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 29, 2024, issued on June 4, 2024 (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. 17 Overview Our business is based on the exploitation of our Axial Flux Induction technology for both electric motors and generators. Our power generation solution based on axial flux induction is known as the AuraGen ® for commercial and industrial applications and the VIPER for military applications. Aura’s axial flux induction technology provide: (i) higher motor/generator efficiency, that directly translated to lower cost for operations (ii) lighter and smaller machines that lead to lower manufacturing cost, (iii) higher reliability that results in less down time and maintenance cost, (iv) the only raw materials used for construction are copper and steel without any rare earth or any other types of permanent magnets. This immediately results in global availability without market risks as well as geopolitical risks of dependence on single source, and (v) the use of approximately 60% less of copper than the equivalent radial flux induction machines, results in less needed mining to extract the needed copper with direct positive environmental impact. Our business model consists of three major components: (i) sales and marketing, iii) design and engineering and (iii) axial flux induction motors and generators manufacturing. Our sales and marketing approaches are composed of direct sales in North America and the use of agents and distributors in other areas. In addition, we are also exploring limited licensing of our technology to very large potential users as well as potential joint ventures with existing industrial motor/generator suppliers. The second component of our business model is focused on the design, engineer and commercialize of new commercial and industrial electric motors based on our axial flux induction for numerous applications such as pumps, compressors, and HVAC. We are also designing electric motors for both 2- and 4-wheel EV application, as well as, expending the product line for electric power generation. The third component of our business model is to set up manufacturing of the axial flux induction products being engineered and design. We are currently completing a 250-kW electric motor prototype based on our axial flux induction for EV applications. This activity is in conjunction with a large European tier 1 automotive supplier interest and inputs. We have also in May 2024 completed the installation of our new smaller 10-kW mobile power generator on a Polaris type ATV platform for US military applications. We expect in the coming months to start shipping this new product to a specific customer. We are also currently in discussions for usage of our technology for numerous wind turbines applications. In fiscal 2024 and first quarter of fiscal 2025 we have significantly increased our engineering capabilities with having hired experts’ engineers in thermo dynamics (Ph.D.), electromagnetic motor design (Ph.D.) Power electronics & control (Ph.D.) and mechanical design (M.S.M.E). We have also acquired the latest in advance engineering tools such as Ansys Maxwell finite elements, MATLAB and 3-D solid work. Our engineering, research and development costs for the three months ended August 31, 2024, were approximately $98.4. 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. 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. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates. There were no changes to our critical accounting policies described in the financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, that impacted our condensed financial statements and related notes included herein. 18 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. 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. Inflation Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising energy prices create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company’s business in fiscals 2023 and 2024 and will continue to impact the Company’s business in fiscal 2025. The implications of higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses. COVID-19 As of the date of this filing, the COVID-19 pandemic has been declared to be officially over. Despite this fact, there continues to be lingering impacts of the COVID-19 pandemic in the regions in which the Company operates. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results stemming from the outbreak and its lingering effects on the Company’s business or results of operations, financial condition, or liquidity. Results of Operations Three months ended August 31, 2024, compared to three months ended August 31, 2023 Net revenue was $3 for the three-months ended August 31, 2024, compared to $0 for the three-months ended August 31, 2023. Revenues continue to be negatively impacted due to a generally low level of resources on our legacy products as well as our shift to the development and production of the prototype for our new product line. We cannot project with confidence the timing or amount of revenue that we can expect until the prototype is completed, which should be in Fiscal 2025. Cost of goods sold was $(18) in the three-months ended August 31, 2024, compared to $80 for the three-months ended August 31, 2023. The gross loss and related gross margin loss were largely influenced by the low volume of shipments in this quarter which reduced our ability to fully absorb fixed operating costs. 19 Engineering, research and development expenses were $239 in the three-months ended August 31, 2024, compared to $287 for the three-months ended August 31, 2023. Selling, general and administration (“SG&A”) expenses for the three months ending August 31, 2024, were $2,255 as compared to $342 for the three months ending August 31, 2023, an increased by $1,913 or 559%. The increase in SG&A was due to increased headcount and pay increases, and $1,601 in stock-based compensation, which did not occur in the prior year period. Interest expense decreased by $123 to $289 from $412 for the three months ending August 31, 2024, and 2023 respectively. Six months ended August 31, 2024, compared to six months ended August 31, 2023 Net revenue was $50 for the six-months ended August 31, 2024, compared to $10 for the six-months ended August 31, 2023. Revenues continue to be negatively impacted due to a generally low level of resources on our legacy products as well as our shift to the development and production of the prototype for our new product line. We cannot project with confidence the timing or amount of revenue that we can expect until the prototype is completed, which should be in Fiscal 2025. Cost of goods sold was $29 in the six months ended August 31, 2024, compared to $95 for the six-months ended August 31, 2023. This resulted in a gross profit of $21 compared to a gross loss of $85 for the six-months ended August 31, 2023. The cost of goods sold in the six-months ended August 31, 2024, included an increase in the inventory reserve of $20. The gross loss and related gross margin for the six-months ended August 31, 2023 were largely influenced by the low volume of shipments in this quarter which reduced our ability to fully absorb fixed operating costs. Engineering, research and development expenses were $549 in the six-months ended August 31, 2024, compared to $494 for the six-months ended August 31, 2023. Selling, general and administration (“SG&A”) expenses for the six months ending August 31, 2024, were $2,629 as compared to $850 for the six months ending August 31, 2023, an increased by $1,779 or 209%. The increase in SG&A was due to increased headcount and pay increases, and $1,601 in stock-based compensation, which did not occur in the prior period. Interest expense decreased by $276 to $564 from $840 for the six months ending August 31, 2024, and 2023 respectively. Liquidity and Capital Resources Going Concern During the six-month period ended August 31, 2024, the Company recognized net loss of $21,648 from operation and used cash in operating activities of $1,619. As of August 31, 2024, the Company also has a shareholder deficit of $39,770 and notes payable totaling $5,315 are also past due. 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 29, 2024, 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. 20 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. At August 31, 2024, we had cash of $15, compared to cash of approximately $124 at February 29, 2024. Subsequent to August 31, 2024, the Company issued 2,876,070 shares of common stock in exchange for cash proceeds of approximately $719. 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 $6,000 to maintain existing operations for Fiscal 2025 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 $13,000 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 entities (collectively the “Kopple”) claimed should have been originally issued to them pursuant to various agreements with the Company entered to between 2013-2016. In March 2022, the Company reached a settlement with Kopple 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. 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. In March 2024, the Company and Kopple again amended the note payable. The amendment (i) replaced the requirement to pay the $3,850 past due principal balance with the requirement to pay $2,000 due December 15, 2024, effectively extending the payment of $1,850 to future periods; (ii) increased the stated interest rate to 10%; (iii) added a fee of $15 monthly until the Company makes a principal payment of $2 million by December 2024; (iv) effective August 30, 2024, the Company will grant Kopple a conversion right that gives Kopple the option to be able to convert the note payable into equity of the Company at a conversion price of the lower of $1.00 per share or 50% of the 10 day volume weighted average price of the Company’s common stock; (v) during Fiscal 2025, will require the Company to pay 20% of all collected revenues within 10 days of the end of each fiscal quarter; (vi) will require the Company to pay Kopple 20% of any amount raised in new capital in the form of equity, debt or convertible debt above $3.5 million; (vii) reduces the exercise price of the warrants granted to Kopple in March 2022 from $0.85 per share to $0.50 per share; and (vii) extends the warrant expiration date from March 8, 2029, to March 31, 2031. 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 August 31, 2024 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. 21