and judgments of certain amounts included in the financial statements.

We use authoritative pronouncements, historical

experience and other assumptions as the basis for making judgments.

The full impact of the COVID-19 pandemic is unknown and cannot be

reasonably estimated for these key estimates and assumptions.

However, we made appropriate accounting estimates based on the facts and

circumstances available as of the reporting date.

To the extent that there are differences between these estimates and actual results,

our financial statements may be materially affected.

Revenue Recognition

The Company recognizes revenue in accordance with

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

from Contracts with Customers.

To determine revenue recognition under ASC 606, an entity performs the following five-steps (i) identifies

the contract(s) with a customer;

The Company recognizes revenue

in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”)

Topic 606, Revenue from Contracts with Customers.

To determine revenue recognition under ASC 606, an entity performs the following five-steps

(i) identifies the contract(s) with a customer;

(ii) identifies the performance obligations in the contract;

(iii) determines the transaction price;

(iii) determines the transaction

(iv) allocates the transaction price to the performance obligations in the contract;

and (v) recognizes revenue when (or as) the entity

satisfies a performance obligation.

The Company only applies the five-steps to contracts when it is probable that the entity will collect

the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

In accordance with ASC 606, we recognize revenue,

net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e.

point-in-time), which also corresponds

to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.

Our payment terms are

cash payment due upon delivery and typically includes a 2% price discount off the selling price in accordance with this policy.

Our commercial

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

We offer a 24 month assurance-type

warranty covering material and manufacturing defects, which we account for under the guidance of ASC 460, Guarantee.

Inventories are valued at the lower of cost (first-in,

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

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

inventory based on estimated future usage and sales.

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

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

Once inventory has been written down, it creates a new

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

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.

and (v) recognizes revenue when (or as) the

entity satisfies a performance obligation.

The Company only applies the five-steps to contracts when it is probable that the entity will

collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

In accordance with ASC 606,

we recognize revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e.

point-in-time),

which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.

Our payment terms are cash payment due upon delivery and typically includes a 2% price discount off the selling price in accordance with

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

We offer a 24-month assurance-type warranty covering material and manufacturing defects, which we account for under the guidance of ASC

460, Guarantee.

Inventories are valued at

the lower of cost (first-in, first-out) or net realizable value, on an average cost basis.

We review the components of inventory on a

regular basis for excess or obsolete inventory based on estimated future usage and sales.

When evidence exists that the net realizable

value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs.

Once inventory has

been written down, it creates a new cost basis for inventory that may not be subsequently written up.

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.

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

the lease term.

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

the present value of unpaid lease payments.

Share-Based Compensation

The Company periodically issues stock options

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

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

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

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

The Company uses Level 2 inputs for its valuation

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

The Company’s

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

in the statement of operations.

The COVID-19 global pandemic has negatively affected

the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the

global financial markets.

We began to see the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese joint venture’s

manufacturing facilities being required to close and many of our customers suspending their own operations due to the COVID-19 pandemic.

As a result, net sales and production levels during the fourth quarter of Fiscal 2020, Fiscal 2021 and Fiscal 2022 were significantly

reduced, thus impacting our results of operations during these periods.

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:

The Company periodically issues

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

and for financing costs.

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

and is recognized as expense over the requisite service period.

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

and manner as if the Company had paid cash for services.

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

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

Share-based compensation

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

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

The COVID-19 global pandemic

has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital

and credit markets in the global financial markets.

We began to see the impact of COVID-19 during our fourth quarter of Fiscal 2020 with

our Chinese joint venture’s manufacturing facilities being required to close and many of our customers suspending their own operations

due to the COVID-19 pandemic.

As a result, net sales and production levels during the fourth quarter of Fiscal 2020, Fiscal 2021, Fiscal

2022 and Fiscal 2023 were significantly reduced, thus impacting our results of operations during these periods.

In response to the COVID-19

pandemic and business disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety.

measures included the following:

Reduction of payroll costs through temporary furloughs;

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Deferral of discretionary spending.

The extent of the impact of the COVID-19 pandemic

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

COVID-19 outbreak within the U.S.

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

in the commercial vehicle markets.

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

If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require us to take further

actions as it relates to costs and liquidity.

These and other potential impacts of the COVID-19 pandemic will continue to adversely impact

our results for the first quarter of Fiscal 2023, as well as the full Fiscal year, and that impact could be material.

The extent of the impact of

the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration

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

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

on our customers, especially in the commercial vehicle markets.

These future developments are outside of our control, are highly uncertain,

and cannot be predicted.

If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require

us to take further actions as it relates to costs and liquidity.

These and other potential impacts of the COVID-19 pandemic will continue

to adversely impact our results for the first quarter of Fiscal 2023, as well as the full Fiscal year, and that impact could be material.

Results of Operations

Fiscal 2023 compared to Fiscal 2022

Revenues in Fiscal 2022 were approximately $100,000

as compared to the Fiscal 2021 period of approximately $115,000, a reduction of approximately 13%.

Fiscal 2022 revenues consisted principally

of the delivery of 8 AurtaGen ® /VIPER systems, including the initial units of the Company’s new design.

consisted of the delivery of 20 AuraGen ® /VIPER units.

We believe that the low levels of revenue in both Fiscal 2022 and

Fiscal 2021 were the result of being impacted significantly by the COVID-19 pandemic and its impact on the global economy.

Revenues in Fiscal 2023 were

approximately $71,000 as compared to the Fiscal 2022 period of approximately $100,000, a reduction of approximately 29%.

Fiscal 2023 revenues

consisted principally of the delivery of 9 AuraGen ® /VIPER systems, 7 of which were to a single distributor customer.

2022 revenues consisted principally of the delivery of 8 AuraGen ® /VIPER systems, including the initial units of the Company’s

We believe that the low levels of revenue in both Fiscal 2023 and Fiscal 2022 were the result of being impacted significantly

by the COVID-19 pandemic and its impact on the global economy.

Cost of Goods

Cost of goods sold was approximately $124,000 and $81,000 in the years

ended February 28, 2022 and February 28, 2021, respectively.

During Fiscal 2022, we benefited from the utilization of fully reserved inventory

to deliver 8 units and recorded material cost at 31% of sales value, direct labor at 41% of sales value and other overheads at 16% of

Additionally, the Company recorded an inventory write-down of $36,000 to cost of goods sold, which resulted in a negative gross

margin of approximately $24,000 in Fiscal 2022.

During Fiscal 2021, we benefited from the utilization of fully reserved inventory to deliver

20 units and recorded material cost at 25% of sales value, direct labor at 45% of sales value and other overheads at 3% of sales.

increase in direct material costs as a percentage of sales in FY2022 is partly attributable to the costs associated with newly acquired

inventory for the Company’s upgraded ECU design.

While both the FY 2022 and FY 2021 periods benefited from the utilization of inventory

that was previously fully reserved, the new design units fabricated in FY2022 did include the costs of new electronics boards.

As production

levels increase over time, the amount of recoverable inventory will decline and the amount of direct material recorded within cost of

goods sold will increase, reducing the gross profit contribution of units of sales.

Cost of goods sold was approximately

$88,000 and $124,000 in the years ended February 28, 2023, and February 28, 2022, respectively.

During Fiscal 2023, we benefited from

the utilization of fully reserved inventory to deliver 9 units and recorded material cost at 32% of sales value, direct labor at 43% of

sales value and other overheads at 44% of sales.

Additionally, the Company recorded an inventory write-down of $4,000 to cost of goods

sold, which resulted in a negative gross margin of approximately $17,000 in Fiscal 2023.

The disproportionate increase in manufacturing

overhead costs resulted from higher depreciation and systems costs without an offsetting increase in production volumes.

During Fiscal

2022, we benefited from the utilization of fully reserved inventory to deliver 8 units and recorded material cost at 31% of sales value,

direct labor at 41% of sales value and other overheads at 16% of sales.

Additionally, the Company recorded an inventory write-down of

$36,000 to cost of goods sold, which resulted in a negative gross margin of approximately $24,000 in Fiscal 2022.

While both the FY 2023

and FY 2022 periods benefited from the utilization of inventory that was previously fully reserved, the new design ECU units fabricated

in those periods did include the costs of new electronics boards.

As production levels increase over time, the amount of recoverable inventory

will decline and the amount of direct material recorded within cost of goods sold will increase, reducing the gross profit contribution

of units of sales.

Engineering, Research and Development

Engineering, research and development costs increased

to approximately $611,000 in Fiscal 2022 from approximately $237,000 in Fiscal 2021.

The approximately 158% increase is a result of (i)

successfully recruiting a new Chief Scientist to drive the Company’s augmented engineering activities;

(ii) increased expenses incurred

in the process of designing, fabricating and testing the new version of our electronic control unit (“ECU”) for our AuraGen ® /VIPER

as well as (iii) sustaining engineering expenses related to the expansion of manufacturing capability.

Engineering, research and

development costs increased to approximately $850,000 in Fiscal 2023 from approximately $611,000 in Fiscal 2022, an increase of approximately

$239,000 or 39%.

The increase is a result of the Company’s augmented engineering activities, including (i) successfully recruiting

new additions to the engineering staff;

(ii) licensing of modeling and design software tools for the full 12-month period;

(iii) additional expenses incurred in the process of designing, fabricating and testing the new version of our electronic control unit

(“ECU”) for our AuraGen ® /VIPER products.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased

approximately $1,218,000, or 77%%, to $2,795,000 in Fiscal 2022 from $1,577,000 in Fiscal 2021 due to several factors.

Most notable of

these were (i) increased net occupancy related costs of approximately $266,000 including some residual expenses related to the moving

costs for consolidation of operations into the new facility in Lake Forest, CA (ii) increased stock-based compensation expense of $160,000

related to the vesting schedule of stock options granted to members of the Board of Directors and advisors to the Board in FY 2021 (iii)

increased legal fees of $488,000 principally for the Koppel matter and (iv) increased employee related expenses of $185,000 primarily

associated with the Company’s efforts to increase global sales to offset some of the effects of the pandemic.

Selling, general and administrative

expenses decreased approximately $159,000, or 6%, to $2,636,000 in Fiscal 2023 from $2,795,000 in Fiscal 2022 due to several factors.

Most notable of these was a decrease in non-cash share-based compensation of approximately $612,000 as all stock options completed vesting

in Fiscal 2022 with no new grants in Fiscal 2023.

This was partially offset by (i) increased salary and wage-related expenses of approximately

$400,000, including higher expenses related to the sales team as well as a full year of costs for the Company’s CFO;

and (ii) increased

depreciation and software license related costs of approximately $55,000 associated with equipment and computer systems acquired in late

Fiscal 2022 and in Fiscal 2023.

Non-Operating Income, Interest Expense and

Tax Provision

Net interest expense decreased slightly to approximately $1,272,000

in Fiscal 2022 from approximately $1,280,000 in Fiscal 2021, a decrease of $8,000, or 0.6%, on approximately $11.2 and $11.2 million of

principal amounts due at February 28, 2022 and February 28, 2021, respectively.

During Fiscal 2022, the Company recorded other income

of approximately $167,000 for the forgiveness of principal and accrued interest on two Payroll Protection Program (“PPP”)

The PPP loans provided for up to 100% forgiveness of the debt if the proceeds were used for specifically authorized expenditures.

Net interest expense decreased

significantly to approximately $727,000 in Fiscal 2023 from approximately $1,272,000 in Fiscal 2022, a decrease of approximately $545,000,

This is principally a result of the settlement of the litigation with Robert Kopple and his affiliates.

Under the terms of the

settlement, no interest was to accrue until payment of the initial $3 million, which was extended to May 2023.

In exchange for the extensions,

the company recorded $335,000 of fees which are being categorized as interest, plus note interest of approximately $52,000.

The aggregate

Kopple-related interest in Fiscal 2023 of approximately $387,000 compares to the Fiscal year 2022 Kopple-related interest of approximately

$823,000, a 53% reduction.

Extinguishment gains and favorable

changes in the fair value of the Company’s derivative warrant liabilities aggregated to an approximately $819,000 positive impact

for the Company in Fiscal 2023, an approximate $281,000 increase from the aggregate approximately $538,000 positive impact in Fiscal 2022.

The favorable fair value changes and extinguishment gains in Fiscal 2023 were principally associated with the expiration of approximately

4.7 million warrants in February 2023.

During Fiscal 2022, the Company

recorded other income of approximately $167,000 for the forgiveness of principal and accrued interest on two Payroll Protection Program

(“PPP”) loans.

The PPP loans provided for up to 100% forgiveness of the debt if the proceeds were used for specifically authorized

expenditures.

Both of the PPP loans were forgiven at 100% of principal plus accrued interest.

In Fiscal 2021, we recorded other income of approximately

$3.6 million on debt settlements of $0.7 million of notes payable and cancellation of liabilities of $2.7 million following the expiration

of the statute of limitations for settlement.

Net Income (loss)

We recorded a net loss of approximately $3,992,000 and net income of

approximately $45,000 in the Fiscal years ended February 28, 2022 and February 28, 2021, respectively, or a decrease of income of approximately

$4,037,000 due to several factors:

(i) Fiscal 2021 included gain on debt settlement of approximately $733,000 (ii) approximately $2,683,000

gain related to the Fiscal 2021 cancellation of current liabilities due to the expiration of the statute of limitations (iii) increased

engineering and R&D expenses of approximately $373,000 in Fiscal 2022 (iv) increased operating expenses in selling, marketing and

general and administrative of approximately $1,058,000 in Fiscal 2022 and (v) higher non-cash stock-based compensation expenses of approximately

$160,000 in FY 2022.

We recorded net losses of

approximately $3,410,000 and $3,992,000 in the Fiscal years ended February 28, 2023 and February 28, 2022, respectively, or an increase

of income of approximately $582,000 due to several factors as note above:

(i) Fiscal 2023 included the lower interest expense of approximately

(ii) approximately $110,000 greater non-operating gains related to changes in the fair value of derivatives liabilities and

extinguishment of warrants;

(iii) decreased operating expenses in selling, marketing and general and administrative of approximately $159,000;

and (iv)increased engineering and R&D expenses of approximately $239,000 partially offsetting the other income improvements,

Liquidity and Capital Resources

For the year ended February 28, 2022, we recorded

a net loss of approximately $4.0 million and used cash in operations of approximately $2.6 million and at February 28, 2022, had a stockholders’

deficit of approximately $21.2 million, and approximately $13 million of notes payable-related parties payable were in default as of that

These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year

from the date of issuance of these financial statements.

In addition the Company’s independent registered public accounting firm,

in their report on the Company’s February 28, 2022, audited financial statements, raised substantial doubt about the Company’s

ability to continue as a going concern.

The net loss in Fiscal 2022 as compared to the

Fiscal 2021 net income was due to Fiscal 2021 having $3.5 million of non-cash gains on the cancellation of current liabilities and certain

debt instruments.

Fiscal 2022 also included additional expenditures to ramp up the Company’s engineering, R&D, selling and administrative

A significant factor in both periods contributing to the negative operating cash flows is the low level of operating activities

caused principally by the COVID-19 pandemic.

As a result of the impacts of the COVID-19 pandemic, we may be required to raise additional

capital and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global

financing markets, the availability of sufficient amounts of financing, and our future prospects.

At February 28, 2022, we had cash of approximately

$150,000, compared to cash of approximately $391,000 at February 28, 2021.

Subsequent to February 28, 2022, the Company issued 1,153,666

shares of common stock in exchange for cash proceeds of $346,100.

In addition, subsequent to February 28, 2022, the Company reached an

agreement with a related party note holder (Kopple) to resolve all litigation between them related to notes payable and accrued interest

of $12.1 million.

Working capital deficit at February 28, 2022 was a $21.7 million deficit as compared to an $15.5 million deficit at

the end of the prior fiscal year.

The principal reasons for the increase in the deficit were the reclassification of $4.4 million in convertible

notes payable from long-term to current liabilities and approximately $0.8 million in additional interest accrued on the related party

note payable with Mr.

At February 28, 2022 and February 28, 2021, we had no accounts receivable.

Prior to fiscal 2020, in order to maintain liquidity,

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

We have no bank line of credit and

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

Based on a cash flow analysis performed by management, we

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

to customers.

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

amounts required to keep the business operating.

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

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

If we cannot raise the needed funds, we would also

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

current business plan and ultimately our viability as a company.

Since July 2017 the Company has been engaged in

litigation with a former director, Robert Kopple, relating to approximately $13 million of notes payables and the current equivalent of

the approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr.

For the year ended February

28, 2023, we recorded a net loss of approximately $3.4 million and used cash in operations of approximately $3.1 million and at February

28, 2023, had a stockholders’ deficit of approximately $20.3 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.

the Company’s independent registered public accounting firm, in their report on the Company’s February 28, 2023, audited financial

statements, raised substantial doubt about the Company’s ability to continue as a going concern.

The net loss in Fiscal 2023

was approximately $582,000 less as compared to Fiscal 2022 due to several offsetting items, but most notably reduced interest expense

of approximately $545,000.

Fiscal 2022 also included additional expenditures to ramp up the Company’s engineering, R&D, selling

and administrative activities.

A significant factor in both periods contributing to the negative operating cash flows is the low level

of operating activities caused principally by the COVID-19 pandemic.

As a result of the impacts of the COVID-19 pandemic, we may be required

to raise additional capital and our access to and cost of financing will depend on, among other things, global economic conditions, conditions

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

At February 28, 2023, we had

cash of approximately $15,000, compared to cash of approximately $150,000 at February 28, 2022.

Subsequent to February 28, 2023, the Company

issued 2,334,847 shares of common stock in exchange for cash proceeds of $770,120.

Working capital deficit at February 28, 2023 was a

$13.7 million deficit as compared to an $21.7 million deficit at the end of the prior fiscal year.

The principal reasons for the decrease

in the deficit is the March 2022 settlement agreement the Company reached with a related party note holder (Kopple) to resolve all outstanding

litigation between them related to notes payable and accrued interest of $12.1 million.

The February 28, 2023 financial statements reflect

the reclassification to non-current of $7.1 million of the debt to Robert Kopple and his affiliated entities (collectively the “Kopple

Parties”) as a result of the settlement.

At February 28, 2023 and February 28, 2022, we had no significant accounts receivable.

Prior to Fiscal 2020, in order

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

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 $6 million to maintain existing operations for Fiscal 2024 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 will 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.

Between July 2017 and March

2022, the Company was engaged in litigation with a former director, Robert Kopple, relating to more than $13 million and the current equivalent

of the approximately 23 million warrants, exercisable for seven years at a price of $0.10 per share, which Mr.

Kopple and his affiliated

1 unchanged sentence

with the Company entered to between 2013-2016.

In March 2022, the Company reached a settlement with the Kopple Parties that resolves all

In March 2022, the Company reached a settlement with the Kopple Parties that resolved all

claims asserted against the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of

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

$3 million of which is to be paid on or before June 8, 2022, after which, interest will accrue on the unpaid balance at a rate of 6%,

Under the terms of the settlement, the Company agreed to pay an aggregate amount of $10 million over a period of seven years,

including $3 million initial payment to be paid in June 2022.

$150 was paid in June 2022, and the balance of the initial payment of $2.85

million was extended to May 29, 2023.

In exchange for the extension, the Company was required to pay $165,000 in extension and forbearance

fees in cash and $430,000 in accrued forbearance fees.

Beginning in January 2023, interest accrues 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

The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of approximately 3.3 million shares

of our common stock at a price of $0.85 per share.

The settlement also provides for standard mutual general release provisions and includes

customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the

right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under

the settlement.

As of June 8, 2022 and the date of this report, the Company has not yet paid the $3,000,000 installment due to Kopple.

Pursuant to the agreement, the Company has 60 days to cure the nonpayment of the $3,000,000 default.

(See Part IV, Item 15, Note 19 to

the Financial Statements).

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 elsewhere in this Annual Report on Form 10-K for information

regarding the dispute and settlement with Mr.

All amounts, including all accrued interest and deferred fees, 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.

We consider the transactions described above with

Kopple to be related party transactions.

Legal Proceedings”

and “Part IV, Item 15, Note 9 and Note 17 to the Financial Statements” included elsewhere in this Annual Report on Form 10-K

for information regarding the dispute and settlement with Mr.

Kopple regarding these transactions.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the

information required by this Item 7A.

As a smaller reporting company, we are not required

to provide the information required by this Item 7A.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements at page F-1.

CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

For the year ended February

28, 2023, there were no disagreements or any reportable events to disclose.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis