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/A
     for the year ended February 28, 2019, issued on October 24, 2019 (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 as a result 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.





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Overview

Beginning with 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 $30.23 million of debt.

As of the date of this filing, Robert Kopple, our former Vice Chairman of the Board, is the only significant unsecured note holder that has not agreed to restructure his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.3 million on terms significantly preferable to other similarly situated unsecured creditors. We dispute Mr. Kopple's claims. See "Part II-Other Information, Item 1. Legal Proceedings" included elsewhere in this Quarterly Report on Form 10-Q for information regarding the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted our numerous offers to restructure this debt.

During the three-months ended November 30, 2019, we recorded a one-time gain to other income on the Statement of Operations of approximately $1.9 million consisting of the cancellation of accounts payable of $0.3 million, cancellation of customer advances of $0.4 million and cancellation of unpaid wages and salaries of $1.5 million. In addition, $1.0 million of unpaid compensation owed to a former CEO and a related party was cancelled and accounted for as a capital transaction and reclassified from accrued expense-related party to additional paid-in-capital. These amounts were incurred in prior years and were cancelledas the related statue of limitation periods have since expired. The Company reclassified in the three-months ended November 30, 2019 approximately $0.3 million related to the shares issued to the Company's president in August 2019 as other expense (see Notes 3 and 7 to the Condensed Financial Statements).

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, we began significantly increasing our sales, engineering, manufacturing and marketing activities under our new management team.

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 and joint ventures for sales internationally. In North America, our primary focus is in (a) mobile exportable power applications, (b) transport refrigeration, and (c) U.S. Military applications.

(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® solution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms. Afterreducing our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscal 2018 and 2019, we expect modest engineering activities budgeted at approximately $200,000 during the fiscal 2020 year.





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Operations.

During the first half of fiscal 2016, we significantly reduced operations due to lack of financial resources. During the second half of fiscal 2016, our operations were further disrupted when we were forced to move from our facilities in Redondo Beach, California to a smaller facility in Stanton, California. During fiscal years 2017 to 2019, the Company reduced its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. During this time, our 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, we successfully restructured in excess of $30 million of debt. During fiscal 2019, we continued to address our financial needs, were able to ship a small quantity of product during fiscal 2019 and shipped a small amount to customers and maintained a small inventory of finished product. During the nine-months ended November 30, 2020, we increased production and recognized approximately $745,000 of revenue. Our marketing strategy during fiscal 2020 includes the following key activities:

(i) One 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 entered in China to explore other international opportunities.





Going Concern.

Our independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues (see Note 3 to the Condensed Financial Statements). See Report of Independent Registered Public Accounting Firm on page F-1, together with the Company's audited consolidated financial statements for the fiscal year ended February 28, 2019 on Form 10-K/A issued on October 24, 2019.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial conditions and results of operations are based upon our consolidated 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. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements.





Revenue Recognition

We adopted Accounting Standards Codification ("ASC") 606. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

We have assessed the impact of the guidance by performing the following five steps analysis:

Step 1: Identify the contract

Step 2: Identify the performance obligations

Step 3: Determine the transaction price

Step 4: Allocate the transaction price



Step 5: Recognize revenue

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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. We have minimally operated and therefore have only produced minimal product since late 2015. As a result, while we believe that a portion of the inventory has value, we are unable to substantiate its demand and market value and as a result we elected to fully reserve our inventory it in its entirety as of February 28, 2019. During fiscal year 2020, we increased production and, accordingly, we have assigned a value of $53,000 to our physical and book inventory as of November 30, 2019.





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 consolidated statements of operations.

We account for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, "Equity Based Payments to Non-Employees", 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.

For the past, several years and 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.





Results of Operations

Nine-months ended November 30, 2019 compared to nine-months ended November 30, 2018

Net revenues were $744,850 for the nine-months ended November 30, 2019 (the "Nine-Months FY2020") compared to $39,274 for the nine-months ended November 30, 2018 (the "Nine-Months FY2019"), or an increase of 1,796% compared to the same period of fiscal 2019. During the second and third quarters of 2020, we delivered 116 generator units to a distribution customer as compared to 6 units in the same period in the prior year for a military application.

Cost of goods sold were $147,752 in the Nine-Months FY2020 compared to $110,026 in the Nine-Months FY2019 resulting in a gross profit of $597,097 and a loss of $70,752, respectively, and gross margins of 80.0% and negative 180.2%, respectively. Gross profit and related gross margin for the Nine-Months FY2020 shipments were high due to the utilization of inventory previously fully reserved. We do not expect gross margins above 80% to continue for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory will decline.

Engineering, research and development expenses were $123,024 in the Nine-Months FY2020, compared to $302,293 in the Nine-Months FY2019, or a decline of 59.3%. Beginning fiscal 2021, we expect to increase spend of research and development to include additional technical personnel, test and evaluation components, capital equipment, larger space allocation to an annualized spend of $700,000.

Selling, general and administrative expense was $915,934 for the nine-months ended November 30, 2019 as compared to $2,797,711 during the comparable period of fiscal year 2019, or a decline of $1,881,777 (67%). During Nine-Months FY2019, we incurred an expense of $417,000 related to the repricing of warrants and options, $432,000 of higher legal expenses, higher consulting expense and administrative headcount cost.

Net interest expense in the Nine-Months FY2020 increased $37,138 or 4%, to $885,731 from $848,593 in the Nine-Months FY2019.





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Our net income for the Nine-Months FY2020 increased $4,298,864, or 116%, to $583,657 from a net loss of $3,715, 207 in the Nine-Months FY2019 due primarily to (i) the recording of a total of $1.9 million in gains, as compared to $0.3 million in the same period of fiscal 2018, on cancellation of accounts payables, customer advances and unpaid salaries and related expenses following expiration of applicable statute of limitations periods (ii) increased gross profit contribution of $0.7 million on higher levels of shipments and (iii) reduced operating expenses of $2.1 million.

Three months ended November 30, 2019 compared to three months ended November 30, 2018

Net revenues were $396,775 for the three-months ended November 30, 2019 (the "Three-Months FY2020") compared to $0 for the three-months ended November 30, 2018 (the "Three-Months FY2019"). During the second quarter of 2020, we delivered 64 generator units to a distribution customer as compared to 0 units in the same period in the prior year.

Cost of goods sold were $116,655 in the Three-Months FY2020 compared to $37,032 in the Three-Months FY2019 resulting in a gross profit of $281,119 and a loss of $37,032, respectively, and gross margins of 70.8% and a meaningless gross margin, respectively. Gross profit and related gross margin for the Three-Months FY2020 shipments were high due to the utilization of inventory previously fully reserved. We do not expect gross margins above 80% to continue for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory will decline.

Engineering, research and development expenses were $30,472 in the Three-Months FY2020, compared to $138,417 in the Three-Months FY2019, or a decrease of 78%

Selling, general and administrative expense decreased $383,000 (48%) to $407,652 in the Three-Months FY2020 from $790,985 in the Three-Months FY2019. During Three-Months FY2020, we incurred less cost for administrative headcount and consultancy cost by $250,000 and $150,000 in reduced legal fees.

Net interest expense in the Three-Months FY2020 decreased $11,293 or 4%, to $283,928 from $295,221 in the Three-Months FY2019.

Net income for the Three-Months FY2020 increased $2,780,761, or 212%, to $1,470,317 from a loss of $1,310,444 in the Three-Months FY2019 due primarily to (i) the recording of a total of $1.9 million in gains on cancellation of accounts payables, customer advances and unpaid salaries and related expenses following expiration of the applicable statute of limitation periods (ii) increased gross profit contribution of $0.3 million on higher levels of shipments (iii) reduced operating expenses of $0.5 million and (iv) other expense of $0.1 million.

Liquidity and Capital Resources

Net cash used in operations for the nine months ended November 30, 2019, was $490,578, a decrease of $1,411,573 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the nine-months ended November 30, 2019, was $255,245 consisting of (i) cash proceeds from issuance of common stock of $295,245 partially and (ii) offset by $40,000 of principle payments on a note payable as compared to cash provided by financing of $1,175,000 in the same period of fiscal 2019 consisting of (i) proceeds from a subscription receivable of $1,225,000 and offset by (ii) principle payment of $50,000 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 were no acquisitions of property and equipment during the Nine-Months FY2020 or the Nine-Months FY2019.

Accrued expenses as of November 30, 2019 decreased $1.1 million to $1,066,260 from $2,197,129 as of February 28, 2019 due to the one-time cancellation of accounts payable, customer deposits and unpaid salaries and related expenses discussed above. Accrued expense-related party decreased by $1.0 million to $0 associated with the cancellation of the related party obligation as discussed above.

The Company had a deficit of $19.3 million in shareholders' equity as of November 30, 2019, compared to $21.6 million as of February 28, 2019 with the net change attributed to net income of approximately $1.6 million and the issuance of shares of $0.7 million.

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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