AURA SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AURA SYSTEMS, INC. CONDENSED BALANCE SHEETS (Unaudited) August 31, 2023 February 28, 2023 (amounts in thousands, except share data) (Unaudited) Assets Current assets Cash and cash equivalents $ 52 $ 15 Inventories 101 155 Prepaid and other current assets 28 142 Total current assets 181 312 Property and equipment, net 430 461 Operating lease right-of-use asset 717 816 Security deposit 160 160 Total assets $ 1,488 $ 1,749 Liabilities and Shareholders’ Deficit Current liabilities Accounts payable and accrued expenses (including $ 371 and $ 376 due to related party, respectively) $ 2,621 $ 2,758 Accrued interest (including $ 1,701 and $ 995 due to related party, respectively) 2,129 1,389 Customer advances 447 454 Convertible notes payable, past due 1,403 1,403 Convertible note payable-related party, past due 3,000 3,000 Notes payable, current portion 93 92 Notes payable-related parties, current portion 4,718 4,714 Operating lease liability, current portion 222 207 Derivative warrant liability 1 9 Total current liabilities 14,634 14,026 Notes payable, non-current portion 214 256 Note payable-related party, non-current portion 7,004 7,065 Operating lease liability 545 660 Total liabilities 22,397 22,007 Commitments and contingencies - - Shareholders’ deficit Common stock: $ 0.0001 par value; 150,000,000 shares authorized; 99,525,617 and 94,648,346 issued and outstanding at August 31, 2023 and February 28, 2023, respectively. 10 9 Additional paid-in capital 456,116 454,507 Accumulated deficit ( 477,035 ) ( 474,774 ) Total shareholders’ deficit ( 20,909 ) ( 20,258 ) Total liabilities and shareholders’ deficit $ 1,488 $ 1,749 The accompanying notes are an integral part of these unaudited financial statements. 1 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three-Months Ended Six-Months Ended August 31, August 31, 2023 2022 2023 2022 (amounts in thousands, except share and per share data) Net revenue $ - $ 10 $ 10 $ 17 Cost of goods sold (includes inventory write-down of $ 58 for the three and six months ended August 31, 2023) 80 16 95 30 Gross loss ( 80 ) ( 6 ) ( 85 ) ( 13 ) Operating expenses Engineering, research and development (including $ 36 , $ 35 , $ 52 and $ 34 to related party, respectively) 287 244 494 411 Selling, general & administration 342 556 850 1,406 Total operating expenses 629 800 1,344 1,817 Loss from operations ( 709 ) ( 806 ) ( 1,429 ) ( 1,830 ) Other income (expense): Interest expense, net (including $ 319 , $ 40 , $ 781 and $ 125 to related parties, respectively) ( 412 ) ( 147 ) ( 840 ) ( 229 ) Change in fair value of derivative warrant liability 1 187 8 741 Net loss $ ( 1,120 ) $ ( 766 ) $ ( 2,261 ) $ ( 1,318 ) Basic and diluted loss per share $ ( 0.01 ) $ ( 0.01 ) $ ( 0.02 ) $ ( 0.02 ) Basic and diluted weighted-average shares outstanding 98,332,041 87,304,610 97,184,290 85,789,014 See accompanying notes to these unaudited financial statements. 2 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT (Unaudited) Three Months and Six Months Ended August 31, 2023 (amounts in thousands, except share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2023 94,648,346 $ 9 $ 454,507 $ ( 474,774 ) $ ( 20,258 ) Common shares issued for cash 2,586,362 - 853 - 853 Net loss - - - ( 1,141 ) ( 1,141 ) Balance, May 31, 2023 97,234,708 9 455,360 ( 475,915 ) ( 20,546 ) Common shares issued for cash 2,290,909 1 756 - 757 Net loss - - - ( 1,120 ) ( 1,120 ) Balance, August 31, 2023 (unaudited) 99,525,617 $ 10 $ 456,116 $ ( 477,035 ) $ ( 20,909 ) Three Months and Six Months Ended August 31, 2022 (amounts in thousands, except share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2022 83,119,104 $ 8 $ 450,137 $ ( 471,364 ) $ ( 21,220 ) Common shares issued for cash 2,116,665 - 635 - 635 Fair value of warrants issued for note settlement - - 1,051 - 1,051 Net loss - - - ( 552 ) ( 552 ) Balance, May 31, 2022 85,235,769 8 451,823 ( 471,916 ) ( 20,086 ) Common shares issued for cash 3,943,668 1 1,033 - 1,034 Net loss - - - ( 766 ) ( 766 ) Balance, August 31, 2022 (unaudited) 89,179,437 $ 9 $ 452,856 $ ( 472,682 ) $ ( 19,818 ) See accompanying notes to these unaudited financial statements. 3 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended August 31, 2023 August 31, 2022 (amounts in thousands) Net loss $ ( 2,261 ) $ ( 1,318 ) Adjustments to reconcile net loss to cash used in operating activities Depreciation and amortization 52 37 Inventory write-down 58 4 Change in fair value of derivative warrant liability ( 8 ) ( 741 ) Changes in operating assets and liabilities: Inventory ( 4 ) ( 14 ) Prepaid and other current assets 93 147 Operating lease right-of-use asset 99 89 Accounts payable, accrued expenses and customer advances ( 137 ) 266 Accrued interest on notes payable 683 118 Customer advances ( 7 ) - Operating lease liability ( 100 ) ( 87 ) Cash used in operating activities ( 1,532 ) ( 1,499 ) Cash used in investing activities: Purchase of property and equipment - ( 23 ) Cash flows from financing activities: Proceeds from issuance of common stock 1,610 1,668 Principal payments of notes payable ( 41 ) ( 188 ) Cash provided by financing activities 1,569 1,480 Net increase (decrease) in cash and cash equivalents 37 ( 41 ) Cash and cash equivalents-beginning of period 15 150 Cash and cash equivalents-end of period $ 52 $ 108 Cash paid for: Interest $ 85 $ 91 Income taxes $ - $ - Supplemental schedule of non-cash transactions: Reclassification of prepaid expense to property and equipment $ 21 $ - Adjustment to interest expense to account for the effective interest rate of note payable $ 61 $ - Fair value of warrants issued for note settlement $ - $ 1,051 See accompanying notes to these unaudited financial statements. 4 AURA SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share amounts) NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Aura Systems, Inc., (“Aura”, the “Company”) a Delaware corporation, is engaged in the development, commercialization, and sale 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. Basis of Presentation The accompanying unaudited condensed financial statements as of and for the three and six months ended August 31, 2023 and 2022, have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented. The Condensed Balance Sheet information as of February 28, 2023, was derived from the Company’s audited Financial Statements as of February 28, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on May 26, 2023. These financial statements should be read in conjunction with that report. The results of operations for the period ended August 31, 2023, may not necessarily be indicative of the results that may be expected for the full fiscal year ending February 28, 2024. The Company’s fiscal year ends on the last calendar day of February. Accordingly, the current fiscal year will end on February 29, 2024 and is referred to as “Fiscal 2024”. Our prior fiscal years ended February 28, 2023, February 28, 2022 and 2021, and are referred to as “Fiscal 2023”, “Fiscal 2022” and “Fiscal 2021”, respectively. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the six-month period ended August 31, 2023, the Company recognized net loss of $ 2,261 and used cash in operating activities of $ 1,532 , respectively. As of August 31, 2023, the Company also has a shareholder deficit of $ 20,909 and notes payable totaling $ 5,200 are also past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February 28, 2023, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In the event the Company is unable to generate profits and is unable to obtain financing for its working capital requirements, it may have to curtail its business further or cease business altogether. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability. 5 During the next twelve months the Company intends 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, the Company plans to source new suppliers for manufacturing operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. The Company anticipates being able to obtain new sources of funding to support these actions in the upcoming fiscal year. Inflation Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising energy prices create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company’s business in 2023 and the first six months of 2024 and will continue to impact the Company’s business in 2024 and 2025. The implications of higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses. COVID-19 As of the date of this filing, the COVID-19 pandemic has been declared to be officially over. Despite this fact, there continues to be lingering impacts of the COVID-19 pandemic in the regions in which the Company operates. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results stemming from the outbreak and its lingering effects on the Company’s business or results of operations, financial condition, or liquidity. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates. Vendor Concentration As of August 31, 2023 and February 28, 2023, there were four vendors who accounted for over 10 % of the Company’s consolidated accounts payable. Revenue Recognition The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Our primary source of revenue is the manufacture and delivery of generator sets used primarily in mobile power applications. Our principal sales channel is sales to a domestic distributor. In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligation to the customer. Share-Based Compensation The Company periodically issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services. 6 Fair Value of Financial Instruments The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: ● Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets; ● Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and ● Level 3 – Unobservable inputs. The recorded amounts of inventory, other current assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature. The carrying amounts of notes payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation to current market conditions. The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of August 31, 2023 and February 28, 2023: (amounts in thousands) August 31, 2023 Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ - $ 1 $ 1 Total $ - $ - $ 1 $ 1 February 28, 2023 Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ - $ 9 $ 9 Total $ - $ - $ 9 $ 9 The Company estimated the fair value of the derivative warrant liability using the Binomial Model. The following table provides a roll-forward of the warrant derivative liability measured at fair value on a recurring basis using unobservable level 3 inputs for the period ended August 31, 2023 as follows: (amounts in thousands, except share data) Number of Derivative Warrants Outstanding Fair Value of Derivative Warrant Liability February 28, 2023 113,100 $ 9 Change in fair value of derivative warrant liability - ( 8 ) Gain on extinguishment on expiration of warrants - - August 31, 2023 113,100 $ 1 7 Reclassifications Certain February 28, 2023 balances have been reclassified to conform with the August 31, 2023 presentation. In presenting the Company’s consolidated balance sheet at February 28, 2023, the Company originally presented accrued interest of $ 1,389 and accrued payroll and other expenses of $ 441 , totaling $ 1,830 as a separate line item called Accrued Expenses. In presenting the Company’s consolidated balance sheet at August 31, 2023, the Company has reclassified the balance of accrued interest of $ 1,389 as a separate line item, and the balance of accrued payroll and other expenses of $ 441 as part of accounts payable and accrued expense. Loss per share The Company’s loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional shares of common stock were dilutive. Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method for convertible debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities were exercised. For the six-months ended August 31, 2023 and August 31, 2022, the calculations of basic and diluted loss per share are the same because potentially dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following: August 31, 2023 August 31, 2022 Warrants 3,564,764 8,132,498 Options 4,250,000 5,059,769 Convertible notes 3,986,274 3,829,208 Total 11,801,038 17,021,475 Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective March 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures. 8 In September 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning March 1, 2023, and early adoption is permitted. The Company adopted ASU 2021-04 effective March 1, 2023. The adoption of ASU 2016-13 did not have any impact on the Company’s financial statement presentation or disclosures. Other recent accounting pronouncements and guidance issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements. NOTE 2 – CONVERTIBLE NOTES PAYABLE, PAST DUE Convertible notes payable consisted of the following: August 31, 2023 February 28, 2023 (amounts in thousands) Convertible notes payable – past due $ 1,403 $ 1,403 Non-current - - Current $ 1,403 $ 1,403 In Fiscal 2013 and 2014, the Company issued six convertible notes payable in the aggregate of $ 4,000 . The notes are unsecured, bear interest at 5 % per annum and are convertible to shares of common stock at a conversion price of $ 1.40 per share, as adjusted. The notes were originally due in 2014 to 2017, and were all amended in 2018 and the maturity date for all the notes was changed to January 11, 2023. As of August 31, 2023 and February 28, 2023, the outstanding balance of the convertible notes payable amounted to $ 1,403 and are past due. NOTE 3 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY, PAST DUE Convertible note payable – related party consisted of the following: August 31, 2023 February 28, 2023 (amounts in thousands) Convertible note payable – past due $ 3,000 $ 3,000 Non-current - - Current $ 3,000 $ 3,000 On January 24, 2017, the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company. As part of the agreement, the Company issued a $ 3,000 convertible note. The convertible note is unsecured, bears interest at 5 % per annum, was due February 2, 2023, and is convertible into shares of common stock at a conversion price of $ 1.40 per share, as adjusted. As of August 31, 2023 and February 28, 2023, the convertible note of $ 3,000 and is past due. 9 NOTE 4 – NOTES PAYABLE Notes payable consisted of the following: (amounts in thousands) August 31, 2023 February 28, 2023 Secured notes payable (a) Note payable-EID loan $ 150 $ 150 (b) Notes payable-vehicles and equipment 147 188 Unsecured notes payable (c) Note payable-other 10 10 Total $ 307 $ 348 Non-current 214 256 Current 93 92 (a) Economic Injury Disaster (EID) Loan On July 1, 2020, the Company received a $ 150 loan under the United States Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EID Loan”) program. The loan is due July 1, 2050, interest accrues at 3.75 % per annum, and is secured by the assets of the Company . (b) Notes payable-vehicle and equipment During Fiscal 2022, the Company issued notes payable to purchase two pieces of equipment and a vehicle for $ 329 . The notes are secured by the equipment and vehicle purchased. One note for $ 210 is due October 31, 2024, and requires 36 equal monthly payments of approximately $ 6 each, including interest at 2.9 % per annum. The second note for $ 78 is due January 20, 2027, and requires 72 equal monthly payments of approximately $ 1.5 each, including interest at 10.9 % interest per annum. As of August 31, 2023 and February 28, 2023, the balance of the two notes was $ 147 and $ 188 , respectively. (c) Note payable-other As of August 31, 2023 and February 28, 2023, the Company has one note payable due to an individual issued in September 2015 that is payable on demand with an interest rate of 10 % per annum. NOTE 5 – NOTES PAYABLE-RELATED PARTIES Notes payable-related parties consisted of the following: (amounts in thousands) August 31, 2023 February 28, 2023 Unsecured notes payable (a) Notes payable-Kopple (as restructured) $ 10,855 $ 10,915 (b) Note payable- Gagerman 82 82 Accrued interest-Gagerman 85 82 Subtotal-Gagerman 167 164 (c) Note payable-Jiangsu Shengfeng – past due 700 700 Total $ 11,722 $ 11,779 Non-current 7,004 7,065 Current $ 4,718 $ 4,714 10 (a) Kopple Note In fiscals 2013 through 2018, the Company issued notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate principal amount of $ 6,107 . Robert Kopple is the former Vice-Chairman of the Company’s Board of Directors and is a current shareholder in the Company. Between July 2017 and March 2022, the Company was engaged in litigation with Kopple relating to more than $ 13,000 of principal and accrued interest due under the notes, and the equivalent of the approximately 23 million warrants. On March 14, 2022, the Company reached an agreement with Kopple and resolved all remaining litigation between them, including all amounts owed to Kopple under the notes. Under the terms of the settlement, the Company agreed to issue a new note and pay Kopple an aggregate amount of $ 10,000 , including $ 3,000 initially due in June 2022, and $ 1,000 to be paid annually for seven years after the initial $ 3,000 is paid. Additionally, the settlement agreement granted Koppel a five year, fully vested warrant exercisable into 3,331,664 shares of the Company’s common stock at a price of $ 0.85 per share with a fair value of $ 1,100 . The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply. The carrying value of the restructured note remains the same as before the restructuring, reduced only by the fair value of the warrants issued in connection with the transaction. The Company determined that the future undiscounted cash flows of the restructured new Kopple note exceeded the carrying value, and accordingly, no gain was recognized, and no adjustment was made to the carrying value of the debt, other than the adjustment for the fair value of the warrants. Interest expense on the new Kopple note is computed using a new effective rate that equates the present value of the future cash payments specified by the new terms with the carrying value of the debt. In June 2022, the first installment of $ 3,000 became due, of which $ 150 was paid and $ 2,850 is still outstanding. Subsequently, the note was amended several times to extend the payment date of the remaining balance of $ 2,850 of the initial payment through January 2023, and the Company incurred extension and forbearance fees totaling $ 335 . In January 2023, pursuant to the terms of the amended note payable, the Company started accruing interest on the outstanding note balance at a rate of 6 % per annum, compounded annually. As of February 28, 2023, outstanding principal balance amounted to $ 10,915 . During the six months ended August 31, 2023, the note was amended multiple times to extend the payment term of the remaining balance of $ 2,850 of the initial payment and installment payment of $ 1,000 , originally due in June 2023, through August 1, 2023. As a result of these amendments, the Company incurred extension and forbearance fees totaling $ 390 . In addition, the Company recorded a reduction of $ 60 to the note to adjust stated interest of 6 % to an effective interest rate of 4.5 %. As of August 31, 2023, outstanding balance of the note payable amounted to $ 10,855 . Subsequent to August 31, 2023, the Company and Kopple have agreed in principle for another extension of the deadline for payment of the $ 2,850 of the initial payment and installment payment of $ 1,000 and intend to memorialize such an agreement in writing by end of October 2023. Such further amendment will also indicate that by such extension, the Company is not in default of the agreement as of August 31, 2023, and through the date that the financial statements are issued. 11 The settlement agreement with Kopple provides for certain increases in the amounts payable to Kopple and the right of such parties to enter a judgement against the Company if the Company remains in unsecured default in its payment obligations. Pursuant to the settlement agreement, the Company is also subject to certain affirmative and negative covenants such as periodic submission of financial statements to Koppel and restrictions on future financing and investing activities, as defined in the agreement, including the covenant to not create any indebtedness that is senior in right of payment to the Kopple debt. Management believes such covenants are normal for this type of transaction and that management believes meeting these covenants will not affect operations and the Company was in compliance with all covenants as of August 31, 2023. (b) Note payable-Gagerman Melvin Gagerman, the Company’s former CEO and CFO whose employment was permanently terminated in July 2019, claims that in April 2014 the Company issued an unsecured demand promissory note to him in the amount of $ 82 that bears interest at a rate of 10 % per annum. Gagerman claims that this note has not been repaid to date and is now owed. In June 2022, Gagerman brought suit against the Company for repayment of this alleged note. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when Gagerman was the Company’s CEO, CFO, Corporate Secretary and Chairman of the Company’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman. Additionally, the Company has filed a cross-complaint against Gagerman for, among things, conversion, violation of California Business & Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against the Company. Although the Company disputes Gagerman’s claims, under the guidance of ASC 450 – Contingencies , the Company has recorded the claimed notes payable and accrued interest of approximately $ 167 and $ 164 as of August 31, 2023 and February 28, 2023, respectively. (c) Jiangsu Shengfeng Note On November 20, 2019, the Company reached an agreement with a former joint venture partner Jiangsu Shengfeng regarding the return of $ 700 that had been advanced to the Company in prior years. As a result, in November 2019, the Company issued a non-interest-bearing promissory note for $ 700 to be paid over an 11-month period beginning March 15, 2020, through February 15, 2021. As of August 31, 2023 and February 28, 2023, the principal due was $ 700 , and was past due. NOTE 6 – ACCRUED INTEREST Accrued expenses consisted of the following: August 31, 2023 February 28, 2023 (amounts in thousands) Accrued interest-convertible notes payable (past due) $ 389 $ 354 Accrued interest-convertible notes payable related party (past due) 789 713 Accrued interest and fees- Kopple note payable (related party) 912 282 Accrued interest-notes payable 21 23 Accrued interest- other 18 17 $ 2,129 $ 1,389 12 NOTE 7 – LEASES Our administrative and production operations including warehousing, are housed in an approximately 18,000 square foot facility in Lake Forest, California. The Lake Forest lease is for 66-months effective February 2021 through August 31, 2026. The initial monthly base rental rate was approximately $ 22 per month and escalates 3 % each year to approximately $ 26 per month in 2026. The lease liability was determined by discounting the future lease payments under the lease terms using a 10 % per annum discount rate to arrive at the current lease liability. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives. The components of lease expense and supplemental cash flow information related to leases for the period are as follows: (amounts in thousands) Six-Months ended August 31, 2023 Six-Months ended August 31, 2022 Lease Cost Operating lease cost (included in general and administration in the Company’s statement of operations) $ 139 $ 139 Other Information Cash paid for amounts included in the measurement of lease liabilities $ 141 $ 137 Weighted average remaining lease term – operating leases (in years) 3.00 4.00 Average discount rate – operating leases 10.0 % 10.0 % The supplemental balance sheet information related to leases for the period is as follows: At August 31, 2023 Operating leases Long-term right-of-use assets $ 717 Short-term operating lease liabilities $ 222 Long-term operating lease liabilities 545 Total operating lease liabilities $ 767 Maturities of the Company’s lease liability is as follows: Operating Lease Years Ending February 28: 2024 (6 months remaining) $ 141 2025 291 2026 300 2027 154 Total lease payments 886 Less: Imputed interest/present value discount ( 119 ) Present value of lease liabilities $ 767 13 NOTE 8 – DERIVATIVE WARRANT LIABILITY In prior years the Company issued warrants that include a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. The Company determined that the warrants do not satisfy the criteria for classification as equity instruments due to the existence of the cash settlement feature that is not within the sole control of the Company, and the warrants are accounted for as liabilities in accordance with ASC 815. The fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying statements of operations. The warrant liability will ultimately be converted into the Company’s equity when the warrants are exercised or will be extinguished upon the expiration of the outstanding warrants. The following tables summarize the derivative warrant liability: (amounts in thousands, except share and per share data) August 31, 2023 February 28, 2023 Stock price $ 0.20 $ 0.25 Risk free interest rate 5.2 % 4.7 % Expected volatility 171 % 190 % Expected life in years 0.46 0.97 Expected dividend yield 0 % 0 % Number of warrant shares 113,100 113,100 Fair value of derivative warrant liability $ 1 $ 9 Number of Derivative Warrants Outstanding Fair Value of Derivative Warrant Liability February 28, 2023 113,100 $ 9 Change in fair value of derivative warrant liability - ( 8 ) Gain on extinguishment on expiration of warrants - - August 31, 2023 113,100 $ 1 NOTE 9 – SHAREHOLDERS’ DEFICIT Common Stock During the six-months ended August 31, 2023, the Company issued 4,877,271 shares of common stock for approximately $ 1,610 in cash. During the six-months ended August 31, 2022 the Company issued 6,060,333 shares of common stock for approximately $ 1,669 . Stock Options A summary of the Company’s stock option activity for the six-months ended August 31, 2023 is as follows: (amounts in thousands, except share and per share data) Number of Options Exercise Price Weighted Average Intrinsic Value Outstanding, February 28, 2023 4,792,857 $ 0.48 $ - Granted - - - Exercised - - - Cancelled ( 542,857 ) 1.40 - Outstanding, August 31, 2023 4,250,000 $ 0.37 $ - 14 There was no intrinsic value as of August 31, 2023, as the exercise prices of these options were greater than the market price of the Company’s stock. The exercise prices and information related to options under the 2011 Plan outstanding on August 31, 2023 is as follows: Range of Exercise Price Stock Options Outstanding Stock Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Options Outstanding Weighted Average Exercise Price of Options Exercisable $ 0.25 to $ 1.40 4,250,000 4,250,000 2.16 $ 0.37 $ 0.37 The Company granted no stock options under its stock option 2011 Plan for the six-month period ended August 31, 2023 and the six-month period ended August 31, 2022. Warrants A summary of the Company’s warrant activity for the six-months ended August 31, 2023 is as follows: Number of Warrants Exercise Price Outstanding, February 28, 2023 3,564,764 $ 0.86 Granted - - Exercised - - Cancelled - - Outstanding, August 31, 2023 3,564,764 $ 0.86 There was no intrinsic value as of August 31, 2023, as the exercise prices of these warrants were greater than the market price of the Company’s stock. The exercise prices and information related to the warrants as of August 31, 2023 is as follows: Range of Exercise Price Stock Warrants Outstanding Stock Warrants Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Warrants Outstanding Weighted Average Exercise Price of Warrants Exercisable $ 0.50 to $ 1.40 3,564,764 3,564,764 5.33 $ 0.86 $ 0.86 In March 2022, pursuant to an agreement with a note holder (see Note 5), the Company issued to Mr. Kopple 3,331,664 warrants to purchase the Company’s common stock with a term of 7 years and at an exercise price of $ 0.85 per share. The Company determined the fair value of the Kopple Warrants was $ 1,051 using a Black-Scholes model using the assumptions as set forth in the table below: Warrants issued during the Six-Months Ended August 31, 2022 Exercise Price $ 0.85 Share Price $ 0.317 Volatility % 225 % Risk-Free Rate 1.98 % Expected Term (yrs.) 7.0 Dividend Rate 0 % 15 NOTE 10 – RELATED PARTY TRANSACTIONS As of August 31, 2023 and February 28, 2023, Bettersea LLC (“Bettersea”) was an 9.2 % and 9.7 %, respectively, shareholder in the Company. For the six-months ended August 31, 2023 and August 31, 2022, the Company incurred total fees to Bettersea of $ 88 and $ 69 , respectively, for various consulting services. As of August 31, 2023 and February 28, 2023, a total of $ 229 and $ 216 , respectively, was due to Bettersea and included in accounts payable and accrued expenses. NOTE 11 – CONTINGENCIES The Company is subject to legal proceedings and claims 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 in accrued salary and related charges by the California labor board. In August 2021, the Company reached a settlement by which the Company agreed to pay approximately $ 330 , representing the principal award plus accrued interest. As of the time of this filing, the Company has paid approximately $ 292 toward the settlement amount. The remaining balance of approximately $ 38 is to be paid no later than December 31, 2023 , and accrues interest of 10 % per annum until paid. Between July 2017 and March 2022, the Company was engaged in litigation with a former director, Robert Kopple, relating to more than $ 13,000 and the current equivalent of the approximately 23 million warrants, exercisable for seven years at a price of $ 0.10 per share, which Mr. Kopple and his affiliated entities (collectively “Kopple”) claimed should have been originally issued to them pursuant to various agreements with the Company entered into between 2013-2016. In March 2022, the Company reached a settlement (the “Binding Term Sheet”) with Kopple that resolved all claims asserted against the Company without any admission, concession or finding of any fault, liability, or wrongdoing on the part of the Company. Under the terms of the settlement, the Company agreed to pay an aggregate amount of $ 10,000 over a period of seven years , including $ 3,000 initial payment to be paid in June 2022. $ 150 was paid in June 2022, and the balance of the initial payment of $ 2,850 was extended to August 1, 2023 . The Company and Koppel have agreed in principle to another extension of the deadlines for payments owed by the Company to Kopple and intend to memorialize such an agreement in writing on or before October 31, 2023. Such further amendment will also indicate that by such extension the Company is not in default on the Binding Term Sheet as of September 30, 2023, and through the date that the financial statements are issued. All amounts, including all accrued interest and deferred fees, are to be paid no later than eight years from the date of the initial payment. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement (see Note 5). 16 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. In June 2022, Melvin Gagerman, the Company’s former CEO and CFO whose employment with Aura was permanently terminated in July 2019, brought suit against the Company for repayment of an allegedly unsecured demand promissory note in the principal amount of $ 82 which he claims was entered into in April 2014 and bears interest at a rate of 10 % per annum. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when he was the Company’s CEO, CFO, Corporate Secretary and Chairman of Aura’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman and has filed a cross-complaint against him for, among things, conversion, violation of California Business& Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against Aura, including without limitation, Gagerman’s actions in opposing the valid 2019 stockholder consent action. NOTE 12 – SUBSEQUENT EVENTS Subsequent to August 31, 2023, the Company issued 796,972 shares of common stock in exchange for cash proceeds of approximately $ 263 . 17