AURA SYSTEMS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except share and per share amounts) Forward Looking Statements This Report contains forward-looking statements within the meaning of the federal securities laws. Statements other than statements of historical fact included in this Report, including the statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding future events or prospects are forward-looking statements. The words “approximates,” “believes,” “forecasts,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would,” “could,” “should,” “seek,” “may,” or other similar expressions in this Report, as well as other statements regarding matters that are not historical fact, constitute forward-looking statements. We caution investors that any forward-looking statements presented in this Report are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends. Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following: ● Our ability to generate positive cash flow from operations; ● Our ability to obtain additional financing to fund our operations; ● The impact of economic, political and market conditions on us and our customers; ● The impact of unfavorable results of legal proceedings; ● Our exposure to potential liability arising from possible errors and omissions, breach of fiduciary duty, breach of duty of care, waste of corporate assets and/or similar claims that may be asserted against us; ● Our ability to compete effectively against competitors offering different technologies; ● Our business development and operating development; ● Our expectations of growth in demand for our products; and ● Other risks described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2023, issued on May 26, 2023 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference. We do not intend to update or revise any forward-looking statements, whether because of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements. 19 Overview Our business is based on the exploitation of our Axial Flux Induction solution known as the AuraGen ® for commercial and industrial applications and the VIPER for military applications. Our business model consists of two major components: (i) sales and marketing, (ii) design and engineering. Our sales and marketing approaches are composed of direct sales in North America and the use of agents 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 removed Ronald Buschur, William Anderson and Si Ryong Yu from the Company’s Board of Directors and elected Ms. Cipora Lavut, Mr. David Mann and Dr. Robert Lempert as directors of the Company in their stead. See Item 3, Legal Proceedings for more information. Also, in Fiscal 2020, Melvin Gagerman –– Aura’s CEO and CFO since 2006 –– was replaced. In July 2019 Ms. Lavut succeeded Mr. Gagerman as President and Mr. Mann succeeded Mr. Gagerman as CFO. Dr. Lempert was appointed as Secretary of the Company by the Board of Directors also in July 2019. In the second half of Fiscal 2020, the Company began significantly increasing its engineering, manufacturing and marketing activities. From July 8, 2019 through the end of Fiscal year 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 2021 by the COVID-19 pandemic, during these periods we continued to expand our engineering and manufacturing capabilities. See “Item 1. Business. 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. See “Item 3. 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 $10,000 over a period of seven years; $3,000 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 3,331,664 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. 20 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. For these key estimates and assumptions, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are significant 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. 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 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. Leases 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 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 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 period. Recognition 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. 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 3 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. 21 Impact of COVID-19 The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We began to see the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese joint venture’s manufacturing facilities being required to close and many of our customers suspending their own operations due to the COVID-19 pandemic. As a result, net sales and production levels during the fourth quarter of Fiscal 2020, the entirety of Fiscal 2021, Fiscal 2022, Fiscal 2023 and the first quarter of Fiscal 2024 were significantly reduced, thus impacting our results of operations during these quarters. Despite the fact that the COVID-19 pandemic was officially declared to have ended in May 2023, the Company is still experiencing some of its negative effects. In response to the COVID-19 pandemic and business disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety. The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity have been dependent upon a number of factors, 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 factors continue to be outside of our control, are highly uncertain, and cannot be predicted. If the impact continues to linger, 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, Fiscal 2022 and Fiscal 2023, the first quarter of fiscal year 2024, and could be impactful for the balance of Fiscal 2024. Going Concern During the three-month period ended May 31, 2023, the Company reported a net loss of approximately $1,141 and used cash in operating activities of approximately $797. 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, 2023, 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 altogether. 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. 22 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 May 31, 2023 compared to three months ended May 31, 2022 Net revenue was approximately $10 for the three-months ended May 31, 2023 (“Fiscal Q1 2024”) compared to approximately $6 for the three-months ended May 31, 2022 (“Fiscal Q1 2023”). Revenues continue to be negatively impacted by both the lingering effects of the COVID-19 pandemic, as well as a generally low level of resources. We cannot 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 $15 in Fiscal Q1 2024 compared to approximately $13 in Fiscal Q1 2023. This resulted in a gross loss of approximately $5 or a gross margin loss of 49%, and approximately $7 gross loss and a gross margin loss of 113%, in Fiscal Q1 2024 and Fiscal Q1 2023, 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. Engineering, research and development expenses were approximately $207 in Fiscal Q1 2024, compared to approximately $167 in the Fiscal Q1 2023, or an increase of 24%. Fiscal Q1 2024 includes a higher engineering staff level and a concentrated effort to optimize the Company’s several new designs of its generators and motors. Fiscal Q1 2023 reflects the Company’s initial efforts to increase its development program, including costs for engineering several new designs, as well as increased testing of its new electronic control unit (“ECU”). Selling, general and administration (“SG&A”) expenses decreased by approximately $342 or 40% to approximately $508 in the Fiscal Q1 2024 period from approximately $850 in the Fiscal Q1 2023 period. The decrease during Fiscal Q1 2024 was principally attributed to lower legal costs of $332 almost exclusively related to the settlement of the Kopple litigation in the FQ1 2023 period. Interest expense in Fiscal Q1 2024 increased approximately $347 or 427%, to approximately $428 from approximately $81 in the Fiscal Q1 2023 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 did not accrue interest until January 2023, so FQ1 2023 included no Kopple-based interest. In Fiscal Q1 2024, $87 of interest was accrued on the unpaid balance of the restructured Kopple note, and in addition, the Company recorded $260 of extension and forbearance fees, which are being categorized as interest. Other income in the Fiscal Q1 2024 period was approximately $7 which represents the favorable change in the fair value of the derivative warrant liability for the three-months, measured as of May 31, 2023. Comparatively, the revaluation of the derivative warrant liability in Fiscal Q1 2023, measured as of May 31, 2022, resulted in a favorable change in the fair value of approximately $553 for the three-month period. 23 Net loss for the three-month period of Fiscal Q1 2024 increased by approximately $589, to a loss of approximately $1,141 from a net loss of approximately $552 in the three-month period of Fiscal Q1 2023. This was attributed to (i) a significantly lower net gain related to derivative liability valuation of approximately $546 and (ii) higher interest expense of approximately $347, which were partially offset by (i) a decreased operating loss of $304 principally attributable to the lower legal expenses related to the Kopple settlement. Liquidity and Capital Resources For the three-month period ended May 31, 2023, we recorded a net loss of approximately $1,141 and used cash in operations of approximately $797 and at May 31, 2023, had a stockholders’ deficit of approximately $20.5 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, 2023, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The net loss of approximately $1,141 in Fiscal Q1 2024 as compared to the Fiscal Q1 2023 net loss of approximately $552 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 Fiscal Q1 2024 having substantially higher interest expense related to the Kopple restructured note, partially offset by a decreased 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 lingering effects of 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 31, 2023, we had cash of approximately $50, compared to cash of approximately $15 at February 28, 2023. Subsequent to May 31, 2023, the Company issued 787,880 shares of common stock in exchange for cash proceeds of approximately $260. Working capital deficit at May 21, 2023 was a $14.1 million deficit as compared to an $13.7 million deficit at February 28, 2023. At May 31, 2023 and February 28, 2023, 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 $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. 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 $10,000 over a period of seven years; $3,000 of which was originally to be paid in June 2022, and subsequently extended to August 1, 2023, Beginning in January 2023, interest began to accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest and deferred forbearance 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 3,331,664 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 installment due to Kopple; having only made a partial payment of $150 in June 2022. 24 We consider the transactions described above with Mr. Kopple to be related party transactions. See “Item 3. Legal Proceedings” and “Part IV, Item 15, Notes 9 and 17 to the Financial Statements” included in the Company’s Annual Report on Form 10-K filed with the SEC on May 26, 2023 for information regarding the dispute and settlement with Mr. Kopple regarding these transactions. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide disclosure under this Item 3.