Aura Systems Inc.
Shareholder 2011 Page | 6
March 15, 2011
Shareholders of Aura Systems Inc.
Our Company just ended its 2011 fiscal year and this letter is to provide you with a roadmap of where we came from and where we are going. It is important to understand that Aura is a technology company with a proven and commercialized solution for mobile power applications. The Aura solution can be classified as disruptive, since it provides for a paradigm shift in the way business is done in the mobile power sector both in terms of technology and economics. The market penetration for this type of industrial/commercial technology requires a long sales cycle since every new user wants to test the solution and then try small quantities before full acceptance. As we achieve more market penetration we expect the sale cycle time to be reduced. On the other hand, once the technology is fully accepted, users tend to stay with the solution for very long periods usually measured in tens of years. Over the last five years your company has laid the required groundwork with many different potential users across the globe that have tested and purchased small to moderate quantities of the Auragen/VIPER mobile electric power solution.
After careful analysis, your management team has developed a business model and plan for the next few years to rapidly increase market acceptance, thus growing revenues and profits starting this new fiscal year. This plan is ambitious, methodical, well thought out, and requires careful execution. Of course like all plans and projections, there are risk elements that are outside of our control that can have a negative impact on the projections; therefore no assurances can be given that the actual results may end up as estimated. The execution of the plan is focused on using existing customers who have been testing the Auragen/VIPER solution over the last several years and the all-electric transport refrigeration solution as discussed below. In addition, the plan calls for augmenting the existing customers with new users that have just started to experience the Aura mobile power solution.
Recent events and the global economic situation created a worldwide awareness for the need to change the way business is done. It is now clear that there is a need to provide industrial and commercial mobile electric power solutions that are more efficient and require less use of fossil fuels to provide both cost savings and environmental safeguards. It is a well-known fact that electrical machines are significantly more efficient than mechanical machines and therefore, whenever possible, the replacement of mechanical machines with electrical machines such as motors and generators would result in significant operating cost savings. In addition, the elimination or reduction in size of internal combustion machines provides a significant impact on the environment since it is universally accepted that pollution from internal combustion machines is responsible for significant health hazards.
Aura Systems Inc. (“Aura”) is well positioned to become a significant force in shaping the upcoming changes with its patented axial induction machine (no permanent magnets) known as the AuraGen for commercial applications and VIPER for military applications. It is now generally accepted, that axial induction machines have an advantage in power density over radial flux machines; that is more power/torque per unit volume. Since the main cost of traditional induction machines are the costs associated with copper, steel and aluminum, it readily follows that the need for significantly less quantities of such materials for the same output results in significantly lower costs. In addition, the smaller package and topology provides the opportunity to use these machines in numerous new applications that have limited space availability such as in vehicles. Aura’s approach to such induction machines not only creates a device that lends itself to mass manufacturing techniques, but also, through the use of Aura’s unique patented architecture, the AuraGen/VIPER system provides for load following and a variable speed solution without the need of a gearbox. Aura’s control system architecture consists of two power buses, a high voltage power bus (400-1200 VDC) to support large loads (such as motors, compressors and pumps) and a 24 VDC power bus to support smaller loads (such as automotive lights). The built-in inverter provides AC output, while the built-in DC/DC converter provides for battery charging and the support of DC loads. The two buses are connected to each other by Aura’s patented bi-directional power supply. The bi-directional power supply also provides for a seamless uninterrupted transition from a mode where the primary driver is on to off, as well as, a method to handle sudden power spikes without current or voltage fluctuations.
Aura’s axial flux machine, due to its high efficiency, size, weight, and cost, provides for a global paradigm shift in mobile power. Over the last several years, Aura has laid the groundwork for global recognition and adaptation of this technology. Our approach has been to focus on added value to the users as well as to provide environmental friendly solutions for numerous applications.
A few examples of recent activities at Aura could provide a potential investor with a roadmap where this is headed in commercial, industrial and military markets.
1. Transport refrigeration in trucks and trailers- In late 2008, Aura introduced an all electric mid- sized truck refrigeration system powered by the AuraGen solution. At the time, Aura used a refrigeration system provided by a very large refrigeration company that provides stationary coolers and refrigeration. After fielding numerous units with a variety of users, the concept and value proposition were completely validated. The system eliminates the traditional small diesel engine used to run the refrigeration system, resulting in significantly reduced fuel usage and a significant reduction of NOx and PM emissions associated with the diesel engine. The all-electric solution does not require any scheduled maintenance, which is a major component of operating cost associated with the traditional diesel solutions. With diesel fuel cost at approximately $2.75 per gallon (current diesel is at $3.90 per gallon), users have documented approximately $300 per month in fuel savings and an additional savings of approximately $100 per month in eliminated scheduled maintenance. In addition to the economic benefits described above, the users of Aura’s all-electric transport refrigeration are exempt from the new harsh California-Air Resource-Board (“CARB”) regulations that were recently introduced. These new regulations not only provide for major fines for the use of non-conforming diesel engines, but also require a considerable number of scheduled reports from the users to CARB, resulting in addition overhead costs to the users.
It is clear that Transport Refrigeration Units (“TRU”) is a business area where Aura’s solution can provide a drastic shift in the way business is done. However, while the AuraGen was designed to operate in the harsh environment encountered on trucks, the refrigeration solution was not. In early 2010, Aura entered into an agreement with Zanotti of Italy, a 50 year old company that specializes in transportable refrigeration systems to supply the refrigeration system. Aura’s engineers worked closely with Zanotti’s engineers to provide a completely integrated transportable solution specifically designed for truck applications. After lengthy testing, the AuraGen-Zanotti solution is now ready for sale. Our sales model is focused on reaching over $12 million in sales (approximately 0.8 % market share) of the all-electric transport refrigeration in our fiscal 2012-year (Year ending February 28, 2012). The market in North America for midsize transport refrigeration is approximately 15,000 to 20,000 systems per year. The trailer refrigeration market is approximately 4 times as large (50,000-80,000 systems/year).
2. Hybrid vehicle applications-Aura’s axial flux induction machine (AuraGen) is a very serious contender to replace the currently expensive permanent magnet (‘PM”) rare earth (NdFeB) type motors and generators used in the popular hybrid automobiles being sold today. World events in the last several months have focused current users of PM machines to the need to find an alternative solution due to the high cost and limited availability of the rare earth magnets ($90/kg with 100% imported from China). In February 2011, as a reaction to the economic and political issues arising from recent events with regard to rare earth permanent magnets, the U.S. Department of Energy issued a Request for Proposal (“RFP”) entitled “Motors with reduced or eliminated use of Rare-Earth Permanent Magnets for Advanced EDV Electric Traction Drives”. Recently, Toyota announced that they are looking for an alternative to the PM generators used in their hybrid vehicles. It can be shown that an AuraGen solution to replace the larger PM generator used in the Toyota Prius hybrid will exhibit a diameter that is approximately 15% smaller, a total stator weigh that is more than 25% lighter, an axial length that is comparable, and a cost that is approximately $1,200 less at the same production levels.
Currently Aura is under contract to deliver 1,000 AuraGen generators to Azure Dynamics for a FORD E-350 Van hybrid solution (approximately 700 systems have already been delivered). The AuraGen is used both as a generator and a starting motor. The initial end users consist of Fed-X, Purolator and AT&T. Aura is currently in discussions with Azure Dynamics for the production schedule for the next 12 months that is currently estimated at 1,000 AuraGen generators.
Aura has recently started to explore the opportunities for the AuraGen solution for electric cars and buses in China. These AuraGens would vary in power from a few kW to 125 kW. Preliminary, numerous groups in China have shown interest and are currently testing the AuraGen solution.
The cost comparison between a PM solution and the AuraGen solution can be examined by looking at the generator’s stator(s) and rotor costs as well as the electronic components. The stator(s) of a PM axial flux machine are very similar to the axial flux induction machine and therefore the stator costs are comparable. The rotor, on the other hand, of a PM machine contains expensive permanent magnets. For example, in the Prius 50 kW machine there is approximately 13.5 kg. of NdFeB magnets. Neodymium (Nd) alone is priced at $90 per kilogram. The AuraGen rotor is a cast part and therefore the cost is basically the cost of raw materials. There is cost savings in the AuraGen rotor of approximately $1,200. As far as the electronic controller cost is concerned, the AuraGen system controller is somewhat less complicated due to the fact that there is no need for the control of a bucking magnetic field as is required in a PM machine. Therefore, the cost of the AuraGen type controller is somewhat less than the one used for PM machines.
For some time now, there has been a debate among engineers of “Induction vs PM” machines for hybrid and electric vehicle applications. The recent drastic increase in the cost of rare earth magnets, as well as the production concentration in China, has clearly tilted the debate in favor of the induction solution. When adding the advantages of the axial flux design, the AuraGen solution could potentially be universally adopted as the solution of choice for all hybrid and electric vehicle solutions. The market for electric and hybrid vehicles is estimated in the 100s of thousands per year.
3. Military applications- Armies across the world have a continuous increase in electric power needs for advance weapon systems, communication equipment, and numerous digital sensors and instruments. The traditional approach used by militaries has been the use of the vehicle’s alternators and or the use of towed gensets. Current available alternators can no longer support the required power, and this is creating an unprecedented opportunity for Aura’s VIPER solution. The VIPER characteristics of being able to provide the full rated power (8-16 kW) at low RPM (military vehicles typically operate at low RPM speeds) is generating interest from militaries around the world.
Recently the U.S. Army has contracted with Aura(approximately $1.0 million) to develop a 30 kW version of the VIPER to be completed by the end of summer 2011. Aura is currently under contract with the U.S.C.G (Coast Guard) to supply 16-kW of power for all of its new 200 42-foot patrol boats. Over 1,200 VIPER systems have now been deployed for different homeland security and military applications both in the U.S. and overseas. The South Korean military has over 400 VIPERS deployed and is a constant ongoing customer. Numerous Israeli defense contractors and the IDF are now in different stages of integrating the VIPER for their applications. To date, several of them have purchased small quantities for testing and integration.
We expect during our fiscal 2012 year (current year) to start significant programs with the Israeli military (IDF), Singaporean military, Austrian military, the Mexican military, the UK military, numerous branches of the U.S military and others. In addition, we have numerous bids outstanding for very significant multi-year programs with the South Korean military ($100 million), Kinetics in Israel ($25 million), IDF ($10 million), and Textron (USN) ($100 million). We have started exploring opportunities for a joint venture with Plasan and Beth-El in Israel for a unique 40-50 kW configuration.
Combined, the programs described above provide Aura with the opportunity to become the major mobile power provider for military applications.