(Unaudited)

See accompanying notes to these unaudited financial statements.

AURA SYSTEMS INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED AUGUST 31, 2019

(Unaudited)

See accompanying notes to these unaudited financial statements.

AURA SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 – ORGANIZATIONNATURE OF OPERATIONS AND OPERATIONSSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Aura Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage in the development, commercialization, and sales of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen^®axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets. In addition, the Company has also developed and patented High Force Electromagnetic Linear Actuators which it has sold in prior years.

NOTE 2 – ACCOUNTING POLICIES

Accounting principlesBasis of Presentation 

In the opinion of management, the accompanying balance sheets and relatedunaudited interim condensed financial statements of income and comprehensive income, and cash flows includereflect all adjustments consisting only of a normal recurring items,nature that are necessary for theira fair presentation of the results for the interim periods presented. However, the results of operations included in conformitysuch financial statements may not necessary be indicative of annual results.

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with informationthe Company’s audited financial statements and notes thereto included in the Company’s Amended Annual Report on Form 10-K/A10-K for the year ended February 28, 201929, 2020 (“Fiscal 2020”) filed on October 24, 2019 with the United States Securities and Exchange Commission (“SEC”) on July 13, 2020 (“2020 Form 10-K.”).

Our fiscal year ends on the last day of February. Accordingly, the current fiscal year is ending on February 28, 2021; we refer to the current fiscal as (“Fiscal 2021”). The prior fiscal year is Fiscal 2020.

Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in our financial statements included in Company’s 2020 Form 10-K. During the three and six-months ended August 31, 2020, the Company recognized aggregate gains of approximately $2.7 million in connection with the cancellation of certain accounts payable balances and accrued payroll related to unpaid wages and salaries and approximately $0.9 million in connection with demand promissory notes with three persons for which the respective statute of limitations periods have expired.

Earnings Per Share

The following table sets forth the basic and dilutive earnings per share for the three and six-months ended August 31, 2020. The dilutive earning per share includes only the dilutive incremental effect of additional shares issued on an “as if converted basis” in relation to the convertible notes payable principle amounts outstanding as of August 31, 2020 (see Notes 3 and 6).

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company evaluated the impact of the adoption of Topic 842 effective for the six-months ended August 31, 2019 and the impact was none on the Condensed Financial Statements.

In June 2016, the FASB issued ASUAccounting Standards Update 2016-13, “MeasurementFinancial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements,” whichInstrument. Subsequent to the issuance of ASU 2016-13, the FASB clarified the guidance through several ASUs. The collective new guidance (ASC 326) generally requires companiesentities to measure credit losses utilizinguse a methodology that reflectscurrent expected credit loss model, which is a new impairment model based on expected losses and requires considerationrather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of a broader range ofall contractual cash flows that the entity does not expect to collect. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable information to inform credit loss estimates. ASU 2016-13forecasts. ASC 326 is effective for annual reporting periods, and interim fiscal reporting periods therein, beginning after December 15, 2019 (fiscal year 20212022, with early adoption permitted for the Company).annual reporting periods beginning after December 15, 2018. The Company hasis continuing to evaluate the expected impact of this ASC 326 but does not yet determined the potential effects of the adoption of ASU 2016-13expect it to have a material impact on its Financial Statements.financial statements upon adoption.

The Company 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.

The Company has 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

Reclassifications

Certain reclassifications have been made to the comparative financial statements to conform to the current period presentation.

NOTE 32 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the six months ended August 31, 2019 and 2018,The unaudited condensed financial statements of the Company incurred lossesdo not include any adjustments relating to the recoverability and classification of $886,659recorded assets, or the amounts and $2,449,576, respectively, and had negative cash flows from operating activitiesclassifications of $413,777 and $1,770,320, respectively.liabilities that might be necessary should the Company be unable to continue as a going concern. 

If the Company is unable to generate profits on a sustained basis and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

Beginning with the second quarter of fiscal year 2020, we increased operations of our AuraGen^®/VIPER business and duringrevenue for the second quarter we recognized approximately $348,000three and six-months ended August 31, 2020 was $5,000 and $53,633, respectively, as compared to $348,075 of revenue in revenue. We plan to lease or acquire a new facilitythe comparable periods of approximately 50,000 square feet to support operations during the remainder of fiscalFiscal 2020.

NOTE 43 – NOTES PAYABLE

NotesNon-related party and related party notes payable transaction consisted of the following:

DEMAND PROMISSORY NOTESDemand Promissory Notes and Notes Payable

The Demand Promissory Notes at August 31 and February 29, 2020 are six individual notesfor one and four individuals, respectively, issued in September 2015 that are payable on demand with an interest rate of 10% per annum. The principal

As of August 31, 2020, the principle amount of each note andowed to the person/entity they are payable to are as follows: $10,000 Mr. Zeitlin, a former director of the Company; $30,000 Mr. Sook; $461,537 Mr. Macleod, a former president of the Company; $4,500 Mr. Howsmon, a former director of the Company; $4,500 El Pais, an entity controlled by Salvador Diaz, a current director of the Company.Company, was $10,000.

In February 2018, the Company issuedsecond quarter of fiscal year 2021, liabilities with respect to $758,537 in principal plus $385,349 in accrued interest were reversed as the related statute of limitations were determined to have expired. This reversal resulted in an aggregate reduction of current liabilities of $1,143,886, the recording of an issuance of 192,641 shares of its common stock to Steven Veenon the Condensed Balance Sheet as of August 31, 2020, and the recognition of $871,887 as gain on extinguishment of debt on the Condensed Statements of Operations for the three and six-months ended August 31, 2020.

Abdou and Abdou

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $125,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $24,470 as a discount, which has been fully amortized. There is a remaining balance of $125,000 as of February 28, 2019. In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in satisfaction of $267,000 in debt. Despite this issuance, Mr. Veen claims to continue to be entitled toa lawsuit filed by Messrs. Abdou demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the $267,000 debt.Company entered into an agreement with all secured creditors other than Mr. Veen has, to-date, not surrenderedW. Abdou and Mr. M. Abdou. In September 2018, the shares issued to himcourt entered a judgment of approximately $235,000 plus legal fees of in fulfillmentfavor of the debt he claims to be still owedMessrs. Abdou. The Company subsequently appealed this judgment and, continues to own the 192,641 sharesin September 2019, reached a settlement agreement with these creditors for a principal amount of $325,000, of which approximately $180,000 and $215,000 were outstanding as of August 31 and February 29, 2020, respectively.

Paycheck Protection Plan Loan

During April 2020, the dateCompany ceased operations for approximately 6 weeks in compliance with State of California and the County of Orange public health pronouncements associated with the COVID-19 pandemic. On April 23, 2020, we obtained a Paycheck Protection Program (“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, and all loan payments are deferred for six months, at which time the balance is payable in 18 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 filing. type. As required, the Company intends to use the PPP loan proceeds for payroll, healthcare benefits, rent and other qualifying expenses. The Company’s new management team isprogram 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 processCARES Act. While we intend to apply for the forgiveness of investigating the circumstances surrounding Mr. Veen.PPP Loan, there is no assurance that we will obtain forgiveness of the PPP Loan in whole or in part. As of August 31, 2020, $37,202 was classified as notes payable, non-current and $37,203 was classified as part of notes payable, current portion.

CONVERTIBLE DEBTEconomic Injury Disaster Loan

Entities negatively impacted by the COVID-19 pandemic were eligible to apply for loans sponsored by the United States Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EIDL Loan”) program. On July 1, 2020, the Company received cash proceeds of $149,900 under this program. The proceeds can be used to fund payroll, healthcare benefits, rent and other qualifying expenses, and the loan is not subject to a loan forgiveness provision. The standard EIDL Loan repayment terms include: interest accrues at 3.75% per annum effective July 1, 2020; the payment schedule contains a one-year deferral period on initial principle and interest payments; the loan term is thirty years; The Company pledged the assets of the Company as collateral for the loan; and there is no prepayment penalty or fees. As of August 31, 2020, the amount outstanding including accrued interest of $941 is $150,841 and is classified as part of notes payable, non-current on the August 31, 2020 balance sheet.

Convertible Notes Payable

Kenmont Capital Partners

On May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note with a principal value of $1,087,000 (“New Kenmont Note”) and warrants to Kenmont Capital Partners LP. The New Kenmont Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $342,020 as a discount, which has been fully amortized. There iswas a remaining balance of $549,954 as of August 31 2019.and February 29, 2020, respectively.

LPD Investments

On May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. The New LPD Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $175,793 as a discount, which has been fully amortized. There is a remaining balance of $163,677 as of August 31 2019.and February 29, 2020, respectively.

Guenther

On May 7, 2013, the Company entered into an agreement with an individual, Mr. Guenther, for the sale of $750,000 of secured convertible note payable (the “Note”) and warrants. The Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares and have an initial exercise price of $0.75 per share and have a 7-year term. The Company recorded $235,985 as a discount, which has been fully amortized. There is a remaining balance of $232,194 as of August 31 2019.and February 29, 2020, respectively.

Dresner and Lempert

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and Mr.Dr. Lempert, for the sale of $200,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $39,152 as a discount, which has been fully amortized. There is a remainingDuring Fiscal 2020, Dr. Lempert converted his share of the amount outstanding into common shares and the balance outstanding of $78,182$59,506 as of August 31 2019.

Abdou and AbdouFebruary 29, 2020, respectively, is for Dresner exclusively.

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. M. Abdou and Mr. W. Abdou, for the sale of $125,000 of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $24,470 as a discount, which has been fully amortized. There is a remaining balance of $125,000 as of February 28, 2018. In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by the Mssrs. Abdou demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than Mr. W. Abdou and Mr. M. Abdou. In September 2018 the court entered a judgment of approximately $235,000 plus legal fees in favor of the Mssrs. Abdou. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for an aggregate principle amount of approximately $315,000.

Kopple Notes

On August 19, 2013, the Company entered into an agreement with Robert Kopple, a former member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Kopple Notes”) and warrants. The Kopple Notes carry a base interest rate of 9.5%, have a 4-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company recorded $667,118 as a discount, which has been fully amortized. The Company also entered into a demand note payable with this individual in the amount of $20,000, which bears interest at a rate of 5%. As of August 31, 2019, the balance of the $2,000,000 note including interest is $3,621,944, and the balance of the demand note payable including interest is $22,410. The total owed under these two notes is $3,644,354.

7% Convertible Promissory Notes:

Dalrymple – August 2012

On August 10, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $1,000,000 of unsecured Convertible Promissory Note. The Convertible Promissory Note balance together with all accrued interest thereon was due and payable on August 10, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date. On January 11, 2018, the note was renegotiated with a final payment date of January 11, 2023 with an annual interest rate of 5%.  The Company recorded $310,723 as a debt discount, which will be amortized over the life of the note.There is a remaining balance of $264,462 as of August 31 2019and February 29, 2020, respectively.

Dalrymple – October 2012

On October 2, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $500,000 of unsecured Convertible Promissory Note. This Convertible Promissory Note balance together with all accrued interest thereon was due and payable on October 2, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date. On January 11, 2018, the note was renegotiated with a final payment date of January 11, 2023 with an annual interest rate of 5%. The Company recorded $137,583 as a debt discount, which will be amortized over the life of the note.There is a remaining balance of $133,178 as of August 31 2019.and February 29, 2020, respectively.

On January 30, 2017, the Company entered into an agreement entitled First Amendment to Transaction Documents with five of seven secured creditors holding a security interest in all of the Company’s assets except for its patents and other intellectual properties. These creditors are the seven listed above under Convertible Debt and include the following: Kenmont Capital Partners, LPD Investments, Guenther, Dresner, Lempert and Mr. M. Abdou and Mr. W. Abdou. All of the creditors entered into the January 30, 2017 agreement with the exception of the Messrs.Mr. W. Abdou and Mr. M. Abdou. The original agreement dated May 7, 2013 provided that if at least 75% of the stock issuable upon conversion of the convertible notes votes to amend the agreement and/or waive any conditions or defaults, then any such amendments or waivers shall be binding on all secured creditors. The five secured creditors signing the amendment total in excess of 95% of the issuable stock upon conversion and, therefore the agreement is binding on all seven of the secured creditors. The agreement provided that all accrued and unpaid interest will be added to the principal amount. The amended note provided for no interest from November 1, 2016 to February 14, 2018, the date at which the 1-for-7 reverse stock split became effective at which time 80% of the total debt including accrued interest was converted into shares of common stock and a new five year 5% per annum convertible note was issued for the remainder. The new amended and restated senior convertible notes have a maturity date of January 30, 2022. The five creditors and the Company entered into a Second Amendment to Transaction Documents on March 14, 2017 and a Third Amendment to Transaction Documents on April 8, 2017, both of which extended the required date of the stockholder approval of the 1-for-7 reverse stock split, which approval was completed on February 14,obtained in January 2018. The amended and restated senior convertible notes also require the Company to make a “Required Cash Payment” as defined in the agreement if the Company receives at least $4,000,000 in aggregate gross proceeds from the sale of equity securities (including securities convertible into equity securities) of the Company in one or a series of related transactions. The Required Cash Payment is equal to the current outstanding balance of the notes, which was $1,149,007 atapproximately $1,005,000 as of August 31 2019,and February 29, 2020, respectively, plus any outstanding accrued interest.

NOTE 54 – ACCRUED EXPENSES

Accrued expenses consisted of the following:following as of the period referenced below:

Accrued payroll and related expenses consist primarily of salaries and vacation time accrued but not paid to employees due to our lack of financial resources. On August 28, 2019,In the board approved a stock issuancesecond quarter of 1,030,385fiscal year 2021, liabilities with respect to Cipora Lavut,approximately $1.3 million in accrued payroll and related expenses were reversed as the Company’s president, at a fair valuerelated statute of $329,723, for full satisfaction of prior amounts owedlimitation periods were determined to her for unpaid salaries up to August 28, 2019.have expired.

NOTE 65 – SHAREHOLDERS’ EQUITY (restated)

Common Stock

During the six monthsthree and six-months ended August 31, 2020, the Company issued 3,866,664 and 5,224,997 shares of common stock, respectively, for $580,000 and $815,000 in cash, respectively. During the three and six-months ended August 31, 2019, the Company issued 1,688,223501,765 and 658,015 shares of common stock, respectively, for $480,076, of which$100,353 and $150,353 in cash, respectively. During August 2019, 1,030,385 was issued in satisfaction of amounts owed to Cipora Lavut of $329,723, and 658,015 shares were issued for casha settlement valued at $329,723 and during August 2020, 192,641 shares were issued in connection with the amount of $150,353, including the issuance of an aggregate 10,000 warrants to three investors, immediate vesting, an exercise price of $1.40, and a 5-year term.Veen settlement (see Note 3).

During the six months ended August 31, 2018 (restated), the Company issued 7,364,735 shares of common stock, valued at $2,280,964 to BetterSea LLC, a greater than 15% shareholder as part of a restructuring agreement in fulfillment of a contractual obligation. The issuance of the shares was previously reported by the Company.Employee Options and Warrants

During the six months ended August 31, 2018, the Company issued 742,857 warrants to member of its board of directors. The warrants have a term of five years and an exercise price of $1.40. The Company recorded and expense of $312,072 for the issuance of these warrants. During the six months ended August 31, 2018, the Company re-priced to $1.40 all outstanding employee stock options and warrants that had a previous exercise price greater than $1.40. The Company recorded an expense of $105,352 as a result of the re-pricing.

Employee Stock Options

The 2006 Employee Stock Option Plan

In September 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan, subject to shareholder approval, which was obtained at a special shareholders meeting in 2009. Under the 2006 Plan, the Company may grant options for up to the greater of Three Million (3,000,000)three million or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. The sharesAs of Common Stock available under the 2006 Plan was increased to the greater of Ten Million shares (10,000,000) or 15% of the number of shares of Common Stock of Aura from time to time outstanding at the October 2011 shareholders meeting. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may not be greater than ten years,February 29, 2020, and they typically vest over a three-year period. No options were issued during the three-month period ended August 31, 2019. Activity in the plan for the six-month period ended August 31, 2019 is as follows:2020, there were no stock options outstanding.

Information regarding the options outstanding and exercisable as of August 31, 2019 follows:

The 2011 Director and Executive Officers Stock Option Plan

In October 2011, shareholders approved the 2011 Director and Executive Officers Stock Option Plan at the Company’s annual meeting. Under the 2011 Plan, the Company may grant options for up to 15% of the number of shares of Common Stock of the Company from time to time outstanding. Pursuant to this plan,outstanding, with a contractual option term of five-years, and a vesting period not less than six-months and one day following date of grant. In the six-months ended August 31, 2020, the Board or a committee of the Board may grantDirectors approved grants of 250,000 stock options to each board member for an option to any person who is elected or appointed a director or executive officeraggregate of the Company. The1,250,000 options, with an exercise price of each$0.25 per option shall beand at least equal to the faira market valueprice of such shares$0.16 on March 19, 2020, the date of grant. The termfollowing table provides the assumptions required to apply the Black-Scholes Merton option model to determine the fair value of the stock options may not be greater than five years. Activityas of the grant date:

The aggregate fair value of the 1,250,000 options granted in March 2020 is $194,000, or $0.155 per option, with $96,477 and $174,076 recorded as part of sales, general and administration expense during the plan for the six-month periodthree and six-months ended August 31, 2019 is as follows:2020, respectively. No stock-based compensation expense was recorded during Fiscal 2020.

WarrantsThe following tables provide additional information regarding stock options outstanding and exercisable under the 2011 Director and Executive Officers Stock Option Plan:

Warrants

Historically, warrants have been issued to investors and others for services and enticements to invest funds with the Company. Generally, these warrants fully vest immediately or within a 90-day period from the date of grant and have an expiration date of five-years from the date of grant. With grants dated prior to Fiscal 2021, an exercise price of $1.40 has been used with all warrants. No warrants were issued in the six-months ended August 31, 2020.

Activity in issued and outstanding warrants is as follows:follows for the six-months ended August 31, 2020:

Information regardingOther information related to the warrants outstanding and exercisable as of August 31, 2019 follows 2020 follows:

NOTE 76 – RELATED PARTIES TRANSACTIONS

Notes payable-related party, non-current - $3,000,000 on the condensed balance sheets as of August 31 and February 29, 2020 consists of the Breslow Note as described below:

Breslow Note

On January 24, 2017, the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a former Director of the Company. Pursuant to the agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $23,872,614 including $8,890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest due, waive all events of default and sign a new five-year convertible note in the amount of $14,982,041 providing for no interest for six months and interest of 5% per annum thereafter payable monthly in arrears. The note also provides various default provisions. In accordance with the agreement, on February 14, 2018, the effective date of the 1-for-7 reverse stock split, $11,982,041 of the note was converted into 7,403,705 shares of common stock and the then accrued interest of $9,388,338 was forgiven. A new $3,000,000 convertible five-year note representing the remaining balance was entered into.into at a conversion rate of $1.40. The note bears interest at a rate of 5% per annum payable monthly in arrears.arrears with accrued interest of $338,527 and $262,911 recorded as accrued interest-related party (see Note 4) as of August 31 and February 29, 2020, respectively.

Kopple Note

At August 31, 2019, the balance in Notes Payablepayable and accrued interest-related party, current - $11,752,402 on the condensed balance sheet as of $6,423,509,August 31 and $11,333,960 as of February 29, 2020 consists of $3,587,322 plusthe Kopple Notes, the Gagerman Note and the Jiangsu Shengfeng Note as set forth below:

Kopple Notes

As of August 31, and February 29, 2020, the principal amount owed to Robert Kopple (former Vice-Chairman of our Board) of $5,607,323 was unchanged. As of August 31, 2020, accrued interest of $2,836,187$5,302,419 was owed to Mr. Kopple (afor a total balance of $10,909,742. As of February 29, 2020, accrued interest of $4,887,610 was owed to Mr. Kopple for a total balance of $10,494,933.

On August 19, 2013, the Company entered into an agreement with Robert Kopple, a former member of its Board member)of Directors for the sale of $2,500,000 of convertible notes payable (the “Kopple Notes��) and warrants. The Kopple Notes carried a base interest rate of 9.5%, have a 10% shareholder. At4-year maturity date and were convertible into shares of common stock at the conversion price of $3.50 per share (conversion feature expired in 2017). The warrants were subsequently exercised. The Company recorded $667,118 as a discount, which has been fully amortized. The Company also entered into a demand note payable with this individual in the amount of $20,000, which bears interest at a rate of 5% per annum.

Gagerman Note

On August 31, 2019,2020, the balance in ConvertibleGagerman note payable and accrued interest-related party includes $2,000,000consisted of $82,000 of unsecured convertible notesnote payable plus accrued interest of $1,773,178 and an unsecured convertible note of $20,000 plus accrued interest of $2,923 to Mr. Kopple.

Gagerman Note

Related party transactions also include $82,000 of unsecured notes payable plus accrued interest of $52,437$60,660 for a total owed to Melvin Gagerman of $142,660, the Company’s former CEO and CFO, pursuant to a demand note entered into on April 5, 2014. Interest accrues at 10% per annum. On February 29, 2020, the amount owed to Gagerman was $139,026.

Jiangsu Shengfeng Note

On November 20, 2019, the Company entered into a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture, to return $700,000 previously advanced to the Company in September 2018 and recorded as part of customer advance on the balance sheet as of February 28, 2019. Following this agreement which would consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 would be paid over a 12-month period. Principal loan amount on August 31, 2020 and February 29, 2020 was $700,000, respectively, and is classified as part of notes payable and accrued interest-related party, current on the balance sheets as of August 31, 2020.

Accrued expense-related party – In the second quarter of fiscal year 2021, liabilities with respect to approximately $1,008,000 in accrued payroll and related expenses to former officers of the Company were reversed to other income in the Condensed Statement of Operations for the three and six-months ended August 31, 2020 as the related statute of limitation periods were determined to have expired.

NOTE 87 – COMMITMENTS & CONTINGENCIES

Leases

Our facilities consist of approximately 20,000 square feet in Stanton, California and, prior to July 31, 2020, an additional storage facility in Santa Clarita, California. The Stanton facility is used for some assembly and testing of AuraGen^®AuraGen®/VIPER systems and is rented on a month-to-month basis. The rent for the Stanton facility isbasis at $10,000 per month andmonth. Prior to July 2020, the storage facility is an additionalCompany paid $5,000 per month, both on a month-to-month basis. Our current Stantonbasis, for the Santa Clarita storage facility. Following the closure of this facility, is not sufficient to support the expected operations and the Company is evaluating new facility options to be used for limited production, testing, warehousing and engineering, as well as needed office space for support staff. The Company also rents temporary storage spacecurrently renting on a month-to-month basis. basis approximately 1,000 square feet of temporary offsite storage space at a monthly cost of approximately $2,500.

Commencing in February 2019 and ending in July 2019, the Company began rentingrented approximately 300 square feet of office space in Irvine, California at a cost of $ 2,350 per month on a month-to-month basis. In July 2019, the Company ceased renting this office space.

Following the adoption of Topic 842, Leases, as of the start of fiscal yearFiscal 2020, the Company determined that there was no impact on its Condensed Financial Statements during the six-month periodfiscal year ended February 29, 2020, and as of August 31, 2019.2020, it is management’s intention to vacate the existing facilities and consolidate operations at a different location as soon as practical. The standard requires entities to evaluate all lease transactions including leases previously classified as operating leases, and, if required under Topic 842, a right-to-use asset and a corresponding lease liability mayto be recorded on the balance sheet in the period in which a lease commences.

Joint Venture

In March 2017 the Company entered into a joint venture with a Chinese partner to form Jiangsu Shengfeng Mobile Power Technology Co., Ltd. (“Jiangsu Shengfeng”) 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 is to contribute 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 to the venture in the form of $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.

In addition, Jiangsu Shengfeng is required to purchase a minimum of $1,250,000 of product from the Company supported by letters of credit for distribution until their factory is built, equipment installed, and staff hired and properly trained by Aura personnel. During fiscal 2019, Jiangsu Shengfeng placed a $1,000,000 order with the Company including a $700,000 advance payment. Aura has also committed to supply personnel for six months at no cost other than to be reimbursed for travel, room and board. This commitment has been fulfilled and Aura is under no further obligation to supply personnel at no cost. The agreement was subject to the approval of the Chinese Government which was received in April 2017. Mr. Song, the majority shareholder of the Chinese partner of the joint venture, invested $2,000,000 in Aura’s common shares at a price of $1.40 per share.

Contingencies

We are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.

In 2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring all its options and available remedies and is working toward an offer to settle this matter.

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $10$10.6 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 3.15$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, theour former CEO (notand a director)former director, in connection with these allegations. In 2018, the Court sustained demurrers bydismissed 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. 

In April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend & Stockton LLP alleging various actsHowever, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018, Kilpatrick Townsend & Stockton LLP filed a cross-complaint against the Company claiming in excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached aany such settlement, with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC (“BetterSea”), onehe receive unilateral control over significant aspects of the Company’s long-standing technical consultants. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillmentfinancial 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 this contractual obligation based onnearly all personnel, all to the then-outstanding closing quoteexclusion of the stock. The issuanceCompany’s management team and stockholder-elected Board of the shares was previously reported by the Company.Directors. The Company also paid $20,000 in legal fees on behalfbelieves that allowing Mr. Kopple such level of BetterSea relatedoperational control over the Company without any accountability would be highly detrimental to legal expense associatedthe Company and is incompatible with the Company’s delays in the issuanceBoard of the stock.Directors’ duties to shareholders and creditors as a whole.

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’s father,a relative of Scholnick, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that anyIn April 2020, Aura and Scholnick entered into a Confidential Settlement and Release Agreement wherein (i) the 2018 action initiated by Scholnick against Aura was resolved with no amounts owing by Aura and the complaint and cross-complaint were subsequently dismissed with prejudice; and (ii) the amount is now owedowing to Scholnick.Aura pursuant to the judgment against J.B. Moving and Delivery was compromised and resolved through a single lump-sum payment to Aura.

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr.Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Mr.Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.

NOTE 9- FINANCIAL STATEMENT RESTATEMENTS

The Company issued an amended report on Form 10-K/A on October 24, 2019 for the fiscal year ended February 28, 2019 that corrected misstatements of its financial statements as of February 28, 2019. The following tables describe one of those misstatements, which should have been recorded in the three and six-months ended August 31, 2018.

AURA SYSTEMS, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX-MONTHS ENDED AUGUST 31, 2018

AURA SYSTEMS, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX-MONTHS ENDED AUGUST 31, 2018

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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:

We do not intend to update or revise any forward-looking statements, whether as a resultbecause 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.

Overview

Beginning withOur 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 activities.

In fiscalFiscal 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 fiscalFiscal 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 fiscalFiscal 2018, we eliminated a total of approximately $30.23$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 was extinguished, representing a gain of approximately $3.5 million on the Condensed Statement of Operations for the three and six-months ended August 31, 2020, as the respective statute of limitation periods were deemed to have expired.

AsThe Company is presently engaged in a dispute with one of the date of this filing,its former directors, Robert Kopple, our former Vice Chairmanrelating to approximately $10.6 million (representing approximately $5.4 million loaned to the Company over the course of the Board, is the only significant unsecured note holder that has not agreed2013 to restructure his debt.2016; approximately $170,000 Mr. Kopple claims that heto 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 are owed approximately $10.1 million on terms significantly preferable to other similarly situated unsecured creditors. We disputeby the Company. In July 2017, Mr. Kopple’s claims. See “Part II-Other Information, Item 1. Legal Proceedings” included elsewhereKopple 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 this Quarterly Report on Form 10-Q for information regardingconnection with these allegations. In 2018, the disputeCourt 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 regarding these transactions.Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple hascontinues 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 accepted our numerous offerslimited to, restructure this debt.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 fiscalFiscal 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 under our new management team.activities.

Our business is based on the exploitation of our patented mobile power solution known as the AuraGen^®AuraGen® for commercial and industrial applications and the VIPER for military applications. Our business model consists of two major components;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.distributors. 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 AuraGenAuraGen®/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 fiscalFiscal 2018 and 2019, we expectincurred modest engineering activities budgeted atexpenses of approximately $750,000$50,000 and $84,000 during the fiscal 2020 year.

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 the we were 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, fiscal 2018three and fiscal 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, was 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 six-months ended August 31 2020, we have increased productionrespectively, and have recognized approximately $348,000 of revenue. Our marketing strategy$34,000 and $93,000 during fiscal 2020 includes the following key activities:three and six-months ended August 31, 2019, respectively.

(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 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,In preparing our financial statements, we evaluatehave made our best estimates including, but not limited to, those related to revenue recognition.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. ActualThe 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, 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.statements may be materially affected.

Revenue Recognition

We adopted Accounting Standards Codification (“ASC”) 606.The core principle of 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(“ASC 606”), is that an entity to recognizerecognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that itto which the entity expects to be entitled to receive in exchange for those goods or services recognized asservices. 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.

We have assessedOur primary source of revenue is the impactmanufacture and delivery of AuraGen/VIPER sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $5,000 and $54,000 for the guidance by performingthree and six-months ended August 31, 2020, respectively, and $354,000 for the following five steps analysis: three and six-months ended August 31, 2019, respectively. Our current principle sales channel is sales to a domestic distributor.

Step 1: IdentifyIn accordance with ASC 606, we recognize the contractentirety of the revenue, net of discounts, for our AuraGen/VIPER sets at time of product delivery to the distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer. 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 at August 31, 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.

Step 2: Identify the performance obligations

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognize revenue

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 haveFrom Fiscal 2015 through 2019 we minimally operated and therefore have only produced minimal product since late 2015.product. As a result, while we believebelieved that a portion of the inventory hashad value, we arewere unable to substantiate its demand and market valuefully 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 a result we have elected to reserve it in its entirety as of August 31raw material and February 28, 2019.work-in-process.

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, such as consultants and third parties, in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”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.

For the past, several years and inIn 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-acceptedwidely 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

Six-months During the six-month period ended August 31, 2019 compared2020, 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 $96,000 and $174,000 were recorded in the three and six-months ended August 31, 20182020, respectively. No stock-based compensation expense was recorded during Fiscal 2020.

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 two 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:

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 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 will adversely impact our results for the first two quarters of Fiscal 2021, as well as the full fiscal year, 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 six-months ended August 31, 2020, we reported net profit of approximately $2.7 million and $2.1 million, respectively, and had negative cash flows from operating activities of approximately $832,000 for the six-month period ended August 31, 2020. The profits in the current year are attributed to the recognizable non-operating income associated with the cancellation of certain liabilities due the expiration of the statute of limitations. This reduction is due to the debt being cancelled based on a cancellation of indebtedness due, supported by a statute of limitations.

If we are unable to generate operating profits on a sustained basis and is unable to continue to obtain financing for its working capital requirements, we may have to curtail its business sharply or cease business altogether.

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 its ability to generate sufficient cash flow to meet its 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 August 31, 2020 compared to three months ended August 31, 2019

Net revenues were $348,075revenue was $5,000 for the six-monthsthree-months ended August 31, 2020 (the “Three-Months FY2021”) compared to $348,000 for the three-months ended August 31, 2019 (the “Six-Months“Three-Months FY2020”) compared to $39,724 for the six-months ended August 31, 2018 (the “Six-Months FY2019”), or an increase of 776% compared to the same period of fiscal 2019.. During the secondcurrent quarter of 2020,2021, we delivered 521 generator unitsunit to distribution customersa foreign customer as compared to 652 units delivered in the same periodquarter in the prior year for a military application.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 or until an effective vaccine becomes widely available.

Cost of goods sold were $32,097was approximately $3,500 in the Six-Months FY2020Three-Months FY2021 compared to $73,444approximately $29,000 in the Six-Months FY2019Three-Months FY2020 resulting in a gross profit of $315,978$1,500, or a gross margin of 30%, and a loss$319,000 gross profit in the Three-Months FY2020 and a gross margin of $33,720, respectively, and gross margins of 90.8% and negative 84.9%, respectively.91%. Gross profit and related gross margin for the Six-Months FY2020Three-Months FY2021 shipments were highlargely influenced by the low volume of shipments in the quarter which reduced our ability to fully absorb fixed operating costs. The gross margin of 91% 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 high utilizationunit cost of inventory previously fully reserved.52 units sold in that quarter. We do not expect gross margins above 90% to continueoccur regularly 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 $92,552approximately $63,000 in the Six-Months FY2020,Three-Months FY2021, compared to $163,876approximately $34,000 in the Six-Months FY2019,Three-Months FY2020, or a declinean increase of 43.5%62%.

Selling, general and administrative (“SG&A”) expense decreased $1,543,312 (75%increased approximately $221,000 (105%) to $508,227approximately $432,000 in the Six-Months FY2020Three-Months FY2021 from $2,051,539approximately $211,000 in the Six-Months FY2019.Three-Months FY2020. During Six-Months FY2019,Three-Months FY2021, we incurred higher legalrecorded (i) $96,000 of stock-based compensation expense of expense of $417,000 related to the repricinggrant of warrants1,250,000 options to our five board members, (ii) incurred approximately $64,000 in one-time costs to physically close our offsite storage facility in Santa Clarita, CA and options, $432,000consolidate usable inventory into temporary storage facilities (iii) incurred additional salaries and consulting costs of approximately $80,000 due to change in executive management that occurred in the Three-Months FY2020, (iv) higher legalaccounting fees of $38,000 due to the timing of the fiscal year end audit occurring in the second quarter of Fiscal 2021 due to COVID-19 delays, offset partially by (v) reduced travel expenses higher consulting expense and administrative headcount cost.of $33,000.

Net interest expense in the Six-Months FY2020Three-Months FY2021 increased $48,461approximately $42,000 or 9%15%, to $601,833approximately $327,000 from $553,372approximately $285,000 in the Six-Months FY2019.Three-Months FY2020 due largely to interest costs related to past due payables of $38,000.

Our net lossOther income and gain on extinguishment of debt totals $3.5 million in the Three-Months FY2021, as compared to $0 in the same period of Fiscal 2020. This amount was attributed to the extinguishment of approximately $2.3 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 principle, all of which represent liabilities with respect to which the applicable statute of limitation periods have been deemed to have expired as of the effective date of this filing.

Net profit for the Six-Months FY2020 decreased $1,562,917, or 63%,Three-Months FY2021 increased by approximately $2.9 million, to $886,659approximately $2.7 million from $2,449,576a loss of $211,000 in the Six-Months FY2019.Three-Months FY2020 due primarily to the $3.5 million in current liabilities extinguished partially offset by (i) lower gross profit on reduced number of shipments of $318,000 (ii) $96,000 of stock-based compensation expense, (iii) higher salaries and consulting costs of $94,000, (iv) one-time relocation of inventory costs of $64,000, and (v) higher interest costs and other expenses of $57,000.

ThreeSix months ended August 31, 2020 compared to six months ended August 31, 2019 compared to three months

Net revenue was $54,000 for the Six-Months ended August 31, 2018

Net revenues were $348,0752020 (the “Six-Months FY2021”) compared to $348,000 for the three-monthsSix-Months ended August 31, 2019 (the “Three-Months“Six-Months FY2020”) compared to $1,874 for the three-months ended August 31, 2018 (the “Three-Months FY2019”). During the second quarter of 2020, Six-Months FY2021,

we delivered 529 generator units to distribution customers as compared to 052 units delivered in Six-Months FY2020. Revenue year-on-year has been negatively impacted by the same period inCOVID-19 pandemic. We cannot project with confidence the prior year for a military application.timing or amount of revenue that we can expect until the pandemic is under control or until an effective vaccine becomes widely available.

Cost of goods sold were $29,208was approximately $44,000 in the Three-Months FY2020Six-Months FY2021 compared to $58,317approximately $32,000 in the Three-Months FY2019Six-Months FY2020 resulting in a gross profit of $318,867$10,000, or a gross margin of 19%, and a loss$316,000 gross profit in the Six-Months FY2020 and a gross margin of $56,443, respectively, and gross margins of 91.7% and negative 3,012%, respectively.91%. Gross profit and related gross margin for the Three-Months FY2020Six-Months FY2021 shipments were highlargely influenced by the low volume of shipments in the period which reduced our ability to fully absorb fixed operating costs. The gross margin of 91% in the Six-Months FY2020 was achieved by taking advantage of inventory on-hand, previously fully reserved due to lack of estimable demand, to offset the high utilizationunit cost of inventory previously fully reserved.52 units sold year-to-date. We do not expect gross margins above 90% to continueoccur regularly for shipments of generator units in future quartersperiods as the availability of usable parts from fully reserved inventory will decline.

Engineering, research and development expenses were $34,359approximately $97,000 in the Three-Months FY2020,Six-Months FY2021, compared to $31,023approximately $92,000 in the Three-Months FY2019,Six-Months FY2020, or an increasea decrease of 10.8%.3%

Selling, general and administrative (“SG&A”) expense decreased $838,569 (80%increased approximately $267,000 (53%) to $211,004approximately $775,000 in the Three-Months FY2020Six-Months FY2021 from $1,049,573approximately $508,000 in the Three-Months FY2019.Six-Months FY2020. During Three-Months FY2020,Six-Months FY2021, we recorded (i) $174,000 of stock-based compensation expense related to the grant of 1,250,000 options to our five board members, (ii) incurred less cost for administrative headcountapproximately $64,000 in one-time costs to physically close our offsite storage facility in Santa Clarita, CA and consultancy cost by $250,000, $400,000 in reduced legal fees associated with legal action directed at Kilpatrick Townsend & Stockton LLP, our prior legal counsel,consolidate usable inventory into temporary storage facilities (iii) incurred additional salaries and reduced otherconsulting costs of $150,000 thanapproximately $14,000, and (iv) higher accounting fees of $37,000 due to the timing of the fiscal year end audit occurring in Three-Months FY2019.the second quarter of Fiscal 2021 due to COVID-19 delays.

Net interest expense in the Three-Months FY2020Six-Months FY2021 increased $8,633approximately $15,000 or 3%, to $284,788approximately $617,000 from $276,155approximately $602,000 in the Three-Months FY2019.Six-Months FY2020 due largely to interest costs related to past due payables of $38,000.

Our net lossGain on debt settlement was $46,000 in the Six-Months FY2021 as compared to $0 in the same period of Fiscal 2020 due primarily to the settlement of a legal issue. Other income and gain on extinguishment of debt totals approximately $3.6 million in the Six-Months FY2021, as compared to $0 in the same period of Fiscal 2020. This amount was attributed to the extinguishment of approximately $2.3 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 principle, all of which represent liabilities with respect to which the applicable statute of limitation periods have been deemed to have expired as of the effective date of this filing.

Net income for the Three-Months FY2020 decreased $1,201,855 or 85%,Six-Months FY2021 increased by approximately $3.0 million, to $211,339$2.1 million from $1,413,194a loss of $887,000 in the Three-Months FY2019.Six-Months FY2020 due primarily to the $3.5 million in cancellations of current liabilities partially offset by (i) lower gross profit on reduced number of shipments of $306,000 (ii) $174,000 of stock-based compensation expense, (iii) higher salaries and consulting costs of $31,000, (iv) one-time relocation of inventory costs of $64,000, and (v) higher interest costs and other income/expenses of net $30,000.

Liquidity and Capital Resources

Net cash used in operations for the six monthssix-months ended August 31, 2019,2020, was $397,436, a decreaseapproximately $832,000, an increase of $1,356,598$418,000 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the six-months ended August 31, 2019,2020, was $150,297approximately $1,004,000 consisting of (i) cash proceeds from the issuance of common stock asof $815,000, (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) a $35,000 principle payments on a note payable; compared to a total of $1,075,000cash provided by financing activitiesof $150,000 in the same period of fiscal 2019Fiscal 2020 consisting of (i)cash proceeds from a subscription receivablethe issuance of $1,150,000 and offset by (ii) principle payment of $50,000 on a note payable.658,015 common shares. 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 Six-Months FY2020 or the Six-Months FY2019.three-months ended August 31, 2020 and 2019.

AccruedThe total of accrued expenses and accrued expenses-related party as of August 31, 2019 increased $43,8562020 decreased by approximately $1.3 million to $3,161,600$683,000 from $3,205,456approximately $2,954,000 as of February 28, 2019. At August 31, 2019, approximately $2.6 million of accrued expenses is salaries accrued but unpaid to certain current and former employees29, 2020 due to the cancellation of the unpaid salaries of $2.3 million. During the same six-month period in Fiscal 2021, accrued interest on all notes payable due to related parties and non-related parties, increased by approximately $579,000 for recurring interest costs offset by approximately $386,000 of cancellations related to the three demand notes as a lackresult of resources, and approximately $0.6 millionstatute of limitations expiration. This reduction is accrued but unused vacation earneddue to the debt being cancelled based on a cancellation of indebtedness due, supported by employees.a statute of limitations.

The Company had a deficit of $22.0$19.9 million in shareholders’ equity as of August 31, 2019,2020, compared to $21.6$23.3 million as of February 28, 201929, 2020 with the net positive change of $2.9 million attributed to (i) net lossprofit year-to-date of approximately $886,000 offset by$2.1 million (ii) the issuance of approximately 5.2 million shares valued at approximately $0.8 million for cash and (ii) the granting to board members 1,250,000 options in March 2020 with an aggregate fair value of $480,000.$194,000, of which approximately $174,000 was recognized as expense during the first two quarters of Fiscal 2021.

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, and all loan payments are deferred for six months, at which time the balance is payable in 18 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 principle 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.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide disclosure under this Item 3.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the specified time periods. For the last 3 fiscalFiscal years, these control and procedures broke down due to insufficient capital to maintain such controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company’s management evaluated, with the participation of the Company’s ChiefPrincipal Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s ChiefPrincipal Executive Officer and Chief Financial Officer concluded that these controls and procedures were ineffectiveeffective as of the end of the period covered by this report in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. The Company continues to remediate the findings contained in our Annual Report on Form 10-K/A,10-K, for the fiscalFiscal year ended February 28, 2019,29, 2020, issued on October 24, 2019.July 13, 2020.

Changes in Internal Control over Financial Reporting

There have been no other changes in our internal control over financial reporting during our fiscal quarter ended August 31, 2019,2020, not previously identified in our Annual Report on Form 10-K/A,10-K, for the fiscalFiscal year ended February 28, 201929, 2020 and issued on October 24, 2019July 13, 2020 which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

We are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results. 

In 2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring all its options and available remedies and is working toward an offer to settle this matter.

In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants in a lawsuit filed by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January 2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. In September 2018 the court entered a judgment of approximately $235,000 in favor of the two secured creditors. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors (see note 14)

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $9$10.9 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 3.15$5.3 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, theour former CEO (notand a director)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,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. If theHowever, to-date, no settlement negotiation is unsuccessful, the Company intendshas been reached in large part because Mr. Kopple continues to vigorously defend against these claims. See “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysisdemand that as part of Financial Condition and Results of Operations” included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the transactions under dispute with Mr. Kopple.

In April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend & Stockton LLP alleging various acts of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018, Kilpatrick Townsend & Stockton LLP filed a cross-complaint against the Company claiming in excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached aany such settlement, with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC (“BetterSea”), onehe receive unilateral control over significant aspects of the Company’s long-standing technical consultants. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillmentfinancial 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 this contractual obligation based onnearly all personnel, all to the then-outstanding closing quoteexclusion of the stock. The issuanceCompany’s management team and stockholder-elected Board of the shares was previously reported by the Company.Directors. The Company also paid $20,000 in legal fees on behalfbelieves that allowing Mr. Kopple such level of BetterSea relatedoperational control over the Company without any accountability would be highly detrimental to legal expense associatedthe Company and is incompatible with the Company’s delays in the issuanceBoard of the stock.Directors’ duties to shareholders and creditors as a whole.

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’s father,a relative of Scholnick, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that anyIn April 2020, Aura and Scholnick entered into a Confidential Settlement and Release Agreement wherein (i) the 2018 action initiated by Scholnick against Aura was resolved with no amounts owing by Aura and the complaint and cross-complaint were subsequently dismissed with prejudice; and (ii) the amount is now owedowing to Scholnick.Aura pursuant to the judgment against J.B. Moving and Delivery was compromised and resolved through a single lump-sum payment to Aura.

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr.Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Mr.Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To-date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s Fiscal 2020 Annual Report on Form 10-K issued on JuneJuly 13, 2019 and the Amended Annual Report on Form 10-K/A for the year ended February 28, 2019, issued on October 24, 2019.2020.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the six-months ended August 31, 2019,2020, we issued 658,0155,224,997 shares of common stock for $150,353.cash proceeds of $815,000.

ITEM 3. Defaults Upon Senior Securities.

As of the date of this filing, Robert Kopple, the Company’sour former Vice Chairman of the Board, is the only significant unsecured note holder that has not agreedexecuted formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.9 million (representing approximately $5.4 million loaned to restructure his debt.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 $5.3 million Mr. Kopple claims to be owed approximately $5.3 million plusfor interest, loan fees and approximately 3.14 million warrantslate payment fees) on terms significantly preferable to other similarly-situatedsimilarly situated unsecured creditors. To-date,creditors as well as warrants to purchase approximately 3.3 million shares of our common stock. We dispute Mr. Kopple has not accepted the Company’s multiple offers to restructure his debt. The Company is presently engagedKopple’s claims and we are currently in a legal dispute regarding these claims. See “Item 1. Legal Proceedings” included elsewhere in this Quarterly Report on Form 10-Q for information regarding the dispute with Mr. Kopple relating to the debt and securities which Mr. Kopple claims to be owed to him and his affiliates by the Company. See,regarding these transactions as well as “Note 3 – Notes Payable” and “Note 5 – Related Parties Transactions” to the Company’s condensed financial statements, and “Liquidity and Capital Resources” in “Item 2.2 and Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this quarterly report on Form 10-Q for additional information regarding amounts that may be owed under the Company’s notes payable and the recent restructuring of certain Company debt. Mr. Kopple has not accepted our numerous offers to settle this debt and continues to demand that as part of any such resolution, 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.

In June 2014, we entered into a Financing Letter of Agreement (the “June 2014 Agreement”) with two affiliate entities of Mr. Kopple, KF Business Ventures and the Kopple Family Partnership (the “Additional Kopple Parties”), pursuant to which the Additional Kopple Parties loaned us an additional $1,000,000 (the “June 2014 Loan”). In connection with the June 2014 Loan, Mr. Kopple also added $202,205 in penalties and accrued interest, credited us with $200,000 for amounts previously repaid by us and consolidated several earlier advances into a single new note (the “June 2014 Kopple Note”) in the principal amount of $2,715,2067 and bearing simple interest at a rate of 10% per annum. We were also required to obtain a subordination agreement from the Breslow Parties in favor of the Kopple Parties with respect to the June 2014 Kopple Note.

Pursuant to the June 2014 Agreement, the Kopple Parties also placed various restrictions on our ability to raise additional capital, hire qualified personnel and pay certain expenses without his prior approval for so long as the principal amount of his note remained outstanding. The June 2014 Kopple Note also required us to issue Mr. Kopple a stock purchase warrant (the “June 2014 Kopple Warrant”) to purchase approximately 771,000 shares of our common stock at an exercise price of $0.70 per share, to be exercisable for seven years. Additionally, if we borrowed funds, issued capital stock or rights to acquire or convert into capital stock, or granted rights in respect to territories to any person for cash consideration of more than $5 million in the aggregate after the date of the June 2014 Kopple Note, we would be required to pay the entire amount of such cash consideration in excess of $5 million as a mandatory prepayment of the June 2014 Kopple Note. Additionally, Mr. Kopple required a default provision providing that in the event that the entire outstanding balance of the June 2014 Kopple Note was not paid in full prior to October 1, 2014, then for each consecutive calendar month during the period beginning October 1, 2014 and ending March 31, 2015, we would issue to Mr. Kopple additional stock purchase warrants, each to purchase 416,458 shares of our common stock, up to a maximum aggregate of approximately 2.5 million shares of our common stock, at $0.70 per share (the “Kopple Penalty Warrants”), the Kopple Penalty Warranties to be exercisable for seven years from the time of their respective issuances. In addition to the Kopple Penalty Warrants, the default provision under the June 2014 Kopple Note provides for a 5% late charge on the total amount due plus 15% per year interest. We have not repaid the Kopple Parties in full for the amounts loaned to us. Additionally, we have not issued any of the Kopple Penalty Warrants and management believes that Mr. Kopple is not entitled to receive them. We have also cancelled the June 2014 Kopple Warrant.

We consider the transactions described above with Mr. Kopple to be related party transactions.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information.

None.

ITEM 6.  Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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