ITEM
1. BUSINESS
Introduction
The
Company, a Delaware corporation, was founded in 1987. The Company designs, assembles, tests and sells our proprietary and patented
axial flux induction machine known as the AuraGen
®
for industrial and commercial applications and the VIPER for
military applications (collectively referred to as the “AuraGen”). The Company also designs, tests and sells our proprietary
linear-force electromagnetic actuators.
Our
patented AuraGen
®
system –– when applied as a generator –– uses the existing engine of
a vehicle (or any other prime mover) to create mechanical energy which is then converted into electric power by our system. Our
patented control system is used to deliver such power to the user. When used as an electric motor, our system delivers mechanical
power to drive mechanical devices. 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 completely disrupted when the
Company was forced to move from its facilities in Redondo Beach, California to a smaller facility in Stanton, California. During
fiscal 2017, the Company suspended 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. Subsequent to year end, we have begun once again shipping units.
Traditional
induction machines represent a radial flux design and are the workhorse of industry due to their robustness, attractive cost,
and easy control. However, radial flux machines are also relatively heavy and bulky. Axial flux induction machines (such as the
AuraGen
®
), on the other hand, have all of the advantages of radial flux machines, but with the advantage of higher
energy density. This results in axial flux machines being smaller and lighter yet with equivalent performance. Unlike permanent
magnet (“PM”) machines, induction machines do not use any permanent magnets and therefore the controller can change
the magnetic (B) fields since generally the magnetic (B) field is proportionate to the voltage divided by the frequency (V/f).
It is generally accepted that for PM machines, as machine size grows, the magnetic losses increase proportionately, and partial
load efficiency drops. On the other hand, with induction machines, as the machine size grows, magnetic losses do not necessarily
grow. Induction drives could offer an advantage when high-performance is desired. The peak efficiency of an induction drive will
be somewhat lower than with PM machines, but average efficiency may actually increase.
The
history of electric motors reveals that the earliest machines were in fact axial flux machines. However, after the first radial
flux machines were demonstrated in the early 1900’s, such machines were accepted as mainstream configuration. The reason
for shelving the axial flux machines were multifold and can be summarized as follows: (i) 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. Technological developments by Aura show that
all of the historical objections for axial flux machines can be addressed with recent developments in the design of such machines,
as well as, the design of the proper manufacturing processes and tooling.
The
issue of the 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. This has been disclosed in Aura’s U.S. Patent 5,734,217
(March 1998), which expired in March 2018, and U.S. Patent 6,157,175 (Dec. 2000). In addition to other benefits, the topology
is such that the axial forces on the bearings are very small and negligible.
The
Company has also developed a cast rotor for the axial flux machine as described in U.S. Patents 5,734,217 and 6,157,175. This
rotor does not require any laminates and provides the structural integrity to withstand very large centrifugal forces, while at
the same time provides the proper electric and magnetic properties.
Aura’s
US Patent 8,955,624 (February 2015) teaches a method for retrofitting a vehicle to transfer mechanical power out of the engine
compartment. This is essential for vehicles that don’t have sufficient space in the engine compartment for Aura’s
axial flux induction generator.
The
issues of fabrication difficulties and the high cost involved in manufacturing of the laminated stator cores were resolved years
ago by the Company using a technique involving punching the slots while rolling the steel. This approach creates a continuous
punched steel ribbon at a cost that is lower than the traditional punched laminates because less material is wasted. The equipment
required uses a closed loop control system that controls a precision step-motor and a punching press. Over the past 10 years,
we have delivered thousands of units of our induction axial flux machines in the 5-16kW range and have not encountered technical
issues that would appear to affect the use of the same techniques in any other size induction axial flux machines. Many manufacturers
of PM axial flux machines, including Aura, have resolved the issues regarding difficulties in assembling the machine and maintaining
a uniform air gap. Therefore, this is no longer an issue.
As
described above, the Company developed the technology and manufacturing processes to overcome the traditional objections to axial
flux machines. Once we resolved the historical issues relating to the axial flux approach as described above, the next step was
to develop a smart control system that provided for a total variable speed solution. A complete power generation system based
on Aura’s axial flux generator and Aura’s unique smart controller is disclosed in Aura’s U.S. Patent 6,700,214
(March 2, 2004). Finally, Aura’s U.S. Patent 6,700,802 (March 2, 2004) disclosed a method where power from multi sources
can be added to handle sudden power spikes such those that occur when a compressor, motor, or pump is turned on. In addition,
patent 6,700,802 provides a very unique method (bi-directional power supply) for uninterrupted seamless transition from generator
power to battery pack power and back to generator power.
The
AuraGen
®
system is composed of three primary subsystems (i) the patented axial flux alternator, (ii) the electronic
control unit (“ECU”) and (iii) mounting kit that is a mechanical interface between the alternator and the prime mover.
The architecture of our patented ECU is designed to separate the power generation from the power user, thus creating a flexible
system that can support multi voltages simultaneously. The system architecture is based on having a direct current (“DC”)
power bus that is used to excite the alternator and also to collect energy from the alternator. The user loads are supported from
the power bus and not directly from the alternator. This immediately leads to a load following design where the demand on the
alternator at any moment in time is equal to the demanded user load (up to the maximum alternator power capabilities). In addition,
the output power is constructed from the power bus with either a PWM based inverter for alternating current (“AC”)
output, and/or, a unique patented bi direction power supply (“BDPS”) that acts as a DC to DC converter to provide
different DC voltages as an output. The BDPS provides the capability of adding power to the bus from a DC source such as batteries
whenever sudden spikes or demands occur. The BDPS also provides the seamless transition to maintain the power bus when the prime
mover is turned off (batteries are used to support the power bus).
After
a lengthy development period, the Company began commercializing the AuraGen
®
in late 1999 and early 2000. Our first
commercial product was a 5,000-watt 120/240V AC machine, in 2001; we subsequently added an 8,000-watt configuration and also introduced
the BDPS that allowed us to provide simultaneously an AC/DC solution. In fiscal 2008, the Company introduced a system that generates
up to 16,000-watts of continuous power by combining two 8,000 watts’ systems (dual system) and in fiscal 2010 introduced
the TanGen system that combines two 8,000 watts systems on a single output shaft (two rotors on a single shaft). In May 2018,
the Company demonstrated a new system that generates up to 15,000-watts of continuous power via a single system (as opposed to
requiring a duel system) with the same small physical footprint as the 8,000 watts solution.
As
described above, the focus on mobile power applications requires an interface kit to the prime mover. Many of our applications
are such that the AuraGen/VIPER is driven directly from a truck or SUV engine. The Company now has configurations available for
more than 90 different engine types, including a majority of models of General Motors and Ford, some Chrysler models and numerous
other engine models made by International, Isuzu, Nissan, Hino (Toyota), Mitsubishi, Caterpillar, Detroit Diesel, Cummins, and
Freightliner. In addition, the Company has interface kits for numerous model of military HMMWV, as well as other military vehicles.
Also, starting in fiscal 2008, the AuraGen/VIPER was installed on a number of U.S. Navy boats and on a number of the U.S. Coast
Guard 44 ft. patrol boats. In addition to the usage of the vehicle engine as the prime mover, the Company has also developed numerous
Power-Take-Off (“PTO”) interface kits for many different vehicle platforms.
Starting
in early 2017, the Company began reexamining its strategic approach to the market and has identified key areas upon which to initially
focus as the Company restarts operations. The markets available for AuraGen
®
products are both vertical and horizontal
in nature and cover numerous industries and applications worldwide. As such, the Company has developed a strategy focused on the
formation of international joint ventures and other strategic partnerships to address local markets and needs. The first such
joint venture, Jiangsu Shengfeng Mobile Power Technology Co., Ltd. (“Jiangsu Shengfeng”), was entered into during
2017 to address the Chinese market. Under the Jiangsu Shengfeng joint venture agreement, Aura owns 49% of the venture and our
Chinese partner owns 51%. The Chinese partner contributed approximately $9.25 million to the venture –– principally
in the form of facilities and equipment as wells as approximately $500,000 in cash. The Company contributed $250,000 in cash as
well as a limited license to the joint venture to manufacture, sell and service the AuraGen
®
products within China.
The limited license sold to the Jiangsu Shengfeng joint venture, however, does not permit Jiangsu Shengfeng 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. Jiangsu Shengfeng’s board of directors consists of three members appointed by the Company
and three appointed by our Chinese partner; Jiangsu Shengfeng’s CEO is appointed by our Chinese partner while its CFO and
director for quality assurance and control are appointed by Aura.
Business
Arrangements
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 disrupted when the Company was forced to move from its facilities in
Redondo Beach, California to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were
sporadic. During fiscal 2017 and fiscal 2018, the Company suspended its engineering, manufacturing, sales, and marketing activities
to focus 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 and, subsequent to year
end, we have once again begun fulfilling orders.
In
March 2017, the Company signed a joint venture agreement with a Chinese company to build, service and distribute AuraGen
®
products in China. The Chinese partner owns 51% of the joint venture and the Company owns 49%. The Chinese partner contributed
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.
The
AuraGen
®
/VIPER
The
AuraGen
®
is composed of three basic subsystems. The first subsystem is the axial flux induction generator that
is bolted to, and driven by, the vehicle's engine, PTO, or any other prime mover. The second subsystem is the ECU, which filters
and conditions the electricity to provide clean, steady voltages for both AC and DC power, and provides for variable speed applications
as well as load following for increased efficiency. The third subsystem consists of mounting brackets and supporting components
for installation and integration of the generator with the vehicle engine, PTO, or the prime mover.
Currently,
the Company has power solutions for four continuous power levels: (a) 5,000 watts; (b) 8,000 watts; (c) 16,000 watts via a duel
TanGen system and; (d) 15,000 watts via a single system. All the AC power is pure sine wave with total harmonic distortion of
less than 2.1% and is available in 120 VAC and/or 230/240 VAC as well as 50/60 Hz and either single or three phases. In addition,
the power generated on all models can be partitioned to provide simultaneous AC and 14 or 28 VDC. The AuraGen
®
power levels can be generated as the prime mover speed varies from idle to maximum rated speed. The VIPER (the military version
of the AuraGen
®
system) includes as an option a complete power management system which (i) monitors in real time
the batteries’ voltage and temperature, (ii) provides a partition of the power between AC and DC simultaneously with the
ability to be programmed from all AC to all DC, (iii) monitors the RPM of the generator, (iv) monitors the temperatures of the
generator and the ECU, (v) monitors the raw power generated, (vi) monitors both the AC and DC loads as to voltage and current,
(vii) provides programming of load prioritization and load shedding, and (viii) monitors the voltage of the internal 400-800 VDC
bus.
Mobile
and Remote (not power grid connected) Power Industry
The
mobile and remote power generation market is large and growing. There are four basic market segments (i) military, (ii) stationary
but remote commercial/industrial, (iii) mobile commercial/industrial, and (iv) hybrid, electric and autonomous vehicles. The military
market place is also divided between mobile and stationary applications.
According
to the U.S. Census Bureau, in 2007 the U.S. motor and generator industry, for larger than one horsepower applications, recorded
more than $9.5 billion in sales (
U.S Census Bureau Industry Statistical Sampler).
We
believe that one of the fastest growing segments in the military market place is On-Board-Exportable-Power (OBEP), which is electric
power on vehicles that can be used to support other than vehicle functions. The driver for the increased demand for on board power
are numerous advance weapon systems as well as increase in C
4
I functions (command, control, communication, computers
and information). Currently, most on board power is provided by APUs that are (i) large fuel users, (ii) bulky, (iii) heavy and
(iv) require constant maintenance. Militaries all over the world are seeking more efficient integrated power solutions for their
vehicles.
Similar
to the military demands, the commercial and industrial markets also require on board power to support modern computers, digital
sensors and instruments as well as electrical driven tools. Current automotive alternators cannot supply the existing demanded
power and thus the common solution is the use of APUs. These APUs are environmentally unfriendly, substantial users of fuel, heavy,
bulky and require constant maintenance and scheduled service. Vehicles used in the telecommunications, utilities, public works,
construction, catering, oil and gas industries, emergency/rescue, and recreational vehicles rely heavily on mobile power for their
daily work. Hybrid and electric vehicles by their nature require significant amounts of on board power to charge batteries as
well as to operate electric motors.
The
traditional available solutions for mobile and remote power users are:
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Gensets
(AKA APUs),
Gensets are standalone power generation units that are not incorporated
into a vehicle and require external fuel, either gasoline or diesel, in order to generate
electricity. Gensets (i) are generally noisy and cumbersome to transport because of their
weight and size, (ii) typically run at constant speed to generate 50 or 60 Hz of AC power,
(iii) must be operated at a significant part of the rated power to avoid wet staking,
(iv) are significantly derated in the presence of harmonics in the loads and (v) require
significant scheduled maintenance and service. Genset technology has been utilized since
the 1950s.
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High-Output
Alternators,
High-output alternators are traditionally found in trucks and commercial
vehicles and the vehicle’s engine is used as the prime mover. All high-output alternators
provide their rated power at very high RPM and significantly less power at lower RPM.
In addition, high-output alternators are generally only 30% efficient at the low RPM
range and increase to 50% efficiency at the high end of the RPM range. The power generated
by high-output alternators is 12 or 24 Volt DC and an inverter is required if AC power
is needed. In addition, due to the low power output at low RPMs, in order to get significant
power, a throttle controller is used to speed-up the engine.
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Inverters,
Inverters are devices that invert DC to AC. Inverters as mobile power generators
are traditionally used in low power requirements, typically less than 2,500 watts, and
do not have the ability to recharge the batteries that are traditionally used as the
source of power. Thus, typical inverter users require other means to recharge the used
batteries such as “shore-power” or gensets. More recently dynamic inverters
became available. Dynamic inverters use power from the alternator to augment power from
the batteries and are able to achieve power levels in excess of 6,000 watts. Dynamic
inverters introduce significant stresses on both the batteries and alternators, which
causes significant life shortening for both. When the inverter is turned on, the alternator
is switched off from the vehicle battery and tied into a transformer that uses electronic
controls to change the DC alternator inputs to AC inverter output. A separate transformer
winding provides battery charging so that fully regulated 120 Volt AC and 12 Volt DC
power is available as long as the engine is running at high enough RPM to provide power
for the load and the battery charging. All dynamic inverters require a high-output alternator
to be able to output significant AC power. As is often the case, the limiting factor
is the high-output alternator. In order to get stable output, a very accurate throttle
controller is also needed to maintain steady speed on the engine.
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Permanent-Magnet
Alternators.
Recently, a number of companies have introduced alternators using exotic
permanent magnets. These alternators tend to have higher power generation capabilities
than regular alternators at lower engine RPM. In order to be practical in an under-the–hood
environment (200
o
F) active cooling must be added, since the magnets are demagnetized
at approximately 176
o
F. There are other issues that require an active control
system that will add and subtract magnetic field strength as the engine RPM increases.
Over 95% of the magnets used for electric machines comes from China and, beginning in
2011, the price of these magnets has sky-rocketed. In addition, China started limiting
export of the magnets in order to have sufficient supplies for local consumption.
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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. The most widely deployed fuel cells cost about $2,000 per kilowatt.
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Batteries
.
Batteries convert stored chemical energy to electrical.
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Competition
The
Company is involved in the application of its AuraGen
®
technology to mobile power and, as such, faces substantial
competition from companies offering different technologies
.
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 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 divides essentially 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 and Kohler, among others, are well established and respected brand names in the genset
market for higher reliability auxiliary power generation. There are 44 registered genset-manufacturing companies in the United
States.
High
Output Alternators
- There are many High
Output Alternator manufacturers. Some of the better known 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. The AuraGen
®
end to end system (including mechanical linkages, belt and electronics) is over 85%5 efficient at low and moderate RPM ranges
and is approximately 80%80 efficient at the very high RPM range (at very high RPM windage is the major lose).
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 $700-850 per kilowatt plus the cost of a high output alternator ($1,000) and a good throttle controller ($250-500).
Permanent-Magnet
(“PM”) alternators.
-A number
of companies have introduced alternators using exotic NdFeB magnets (UQM technologies is one of the better known). 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 (200
o
F+).
In order to apply such devices for automotive applications one must add expensive and cumbersome active cooling since the magnets
are demagnetized at approximately (176
o
F). To date, such machines have been used mostly in wind-power generation applications.
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.
Finally,
PM machines are significantly more expensive than induction machines. Most of the material coming from China. In addition to the
recent price increase, the Chinese government has historically used Nd as a political weapon, thus causing the US government and
others to look for alternative solutions that do not use Nd magnets. Clearly the Aura solution is a great alternative to any PM
solution.
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, however,
generally prohibitively expensive, and the most widely deployed fuel cells cost about $1,500 per kilowatt.
Others-
Symetron Technology by Raser Inc. is sometimes mistaken for a new form of motor or generator. The Symetron technology is a
variable frequency motor/generator controller that uses numerous control schemes to optimize performance. The Symetron technology
involves adaptive tuning to continuously optimize motor and system efficiency for the speed and torque operating point. When the
system was tested in November 2006 the adaptive algorithm or table calculations were performed offline and then input to the controller.
The
Symetron controller is a potential competitor to variable speed motor controllers provided by such companies as of ABB, or Baldor-Electric
Co. The Symetron technology is not a new form of motor/generator.
There are a number of companies that advertise
a “secret” approach for higher performance of inductive machines. Typically, these claims are not proven and are based
on changing the winding connections from Y to D or D to Y.
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Axco
in Finland briefly introduced axial flux machines similar to Aura’s. However, Axco stopped its pursuit of patent protection
in the U.S. when they discovered Aura’s patents. Furthermore, one of Axco scientist cites Aura’s approach in his PhD
dissertation. Axco business is currently focused on large permanent magnets applications mostly related to large windmills.
Evans
electric in Australia has recently 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 patents.
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
considerable fuel every operating hour. In addition, the diesel solutions emit 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.
The
economic and environmental benefits of the AuraGen
®
solution are greatly amplified in transport refrigeration applications
where a separate diesel engine is eliminated. An analysis of our solution for large refrigeration trucks (117,000 trucks across
the nation) shows potential annual savings in excess of 26,000
tons of NMHC +NOx,
23,000 tons of CO and over to 1,400 tons of PM
. The
diesel fuel savings
exceed 100,000,000 annual gallons
. The above numbers are very conservative since they reflect: (i) the assumption
that all refrigeration diesel engines already meet the Tier 4 EPA requirements and (ii) that there are no additional savings from
idle reductions. Both assumptions are used as a lower bound for the anticipated savings.
Most
of our competitors have 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
®
aggressively.
The
AuraGen
®
uses new 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
®
We
believe the AuraGen
®
system to be a superior product due to its convenience, cost efficiency, fuel efficiency,
reliability, flexibility in power output, quality of the electricity generated, and its ability to provide the full power at variable
speeds as well as provide load following architecture.
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Smaller
Size and Weight
.
The AuraGen’s
®
patented breakthrough design is more than 50% smaller
and lighter as compared to traditional solutions of comparative output. This ultra-compact
design allows the AuraGen
®
to reside “under-the-hood” of most
vehicles and to be powered by a vehicle’s primary engine or power takeoff “PTO”.
In comparison, traditional solutions are too large and bulky to be integrated directly
into most vehicles and, therefore, require their own independent power source.
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Higher
Efficiency
.
The AuraGen
®
power solution is also more efficient than traditional solutions.
due to the significant increase in efficiency of the AuraGen
®
design over
conventional designs Traditional alternators, for example, are at best 50% efficient
and require approximately 1 gallon of fuel per each 7.6 kW-hr. The AuraGen
®
system in comparison is approximately 85%5 efficient and requires approximately
only 1 gallon of fuel per each 15.9 kW-hr. Thus, given a need for 10 kW of power, for
example, the traditional solution will require approximately 1.3 gallons per hour of
fuel while the AuraGen
®
solution will require only 0.63 gallons per hour
for the same output.
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The
AuraGen
®
solution is also a load-following solution that further increases efficiency. A load following solution
is able to adjust the amount of power output generated at any one moment to mirror the immediate demand. This is an important
characteristic as power demands generally fluctuate (sometimes dramatically). Traditional solutions, in comparison, are not load-following
and simply provide power at their maximum output rating at all times, irrespective of demand. By producing only that amount of
power necessary to meet actual demand, however, the AuraGen
®
becomes especially efficient whenever less than maximum
power output is required.
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Variable
Speed
.
The AuraGen
®
solution provides full power at near idol. This means that,
unlike most other traditional systems, the AuraGen
®
system’s ability
to provide users with full power is largely independent of the speed of the prime mover.
The ability to operate at variable speed makes the Aura solution very attractive when
the speed of the prime mover varies and is unpredictable, such as in automotive applications.
The variable speed solution is a direct consequence of our system architecture where
we separated the power generation from the power delivery by the power bus.
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Earth-Forward,
Green Technology
.
The AuraGen
®
system is significantly more environmentally-friendly than
traditional generator and mobile power technology. Because of its extreme efficiency
and resulting small size, the AuraGen
®
system utilizes fewer resources
to manufacture. Moreover, 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.
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In
applications, such as transport refrigeration, use of the AuraGen
®
system eliminates the need for a separate auxiliary
diesel engine to run the refrigeration unit; because these auxiliary diesel engines are highly pollutive as to both emissions
and noise, the AuraGen
®
has the potential to meaningfully impact air and noise pollution levels in areas where
it is employed.
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Durability;
No Scheduled Maintenance
.
The AuraGen
®
is not sensitive to temperature or altitude variations and
generates the rated power at or near idle engine RPM. The AuraGen
®
also
does not require scheduled maintenance and is offered with a three-year warranty, compared
to the typical one-year warranty available for traditional solutions.
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Targeted
Markets
It
is only recently that the Company has started to reexamine and identify key markets upon which to initially focus as the Company
plans to restart operations.
(i)
A key element of our business plan is focused on electric transport refrigeration. The market is well understood and both social
and economic forces are providing an unprecedented opportunity to gain significant market share. Our immediate focus is on 20-k
BTU/hr. midsize trucks and the 50-k BTU/hr. trailers.
(ii)
Another element of our business plan is focused on our mobile power solution for military applications around the globe.
(iii)
We also plan to seek joint venture opportunities similar to the agreement we recently entered in China to explore other international
opportunities.
Facilities,
Manufacturing Process and Suppliers
During
fiscal 2018, our facilities consisted of approximately 20,000 square feet in Stanton, California and an additional storage facility
for existing inventory. The Stanton facility is used for some assembly and testing of AuraGen/VIPER systems and is rented on a
month-to-month basis. The rent for the Stanton facility is $10,000 per month and the storage facility is an additional $5,000
per month. Our current Stanton facility is not sufficient to support the expected operations and the Company is currently looking
for a new facility to be used for production, testing, and engineering as well as needed office space for support staff.
Our
Jiangsu Shengfeng joint venture, of which the Company owns 49% and as further described in “Business—Introduction”,
owns facilities of approximately 400,000 square feet, consisting of approximately 200,000 square feet of manufacturing space and
200,000 square feet of general office and engineering space. The Jiangsu Shengfeng facilities are fully paid for and there is
no monthly or annual rent associated with these facilities.
As
the Company is gearing up operations again, we need to renew relationships and contracts with our suppliers or locate suitable
new suppliers for subassemblies and other components. Recently, the Company entered into discussions with several of its prior
suppliers and is in the process of negotiating settlements of old payables and arranging new supply contracts.
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 maintain an ongoing advantage over potential competition. Our engineering, research and development costs for fiscal 2018
were approximately $100,000 compared to approximately $30,000 in fiscal 2017.
We
stopped practically all research and development in fiscal 2017 and fiscal 2018 due to severe cash shortfall; however, we did
redesign our Electronic Control Unit (“ECU”) to include the latest state-of-the-art power electronics and processors.
Subsequent to year end, we also introduced a new 15,000-watt5 single unit AuraGen
®
system which offers15,000 watts
of power with the rated power at the same size and weight of our physical envelope as the 8-kW solution.
We
set a modest budget of approximately $750,000 for research and development in fiscal 2019 and based on our anticipated resources.
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 maintain an ongoing advantage over potential competition.
Patents
and Intellectual Property
Our
intellectual property portfolio consists of trademarks, proprietary know-how, trade secrets, and patents.
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. 5,734,217; 6,157,175; 6,700,214; 6,700,802; 8,955,624; with expiration dates in 2018, 2020, 2024,2024
and 2032 respectively. A provisional patent for a water-cooled AuraGen
®
was granted in March 2013.
The
following applications are pending: Application 13/849,464 filed in March 2013; and Application 13/781,749 filed in March 2013.
Induction
Machine
The
basic patent covers a new form of induction machine with superior performance in a much smaller size than conventional machines.
The solid cast rotor, the shaped magnetic field, the secondary conduction path through the steel and the axial magnetic orientations
are key components of this innovation.
Control
System
This
system separates the power generation from the power delivery by introducing a 400 VDC buss. For each cycle of each phase, part
of the cycle power is drawn from the bus to run the electronics and energize the coils, while during the other part of the cycle,
power is delivered to charge up the buss. The control system must balance all the timing to effect zero voltage change to the
buss under dynamic variations of frequency and loads. The ability to optimize in real time the slip frequency is a key innovation
in motor and generator control for variable speed, variable frequency, and variable load systems.
Bi-Directional
Power Supply (“BDP”)
The
patented ICS system developed by Aura provides a new capability in power systems. The BDP allows a system to use multiple sources
of power simultaneously. It is a key component in providing the ability to deliver both AC and DC power simultaneously, as well
as the ability to handle large power surges without the need for a throttle controller.
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.
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 approximately four full-time equivalent employees. Additionally, the Company engages
several independent contractors to support various technical developments. The independent contractors are used on an as-need
basis.
Significant
Customers
We
have no significant customers at this time. However, the Company has an initial commitment of approximately $1.25 million to deliver
AuraGen
®
systems and components in 2018. Although we had no sales during the 2018 fiscal year, subsequent to year-end,
we have begun fulfilling orders and, as of the date of this filing, have already shipped approximately a dozen units.
Backlog
There
are no significant customers as of the date of the filing of this Annual Report on Form 10-K. However, the Company has an initial
order of AuraGen
®
systems and components representing approximately $1.25 million and deliverable during2018. Management
believes that now that the Company is operating again, a significant backlog will develop. No assurances, however, can be given
how long it will take the Company, if at all, to develop a significant backlog.
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 a history of losses, and we may not be profitable in any future period.
In
each fiscal year since our reorganization in 2006, we have reported losses. 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 16-18 kW product, and developing a nine-inch system capable of delivering approximately 4 kW of power. We continue
to need substantial funds for the development of new 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 recommence operations or be profitable in the future. Even if we
recommence operations and achieve profitability, we may not be able to sustain it.
We
will need additional capital in the future to meet our obligations and financing may not be available. During fiscal 2018, the
Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial
obligations. If we cannot obtain additional capital, we will not be able to recommence our operations.
As
a result of our operating losses, we have financed our operations through sales of our debt and equity securities. 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 disrupted when the Company was forced to move from its facilities in
Redondo Beach, California to a smaller facility in Stanton, California. During fiscal 2017 and fiscal 2018, the Company suspended
its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. While
we plan to recommence operations, expand sales and marketing and improve operations, we continue to operate at negative cash flow.
Our ability to continue as a going concern is dependent upon our ability to obtain additional operating capital and generating
sufficient operating cash flow. 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.
Our
independent public accounting firm has included an explanatory paragraph in its opinion to the effect that there is substantial
doubt about our ability to continue as a going concern.
Our
independent public accounting firm has included an explanatory paragraph in its opinion to the effect that there is 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.
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 anticipate that we will require substantial additional
funds in excess of our current financial resources for research, development and commercialization of our technology and 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.
Market
acceptance of our AuraGen® product line is uncertain. If a large enough market does not develop for our products, our business
and the results of our operations will be materially and adversely affected.
Our
business is dependent upon sales generated from our AuraGen®/VIPER family of products. This product line utilizes advanced
technology and has only recently begun being used in the marketplace for selected applications. We are dependent on the broad
acceptance by businesses and industry of our products. Because the market for our product line is emerging, the potential size
of this market and the timing of its development cannot be predicted. A significant market may fail to develop, or it may develop
more slowly than we anticipate, either of which will have a material adverse effect on our business and results of operations.
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. 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 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. 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
are and may 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, 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
are currently party to litigation with one of our directors relating to approximately $5.4 million and approximately 3.15 million
warrants which the director claims are owed to him and his affiliates. An adverse ruling on these claims in this litigation would
materially and adversely affect our business results or operating and financial condition, dilute our shareholders’ equity
interests in the Company and could adversely effect our stock price.
The
Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $5.4 million
and approximately 3.15 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017,
Mr. Kopple filed suit against the Company as well as against the then other present and former members of the Board of Directors
in connection with these allegations. The Company believes that it has valid defenses in these matters and believes that no warrants
are due to Mr. Kopple or his affiliates. The Company intends to vigorously defend against these claims. However, if Mr. Kopple
were to prevail, an adverse ruling on these claims would materially and adversely affect our business results or operating and
financial condition, dilute our shareholders’ equity interests in the Company and could adversely affect our stock price.
See Item 3. “Legal Proceedings”, “Liquidity and Capital Resources” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form
10-K for additional information regarding the transactions under dispute.
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 product 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.
Many
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). Many 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 early 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, we expect our business to grow. Our failure to efficiently manage our growth
could have an adverse affect 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 have a limited capability to manufacture most of the AuraGen
®
components on a commercial scale. Therefore,
we rely extensively on subcontracts 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 amount of components or components of adequate
quality, which would delay production of our product. We do not have written agreements with any suppliers. Furthermore, those
suppliers who make our more technically difficult 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.
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 demand for AuraGen
®
systems, we will need to renew 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. We do not currently have the required funds to acquire such tooling 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 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.
We
face changes in global and local economic conditions that may adversely affect consumer demand and spending, our manufacturing
operations or sources of merchandise and international operations.
Our
industry is subject to variations in the general economy and to uncertainty regarding future economic prospects. Such uncertainty,
as well as other variations in global economic conditions such as rising fuel costs, wage and benefit inflation, currency fluctuations,
and increasing interest rates, may continue to cause inconsistent and unpredictable customer spending while increasing our own
input costs. In addition, this downturn has had, and may continue to have, an unprecedented negative impact on the global credit
markets. Credit has tightened significantly in the last several months, resulting in financing terms that are less attractive
to borrowers, and in many cases, the unavailability of certain types of debt financing. These risks, as well as industrial accidents
or work stoppages, could also severely disrupt our manufacturing operations, which could have a material adverse effect on our
financial performance.
Our
ability to obtain adequate supplies or to control our costs may be adversely affected by events affecting international commerce
and businesses located outside the United States, including natural disasters, changes in international trade, central bank actions,
changes in the relationship of the U.S. dollar versus other currencies, labor availability and cost, and other governmental policies
of the U.S. and the countries from which we import our merchandise or in which we operate facilities. The inability to import
products from certain foreign countries or the imposition of significant tariffs could have a material adverse effect on our results
of operations.
Acquisitions,
joint ventures, and strategic alliances may have an adverse effect on our business.
We
expect to continue entering into joint ventures and strategic alliances as part of our long-term business strategy. 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.
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. Our continued
ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
The incentives to attract, retain and motivate employees provided by our 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.
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.