AURA SYSTEMS INC 10-K

ITEM 9A. 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. 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. Our President and our Chief Financial Officer concluded that, as a result of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were effective as of February 28, 2021. Management has concluded that during the Fiscal year ended February 28, 2021, actions taken by the Company to maintain effectiveness were successful such that our disclosure controls and procedures were effective as of February 28, 2021. Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of February 28, 2021. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on these assessments, and on those criteria, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of February 28, 2021. Changes in Internal Control Over Financial Reporting There was a significant change in the Company’s internal control over financial reporting that occurred during the Company’s Fiscal year ended February 28, 2021, that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the fiscal year ended February 28, 2021, the Company implemented QuickBooks Solutions-Wholesale and Manufacturing software as its primary accounting and operations environment. Inherent Limitations on Effectiveness of Controls The Company does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION None 28 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive Officers In March 2019, stockholders of the Company controlling a majority of the outstanding shares of the Company’s common stock delivered signed written consents to the Company removing Ronald Buschur, William Anderson, and Si Ryong Yu as members of the Company’s Board and electing Ms. Cipora Lavut, Mr. David Mann, and Dr. Robert Lempert as directors of the Company in their stead. As a result of Aura’s refused to recognize the legal effectiveness of the consents, in April 2019, 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. 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 stockholder 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 July 2019 the employment of Melvin Gagerman was terminated. See Item 3, Legal Proceedings for more information. Also in July 2019, the Board of Directors appointed Ms. Lavut to succeed Mr. Gagerman as President of Aura, appointed Mr. Mann to succeed Mr. Gagerman as Chief Financial Officer of the Company, and appointed Dr. Lempert secretary of Aura. The following table sets forth the names, ages, and offices of all our current directors and executive officers. Our officers are appointed by, and serve at the pleasure of, the Board of Directors. The stockholders at the annual meeting elect our directors to serve until the next meeting. Name Age Title Gary Douglas (1) 73 Director, Member of the Audit Committee Salvador Diaz-Verson, Jr. (1) 62 Director, Chairman of the Audit Committee David Mann (2) 49 Chief Financial Officer, Director, Chairman of the Compensation Committee, Member of the Nominating Committee and Member of the Audit Committee Cipora Lavut (2) 65 President, Chairman of the Board, Member of Nominating Committee and Member of the Compensation Committee Robert Lempert (2) 77 Secretary, Director, Chairman of the Nominating Committee and Member of the Compensation Committee (1) Mr. Douglas and Mr. Diaz-Verson, Jr. were appointed to the Board of Directors on March 29, 2018 by the written consent of stockholders holding a majority of the Company’s shares. (2) In March 2019, stockholders of the Company controlling a combined total of more than 27.5 million shares delivered signed written consents to the Company electing Ms. Lavut, Mr. Mann and Dr. Lempert to the Company’s Board of Directors. Because of Aura’s refusal to recognize the legal effectiveness of the consents, in April 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware seeking an order confirming the validity of the elections. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that 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. In July 2019, the Board of Directors appointed Ms. Lavut President and Chairman of the Board, appointed Mr. Mann as Chief Financial Officer and appointed Dr. Lempert as Secretary. 29 Biographical information with respect to our current directors and executive officer is provided below. Salvador Diaz-Versón, Jr . Mr. Diaz-Versón, Jr. was elected as a director on March 29, 2018. Previously, he served as a director of the Company from 1997-2005 and again from June 2007 until January 2018. Mr. Diaz-Versón, Jr. is the founder, Chairman and President of Diaz-Verson Capital Investments, Inc., and was a registered investment advisor with the Securities and Exchange Commission until 2009. Mr. Diaz-Versón, Jr. served as President and member of the board of directors of American Family Corporation (AFLAC, INC.) from 1976 until 1992. Mr. Diaz-Versón, Jr. served as President and Chief Investment Officer of American Family Life Assurance Company, a subsidiary of AFLAC, Inc. He is currently Chairman of Miramar Securities. Mr. Diaz-Versón, Jr. has received two presidential appointments to the Christopher Columbus Fellowship Foundation; first by President George H.W. Bush in 1992 and subsequently by President Clinton in 2000. Mr. Diaz-Versón, Jr. is a trustee of the Florida State University Foundation and is a national trustee of the Boys and Girls Club of America. He also serves as a trustee of Clark Atlanta University. Mr. Diaz-Versón, Jr. is a graduate of Florida State University and was selected as a director in view of his lengthy experience in managing companies and his knowledge of capital investments. Gary Douglas . Mr. Douglas was elected as a director on March 29, 2018. Mr. Gary Douglas has a BBA in Management degree, with extensive experience in cooperate communication and investment banking. He is a principal in Douglas Strategic Communications LLC, a marketing strategy and communications consultancy, and Ex officio Chairman of Picture Marketing, Inc., a digital marketing company. Mr. Douglas also formally served as Chief Marketing Officer of O’Melveny Consulting LLP, a unit of a global law firm. He also served as President of SP/Hambros America and Division President of Geneva Learning Systems and Group Vice President of Business Development for the five Geneva Companies, both SP/Hambros and The Geneva companies were middle market investment bankers. Mr. Douglas brings to the Board extensive experience in cooperate communication and investment banking. Cipora Lavut . Ms. Lavut was one of Aura’s original founding members. From 1987 to 2002 Ms. Lavut served on Aura’s Board and as a Senior Vice President. During this period, Ms. Lavut was instrumental to Aura receiving large contracts from The Boeing Company, Litton Industries and the United States Air Force. Ms. Lavut also provided critical investor relations and marketing support during this time. Ms. Lavut left Aura in 2002. At the request of Aura’s then Board of Directors and management, in 2006 Ms. Lavut returned to Aura as Vice President in charge of investors relations and corporate communication. In January 2016, Ms. Lavut left the Company to pursue other business ventures. Ms. Lavut presently provides marketing and business consulting to a variety of retail and service-oriented businesses. She holds a degree from California State University, Northridge. Robert Lempert . Dr. Lempert graduated from the University of Pennsylvania and conducted his residency at the Albert Einstein Medical Center in Philadelphia. Dr. Lempert also served as a Captain in the U.S. Army and previously served on the Company’s Board from November 28, 2017 (when he was appointed by the then-Board to fill one of the two existing vacancies) until January 11, 2018. Dr. Lempert has been a significant investor, shareholder and an active advocate of Aura’s technology for more than 20 years. David Mann . Mr. Mann has been Vice President of Marketing for Mann Marketing, a manufacturing and import company, since 1990 and the Vice President of Sales of that company since 2007. From 2000 until 2007, Mr. Mann also served as Vice President of Operations. Mr. Mann has extensive experience dealing with all aspects of marketing and sales, as well as suppliers in both North America and China. Mr. Mann has been an investor in the Aura since 2007 and previously served as a director of the Company from November 28, 2017 (when he was appointed by the then-Board to fill one of the two existing vacancies) until January 11, 2018. Mr. Mann holds a degree in Business Administration from College St. Laurent, Montreal, Canada. Delinquent Section 16(a) Reports Our shares of common stock are registered under the Securities Exchange Act of 1934, and therefore our executive officers and directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, no executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports during the year ended February 28, 2021. 30 Code of Ethics We have adopted a Code of Ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other members of the Company’s Finance Department. This Code of Ethics is posted on the Company’s website within a broader Code of Business Conduct and Ethics at www.aurasystems.com in the Investor Relations section. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a waiver from, the provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of such provision of our Code of Ethics by posting such information on our website within four business days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed. Family Relationships None of our directors or executive officers is related to one another. Committees of the Board of Directors The Board maintains the following committees to assist it in discharging its oversight responsibilities. Audit Committee . The Audit Committee does not have a formal charter but is responsible primarily for overseeing the services performed by our independent registered public accounting firm, evaluating our accounting policies and system of internal controls, and reviewing our annual and quarterly reports before filing with the Securities and Exchange Commission. The current members of the Audit Committee are Mr. Salvador Diaz Versón Jr., Mr. David Mann and Mr. Gary Douglas. The Board of Directors has determined that the Audit Committee does not have a member who is an “audit committee financial expert” as such term is defined by the rules and regulations of the Securities and Exchange Commission. While the Board recognizes that the Board members serving on the Audit Committee do not meet the qualifications required of an “audit committee financial expert,” the Board believes that the appointment of a new director to the Board of Directors and to the Audit Committee at this time is not necessary as the level of financial knowledge and experience of the current member of the Audit Committee, including such member’s ability to read and understand fundamental financial statements, is sufficient to adequately discharge the Audit Committee’s responsibilities Compensation Committee . The Compensation Committee does not have a formal charter but reviews and recommends to the full Board the amounts and types of compensation to be paid to the Chairman and Chief Executive Officer; reviews and approves the amounts and types of compensation to be paid to our other executive officers and the non-employee directors; reviews and approves, on behalf of the Board, salary, bonus and equity guidelines for our other employees; and administers our equity plans. The Compensation Committee is currently comprised of Mr. David Mann, Ms. Cipora Lavut and Dr. Robert Lempert. Nominating Committee . The Nominating Committee does not have a formal charter but assists the Board in identifying qualified individuals to become directors, determines the composition of the Board and its committees, monitors the process to assess the Board’s effectiveness and helps develop and implement our corporate governance guidelines. The Nominating Committee also considers nominees proposed by stockholders. The Nominating Committee currently consists of Mr. David Mann, Ms. Cipora Lavut and Dr. Robert Lempert. Director Compensation Although we do not currently compensate our directors in cash for their service as members of our Board of Directors, the Board may, in its discretion, elect to compensate directors for attending Board and Committee meetings and to reimburse directors for out-of-pocket expenses incurred in connection with attending such meetings. Additionally, our directors are eligible to receive stock options under the 2011 Directors and Executive Officer Stock Option Plan. During Fiscal 2021, each Director received options under the 2011 Directors and Executive Officer Stock Option Plan to acquire 250,000 shares of the Company’s common stock at an exercise price of $0.25. On the date of grant the shares were traded at $0.16 per share. None of the Directors received any stock options during the prior Fiscal year (Fiscal 2020). There are no payments due to any directors upon their resignation or retirement as members of the Board. 31 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation earned by or paid to the principal executive officer and the two most highly compensated executive officers, other than the principal executive officer, (the “named executive officers”) during the Fiscal years ended February 28, 2021 and February 29, 2020. 2021 Summary Compensation Table Fiscal Salary Option Awards Non-Equity Incentive Compensation All Other Compensation Total Name and Principal Position Year ($) ($) ($) ($) ($) Melvin Gagerman (1) 2020 64,000 - - - 64,000 Chief Executive Officer Chief Financial Officer Kevin Michaels (2) 2020 41,000 - - - 41,000 Treasury Officer Cipora Lavut 2021 140,000 (3) - - - 140,000 President 2020 41,667 (3) - - 42,300 (4) 83,967 (1) Mr. Gagerman was elected Chairman and Chief Financial Officer effective February 1, 2006 and was elected President and Chief Executive Officer effective May 25, 2006. On March 28, 2018, Mr. Gagerman was terminated by the then-seated Board of Directors but was subsequently re-appointed. Mr. Gagerman was permanently terminated on July 8, 2019. On January 11, 2018 the Board of Directors authorized the Company to pay Mr. Gagerman a monthly salary of $16,000, including a monthly car allowance of $1000, and to provide Mr. Gagerman with health and life insurance benefits commensurate with those given to all other employees. No other benefits or compensation were authorized by the Board of Directors. (2) Mr. Michaels began serving as Treasury Officer in February 2019; he was terminated in July 2019. (3) Ms. Lavut was elected President effective July 9, 2019 and on March 19, 2020, the Board of Directors authorized an annual salary of $250,000, retroactively effective to January 1, 2020. From January through February 2020, Ms. Lavut’s salary was accrued but was not paid. From March 2020 to February 2021, Ms. Lavut has been accruing an annual salary of $250,000 and has been paid 140,000 over the same period. (4) From July 2019 through December 31, 2019, Ms. Lavut received $42,300 in compensation. In March 2020, the Board of Directors authorized an annual salary of $250,000, retroactively effective January 1, 2020. From January through February 2020, Ms. Lavut’s salary was accrued but was not paid. Outstanding Equity Awards at 2021 Fiscal Year-End Neither Mr. Gagerman nor Mr. Michaels have any outstanding stock option awards as of February 28, 2021. On March 19, 2020, the Board of Directors approved the grant of a total of 1,250,000 options to acquire the Company’s common stock to each of the five current board members in equal amounts of 250,000 per person under the Company’s Directors and Executive Officers Stock Option Plan. All of these options were outstanding as of February 28, 2021. Option Exercises and Stock Vesting During Fiscal 2020 No stock options were exercised during Fiscal 2020 by the individuals named in the Summary Compensation Table. 32 Option Exercises and Stock Vesting During Fiscal 2021 On March 19, 2020, the Board of Directors approved the grant of a total of 1,250,000 options to acquire the Company’s common stock to each of the five current board members in equal amounts of 250,000 per person under the Company’s Directors and Executive Officers Stock Option Plan. Per the terms of the 2011 D&O Option Plan, vesting occurs after a six-month period plus one day from the date of grant, with a five-year expiration term, and with an exercise price of $0.25 per warrant Employment Contracts, Termination of Employment Contracts and Change in Control Arrangements We do not currently have any employment agreements with any of our Named Executive Officers. In March 2020, the Board of Directors approved an annual salary for Ms. Lavut of $250,000, retroactively effective from January 1, 2020. Potential Payments to the Named Executive Officers Upon Termination or Change in Control None of the named executive officers is entitled to any payments or benefits upon termination, whether by change in control or otherwise, other than benefits available generally to all employees. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, to the extent of our knowledge, certain information regarding our common stock owned as of May 20, 2021 (i) by each person who is known to be the beneficial owner of more than 5% of our outstanding common stock, (ii) by each of our Directors and the named executive officers in the Summary Compensation Table, and (iii) by all Directors and current executive officers as a group: Beneficial Ownership Table Beneficial Owner (1) Number of Shares of Common Stock Percent of Common Stock Melvin Gagerman 328,500 * % Kevin Michaels 0 * % William Anderson 0 * % Salvador Diaz-Verson, Jr. (2) 757,178 1.1 % Gary Douglas (3) 450,000 * % Sri Ryong Yu 293 * % Ronald J. Buschur 0 * % Cipora Lavut (4) 1,567,321 2.2 % David Mann (5) 1,824,843 2.5 % Robert Lempert (6) 497,343 * % All current executive officers and Directors as a group (five) (2) (3) (4) (5) (6) 5,096,685 6.9 % 5% Stockholders Warren Breslow (7) 10,592,216 14.3 % Elimelech Lowy (8) 7,612,645 10.1 % BetterSea LLC 7,364,735 10.4 % * Less than 1% of outstanding shares (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission. The calculation of the percentage of beneficial ownership is based upon 71,107,442 shares of common stock outstanding on February 28, 2021. In computing the number of shares beneficially owned by any stockholder and the percentage ownership of such stockholder, shares of common stock which may be acquired by a such stockholder upon exercise or conversion of warrants or options which are currently exercisable or exercisable within 60 days of February 28, 2021, are deemed to be exercised and outstanding. Such shares, however, are not deemed outstanding for purposes of computing the beneficial ownership percentage of any other person. Shares issuable upon exercise of warrants and options which are subject to stockholder approval are not deemed outstanding for purposes of determining beneficial ownership. Except as indicated by footnote, to our knowledge, the persons named in the table above have the sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The mailing address for each of the officers and directors is c/o Aura Systems, Inc., 20431 North Sea, Lake Forest, CA 92630. 33 (2) Includes 687,428 warrants exercisable within 60 days of February 28, 2021. (3) Including 450,000 warrants exercisable within 60 days of February 28, 2021. (4) 301,666 warrants exercisable within 60 days of February 28, 2021. On August 28, 2019, the Board of Directors approved 1,030,625 shares for issuance to Ms. Lavut in settlement of amounts previously lent by Ms. Lavut to the Company and certain unpaid amounts owed to Ms. Lavut for services performed prior to February 2016. (5) Includes warrants to purchase 500,912 shares exercisable within 60 days of June 30, 2020 as well as 1,323,931 shares, 891,204 of which Mr. Mann has sole dispositive power and approximately 432,727 of which, Mr. Mann holds a power of attorney to vote such shares. (6) Includes warrants to purchase 350,000 shares exercisable within 60 days of February 28, 2021. (7) Includes warrants to purchase 666,000 shares exercisable within 60 days of February 28, 2021.and the right to convert $3,000,000 and accrued interest of $412,911 convertible note payable to 2,437,794 common shares at a conversion price of $1.40. (8) Includes warrants to purchase 4,092,877 shares exercisable within 60 days of February 28, 2021. and 3,519,768 shares, which Mr. Lowy has sole dispositive power. Securities Authorized for Issuance Under Equity Compensation Plans as of February 28, 2021 Equity Compensation Plan Information as of February 28, 2021 a. b. c. Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price for Options, Warrants and Rights Number of Securities For Future Issuances Under Equity Compensation Plans (Excluding Securities Reflected in Column (a.) Equity compensation plans approved by equity holders 2,290,001 $ 0.77 15,448,764 Equity compensation plans not approved by equity holders 111,438 $ 1.40 - (1) Reflects options under the 2006 Stock Option Plan and the 2011 Stock Option Plan, of which both were approved by Company shareholders. The 2006 Stock Option Plan authorizes the Company to grant stock options exercisable for up to an aggregate number of shares of common stock equal to the greater of (i) 10,000,000 shares of common stock, or (ii) 10% of the number of shares of common stock outstanding from time to time. The 2011 Stock Option Plan authorizes the Company to grant stock options or warrants to executive officers and directors exercisable for up to an aggregate number of shares equivalent to 15% of the number of shares of common stock outstanding from time to time. The numbers in this table are as of February 28, 2021 (See Note 9 to the Financial Statements). For additional information regarding options and warrants, see Note 10 to our financial statements appearing elsewhere in this report. 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Review and Approval of Related Party Transactions Our Audit Committee is responsible for the review and approval of all related party transactions required to be disclosed to the public under SEC rules. This procedure, which is contained in the written charter of our Audit Committee, has been established by our Board of Directors in order to serve the interests of our shareholders. Related party transactions are reviewed and approved by the Audit Committee on a case-by-case basis. Under existing, unwritten policy no related party transaction can be approved by the Audit Committee unless it is first determined that the terms of such transaction is on terms no less favorable to us than could be obtained from an unaffiliated third party on an arms-length basis and is otherwise in our best interest. Director Independence Using the definition of “independence” included in the listing rules of The Nasdaq Stock Market, our Board has determined that Salvador Diaz-Versón, Jr. and Gary Douglas are both independent directors. ITEM 14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES The following table sets forth the aggregate fees billed to us by BF Borgers, CPA, PC (“BFB CPA”) for the years ended February 28, 2021, and February 29, 2020: Year Ended February 28, 2021 February 29, 2020 Audit Fees $ 61,000 $ 79,500 Audit-related fees - - Tax fees - - All other fees - - Total $ 61,000 $ 79,500 As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-K, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those Fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.” Audit Fees Services provided to us by BFB CPA, Inc. with respect the audit of our annual financial statements and review of our annual reports on Form 10-K and for reviews of the financial statements are included in our quarterly reports on Form 10-Q for the first three quarters of the years ended February 28, 2021 and February 29, 2020. Audit Related Fees BFB CPA did not provide any professional services to us during Fiscal 2021 or Fiscal 2020 which would constitute “audit related fees”. Tax Fees BFB CPA did not provide any professional services to us during Fiscal 2021 or Fiscal 2020 which would constitute “tax fees”. 35 All Other Fees BFB CPA did not provide any professional services to us during Fiscal 2021 or Fiscal 2020 which would constitute “other fees”. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors Under the SEC’s rules, the Audit Committee is required to pre-approve the audit and permissible non-audit services performed by the independent registered public accounting firm in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent registered public accounting firm. Consistent with the SEC’s rules, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. During Fiscal 2018 and 2017 all services provided by BFB CPA were pre-approved by the Audit Committee in accordance with this policy. There were no hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent Fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees. 36 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Documents filed as part of this Form 10-K: 1. Financial Statements See Index to Financial Statements at page F-1 2. Financial Statement Schedules See Index to Financial Statements at page F-1 3. Exhibits See Exhibit Index ITEM 16. FORM 10-K SUMMARY None. 37 INDEX TO EXHIBITS Description of Documents 3.1 Amended and Restated Certificate of Incorporation of Aura Systems, Inc. (Incorporated by reference to Exhibit 3.1 to Aura Systems, Inc.’s Form 10-K filed on June 15, 2009) 3.1(a) Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated February 14, 2018 (Incorporated by reference to Exhibit 3.1 to Aura Systems, Inc.’s Current Report on Form 8-K filed on February 21, 2018) 3.2 Amended and Restated Bylaws of Aura Systems, Inc. (Incorporated by reference to Exhibit 3.2 to Aura Systems, Inc.’s Report on Form 10-K filed on June 15, 2009) 10.1* Aura Systems, Inc. 2006 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to Aura System, Inc.’s Form 10-K filed on March 25, 2008) 10.2* Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.5 to Aura System, Inc.’s Form 10-K filed on March 25, 2008) 10.3 Second Amendment to Transaction Documents dated March 14, 2017 among Registrant and those persons who have signed the signature page thereto (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.4 Third Amendment to Transaction Documents dated April 8, 2017 among Registrant and those persons who have signed the signature page thereto (Incorporated by reference to Exhibit 10.2 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.5 Second Amendment to Debt Refinancing Agreement dated April 9, 2017 by and between Aura Systems, Inc., on the one hand, and Warren Breslow and the Survivor’s Trust Under the Warren L. Breslow Trust, on the other hand (Incorporated by reference to Exhibit 10.3 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.6 First Amendment to Unsecured Convertible Promissory Note dated June 15, 2017 by and between the Survivor’s Trust Under the Warren L. Breslow Trust and the Registrant (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.7 Agreement entered into on June 19, 2017 between Aura Systems Inc. and BetterSea LLC (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Current Report on Form 8-K/A filed on May 9, 2018) 10.8 Financing Letter of Agreement dated June 20, 2014 between Aura Systems, Inc. and KF Business Ventures, LP, joined by its affiliate Kopple Family Partnership, LP (Incorporated by reference to Exhibit 10.31 to Aura Systems, Inc.’s Form 10-K for the period ended February 28, 2015)** 10.9 Unsecured Promissory Note dated June 20, 2014 by Aura Systems, Inc. in favor of KF Business Ventures, LP in the original principal amount of $2,915,206.11 (Incorporated by reference to Exhibit A to Exhibit 10.31 to Aura Systems, Inc.’s Form 10-K for the period ended February 28, 2015)** 10.10 Form of Warrant by Aura Systems, Inc. to KF Business Ventures, LP (Incorporated by reference to Exhibit B to Exhibit 10.31 to Aura Systems, Inc.’s Form 10-K for the period ended February 28, 2015)** 10.11 Sino-Foreign Cooperative Joint Venture Contract dated January 27, 2017 between Aura Systems, Inc. and Jiangsu AoLunTe Electrical Machinery Industrial Col, Ltd. (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Form 8-K filed on February 1, 2017) 10.12* Aura Systems, Inc. Directors and Executive Officers Stock Option Plan (Incorporated by reference to Exhibit 10.67 to Aura Systems, Inc.’s Form S-1 filed on November 30, 2011) 14.1 Code of Ethics (Incorporated by reference to Exhibit 14.1 to Aura Systems, Inc.’s Annual Report on Form 10-K filed on June 13, 2018) 31.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350 101.INS XBRL Instance Document 101.SCH XBRL Schema Document 101.CAL XBRL Calculation Linkbase Document 101.DEF XBRL Definition Linkbase Document 101.LAB XBRL Label Linkbase Document 101.PRE XBRL Presentation Linkbase Document * Indicates a management contract or compensatory plan or arrangement. ** See Item 3. “Legal Proceedings” and Item 12. “Security Ownership of Certain Beneficial Owners and Management” included elsewhere in this Annual Report on Form 10-K for information on the dispute with Mr. Kopple regarding these exhibits. In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed. Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. AURA SYSTEMS, INC. Dated: June 1, 2021 By: /s/ Cipora Lavut Cipora Lavut President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signatures Title Date /s/ Cipora Lavut President (Principal Executive Officer), June 1, 2021 Cipora Lavut Board Chair /s/ David Mann Chief Financial Officer June 1, 2021 David Mann (Principal Financial Officer, Principal Accounting Officer), Director /s/ Robert Lempert Director June 1, 2021 Robert Lempert /s/ Gary Douglas Director June 1, 2021 Gary Douglas /s/ Salvador Diaz-Verson, Jr. Director June 1, 2021 Salvador Diaz-Verson, Jr. 40 Index to Financial Statements Report of Independent Registered Public Accounting Firm F-2 Financial Statements of Aura Systems, Inc.: Balance Sheets as of February 28, 2021 and February 29, 2020 F-4 Statements of Operations - Years ended February 28, 2021 and February 29, 2020 F-5 Statements of Stockholders’ Deficit - Years ended February 28, 2021 and February 29, 2020 F-6 Statements of Cash Flows - Years ended February 28, 2021 and February 29, 2020 F-7 Notes to Financial Statements F-8 to F-21 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Aura Systems, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Aura Systems, Inc. (a Delaware corporation), (the “Company”) as of February 28, 2021 and February 29, 2020, the related statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2021 and February 29, 2020 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant operating losses since inception and has a working capital deficit which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F- 2 Critical Audit Matter Description The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following: ● The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. ● Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). How the Critical Audit Matter Was Addressed in the Audit We selected a sample of sales and performed the following procedures: ● Obtained invoices, receipts, shipping documents for each selection. ● Assessed the terms in the customer invoices and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. We evaluated management’s significant accounting policies related to these customer agreements for reasonableness We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. /s/ BF Borgers CPA PC Certified Public Accountants Lakewood, CO June 1, 2021 We have served as the Company’s auditor since 2020. F- 3 AURA SYSTEMS, INC. BALANCE SHEETS February 28, 2021 February 29, 2020 Assets Cash and cash equivalents $ 390,702 $ 19,807 Inventory 94,166 90,037 Other current assets 115,202 1,487 Total current assets 600,070 111,330 Fixed Assets, net 14,870 - Right-of-use asset 1,168,053 - Deposit 159,595 - Total assets $ 1,942,589 $ 111,330 Liabilities & Shareholders’ Deficit Current liabilities Accounts payable $ 1,880,172 $ 2,537,061 Accrued expenses 1,288,107 2,707,898 Customer advances 440,331 440,331 Operating lease liability 110,587 - Accrued expense-related party - 1,008,328 Notes payable, current portion 198,331 983,717 Notes payable and accrued interest-related party 12,165,015 11,333,960 Total current liabilities 16,082,543 19,011,296 Convertible note payable-related party 3,000,000 3,000,000 Note payable 159,922 0 Convertible notes payable 1,402,971 1,402,971 Operating lease liability, non-current 1,046,902 - Total liabilities 21,692,339 23,414,267 Commitments and contingencies - - Shareholders’ deficit Common stock: $0.0001 par value; 150,000,000 shares authorized at February 28, 2021 and February 29, 2020; 71,107,442 and 56,400,874 issued and outstanding at February 28, 2021 and February 29, 2020, respectively 7,109 5,639 Additional paid-in capital 446,126,640 443,417,452 Accumulated deficit (465,883,499 ) (466,726,027 ) Total shareholders’ deficit (19,749,750 ) (23,302,937 ) Total liabilities and shareholders’ deficit $ 1,942,589 $ 111,330 See accompanying notes to these financial statements. F- 4 AURA SYSTEMS, INC. STATEMENTS OF OPERATIONS Fiscal Years Ended February 28, February 29, 2021 2020 Net revenue $ 114,923 $ 821,987 Cost of goods sold 81,449 177,079 Gross profit 33,475 644,908 Operating expenses Engineering, research & development 237,450 172,382 Selling, general & administration 1,318,602 1,259,312 Impairment of joint venture - 250,000 Total operating expenses 1,556,052 1,681,694 Loss from operations (1,522,577 ) (1,036,786 ) Other (income) expense: Interest expense, net 1,293,409 1,233,912 (Gain) loss on debt settlement (71,775 ) 327,795 Gain on extinguishment of debt (866,887 ) - Other income (2,720,652 ) (1,507 ) Income (loss) before tax provision 843,328 (2,596,986 ) Income tax provision 800 9,880 Net Income (loss) $ 842,528 $ (2,606,866 ) Basic income (loss) per share $ 0.01 $ (0.05 ) Basic weighted-average shares outstanding 61,675,566 54,762,456 Diluted income (loss) per share $ 0.01 $ (0.05 ) Dilutive weighted-average shares outstanding 61,741,854 54,762,456 See accompanying notes to these financial statements. F- 5 AURA SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS’ DEFICIT Common Stock Shares Common Stock Amount Additional Paid- In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2019 53,714,145 $ 5,371 $ 442,519,092 $ (464,119,162 ) $ (21,594,699 ) Shares issued for cash 2,533,015 253 522,432 - 522,685 Shares cancelled (1,065,051 ) (107 ) - - (107 ) Shares issued for settlement 1,168,765 119 363,262 - 363,381 Shares issued for services 50,000 3 9,998 - 10,001 Warrants issued to equity investors - - 2,668 - 2,668 Net loss - - - (2,606,865 ) (2,606,865 ) Balance, February 29, 2020 56,400,874 $ 5,639 $ 443,417,452 $ (466,726,027 ) $ (23,302,937 ) Shares issued for cash 14,098,327 1,410 2,144,589 - 2,145,999 Shares issued for settlement 608,241 60 370,849 - 370,909 Stock-based compensation - - 193,750 - 193,750 Net income - - - 842,528 842,528 Balance, February 28, 2021 71,107,442 $ 7,109 $ 446,126,640 $ (465,883,499 ) $ (19,749,750 ) See accompanying notes to these financial statements. F- 6 AURA SYSTEMS, INC. STATEMENTS OF CASH FLOWS Fiscal Years Ended February 28, February 29, 2021 2020 Net income (loss) $ 842,528 $ (2,606,866 ) Adjustments to reconcile net income (loss) to cash used in operating activities Depreciation 743 - Gain on write-off of liabilities (3,585,639 ) - Loss on settlement of debt - 339,724 Impairment of joint venture - 250,000 Stock-based compensation expense 193,750 - Changes in working capital assets and liabilities: Inventory (4,129 ) (90,037 ) Other current assets (113,716 ) 58,362 Deposit on leased facility (159,595 ) - Accounts payable and accrued expenses 99,839 108,749 Accrued interest on notes payable 847,987 1,142,524 Operating lease liability (10,564 ) - Customer advances - 3,789 Cash used in operating activities (1,888,795 ) (793,754 ) Cash used in investing activities: Purchase of property, plant and equipment (15,614 ) - Cash flows from financing activities: Issuance of common stock 2,146,000 525,352 Payment on notes payable (95,000 ) (70,000 ) Proceeds from Federal PPP & SBA notes 224,305 - Cash provided by financing activities 2,275,305 455,352 Net increase (decrease) in cash and cash equivalents 370,896 (338,403 ) Beginning cash 19,807 358,209 Ending cash $ 390,703 $ 19,807 Cash paid in the period for: Interest $ 4,428 $ - Income taxes $ - $ - Supplemental schedule of non-cash transactions: Accounts payable converted into shares of common stock $ 103,909 $ - Accrued expenses converted into shares of common stock $ - $ 339,723 Notes payable converted into shares of common stock $ 267,000 $ 13,159 Convertible notes converted into shares of common stock $ - $ 20,501 Customer advance reclassified as note payable $ - $ 700,000 See accompanying notes to these financial statements. F- 7 AURA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS February 28, 2021 NOTE 1 – ORGANIZATION AND OPERATIONS Aura Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage 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. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the fiscal years ended February 28, 2021 and February 29, 2020, the Company incurred net profit of approximately $0.8 million and a loss of approximately $2.6 million, respectively, and had negative cash flows from operating activities of $1.9 million and $0.8 million, respectively. The net profit of $0.8 million in Fiscal 2021 is attributed to recognizing non-operating income associated with the cancellation of certain liabilities due the expiration of the statute of limitations of approximately $3.6 million. 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. 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. During the next twelve months we expect 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 Fiscal 2021, we completed our relocation of our operations and administrative offices to a new location (see Note 8, Leases), 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. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 generator sets used primarily in mobile power applications, which represented 100% of our revenues of approximately $0.1 million and $0.8 million for the fiscal years ended February 28, 2021 and February 29, 2020, respectively. Our principal 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 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 obligations to the customer. Our payment terms are cash payment due upon delivery and typically includes a 2% price discount off the selling price 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 an eighteen-month 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 February 28, 2021 and February 29, 2020, respectively; however, we expect warranty claims to eventually be nil, therefore, we have not delayed the recognition of revenue during Fiscal years 2021 and 2020. Cash and Cash Equivalents Cash and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. We have not experienced any losses in such accounts and believe we are not exposed to any significant risk on cash and cash equivalents. F- 8 Inventories Inventories are valued at the lower of cost (first-in, first-out) or market, on an average 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 its demand and market value, we fully reserved it as of February 28, 2019 Stock-Based Compensation The Company accounts for stock-based compensation under the provisions of FASB ASC 718, Compensation – Stock Compensation (“ASC 718”), 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. The Company accounts for stock option and warrant grants issued and vesting to non-employees, such as consultants and third parties, in accordance with ASC 718, 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, the Company has 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. Operating Leases The Company adopted ASC Topic 842, Leases (“ASC 842”), in Fiscal 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 (“ROU”) asset is also recognized that is subject to amortization 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 ASC 842 to this lease and any other operating leases we enter into in the future. 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 Company measures our financial assets and liabilities in accordance with the requirements of FASB ASC 825 “Financial Instruments”. The carrying values of accounts payable, current notes payable, accrued expenses and other liabilities approximate fair value due to the short-term maturities of these instruments. The carrying amounts of long-term convertible notes payable approximate their respective fair values because of their current interest rates payable and other features of such debt in relation to current market conditions. F- 9 Income Taxes The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes (“ASC 740”). Under ASC 740, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial statement reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities. The Company has significant income tax net operating losses; however, due to the uncertainty of the realizability of the related deferred tax asset and other deferred tax assets, a valuation allowance equal to the amount of deferred tax assets has been established at February 28, 2021 and February 29, 2020. ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merit. Earnings (Loss) per Share The Company applies FASB ASC 260, Earnings per Share (“ASC 260”). Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common shares available upon exercise of outstanding warrants using the treasury stock method, except for periods of operating loss for which no common share equivalents are included because their effect would be anti-dilutive. Diluted earnings per share also includes the dilutive effect of assuming the convertible securities that are outstanding are converted into common shares by applying the conversion rate to the securities’ amounts outstanding and determining which, if any, convertible securities are dilutive. This assumption will add additional shares to the denominator for the diluted number of shares outstanding. The numerator is affected by assuming the accrued interest due to the holders of the convertible securities is no longer applicable, which increases the amount of income in the numerator. The Company determined that all of the convertible securities outstanding at February 28, 2021 were antidilutive to the basic earnings per share and 4,631,500 shares were excluded from the calculation. In addition, 1,040,000 stock options granted under the 2011 Plan (See note 9) and warrants of 5,662,272 were excluded from the calculation of diluted earning per share at February 28, 2021 because they were antidilutive. The following table sets forth the basic and diluted income (loss) per share for the fiscal years ended February 28, 2021 and February 29, 2020: Fiscal Year Ended February 28, 2021 Income Shares Per-share (Numerator) (Denominator) Amount Basic EPS Income available to common stockholders $ 842,528 61,675,566 $ 0.01 Effect of Dilutive Securities Stock Options-2011 Plan $ - 66,288 $ - Dilutive EPS Income available to common stockholders plus assumed conversions $ 842,528 61,741,854 $ 0.01 Fiscal Year Ended February 29, 2020 Income Shares Per-share (Numerator) (Denominator) Amount Basic EPS Loss available to common stockholders $ (2,606,866 ) 54,762,456 $ (0.05 ) Dilutive EPS Loss available to common stockholders $ (2,606,866 ) 54,762,456 $ (0.05 ) F- 10 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this amendment on its financial statements. In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the effect of adopting this ASU on its consolidated financial statements. In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) 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 the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 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 Conversion 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 certain 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, 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 evaluating the impact of this guidance on its financial statements. NOTE 3 – INVENTORIES Inventories on February 28, 2021 and February 29, 2020 consisted of the following: February 28, 2021 February 29, 2020 Raw materials $ 91,739 $ 90,037 Finished goods $ 2,427 $ - Total inventory $ 94,166 $ 90,037 Inventories consist primarily of components required for the manufacture of the Company’s AuraGen ® /VIPER product. F- 11 NOTE 4 – OTHER CURRENT ASSETS AND INVESTMENT IN JOINT VENTURE Other current assets of approximately $115,000 on February 28, 2021 consist of vendor advances of $37,400, employee salary draws of $63,500 and prepaid expenses of $14,300. On February 29, 2020, other current assets consisted of unamortized prepaid expense of $1,487. In March 2017, we entered into a joint venture agreement with a Chinese partner, Jiangsu Shengfeng Mobile Power Technology Co., Ltd. (“Jiangsu Shengfeng”), to address the Chinese market. Under the Jiangsu Shengfeng joint venture agreement, the Company owns 49% of the venture and our Chinese partner owns 51%. The Chinese partner agreed to contribute a total of approximately $9.25 million to the venture –– principally in the form of facilities and equipment as wells as approximately $500,000 in cash. The Company contributed $250,000 in cash as well as a limited license to the joint venture to manufacture, sell and service the AuraGen ® products within China. The limited license sold to the Jiangsu Shengfeng joint venture, however, does not permit Jiangsu Shengfeng to manufacture the AuraGen ® rotor; rather, the joint venture is required to purchase all rotor subassemblies as well as certain software elements directly from the Company. During Fiscal 2020, the Company recorded an impairment expense of $250,000 to write-off the joint venture investment due to operational and future cash-flow uncertainties associated with AuraGen ® /VIPER market development prospects in China. NOTE 5 – NOTES PAYABLE Notes payable as of February 28, 2021 and February 29, 2020 consisted of the following: Non-Related Party Promissory Notes February 28, 2021 February 29, 2020 Demand promissory notes payable with 1 individual, carrying an interest rate of 10% (see Demand Promissory Notes below) $ 10,000 $ 768,537 Messrs. Abdou notes payable 120,181 215,181 U.S. Payroll Protection Plan loan program 74,405 - U.S. Small Business Administration-Economic Injury Disaster Loan 153,668 - Total Demand and Notes Payable 358,254 983,718 Convertible Promissory Note originally dated August 10, 2012, due January 11, 2023, convertible into shares of our common stock at a price of $0.76 per share, carrying interest rate of 5%. See Convertible Promissory Notes – Dalrymple August 2012 for further details. 264,462 264,462 Convertible Promissory Note originally dated October 2, 2012, due January 11, 2023, convertible into shares of our common stock at a price of $0.76 per share, carrying interest rate of 5%. See Convertible Promissory Notes – Dalrymple October 2012 for further details. 133,178 133,178 Senior secured convertible notes originally dated May 7, 2013, due January 11, 2023, convertible into shares of our common stock at a price of $0.75 per share, carrying interest rate of 5%. See Convertible Debt – Kenmont Capital Partners, LPD Investments and Guenther for further details. 945,825 945,825 Senior secured convertible notes originally dated June 20, 2013, due January 11, 2023, convertible into shares of our common stock at a price of $0.50 per share, carrying interest rate of 5%. See Convertible Debt – Dresner and Lempert for further details. 59,506 59,506 Total Convertible Promissory Notes 1,402,971 1,402,971 Accrued Interest - notes payable 239,038 498,698 Total Non-Related Party 2,000,263 2,885,387 Notes Payable-Related Party Convertible Note payable – related party, carrying an interest rate of 5% - see Note 6, Breslow Note, for further details 3,000,000 3,000,000 Kopple Notes Payable-related party, see Kopple Notes, Note 6 below: 11,317,788 10,494,933 Mel Gagerman Notes Payable, see Gagerman, Note 6 below: 147,226 138,526 On November 20, 2019, the Company entered into a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture. Payment terms consist of a non-interest bearing promissory note and a payment plan pursuant to which the $700,000 is paid over a 12-month period beginning March 15, 2020 through February 15, 2021. 700,000 700,000 Accrued Interest - notes payable- related party. 412,911 262,911 Total Related Party 15,577,925 14,596,371 Total notes payable and accrued interest 17,578,188 17,481,758 Less: Current portion $ (13,015,295 ) $ (13,078,787 ) Long-term portion $ 4,562,893 $ 4,402,971 F- 12 Demand Promissory Notes and Notes Payable Demand promissory notes as of February 28, 2021 and February 29, 2020 are for one and four individuals, respectively, issued in September 2015 that are payable on demand with an interest rate of 10% per annum. As of February 28, 2021, the one individual is for the principal amount owed to the Mr. Zeitlin, a former director of the Company, of $10,000. In the year ended February 28, 2021, $758,537 of demand notes principal and $385,349 of 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 Balance Sheet as of February 28, 2021, and the recognition of $871,887 as gain on extinguishment of debt on the Statements of Operations for the year ended February 28, 2021 . 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 $120,000 and $215,000 were outstanding as of February 28, 2021 and February 29, 2020, respectively. Paycheck Protection Plan Loan 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 used the PPP loan proceeds for payroll, healthcare benefits, rent and other qualifying expenses. The program provides that the use of PPP Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. While we intend to apply for the forgiveness of the PPP Loan, there is no assurance that we will obtain forgiveness of the PPP Loan in whole or in part (See Note 13 in which we were notified of PPP loan forgiveness in April 2021). As of February 28, 2021, $8,166 was classified as notes payable, non-current and $66,239 was classified as part of notes payable, current portion. 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 interest accrues at 3.75% per annum effective July 1, 2020; the payment schedule contains a one-year deferral period on initial principal 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 February 28, 2021, the amount outstanding including accrued interest of $3,768 is $153,668 and is classified as part of notes payable, non-current on the February 28, 2021 balance sheet. F- 13 Convertible Notes Payable Kenmont Capital Partners On May 7 and September 25, 2013, the Company entered into Securities Purchase Agreements for senior convertible notes in the aggregate amount of approximately $1,807,000 (“New Kenmont Notes”) and warrants to Kenmont Capital Partners LP. The New Kenmont Notes had a 1-year maturity date and were convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. On October 31, 2016, the Securities Purchase Agreements were amended and restated to include a provision for mandatory redemption in which 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 February 28, 2021 and February 29, 2020, respectively. LPD Investments On May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to a senior secured convertible note with a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd. The New LPD Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $175,793 as a discount, which has been fully amortized. There is a remaining balance of $163,677 as of February 28, 2021 and February 29, 2020, respectively. Guenther On May 7, 2013, the Company entered into an agreement with an individual, Mr. Guenther, for the sale of $750,000 of secured convertible note payable (the “Note”) and warrants. The Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares and have an initial exercise price of $0.75 per share and have a 7-year term. The Company recorded $235,985 as a discount, which has been fully amortized. There is a remaining balance of $232,194 as of February 28, 2021 and February 29, 2020, 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 February 28, 2021 and February 29, 2020, 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 February 28, 2021 and February 29, 2020, respectively. Dalrymple – October 2012 On October 2, 2012, the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $500,000 of unsecured Convertible Promissory Note. This Convertible Promissory Note balance together with all accrued interest thereon was due and payable on October 2, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing date. On January 11, 2018, the note was renegotiated with a final payment date of January 11, 2023 with an annual interest rate of 5%. The Company recorded $137,583 as a debt discount, which will be amortized over the life of the note . There is a remaining balance of $133,178 as of February 28, 2021 and February 29, 2020, respectively. F- 14 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 February 28, 2021 and February 29, 2020, respectively, plus any outstanding accrued interest. NOTE 6 – RELATED PARTIES TRANSACTIONS Notes payable-related party, non-current - $3,000,000 on the balance sheets as of February 28, 2021 and February 29, 2020, respectively, 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 $412,911 and $262,911 recorded as accrued interest-related party (see Note 4) as of February 28, 2021 and February 29, 2020, respectively. Notes payable and accrued interest-related party, current - $12,165,015 and $11,333,960 on the balance sheets as of February 28, 2021 and February 29, 2020, respectively, consists of the Kopple Notes, the Gagerman Note and the Jiangsu Shengfeng Note as set forth below: Kopple Notes As of February 28, 2021, and February 29, 2020, the principal amount owed to Robert Kopple (former Vice-Chairman of our Board) of $5,607,323 was unchanged. As of February 28, 2021, accrued interest of $5,710,465 was owed to Mr. Kopple for a total balance of $11,317,788. As of February 29, 2020, accrued interest of $4,887,611 was owed to Mr. Kopple for a total balance of $10,494,934. On August 19, 2013, the Company entered into an agreement with Robert Kopple, a former member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Kopple Notes”) and warrants. The Kopple Notes 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. F- 15 Gagerman Note On February 28, 2021, the Gagerman note consisted of $82,000 of unsecured note payable plus accrued interest of $65,226 for a total owed to Gagerman of $147,226, the Company’s former CEO and CFO, pursuant to a demand note entered into on April 5, 2014. Interest accrues at 10% per annum. On February 29, 2020, the amount owed to Gagerman was $138,526. Jiangsu Shengfeng Note On November 20, 2019, the Company entered into a preliminary agreement with Jiangsu Shengfeng, the Company’s Chinese joint venture, to return $700,000 previously advanced to the Company in September 2018 and recorded as part of customer advance on the balance sheet as of February 28, 2019. Following this agreement which would consists of a non-interest-bearing promissory note and a payment plan pursuant to which the $700,000 would be paid over a 12-month period. Principal loan amount on February 28, 2021 and February 29, 2020 was $700,000, respectively, and is classified as part of notes payable and accrued interest-related party, current on the balance sheets as of February 28, 2021 and February 29, 2020. NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities on February 28, 2021 and February 29, 2020 consisted of the following: February 28, 2021 February 29, 2020 Accrued payroll and related expenses 547,412 $ 1,868,928 Accrued payroll - related party - 1,008,328 Customer advances 440,331 440,331 Accrued interest 239,038 498,698 Accrued interest-related party 412,911 262,911 Operating lease liability 110,587 - Other accrued expenses 88,747 77,362 $ 1,839,026 $ 4,156,557 Accrued payroll and related expenses consist primarily of salaries and vacation time accrued but not paid to employees due to our lack of financial resources. Customer advances, which represent advanced payments received by the Company in connection with future product deliveries in the amount of approximately $440,000 at February 28, 2021 and February 29, 2020, respectively. Accrued interest consists of amounts due (see Note 5) to holders of convertible promissory notes of $1.4 million and for demand and other promissory notes of approximately $0.4 million. The accrued interest-related party is related to principal amount due to Mr. Breslow of $3.0 million as of February 28, 2021 (see Note 6). The operating lease liability of approximately $111,000 is the current portion of the lease liability recognized in accordance with ASC 842 (see Note 8). NOTE 8 – COMMITMENTS & CONTINGENCIES Leases During Fiscal 2020 and 2021, our facilities consisted primarily of approximately 20,000 square feet in Stanton, California and an additional storage facility in Santa Clarita, California. Effective February 28, 2021, we vacated the Stanton facility 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. The Stanton facility previously was used for final assembly and testing of AuraGen ® /VIPER systems under a month-to-month rental agreement for $10,000 per month. The monthly rent for the Santa Clara storage facility that was terminated effective July 31, 2020 was also under a month-to-month rental agreement for $5,000 per month. Following the exit from the Santa Clarita facility to February 28, 2021, we rented temporary storage space through February 28, 2021 for approximately $2,500 per month. At February 28, 2021, in accordance with ASC Topic 842, we recognized a 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 lease liability is determined by discounting the future lease payments under the lease terms and applying a 10% per annum discount rate to arrive at the current lease liability. Operating expenses estimated to be approximately $4,000 per month are considered a variable lease component and excluded from the determination of the ROU asset and the lease liability. Other operating expenses, such as utilities and property taxes, are similarly excluded in the calculation of the ROU as they do not represent goods and services provided by the lessor under the terms of the lease. F- 16 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. 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 $11.3 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 $5.7 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 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, 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. F- 17 NOTE 9 – STOCKHOLDERS’ DEFICIT Common Stock On February 28, 2021 and February 29, 2020, the Company had 150,000,000 shares of $0.0001 par value common stock authorized for issuance. During the year ended February 28, 2021, the Company issued a total of approximately 14.7 million shares of common stock, of which 14.1 million shares were issued for cash totaling approximately $2.1 million and the remainder of 0.6 million shares for settlement of debt totaling $371,000. During the year ended February 29, 2020, the Company issued 2.5 million shares of common stock for cash totaling $525,000, 1.2 million shares for settlement of debt of $366,000, $50,000 shares of common stock for services rendered to the Company of $10,000 and a cancellation of 1.1 million shares outstanding in October 2019 in connection with a settlement agreement. Employee Stock Options The 2006 Employee Stock Option Plan In September 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan (“2006 Plan”), subject to shareholder approval, which was obtained at a special shareholders meeting in 2009. Under the 2006 Plan, the Company may grant options for up to the greater of Three Million (3,000,000) or 10% of the number of shares of the Common Stock of Aura outstanding from time to time. At the October 2011 shareholder meeting, the shares of Common Stock available under the 2006 Plan was increased to the greater of Ten Million shares (10,000,000) or 15% of the number of shares of Common Stock of Aura outstanding from time to time. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may not be greater than ten years, and they typically vest over a three-year period. No options under the 2006 Plan have been issued since 2016. The 2011 Director and Executive Officers Stock Option Plan In October 2011 shareholders approved the 2011 Director and Executive Officers Stock Option Plan (“2011 Plan”) at the Company’s annual meeting. Under the 2011 Plan, the Company may grant options, or warrants, for up to 15% of the number of shares of Common Stock of the Company from time to time outstanding. Pursuant to this plan, the Board or a committee of the Board may grant an option to any person who is elected or appointed a director or executive officer of the Company. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may not be greater than five years. Activity in the 2006 Plan is as follows for the fiscal years ended February 28, 2021 and February 29, 2020: Number of Shares Exercise Price Weighted Average Intrinsic Value Outstanding, February 28, 2019 647,000 $ 1.40 $ - Granted - - - Exrecised - - - Cancelled (647,000 ) 1.40 - Outstanding, February 29, 2020 - $ - $ - Granted - - - Exrecised - - - Cancelled - - - Outstanding, February 28, 2021 - $ - $ - During Fiscal 2020, the remaining 647,000 stock options as of February 29, 2020 expired unexercised at an exercise price of $1.40 per option. F- 18 Activity in the 2011 Plan for issued and outstanding options during Fiscal 2021 and 2020 is as follows: Number of Shares Exercise Price Weighted Average Intrinsic Value Outstanding, February 28, 2019 1,125,715 $ 1.40 $ - Granted - 1.40 - Exrecised - - - Cancelled (85,714 ) 1.40 - Outstanding, February 29, 2020 1,040,001 $ 1.40 $ - Granted 1,250,000 0.25 125,000 Exrecised - - - Cancelled - - - Outstanding, February 28, 2021 2,290,001 $ 0.77 $ 125,000 The exercise prices and information related to options under the 2011 Plan outstanding on February 28, 2021 is as follows: Range of Exercise Price Stock Options Outstanding Stock Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Warrants Outstanding Weighted Average Exercise Price of Warrants Exercisable $0.25 to $1.40 2,290,001 2,290,001 2.99 yrs. $ 0.77 $ 0.77 On March 19, 2020, the Board of Directors approved the grant of 250,000 options to each of the five current members of the Board under the Company’s 2011 Director and Executive Officers Stock Option Plan, in the aggregate amount of 1,250,000 options. These options bear an exercise price of $0.25 per option and are exercisable for a period of five years, subject to earlier termination per the terms of the 2011 Director and Executive Officers Stock Option Plan. The closing price of the Company’s common stock on the date of grant was $0.16. A fair value of $193,750, or $0.155 per option, was determined by applying the Black-Scholes-Merton option valuation model using a volatility rate of 225%, a risk-free interest rate of 0.57%, expected term of 4 years and an equity fair value on the date of grant of $0.16. The fair value of $193,750 was recorded as selling, general and administrative expense on the Statement of Operations for the year ended February 28, 2021. W arrants Number of Shares Exercise Price Outstanding, February 28, 2019 6,365,272 $ 1.40 Granted 10,000 1.40 Exrecised - - Cancelled (558,333 ) 1.40 Outstanding, February 29, 2020 5,816,939 $ 1.40 Granted - Exrecised - - Cancelled (154,667 ) 1.40 Outstanding, February 28, 2021 5,662,272 $ 1.40 The 10,000 warrants granted in Fiscal 2020, fully vested, with an exercise price of $1.40, and expiring after five years, to three investors who were issued 250,000 shares in exchange for $50,000 of cash. A fair value of $2,668 was determined by applying the Black-Scholes-Merton option valuation model using a volatility rate of 246%, a risk-free interest rate of 1.76%, expected term of 4 years and a range of equity fair values on the dates of grant of $0.258 to $0.30. F- 19 The exercise prices and information related to the warrants under the 2011 Plan outstanding on February 28, 2021 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 $ 1.40 5,662,272 5,662,272 1.73 yrs. $ 1.40 $ 1.40 At February 28, 2021, the weighted average intrinsic value for the stock warrants outstanding is zero. NOTE 10 – INCOME TAXES The Company recorded an income tax expense of $800 attributable to the Fiscal 2021 state franchise taxes being unpaid. In Fiscal 2020, the Company recorded a total of $4,000 in unpaid state franchise taxes for fiscal years 2016 to 2020. 2021 2020 Current: Federal $ - $ 5,880 State 800 4,000 Total 800 9,880 Deferred: Federal - - State - - Total $ - $ - Total Provision $ 800 $ 9,880 The Company has provided full valuation allowance for the deferred tax assets on the expected future tax benefits from the net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized in the near future. 2021 2020 Expected tax benefit 21 % 21 % State tax benefit, net of federal benefit 7 % 7 % Changes in valuation allowance -28 % -28 % Total 0 % 0 % The following table summarizes the significant components of our deferred tax asset at February 28, 2021 and February 29, 2020: 2021 2020 Deferred tax asset Primarily relating to net operating loss carry-forwards, but also reserves for inventory and accounts receivable, stock-based compensation and other $ 38,104,000 $ 40,984,000 Valuation allowance (38,104,000 ) (40,984,000 ) Net deferred tax asset $ - $ - We recorded an allowance of 100% for deferred tax assets due to the uncertainty of its realization. At February 28, 2021, we had operating loss (NOL) carry-forwards of approximately $167,200,000 for federal purposes, of which $164,600,000 may be available to reduce future years’ taxable income through 2037, and $2,600,000 may be available to offset future taxable income indefinitely. There is approximately $42,800,000 for state purposes, which expire through 2039. F- 20 We follow FASB ASC 740 related to uncertain tax positions. Under FASB ASC 740, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. At February 28, 2021 and February 29, 2020, we have no unrecognized tax benefits. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of February 28, 2021, and February 29, 2020, we have no accrued interest and penalties related to uncertain tax positions. We are subject to taxation in the U.S. and California. Our tax years for 2014 and forward are subject to examination by our tax authorities. We are not currently under examination by any tax authority. The Company has failed to file its California tax returns for the years ended February 28, 2015 thru February 28, 2021 due to its inability to pay the minimum annual franchise tax payment of $800. The tax provision for Fiscal 2020 includes an accrual for the California minimum franchise tax amounts for five-years from 2016 to 2021, or $4,800. NOTE 11 – EMPLOYEE BENEFIT PLANS The Company had previously sponsored two employee benefit plans: The Employee Stock Ownership Plan (the “ESOP”) and a 401(k) plan. Neither of these plans is active nor being funded. NOTE 12 – NON-RECURRING TRANSACTIONS During Fiscal 2021, the Company recorded non-recurring transactions due primarily to the cancellation of liabilities following the expiration of the statute of limitations on such debt. Notes payable and accrued interest of approximately $877,000 were cancelled on debt previously reported as owed to McCleod ($692,000), Veen ($134,000) and Sook ($51,000) and recorded as a gain on extinguishment of debt in the Statement of Operations for Fiscal 2021. Other income for Fiscal 2021 of approximately $2,720,000 consists primarily of the cancellation of accrued payroll of $2,345,000 and accounts payable of $339,000 due to the expiration of the statute of limitations on such debt. Included in other income was a legal settlement of $46,000. NOTE 13 – SUBSEQUENT EVENTS During April 2021, the Company received notification that the Payroll Protection Plan (“PPP”) loan in the principal amount of $74,405 was forgiven. On April 23, 2020, we obtained this PPP loan 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. F- 21