Washington, D.C. 20549
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of the “large accelerated filer,” “accelerated filer,” “non-accelerated filer,”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has fi led a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On August 31, 2021, the aggregate market value
of the voting stock held by non-affiliates of the Registrant was $29,061,265. The aggregate market value has been computed by reference
to the last sale price of the stock as quoted on the Pink Sheets quotation system on August 30, 2021. For purposes of this calculation,
voting stock held by officers, directors, and affiliates has been excluded.
On June 13, 2022, the Registrant had 84,272,770
shares of common stock outstanding.
Documents incorporated by reference: None.
PART I
ITEM 1. BUSINESS
Introduction
Aura Systems, Inc., is a Delaware corporation
that was founded in 1987. The Company designs, assembles, tests and sells our proprietary and patented axial flux (“AF”) induction
machines known as the AuraGen® for industrial and commercial applications and the AuraGen® VIPER for military
applications (collectively referred to as the “AuraGen®”). The AuraGen® can be used either as
an electric motor or generator depending on the rotational speed of the rotor relative to the rotational speed of the magnetic field produced
by the stator; when the rotor rotates slower than the magnetic field the AuraGen® acts as an electric motor and when the
rotor rotates faster than the magnetic field, the AuraGen® acts as a generator.
Traditional induction machines use a radial flux
(“RF”) design as opposed to the axial flux design of the AuraGen®. These traditional RF machines have been
the conventional workhorses of industry due to their robustness, attractive cost, and ease of control. However, RF machines are both heavy
and bulky making them ill-suited for a variety of applications in which size and weight are paramount considerations, including most mobile
applications. Although axial flux technology has long been recognized as having a higher energy density (more energy per unit volume or
weight) than traditional RF induction machines, for many years, however, RF technology was considered the only solution because of perceived
insurmountable technological impediments to the creation of a viable axial flux equivalent including: (i) challenges controlling the strong
axial magnetic attraction force between the stator and the rotor, (ii) fabrication difficulties such as cutting the slots in laminated
cores, (iii) high cost involved in manufacturing the laminated stator core, (iv) difficulties in assembling the machine and maintaining
a uniform air gap and (v) providing a laminated rotor that can stand the large centrifugal forces. Aura, however, has overcome these barriers
through a variety of technological innovations.
The issue of a strong axial magnetic attraction
force between the stator and the rotor was addressed by Aura’s patented approach of using a topology of two stators and a rotor
sandwiched between them or two rotors and a stator sandwiched between. The issues related to the fabrication and the high cost of manufacturing
of the laminated stator cores were resolved by Aura using a technique involving punching the slots while rolling the steel, resulting
in a continuous punched steel ribbon at a cost less than traditional punched laminates. Using various modern techniques and instruments,
Aura has also overcome the difficulties in assembling the machine and maintaining a uniform air gap. Aura has also developed a patented
cast rotor that does not require any laminates and provides the structural integrity to withstand large centrifugal forces, while at the
same time provides the proper electric and magnetic properties. Thus, although the general operating principals of the AuraGen®
are the same as a traditional RF machine, the novel design of the AuraGen® and its unique performance characteristics offer
perceivable advantages over traditional RF technology.
| ● | A Smaller Footprint and a Lighter Weight Makes the AuraGen®
Uniquely Suited for Applications in which Fit, and Weight are Critical Factors. On average, the AuraGen® system
is approximately 50 percent lighter than comparable RF systems. Likewise, on average the AuraGen® has a volume of approximately
35% of RF equivalent machines. As a result, the AuraGen® is uniquely able to be installed in locations traditional RF
technology cannot possibly due to size and weight. The use of an AuraGen® motor or generator with a disc rotor can thus
be adopted in the construction of various devices with advantages in size, weight, and function. In addition, Aura’s axial flux
design readily lends itself to stacking multiple rotors and stators on the same shaft, thus designing a relatively compact system capable
of very large outputs. |
| ● | AuraGen® Provides Greater Output Efficiency
as Compared to Traditional RF Technology. Aura’s Axial Flux rotor design has significantly less inertia than the rotor used
in equivalent traditional RF machines. As a result, Aura’s systems require less input horsepower to rotate at the required rpm,
resulting in an increase in output efficiency. In addition, Aura’s stators require approximately 60% less copper than used in equivalent
RF machines with much shorter stator coil end turns and shorter flux return paths. As a result, Aura’s design provides
lower copper losses (additional increase in output efficiency) and lower manufacturing cost. In addition, specific AuraGen®
geometry/symmetry results in magnetic flux paths that inherently avoid parasitic eddy currents without need for laminates All of
the above contribute to an increase in efficiency. |
| ● | Unlike Other
electrical machines that are Dependent on Foreign Rare Earth Metals, the AuraGen®
is Not. The AuraGen®, being an induction machine, does not use any
permanent magnets (“PM”). Typical PM machines use NeFeB magnets (rare earths)
that are mostly produced in China. In an article titled U.S. Needs a Strong Defense Against
China’s Rare Earth weapon, written James Stavridis of Bloomberg opinion March 4, 2021
“China controls roughly 80% of the rare-earths market, between what it mines itself
and processes in raw material from elsewhere. If it decided to wield the weapon of restricting
the supply — something it has repeatedly threatened to do —
it would create a significant challenge for manufacturers and a geopolitical predicament
for the industrialized world. … In 2010, Beijing threatened to cut off exports to
Japan over the disputed Senkaku Islands. Two years ago, Beijing was reportedly considering
restrictions on exports to the U.S. generally, as well as against specific companies (such
as defense giant Lockheed Martin Corp.) that it deemed in violation of its policies against
selling advanced weapons to Taiwan. |
| ● | Most EVs use PM machines. In applications that require
variable speed and variable loads, such as in EV applications, the magnetic B field should be adjusted over the operating range. Generally
bucking B fields are required to adjust for the B field produced by the Permanent magnets. In contrast, Aura’s induction
machines do not have any PM and B fields are easily adjustable. This means that at light loads the controller can reduce voltage such
that magnetic losses are reduced, and efficiency is maximized. Thus, Aura’s induction machine when operated with an Aura smart controller
has an advantage over a PM machine – magnetic and conduction losses can be traded such that efficiency is optimized. This advantage.
becomes increasingly important as performance is increased. |
After a lengthy development period, the Company
first began commercializing the AuraGen® in late 1999 and early 2000. In 2001, the first commercial AuraGen®
product was a 4-pole machine which, when combined with our proprietary and patented electronic control unit (“ECU”), generated
5 kW of exportable 120/240 VAC power. We subsequently added a 6-pole configuration and introduced our patented bi-directional power supply
that provided for 8.5 kW watts of exportable power with the capability of providing both alternating (“AC”) and direct (“DC”)
power simultaneously. In Fiscal 2008, the Company introduced an AuraGen® system that generated up to 17 kW of continuous
power by combining two 8.5 kW systems on a single shaft. Starting in July 2019, we began to redesign and upgrade the ECU and develop new
axial flux generator configurations. As a result of such efforts, our redesigned ECU allows us to replace the old 5 kW solution with a
6.5 kW solution using the same 4-pole generator as well as to upgrade the output of the 6-pole machine from 8.5 kW to 15 kW. Our recent
efforts have also resulted in the development of a 15-kW solution specifically designed to address cell tower needs of 240 VAC and simultaneously
48 VDC as well as new 4 kW and 10 kW solutions. The new 4 kW as a motor is approximately 6.5 inches in diameter and approximately 5 inches
deep and has efficiency above 90%. The new 10 kW design as a mobile generator is approximately 8 inches in diameter, and 5 inches in axial
length and efficiency higher than 92%.
To date, the Company has sold approximately 11,000
AuraGen® solutions for numerous applications.
During the first half of Fiscal 2016, the Company
significantly reduced operations due to lack of financial resources. During the second half of Fiscal 2016, the Company’s operations
were further disrupted when the Company was forced to move from its facilities in Redondo Beach, California to a smaller shared facility
in Stanton, California. During Fiscal 2017, the Company curtailed much of its engineering, manufacturing, sales, and marketing activities
to focus on renegotiating numerous financial obligations. During Fiscal 2018, the Company successfully restructured in excess of $30 million
of debt and held its first stockholder meeting since 2011. During Fiscal 2019, the Company continued to focus on seeking new sources of
financing and utilized a contract manufacturer for very limited manufacturing. During fiscal 2019 the Company sold 11 systems.
In March 2019, stockholders of the Company represented
a majority of the outstanding shares of the Company’s common stock delivered signed written consents to the Company removing Ronald
Buschur, William Anderson and Si Ryong Yu as members of the Company’s Board and electing Ms. Cipora Lavut, Mr. David Mann, and Dr.
Robert Lempert as directors of the Company in their stead. Because of Aura’s refusal to recognize the legal effectiveness of
the consents, in April 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225
of the Delaware General Corporations Law, seeking an order confirming the validity of the consents. On July 8, 2019 the Court of Chancery
entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had
been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr.
Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written
consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and
Salvador Diaz-Versón, Jr. See Item 3, Legal Proceedings for more information. Following this ruling by the Court of Chancery, the
newly confirmed Board of Directors terminated the employment of Melvin Gagerman, who had served as CEO and CFO of the Company since 2006,
and installed Ms. Lavut as President, Mr. Mann as Chief Financial Officer and Dr. Lempert as Secretary of the Company. In February 2022,
Mr. Steven Willett was appointed CFO.
Upon assuming control in the second half of Fiscal
2020, the Company’s new management team began significantly increasing its engineering, manufacturing and marketing activities as
well as rebuilding relationships with its vendors and suppliers. Through these efforts, since July 8, 2019, the Company has shipped more
than one-hundred and forty units (a greater than ten-fold increase over Fiscal 2019) and recorded approximately $1.0 million in revenue.
During Fiscal 2022 and Fiscal 2021, the Company’s revenues and operations were adversely affected by the COVID-19 pandemic which
resulted in a decline in revenues and shipments to customers.
Impact of the COVID-19 Pandemic
The COVID-19 global pandemic has negatively affected
the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the
global financial markets. We began to see the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese joint venture’s
manufacturing facilities being required to close and many of our customers suspending their own operations due to the COVID-19 pandemic.
As a result, net sales and production levels during the fourth quarter of Fiscal 2020 and the entirety of Fiscal 2021 were significantly
reduced, thus impacting our results of operations during these fiscal periods.
In response to the COVID-19 pandemic and business
disruption, we implemented certain measures to manage costs, preserve liquidity and enhance employee safety. These measures included the
following:
| |
● |
Careful monitoring of operating expenses including wages and salaries; |
| |
● |
Enhanced cleaning and disinfection procedures at our facilities, promotion of social distancing at our facilities and requirements for employees to work from home where possible; |
| |
|
|
| |
● |
Reduction of capital expenditures; and |
| |
|
|
| |
● |
Deferral of discretionary spending. |
As of the filing of this Annual Report on Form
10-K on June 15, 2022, the extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend
largely on future developments, including the effectiveness of vaccination programs globally, the impact on capital and financial markets
and the related impact on our customers, especially in the commercial vehicle markets. These future developments are outside of our control,
are highly uncertain and cannot be predicted. If the impact is prolonged due, for example, to variant strains of the COVID-19 having an
adverse impact, then it can further increase the difficulty of planning for operations and may require us to take further actions as it
relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic will continue to adversely impact our results
for the current year, Fiscal 2023, and that impact could be material.
Business Arrangements
During Fiscal 2018 and Fiscal 2019, the Company’s
engineering, manufacturing, sales, and marketing activities were reduced while we focused on renegotiating numerous financial obligations.
During this time, the Company’s agreements with numerous customers, third party vendors, and organizations and entities material
to the operation of the Company business were canceled, delayed or terminated. During Fiscal 2018, the Company successfully restructured
in excess of $30 million of debt. Also, during Fiscal 2018, the Company signed a joint venture agreement with a Chinese company to build,
service and distribute AuraGen® products in China. Under the Jiangsu Shengfeng joint venture agreement, the Chinese partner
owns 51% of the joint venture and the Company owns 49%. The Chinese partner contributed a total of approximately $9.75 million to the
venture principally in the form of facilities, equipment, and approximately $500,000 of working capital while the Company contributed
$250,000 in cash as well as a limited license. The limited license sold to the joint venture, however, does not permit the venture to
manufacture the AuraGen® rotor; rather, the joint venture is required to purchase all rotor subassemblies as well as certain
software elements directly from the Company. During Fiscal 2018, Jiangsu Shengfeng placed a $1,000,000 order with the Company including
a $700,000 advance payment of which the Company has failed to deliver product in accordance with the order received. On November 20, 2019,
the Company reached a preliminary agreement with Jiangsu Shengfeng regarding the return of $700,000 previously advanced to the Company.
The preliminary agreement reached consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000
is to be paid over a 11-month period beginning March 15, 2020, through February 15, 2021. The preliminary agreement was subject to the
JV continuous operation. However, starting in January 2020 the JV was shut down by the Chinese authority due to the COVID-19 virus, and
as of the date of this filing, the JV operation has not restarted. In February 29, 2020, the unpaid balance of $700,000 was reported as
part of notes payables – related party in the accompanying financial statements. During Fiscal 2020, the Company recorded an impairment
expense of $250,000 to fully write-off the Jiangsu Shengfeng investment due to the uncertainty of the operation.
In Fiscal 2020 stockholders of the Company successfully
removed Ronald Buschur, William Anderson and Si Ryong Yu from the Company’s Board of Directors and elected Ms. Cipora Lavut, Mr.
David Mann and Dr. Robert Lempert as directors of the Company in their stead. See Item 3, Legal Proceedings for more information. Also,
in Fiscal 2020, Melvin Gagerman, Aura’s CEO and CFO since 2006, was replaced. In July 2019 Ms. Lavut succeeded Mr. Gagerman as President
and Mr. Mann succeeded Mr. Gagerman as CFO. Dr. Lempert was appointed as Secretary of the Company by the Board of Directors also in July
2019. In February 2022, Mr. Steven Willett was appointed CFO. During the second half of Fiscal 2020, the Company began significantly increasing
its engineering, manufacturing and marketing activities. From July 8, 2019, through the end of Fiscal year 2022 (February 28, 2022), we
shipped more than 140 units to customers (a more than a ten-fold increase over Fiscal 2019).
Recent Developments.
Beginning in Fiscal 2020, a novel strain of coronavirus commonly referred
to as COVID-19 emerged and spread rapidly across the globe, including throughout all major geographies in which we operate (North America,
Europe, and Asia), resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial
markets. Governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced
business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such factors, among others, have resulted
in a significant decline in spending and resource availability. Additionally, during this period of uncertainty, companies across a wide
array of industries have implemented various initiatives to reduce operating expenses and preserve cash balances, including work furloughs,
reduced pay, and severance actions, which could lower consumers’ disposable income levels or willingness to purchase discretionary items.
As a result of the COVID-19 pandemic, we have experienced varying degrees
of business disruptions and periods of closure of our corporate facilities as have our customers, suppliers, and vendors, resulting in
significant adverse impacts to our operating results. Resurgences in certain parts of the world resulted in further business disruptions
periodically throughout Fiscal 2022 and Fiscal 2021. Such disruptions have continued into the first quarter of Fiscal 2023, impacting
our business.
Despite the introduction of COVID-19 vaccines,
the pandemic remains highly volatile and continues to evolve. Accordingly, we cannot predict for how long and to what extent the pandemic
will impact our business operations or the global economy as a whole.
The AuraGen®/VIPER Product Overview:
Markets Served by the AuraGen®/VIPER
Induction Motor Applications
Aura’s axial flux induction machine can
be used as either an electric motor or generator as described above. Due to the inherit advantages of Aura’s axial flux induction
machine, such as (i) no rare earth or any other kind of permanent magnets, (ii) significantly less copper (60% less) than equivalent traditional
induction motors (iii) higher energy density and (iv) fewer overall materials, we believe Aura’s axial flux induction motor can
be used across a wide range of industries and applications. Because even a small percent increase in motor efficiency translates to a
market-wide savings of tens of billions of dollars per year and because Aura’s axial flux motor design is more efficient than equivalent
radial flux induction motors, we believe that with the proper financial resources, over time, we can capture a reasonable share of the
global electric motor market.
Electric motor are the main users of electricity,
accounting for approximately 53% of the global demand for electricity. Over 65% of the energy used to support electric motors is used
for industrial motor systems.1 The industrial electric
motor market is expected to grow from an estimated USD 113.3 billion in 2020 to USD 169.1 billion by 2026, at a
CAGR of 6.9% during the forecast period2. The increase in
global electricity consumption, and the use of electrical equipment and machines in different industries and the renewables sector are
major factors driving growth in the electric motor market during the forecast period
Electric
motors are employed in infrastructure, major structures, and industries all around the world. Each year, approximal 30 million motors
are sold for industrial use alone3. Electric motors
find application in a variety of equipment throughout industry. Common industrial applications include: (i) compressors, (ii)
fans and blowers, (iii) heavy duty equipment, (iv) HVAC systems, (v) pumps and (vi) machine tools (laths and mills etc.) Electric
motors and generators are one of the most important tools in modern day life.
Numerous
studies show a high potential for energy efficiency improvement in motor systems. Specifically, system optimization approaches which
address the entire motor system demonstrate high potential for energy savings. For most countries the saving potentials for energy efficiency
improvements in motor systems with best available technology lie between 9 and 13 percent of the national industrial electricity
demand4.
Aura’s machines use approximately
60% less copper, are approximately 1/3 the size and weight and are more efficient than the equivalent traditional radial flux (“RF”)
induction machine.
When compared to radial and axial flux permanent
magnet machines, Aura machines are less expensive to manufacture, do not use any rare earths, do not use any permanent magnets, are not
dependent on supply from China, are more robust, have a higher operating speed range, have lower maintenance, have a longer lifetime,
and are generally smaller, lighter and higher in efficiency.
EV applications
The universal global
trend for electrification has created in addition to the industrial demand for motors also a very large demand for motors used in electric
transportation for vehicles, planes, and boats (“EV”). In such applications, one or more electric motors are used for
propulsion. The power to drive the electric motors is generally a battery system or fuel cell. Both batteries and fuel cells convert some
form of fuel to electricity through some chemical process. EVs include, but are not limited to, road and off-road vehicles, surface
and underwater vessels, electric aircraft, and electric spacecraft.
| 1 |
Identification of Technoeconomic Opportunities with the Use of Premium Efficiency Motors as Alternative for Developing Countries -Julio R. Gómez etc. Published: October 16, 2020 |
| 2 |
Markets & Markets Electric Motor Market Published Date: Nov 2020 | Report Code: EP 3882 |
| 3 |
Precedence Research October 6, 2021 |
| 4 |
Energy efficiency in electric motor systems- UN industrial Development Organization Venna 2012 |
It is rather interesting
to note that, while electric motors have been around for more than 200 years, technical information on electric motors in EVs is very
scarce and generally only found in niche technology sites. Most EV literature only notes
the motor’s relative quietness, its torque response, its simplicity, and long-term low maintenance requirements. Most of the space
dedicated to the powertrain (motor, motor- controller and some cases a gear box) is focuses, instead, on the battery—its size and
weight, where it sits, the range, how long it takes to fully charge, etc. Yet, the only function of the battery system is to support the
electric motors and its controller.
In addition to the batteries, the electric
motor and supporting power electronics are critical components of EV drivetrain. It is expected that over 100 million electric motors
will be required per year by 2032 to meet the demand for the growing EV market5
(where would all the rare earths come from to support 100 million motors per year?).
The global Electric
Vehicle Market size is projected to grow from 4 million units in 2021 to 34.76 million units by 20306.
The AC motor (most power by alternating current) is expected to witness the fastest growth in the electric motor market during the
forecast period.
The global electric powertrain market (electric
motor, plus motor controller plus a gear box) size is projected to surpass around US$ 200 billion by 2027 and growing at a CAGR 13.8%.
The motor/generator component expected to show lucrative growth over the analysis period attributed to the escalated penetration of plug-in
hybrid battery electric vehicle (“PHEV”) and battery electric vehicle (“BEV”) across the globe7
There are several key performance metrics for
electric motors. Power and torque density enables improved driving dynamics in a smaller and lighter package, with weight and space being
at a premium in EVs. Another critical area is efficiency. Improving efficiency means that less energy stored in the battery is
wasted when accelerating the vehicle, resulting in improved range from the same battery capacity. Smaller motor system weight will also
contribute to increase in range since less weight needs to be moved.
Most electric motors
currently used for electric mobility employ high energy permanent magnets8.
The magnetic material is usually sintered neodymium–iron–boron (NdFeB) made or processed in China. Neodymium is one of the
rare earth elements. China has around a third of all rare earth reserves and around 90% of global production9.
In 1987 the Chinese President Deng Xiaoping famously said, “the middle East has Oil; China has rare earths”. An Oxford
Analytics Expert briefing on July 30, 2020, states that “(i) Permanent Magnets will account for 3⁄4 of rare earth demand by
2030 up from 1⁄4 in 2020 and (ii)Electric vehicles and off shore wind will drive demand and be most vulnerable to supply shocks”.
| 5 |
Emerging Electric Motor Technologies for the EV Market Sep 28, 2021Luke Gear |
| 6 |
Market & market Electric Vehicle Market May 2021 Report code AT4907 |
| 7 |
Precedence research June 9, 2021 |
| 8 |
Will rare earth be eliminated in EV motor-Dr. James Edmondson Nov 2-2020 |
| 9 |
Vikendi December 29, 2021 |
Permanent magnet (“PM”)
machines can be extremely light in weight and highly efficient. In PM machines the magnetic field B is fixed by the magnets and the only
way to change this is with a bucking field. These bucking currents result in increase in temperature that could affect the magnetization
of the permanent magnets.
In PM machines the operating temperature must
be kept at below 100oC because at that temperature the magnets start to lose some of their magnetization and at 180oC
they become completely demagnetized. However, in EV applications at low speed, one needs to use a lot of current (generating high heat)
to get the required torque; similarly, at high speeds one needs a lot of current for the bucking fields to reduce the B field. Thus, PM
machines for mobility require a very complex cooling system. All the components in the machine are designed for maximum specifications
but operationally the machine is limited by temperature requirements of the magnets. The cost of such machines is high due to (i) The
permanent magnets ($50-$70 per kg), (ii) the complex cooling system and (iii) complex controller.
In addition to the cost issues, the permanent
magnets are subject to the economic and political control of China. There is always the possible situation that China economically
weaponizes rare earth and stops sending the refined product to the U.S so they cannot be used in weapon systems or commercial applications
such as electric vehicles10. In the past during political
disputes China threatened to cease export of rare earths11.
Unlike the PM machines, Aura’s axial
flux induction machines do not use any permanent magnets and therefore the controller can change the B fields since B is proportionate
to the voltage divided by the frequency (V/f). Thus, the Aura machine, when operated with a smart inverter, has an advantage over a PM
machine. The Aura machine has a smaller volume, equal or better efficiency, more reliable and a large cost advantage. This advantage becomes
increasingly important as performance is increased.
Mobile and Remote Power Applications
The global generator sales market was $20.3 billion
in 2019 and is estimated to reach $27.16 billion by 2027 (Fortune Business Insight). Most industries dealing with construction and infrastructure
rely on mobile generators to support modern computers, digital sensors and instruments as well as electrical driven tools. Current automotive
alternators cannot supply the existing demanded power for many such applications and thus the common solution is the use of stand-alone
gensets (often referred to a “Auxiliary Power Units” or simply “APUs”). These APUs, however, (i) consume large
amounts of fuel, (ii) are heavy and bulky and accordingly must often be towed on trailers, and (iii) require constant maintenance. Additionally,
traditional APUs are generally not considered to be environmentally friendly power solutions based on their high fuel consumption, loud
operating noise levels, and the emissions they secrete into the air. In comparison, the AuraGen® system is small and
light enough to generally be integrated directly into existing vehicles, does not require significant maintenance, nor do they require
any set-up or tear-down time. In addition, there are no heavy lifting required and to contact with hot surfaces. The AuraGen®
operation when integrated in a vehicle or a boat is completely seamless and transparent to the user.
Likewise, for law enforcement, emergency responders
and militaries alike, mobile power is generally a necessity. Indeed, one of the fastest growing segments for mobile power is the military
marketplace for On-Board-Exportable-Power (OBEP), which is electric power on vehicles that can be used to support non-vehicle functions
such as weapon systems and C4I functions (command, control, communication, computers and information). Currently, most on-board
power is provided by APUs. Given the drawbacks of APUs, however, militaries, law enforcement and first responders all over the world are
seeking more efficient integrated power solutions for their vehicles.
In addition, numerous leisure users are increasingly
demanding mobile power for use of air-conditioning, appliances and other amenities.
| 10 |
China Maintains Dominance in Rare Earth Production-National defense 9/8/21 by Stew Magnuson |
| 11 |
Supercomputers Predict rare earth Market Vulnerability-National defense 9/9/21 by Stew Magnuson |
Beside stand-alone gensets (often referred to
“auxiliary power units” or simply “APU” s), all automotive users rely on integrated alternators in their vehicles
for such things as navigation systems, electric seating, electric windows, sound/ phone systems and lights. In 2019 alone, 87.9 million
passenger vehicles were sold globally12 (each one used an
alternator. The market for automotive alternators is presently dominated mainly by four companies: Denso, Valeo, Mitsubishi Electric,
and Hitachi Automotive. These companies jointly control nearly 80% of the global market. The compact size and significant increase
in efficiency of the AuraGen® provides an ideal replacement (fit and form) for high output automotive alternators while
offering higher efficiency, longer lifetime and the flexibility of multi types of voltage both AC and DC. Recently, the Company completed
the design for a 10-kW alternator with diameter of less than 8 inches and axial length of less than 6 inches. The new 10 kW alternator
will provide the full 10 kW power at alternator speeds of 2,500-13,000 rpm with efficiency higher than 92%.
The AuraGen® solution increase
in efficiency over traditional generators, when combined with our load following architecture and the ability to provide both AC and -48VDC
simultaneously makes our solution very attractive to cell towers operators that depend on diesel power. Our solution has the potential
for a significant reduction in diesel fuel consumption for such an application.
Competition
The Company is involved in the application of
its AuraGen® technology to electric motors and mobile power. Therefore, it faces substantial competition from companies
offering different technologies.
Electric Motors
There are four (4) basic approaches for electrical
machines: (i) the rotor can be electrically excited such that it creates a magnetic field with constant orientation (as in synchronous
machines) and usually uses brushes and or commutators; (ii) the shape of the rotor can induce reluctance variations in the stator (as
in switched reluctance machines); (iii) the rotor can be permanently magnetized with permanent magnets (“PM “) as in brushless
DC machines; and (iv) the rotor field can be induced from the stator due to the rotor’s structure as in induction machines. Our
axial flux technology is an induction machine.
Brushed machines are
machines in which the rotor coil is supplied with current through brushes. Unlike commutators, brushes only transfer electric current
to a moving rotor; commutators also provide switching of the current direction. Large, brushed machines which are run with DC to the stator
windings at synchronous speed are the most common generator in power plants because they also supply reactive power to
the grid. They can be started by the turbine and can generate power at constant speed without a controller. This type of machine is often
referred to in the literature as a “synchronous machine”.
Reluctance machines have
no windings in the rotor, only a ferromagnetic material shaped so that “electromagnets” in the stator can “grab” the
teeth in the rotor resulting in a slight movement. The electromagnets are then turned off, while another set of electromagnets is turned
on to move the stator further. Reluctance machines are also sometimes referred to as “step motors” as a result of the step-like
movement. These machines are suited for low speed and accurate position control. Reluctance machines can be supplied with PMs in the stator
to improve performance. The “electromagnet” is then “turned off” by sending a negative current to the coil. When
the current is positive the magnet and the current cooperate to create a stronger magnetic field, which will improve the reluctance machine’s
maximum torque without increasing the currents maximum absolute value.
PM machines have
permanent magnets in the rotor which set up a magnetic field. The magnetic field is created by modern PMs (Neodymium Iron Boron magnets
“NeFeB”), which means that PM machines have a higher torque/volume and torque/weight ratio than machines with rotor coils
under continuous operation.
In general, it is usually
possible to overload electric machines for a short time until the current in the coils heats parts of the machine to a temperature which
cause damage. However, PM machines are very sensitive to such overloads because too high of a current in the coils can create a magnetic
field strong enough to demagnetize the magnets. The majority (85%) NeFeB magnets are produced in China. Magnax and many other are examples
of Companies using such an approach.
| 12 |
Motor Intelligence. Automotive alternator market growth trends forecast 2021-2026) |
AC induction machine (no PM) is
the most common electrical machine in use today. A changing magnetic field in the stator induces a current in the rotor. The current
in the rotor produces its own magnetic field, which then interacts with the magnetic field of the stator, causing the rotor to turn. The
name induction comes from the fact that current is induced in the rotor by the changing magnetic field of the stator. Radial flux
induction machines have been the workhorse of industry due to their robustness, attractive cost, and easy of control; however, they are
relatively, heavy and bulky. On the other hand, Aura’s axial flux (“AF”) induction machines, have all of the advantages
of the radial flux machines but with the advantage of higher energy density and higher efficiency resulting in a smaller and lighter machine
with equivalent or better performance. Unlike the PM machines, induction machines do not use any permanent magnets and therefore the
controller can change the B fields since B is proportionate to the voltage divided by the frequency (V/f).
Although our axial flux induction technology provides
significant advantages in both cost (significant less copper, steel and aluminum), size/weight and performance, most of our competitors
have far greater financial, technical, and marketing resources than we have. They have larger budgets for research, new product development
and marketing, and have long-standing customer relationships.
Key players in the market are (i) Nidec Motor
Corporation, (ii) ABB Ltd., (iii) Siemens AG, (iv) WEG Electric Corp, (v) Regal Beloit Corporation, (vi) Wolong, and (vii)Teco Westinghouse.
Generators
There are five basic approaches used in mobile generators
Gensets AKA APU. Portable
generators meet the large market need for auxiliary power. Millions of units per year are sold in North America alone, and millions more
are sold across the world to meet market demands for 1 to 20 Kilowatts of portable power. The market for these power levels addresses
the commercial, leisure and residential markets, and is essentially divided into: (a) higher power, higher quality and higher price commercial
level units; and (b) lower power, lower quality and lower price level units. Gensets provide the strongest competition across the widest
marketplace for auxiliary power. Onan, Honda, Generac and Kohler, among others, are well established and respected brand names in the
genset market for higher reliability auxiliary power generation. There are over 40 registered genset-manufacturing companies in the United
States.
Some of the key suppliers are
Caterpillar (US), Cummins (US), Rolls-Royce Holdings (UK), Atlas Copco (Sweden), Mitsubishi Heavy Industries, Ltd. (Japan), Yanmar (Japan),
Generac (US), ABB (Switzerland), Siemens Energy (Germany), Weichai Group (China), Kohler Co. (US), Kirloskar Oil Engines Ltd. (India),
Denyo (Japan), and Sterling & Wilson (India),
High Output Alternators.
There are many High Output Alternator manufacturers. Some of the better-known ones are Delco-Remy, Bosh, Nippon Densu, Hitachi, Mitsubishi
and Prestolite. All alternators provide their rated power at very high RPM and significantly less power at lower RPM. In addition, alternators
are generally only 30% efficient at the low RPM range and increase to 50% efficiency at the high RPM range.
Inverters. There are many inverter
manufacturers across the globe; the best known one is Xentrex. The pricing of industrial grade sine wave inverters is approximately $400
per kilowatt plus the cost of a high output alternator (estimated at $1,000) and a good throttle controller (estimated in the range of
$250-500).
Permanent-Magnet Alternators. A
number of companies have introduced alternators using exotic rare earth Neodymium (NdFeB) magnets. These alternators tend to have higher
power generation capabilities than regular alternators at lower RPM. Unfortunately, PM machines with NdFeB magnets are very sensitive
to temperature and, unlike the AuraGen®, cannot survive the typical under-the-hood environment (200oF+). In
order to apply such devices for automotive applications one must add an active cooling system to keep the magnets from demagnetizing at
approximately 200oF. In addition, most of the rare earth magnets (NeFeB) are manufactured in China and are subject to potential
political and economic pressure.
In addition to the temperature challenges of such
machines, there are other issues involving active control of the magnetic field. The main disadvantage of PM generators is the difficulty
of output voltage regulation to compensate for speed and load variation due to the lack of a simple means of field control.
Fuel Cells. Fuel cells are
solid-state, devices that produce electricity by combining a fuel containing hydrogen with oxygen. They have a wide range of applications
and can be used in place of the internal combustion engine and traditional lead-acid and lithium-ion batteries. These systems are generally
more expensive. The most widely deployed fuel cells are estimated to cost significantly more per kilowatt than alternative solutions.
Others
Evans Electric in Australia has introduced an
axial flux machine with a complete conductive rotor. Such a machine was first introduced by Brinner more than 20 years ago and was abandoned
because the rotor lacked the required rigidity to withstand the magnetic and centrifugal forces. The Brinner machine is cited in Aura’s
issued patents.
Numerous companies are introducing axial flux
machines; however, they generally use rare earth NeFeB magnets (made in China) and are thus not induction machines but rather permanent
magnet machines. Some of the better-known companies are YASA, EVO, Magnax and Phi Power.
Most of our competitors have far greater financial,
technical, and marketing resources than we have. They have larger budgets for research, new product development and marketing, and have
long-standing customer relationships. We also compete with many larger and more established companies in the hiring and retention of qualified
personnel. Our financial condition has limited our ability to market the AuraGen®.
The AuraGen® uses a different technology
and because our product is radically different from traditionally available mobile power solutions, users may require lengthy evaluation
periods to gain confidence in the product. OEMs and large fleet users also typically require considerable time to make changes to their
planning and production.
Competitive Advantages of the AuraGen® Axial Flux
Induction technology
As a motor-Aura’s Axial Flux
(“AF”) induction motor/generator is increasingly attracting attention from high impact potential users seeking advantages
over conventional motors, particularly for Electric Vehicle applications. These advantages include (i) compact construction, (ii) better
power to weight ratio, (iii) shorter axial length, (iv) better efficiency, (v) better torque to volume and weight ratio, (vi) very high
utilization of active materials (less than 60% of the copper) and (vii) excellent ventilation and cooling. Induction machines (i) do not
use any rare earth elements and have no permanent magnets. Due to their flat shape, lower weight and compact construction, Aura’s
axial flux motors are ideal for pumps, fans, food processors, HVHC, etc. An axial flux machine is also preferred in applications where
the rotor can be integrated with the rotating part of mechanical loads.
The AuraGen® motor’s operational
range is between -40 and 340-degrees F; therefore, it is suitable to operate in a harsh environment.
As an alternator. Aura’s induction
machine provides significant advantages in power generation, particularly in mobile applications. Its smaller volume and higher efficiency,
when combined with the geometric shape means it can be integrated with existing vehicles and boats. Such integrated solutions do not require
set up time. There are no heavy weights to lift (gensets), usable cargo space is optimized and there is no need for separate fuel/containers.
Remarkably, there is no scheduled maintenance required.
The AuraGen® alternator’s
operational range is between -40- and 340-degrees F; therefore, it is suitable for operating under the hood of a vehicle where the ambient
temperature can easily be above 200 degrees F.
Earth-Forward, Green Technology.
The AuraGen® system is significantly more environmentally friendly than traditional motors and generator. Because of its
extreme efficiency and smaller size, the AuraGen® system utilizes fewer resources and materials to manufacture (in particular
less than 60% of the copper). When used in power generation, the AuraGen® uses a vehicle’s primary automotive engine,
which is already highly regulated for environmental protection. Traditional mobile power solutions, in comparison, use small, less efficient,
auxiliary engines that produce significantly higher levels of emissions per unit of power output than the automobile engine.
Durability; No Scheduled Maintenance.
The AuraGen® motor/generator solution does not require any scheduled maintenance. The historical failure rate for Aura’s
machines over a 20-year period is less than 0.5%. The bearings are rated for 28,000 hours.
Aura’s axial flux induction (no PM) can
be summarized as
| ● | Disruptive since it addresses the entire field of electrical motors and generators by providing a solution that is smaller,
lighter, more efficient, cost less to manufacture and does not use any permanent magnets. |
| ● | Aura has demonstrated mass production of this technology with more than 11,000 machines. |
| ● | The market opportunity for industrial applications of Aura’s motors/generators is more than $100 billion per year. |
| ● | The EV powertrain business opportunity for the Aura’s is a significant percentage of the $200+ billion per year projected
business. |
| ● | The economic value proposition is well defined in terms of cost, performance and size. |
| ● | The Aura solution provides significant global reduction in the use of raw materials such as copper, steel, and aluminum.
|
| ● | The higher efficiency of Aura’s motor, when used in a manufacturing environment, can lead to a noticeable reduction in
the global consumption of energy. |
| ● | When used for mobile power generation, Aura’s technology leads to a significant reduction in global pollution by being
able to reduce and, in many situations, eliminate completely small diesel and gasoline engines used in power generation. |
| ● | When used for electric vehicles, the smaller size, weight, and increased efficiency could lead to an increase in range and/or
reduced battery weight. |
| ● | When used in remote stand-alone diesel power generation such as cell towers, Aura’s increased efficiency, lower rotor inertia,
voltages flexibility and load-following architecture results in a significant reduction in fuel usage (and, of course, reduced pollution).
|
| ● | Aura’s significantly (65% less) lower rotor inertia and variable speed capabilities make Aura’s solution ideal for
small hydro applications that are currently being ignored because of construction cost, low head, and slow flow situations. |
Targeted Market
The Company is re-examining and identifying new
key markets to focus on as the Company expands operations.
The global drive for electrification is in search
of better more effective electric motors. The recent realization by many potential users of such motors that permanent magnet motors are
depending on NeFeB rare earth magnets from China has created a need for alternative to the PM motors. Our axial flux induction machine
is a solution that does not use any magnets and has the required performance characteristic as well as fit and form for numerous applications.
Electric motors
Electric motors for industrial
applications. We have completed the design of 4 kW and 10 kW machines. The designs show significantly increased efficiency as compared
to equivalent other designs, and in addition they are a fraction of the size and weight, use approximately 50-60% less copper and cost
less to manufacture.
Electric motors for electric delivery trucks.
We are exploring the use of our axial flux induction machine to be integrated into electric delivery trucks. This application would require
approximately 150-kW machine that will use 600-800VDC battery system. We started the design activities for this application and expect
to complete the design over the next few months.
Electric motors for high end electric cars.
We are exploring the use of our axial flux induction machine to be integrated into high end electric cars. This application would require
approximately 250-300-kW machine that will use 800VDC battery system and will operate at 20,000 RPM.
Electric motors for flywheels. Our
axial flux machine lends itself to multi stacking of rotors and stators on a single shaft to create motors in the 750kW range with a diameter
of approximately 13-14 inches. Due to the solid rotor disk of our axial flux machine one can operate such machines safely in the 20,000
RPM range.
Drive motors for electric boats-
We started to explore the possibility of using our axial flux induction machine as a drive motor for small to medium electric boats.
Mobile power generation
Military market. One focused
market for the Company’s VIPER solution is military applications. The global military land vehicles market is expected to grow by
29% through 2022, increasing to $30.33 billion by 202213.
While traditional markets for military vehicles such as the U.S. are choosing to upgrade and maintain existing fleets rather than replace
aging vehicles, other regions are looking to purchase new units, which also provides maintenance and upgrade opportunities. The active
number of military vehicles was estimated at over 408,000 in 2012 and is expected to increase to slightly over 418,000 by 2021. New vehicle
procurement is expected to decline in western defense and increase in emerging markets of APAC and the Middle East.
Automotive alternators. In
2019, 87.9 million units of passenger cars were sold globally,14
each one used an alternator. The market for automotive alternators is dominated mainly by four companies: Denso, Valeo, Mitsubishi Electric,
and Hitachi Automotive. These companies jointly control nearly 80% of the global market. The compact size and significant increase in
efficiency of the AuraGen® provides an ideal replacement (fit and form) for high output automotive alternators.
Diesel based cell towers. According to Statista (Technology
and telecommunication Thomas Alsop sept 22, 2020), in 2019, there were 395,562 mobile wireless cell sites in the United States, with a
large amount of investment going toward 5G-ready cell sites and antennas as per the source. Phil Marshall, chief research officer at Tolaga
Research, estimates the global number of base stations at 6.5 million sites, while Chinese equipment vendor Huawei puts the number at
7 million. Many of the cell sites are powered by diesel generators. The AuraGen® solution increase in efficiency over traditional
generators, when combined with our load following architecture and the ability to provide both AC and -48VDC simultaneously makes our
solution very attractive to cell towers operators that depend on diesel power. Our solution has the potential for significant diesel fuel
savings in such an application.
Transport Refrigeration (“TRU”).
The main competitors for the all-electric TRU are traditional diesel-based solutions provided by Thermo-king and Carrier. The diesel
based comparable systems provided by Thermo-king and Carrier are somewhat less expensive than our AuraGen® all-electric
solution, however the diesel solutions require frequent maintenance and the utilization of a separate diesel engine that consumes additional
fuel every operating hour. In addition, the diesel solution emits harmful emissions that have been recognized by the U.S. Environmental
Protection Agency, California’s Air Resource Board and others as dangerous pollutants and are increasingly subject to federal and
state regulations.
| 13 | John Keller July 10, 2014 Military and Aerospace Electronics |
| 14 | Motor Intelligence. Automotive alternator market growth trends forecast 2021-2026) |
Facilities, Manufacturing Process and Suppliers
During Fiscal 2021, our facilities consisted primarily
of approximately 20,000 square feet in Stanton, California that we shared with ECS Corporation and an additional storage facility in Santa
Clarita, California. The Stanton facility was under a month-to-month rental agreement for $10,000 per month. The monthly rent for the
Santa Clarita storage facility was also under a month-to-month rental agreement for $5,000 per month and was terminated effective July
31, 2020. Following exit from the Santa Clarita facility in July 2020 through February 28, 2021, we rented temporary storage space for
approximately $2,500 per month. In early Fiscal 2022 we consolidated all administrative offices and operations in a new modern stand-alone
facility consisting of approximately 18,000 square feet in Lake Forest, California. This Lake Forest facility is subject to a lease agreement
with a 66-month lease period effective from February 2021, through August 31, 2026. The monthly base lease rate for the Lake Forest Facility
is currently $22,848 per month with a 3% annual escalation.
As the Company continues to expand operations,
we will need to renew relationships and contracts with our suppliers or locate suitable new suppliers for subassemblies and other components.
Research and Development
We believe that ongoing research and development
is important to the success of our product in order to utilize the most recent technology, develop additional products and additional
uses for existing products, stay current with changes in vehicle manufacture and design and to maintain an advantage over potential competition.
Our engineering, research and development costs for Fiscal 2022 was approximately $0.6 million compared to approximately $0.2 million
in Fiscal 2021.
In Fiscal 2019 we began redesign work on our Electronic
Control Unit (“ECU”) to include state-of-the-art power electronics and processors. Work on this redesign was temporarily suspended
in mid-2019 when the Company’s then-management team reallocated significant resources to unsuccessfully oppose shareholders controlling
a majority of the outstanding shares of the Company’s common stock who sought to replace certain members of the Company’s
Board of Directors. On July 8, 2019, the Delaware Court of Chancery entered final judgment confirming the validity of this stockholder
action. With the new management team installed, starting in July 2019 work on the ECU redesign resumed and, in September 2019, we successfully
tested and implemented this newly designed ECU. As a result of such efforts, our redesigned ECU allows us to replace the old 5 kW solution
with a 6.5 kW solution using the same 4-pole generator as well as to upgrade the output of the 6-pole machine from 8.5 kW to 15 kW. Our
recent efforts have also resulted in the development of a 15 kW solution specifically designed to address cell tower needs of 240 VAC
and simultaneously 48 VDC as well as a new 4 kW solution that is 7.5 inches in diameter and 5 inches deep that is being configured both
as a motor and automotive alternator. In Fiscal 2022 we delivered the initial units of our new ECU solution.
Patents and Intellectual Property
Our intellectual property portfolio consists of trademarks, proprietary
know-how, trade secrets, and patents. Historically the Company obtained over 70 patents in electromagnetic and electrooptical technologies.
In the area of electromagnetic technology, we
have developed numerous magnetic systems and designs that result in a significant increase of magnetic field density per unit volume that
can be converted into useful power energy or work. This increase in field density is a factor of three to four, which, when incorporated
into mechanical devices, could result in a significant reduction in size and cost of production for the same performance.
The applications of these technological advances
are in machines used every day by industrial, commercial, and consumers. We have applied technology to numerous applications in industrial
machines, such as generators, motors, actuators, and linear motors.
We hold the following patents: Nos. 6,700,214;
6,700,802; 8,955,624; with expiration dates in 2024, 2024 and 2033, respectively.
At the end of Fiscal 2013 and the first quarter
of Fiscal 2014, we filed five new patent applications related to the AuraGen®. These new patent applications are specifically
designed to cover the (i) integration of the AuraGen® power solution with transport refrigeration, (ii) the interface kit
of the AuraGen® with prime movers, (iii) a water cooled AuraGen® solution for situations where ventilation
is not available, (iv) a unique cable system with safety protection to transfer high power between two moving objects, and (v) a unique
clamping of power electronic components to heat sink to ensure good thermal conductivity.
The patent application for the integration of
the AuraGen® power solution with transport refrigeration was specifically geared for U.S. trucks manufactured prior to
2015. This application was abandoned, and we expect to reexamine the patent ideas over the next 12 months as applied to both U.S. and
foreign trucks for more up-to-date required configurations. The patent application for interface kit of the AuraGen® with
prime mover patent was issued (8,955,624). A provisional Patent (502,246,733) was issued for the water cooled AuraGen®
solution in 2013.
The patent application for a unique cable system
with safety protection to transfer high power between two moving objects was abandoned by prior management during the 2015-2019 period.
The patent application for a unique clamping of power electronic components to heat sink to ensure good thermal conductivity was abandoned
since Aura’s power electronic solution has since been completely redesigned and the old design issues are no longer relevant.
Government Regulation
We are subject to laws and regulations that affect
the Company’s activities, which include, but are not limited to, the areas of labor, intellectual property and ownership and infringement,
tax, import and export requirements, environmental, and health and safety. As we recommence operations, our operations will again be subject
to federal, state and local laws and regulations governing the occupational health and safety of our employees and wage regulations. For
example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state
laws that protect and regulate employee health and safety. We expect to expend resources to maintain compliance with OSHA requirements
and industry best practices.
Employees
As of the date of this filing, the Company has
a total of ten (10) full-time employees in research and development, sales, operations and administration. Additionally, the Company engages
independent contractors, on an as-needed basis, to support various areas of the business. During Fiscal 2022 and Fiscal 2021 we engaged
three independent contractors, two to support engineering developments, and one for accounting support.
Significant Customers
In fiscal 2022, there were four customers that
accounted for over 10% individually of the Company’s revenues, however no customer is considered significant. In fiscal 2021, one
significant customer, CBOL, accounted for 83% of revenues.
Backlog
As of the date of the filing of this Annual Report
on Form 10-K, the Company has no significant backlog of orders.
Raw Materials
The most important raw materials we use in manufacturing
our products are steel, copper, and aluminum. Raw materials are purchased both domestically and outside the United States. We have no
significant long-term supply contracts. When possible, we maintain a number of sources for our raw materials, which we believe contribute
to our ability to obtain competitive pricing. The cost of some of our raw materials and shipping costs are dependent on petroleum cost.
Higher material prices, cost of petroleum, and costs of sourced products could have an adverse effect on margins.
We enter into standard purchase agreements with
certain foreign and domestic suppliers to source selected products. The terms of these arrangements are customary for the industry and
do not contain any long-term contractual obligations on our behalf.
Available Information
We file annual, quarterly and current reports
and other information with the Securities and Exchange Commission (the “SEC” or the “Commission”). These materials
can be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials
may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address. Information about the
Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
On our website, www.aurasystems.com, we provide
free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto,
as soon as reasonably practicable after they have been electronically filed or furnished to the SEC. Information contained on our website
is not part of this Annual Report on Form 10-K or our other filings with the SEC.
ITEM 1A. Risk Factors
We have been a party to litigation, a consent
solicitation and a proxy contest with shareholders controlling a majority of the Company’s stock, which is costly and time-consuming
and has had a material adverse effect on our business, results of operations and financial condition and could adversely affect our stock
price.
In March 2019, stockholders of the Company representing
a majority of the outstanding shares of the Company’s common stock delivered signed written consents to the Company removing Ronald
Buschur, William Anderson and Si Ryong Yu as members of the Company’s Board and electing Ms. Cipora Lavut, Mr. David Mann and Dr.
Robert Lempert as directors of the Company. Because of Aura’s refusal to recognize the legal effectiveness of the consents,
on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the
Delaware General Corporations Law, seeking an order confirming the validity of the consents. On July 8, 2019 the Court of Chancery entered
final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly
removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr.
Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and
(c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón,
Jr. Aura’s refusal to recognize the legal effectiveness of the consents and the decision by the Company’s former leadership
team to utilize corporate resources to vigorously contest the shareholder action has consumed significant financial resources, temporarily
stagnated operations, and resulted in substantial costs, all of which had a material adverse effect on our business, operating results
and financial condition.
We have a history of losses, and we may not be profitable in
any future period.
Except for Fiscal 2018 and Fiscal 2021, in each
fiscal year since our reorganization in 2006, we have reported losses. For Fiscal year 2022, we recorded a net loss of $4.0 million. Since
the Company’s Chapter 11 Plan reorganization in 2006, we have spent considerable amounts on, among other things, building market
awareness and infrastructure for sales and distribution, enhancing our engineering capabilities, perfecting an all-electric refrigeration
transport system for midsize trucks, developing a 15 kW product, and developing a six-inch system capable of delivering approximately
4 kW of power. We continue to need substantial funds for the development of new products, enhancement of existing products and in order
to expand sales. However, sales of our products have not increased as we expected them to and may never increase to the level that we
need to expand our operations, or even to sustain them. We can provide no assurance as to when, or if, we will be profitable in the future.
Even if we achieve profitability, we may not be able to sustain it.
The effects of a pandemic or widespread
outbreak of an illness, such as the COVID-19 pandemic, has had and could continue to have a material adverse impact on our business, results
of operations and financial condition.
The outbreak of COVID-19 was declared a pandemic
by the World Health Organization (“WHO”) during our fourth quarter of Fiscal 2020 and continues to impact our operations and
cash flows up to the filing date of this Annual Report for Fiscal 2022. While we have implemented measures to mitigate the impact of the
COVID-19 pandemic, we expect our Fiscal 2023 results of operations to continue to be adversely affected by the COVID-19 pandemic.
As a result of the COVID-19 pandemic, we have
experienced varying degrees of business disruptions and periods of closure of our corporate facilities, as have our customers, partners,
suppliers, and vendors, as described in Item 1 — “Business — Recent Developments.” Collectively, these disruptions
have had a material adverse impact on our business throughout Fiscal 2022 and Fiscal 2021. Despite the introduction of COVID-19 vaccines,
the pandemic remains highly volatile and continues to evolve. Accordingly, we cannot predict for how long and to what extent this crisis
will continue to impact our business operations or the global economy as a whole. Potential impacts to our business include, but are not
limited to:
| |
● | our ability to successfully execute our long-term growth strategy; |
| |
● | potential declines in the level of purchases of products, including our products, caused
by higher unemployment and lower disposal income levels, travel and social gathering restrictions, work-from-home arrangements, or other
factors beyond our control; |
| |
● | our ability to generate sufficient cash flows to support our operations, including repayment
of our debt obligations as they become due; |
| |
● | the potential loss of one or more of our significant customers or partners, or the loss of
a large number of smaller customers or partners, if they are not able to withstand prolonged periods of adverse economic conditions,
and our ability to collect outstanding receivables; |
| |
● | temporary closures or other operational restrictions of our facilities; |
| |
● | supply chain disruptions resulting from closed factories, reduced workforces, scarcity of
raw materials, and scrutiny or embargoing of goods produced in infected areas, including any related cost increases; |
| |
● | our ability to access capital markets and maintain compliance with covenants associated with
our existing debt instruments, as well as the ability of our key customers, suppliers, and vendors to do the same with regard to their
own obligations; |
| |
● | additional costs to protect the health and safety of our employees, customers, and communities,
such as more frequent and thorough cleanings of our facilities and supplying personal protection equipment; |
| |
● | diversion of management attention and resources from ongoing business activities and/or a
decrease in employee morale; and |
| |
● | our ability to maintain an effective system of internal controls and compliance with the
requirements under the Sarbanes-Oxley Act of 2002. |
Additional discussion
related to the various risks and uncertainties described above is included elsewhere within this “Risk Factors” section of
our Form 10-K.
We derive a substantial portion of our revenues
from customers in industries susceptible to trends and factors affecting those industries, including the COVID-19 pandemic.
Our AuraGen® system is geared toward
end-markets such as commercial vehicles, communications, transportation industries, and consumer and industrial equipment markets. Factors
negatively affecting these industries also negatively affect our business, financial condition and results of operations. Any adverse
occurrence, including industry slowdown, recession, costly or constraining regulations, excessive inflation, prolonged disruptions in
one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales
in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely
affect our business, financial condition and results of operations.
As a result of the COVID-19 pandemic, global vehicle
production has decreased, and some manufacturers have completely shut down manufacturing operations in some countries and regions, including
the United States and Europe. As a result, we have experienced, and are likely to continue to experience, delays in the production and
distribution of our products and the loss of sales. If the global economic effects caused by the COVID-19 pandemic continue or increase,
overall customer demand may continue to decrease which could have a further adverse effect on our business, results of operations and
financial condition.
We will need additional capital in the future
to meet our obligations and financing may not be available. During Fiscal 2022 and Fiscal 2021, the Company attempted to increase
its engineering and manufacturing activities, but it still struggled with meeting its financial requirements. If we cannot obtain additional
capital, we will not be able to continue our operations.
As a result of our operating losses, we have largely
financed our operations through sales of our equity securities. Beginning with Fiscal 2017, the Company significantly reduced its engineering,
manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations and conserving cash. For Fiscal
2022 and Fiscal 2021, we had approximately $2.6 million negative and $1.9 million negative cash flows from operations, respectively, due
primarily to the impact of the COVID-19 pandemic. The Company’s engineering and manufacturing activities remained limited due to
our inability to increase sales and raise significant amounts of new financing. Our ability to continue as a going concern is directly
dependent upon our ability to obtain additional operating capital and generating sufficient operating cash flow. The impacts of the
COVID-19 pandemic have caused significant uncertainty and volatility in the credit markets and there can be no assurance that lenders
or investors will make additional commitments to provide financing to us under current circumstances. 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 prospects. If we are unable to obtain additional funding as and when we need it, we will not be able to recommence operations or undertake
our planned expansion.
There is substantial doubt about our ability
to continue as a going concern.
Our independent registered public accounting
firm in their report on the Company’s February 28, 2022 audited financial statements raised substantial doubt about our
ability to continue as a going concern. We do not have any sufficient committed sources of capital and do not know whether
additional financing will be available when needed on terms that are acceptable, if at all. This going concern statement from our
independent public accounting firm may discourage some investors from purchasing our stock or providing alternative capital
financing. The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of
operations and prospects.
We have identified material weaknesses in our disclosure controls and
procedures internal control over financial reporting. The matters involving internal controls and procedures that our management considered
to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) ineffective controls over transactions
for debt issuances to provide for review of all terms in a timely and accurate manner, to ensure reporting is in conformance with generally
accepted accounting principles and properly reflected in the financial results; and (2) ineffective controls over transactions for common
stock issuances and options to provide for review of all terms in a timely and accurate manner, to ensure reporting is in conformance
with generally accepted accounting principles and properly reflected in the financial results. These material weaknesses resulted in the
restatement of our financial statements for the year ended February 28, 2021. The Company plans to remediate the identified
material weaknesses and other deficiencies and enhance our internal controls and disclosure controls over financial reporting in fiscal
2023, but there can be no guarantee that this will be accomplished.
If we do not receive additional financing
when and as needed, we may not be able to continue the research, development and commercialization of our technology and products. In
that case, our business and results of operations would be materially and adversely affected.
Our capital requirements have been and will continue
to be significant. We will require substantial additional funds in excess of our current financial resources for research,
development and commercialization of products, to obtain and maintain patents and other intellectual property rights in these technologies
and products, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. When
and as we need additional funds, such funds may not be available on commercially reasonable terms or at all. If we cannot obtain
additional funding when and as needed, our business and results of operation would be materially and adversely affected.
Our intellectual property rights are valuable,
and any inability or failure to protect them could reduce the value of our products, services and brand, which would have a material adverse
effect on our business.
Our patents, trademarks, and all of our other
intellectual property rights are important assets for us. There are events that are outside of our control that pose a threat
to our intellectual property rights. For example, effective intellectual property protection may not be available in every
country in which our products and services are distributed or made available. Also, the efforts we have taken to protect our
proprietary rights may not be sufficient or effective. Due to our lack of financial resources, we may not be able to adequately
protect our technology portfolio or apply for new patents to extend our intellectual property portfolio. The expiration of patents in
our patent portfolio may also have an adverse effect on our business. Any significant impairment of our intellectual property rights could
harm our business and or our ability to compete. Protecting our intellectual property rights is costly and time consuming and
we may need to resort to litigation to enforce our patent rights or to determine the scope and validity of third-party intellectual property
rights and we may not have the financial resources to pay for such litigation. Some of our competitors may be able to sustain
the costs of complex patent litigation more effectively than we can because they have substantially greater resources.
We seek to obtain patent protection for our innovations. It
is possible, however, that some of these innovations may not be protectable. In addition, given the costs of obtaining patent
protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always
the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed
invalid or unenforceable. Our inability or failure to protect our intellectual property rights could have a material adverse
effect on our business by reducing the value of our products, services and brand.
We occasionally become subject to commercial
disputes that could harm our business by distracting our management from the operation of our business, by increasing our expenses and,
if we do not prevail, by subjecting us to potential monetary damages and other remedies.
From time to time, we are engaged in disputes
regarding our commercial transactions. These disputes could result in monetary damages or other remedies that could adversely
impact our financial position or operations. Even if we prevail in these disputes, they may distract our management from operating our
business and the cost of defending these disputes would reduce our operating results.
We have been named as a party in various
legal proceedings, and we may be named in additional litigation, all of which will require significant management time and attention,
result in significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on our business,
operating results and financial condition.
We have been and may in the become subject to
various legal proceedings and claims that arise in or outside the ordinary course of business. Certain current lawsuits and pending proceedings
are described under Part I, Item 3. “Legal Proceedings.”
The results of these lawsuits and future legal
proceedings cannot be predicted with certainty. Also, our insurance coverage may be insufficient or not provide any coverage at all for
certain claims, our assets may be insufficient to cover any amounts that exceed our insurance coverage, and we may have to pay damage
awards or otherwise may enter into settlement arrangements in connection with such claims. Any such payments or settlement arrangements
in current or future litigation could have a material adverse effect on our business, operating results or financial condition. Even if
the plaintiffs’ claims are not successful, current future litigation could result in substantial costs and significantly and adversely
impact our reputation and divert management’s attention and resources, which could have a material adverse effect on our business,
operating results or financial condition. In addition, such lawsuits may make it more difficult to finance our operations.
We have substantial indebtedness and obligations to pay interest.
We currently have, and will likely continue to
have, a substantial amount of indebtedness and obligations to pay interest from various financing and settlement arrangements. Our indebtedness
and interest obligations could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a
large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility
to adjust to market conditions, and place us at a competitive disadvantage. As of February 28, 2022, we had total notes payable debt outstanding
plus accrued interest of approximately $18.7 million, of which $18.4 million was short term.
In March 2022, the Company reached a settlement
that resolves the various claims asserted against us by former director, Robert Kopple, and his affiliated entities. 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. 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 years; $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 Item 3. “Legal Proceedings”, “Liquidity and Capital Resources” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Footnote 19 “Subsequent Events “in the
Notes to Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the transactions
under dispute.
We expect to obtain the money to pay our expenses and pay the principal
and interest on our indebtedness from cash flow from our operations and potentially from securities offerings. Accordingly, our ability
to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business,
economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us
to pay the principal and interest on our debt and meet our other obligations, we could face substantial liquidity problems and might be
required to dispose of material assets or operations, restructure or refinance our debt, which we may be unable to do on acceptable terms,
and forego attractive business opportunities. In addition, the terms of our existing or future debt agreements may restrict us from pursuing
any of these alternatives.
Our business is not diversified. If
we cannot increase market acceptance of our products, modify our products and services, or compete with new technologies, we may never
be profitable.
We currently focus all of our resources on the
successful commercialization of the AuraGen® family of products. Because we have elected to focus our business
on a single technology line rather than diversifying into other areas, our success will be dependent upon the commercial success of these
products. If we are unable to increase market acceptance of our products, if we are unable to modify our products and services
on a timely basis so that we lose customers, or if new technologies make our technology obsolete, we may never be profitable.
Most of our competitors are larger and better
financed than we are and have a greater presence in the marketplace. Our business may be adversely affected by industry competition.
Both in the U.S. and internationally, the industries
in which we operate are extremely competitive. We face substantial competition from companies that have a long history of offering
traditional auxiliary power units (portable generators), traditional automotive alternators, and inverters (a device that inverts battery
direct current electricity to alternating current). Most of our competitors have substantially greater financial resources,
spend considerably larger sums than we spend on research, new product development and marketing, and have long-standing customer relationships. Furthermore,
we must compete with many larger and better-established companies in the hiring and retention of qualified personnel. Although
we believe we have significant technological advantages over our competitors, realizing and maintaining such advantages will require us
to develop customer relationships and will also depend on market acceptance of our products. We may not have the financial
resources, technical expertise, or marketing and support capabilities to compete successfully, which would materially and adversely affect
our business.
We may not be able to establish an effective
distribution network or strategic OEM relationships; in which case our sales will not increase as expected and our financial condition
and results of operations would be adversely affected.
We are in the very beginning stages of developing
our distribution network and establishing strategic relationships with original equipment manufacturer (OEM) customers. We
may not be able to identify appropriate distributors or OEM customers on a timely basis. The distributors with which we partner
may not focus adequate resources on selling our products or may otherwise be unsuccessful in selling them. In addition, we
cannot assure you that we will be able to establish OEM relationships on favorable terms or at all. The lack of success of
distributors or OEM customers in marketing our products would adversely affect our financial condition and results of operations.
If we are successful in executing our business
plan to grow our business, our failure to efficiently manage our growth could have an adverse effect on our business.
If we are successful in executing our business
plan, we may experience growth in our business that could place a significant strain on our management and other resources. Our
ability to manage this growth will require us to successfully assimilate new employees, improve existing management information systems
and reorganize our operations. If we fail to manage growth efficiently, our business could be adversely affected.
We may experience delays in product shipments
and increased product costs because we depend on third party manufacturers for certain product components. Delays in product
shipment or an inability to replace certain suppliers could have a material adverse effect on our business and results of operations.
We currently do not have the capability to manufacture
most of the AuraGen® components on a commercial scale. Therefore, we rely extensively on contracts with third
party manufacturers for such components. The use of third-party manufacturers increases the risk of delay of shipments to our
customers and increases the risk of higher costs if our manufacturers are not available when required. Our suppliers and manufacturers
may not supply us with a sufficient number of components or components of adequate quality, which would delay production of our product. We
do not currently have written agreements with any suppliers. Furthermore, those suppliers who make certain components may not
be easily replaced. Any of these disruptions in the supply of components could have a material adverse effect on our business or
results of operations. Furthermore, we are monitoring the impact of the COVID-19 pandemic on the operations of the Company, particularly
with respect to possible delays and other disruptions to the supply-chain.
Although we generally aim to use standard
parts and components for our products, some of our components are currently available only from limited sources.
We may experience delays in production of the
AuraGen® if we fail to identify alternate vendors, or if any parts supply is interrupted or reduced or if there is a significant
increase in production costs, each of which could materially adversely and affect our business and operations.
We will need to renew sources of component
supplies to meet increases in demand for the AuraGen®. There is no assurance that our suppliers can or will
supply the components to us on favorable terms or at all.
As we recommence our operations and in order to
meet future demand for AuraGen® systems, we will need to renew contracts or form new contracts with our prior manufacturers
and suppliers or locate other suitable manufacturers and suppliers for subassemblies and other components. Recently, we entered into discussions
with several of our prior suppliers and we are in the process of negotiating settlements of old payables and arranging new supply contracts.
Although we believe that there are a number of potential manufacturers and suppliers of the components, we cannot guarantee that contracts
for components can be obtained on favorable terms or at all. Any material adverse change in terms of the purchase of these
components could increase our cost of goods.
We need to invest in tooling to have a more
extensive line of products. If we cannot expand our tooling, it may not be possible for us to expand our operations.
We are currently limited in the products that
we are able to manufacture because of the limitations of our tooling capabilities. In order to have a broader line of products
that address industrial and commercial needs, we must make a significant investment in additional tooling or pursue new alternatives to
replace traditional tooling. We do not currently have the funds required to acquire new tooling or to obtain replacements and
no assurances can be given that we will have the required funds in the future. If we do not acquire the required funds for
tooling or replacement tooling, we may not be able to expand our product line to meet industrial and commercial needs.
We are subject to government regulation
that may restrict our ability to use certain suppliers outside the U.S. or to sell our products into certain countries. If we cannot
obtain the required approval from government agencies, then our business may be adversely affected.
We depend on third party suppliers for our parts
and components, some of which are located outside of the United States. In the event that some of these suppliers are barred
from selling their products in the United States, or cannot meet other U.S. government regulations, we would need to locate other suppliers,
which could delay or prevent us from shipping product to our customers. We use copper, steel and aluminum in our product and
in the event of government regulations or restrictions of these materials we may experience a shortage of these materials to manufacture
our product. Furthermore, U.S. law restricts us from selling products in some potential foreign markets without U.S. government
approval. If we cannot obtain the required approvals from government agencies to obtain materials or contract with suppliers
or if we are restricted by government regulation from selling our products into certain countries, our business may be adversely affected.
Acquisitions, joint ventures, and strategic
alliances may have an adverse effect on our business.
In March 2017, we entered into a joint venture
agreement with a Chinese partner. This joint venture arrangement and other transactions and arrangements involve significant challenges
and risks, including that they do not advance our business strategy, that we get an unsatisfactory return on our investment, that we have
difficulty integrating and retaining new employees, business systems, and technology, or that they distract management from our other
businesses. If an arrangement fails to adequately anticipate changing circumstances and interests of a party, it may result in early termination
or renegotiation of the arrangement. The success of these transactions and arrangements will depend in part on our ability to leverage
them to enhance our existing products and services or develop compelling new ones. It may take longer than expected to realize the full
benefits from these transactions and arrangements, such as increased revenue, enhanced efficiencies, or increased market share, or the
benefits may ultimately be smaller than we expected. These events could adversely affect our operating results or financial condition.
During Fiscal 2020, the Company recorded an impairment expense of $250,000 writing-off the Jiangsu Shengfeng investment due to operational
and future cash-flow uncertainties associated with AuraGen® market development prospects in China through the joint venture.
We rely on highly skilled
personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.
Our performance is largely dependent on the talents
and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop,
motivate, and retain highly skilled personnel for all areas of our organization. We are currently in default under several agreements
with various key consultants which may make those parties unwilling to continue to work with the Company. Our continued ability to compete
effectively depends on our ability to attract new employees and to retain and motivate our existing employees and consultants. The
incentives to attract, retain and motivate employees and consultants provided by our ability to pay competitive salaries and rates as
well as offering additional incentives such as stock option grants or by future arrangements may not be as effective as in the past. If
we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively.
Our business is subject to the risks of
earthquakes and other natural catastrophic events, and to interruptions by man-made problems such as computer viruses, terrorism, or pandemics.
Our corporate headquarters and our research and
development operations are located in the State of California in regions known for seismic activity. A significant natural disaster, such
as an earthquake, in this region could have a material adverse effect on our business, financial condition and results of operations.
In addition, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer
systems. Any such event could have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain effective internal controls
over financial reporting could adversely affect our business and the market price of our Common Stock.
Pursuant to rules adopted by the SEC under the
Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal controls over financial reporting and provide
a management report on our internal controls over financial reporting in all annual reports. This report contains, among other matters,
a statement as to whether our internal controls over financial reporting are effective and the disclosure of any material weaknesses in
our internal controls over financial reporting identified by management. Section 404 also requires our independent registered public
accounting firm to audit the effectiveness of our internal control over financial reporting.
As described in ITEM 9A, Controls and Procedures
contained herein in this Annual Report, we have concluded that the Company’s internal controls over financial reporting are not
effective for the Fiscal year ended February 28, 2022 and have identified a material weakness in our financial reporting internal controls.
The Company plans to remediate the material weakness in fiscal 2023, but there is no guarantee that this will be accomplished. Presently,
the Company does not have the financial resources to fully comply with all requirements of Section 404. If, in the future, we identify
one or more material weaknesses in our internal controls over financial reporting during this continuous evaluation process, our management
may not be able to assert that such internal controls are effective. Therefore, if we are unable to assert that our internal controls
over financial reporting are effective in the future, or if our auditors are unable to attest that our internal controls are effective
or they are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy
and completeness of our financial reports, which would have an adverse effect on our business and the market price of our Common Stock.
Trading on the OTC Markets is volatile and
sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common stock is quoted on the Pink Sheets
of the OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices,
due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the
market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and
trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ
or a stock exchange like the New York Stock Exchange. These factors may result in investors having difficulty reselling any shares of
our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
During Fiscal 2021, our facilities consisted primarily
of approximately 20,000 shared square feet in Stanton, California and an additional storage facility in Santa Clarita, California. The
Stanton facility previously was used for final assembly and testing of AuraGen®/VIPER systems under a month-to-month rental
agreement for $10,000 per month. The monthly rent for the Santa Clarita storage facility that was terminated effective July 31, 2020 was
also under a month-to-month rental agreement for $5,000 per month. Following the exit from the Santa Clarita facility to February 28,
2021, we rented temporary storage space through February 28, 2021 for $2,500 per month. Effective February 28, 2021, we vacated the Stanton
facility and consolidated our administrative offices, operations including warehousing space within an approximately 18,000 square feet
facility in Lake Forest, California under a rental agreement that commenced on February 15, 2021 and covers a 66-month rental period effective
from February 2021 through August 31, 2026.
ITEM 3. LEGAL PROCEEDINGS
We are subject to the legal proceedings and claims
discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary
course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates
potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings
and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an
outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s
expectations, the Company’s financial statements for that reporting period could be materially adversely affected. The Company settled
certain matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial
condition or operating results.
In 2017, the Company’s former COO was
awarded approximately $238,000 in accrued salary and related charges by the California labor board. In August 2021, the Company
reached a settlement by which the Company agreed to pay approximately $330,000, representing the principal award plus accrued
interest. As of the time of this filing, the Company has paid approximately $108,400 toward the settlement amount. The remaining
balance of approximately $221,600 is to be paid no later than September 1, 2022, and accrues interest of 10% per annum
until paid.
Since July 2017 the Company has been 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 entities (collectively
the “Kopple Parties”) 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 the Kopple Parties that resolves all claims asserted against
the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company. Under the terms
of the settlement, we have agreed to pay an aggregate amount of $10 million over a period of seven years; $3 million of which is to be
paid on or before June 8, 2022, after which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts,
including all accrued interest, are to be paid no later than eight years from the date of the initial payment. The Kopple Parties have
also received seven-year warrants to purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of
$0.85 per share. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties,
and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment
against the Company if the Company remains in uncured default in its payment obligations under the settlement. As of 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).
On March 26, 2019, various stockholders of the
Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald
Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company. On March 27, 2019, those
same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the
Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority
of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because
of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the
Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming
the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Dr. Lempert, Mr. Douglas
and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs,
confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s
outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority
of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of
Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful
opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their
litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination
has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.
On June 20, 2013, the Company entered into an
agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $125,000 of secured convertible notes payable (the “Notes”)
and warrants. In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other
defendants in a lawsuit filed by the Messrs. Abdou demanding repayment of loans totaling $125,000 plus accrued interest and exemplary
damages. In January 2017, the Company entered into an agreement with all secured creditors other than Mr. W. Abdou and Mr. M. Abdou. In
September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the Messrs. Abdou. The Company subsequently
appealed this judgment and, in September 2019, reached a settlement agreement with the Messrs. Abdou to implement a payment plan in accordance
with the 2018 judgment. As of February 28, 2022 the outstanding principal balance was zero and remaining interest was approximately $18,000. As
of the date of this filing, all amounts have been paid and no principal or interest remains outstanding.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
See accompanying notes to these financial statements.
See accompanying notes to these financial statements.
See accompanying notes to these financial statements.
See accompanying notes to these financial statements.
NOTES TO FINANCIAL STATEMENTS
February 28, 2022
NOTE 1 – ORGANIZATION AND OPERATIONS
Aura Systems, Inc., (“Aura”, “We”
or the “Company”) a Delaware corporation, was founded to engage in the development, commercialization, and sale of products,
systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen®
axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets.
Going Concern
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. During the fiscal year ended February 28, 2022, the Company incurred a net loss of
approximately $4.0 million and had negative cash flows from operating activities of approximately $2.6 million and at February 28, 2022,
had a stockholders deficit of approximately $21.2 million and a working capital deficit of approximately $21.7 million. Also, at February
28, 2022, the Company is in default on notes payable in the aggregate amount of approximately $13.0 million. These factors raise substantial
doubts about the Company’s ability to continue as a going concern within one year of the date that these financial statements are
issued. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
At February 28, 2022, the Company had cash on
hand in the amount of $150,000. 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
to resolve all litigation between them related to notes payable and accrued interest of $12.1 million (see Note 19). Management estimates
that the current funds on hand will be sufficient to continue operations through the next four months. The Company’s ability to
continue as a going concern is dependent upon its ability to continue to implement its business plan. During the next twelve months we
intend to continue to attempt to increase the Company’s sale of our AuraGen®/VIPER products both domestically
and internationally and to add to our existing management team. In addition, we plan to continue to 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. No assurance can be given that any future financing, if needed,
will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain
additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial
dilution for its stockholders, in the case of equity financing. 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.
COVID-19
As of the date of this filing, there continues to
be widespread concern regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which the Company
operates. Although the impacts of the COVID-19 pandemic have not been material to date, a prolonged downturn in economic conditions could
have a material adverse effect on our customers and demand for our services. 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 of the outbreak and its effects on the Company’s business or results
of operations, financial condition, or liquidity.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the reported periods. 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.
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; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price;
(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.
Our primary source of revenue is the manufacture and delivery of generator
sets used primarily in mobile power applications, which represented nearly 100% of our revenues of approximately $100,000 and $115,000
for the fiscal years ended February 28, 2022 and February 28, 2021, respectively. Our principal sales channel is sales to a domestic distributor.
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, Guarantees.
We have a limited history of shipments, and, as such, we have not recorded a warranty liability on our balance sheets at February
28, 2022 and February 28, 2021, respectively; however, we expect warranty claims to eventually be nil, therefore, we have not delayed
the recognition of revenue during Fiscal years 2022 and 2021.
Cost of Goods Sold
Cost of goods sold primarily consists of the salaries
of certain employees and contractors, purchase price of consumer products, packaging supplies, inventory reserve and customer shipping
and handling expenses. Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of
revenue upon sale of products to our customers.
Cash and Cash Equivalents
Cash and equivalents include cash on hand and cash
in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
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. During the year ended February 28, 2022, the Company wrote-down
inventories of $36,000. During the year ended February 28, 2021, there were no inventory write downs recorded.
Property and Equipment
Property and equipment are recorded at historical
cost and depreciated on a straight-line basis over their estimated useful lives of approximately three years up to ten years once the
individual assets are placed in service. Leasehold improvements are amortized over the shorter of the useful life or the remaining period
of the applicable lease term.
Management assesses the carrying value of property
and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication
of impairment, management prepares an estimate of future cash flows expected
to result from the use of the asset and its eventual disposition. If these cash flows are less than the
carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value at that time. At February
28, 2022 and 2021, management determined there were no impairments of the Company’s property and equipment.
Impairment
of Long-lived Assets
The Company reviews its property and
equipment, right-of-use asset, and other long-lived assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows
or market value, if readily determinable. For the years ended February 28, 2022 and 2021, the Company had no impairment of long-lived
assets.
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.
Customer Advances
Customer advances represent consideration received
from customers under revenue contracts for which the Company has not yet delivered to the customer.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the
Company to concentrations of credit risk consist of cash and accounts receivable. Cash is deposited with a limited number of financial
institutions. The balances held at any one financial institution at times may be in excess of Federal Deposit Insurance Corporation (“FDIC”)
insurance limits of up to $250,000. We have not experienced any losses in such accounts and believe we are not exposed to any significant
risk on cash and cash equivalents.
During the year ended February 28, 2022, one customer
accounted for 18% of revenues. During the year ended February 28, 2021, one customers accounted for 83% of revenues.
As of February 28, 2022, three vendors accounted
for 44%, 13% and 15% of accounts payable. As of February 28, 2021, three vendors accounted for 34%, 31% and 13% of accounts payable.
Research and Development
The Company engages in research and development to stay current with
changes in vehicle manufacture and design and to maintain an advantage over potential competition. Research and development expenses relate
primarily to the development, design, testing of preproduction prototypes and models and are expensed as incurred. Research and development
costs for Fiscal 2022 and 2021 was approximately $600,000 and $200,000, respectively.
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.
Income Taxes
The Company uses an asset and liability approach
for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood
of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either
expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is
to recognize interest and/or penalties related to income tax matters in income tax expense.
Derivative Warrant Liability
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 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 reporting date, with any increase or decrease in the fair value being
recorded in the statement of operations.
Fair Value of Financial Instruments
The Company determines the fair values of its financial
instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon
the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures
(“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
| |
● |
Level 1 – Quoted prices (unadjusted) for identical assets and liabilities
in active markets; |
| |
● |
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities
that are observable either directly or indirectly; and |
| |
● |
Level 3 – Unobservable inputs. |
The recorded amounts of inventory, other current
assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature. The carrying amounts of notes
payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation
to current market conditions.
The following table sets
forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of February 28, 2022 and
2021:
| | |
February 28, 2022 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Liabilities | |
| | |
| | |
| | |
| |
| Derivative warrant liability | |
$ | - | | |
$ | 828,232 | | |
$ | - | | |
$ | 828,232 | |
| Total liabilities | |
$ | - | | |
$ | 828,232 | | |
$ | - | | |
$ | 828,232 | |
| | |
February 28, 2021 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Liabilities | |
| | |
| | |
| | |
| |
| Derivative warrant liability | |
$ | - | | |
$ | 1,366,375 | | |
$ | - | | |
$ | 1,366,375 | |
| Total liabilities | |
$ | - | | |
$ | 1,366,375 | | |
$ | - | | |
$ | 1,366,375 | |
The Company estimated
the fair value of the derivative warrant liability using the Binomial Model (see Note 14).
Earnings
(loss) per share
The Company’s earnings (loss) per share
amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Basic earnings (loss)
per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common
shareholders by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional
shares of common stock were dilutive. Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method
for convertible debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities
were exercised
The
following information sets forth the computation of basic and diluted net increase in the Company's net assets per share resulting from
operations for the years ended February 28, 2022 and 2021:
| | |
Year Ended February 28, | |
| | |
2022 | | |
2021 | |
| Numerator | |
| | |
| |
| Net income (loss) | |
$ | (3,991,863 | ) | |
$ | 44,748 | |
| Adjustment for interest expense on convertible notes | |
| - | | |
| 220,179 | |
| Adjusted net income (loss) | |
$ | (3,991,863 | ) | |
$ | 264,927 | |
| | |
| | | |
| | |
| Denominator | |
| | | |
| | |
| Denominator for basic weighted average share | |
| 76,805,616 | | |
| 61,768,215 | |
| Adjustment for dilutive effect of convertible notes | |
| - | | |
| 3,435,419 | |
| Denominator for diluted weighted average share | |
| 76,805,616 | | |
| 65,203,634 | |
| Earnings (loss) per share | |
| | | |
| | |
| Basic earnings (loss) per share: | |
$ | (0.05 | ) | |
$ | 0.00 | |
| Diluted earnings (loss) per share | |
$ | (0.05 | ) | |
$ | 0.00 | |
For
the years ended February 28, 2022, the calculations of basic and diluted loss per share are the same because potential dilutive securities
would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:
| | |
February 28,
2022 | | |
February 28,
2021 | |
| Warrants | |
| 4,800,834 | | |
| 5,662,272 | |
| Options | |
| 5,059,769 | | |
| 3,040,002 | |
| Convertible notes | |
| 3,749,961 | | |
| - | |
| Total | |
| 13,610,564 | | |
| 8,702,274 | |
Reclassifications
Certain prior period amounts have been reclassified
to conform to the current year presentation. These reclassifications have no effect on the previously reported financial position, results
of operations and cash flows (see Note 3).
Segments
The Company operates
in one segment for the manufacture and delivery of generator sets. In accordance with the “Segment Reporting” Topic
of the ASC, the Company’s chief operating decision maker has been identified as the President, who reviews operating results to
make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management
approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide
disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue.
All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities
in economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company
operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial
statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
Credit Losses – Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes
how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace
today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances
based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to
retained earnings as of the beginning of the first reporting period in which the guidance is effective. As a small business filer, the
standard will be effective for the Company for interim and annual reporting periods beginning after March 1, 2023. Management is currently
assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06
(“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments
by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for
as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives.
By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest
rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted
method. ASU 2020-06 will be effective March 1, 2024, for the Company and is to be adopted through a cumulative-effect adjustment to the
opening balance of retained earnings. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within
that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the financial statements, but currently does
not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments. The effect
will largely depend on the composition and terms of the financial instruments at the time of adoption.
In May 2021, the FASB issued ASU 2021-04, Earnings
Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718),
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications
or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 provides clarification and reduces diversity in
an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants)
that remain equity classified after modification or exchange. An issuer measures the effect of a modification or exchange as the difference
between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange.
ASU 2021-04 introduces a recognition model that comprises four categories of transactions and the corresponding accounting treatment
for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination
or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring
on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects
to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes
that interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company’s financial statements
or disclosures.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and
Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s
present or future financial statements.
NOTE 3 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The financial statements for the year ended February 28, 2021 and certain
balances as of February 29, 2020 have been restated. On May 31, 2022, our management determined the following:
| ● | that the Company erroneously did not recognize a derivative warrant
liability associated with warrants issued in prior years that included a fundamental transaction provision that could give rise to an
obligation to pay cash to the warrant holder. As such, the Company determined that the warrants fundamental transaction provision created
a derivative liability pursuant to current accounting guidelines. |
| ● | that the Company had issued common stock in exchange for
a settlement of debt to a former employee during fiscal 2018 and had erroneously not accounted for it until fiscal 2021. |
| ● | that the Company had granted stock options during fiscal
2021 which were erroneously not recorded. |
The effects on the previously issued financial statements are as follows:
| (A) | In fiscal 2022, the Company recognized that previously issued warrants
had characteristics of derivative liabilities. The Company determined the fair value of the warrant derivative liability as of February
29, 2020, was $947,271, and recorded the liability and its associated expense as a prior period adjustment to Accumulated Deficit in the
amount of $947,271. Additionally, the warrant derivative liability was revalued at February 28, 2021 and the net increase in fair value
of $419,103 was recorded as additional liability. The associated other net expense of $432,714 for the increase in fair value, partially
offset by the gain on expiring warrants of $13,611, was recorded to the statement of operations. |
| (B) | In fiscal 2022, the Company recognized that during fiscal 2021, the
Company recorded the effect of issuing common stock for debt to a former employee when the issuance had occurred in fiscal 2018. To correct
the timing of recording the transaction, the Company calculated the gain on the extinguishment of debt as of the February 28, 2018, issuance
date in the amount of $256,044 and recorded the gain as a prior period adjustment to Accumulated Deficit. Additionally, the interest expense
associated with the debt of $13,460 and gain on its extinguishment of $133,500 recorded in fiscal 2021 were reversed out of the statement
of operations. |
| | € | In fiscal 2022, the Company recognized that certain stock options granted during fiscal 2021 should have been fully or partially vested in the year of grant but had no share-based compensation expense recorded in fiscal 2021. To correct the timing of the expense recognition, the Company computed the amount of expense associated with the vesting as of February 28, 2021, and recorded an additional $258,636 of stock-based compensation expense to the statement of operations and is included in selling, general and administrative expenses. |
Reclassifications
| (1) | In fiscal 2021, the Company presented
interest accrued of $3,668 on its Economic Injury Disaster Loan as additional note payable principle. In the accompanying fiscal
2022 financial statements, the Company has reclassified the accrued interest of $3,668 recorded in fiscal 2021 from notes payable to
accrued interest. |
| (2) | In fiscal 2021, the Company presented
$2,713,652 of extinguishment of accrued wages and accounts payable as Other Income. In the accompanying fiscal 2022 financial
statements, the $2,713,652 has been reclassified to gain on extinguishment of debt. |
The following table presents the effect of the restatements and reclassifications
on the Company’s previously issued balance sheet:
| |
|
As of February 28, 2021 |
| |
|
As Previously
Reported |
|
|
Adjustments |
|
|
Reclassifications |
|
|
As Restated |
|
|
Notes |
| Accrued expenses (including accrued interest) |
|
$ |
1,288,107 |
|
|
$ |
- |
|
|
$ |
3,668 |
|
|
$ |
1,291,775 |
|
|
[1] |
| Note payable |
|
|
159,922 |
|
|
|
- |
|
|
|
(3,668 |
) |
|
|
156,255 |
|
|
[1] |
| Derivative warrant liability |
|
|
- |
|
|
|
1,366,375 |
|
|
|
- |
|
|
|
1,366,375 |
|
|
[A] |
| Additional paid-in capital |
|
|
446,126,640 |
|
|
|
(136,004 |
) |
|
|
- |
|
|
|
446,249,272 |
|
|
[B] |
| |
|
|
|
|
|
|
258,636 |
|
|
|
- |
|
|
|
|
|
|
[C] |
| Accumulated deficit |
|
$ |
(465,883,499 |
) |
|
$ |
(1,366,375 |
) |
|
$ |
- |
|
|
$ |
(467,372,506 |
) |
|
[A] |
| |
|
|
|
|
|
|
136,004 |
|
|
|
- |
|
|
|
|
|
|
[B] |
| |
|
|
|
|
|
|
(258,636 |
) |
|
|
- |
|
|
|
|
|
|
[C] |
The following table presents the effect of the restatements and reclassifications
on the Company’s previously issued statement of operations:
| |
|
As of February 28, 2021 |
| |
|
As Previously
Reported |
|
|
Adjustments |
|
|
Reclassifications |
|
|
As Restated |
|
|
Notes |
| Selling, general and administrative expense |
|
$ |
1,318,602 |
|
|
$ |
258,636 |
|
|
$ |
- |
|
|
$ |
1,577,238 |
|
|
[C] |
| Interest expense |
|
|
1,293,409 |
|
|
|
(13,460 |
) |
|
|
- |
|
|
|
1,279,949 |
|
|
[B] |
| Gain on extinguishment of debt |
|
|
866,887 |
|
|
|
(133,500 |
) |
|
|
2,713,652 |
|
|
|
3,447,039 |
|
|
[2] |
| Gain on extinguishment of derivative warrant liability |
|
|
- |
|
|
|
13,611 |
|
|
|
- |
|
|
|
13,611 |
|
|
[A] |
| Change in fair value of derivative warrant liability |
|
|
- |
|
|
|
(432,714 |
) |
|
|
- |
|
|
|
(432,714 |
) |
|
[A] |
| Other income |
|
|
2,720,652 |
|
|
|
- |
|
|
|
(2,713,652 |
) |
|
|
7,000 |
|
|
[2] |
| Net income |
|
$ |
842,528 |
|
|
$ |
(797,780 |
) |
|
$ |
- |
|
|
$ |
44,748 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income per share, basic and diluted |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
$ |
0.00 |
|
|
|
The following table presents the effect of the restatements on the
Company’s previously issued statement of shareholder deficit:
| | |
Common Stock
Shares | | |
Common
Stock Amount | | |
Additional
Paid-In
Capital | | |
Accumulated
Deficit | | |
Total
Shareholders’
Deficit | |
| Balance, February 29, 2020, as previously reported | |
| 56,400,874 | | |
$ | 5,639 | | |
$ | 443,417,452 | | |
$ | (466,726,027 | ) | |
$ | (23,302,937 | ) |
| Prior period revisions | |
| 192,641 | | |
| 19 | | |
| 130,977 | | |
| (691,227 | ) | |
| (560,231 | ) |
| Corrections of errors | |
| (4,469 | ) | |
| | | |
| | | |
| | | |
| - | |
| Balance, February 29, 2020, as restated | |
| 56,589,046 | | |
$ | 5,658 | | |
$ | 443,548,428 | | |
$ | (467,417,254 | ) | |
$ | (23,863,168 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance, February 28, 2021, as previously reported | |
| 71,107,442 | | |
$ | 7,109 | | |
$ | 446,126,640 | | |
$ | (465,883,499 | ) | |
$ | (19,749,750 | ) |
| Prior period revisions | |
| - | | |
| - | | |
| 122,632 | | |
| (1,489,007 | ) | |
| (1,366,375 | ) |
| Corrections of errors | |
| (4,433 | ) | |
| | | |
| | | |
| | | |
| - | |
| Balance, February 28, 2021, as restated | |
| 71,103,009 | | |
$ | 7,109 | | |
$ | 446,249,272 | | |
$ | (467,372,506 | ) | |
$ | (21,116,125 | ) |
The following table presents the effect of the restatements and reclassifications
on the Company’s previously issued statement of cash flows:
| |
|
As of February 28, 2021 |
| |
|
As Previously
Reported |
|
|
Adjustments |
|
|
Reclassifications |
|
|
As Restated |
|
|
Notes |
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
842,528 |
|
|
$ |
(797,780 |
) |
|
$ |
- |
|
|
$ |
44,748 |
|
|
[A] [B] [C] |
| Gain on extinguishment of liabilities |
|
|
(3,585,639 |
) |
|
|
133,500 |
|
|
|
5,100 |
|
|
|
(3,447,039 |
) |
|
[B] |
| Gain on debt settlement |
|
|
|
|
|
|
|
|
|
|
(71,775 |
) |
|
|
(71,775 |
) |
|
|
| Gain on extinguishment of derivative warrant liability |
|
|
- |
|
|
|
(13,611 |
) |
|
|
- |
|
|
|
(13,611 |
) |
|
[A] |
| Change in fair value of derivative warrant liability |
|
|
- |
|
|
|
432,714 |
|
|
|
- |
|
|
|
432,714 |
|
|
[A] |
| Share-based compensation expense |
|
|
193,750 |
|
|
|
258,636 |
|
|
|
- |
|
|
|
452,386 |
|
|
[C] |
| Changes in working capital assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-to-use asset |
|
|
- |
|
|
|
- |
|
|
|
7,220 |
|
|
|
7,220 |
|
|
|
| Accounts payable and accrued expenses |
|
|
99,839 |
|
|
|
- |
|
|
|
(185,308 |
) |
|
|
(85,469 |
) |
|
[1] |
| Accrued interest on notes payable |
|
|
847,987 |
|
|
|
(13,460 |
) |
|
|
251,983 |
|
|
|
1,086,510 |
|
|
[B] [1] |
| Operating lease liability |
|
|
(10,564 |
) |
|
|
- |
|
|
|
(7,220 |
) |
|
|
(17,784 |
) |
|
|
| Supplemental schedule of non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes payable converted into shares of common stock |
|
$ |
267,000 |
|
|
$ |
(267,000 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
[B] |
NOTE
4 – INVENTORIES
Inventories
consisted of the following:
| | |
February 28,
2022 | | |
February 28,
2021 | |
| Raw materials | |
$ | 129,836 | | |
$ | 91,739 | |
| Work-in-process | |
| 14,421 | | |
| - | |
| Finished goods | |
| - | | |
| 2,427 | |
| | |
| | | |
| | |
| Total inventory | |
$ | 144,257 | | |
$ | 94,166 | |
NOTE 5 – PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of
the following:
| | |
February 28,
2022 | | |
February 28,
2021 | |
| Prepaid annual software licenses | |
$ | 94,907 | | |
$ | - | |
| Prepaid commissions | |
| 73,390 | | |
| 63,500 | |
| Vendor advances | |
| 35,500 | | |
| 37,400 | |
| Other prepaid expenses | |
| 51,656 | | |
| 14,303 | |
| Total other current assets | |
$ | 255,453 | | |
$ | 115,203 | |
Equity method investment (written off in fiscal
2020)
In March 2017, the Company entered into a joint
venture (“Jiangsu Shengf”ng") with a Chinese company to build and distribute AuraGen® products in China. The Chinese
partner owns 51% of Jiangsu Shengfeng and contributed facilities and equipment of approximately $9.75 million, and approximately $500,000
of working capital. The Company owns 49% of Jiangsu Shengfeng and contributed $250,000 of working capital as well as a limited license.
In September, 2018, Jiangsu Shengfeng placed a $1,000,000 order with the Company which included an advance payment of $700,000. The Company
failed to deliver products in accordance with the order received. In November 2019, the Company issued a note payable for the $700,000
due to Jiangsu Shengfeng (see Note 10) as part of an agreement for the repayment of the advance subject to Jiangsu Shengf’ng's continuance
of operations. However, starting in January 2020, Jiangsu Shengfeng’s operations were shut down by governmental authorities due
to the COVID-19 virus, and as of the date of this filing, its operations have not restarted. As of February 28, 2020, the Company wrote
off its equity interest in Jiangsu Shengfeng.
NOTE–6 - PROPERTY AND EQUIPMENT, NET
Property and equipment
consisted of the following:
| |
|
February 28, |
|
| |
|
2022 |
|
|
2021 |
|
| Leasehold improvements |
|
$ |
56,530 |
|
|
$ |
- |
|
| Machinery and equipment |
|
|
276,762 |
|
|
|
15,613 |
|
| Vehicle |
|
|
96,334 |
|
|
|
- |
|
| Computer equipment |
|
|
59,816 |
|
|
|
- |
|
| Furniture and fixtures |
|
|
10,592 |
|
|
|
- |
|
| |
|
|
500,034 |
|
|
|
15,613 |
|
| Less accumulated depreciation and amortization |
|
|
(15,508 |
) |
|
|
(743 |
) |
| |
|
$ |
484,526 |
|
|
$ |
14,870 |
|
Depreciation expense
for the years ended February 28, 2022 and 2021 was $14,765 and $743, respectively:
NOTE
7 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable consisted of the following:
| | |
February 28,
2022 | | |
February 28,
2021 | |
| | |
| | |
| |
| Convertible notes payable | |
$ | 1,402,971 | | |
$ | 1,402,971 | |
| Non-current | |
| - | | |
| (1,402,971 | ) |
| Current | |
$ | 1,402,971 | | |
$ | - | |
In Fiscal 2013 and 2014,
the Company issued six convertible notes payable in the aggregate of $4,000,000. As of February 28, 2022 and 2021, the outstanding balance
of the convertible notes payable amounted to $1,402,971. The notes are unsecured, bear interest at 5% per annum and are convertible to
shares of common stock at a conversion price of $1.40 per share, as adjusted. The notes were originally due in 2014 to 2017, and were
all amended in 2018 and the maturity date for all the notes was changed to January 11, 2023.
At February 28, 2022
and 2021, accrued interest on convertible notes payable totaled $284,063 and $213,884, respectively, and is included in accrued expenses
(See Note 11).
NOTE 8 – CONVERTIBLE NOTE PAYABLE-RELATED
PARTY
Convertible
note payable – related party consisted of the following:
| |
|
February 28,
2022 |
|
|
February 28,
2021 |
|
| |
|
|
|
|
|
|
| Convertible note payable |
|
$ |
3,000,000 |
|
|
$ |
3,000,000 |
|
| Non-current |
|
|
- |
|
|
|
(3,000,000 |
) |
| Current |
|
$ |
3,000,000 |
|
|
$ |
- |
|
On
January 24, 2017, the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company.
As part of the agreement, the Company issued a $3,000,000 convertible note. The convertible note is unsecured, bears interest at 5% per
annum, is due February 2, 2023, and is convertible into shares of common stock at a conversion price of $1.40 per share, as adjusted.
At February 28, 2022
and 2021, accrued interest on convertible notes payable-related party totaled $562,911 and $412,911, respectively, and is included in
accrued expenses (See Note 11).
NOTE 9 – NOTES PAYABLE
Notes
payable consisted of the following:
| | |
February 28, 2022 | | |
February 28, 2021 | |
| Secured notes payable | |
| | |
| |
| (a) Note payable-EID loan | |
$ | 150,000 | | |
$ | 150,000 | |
| (b) Notes payable-vehicles and equipment | |
| 265,616 | | |
| - | |
| | |
| | | |
| | |
| Unsecured notes payable | |
| | | |
| | |
| (c) Notes payable-PPP loans | |
| - | | |
| 74,405 | |
| (d) Note payable-Abdou | |
| - | | |
| 120,181 | |
| (e) Note payable-other-in default | |
| 10,000 | | |
| 10,000 | |
| Total | |
$ | 425,616 | | |
$ | 354,586 | |
| Non-current | |
| 327,658 | | |
| 156,255 | |
(a)
Economic Injury Disaster (EID) Loan
Entities
negatively impacted by the COVID-19 pandemic were eligible to apply for loans sponsored by the United States Small Business Administration
(“SBA”) Economic Injury Disaster Loan (“EID Loan”) program. On July 1, 2020, the Company received a $150,000
loan under this program. The proceeds can be used to fund payroll, healthcare benefits, rent and other qualifying expenses, and the loan
is not subject to a loan forgiveness provision. The loan is due July 1, 2050, interest accrues at 3.75% per annum, and is secured by
the assets of the Company.
(b)
Notes payable-vehicle and equipment
During fiscal 2022, the Company purchased two
pieces of equipment and a vehicle for $329,297 as a part of its efforts to expand its operations and research and development capacities.
The Company made down payments aggregating $41,300 with the balance financed by two notes payable aggregating $287,997. The notes are
secured by the equipment and vehicle purchased. One note is due in 36 equal monthly payments of approximately $6,100 each, including interest
at 2.9% per annum. The second note is due in 72 equal monthly payments of approximately $1,500 each, including interest at 10.9% interest
per annum. As of February 28, 2022, the balance of the notes was $265,616.
(c)
Paycheck Protection Plan (PPP) Loans
On
April 23, 2020, the Company was granted a Paycheck Protection Program (“PPP”) loan in the amount of $74,405 pursuant to the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP matures on April 23, 2022, bears interest at
a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the SBA. The Company applied
ASC 470, Debt, to account for the PPP loan. Funds from the PPP loan may only be used for qualifying expenses, including qualifying payroll
costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company used the loan
amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying
expenses. The Company applied for the forgiveness of the PPP Loan, and in April 2021 the Company
was notified that the PPP loan, including accrued interest, was being forgiven under the terms of the PPP program. As a result, the Company
recorded other income of approximately $75,100, representing the forgiven principal and interest.
In March
2021, the Company applied for and received a second PPP loan (“PPP-2”) in the amount of approximately $91,200 pursuant to
CARES Act, as amended to allow a second loan. The terms of the PPP-2 loan were essentially the same as under the original PPP loan. The
Company applied for the forgiveness of the PPP-2 loan, and in January 2022 we were notified that the PPP-2 loan, including accrued interest,
was being forgiven under the terms of the PPP program. As a result, the Company recorded other income of approximately $92,000, representing
the forgiven principal and interest. Total gain on extinguishment of debt recorded for the PPP and PPP-2 loans is $167,104
(d)
Abdou
On
June 20, 2013, the Company issued convertible notes payable to two individuals in the aggregate of $125,000. The notes were due June
20, 2014. The loans were not paid when due, and in September 2019, the note holders and the Company reached a settlement for past due
principal, accrued interest, and fees of approximately $325,000. As of February 28, 2020, the outstanding balance of the settlement note
was $215,181. During the year ended February 28, 2021, the Company paid $95,000 of the note, and as of February 28, 2021, the outstanding
balance was $120,181. During the year ended February 28, 2022, the Company paid the remaining balance of $120,181.
(e)
Other notes payable
Demand
promissory notes as of February 28, 2022 and February 28, 2021 are for one individual issued in September 2015 that is payable on demand
with an interest rate of 10% per annum.
During the year ended February 28, 2021, an aggregate
of $743,386, consisting of $491,537 of demand notes principal and $251,849 of accrued interest, was extinguished as the related statute
of limitations were determined to have expired (see Note 12).
At February 28, 2022
and 2021, accrued interest on notes payable totaled $36,541 and $28,822, respectively, and is included in accrued expenses (See Note 11).
NOTE 10 – NOTES PAYABLE-RELATED PARTIES-IN
DEFAULT
Notes
payable-related parties consisted of the following:
| | |
February 28,
2022 | | |
February 28,
2021 | |
| Unsecured notes payable | |
| | |
| |
| (a) Notes payable-Koppel-in default | |
$ | 5,607,323 | | |
$ | 5,607,323 | |
| Accrued interest-Koppel-in default | |
| 6,533,318 | | |
| 5,710,464 | |
| Subtotal-Koppel-in default | |
| 12,140,641 | | |
| 11,317,787 | |
| | |
| | | |
| | |
| (b) Note payable- Gagerman-in default | |
| 82,000 | | |
| 82,000 | |
| Accrued interest-Gagerman-in default | |
| 73,428 | | |
| 65,228 | |
| Subtotal-Gagerman-in default | |
| 155,428 | | |
| 147,228 | |
| | |
| | | |
| | |
| (c) Note payable-Jiangsu Shengfeng-in default | |
| 700,000 | | |
| 700,000 | |
| | |
| | | |
| | |
| Total | |
$ | 12,996,069 | | |
$ | 12,165,015 | |
| Non-current | |
| - | | |
| - | |
| Current | |
$ | 12,996,069 | | |
$ | 12,165,015 | |
(a)
Kopple Notes
In fiscals 2013 through 2018, the Company issued
notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate of $6,107,323. Robert Kopple
was the former Vice-Chairman of the Company’s Board of Directors and is a current shareholder in the Company. The notes are unsecured,
bear interest at rates ranging from 5% and 15% per annum, and were due in fiscal 2014 through fiscal 2018. At February 28, 2022 and 2021,
the accrued interest due to Kopple totaled $6,533,318 and $5,710,464, respectively. Due to its significance, the balance of accrued interest
is added to the note payable principal for presentation on the accompanying balance sheets. As of February 28, 2022 and 2021, the outstanding
balance of the Kopple notes payable and accrued interest amounted to $12,140,641 and $11,317,787, respectively.
Kopple
brought suit against the Company beginning in 2017 for repayment of the notes.
On March 14, 2022, the Company reached an agreement
with Kopple to resolve all remaining litigation between them. Under the terms of the settlement, the Company agreed to pay Kopple an aggregate
amount of $10,000,000, and granted Koppel warrants exercisable into 3,331,664 shares of the Company’s common stock. The fair value
of the warrants is estimated to be $1,000,000, resulting in total consideration to Kopple of approximately $11,000,00 (see Note 19).
(b)
Note payable-Gagerman
In
April 2014, the Company issued a note payable to Gagerman, former CEO and CFO of the Company, for $82,000. The note is unsecured, bears
interest at a rate of 10% per annum and matured in March 2019. At February 28, 2022 and 2021, accrued interest on notes payable-Gagerman
totaled $73,428 and $65,228, respectively, and is added to the note principal for presentation on the accompanying balance sheets. As
of February 28, 2022 and 2021, the outstanding balance of the Gagerman notes payable and accrued interest amounted to $155,428 and $147,228,
respectively.
(c)
Jiangsu Shengfeng Note
On November 20, 2019, the Company reached an agreement
with its joint venture partner Jiangsu Shengfeng (see Note 5) regarding the return of $700,000 that had been advanced to the Company,
and the Company issued a non-interest-bearing promissory note for $700,000 to be paid over a 11-month period beginning March 15, 2020,
through February 15, 2021. As of February 28, 2022 and February 28, 2021, the principal due was $700,000, respectively. As of February
28, 2022, the note is past due and deemed in default.
NOTE 11 – ACCRUED EXPENSES
Accrued
expenses consisted of the following:
| | |
February 28,
2022 | | |
February 28,
2021 | |
| | |
| | |
(As Restated) | |
| | |
| | |
| |
| Accrued payroll and related expenses | |
$ | 431,597 | | |
$ | 547,412 | |
| Accrued interest-convertible notes payable | |
| 284,063 | | |
| 213,884 | |
| Accrued interest-convertible notes payable related party | |
| 562,911 | | |
| 412,911 | |
| Accrued interest-notes payable | |
| 36,541 | | |
| 28,822 | |
| Other accrued expenses | |
| 377,061 | | |
| 88,746 | |
| | |
$ | 1,692,173 | | |
$ | 1,291,775 | |
NOTE 12 – GAIN ON EXTINGUISHMENT
OF DEBT
During fiscal 2021, the Company recorded a gain
on extinguishment of debt primarily related to the cancellation of liabilities following the expiration of the statute of limitations
on such debt. The Company obtained a legal opinion with conclusions that support the Company’s position that the statute of limitations
for all potential claims owed by the Company on approximately $2,704,000 of accrued wages and vendor payables, and notes payable and accrued
interest of approximately $743,000, had expired pursuant to various precedents. Accordingly, the Company recorded a gain on extinguishment
of debt of $3,447,039 in the accompanying statement of operations for the year ended February 28, 2021.
NOTE 13 – LEASES
During
fiscal 2021, our facilities consisted primarily of an approximate 20,000 square feet facility in Stanton, California and an additional
storage facility in Santa Clarita, California. Effective February 28, 2021, we vacated the Stanton facility and consolidated our administrative,
production operations including warehousing within an approximately 18,000 square foot facility in Lake Forest, California. The Lake
Forest lease is for 66-months effective February 2021 through August 31, 2026. The initial monthly base rental rate was approximately
$22,000 per month and escalates 3% each year to approximately $26,000 per month in 2026. The lease liability was determined by discounting
the future lease payments under the lease terms using a 10% per annum discount rate to arrive at the current lease liability.
Operating
lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent
the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements
is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments.
The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The
components of lease expense and supplemental cash flow information related to leases for the period are as follows:
| | |
Year ended
February 28,
2022 | | |
Year ended
February 28,
2021 | |
| Lease Cost | |
| | |
| |
| Operating lease cost (included in general and administration in the Company’s statement of operations) | |
$ | 279,000 | | |
$ | 170,000 | |
| | |
| | | |
| | |
| Other Information | |
| | | |
| | |
| Cash paid for amounts included in the measurement of lease liabilities for the years ended February 28, 2022 | |
$ | 222,000 | | |
$ | - | |
| Weighted average remaining lease term – operating leases (in years) | |
| 4.5 | | |
| 5.5 | |
| Average discount rate – operating leases | |
| 10.0 | % | |
| 10.0 | % |
The
supplemental balance sheet information related to leases for the period is as follows:
| | |
At
February 28,
2022 | |
| Operating leases | |
| |
| Long-term right-of-use assets | |
$ | 1,000,467 | |
| | |
| | |
| Short-term operating lease liabilities | |
$ | 179,450 | |
| Long-term operating lease liabilities | |
| 867,484 | |
| Total operating lease liabilities | |
$ | 1,046,934 | |
Maturities
of the Company’s lease liability is as follows:
| Year Ending February 28: | |
Operating
Lease | |
| 2023 | |
$ | 275,000 | |
| 2024 | |
| 283,000 | |
| 2025 | |
| 292,000 | |
| 2026 | |
| 300,000 | |
| 2027 | |
| 128,000 | |
| Total lease payments | |
| 1,278,000 | |
| Less: Imputed interest/present value discount | |
| (231,066 | ) |
| Present value of lease liabilities | |
$ | 1,046,934 | |
NOTE 14 – DERIVATIVE WARRANT LIABILITY
The
Company issued warrants in prior years that include a fundamental transaction provision that could give rise to an obligation to pay
cash to the warrant holder. The Company determined that the warrants do not satisfy the criteria for classification as equity instruments
due to the existence of the cash settlement feature that is not within the sole control of the Company, and the warrants are accounted
for as liabilities in accordance with ASC 815. The fair value of the warrants is remeasured at each reporting period, and the change
in the fair value is recognized in earnings in the accompanying statements of operations. The warrant liability will ultimately be converted
into the Company’s equity when the warrants are exercised, or will be extinguished on the expiration of the outstanding warrants.
The following tables summarize the derivative
warrant liability:
| |
|
February 28,
2022 |
|
|
February 28,
2021 |
|
| Stock price |
|
$ |
0.41 |
|
|
$ |
0.35 |
|
| Risk free interest rate |
|
|
1.0 |
% |
|
|
1.8 |
% |
| Expected volatility |
|
|
170 |
% |
|
|
232 |
% |
| Expected life in years |
|
|
0.98 |
|
|
|
2.0 |
|
| Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
| Number of warrants |
|
|
4,800,834 |
|
|
|
5,662,272 |
|
| Fair value of derivative warrant liability |
|
$ |
828,232 |
|
|
$ |
1,366,375 |
|
| |
|
Number of
Warrants
Outstanding |
|
|
Fair Value of Derivative Warrant Liability |
|
| February 29, 2020 (As Restated) |
|
|
5,816,939 |
|
|
$ |
947,272 |
|
| Change in fair value of derivative warrant liability |
|
|
- |
|
|
|
432,714 |
|
| Gain on extinguishment on expiration of warrants |
|
|
(154,667 |
) |
|
|
(13,611 |
) |
| February 28, 2021 (As Restated) |
|
|
5,662,272 |
|
|
$ |
1,366,375 |
|
| Change in fair value of derivative warrant liability |
|
|
- |
|
|
|
(476,603 |
) |
| Gain on extinguishment on expiration of warrants |
|
|
(861,438 |
) |
|
|
(61,540 |
) |
| February 28, 2022 |
|
|
4,800,834 |
|
|
$ |
828,232 |
|
NOTE 15 – STOCKHOLDERS’ DEFICIT
Common
Stock
On
February 28, 2022 and February 28, 2021, the Company had 150,000,000 shares of $0.0001 par value common stock authorized for issuance.
During
the year ended February 28, 2022, the Company issued an aggregate of 12,016,095 shares of its common stock as follows:
| ● | The Company sold 10,199,665 shares of common stock for net proceeds of $2,652,860 in a private placement. |
| ● | The Company issued 1,571,429 shares of common stock with a fair value of $550,000 for settlement of debt. |
| ● | The Company issued 245,001 shares of common stock for services with a fair value of $73,500. The common shares were valued based on the closing price of the Company’s shares of common stock on the respective dates of issuances. |
During
the year ended February 28, 2021, the Company issued an aggregate of 14,513,963 shares of its common stock as follows:
| ● | The Company sold 14,098,327 shares of common stock for net proceeds of $2,146,000 in a private placement. |
| | | |
| | ● | The Company issued 415,636 shares of common stock with a fair value
of $103,909 for settlement of debt. |
Stock Options
A
summary of the Company’s stock option activity is as follows:
| | |
Number of Shares | | |
Exercise
Price | | |
Weighted Average Intrinsic Value | |
| Total options, February 29, 2020 (As Restated) | |
| 1,040,001 | | |
$ | 1.40 | | |
$ | - | |
| Granted | |
| 4,250,000 | | |
| 0.38 | | |
| 225,000 | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Cancelled | |
| - | | |
| - | | |
| - | |
| Total options, February 28, 2021 (As Restated) | |
| 5,290,001 | | |
$ | 0.77 | | |
$ | 225,000 | |
| Granted | |
| - | | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Cancelled | |
| (230,232 | ) | |
| 1.40 | | |
| - | |
| Total options, February 28, 2022 | |
| 5,059,769 | | |
$ | 0.55 | | |
$ | 360,000 | |
| Exercisable, February 28, 2022 | |
| 5,059,769 | | |
$ | 0.55 | | |
$ | 360,000 | |
The
exercise prices and information related to options under the 2011 Plan outstanding on February 28, 2022 is as follows:
| Range of Exercise Price | |
Stock
Options Outstanding | | |
Stock
Options Exercisable | | |
Weighted Average Remaining Contractual Life | | |
Weighted Average Exercise
Price of
Options Outstanding | | |
Weighted Average Exercise Price of Options Exercisable | |
| $0.25 to $1.40 | |
| 5,059,769 | | |
| 5,059,769 | | |
| 3.25 | | |
$ | 0.55 | | |
$ | 0.55 | |
During
the year ended February 28, 2021, the Board of Directors granted options to purchase an aggregate of 2,750,000 shares of the Company’s
common stock to the Company’s President and members of the Board of Directors. Options exercisable into 2,250,000 shares have an
exercise price of $0.25 per share, and options exercisable into 500,000 shares have an exercise price of $0.50 per share. Options exercisable
into 2,000,000 shares vested immediately, and options exercisable into 750,000 shares vest over 12 months. The 2,750,000 options expire
in five years. The aggregate fair value of the options was determined to be $576,879 using a Black-Scholes option pricing model based
on the following assumptions: (i) volatility rate of 222% to 226%, (ii) discount rate of 0.16% to 0.57%, iii) zero expected dividend
yield, and (iv) expected life of 2.5 years to 3 years.
In February 2021, the Company’s Board of
Directors authorized the grant of 1,500,000 stock options at an exercise price of $0.50 per share as compensation for advisors to the
Board. As of February 28, 2022 and 2021, these options have not been issued as the proposal to renew the employee stock option plan needs
to be approved by the shareholders at an annual meeting. Upon approval, the 1,500,000 stock options will be issued. The options vest over
12 months, and expire in five years. Although the options have not been issued, the commitment to issue existed when granted by the Board.
As a result, the fair value of the authorized grant was determined to be $487,600 using a Black-Scholes option pricing model based on
the following assumptions: (i) volatility rate of 226%, (ii) discount rate of 0.34%, iii) zero expected dividend yield, and (iv) expected
life of 3 years.
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its
common stock to estimate the future volatility for its common stock. The expected life of the stock options granted is estimated using
the “simplified” method, whereby the expected term equals the average of the vesting term and the original contractual term
of the stock option. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders
in the past and does not expect to pay dividends to its common stockholders in the future.
During
the years ended February 28, 2022 and 2021, the Company recognized stock-based compensation of $612,093 and $452,386 related to the fair
value of vested stock options.
Employee
Stock Option Plans
In
September 2009, the Company’s shareholders approved the 2006 Employee Stock Option Plan (as amended, the “2006 Plan”).
Under the 2006 Plan, the Company may grant options for up to 10,000,000 or 15% of the number of shares of Common Stock of Aura outstanding
from time to time. As of February 28, 2022 and 2021, no options remain outstanding under the 2006 Plan as the last remaining options
expired during fiscal 2020, and no options are available for grant under the 2006 Plan as the authorized term of the plan has expired.
In
October 2011, the Company’s shareholders approved the 2011 Director and Executive Officers Stock Option Plan (the “2011 Plan”).
Under the 2011 Plan, the Company may grant options, or warrants, for up to 15% of the number of shares of Common Stock of the Company
outstanding from time to time. Pursuant to this plan, the Board or a committee of the Board may grant an option to any person who is
elected or appointed a director or executive officer of the Company. The exercise price of each option shall be at least equal to the
fair market value of such shares on the date of grant, and the term of the options may not be greater than five years.
During
the year ended February 28, 2022, there were no options granted under the 2011 Plan. During the year ended February 28, 2021, the Company
issued 2,750,000 stock options under the 2011 Plan.
Warrants
| | |
Number of
Warrants | | |
Exercise
Price | |
| Outstanding, February 29, 2020 | |
| 5,816,939 | | |
$ | 1.40 | |
| Granted | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | |
| Cancelled | |
| (154,667 | ) | |
| 1.40 | |
| Outstanding, February 28, 2021 | |
| 5,662,272 | | |
$ | 1.40 | |
| Granted | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | |
| Cancelled | |
| (861,438 | ) | |
| 1.40 | |
| Outstanding, February 28, 2022 | |
| 4,800,834 | | |
$ | 1.40 | |
There was no intrinsic value as of February 28, 2022, as the exercise
prices of these warrants were greater than the market price of the Company’s stock. The exercise prices and information related
to the warrants under the 2011 Plan outstanding on February 28, 2022 is as follows:
| Range of Exercise Price | | |
Stock
Warrants
Outstanding | | |
Stock
Warrants
Exercisable | | |
Weighted
Average
Remaining
Contractual
Life | | |
Weighted
Average
Exercise
Price of
Warrants
Outstanding | | |
Weighted
Average
Exercise
Price of
Warrants
Exercisable | |
| $ | 1.40 | | |
| 4,800,834 | | |
| 4,800,834 | | |
| 0.98 | | |
$ | 1.40 | | |
$ | 1.40 | |
NOTE 16 – INCOME TAXES
For the year ended February 28, 2022, the Company
had no income tax expense. For the year ended February 28, 2021, the Company recorded an income tax expense of $800 for state franchise
taxes.
| |
|
FY2022 |
|
|
FY2021 |
|
| Current: |
|
|
|
|
|
|
| Federal |
|
$ |
- |
|
|
$ |
- |
|
| State |
|
|
- |
|
|
|
800 |
|
| Total current |
|
$ |
- |
|
|
$ |
800 |
|
| |
|
|
|
|
|
|
|
|
| Deferred: |
|
|
|
|
|
|
|
|
| Federal |
|
$ |
- |
|
|
$ |
- |
|
| State |
|
|
- |
|
|
|
- |
|
| Total deferred |
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
| Total Provision |
|
$ |
- |
|
|
$ |
800 |
|
The following is a reconciliation of the statutory federal income tax
rate to the Company’s effective tax rate:
| |
|
FY2022 |
|
|
FY2021 |
|
| Federal tax benefit at statutory rate |
|
|
21 |
% |
|
|
21 |
% |
| State tax benefit, net of federal benefit |
|
|
7 |
% |
|
|
7 |
% |
| Change in valuation allowance |
|
|
(28 |
)% |
|
|
(28) |
% |
| Total |
|
|
0 |
% |
|
|
0 |
% |
The following table summarizes our deferred tax
asset at February 28, 2022, and February 28, 2021:
| |
|
FY2022 |
|
FY2021 |
| Deferred tax asset |
|
|
|
|
| Net operating loss carryforwards |
|
$ |
42,141,000 |
|
|
$ |
46,999,000 |
|
| Gross deferred tax assets |
|
|
42,141,000 |
|
|
|
46,999,000 |
|
| Valuation allowance |
|
|
(42,141,000 |
) |
|
|
(46,999,000 |
) |
| Net deferred tax asset (liability) |
|
$ |
- |
|
|
$ |
- |
|
The provisions of ASC Topic 740, Accounting for
Income Taxes, require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred
tax assets are recoverable. For the years ended February 28, 2022 and 2021, based on all available objective evidence, including the existence
of cumulative losses, the Company determined that it was more likely than not that the net deferred tax assets were not fully realizable.
Accordingly, the Company established a full valuation allowance against its net deferred tax assets. The Company intends to maintain a
full valuation allowance on net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.
During the years ended February 28, 2022 and 2021, the valuation allowance decreased by $4.8 million and $5.8 million, respectively.
At February 28, 2022, the Company had available
Federal and state net operating loss carryforwards (“NOL”s) to reduce future taxable income. For Federal purposes the amounts
available were approximately $168.4 million and for state purposes the amounts available were approximately $96.8 million. The Federal
carryforwards expire on various dates through 2042 and the state carryforwards expire through 2039. Due to restrictions imposed by Internal
Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s
NOL may be limited as a result of changes in stock ownership.
The Company’s operations are based in California and it is subject
to Federal and California state income tax. Tax years after 2017 are open to examination by United States and state tax authorities.
The Company adopted the provisions of ASC 740,
which requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination
by the appropriate taxing authorities before any tax benefit can be recorded in the financial statements. ASC 740 also provides guidance
on the recognition, measurement, classification and interest and penalties related to uncertain tax positions. As of February 28, 2022
and 2021, no liability for unrecognized tax benefits was required to be recorded or disclosed.
Our
continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of February 28,
2022, and February 28, 2021, we have no accrued interest and penalties related to uncertain tax positions.
We
are subject to taxation in the U.S. and California. Our tax years for 2014 and forward are subject to examination by our tax authorities.
We are not currently under examination by any tax authority.
The
Company has failed to file its California tax returns for the years ended February 28, 2015 thru February 28, 2022 due to its inability
to pay the minimum annual franchise tax payment of $800. The balance of accrued income taxes related to unpaid California franchise tax
of $4,800 represents six years of minimum taxes due.
NOTE 17 – RELATED PARTY TRANSACTIONS
As of February 28, 2022 and 2021, Bettersea LLC
(“Bettersea”) was an 11.0% and 10.4%, respectively, shareholder in the Company. For the years ended February 28, 2022 and
2021, the Company incurred total fees to Bettersea of $137,500 and $131,300, respectively, for consulting services. As of February 28,
2022 and 2021, a total of $218,507 and $602,501, respectively, was due to Bettersea and included in accounts payable and accrued expenses..
During fiscal 2022, the Company issued 1,285,714 shares of common stock
with a fair value of $450,000 for the settlement of accounts payable of $450,000 due to Bettersea. Also during fiscal 2022, the Company
issued 285,715 shares of common stock with a fair value of $100,000 for the settlement of accounts payable of $100,000 due to the Company’s
President. During fiscal 2021, the Company issued 415,636 common shares with a fair value of $103,909 for the settlement of accounts payable
of $103,909 due to a 50% owner of Bettersea. There were no gains or losses recognized on these transactions.
NOTE 18 – CONTINGENCIES
The Company is subject to legal proceedings and claims that have arisen
in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate
and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome
of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood
of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s
expectations, the Company’s financial statements for that reporting period could be materially adversely affected.
In 2017, the Company’s former COO was awarded
approximately $238,000 in accrued salary and related charges by the California labor board. In August 2021, the Company reached a settlement
by which the Company agreed to pay approximately $330,000, representing the principal award plus accrued interest. As of the time of this
filing, the Company has paid approximately $108,400 toward the settlement amount. The remaining balance of approximately $221,600
is to be paid no later than September 1, 2022, and accrues interest of 10% per annum until paid.
Since July 2017 the Company has been 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 entities (collectively the “Kopple Parties”)
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 the Kopple Parties that resolves all claims asserted against the Company without any admission,
concession or finding of any fault, liability or wrongdoing on the part of the Company. Under the terms of the settlement, we have agreed
to pay an aggregate amount of $10 million over a period of seven years; $3 million of which is to be paid on or before June 8, 2022, after
which, interest will accrue on the unpaid balance at a rate of 6%, compounded annually. All amounts, including all accrued interest, are
to be paid no later than eight years from the date of the initial payment. The Kopple Parties have also received seven-year warrants to
purchase up to an aggregate of approximately 3.3 million shares of our common stock at a price of $0.85 per share. The settlement also
provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain
increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company
remains in uncured default in its payment obligations under the settlement. As of 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 Note 19)
On March 26, 2019, various stockholders of the Company controlling
a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member
of the Company’s Board and electing Cipora Lavut as a director of the Company. On March 27, 2019, those same stockholders
delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s
Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding
shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal
to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the
State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the
consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr.
On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur,
Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting
by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s
outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann,
Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this
stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs
from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To date, no final determination has
been made as to the amount of recoupment, if any, to which such stockholders may be entitled.
NOTE 19 – SUBSEQUENT EVENTS
In fiscals 2013 through 2018, the Company issued
notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate of $5,607,323 (see Note 10).
The notes were due in fiscal 2014 through fiscal 2018. As of February 28, 2022 and 2021, the outstanding balance of the Kopple notes payable
and accrued interest amounted to $12,140,641 and $11,317,787, respectively. Kopple brought suit against the Company beginning in 2017
for repayment of the notes.
On March 14, 2022, the Company reached an agreement
with Kopple to resolve all remaining litigation between them. Under the terms of the settlement, the Company agreed to pay Kopple an aggregate
amount of $10,000,000, including $3,000,000 to be paid by June 8, 2022, and granted Koppel warrants exercisable into 3,331,664 shares
of the Company’s common stock at a price of $0.85 per share. The fair value of the warrants is estimated to be $1,000,000, resulting
in total consideration to Kopple of approximately $11,000,00. Pursuant to current accounting guidelines, the Company will only recognize
any gain on the settlement of the Kopple notes and accrued interest of $12,140,161 upon completion of all settlement payments. 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. The settlement provides for certain increases in the amount
payable to Kopple and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its
payment obligations.
Subsequent to February 28, 2022, the Company issued
1,153,666 shares of common stock in exchange for cash proceeds of $346,100.
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