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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.05pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.21pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.11pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Risk Factors (Item 1A)
4,538 words
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 , 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 to recognize the legal effectiveness of the consents and the decision by the Company’s former team to utilize corporate resources to vigorously contest the shareholder action has consumed significant financial resources, temporarily operations, and resulted in substantial costs, all of which had a material effect on our business, operating results and financial condition.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
The Company’s financial statements have been prepared under the assumption that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended February 28, 2025, the Company incurred a net loss of $21.1 million, used cash in operations of $3.2 million, and at February 28, 2025, had a stockholders’ deficit of $37.6 million. In addition, at February 28, 2025, notes payable and related accrued interest with an aggregate balance of $5.2 million have reached maturity and are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s February 29, 2024, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to increase revenues, obtain additional financing, drive further operating efficiencies, reduce expenditures, and ultimately, create profitable operations. In the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations. The Company does not have any sufficient committed sources of capital and does 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.
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.
While the impact of the COVID-19 pandemic on our business has largely abated, uncertainties continue from the ongoing effects of the pandemic and an economic slowdown. The effects of government agency actions and the Company’s policies and those of third parties to combat future pandemics may negatively impact productivity and the Company’s ability to market and sell its products, cause disruptions to its supply chain anon d impair its ability to execute its business development strategy. These and other disruptions in the Company’s operations and the global economy could negatively impact the Company’s business, operating results and financial condition.
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 axial flux induction technology is geared toward industrial, commercial and EV motor users, and in addition, our mobile power solution is geared to 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, prolongeddisruptions 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 2025 and Fiscal 2024, the Company increased 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 2025 and Fiscal 2024, we had approximately $3.2 million negative and $3.0 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, increased interest rates and inflation 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.
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 in the past and may in the future become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. Certain current 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.
On February 28, 2025, we had total liabilities of $39.0 million, of which $17.6 million was due to a derivative liability related to debt conversion rights to a related party. The current liability portion was $38.4 million, of which $17.6 million was due to a derivative liability related to debt conversion rights to a related party. After adjusting for the derivative liability, the current liabilities are $20.9 million as compared to $15.2 million on February 29, 2024.
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 from securities offerings. Accordingly, our ability to meet our obligation 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 foregoattractive 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 our axial flux induction motors and AuraGen ® mobile power 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... 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.
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, management has concluded that as of February 28, 2025, its internal controls over financial reporting were effective. While the Company believes it has addressed and remediated material weaknesses identified in 2022, there can be no guarantee that other weaknesses in its financial reporting controls will not be identified in the future. Presently, the Company does not have the financial resources to fully comply with all the 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.
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MD&A (Item 7)
2,027 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to “Item 1”.
Overview
Our business is based on the exploitation of our Axial Flux Induction technology for both electric motors and generators. Our power generation solution based on axial flux induction is known as the AuraGen ® for commercial and industrial applications and the VIPER for military applications. Aura’s axial flux induction technology provide: (i) higher motor/generator efficiency, that directly translated to lower cost for operations (ii) lighter and smaller machines that lead to lower manufacturing cost, (iii) higher reliability that results in less down time and maintenance cost, (iv) the only raw materials used for construction are copper and steel without any rare earth or any other types of permanent magnets. This immediately results in global availability without market risks as well as geopolitical risks of dependence on single source, and (v) the use of approximately 60% less of copper than the equivalent radial flux induction machines, results in less needed mining to extract the needed copper with direct positive environmental impact.
Our business model consists of three major components: (i) sales and marketing, iii) design and engineering and (iii) axial flux induction motors and generators manufacturing. Our sales and marketing approaches are composed of direct sales in North America and the use of agents and distributors in other areas. In addition, we are also exploring limited licensing of our technology to very large potential users as well as potential joint ventures with existing industrial motor/generator suppliers. The second component of our business model is focused on the design, engineer and commercialize of new commercial and industrial electric motors based on our axial flux induction for numerous applications such as pumps, compressors, and HVAC. We are also designing electric motors for both 2- and 4-wheel EV application, as well as, expending the product line for electric power generation. The third component of our business model is to set up manufacturing of the axial flux induction products being engineered and design.
We recently completed a 250-kW electric motor prototype based on our axial flux induction for EV applications. This activity is in conjunction with a large European tier 1 automotive supplier interest and inputs. We also completed the design for a 250-kW generator based on our axial flux induction technology. We expect to build this new generator over the next few months. We have also in May 2024 completed the installation of our new smaller 10-kW mobile power generator on a Polaris type ATV platform for US military applications. We started working directly with Polaris to perfect the output from the new generator on their platform. We completed the designs for 5 horsepower axial flux induction motor for swimming pool pump applications, and we also completed the design for a 10 horsepower axial flux induction motor for irrigation pump applications. We are also currently in discussions for usage of our technology for numerous wind turbines applications. During fiscal 2025 we also applied for 3 new patents related to axial flux induction machines.
In fiscal 2024 and 2025 we have significantly increased our engineering capabilities with having hired experts’ engineers in thermo dynamics (Ph.D.), electromagnetic motor design (Ph.D.) Power electronics & control (Ph.D.) and mechanical design (M.S.M.E). We have also acquired the latest in advance engineering tools such as Ansys Maxwell finite elements, MATLAB and 3-D solid work. Our engineering, research and development costs for fiscal 2025 were approximately $1.2 million.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. For these key estimates and assumptions, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are significant differences between these estimates and actual results, our financial statements may be materially affected. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates. There were no changes to our critical accounting policies described in the financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, that impacted our condensed financial statements and related notes included herein.
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, on an average cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not be subsequently written up.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Inflation
Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising energy prices create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company’s business in fiscals 2023 and 2024 and will continue to impact the Company’s business in fiscal 2025. The implications of higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses.
Results of Operations
Fiscal 2025 compared to Fiscal 2024
Revenues
Net revenue was $50 for Fiscal 2025, compared to $56 for Fiscal 2024. Revenues continue to be negatively impacted due to a generally low level of resources on our legacy products as well as our shift to the development and production of numerous prototypes for our new product line. We cannot project with confidence the timing or amount of revenue that we can expect until the prototypes are completed, which should be in Fiscal 2026.
Cost of Goods
Cost of goods sold was $29 for Fiscal 2025, compared to $193 for Fiscal 2024. This resulted in a gross profit of $21 compared to a gross loss of $137 for Fiscal 2024. The gross loss and related gross margin for Fiscal 2024 were largely influenced by the low volume of shipments, which reduced our ability to fully absorb fixed operating costs.
Engineering, Research and Development
Engineering, research and development expenses were $1,249 for Fiscal 2025, compared to $750 for Fiscal 2024. The increase is a result of the Company’s augmented engineering activities, including (i) successfully recruiting new additions to the engineering staff; (ii) licensing of modeling and design software tools for the full 12-month period; as well as (iii) additional expenses incurred in the process of designing, fabricating and testing the new version of our electronic control unit (“ECU”) for our AuraGen ® /VIPER products.
Selling, General and Administrative Expense
Selling, general and administration (“SG&A”) expenses for Fiscal 2025 were $3,586 as compared to $1,873 for Fiscal 2024, an increase of $1,713 or 91%. The increase in SG&A was due to increased headcount and pay increases, and $1,342 in stock-based compensation.
Other Income (Expense) and Interest Expense
Interest expense increased by $345 to $1,810 for Fiscal 2025, as compared to $1,465 for Fiscal 2024. During Fiscal 2025, the Company recorded a gain on debt settlement of $179 and a loss on debt extinguishment of $19,324 (see Notes 7 and 9 of the accompanying financial statements), both of which did not occur in the prior year period. The Company estimated the fair value of the conversion option derivative liability using a Black-Scholes option pricing model and recorded the change in fair value of the derivative liability of $4,629 and $9 at February 28, 2025 and February 29, 2024, respectively.
Net Loss
We recorded net losses of approximately $21,138 and $4,216 for Fiscal 2025 and 2024, respectively. The increase in our net loss was due to several factors, as noted above, including increased stock-based compensation expense, the recording of a loss on debt extinguishment to a related party, and the change in fair value of our derivative liability.
Liquidity and Capital Resources
For the year ended February 28, 2025, we recorded a net loss of $21.1 million. used cash in operations of $3.2 million, and at February 28, 2025, had a stockholders’ deficit of $37.6 million. In addition, at February 28, 2025, notes payable and related accrued interest with an aggregate balance of $5.2 million have reached maturity and are past due. These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s February 28, 2025, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.
Prior to Fiscal 2020, in order to maintain liquidity, we relied upon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis performed by management, we estimate that we will need an additional $6 million to maintain existing operations for Fiscal 2026 and increase the volume of shipments to customers. We cannot assure the reader that additional financing will be available nor that the commercial targets will be met in the amounts required to keep the business operating. The issuance of additional shares of equity in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise the needed funds, we will also be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.
See “Item 3. Legal Proceedings” and “Part IV, Item 15, and Note 9 to the Financial Statements” included elsewhere in this Annual Report on Form 10-K for information regarding the dispute and settlement with Mr. Kopple regarding these transactions.
