AURA SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AURA SYSTEMS, INC. CONDENSED BALANCE SHEETS May 31, 2024 February 29, 2024 (amounts in thousands, except share data) (Unaudited) Assets Current assets Cash and cash equivalents $ 297 $ 124 Accounts receivables 15 - Inventories - 20 Prepaid and other current assets 140 175 Total current assets 452 319 Property and equipment, net 710 378 Operating lease right-of-use asset 559 607 Lease security deposit 160 160 Total assets $ 1,881 $ 1,464 Liabilities and Shareholders’ Deficit Current liabilities Accounts payable and accrued expenses $ 2,407 $ 2,625 Accrued interest 1,702 2,598 Customer advances 447 447 Notes payable current portion 163 119 Convertible notes payable – past due 1,513 1,508 Convertible note payable-related party current portion 4,270 3,020 Notes payable-related parties, current portion 782 4,632 Operating lease liability, current portion 246 238 Derivative liability 17,171 - Total current liabilities 28,701 15,187 Notes payable, non-current portion 438 286 Convertible note payable-related party, non-current portion 8,011 7,088 Operating lease liability 358 423 Total liabilities 37,508 22,984 Commitments and contingencies - - Shareholders’ deficit Common stock: $ 0.0001 par value; 150,000,000 shares authorized; 109,047,248 and 104,591,648 issued and outstanding May 31, 2024, and February 29, 2024, respectively 11 10 Additional paid-in capital 458,610 457,460 Accumulated deficit ( 494,248 ) ( 478,990 ) Total shareholders’ deficit ( 35,627 ) ( 21,520 ) Total liabilities and shareholders’ deficit $ 1,881 $ 1,464 The accompanying notes are an integral part of these unaudited financial statements 1 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ending May 31 2024 2023 (amounts in thousands, except share and per share data) Net revenue $ 47 $ 10 Cost of goods ( 47 ) 15 Gross profit (loss) - ( 5 ) Operating expenses: Engineering, research and development 310 207 Selling, general & administration 374 508 Total operating expenses 684 715 Loss from operations ( 684 ) ( 720 ) Other income (expense): Interest expense, net (including $ 271 and $ 411 to related parties) ( 275 ) ( 428 ) Loss on debt extinguishment - related party ( 19,324 ) - Change in fair value derivative liability 5,023 - Other 2 7 Net loss $ ( 15,258 ) $ ( 1,141 ) Basic and diluted loss per share $ ( 0.14 ) $ ( 0.01 ) Basic and diluted weighted-average shares outstanding 106,140,039 96,036,536 See accompanying notes to these unaudited financial statements. 2 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT (Unaudited) Three Months ended May 31, 2024 and 2023 (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 (unaudited) 97,234,708 $ 9 $ 455,360 $ ( 475,915 ) $ ( 20,546 ) Balance, February 29, 2024 104,591,648 $ 10 $ 457,460 $ ( 478,990 ) $ ( 21,520 ) Common shares issued for cash 4,455,600 1 1,117 111 1,117 Fair value of modified warrants - related party 33 33 Net loss - - ( 15,258 ) ( 15,258 ) Balance, May 31, 2024 (unaudited) 109,047,248 $ 11 $ 458,610 $ ( 494,248 ) $ ( 35,627 ) See accompanying notes to these unaudited financial statements. 3 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) May 31, 2024 May 31, 2023 (amounts in thousands) Net loss $ ( 15,258 ) $ ( 1,141 ) Adjustments to reconcile net loss to cash used in operating activities Depreciation and amortization 25 26 Inventory write-down 20 - Loss on debt extinguishment – related party 19,324 - Change in fair value of derivative liability ( 5,023 ) ( 7 ) Changes in operating assets and liabilities: Accounts receivable ( 15 ) - Inventory - ( 7 ) Prepaid and other current assets 35 ( 9 ) Operating lease right-of-use asset 48 49 Accounts payable, accrued expenses and customer advances ( 218 ) ( 3 ) Accrued interest 335 345 Operating lease liability ( 57 ) ( 50 ) Cash used in operating activities ( 784 ) ( 797 ) Cash used in investing activities: Purchase of property and equipment ( 36 ) ( 1 ) Cash used in investing activities ( 36 ) ( 1 ) Cash flows from financing activities: Proceeds from issuance of common stock 1,117 853 Payment of notes payable ( 124 ) ( 20 ) Cash provided by financing activities 993 833 Net increase in cash and cash equivalents 173 35 Cash and cash equivalents-beginning of period 124 15 Cash and cash equivalents-end of period $ 297 $ 50 Cash paid for: Interest $ - $ 67 Income taxes $ - $ - Supplemental schedule of non-cash transactions: Fair value of modified warrants - related party $ 33 $ - Notes payable issued for the purchase of property and equipment $ 321 $ - Fair value of convertible note payable $ 9,261 $ - Extinguishment of note payable and accrued interest – related party $ 12,164 $ - Conversion feature of convertible note payable – related party accounted as derivative liability $ 22,194 $ - See accompanying notes to these unaudited financial statements. 4 AURA SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS ENDED MAY 31, 2024 AND 2023 (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, manufacturing, licensing and sale of products and components based on its Axial Flux Induction technology for electric motors and generators. Our power generation solution based on axial flux induction is known as the AuraGen ® for commercial and industrial applications and the VIPER for military applications. We are developing axial flux induction electric motors for industrial/commercial applications as well as for two- and four-wheel EV applications. Basis of Presentation The accompanying unaudited condensed financial statements as of and for the three months ended on May 31, 2024 and prior 2023, 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 29, 2024, was derived from the Company’s audited Financial Statements as of February 29, 2024, included in the Company’s Annual Report on Form 10-K filed with the SEC on June 4, 2024. These financial statements should be read in conjunction with that report. The results of operations for the period ended May 31, 2024, may not necessarily be indicative of the results of the full fiscal year ending February 28, 2025. The Company’s fiscal year ends on the last calendar day of February. Accordingly, the current fiscal year will end on February 28, 2025, and is referred to as “Fiscal 2025”. Our prior fiscal years ended February 29, 2024, February 28, 2023, and 2022, and are referred to as “Fiscal 2024”, “Fiscal 2023” and “Fiscal 2022”, respectively. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has not yet generated sufficient revenues to fund operations, has experienced recurring operating losses and relies on debt and equity offerings to generate working capital. During the three-month period ended May 31, 2024, the Company recognized net loss of $ 15,258 from operations and used cash in operating activities of $ 784 . As of May 31, 2024, the Company also has a shareholder deficit of $ 35,627 and notes payable totaling $ 5,315 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 29, 2024, 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. 5 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. During the next twelve months the Company intends to continue to attempt to increase the Company’s operations and focus on development and sale of a family of axial flux motos for industrial/commercial and EV applications. In addition, we also focus on development and sale of our axial flux induction generators for commercial and military applications as well as for wind turbines and other environmental related applications. 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. Inflation Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and the volatility of 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 fiscal 2023 and fiscal 2024 and will continue to impact the Company’s business in fiscal 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 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 U.S. 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 reporting periods. Significant estimates include assumptions made for inventory valuation, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing notes payable, 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 May 31, 2024 , four vendors accounted for 39 %, 12 %, 11 % and 10 % of the Company’s accounts payable. As of February 29, 2024, four vendors accounted for 42 %, 11 %, 11 % and 10 % of 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. 6 Our primary source of revenue is the manufacture and delivery of axial flux induction motors and generator sets used primarily in mobile power applications. Our principal sales channel is sales to domestic end users and distributors and agents internationally. In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at the time of product delivery and acceptance by the customer (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 such services. 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 May 31, 2024 and February 29, 2024: (amounts in thousands) May 31, 2024 Level 1 Level 2 Level 3 Total Liabilities Derivative liability – convertible note conversion option $ - $ - $ 17,171 $ 17,171 Total $ - $ - $ 17,171 $ 17,171 February 29, 2024 Level 1 Level 2 Level 3 Total Liabilities Derivative liability $ - $ - $ $ Total $ - $ - $ $ The Company estimated the fair value of the derivative liability using the Binomial Model. 7 The following table provides a roll-forward of the derivative liability measured at fair value on a recurring basis using unobservable level 3 inputs for the period ended May 31, 2024, as follows: (amounts in thousands, except share data) Fair Value of Derivative Warrant Liability February 29, 2024 $ - Recognition of derivative liability for a convertible note payable conversion option 22,194 Change in fair value of derivative liability ( 5,023 ) Gain on extinguishment - May 31, 2024 $ 17,171 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 three months ended May 31, 2024, and 2023, 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: May 31 2024 May 31, 2023 Warrants 6,521,664 3,564,764 Options 4,250,000 4,250,000 Convertible notes 46,756,007 3,946,823 Total 57,527,671 12,500,209 Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements 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. 8 NOTE 2 – CONVERTIBLE NOTES PAYABLE May 31 2024 February 29, 2024, (amounts in thousands) Convertible notes payable – past due $ 1,513 $ 1,509 Unamortized debt discount - ( 1 ) Net $ 1,513 $ 1,508 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 into 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 to change the maturity date to January 11, 2023. As of May 31, 2024 and February 29, 2024, the outstanding balance of the convertible notes payable amounted to $ 1,403 and are past due. In Fiscal 2024 the Company issued convertible notes payable to unrelated individuals and entities totaling $ 110 in exchange for cash. The notes are unsecured, bear interest at rate of 10 % per annum, and mature in March 2024. The notes payable are convertible into shares of common stock at a conversion price of $ 0.20 per share. As of May 31, 2024 and February 29, 2024, the outstanding balance of the convertible notes payable amounted to $ 110 and $ 106 , respectively, and are past due. NOTE 3 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY Convertible note payable – related party consisted of the following: May 31, 2024 February 29, 2024 (amounts in thousands) (a) Convertible note payable 1 – past due $ 3,000 $ 3,000 (b) Convertible note payable 2 – past due 20 20 (c) Convertible note payable 3 - Kopple 9,261 - Total $ 12,281 $ 3,020 (a) 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, and was due February 2, 2023. The convertible note is convertible into shares of common stock at a conversion price of $ 1.40 per share, as adjusted. As of May 31, 2024 and February 29, 2024, outstanding balance of the convertible note amounted to $ 3,000 and is past due. (b) On October 4, 2023, the Company issued a convertible note payable of $ 20 in exchange for cash to a member of the Company’s Board of Directors. The convertible note is unsecured, bears interest at rate of 10 % per annum and matured in March 2024. The convertible note payable is convertible to common stock at a conversion price of $ 0.20 per share. As of May 31, 2024 and February 29, 2024, outstanding balance of the convertible note amounted to $ 3,000 and is past due. 9 (c) In March 2022, the Company issued a note payable to Kopple (see Note 5). On March 7, 2024, the Company amended the note payable to Kopple. The amendment included, among other things (see Note 5) granting Kopple a conversion right to be able to convert the note payable into equity of the Company at a conversion price of the lower of $ 1.00 per share or 50% of the 10 day volume weighted average price of the Company’s common stock. As the amended Kopple note payable is convertible into common stock, it is now reported as a convertible note payable The conversion right will be effective August 30, 2024. The Company accounted for the amended terms of the note payable as a debt extinguishment and the existing note payable and accrued interest totaling $ 12,164 was derecognized and the amended convertible note payable was recorded at its fair value of $ 9,261 (see Note 5). The convertible note payable is secured by tangible and intangible assets of the Company, bears interest at a rate of 10 % per annum and matures in June 2029. As of May 31, 2024, outstanding balance of the convertible note amounted to $ 9,261 . The Company is also subject to certain affirmative and negative covenants such as periodic submission of financial statements to Kopple 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 the operations of the Company. NOTE 4 – NOTES PAYABLE Notes payable consisted of the following: (amounts in thousands) May 31, 2024 February 29, 2024 Secured notes payable (a) Note payable-EID loan $ 150 $ 150 (b) Notes payable-vehicle and equipment 85 106 (c) Note payable - software license 124 139 (d) Notes payable – machinery and other equipment 232 - Unsecured notes payable (e) Note payable-other 10 10 Total $ 601 $ 405 Current ( 163 ) ( 119 ) Non-current 438 286 (a) Note payable-EID loan During Fiscal 2021, 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 two notes payable to purchase equipment and a vehicle for $ 329 . The notes are secured by the equipment and vehicle purchased. The first note for $ 210 is due October 31, 2024, and requires 36 equal monthly payments of approximately $ 6 , 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 , including interest at 10.9 % interest per annum. 10 (c) Note payable-software license During Fiscal 2024, the Company obtained a loan of $ 155 from a financing institution to finance the use of a third-party software license by the Company. The note payable is secured by tangible and intangible assets of the Company, bears interest at an average rate of 8 % per annum and will mature in September 2026. (d) Notes payable – machinery and other equipment During Fiscal 2025, the Company obtained a loan of $ 274 from a financing institution to finance the purchase of a production machine by the Company. The note payable is secured by the production machine, bears a straight up fee of $ 74,285 to be paid over the course of the loan which will mature in April 2029. In addition, the Company entered into a 60 month financing lease for a forklift with a cost of $ 47 . The lease has an interest rate of 8 %, include a bargain purchase option to acquire the forklift at the end of the lease term for a payment of one dollar. The aggregate total of the note payable and financing lease obligation as of May 31, 2024 amounted $ 232 . (e) Note payable-other As of May 31, 2024, and February 29, 2024, 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) May 31 2024 February 29, 2024 (a) Note payable-Kopple $ - $ 10,915 (b) Note payable- Gagerman 82 82 (c) Note payable-Jiangsu Shengfeng 700 700 Total 782 11,697 Non-current - ( 7,065 ) Current $ 782 $ 4,632 (a) Note payable-Kopple In fiscals 2013 through 2018, the Company issued notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate 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. The notes were unsecured, bear interest at rates ranging from 5 % and 15 % per annum and were due in fiscal 2014 through fiscal 2018. Beginning in 2017, Kopple brought suit against the Company for repayment of the notes. On March 14, 2022, the Company reached an agreement with Kopple to resolve 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 to be paid in installment, of which, $ 3,000 was due in June 2022, and the remaining $ 7,000 to be annually for seven years at $ 1,000 per year. Additionally, the settlement agreement granted Kopple warrants exercisable into 3,331,664 shares of the Company’s common stock at a price of $ 0.85 per share. The Company used the Black-Scholes option pricing model to compute the fair value of the warrants of $ 1,051 . 11 The settlement provides for certain increases in the amounts payable to Kopple and the right of such parties to enter judgement against the Company if the Company remains in uncured default in its payment obligations. Interest on the new note also began accruing in January 2023 at 6 % per annum. The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply as the Company was experiencing financial difficulties and Kopple granted a concession. Per ASC 470-60, 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. In June 2022, the first installment of $ 3,000 became due, of which $ 150 was only paid. Subsequently, the note was amended several times to extend the payment date of the remaining balance of $ 2,850 of the initial payment, and the Company incurred extension and forbearance fees totaling $ 335 that was recorded as part of interest expense. 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 29, 2024, outstanding principal balance amount of $ 10,915 . In March 2024, the Company and Kopple again amended the note payable. The amendment (i) replaced the requirement to pay the $ 3,850 past due principal balance with the requirement to pay $ 2,000 on or before December 15, 2024; (ii) increased the stated interest rate to 10 %; (iii) added a fee of $ 15 monthly until the Company makes a principal payment of $ 2 million by December 2024; (iv) effective August 30, 2024, the Company will grant Kopple the right (but not any obligation) to convert the note payable into equity of the Company at a conversion price equal to the lower of one dollar per share or 50 % of the 10 day volume weighted average price per share of the Company’s common stock; (v) will require the Company to pay 20 % of all collected revenues within 10 days of the end of each fiscal quarter; (vi) will require the Company to pay Kopple 20 % of any amount raised in new capital in the form of equity, debt or convertible debt above $ 3.5 million; (vii) reduces the exercise price of the warrants granted to Kopple in March 2022 from $ 0.85 per share to $ 0.50 per share; and (vii) extends the warrant expiration date from March 8, 2029, to March 31, 2031. The Company accounted for the amended terms of the note payable as a debt extinguishment because the present value of the cash flows under the amended debt terms is greater by 10% compared to the present value of the remaining cash flows under the original existing debt terms. Furthermore, the amendment granted a conversion option to the note holder and is deemed substantially different from the existing note. The Company recorded a loss on debt extinguishment of $ 19,324 as a result of this amendment, which is the difference between (i) the fair value of the amended convertible note payable of $ 9,261 , combined with the fair value of the conversion option of $ 22,194 (see Note 8), and the change in the fair value of the amended warrants of $ 33 , and (ii) the net carrying amount of the existing note payable of $ 12,164 . As a result, the net carrying amount of the existing note payable of $ 12,164 was derecognized and amended note payable was recorded at its fair value of $ 9,261 . As the Kopple new note payable is now convertible to common stock, for financial reporting purposes, the new note payable of $ 9,261 is now reported as a convertible note payable (see Note 3). (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 note payable $ 82 and corresponding accrued interest. 12 (c) Jiangsu Shengfeng Note On November 20, 2019, the Company owned 49 % of a Chinese joint venture named Jiangsu Shengfeng. The Joint venture advanced Aura $ 700 in prior years for products that the Company failed to deliver to the joint venture. The Company reached an agreement with the joint venture 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 the joint venture to be paid over an 11-month period beginning March 15, 2020, through February 15, 2021. The joint venture stopped operations in 2020 as a result of COVID-19 and never resumed or restarted operations. In fiscal 2024 the joint venture was dissolved and liquidated. As of May 31, 2024, and 2023, the outstanding balance of this note payable amounted to $ 700 . The Company is currently in negotiations with the noteholder to settle or extinguish the note payable. NOTE 6 – ACCRUED INTEREST Accrued interest consisted of the following: May 31, 2024 February 29, 2024 (amounts in thousands) Convertible notes payable (past due) $ 455 $ 425 Convertible notes payable - related party - Kopple 232 - Convertible notes payable - related party - others 901 863 Notes payable - related party – Kopple - 1,226 Notes payable - related party - others 92 62 Notes payable 22 22 Total $ 1,702 $ 2,598 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. 13 The components of lease expense and supplemental cash flow information related to leases for the period are as follows: (amounts in thousands) May 31, 2024 May 31, 2023 Lease Cost Operating lease cost (included in general and administration in the Company’s statement of operations) $ 69 $ 70 Other Information Cash paid for amounts included in the measurement of lease liabilities $ 72 $ 71 Weighted average remaining lease term – operating leases (in years) 2.25 3.25 Average discount rate – operating leases 10.0 % 10.0 % The supplemental balance sheet information related to leases for the period is as follows: At May 31, 2024 Operating leases Long-term right-of-use assets $ 559 Short-term operating lease liabilities $ 246 Long-term operating lease liabilities 358 Total operating lease liabilities $ 604 Maturities of the Company’s lease liability is as follows: Operating Lease Years Ending February 28: 2025 (9 months) $ 225 2026 299 2027 155 Total lease payments 679 Less: imputed interest/present value discount ( 68 ) Present value of lease liability $ 604 NOTE 8 – DERIVATIVE LIABILITY In March 2024, pursuant to the amendment of the Kopple note payable (see Note 5), the Company granted Kopple the right to convert the amended note payable into equity of the Company at a conversion price equal to the lower of one-dollar per share or 50 % of the 10 day volume-weighted average price per share of the Company’s common stock. The Company analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and determined that the conversion option should be classified as a derivative liability since it does not have an explicit limit to the number of shares to be delivered upon settlement of the conversion option. The derivative liability is remeasured to fair value at each reporting period, and the change in the fair value is recognized in earnings in the accompanying statements of operations. The Company estimated the fair value of the conversion option derivative liability using a Black-Scholes option pricing model and recorded the fair value of the derivative liability of $ 22,194 at March 7, 2024, the date of issuance, and $ 17,171 at May 31, 2024. 14 The following tables summarize the derivative liability: (amounts in thousands, except share and per share data) May 31, 2024 March 7, 2024 - Issuance Stock price $ 0.42 $ 0.15 Risk free interest rate 4.52 % 4.07 % Expected volatility 181 % 182 % Expected life in years 5.08 5.31 Expected dividend yield 0 % 0 % Number of common stock issuable 41,964,867 151,481,943 Fair value of derivative liability $ 17,171 $ 22,194 NOTE 9 – SHAREHOLDERS’ DEFICIT Common Stock During the three-months ended May 31, 2024, the Company issued 4,455,600 shares of common stock for approximately $ 1,117 in cash. As part of the offering, the Company also granted certain investors warrants to purchase 3,000,000 shares of common stock. The warrants are fully vested, exercisable at $ 1.00 per share and will expire in 3 years. During the three-months ended May 31, 2023, the Company issued 2,586,362 shares of common stock for approximately $ 853 in cash Stock Options A summary of the Company’s stock option activity for the three-months ended May 31, 2024, is as follows: (amounts in thousands, except share and per share data) Number of Options Exercise Price Weighted Average Intrinsic Value Outstanding, February 29, 2024 4,250,000 $ 0.37 $ - Granted - - - Exercised - - - Cancelled - - - Outstanding, May 31, 2024 4,250,000 $ 0.37 $ - As of May 31, 2024, the intrinsic value as these stock options amounted to $ 382 . The exercise prices and information related to options under the 2011 Plan outstanding on May 31, 2024 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 $. 50 4,250,000 4,250,000 1.92 $ 0.37 $ 0.37 The Company granted no stock options under its stock option 2011 Plan for the three-month period ended May 31, 2023, and the three-month period ended February 29, 2024. 15 Warrants A summary of the Company’s warrant activity for the three-months ended May 31, 2024, is as follows: Number of Warrants Weighted Average Exercise Price Outstanding, February 29, 2024 3,521,664 $ 0.83 Granted 3,000,000 1.00 Exercised - - Cancelled - - Outstanding, May 31, 2024 6,521,664 $ 0.77 As noted above, during the three-months ended May 31, 2024, the Company issued warrants to purchase 3,000,000 shares of common stock. The warrants are fully vested, exercisable at $ 1.00 per share and will expire in 3 years. There was no intrinsic value as of May 31, 2024, 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 May 24, 2024, 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 3,521,664 3,564,764 1.47 $ 0.83 0.83 $ 1.00 3,000,000 3,000,000 3.00 $ 1.00 $ 1.00 NOTE 10 – RELATED PARTY TRANSACTIONS As of May 31, 2024, and February 29, 2024, BetterSea LLC was an 8.4 % and 8.8 %, respectively, shareholder of the Company. For the three months ending on May 31, 2024 and 2023, the Company incurred consulting fees to BetterSea of $ 40 and $ 36 , respectively. As of May 31, 2024, and February 29, 2024, a total of approximately $ 221 and $ 213 respectively, was due to BetterSea and included 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. 16 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 (see Note 5). 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. NOTE 12 – SUBSEQUENT EVENTS Subsequent to May 31, 2024, the Company issued 2,480,000 shares of common stock for cash $ 235 . 17