Forward Looking Statements
This Report contains forward-looking statements within the meaning of the
federal securities laws. Statements other than statements of historical fact
included in this Report, including the statements under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," regarding future events or prospects are forward-looking
statements. The words "approximates," "believes," "forecasts," "expects,"
"anticipates," "estimates," "intends," "plans" "would," "could," "should,"
"seek," "may," or other similar expressions in this Report, as well as other
statements regarding matters that are not historical fact, constitute
forward-looking statements. We caution investors that any forward-looking
statements presented in this Report are based on the beliefs of, assumptions
made by, and information currently available to, us. Such statements are based
on assumptions and the actual outcome will be affected by known and unknown
risks, trends, uncertainties and factors that are beyond our control or ability
to predict. Although we believe that our assumptions are reasonable, they are
not guarantees of future performance and some will inevitably prove to be
incorrect. As a result, our actual future results may differ from our
expectations, and those differences may be material. Accordingly, investors
should use caution in relying on forward-looking statements to anticipate future
results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied
by forward-looking statements include the following:
? Our ability to generate positive cash flow from operations;
? Our ability to obtain additional financing to fund our operations;
? The impact of economic, political and market conditions on us and our
customers;
? The impact of unfavorable results of legal proceedings;
? Our exposure to potential liability arising from possible errors and omissions,
breach of fiduciary duty, breach of duty of care, waste of corporate assets
and/or similar claims that may be asserted against us;
? Our ability to compete effectively against competitors offering different
technologies;
? Our business development and operating development;
? Our expectations of growth in demand for our products; and
? Other risks described under the heading "Risk Factors" in Part II, Item 1A of
this Quarterly Report on Form 10-Q and those risks discussed in our other
filings with the Securities and Exchange Commission, including those risks
discussed under the caption "Risk Factors" in our Annual Report on Form 10-K
for the year ended February 29, 2020, issued on July 13, 2020 (as the same may
be updated from time to time in subsequent quarterly reports), which discussion
is incorporated herein by this reference.
We do not intend to update or revise any forward-looking statements, whether
because of new information, future events or otherwise except to the extent
required by law. You should interpret all subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf as
being expressly qualified by the cautionary statements in this Report. As a
result, you should not place undue reliance on these forward-looking statements.
15
Overview
Our fiscal year ends on the last day of February. We refer to our fiscal years
in this Quarterly Report on Form 10-Q as "Fiscal" and the calendar year in which
the fiscal year ends. As such, the current fiscal year ending on February 28,
2021 is designated as Fiscal 2021. The prior fiscal year ended on February 29,
2020 is referred to as Fiscal 2020.
During Fiscal 2017 through 2018, we reduced our engineering, manufacturing,
sales, and marketing activities to focus on renegotiating numerous financial
obligations and minimizing expenditures while we attempted to raise additional
funding and pursue some initial engineering activities.
In Fiscal 2018, we successfully eliminated approximately 68% of our total
indebtedness. Specifically, our secured creditors converted approximately $5.73
million of secured debt into approximately 4.1 million shares of our common
stock. The converted debt represented approximately 80% of the total secured
debt of the Company. The balance of the secured debt (approximately $960,000) is
to be paid to the secured creditors in cash if we raise at least $4.0 million in
proceeds through new equity offerings in one or a series of related offerings.
Additionally, in Fiscal 2018, approximately $12.77 million of unsecured debt was
converted into approximately 9.3 million shares of the Company's common stock
and approximately $12.3 million of unsecured debt was forgiven. In total, during
Fiscal 2018, we eliminated a total of approximately $30.8 million of debt. In
the second quarter of fiscal year 2021 approximately $3.8 million of unpaid
salaries, accounts payables and demand notes were extinguished, representing a
gain of approximately $3.5 million on the Condensed Statement of Operations for
the three and nine-months ended November 30, 2020, as the respective statute of
limitation periods were deemed to have expired.
The Company is presently engaged in a dispute with one of its former directors,
Robert Kopple, relating to approximately $11.1 million (representing
approximately $5.4 million loaned to the Company over the course of 2013 to
2016; approximately $170,000 Mr. Kopple claims to have advanced or paid to third
parties on Aura's behalf; and approximately $5 million Mr. Kopple claims to be
owed for interest, loan fees and late payment charges) and approximately 3.33
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 current director Mr. Diaz-Verson and former directors Mr. Breslow and
Mr. Howsmon, as well as Mr. Gagerman, our former CEO and a former director, in
connection with these allegations. In 2018, the Court sustained demurrers by Mr.
Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these
successful demurrers; all four of these defendants have been dismissed from the
suit. While the Company believes that it has certain valid defenses in these
matters, the Company is currently in settlement discussions with Mr.
Kopple. However, to-date, no settlement has been reached in large part because
Mr. Kopple continues to demand that as part of any such settlement, he receive
unilateral control over significant aspects of the Company's financial and
management functions such as, but not limited to, the right to unilaterally
direct the Company's ordinary business expenditures and requiring the Company to
seek his approval for the hiring of nearly all personnel, all to the exclusion
of the Company's management team and stockholder-elected Board of Directors. The
Company believes that allowing Mr. Kopple such level of operational control over
the Company without any accountability would be highly detrimental to the
Company and is incompatible with the Board of Directors' duties to shareholders
and creditors as a whole.
On February 14, 2018, we effectuated a one-for-seven reverse stock split.
In Fiscal 2019, we began increasing our engineering and manufacturing
activities. We utilized contractors for these services in order to minimize our
expense while we continued to pursue new sources of financing. In July 2019
under our new management team, we began significantly increasing our sales,
engineering, manufacturing and marketing activities.
Our business is based on the exploitation of our patented mobile power solution
known as the AuraGen® for commercial and industrial applications and the VIPER
for military applications. Our business model consists of two major components:
(i) sales and marketing, (ii) design and engineering.
(i) Our sales and marketing approaches are composed of direct sales in North
America and the use of agents, distributors. In North America, our primary focus
is in (a) mobile exportable power applications, and (c) U.S. Military
applications.
16
(ii) The second component of our business model is focused on the design of new
products and engineering support for the sales activities described above. The
engineering support consists of the introduction of new features for our
AuraGen®/VIPER solution such as higher power, different voltages, three phase
options, shore power systems, higher current solutions as well as interface kits
for different platforms. After suspending the majority of our engineering,
manufacturing, sales, and marketing activities to focus on renegotiating
numerous financial obligations in Fiscal 2018 and 2019, we incurred modest
engineering expenses of approximately $70,000 and $169,000 during the three and
nine-months ended November 30, 2020, respectively, and approximately $30,000 and
$123,000 during the three and nine-months ended November 30, 2019, respectively.
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. The full impact of the COVID-19 pandemic is unknown and cannot
be reasonably estimated for these key estimates and assumptions. However, we
made appropriate accounting estimates based on the facts and circumstances
available as of the reporting date. To the extent that there are differences
between these estimates and actual results, our financial statements may be
materially affected.
Revenue Recognition
The core principle of ASC 606, Revenue from Contracts with Customers ("ASC
606"), is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services.
In applying ASC 606, all revenue transactions must be evaluated using a
five-step approach to determine the amount and timing of revenue to be
recognized. The five-step approach requires (1) identifying the contract with
the customer, (2) identifying the performance obligations in the contract, (3)
determining the transaction price, (4) allocating the transaction price to the
performance obligations in the contract and (5) recognizing revenue when
performance obligations are satisfied.
Our primary source of revenue is the manufacture and delivery of AuraGen/VIPER
sets used primarily in mobile power applications, which represented 100% of our
revenues of approximately $7,800 and $61,500 for the three and nine-months ended
November 30, 2020, respectively, and $397,000 and $745,000 for the three and
nine-months ended November 30, 2019, respectively. Our current principle sales
channel is sales to a domestic distributor.
In accordance with ASC 606, we recognize the entirety of the revenue, net of
discounts, for our AuraGen/VIPER sets at time of product delivery to the
distributor (i.e., point-in-time sale), which also corresponds to the passage of
legal title to the customer and the satisfaction of our single performance
obligation to the customer. Our payment terms are cash payment due upon delivery
and typically includes a 2.5% price discount in accordance with this policy. Our
commercial terms and conditions do not include a right of return for reasons
other than a defect in performance or quality. We offer 18 months assurance-type
warranty covering material and manufacturing defects, which we account for under
the guidance of ASC 460, Guarantees. We have a limited history of shipments,
and, as such, we have not recorded a warranty liability on our balance sheets as
of November 30, 2020 and February 29, 2020, respectively; however, we expect
warranty claims to eventually be nil, therefore, we have not delayed the
recognition of revenue during Fiscal 2021 and 2020.
Inventory Valuation and Classification
Inventories are valued at the lower of cost (first-in, first-out) or market, on
a standard cost basis. We review the components of inventory on a regular basis
for excess or obsolete inventory based on estimated future usage and sales. From
Fiscal 2015 through 2019 we minimally operated and therefore only produced
minimal product. As a result, while we believed that a portion of the inventory
had value, we were unable to substantiate demand and fully reserved all
inventory in Fiscal 2019. Beginning with Fiscal 2020, production has increased,
and fully reserved inventory has been used in current production. We classify
all of our inventory as raw material and work-in-process.
17
Stock-Based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718,
"Compensation - Stock Compensation", which requires the measurement of all
share-based payments to employees, including grants of employee stock options,
using a fair value-based method and the recording of such expense in the
statements of operations.
We account for stock option and warrant grants issued and vesting to
non-employees, such as consultants and third parties, in accordance with FASB
ASC 718, "Compensation - Stock Compensation", where appropriate, whereas the
fair value of the equity-based compensation is based upon the measurement date
as determined at the earlier of either (a) the date at which a performance
commitment is reached or (b) at the date at which the necessary performance to
earn the equity instruments is complete.
In accordance with established public company accounting practice, we have
consistently utilized the Black-Scholes option-pricing model to calculate the
fair value of stock options and warrants issued as compensation, primarily to
management, employees, and directors. The Black-Scholes option-pricing model is
a widely accepted method of valuation that public companies typically utilize to
calculate the fair value of options and warrants that they issue in such
circumstances. During the nine-month period ended November 30, 2020, our Board
of Directors awarded a total of 1,250,000 stock options to the five members of
the board, with a five-year term, an exercise price of $0.25 per option, and a
vesting period of not less than six-months and one day. Using the Black-Scholes
option model, we determined an aggregate fair value of $194,000 of which $20,000
and $194,000 were recorded in the three and nine-months ended November 30, 2020,
respectively. No stock-based compensation expense was recorded during Fiscal
2020.
Restatements
We amended our Quarterly Report on Form 10-Q for the period ended November 30,
2019, filed with the SEC on January 14, 2020, solely for the purpose of
restating the financial statements (unaudited) and the accompanying notes to the
financials due to certain adjustments that were recorded in the fourth quarter
ended February 29, 2020; however, to ensure comparability in year-to-year
comparisons, these adjustments were restated to the third quarter of Fiscal
2020. The condensed financial statements in his Quarterly Report for the three
and nine-months ended November 30, 2020 include the effect of the restatements.
Impact of COVID-19
The COVID-19 global pandemic has negatively affected the global economy,
disrupted global supply chains, and created extreme volatility and disruptions
to capital and credit markets in the global financial markets. We began to see
the impact of COVID-19 during our fourth quarter of Fiscal 2020 with our Chinese
joint venture's manufacturing facilities being required to close and many of our
customers suspending their own operations due to the COVID-19 pandemic. As a
result, net sales and production levels during the fourth quarter of Fiscal 2020
and the first three quarters of Fiscal 2021 were significantly reduced, thus
impacting our results of operations during these quarters.
In response to the COVID-19 pandemic and business disruption, we implemented
certain measures to manage costs, preserve liquidity and enhance employee
safety. These measures included the following:
? Enhanced cleaning and disinfection procedures at our facility, promotion of
social distancing at our facility and requirements for employees to work from
home where possible;
? Reduction of capital expenditures; and
? Deferral of discretionary spending.
The extent of the impact of the COVID-19 pandemic on our business, financial
results and liquidity will depend largely on future developments, including the
duration of the spread of the COVID-19 outbreak within the U.S. and globally,
the timing and effectiveness of vaccine development and rollout, and the impact
on capital and financial markets and the related impact on our customers,
especially in the commercial vehicle markets. These future developments are
outside of our control, are highly uncertain and cannot be predicted. If the
impact is prolonged, then it can further increase the difficulty of planning for
operations and may require us to take further actions as it relates to costs and
liquidity. These and other potential impacts of the COVID-19 pandemic have
adversely impacted our results for the first three quarters of Fiscal 2021, as
well as the full fiscal year 2021, and that impact could be material.
Going Concern
The financial statements contained herein in Item I. Financial Statement have
been prepared assuming we will continue as a going concern. During the three and
nine-months ended November 30, 2020, we reported net loss of approximately $0.6
million and net profit of $1.5 million, respectively, and had negative cash
flows from operating activities of approximately $1.2 million for the nine-month
period ended November 30, 2020. The profit in the current year is attributed to
recognizing non-operating income associated with the cancellation of certain
liabilities due the expiration of the statute of limitations of approximately
$3.6 million in the second quarter of Fiscal 2021.
If we are unable to generate operating profits on a sustained basis and are
unable to continue to obtain financing for our working capital requirements, we
may have to curtail our business sharply or cease business altogether.
18
Substantial additional capital resources will be required to fund continuing
expenditures related to our research, development, manufacturing and business
development activities. Our continuation as a going concern is dependent upon
our ability to generate sufficient cash flow to meet our obligations on a timely
basis, to retain our current financing, to obtain additional financing, and
ultimately to attain profitability.
Results of Operations
Three months ended November 30, 2020 compared to three months ended November 30,
2019
Net revenue was approximately $7,800 for the three-months ended November 30,
2020 (the "Three-Months FY2021") compared to approximately $397,000 for the
three-months ended November 30, 2019 (the "Three-Months FY2020"). During the
current quarter of 2021, we delivered 1 generator unit as compared to 64 units
delivered in the same quarter in the prior year. Revenue year-on-year has been
negatively impacted by the COVID-19 pandemic. We cannot project with confidence
the timing or amount of revenue that we can expect until the pandemic is under
control following a successful rollout of the vaccine programs now underway.
Cost of goods sold was approximately $5,300 in the Three-Months FY2021 compared
to approximately $116,000 in the Three-Months FY2020 resulting in a gross profit
of $2,500, or a gross margin of 32%, and a $281,000 gross profit in the
Three-Months FY2020 and a gross margin of 71%. Gross profit and related gross
margin for the Three-Months FY2021 shipments were largely influenced by the low
volume of shipments in the quarter which reduced our ability to fully absorb
fixed operating costs. The gross margin of 71% in the Three-Months FY2020 was
achieved by taking advantage of inventory on-hand, previously fully reserved due
to lack of estimable demand, to offset the unit cost of 64 units sold in the
current quarter. We do not expect gross margins above 70% to occur regularly for
shipments of generator units in future quarters as the availability of usable
parts from fully reserved inventory will decline over time.
Engineering, research and development expenses were approximately $70,000 in the
Three-Months FY2021, compared to approximately $31,000 in the Three-Months
FY2020, or an increase of 130%.
Selling, general and administrative ("SG&A") expense declined by approximately
$149,000 (37%) to approximately $268,000 in the Three-Months FY2021 from
approximately $407,000 in the Three-Months FY2020. During Three-Months FY2021,
we recorded increased expense for (i) $20,000 of stock-based compensation
expense related to the grant of 1,250,000 options to our five board members,
(ii) $24,000 in one-time costs to physically close our offsite storage facility
in Santa Clarita, CA and consolidate usable inventory into temporary storage
facilities (iii) incurred additional salaries and consulting costs of
approximately $38,000; fully offset by reductions of (i) $32,000 for building
rent due to consolidation of storage facilities, (ii) reduced legal and
accounting fees of $142,000, and (iii) reduced travel expenses of $57,000 due to
Covid-19 restrictions.
Interest expense in the Three-Months FY2021 decreased approximately $16,000 or
6%, to approximately $268,000 from approximately $284,000 in the Three-Months
FY2020 due to $34,000 of notes payable settled for common stock in November 2019
and the extinguishment of debt of $872,000 in the second quarter of Fiscal 2021.
Other income in the Three-Months FY2021 was approximately $4,000, as compared to
nil in the same period of Fiscal 2020. Other loss from settlements of
approximately $333,000 in the Three-Months FY2020 was attributed to the debt
settlement in Fiscal 2020 of amounts due to our president of approximately
$330,000 through the issuance of 1,030,385 common shares.
Net loss for the Three-Months FY2021 improved by approximately $184,000, to
approximately $590,000 from a loss of $774,000 in the Three-Months FY2020
adversely attributed to reduced gross profit of $279,000 due to reduced sales of
generator units fully offset by (i) less interest expense of $16,000, (ii)
reduced engineering, sales and general administrative expenses of $109,000, and
(iii) the non-recurring loss of 329,000 related to shares issued for debt
settlement in Fiscal 2020.
Nine months ended November 30, 2020 compared to nine months ended November 30,
2019
Net revenue was approximately $62,000 for the nine-months ended November 30,
2020 (the "Nine-Months FY2021") compared to $745,000 for the nine-months ended
November 30, 2019 (the "Nine-Months FY2020"). During Nine-Months FY2021, we
delivered 10 generator units as compared to 116 units delivered in Nine-Months
FY2020. Revenue year-on-year has been negatively impacted by the COVID-19
pandemic. We cannot project with confidence the timing or amount of revenue that
we can expect until the pandemic is under control or until an effective vaccine
becomes widely available.
19
Cost of goods sold was approximately $47,000 in the Nine-Months FY2021 compared
to approximately $148,000 in the Nine-Months FY2020 resulting in a gross profit
of $15,000, or a gross margin of 24%, and a $597,000 gross profit in the
Nine-Months FY2020 and a gross margin of 80%. Gross profit and related gross
margin for the Nine-Months FY2021 shipments were largely influenced by the low
volume of shipments in the period which reduced our ability to fully absorb
fixed operating costs. The gross margin of 80% in the Nine-Months FY2020 was
achieved by taking advantage of inventory on-hand, previously fully reserved due
to lack of estimable demand, to offset the unit cost of 116 units sold
year-to-date. We do not expect gross margins above 80% to occur regularly for
shipments of generator units in future periods as the availability of usable
parts from fully reserved inventory will decline.
Engineering, research and development expenses were approximately $169,000 in
the Nine-Months FY2021, compared to approximately $123,000 in the Nine-Months
FY2020, or an increase of 37%
Selling, general and administrative ("SG&A") expense increased approximately
$119,000 (13%) to approximately $1,035,000 in the Nine-Months FY2021 from
approximately $916,000 in the Nine-Months FY2020. During Nine-Months FY2021, we
recorded increased expenses of (i) $194,000 of stock-based compensation expense
related to the grant of 1,250,000 options to our five board members, (ii)
incurred approximately $85,000 in one-time costs to physically close our offsite
storage facility in Santa Clarita, CA and consolidate usable inventory into
temporary storage facilities (iii) salaries and consulting costs of
approximately $52,000; offset partially by reduced expenses for (i) professional
fees of $78,000, (ii) rent of $31,000, (iii) travel and entertainment of $82,000
due to restrictions under Covid-19 and (iv) other expenses of $21,000.
Net interest expense in the Nine-Months FY2021 decreased approximately $1,000 or
1%, to approximately $886,000 from approximately $885,000 in the Nine-Months
FY2020.
Gain on other settlements was $46,000 in the Nine-Months FY2021 as compared to
$0 in the same period of Fiscal 2020 due primarily to the settlement of a legal
issue. Loss on other settlements of $333,000 in the Nine-Months FY2020 was
attributed to a debt settlement with our president of approximately $330,000 in
exchange for 1,030,385 shares of common stock. Other income and gain on
extinguishment of debt totals approximately $3.6 million in the Nine-Months
FY2021, as compared to nil in the same period of Fiscal 2020. This amount was
attributed to the cancellation of approximately $2.4 million in accrued payroll
and related expenses, $0.4 million in accounts payable, and three demand notes
of approximately $0.8 million consisting of interest and principal, all of which
represent liabilities with respect to which the applicable statute of limitation
periods have been deemed to have expired.
Net income for the Nine-Months FY2021 improved by approximately $3.2 million, to
net income of approximately $1.5 million from a loss of $1.7 million in the
Nine-Months FY2020 adversely attributed to (i) reduced gross profit of $0.6
million due to reduced sales of generator units and (ii) increased engineering,
sales and general administrative expenses of $0.2 million; fully offset by (i)
other income and gain on extinguishment of debt of $3.6 million related to the
cancellation of liabilities due to expiration of statute of limitations and (ii)
the non-recurring loss of $0.3 million related to shares issued for debt
settlement in Fiscal 2020 and (iii) other income of $0.1 million.
Liquidity and Capital Resources
Net cash used in operations for the nine-months ended November 30, 2020, was
approximately $1,246,000, an increase of $755,000 from the comparable period in
the prior fiscal year. Net cash provided by financing activities during the
nine-months ended November 30, 2020, was approximately $1,379,000 consisting of
(i) cash proceeds from issuance of common stock of $1,220,000, (ii) combined
proceeds of $224,000 related to the U.S. federal Paycheck Protection Program
("PPP") loan program related to COVID-19 and the U.S. Small Business
Administration ("SBA") Economic Injury Disaster Loan ("EIDL") loan program, and
partially offset by (iii) $65,000 principal payments on a note payable; compared
to cash provided by financing of $255,000 in the same period of Fiscal 2020
consisting of cash proceeds from the issuance common shares of $295,000,
partially offset by $40,000 principal payments on a note payable. The cash flow
generated from our operations to date has not been sufficient to fund our
working capital needs, and we cannot predict when operating cash flow will be
sufficient to fund working capital needs.
There was a $9,000 acquisition of property and equipment during the three and
nine-months ended November 30, 2020, respectively. During Fiscal 2020, there
were no acquisitions of property and equipment.
The total of accrued expenses and accrued expenses-related party as of November
30, 2020 decreased by approximately $2.3 million to $686,000 from approximately
$2,954,000 as of February 29, 2020 due to the cancellation of the unpaid
salaries of $2.3 million. During the same nine-month period in Fiscal 2021,
accrued interest on all notes payable due to related parties and non-related
parties increased by approximately $848,000 for recurring interest costs offset
by approximately $386,000 of debt extinguishment related to the three demand
notes because of statute of limitations expiration.
20
The Company had a deficit of $20.0 million in shareholders' equity as of
November 30, 2020, compared to $23.3 million as of February 29, 2020 with the
net positive change of $3.3 million attributed to (i) net profit year-to-date of
approximately $1.6 million (ii) the net issuance of approximately 8.1 million
shares valued at approximately $1.5 million for cash and (ii) the granting to
board members 1,250,000 options in March 2020 with an aggregate fair value of
approximately $0.2 million, all of which approximately was recognized as expense
during the nine-months ended November 30, 2020.
On April 23, 2020, we obtained a PPP loan in the amount of approximately $74,400
pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES
Act"). Interest on the loan is at the rate of 1% per year, loan payments are
deferred for 10 months following the last day of the covered period or June 23,
2020, balance is payable in 24 monthly installments if not forgiven in
accordance with the CARES Act and the terms of the promissory note executed by
the Company in connection with the loan. The promissory note contains events of
default and other provisions customary for a loan of this type. As required, the
Company intends to use the PPP loan proceeds for payroll, healthcare benefits,
rent and other qualifying expenses. The program provides that the use of PPP
Loan amount shall be limited to certain qualifying expenses and may be partially
or wholly forgiven in accordance with the requirements set forth in the CARES
Act. While we intend to apply for the forgiveness of the PPP Loan, there is no
assurance that we will obtain forgiveness of the PPP Loan in whole or in part.
On July 1, 2020, we obtained an EIDL loan in the amount of $149,900 administered
by the SBA. As required under this program, the proceeds of the loan are to be
used for payments of ordinary working capital needs negatively impacted by the
COVID-19 pandemic. Interest accrues from the date of the loan of July 1, 2020 at
a rate of 3.75% per annum, a loan term of 30 years, no prepayment penalties or
fees, and there is a one-year deferral period during which interest accrues but
no payments are required to be made. Following the deferral period for a period
of 29 years, an estimated monthly payment of $734 is required to fully amortize
the principal and accrued interest over the term of the loan. The Company
pledged the assets of the Company as collateral for the loan.
In the past, in order to generate liquidity, we have relied upon external
sources of financing, principally equity financing and private indebtedness. We
have no bank line of credit and require additional debt or equity financing to
fund ongoing operations. The issuance of additional shares of equity in
connection with any such financing could dilute the interests of our existing
stockholders, and such dilution could be substantial. If we cannot raise needed
funds, we would 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.
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