UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended AugustMay 31, 20202021

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

AURA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

10541 Ashdale Street20431 North Sea Circle

Stanton,Lake Forest, CA 9068092630

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (310) 643-5300

Former name, former address and former fiscal year, if changed since last report:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES ☒   NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☐   NO ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

AURA SYSTEMS, INC.

INDEX

ITEM 1. FINANCIAL STATEMENTS

AURA SYSTEMS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to these unaudited financial statements.

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to these unaudited financial statements.

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICITCASH FLOWS

(Unaudited)

See accompanying notes to these unaudited financial statements.

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited)

See accompanying notes to these unaudited financial statements.

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

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY 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 salessale 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.

Basis of Presentation

In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. However, the results of operations included in such 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”) have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 29, 202028, 2021 (“Fiscal 2020”2021”) filed with the Securities and Exchange Commission (“SEC”) on July 13, 2020June 1, 2021 (“20202021 Form 10-K.”).

Our fiscal year ends on the last day of February. Accordingly, the current fiscal year is ending on February 28, 2021;2022; we refer to the current fiscal as (“Fiscal 2021”).2022. The prior fiscal year is Fiscal 2020.2021.

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 20202021 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 June 2016,February 2020, the FASB issued Accounting Standards Update 2016-13, ASU 2020-02, Financial Instruments-Credit Losses (Topic 326): Measurement and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) which amends the effective date of Credit Losses on Financial Instrument. Subsequent to the issuance oforiginal pronouncement for smaller reporting companies. ASU 2016-13 the FASB clarified the guidance through several ASUs. The collective new guidance (ASC 326) generally requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal toand its current estimate of all 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 forecasts. ASC 326 isamendments will be effective for the Company for interim and annual and interimperiods in fiscal reporting periodsyears beginning after December 15, 2022,2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with early adoption permittedConversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for annual reporting periodscertain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2018.2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is continuing to evaluateevaluating the expected impact of this ASC 326 but does not expect it to have a material impactguidance on its financial statements upon adoption.statements.

NOTE 2 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The unaudited condensed financial statements ofDuring the three-month period ended May 31, 2021, the Company do not include any adjustments relating toreported a net loss of approximately $1.1 million and negative cash flows from operating activities of $0.5 million, respectively. In the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. 

Ifevent 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 sharplyfurther or cease business altogether. These factors raise substantial doubts about the Company’s ability to continue as a going concern.

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.

Beginning withDuring the second quarter of fiscal year 2020,next twelve months we increasedintend to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen^®®/VIPER businessproducts both domestically and revenueinternationally and to add to our existing management team. In addition, we plan to complete the move to our new facility for operations, rebuild the threeengineering and six-months ended August 31, 2020 was $5,000sales teams, and $53,633, respectively, as compared to $348,075the extent appropriate, utilize third party contractors to support the operation. We anticipate being able to obtain new sources of revenuefunding to support these actions in the comparable periods of Fiscal 2020.upcoming fiscal year.

NOTE 3 – NOTES PAYABLE

Non-related party and related party notes payable transactionprincipal and accrued interest amounts consisted of the following:

Demand Promissory Notes and Notes Payable

The Demand Promissory Notes at AugustNote

Demand promissory note in the amount of $10,000 as of May 31, 2021 and February 29, 2020 are28, 2021 is for one and four individuals, respectively,Mr. Zeitlen, a former director of the Company, issued in September 2015, that are payable on demand with an interest rate of 10% per annum.

As of August 31, 2020, the principle amount owed to the Mr. Zeitlin, a former director of the Company, was $10,000.

In the second 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 common stock on 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 a lawsuit filed by Messrs. 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 of in favor of the Messrs. Abdou. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors for a principal amount of $325,000, of which approximately $180,000$90,000 and $215,000$120,000 were outstanding as of AugustMay 31 and February 29, 2020,28, 2021, respectively.

Paycheck Protection Plan LoanLoans

During April 2020, the Company 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 type. As required, the Company intends to useused 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 applyOn April 1, 2021, the company received notification that the principal amount of $74,400 and accrued interest of approximately $700 were forgiven under the terms of the loan program and were recorded as a forgiveness of debt on the Condensed Statements of Operations for the forgivenessthree-months ended May 31, 2021.

On March 3, 2021, the Company received $91,235 pursuant to Paycheck Protection Program Second Draw (“PPP2”) in accordance with legislation approved in December 2020. The terms and conditions of this loan is the same as PPP Loan, there is no assurance that we will obtain forgivenesswith the principal amount 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$91,325 recognized as part of notes payable, current portion.non-current on the balance sheet as of May 31, 2021.

Economic 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:include interest accrues at 3.75% per annum effective July 1, 2020; the payment schedule contains a one-year deferral period on initial principleprincipal 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 AugustMay 31 2020,and February 28, 2021, the amountamounts outstanding, including accrued interest of $941 is $150,841$5,224 and is$3,768, respectively, are $155,125 and $153,668, respectively, and are classified as part of notes payable, non-current on the AugustMay 31 and February 28, 2021 balance sheets. On January 6, 2021, the SBA announced a one-year extension of the deferral period for loans that commenced in 2020 balance sheet.delaying payments of principal and interest to July 2022.

Convertible Notes Payable

Kenmont Capital Partners

On May 7 and September 25, 2013, the Company transferred 4entered into Securities Purchase Agreements for senior convertible notes payable with a total principal valuein the aggregate amount of $1,000,000 together with accrued interest, and consulting fees to a senior secured convertible note with a principal value of $1,087,000approximately $1,807,000 (“New Kenmont Note”Notes”) and warrants to Kenmont Capital Partners LP. The New Kenmont NoteNotes had a 1-year maturity date and waswere 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 asOn October 31, 2016, the Securities Purchase Agreements were amended and restated to include a discount,provision for mandatory redemption in which has been fully amortized.80% of the principal and accrued interest amount of approximately $2,750,000, or approximately $2,200,000, was converted into common shares at a conversion price of $0.75 per share. There was a remaining balance of $549,954 as of AugustMay 31 and February 29, 2020,28, 2021, 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 AugustMay 31 and February 29, 2020,28, 2021, 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 AugustMay 31 and February 29, 2020,28, 2021, respectively.

Dresner and Lempert

On June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and 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. During Fiscal 2020, Dr. Lempert converted his share of the amount outstanding into common shares and the balance outstanding of $59,506 as of AugustMay 31 and February 29, 2020,28, 2021, respectively, is for Dresner exclusively.

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 AugustMay 31 and February 29, 2020,28, 2021, 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 AugustMay 31 and February 29, 2020,28, 2021, 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. All of the creditors entered into the January 30, 2017 agreement with the exception of 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 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 approximately $1,005,000 as of AugustMay 31 and February 29, 2020,28, 2021, respectively, plus any outstanding accrued interest.

NOTE 4 – ACCRUED EXPENSES

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

Accrued payroll and related expenses consist primarily of salaries and vacation time accrued in prior years but not paid to employees due to our lack of financial resources. In the second quarterresources (see Note 7). Accrued interest consists of fiscal yearamounts due (see Note 3) to holders of convertible promissory notes of $1.4 million and for demand and other promissory notes of approximately $0.3 million at May 31, 2021. The accrued interest-related party is related to principal amount due to Mr. Breslow of $3.0 million as of May 31 and February 28, 2021 liabilities with respect to approximately $1.3 million in accrued payroll and related expenses were reversed as the related statute of limitation periods were determined to have expired.(see Note 6).

NOTE 5 – SHAREHOLDERS’ EQUITY

Common Stock

During the three and six-monthsthree-months ended AugustMay 31, 2021, the Company issued approximately 1,865,000 shares of common stock for $283,000 in cash, respectively. During the three-months ended May 31, 2020 the Company issued 3,866,664 and 5,224,997approximately 1,358,000 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 501,765 and 658,015 shares of common stock, respectively, for $100,353 and $150,353 in cash, respectively. During August 2019, 1,030,385 shares were issued for a settlement valued at $329,723 and during August 2020, 192,641 shares were issued in connection with the Veen settlement (see Note 3).$235,000.

Employee Options and Warrants

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 or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. As of February 29, 2020, and August 31, 2020, there were no stock options outstanding.

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, 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-monthsthree-months ended AugustMay 31, 2020, the Board of Directors approved grants of 250,000 stock options to each board member for an aggregate of 1,250,000 options, with an exercise price of $0.25 per option and at a market price of $0.16 on March 19, 2020, the date of grant.

On February 25, 2021 and during the fourth quarter of Fiscal 2021, the Board approved the grant of 500,000 stock options to our president with an exercise price of $0.50, vesting in equal increments over a twelve-month period and a five-year contractual term. On December 10, 2020 and during the fourth quarter of Fiscal 2021, the Board approved aggregate grants of 1,000,000 stock options to the four other board members with an exercise price of $0.25, vesting in equal increments over a twelve-month period and a five-year contractual term. The following table provides the assumptions required to apply the Black-Scholes Merton option model to determine the fair value of the stock options as of the grant date:

The aggregate fair value of the 1,250,000 options granted in March 2020 is approximately $194,000, or $0.155 per option, with $96,477 and $174,076$77,599 recorded as part of sales, general and administration expense during the three and six-monthsmonths ended AugustMay 31, 2020, respectively. No stock-based compensation expense was recorded during Fiscal 2020.

The aggregate fair value of the 1,500,000 options granted in December 2020 and February 2021 is approximately $382,500, or $0.255 per option, with $146,300 recorded as part of sales, general and administration expense during the three months ended May 31, 2021.

The following tables provide additional information regarding stock options outstanding and exercisable under the 2011 Director and Executive Officers Stock Option Plan:Plan for the three-months ended May 31, 2021:

Directors and Officers 2011 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-monthsthree-months ended AugustMay 31, 2020.2021.

Activity in issued and outstanding warrants is as follows for the six-monthsthree-months ended AugustMay 31, 2020:2021:

Other information related to the warrants outstanding and exercisable as of AugustMay 31, 20202021 follows:

NOTE 6 – RELATED PARTIES TRANSACTIONS

Notes payable-related party, non-current - $3,000,000 on the condensed balance sheets as of AugustMay 31 and February 29, 202028, 2021 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 at a conversion rate of $1.40. The note bears interest at a rate of 5% per annum payable monthly in arrears with accrued interest of $338,527$450,719 and $262,911$412,911 recorded as accrued interest-related party (see Note 4) as of AugustMay 31 and February 29, 2020,28, 2021, respectively.

Notes payable and accrued interest-related party, current - $11,752,402$12,374,486 on the condensed balance sheet as of AugustMay 31, 2021 and $11,333,960$12,165,015 as of February 29, 202028, 2021 consists of the Kopple Notes, the Gagerman Note and the Jiangsu Shengfeng Note as set forth below:

Kopple Notes

As of AugustMay 31 and February 29, 2020,28, 2021, the principal amount owed to Robert Kopple (former Vice-Chairman of our Board) of $5,607,323 was unchanged. As of AugustMay 31, 2020,2021, accrued interest of $5,302,419$5,917,869 was owed to Mr. Kopple for a total balance of $10,909,742.$11,525,192. As of February 29, 2020,28, 2021, accrued interest of $4,887,610$5,710,464 was owed to Mr. Kopple for a total balance of $10,494,933.$11,317,787.

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��Notes”) and warrants. The Kopple Notes carried a base interest rate of 9.5%, have a 4-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 AugustMay 31, 2020,2021, the Gagerman note consisted of $82,000 of unsecured note payable plus accrued interest of $60,660$67,294 for a total owed to Melvin Gagerman of $142,660,$149,294, 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, 2020,28, 2021, the amount owed to Gagerman was $139,026.$147,227.

Jiangsu Shengfeng Note

OnThe Jiangsu Shengfeng non-interest-bearing promissory note of $700,000 was issued in connection with a return of a customer advance. This promissory note, dated November 20, 2019, the Company entered into a preliminary agreementis 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 loanThe principal 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 condensed balance sheets as of AugustMay 31 2020.and February 28, 2021.

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 7 – COMMITMENTS & CONTINGENCIES

Leases

OurPrior to Fiscal 2022, our facilities consistconsisted primarily of approximately 20,000 square feet in Stanton, California and prior to July 31, 2020, an additionala storage facility in Santa Clarita, California. Effective February 28, 2021, we vacated both facilities and consolidated our administrative offices, operations including warehousing within a 17,700 square foot facility in Lake Forest, California under a 66-month rental agreement covering March 1, 2021 through August 31, 2026, with an initial monthly rental rate of approximately $22,000 increasing to a monthly rate of approximately $26,000 in 2026. At February 28, 2021, in accordance with ASC Topic 842, we recognized a right of use (“ROU”) asset and an operating lease liability of approximately $1.2 million, respectively, of which approximately $0.1 million was classified as a current liability and $1.1 million as non-current liability at February 28, 2021. The Stanton facilitylease liability is used for assemblydetermined by discounting the future lease payments under the lease terms and testing of AuraGen®/VIPER systems and is rented onapplying a month-to-month basis at $10,00010% per month. Priorannum discount rate to July 2020,determine the Company paid $5,000current lease liability. Operating expenses estimated to be approximately $4,000 per month onare considered a month-to-month basis, forvariable lease component and excluded from the Santa Clarita storage facility. Followingdetermination of the closureROU asset and the lease liability. Other operating expenses, such as utilities and property taxes, are similarly excluded in the calculation of this facility, the Company is currently renting onROU as they do not represent goods and services provided by the lessor under the terms of the lease. At May 31, 2021, the ROU asset balance was approximately $1,128,000 and the total lease liability was approximately $1,165,000, of which approximately $161,000 was classified as a month-to-month basis approximately 1,000 square feet of temporary offsite storage space at a monthly cost of approximately $2,500.current liability.

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

Following the adoption of Topic 842, Leases, as of the start of Fiscal 2020, the Company determined that there was no impact on its Condensed Financial Statements during the fiscal year ended February 29, 2020, and as of August 31, 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 to be recorded on the balance sheet in the period in which a lease commences.

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 financial statements for that reporting period could be materially adversely affected.

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. This amount is part of accrued expenses in the condensed balance sheets as of May 31 and February 28, 2021.

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $10.6$11.5 million (representing approximately $5.4 million loaned to the Company over the course of 2013 to 2016; approximately $170,000 Mr. Kopple claims to have advanced or paid to third parties on Aura’s behalf; and approximately $5$5.9 million Mr. Kopple claims to be owed for interest, loan fees and late payment charges) and approximately 3.33 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well as against current director Mr. Diaz-Verson and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, our former CEO and a former director, in connection with these allegations. In 2018, the Court dismissed Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.

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 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. In 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 owing to 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, 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 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 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 because of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements.

Overview

Our fiscal year endsbusiness is based on the last dayexploitation of February. We refer to our fiscal years in this Quarterly Report on Form 10-QAxial Flux Induction solution known as “Fiscal”the AuraGen^® for commercial and industrial applications and the calendar yearVIPER for military applications. Our business model consists of two major components: (i) sales and marketing, (ii) design and engineering. Our sales and marketing approaches are composed of direct sales in whichNorth America and the fiscal year ends. Asuse of agents, distributors. In North America, our primary focus is in (a) mobile exportable power applications, (b) EV applications and (c) U.S. Military applications. The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen^®/VIPERsolution 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.higher power/torque solutions, and different input and output voltages (DC and AC input and output versions)

During Fiscal 2017 through 2018 we reduced ourand Fiscal 2019, the Company’s engineering, manufacturing, sales, and marketing activities to focuswere reduced while we focused on renegotiating numerous financial obligationsobligations. During this time, the Company’s agreements with numerous customers, third party vendors, and minimizing expenditures while we attemptedorganizations and entities material to raise additional funding and pursue some initial engineering activities.

Inthe operation of the Company business were canceled, delayed or terminated. During Fiscal 2018, wethe Company successfully eliminated approximately 68%restructured in excess of our total indebtedness. Specifically, our secured creditors converted approximately $5.73 million of secured debt into approximately 4.1 million shares of our common stock. The converted debt represented approximately 80% of the total secured debt of the Company. The balance of the secured debt (approximately $960,000) is to be paid to the secured creditors in cash if we raise at least $4.0 million in proceeds through new equity offerings in one or a series of related offerings. Additionally, in Fiscal 2018, approximately $12.77 million of unsecured debt was converted into approximately 9.3 million shares of the Company’s common stock and approximately $12.3 million of unsecured debt was forgiven. In total, during Fiscal 2018, we eliminated a total of approximately $30.8$30 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.

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $10.6 million (representing approximately $5.4 million loaned toour former Vice Chairman of the Company overBoard, was the courseonly significant unsecured note holder that did not executed formal agreements regarding the restructure of 2013 to 2016; approximately $170,000his debt. Mr. Kopple claims to have advanced or paid to third parties on Aura’s behalf; and approximately $5 million Mr. Kopple claims to be owed for interest, loan fees and late payment charges) and approximately 3.33 million warrants which Mr. Kopple claims to be owed to himthat he and his affiliates byare presently owed approximately $11.5 million. We dispute Mr. Kopple’s claims. See “Item 3. Legal Proceedings” included in our Annual Report on Form 10-K for Fiscal 2021 and Part II, Other Information, contained in this Quarterly Report for information regarding the Company. In July 2017,dispute with Mr. Kopple filed suit againstregarding these transactions. As of the Company as well as against current directorfiling of this Quarterly Report, Mr. Diaz-VersonKopple has not accepted our numerous offers to settle this debt and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, our former CEO and a former director, in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers; all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement,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 n 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,In Fiscal 2019, we effectuated a one-for-seven reverse stock split.

In Fiscal 2019, wesplit and began increasing our engineering and manufacturing activities. We utilized contractors

In Fiscal 2020 stockholders of the Company successfully removed Ronald Buschur, William Anderson and Si Ryong Yu from the Company’s Board of Directors and elected Ms. Cipora Lavut, Mr. David Mann and Dr. Robert Lempert as directors of the Company in their stead. See Item 3, Legal Proceedings for these servicesmore information. Also, in order to minimize our expense while we continued to pursue new sources of financing.Fiscal 2020, Melvin Gagerman –– Aura’s CEO and CFO since 2006 –– was replaced. In July 2019 under our new management team, weMs. Lavut succeeded Mr. Gagerman as President and Mr. Mann succeeded Mr. Gagerman as CFO. Dr. Lempert was appointed as Secretary of the Company by the Board of Directors also in July 2019. In the second half of Fiscal 2020, the Company began significantly increasing our sales,its engineering, manufacturing and marketing activities. From July 8, 2019 through the end of Fiscal year 2021 (February 28, 2021), we shipped more than 140 units to customers (more than a ten-fold increase over Fiscal 2019). Although our operations were impacted in Fiscal 2021 by the COVID-19 pandemic, during Fiscal 2021 we continued to expand our engineering and manufacturing capabilities. Our engineering, research and development costs for the three months ended May 31, 2020 was approximately $34,000 as compared to $81,000 for the same period of Fiscal 2022. Subsequent to the end of Fiscal 2021, we relocated all administrative offices and operations to a new state-of-the-art facility consisting of approximately 18,000 square feet in Lake Forest, California. This new facility is wholly occupied by Aura.

Our business is based on the exploitation of our patented mobile power solution known as the AuraGen® for commercial and industrial applications and the VIPER for military applications. Our business model consists of two major components: (i) sales and marketing, (ii) design and engineering.

(i) Our sales and marketing approaches are composed of direct sales in North America and the use of agents, distributors. In North America, our primary focus is in (a) mobile exportable power applications, and (c) U.S. Military applications.

(ii) The second component of our business model is focused on the design of new products and engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen®/VIPERsolution such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface kits for different platforms. After suspending the majority of our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in Fiscal 2018 and 2019, we incurred modest engineering expenses of approximately $50,000 and $84,000 during the three and six-months ended August 31 2020, respectively, and approximately $34,000 and $93,000 during the three and six-months ended August 31, 2019, respectively.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. The full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated for these key estimates and assumptions. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are differences between these estimates and actual results, our financial statements may be materially affected.

Revenue Recognition

The core principle of ASC 606, Revenue from Contracts with Customers (“ASC 606”), is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASC 606, all revenue transactions must be evaluated using a five-step approach to determine the amount and timing of revenue to be recognized. The five-step approach requires (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when performance obligations are satisfied.

Our primary source of revenue is the manufacture and delivery of AuraGen/VIPER sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $5,000$24,000 and $54,000$49,000 for the threethree-months ended May 31, 2021 and six-months ended August 31, 2020, respectively, and $354,000 for the three and six-months ended August 31, 2019, respectively. Our current principle sales channel is sales to a domestic distributor.

In accordance with ASC 606, we recognize the entirety of the revenue, net of discounts, for our AuraGen/VIPER sets at time of product delivery to the distributorcustomer (i.e. point-in-time), point-in-time sale), which also corresponds to the passage of legal title to the customer and the satisfaction of our single performance obligationsobligation 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 Augustas of May 31 2020 and February 29, 2020,28, 2021, respectively; however, we expect warranty claims to eventually be nil, therefore, we have not delayed the recognition of revenue during Fiscal 20212022 and 2020.2021.

Inventory Valuation and Classification

Inventories are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. From Fiscal 2015 through 2019 we minimally operated and therefore only produced minimal product. As a result, while we believed that a portion of the inventory had value, we were unable to substantiate demand and fully reserved all inventory in Fiscal 2019. Beginning with Fiscal 2020, production has increased, and fully reserved inventory has been used in current production. We classify all of our inventory as raw material and work-in-process.

Stock-Based Compensation

We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair value-based method and the recording of such expense in the statements of operations.

We account for stock option and warrant grants issued and vesting to non-employees, such as consultants and third parties, in accordance with FASB ASC 718, “Compensation – Stock Compensation”, where appropriate, whereas the fair value of the equity-based compensation is based upon the measurement date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

In accordance with established public company accounting practice, we have consistently utilized the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily to management, employees, and directors. The Black-Scholes option-pricing model is a widely accepted method of valuation that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances. During the six-monththree-month period ended AugustMay 31, 2020, our Board of Directors awarded a total of 1,250,000 stock options to the five members of the board, with a five-year term, an exercise price of $0.25 per option, and a vesting period of not less than six-months and one day. Using the Black-Scholes option model, we determinedwhich resulted in an aggregate fair value of $194,000$193,500 of which $96,000 and $174,000 were$77,600 was recorded as stock-based compensation in the three-months ended May 31, 2020. During the three and six-monthsmonths ended August 31, 2020, respectively. NoFebruary 28, 2021, the board approved an aggregate grant of 1,500,000 stock options to board members, which resulted in an aggregate fair value of $382,500, of which $146,300 was recorded as stock-based compensation expense was recorded duringcost in the three-months ended May 31, 2021.

Operating Leases

We adopted ASC 842, Leases, in Fiscal 2020.2020, which required that public companies evaluate all operating leases in accordance with ASC 842 and recognize a lease liability on the balance sheet by determining the present value of the remaining lease payments for each lease using a discount rate based on the Company’s incremental borrowing rate. A corresponding right-of-use asset is also recognized that is amortized over the remaining term of the lease. Throughout Fiscal 2020 and the majority of Fiscal 2021, we did not implement the new guidance to our existing leases because the guidance does not require application of the standard for leases that are less than 12 months with lease renewal unlikely. All of the facility leases were month-to-month with management’s intention of exiting the leases and facilities as soon as practical. In February 2021, we entered into a 66-month facility lease in Lake Forest, CA that began on March 1, 2021, which resulted in the application of ASC 842 for the fiscal year ended February 28, 2021. As of February 28, 2020, we recognized a lease liability and a right-of-use asset of $1.2 million, respectively. During Fiscal 2022 and beyond, we will be applying the new lease standard to this lease and any other operating leases we enter into in the future.

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, the entirety of Fiscal 2021 and the first two quartersquarter of Fiscal 20212022 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 current and future developments, including the durationcontainment of the spread of the COVID-19 outbreak within the U.S. and globally, the timing and effectiveness of vaccine rollout, the possible spread of Covid-19 variants and the impact on capital and financial markets and the related impact on our customers, especially in the commercial vehicle markets. These future developments are outside of our control, are highly uncertain and cannot be predicted. If the impact is prolonged, then it can further increase the difficulty of planning for operations and may require us to take further actions as it relates to costs and liquidity. These and other potential impacts of the COVID-19 pandemic willhave adversely impactimpacted our results for the first two quartersentirety of Fiscal 2021, as well as the fullfirst quarter of fiscal year 2022, and that impact could be material.impactful for the balance of Fiscal 2022.

Going Concern

The accompanying financial statements contained herein in Item I. Financial Statement have been prepared assuming wethat the Company will continue as a going concern. During the three and six-monthsthree-month period ended AugustMay 31, 2020, we2021, the Company reported a net profitloss of approximately $2.7$1.1 million and $2.1 million, respectively, and had negative cash flows from operating activities of approximately $832,000 for$0.5 million, respectively. In the six-month period ended August 31, 2020. The profits inevent 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 reductionCompany 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, weit may have to curtail its business sharplyfurther or cease business altogether. These factors raise substantial doubts about the Company’s ability to continue as a going concern.

Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. OurThe 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 ourits current financing, to obtain additional financing, and ultimately to attain profitability.

During the next twelve months we intend to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen^®®/VIPER products both domestically and internationally and to add to our existing management team. In addition, we plan to complete the move to our new facility for operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. We anticipate being able to obtain new sources of funding to support these actions in the upcoming fiscal year.

Results of Operations

Three months ended AugustMay 31, 20202021 compared to three months ended AugustMay 31, 20192020

Net revenue was $5,000approximately $23,900 for the three-months ended AugustMay 31, 20202021 (the “Three-Months FY2021”FY2022”) compared to $348,000approximately $49,000 for the three-months ended AugustMay 31, 20192020 (the “Three-Months FY2020”). During the current quarter of 2021,2022, we delivered 13 generator unit to a foreign customer as compared to 528 units delivered in the same quarter in the prior year. Revenue year-on-year has been negatively impacted by the COVID-19 pandemic. We cannot project with confidence the timing or amount of revenue that we can expect until the pandemic is under control or until an effectiveglobally including a successful rollout of the vaccine becomes widely available.programs now underway.

Cost of goods sold was approximately $3,500$49,300 in the Three-Months FY2022 compared to approximately $40,400 in the Three-Months FY2021 compared to approximately $29,000 in the Three-Months FY2020 resulting in a gross profitloss of $1,500,$25,400, or a gross margin loss of 30%106%, and a $319,000$8,200 gross profit in the Three-Months FY2020FY2021 and a gross margin of 91%. Gross profit17%, respectively. The gross loss and related gross margin loss for the Three-Months FY2021 shipmentsFY2022 were largely influenced by the low volume of shipments in the quarter which reduced our ability to fully absorb fixed operating costs.costs including higher operating costs related to the new facility. The gross margin of 91%17% in the Three-Months FY2020FY2021 was achievedalso influenced by taking advantagethe reduced demand for generator sets caused by the onset of inventory on-hand, previously fully reserved due to lack of estimable demand, to offset the unit cost of 52 units sold in that quarter. We do not expect gross margins above 90% to occur regularly for shipments of generator units in future quarters as the availability of usable parts from fully reserved inventory will decline.Covid-19.

Engineering, research and development expenses were approximately $63,000$81,000 in the Three-Months FY2021,FY2022, compared to approximately $34,000 in the Three-Months FY2020,FY2021, or an increase of 62%138%. The higher costs are in relation to the development of a new electronic control unit (“ECU”).

Selling, general and administrativeadministration (“SG&A”) expense increased by approximately $221,000 (105%$469,100 (137%) to approximately $432,000$812,700 in the Three-Months FY2021FY2022 from approximately $211,000$343,600 in the Three-Months FY2020.FY2021. During Three-Months FY2021,FY2022, we recorded increased expense for (i) $96,000$146,300 of stock-based compensation expense related to the recent grant of 1,250,0001,500,000 options to our fivemembers of the board members,of directors, (ii) incurred approximately $64,000$34,000 in one-time costs to physically closeconsolidate our offsite storage facilityoperations in Santa Clarita,Lake Forest, CA and consolidate usable inventory into temporary storage(iii) higher recurring facilities (iii) incurred additional salaries and consultingrent costs of approximately $80,000$51,000 due to changemove to new facility, (iii) higher legal costs of $101,000 due to ongoing litigation costs (iv) $31,500 in executive management that occurred in the Three-Months FY2020, (iv) higher accounting fees of $38,000 due to the timingcompletion of the Fiscal 2021 annual audit in the first quarter of this fiscal year end audit occurring inas compared to the second quarter of Fiscal 2021 duefor the prior year’s annual audit, (v) write-off of $61,000 for deferred sales compensation costs determined not to COVID-19 delays,be recoverable, (vi) additional salary expense for three advisors of $92,600, and (vii) all other expense increases of approximately $29,000, partially offset partially by (v) reduced travel expensesa reduction of $33,000.$77,600 in stock-based compensation costs related to 1,250,000 options granted in March 2020 fully amortized by February 28, 2021.

Net interestInterest expense in the Three-Months FY2021 increasedFY2022 decreased approximately $42,000$20,000 or 15%7%, to approximately $327,000$270,000 from approximately $285,000$290,000 in the Three-Months FY2020FY2021 due largely to interest costs related to past due payablesthe reduction of $38,000.interest-bearing principal amounts outstanding of approximately $700,000 over the prior twelve-month period.

Other income and gain on extinguishment of debt totals $3.5 million in the Three-Months FY2021,FY2022 was approximately $4,000, as compared to $0$53,000 in the same period of Fiscal 2020. This amount was attributed2021 consisting of a legal matter settlement occurring last year of $46,000 and a $7,000 one-time benefit related to the extinguishmentprocurement of the initial PPP loan for $74,400 in April 2020. In the Three-Months FY2022 period, we recorded a gain of approximately $2.3 million$75,000 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 liabilitiesconnection with respect to which the applicable statute of limitation periods have been deemed to have expired asforgiveness of the effective date of this filing.principal and accrued interest related to the initial PPP loan.

Net profitloss for the Three-Months FY2021FY2022 increased by approximately $2.9 million,$503,000, to approximately $2.7 milliona loss of $1,109,000 from a loss of $211,000$606,000 in the Three-Months FY2020 due primarilyFY2021 attributed to the $3.5 million in current liabilities extinguished(i) increased operating loss of $549,000 and (ii) reduced other income of $49,000 partially offset by (i) lower gross profitless interest expense of $20,000 and (ii) a $75,000 gain on reduced numberforgiveness 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.debt.

Six months ended August 31, 2020 compared to six months ended August 31, 2019

Net revenue was $54,000 for the Six-Months ended August 31, 2020 (the “Six-Months FY2021”) compared to $348,000 for the Six-Months ended August 31, 2019 (the “Six-Months FY2020”). During Six-Months FY2021,

we delivered 9 generator units as compared to 52 units delivered in Six-Months FY2020. Revenue year-on-year has been negatively impacted by the COVID-19 pandemic. We cannot project with confidence the timing or amount of revenue that we can expect until the pandemic is under control or until an effective vaccine becomes widely available.

Cost of goods sold was approximately $44,000 in the Six-Months FY2021 compared to approximately $32,000 in the Six-Months FY2020 resulting in a gross profit of $10,000, or a gross margin of 19%, and a $316,000 gross profit in the Six-Months FY2020 and a gross margin of 91%. Gross profit and related gross margin for the Six-Months FY2021 shipments were largely influenced by the low volume of shipments in the period which reduced our ability to fully absorb fixed operating costs. The gross margin of 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 unit cost of 52 units sold year-to-date. We do not expect gross margins above 90% to occur regularly for shipments of generator units in future periods as the availability of usable parts from fully reserved inventory will decline.

Engineering, research and development expenses were approximately $97,000 in the Six-Months FY2021, compared to approximately $92,000 in the Six-Months FY2020, or a decrease of 3%

Selling, general and administrative (“SG&A”) expense increased approximately $267,000 (53%) to approximately $775,000 in the Six-Months FY2021 from approximately $508,000 in the Six-Months FY2020. During 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 approximately $64,000 in one-time costs to physically close our offsite storage facility in Santa Clarita, CA and consolidate usable inventory into temporary storage facilities (iii) incurred additional salaries and consulting costs of approximately $14,000, and (iv) higher accounting fees of $37,000 due to the timing of the fiscal year end audit occurring in the second quarter of Fiscal 2021 due to COVID-19 delays.

Net interest expense in the Six-Months FY2021 increased approximately $15,000 or 3%, to approximately $617,000 from approximately $602,000 in the Six-Months FY2020 due largely to interest costs related to past due payables of $38,000.

Gain 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 Six-Months FY2021 increased by approximately $3.0 million, to $2.1 million from a loss of $887,000 in the 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-monthsthree-months ended AugustMay 31, 2020,2021, was approximately $832,000,$531,000, an increase of $418,000$350,000 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the six-monthsthree-months ended AugustMay 31, 2020,2021, was approximately $1,004,000$344,000 consisting of (i) cash proceeds from issuance of common stock of $815,000,$283,000, (ii) combined proceeds of $224,000$91,000 related to the U.S. federal Paycheck Protection Program Second Draw (“PPP”PPP2”) 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$30,000 principal payments on a note payable; compared to cash provided by financing of $150,000 in the same period of Fiscal 2020 consisting of cash proceeds from the issuance of 658,015 common shares.payable. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs.

There werewas acquisition of property and equipment in the amount of $17,000 during the three-months ended May 31, 2021. There was no acquisitionsacquisition of property and equipment during the three-months ended August 31, 2020 and 2019.corresponding period of Fiscal 2021.

The total of accrued expenses and accrued expenses-related party as of AugustMay 31, 2020 decreased2021 increased by approximately $0.2 million to $1.5 million from approximately $1.3 million to $683,000 from approximately $2,954,000 as of February 29, 202028, 2021 due to the cancellation of the unpaid salaries of $2.3 million. During the same six-month period in Fiscal 2021,(i) accrued interest on all notes payable due to related partiesof $58,000 (ii) increase of accrued payroll of $93,000 and non-related parties, increased by approximately $579,000 for recurring interest costs offset by approximately $386,000(iii) higher accrued professional fees of cancellations related to the three demand notes as a result of statute of limitations expiration. This reduction is due to the debt being cancelled based on a cancellation of indebtedness due, supported by a statute of limitations.$90,000.

The Company had a deficit of $19.9$20.4 million in shareholders’ equity as of AugustMay 31, 2020,2021, compared to $23.3$19.7 million as of February 29, 202028, 2021 with the net positivenegative change of $2.9$0.7 million attributed to (i) net profitloss year-to-date of approximately $2.1$1.1 million (ii) the net issuance of approximately 5.21.9 million shares valued at approximately $0.8$0.3 million for cash and (ii) the granting to board members 1,250,000 options in March 2020 with an aggregate fair value of $194,000, of which(iii) approximately $174,000$0.1 million was recognized as expense during the first two quarters of Fiscalthree-months ended May 31, 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 six10 months at which timefollowing the last day of the covered period or June 23, 2020, balance is payable in 1824 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 useused 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. WhileOn April 1, 2021, we intend to applyreceived notification that our application for theloan forgiveness was accepted and approximately $75,100 of the PPP Loan, there is no assurance that we will obtain forgiveness of the PPP Loan in whole or in part.accrued interest and principal was forgiven.

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 principleprincipal and accrued interest over the term of the loan. The Company pledged the assets of the Company as collateral for the loan. In January 2021, the SBA announced that the deferral period was being extended for another one-year period to July 2022. No other terms were adjusted; the monthly payment would become $778 per month over the remaining term.

On March 3, 2021, we received proceeds of $91,235 from a Second Draw PPP loan (“PPP2”) with the same terms and conditions that were applicable to the April 2020 PPP 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 Fiscal 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 Principal Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Principal Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective 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, for the Fiscal year ended February 29, 2020,28, 2021, issued on July 13, 2020.June 1, 2021.

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 AugustMay 31, 2020,2021, not previously identified in our Annual Report on Form 10-K, for the Fiscal year ended February 29, 202028, 2021 and issued on July 13, 2020June 1, 2021 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 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 $10.9$11.5 million (representing approximately $5.4 million loaned to the Company over the course of 2013 to 2016; approximately $170,000 Mr. Kopple claims to have advanced or paid to third parties on Aura’s behalf; and approximately $5.3$5.9 million Mr. Kopple claims to be owed for interest, loan fees and late payment charges)feess) and approximately 3.33 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017, Mr. Kopple filed suit against the Company as well as against current director Mr. Diaz-Verson and former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, our former CEO and a former director in connection with these allegations. In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman, and as a result of these successful demurrers;demurrers, all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses in these matters, the Company is currently in settlement discussions with Mr. Kopple. However, to-date, no settlement has been reached in large part because Mr. Kopple continues to demand that as part of any such settlement, he receive unilateral control over significant aspects of the Company’s financial and management functions such as, but not limited to, the right to unilaterally direct the Company’s ordinary business expenditures and requiring the Company to seek his approval for the hiring of nearly all personnel, all to the exclusion of the Company’s management team and stockholder-elected Board of Directors. The Company believes that allowing Mr. Kopple such level of operational control over the Company without any accountability would be highly detrimental to the Company and is incompatible with the Board of Directors’ duties to shareholders and creditors as a whole.

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 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. In 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 owing to 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, 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 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 20202021 Annual Report on Form 10-K issued on July 13, 2020.June 1, 2021.

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

During the six-monthsthree-months ended AugustMay 31, 2020,2021, we issued 5,224,9971,865,333 shares of common stock for cash proceeds of $815,000.$283,000.

ITEM 3. Defaults Upon Senior Securities.

As of the date of this filing, Robert Kopple, our former Vice Chairman of the Board, is the only significant unsecured note holder that has not executed formal agreements regarding the restructure of his debt. Mr. Kopple claims that he and his affiliates are owed approximately $10.9$11.5 million (representing approximately $5.4 million loaned to the Company over the course of 2013 to 2016; approximately $170,000 Mr. Kopple claims to have advanced or paid to third parties on Aura’s behalf; and approximately $5.3$5.9 million Mr. Kopple claims to be owed for interest, loan fees and late payment fees) on terms significantly preferable to other similarly situated unsecured creditors as well as warrants to purchase approximately 3.3 million shares of our common stock. stock. We dispute Mr. Kopple’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 regarding these transactions as well as “Note 3 – Notes Payable” and “Note 56 – Related Parties Transactions” to the Company’s condensed financial statements, “Liquidity and Capital Resources” in “Item 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 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.

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 Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.