What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-07-18 compared with 2022-01-18 · 684 added, 568 removed, 104 unchanged (92% of the section changed)

2 unchanged sentences

CONDENSED BALANCE SHEETS

Current assets

Cash and cash equivalents

Other current assets

Prepaid and other current assets

Total current assets

Fixed Assets, net

Right-of-use asset

Liabilities & Shareholders’ Deficit

Property and equipment, net

Operating lease right-of-use asset

Security deposit

Liabilities and Shareholders’ Deficit

Current liabilities

Accounts payable

Accrued expenses

Accounts payable (including $ 208,507 and $ 208,507 due to related party, respectively)

Accrued expenses (including $ 793,053 and $ 750,322 due to related party, respectively)

Customer advances

Operating lease liability

Notes payable, current portion

Notes payable and accrued interest-related party

Convertible notes payable, current portion

Convertible note payable-related party, current portion

Notes payable-related parties, current portion

Operating lease liability, current portion

Derivative warrant liability

Total current liabilities

Convertible note payable-related party

Notes payable, non-current

Convertible notes payable

Operating lease liability, non-current

Notes payable

Note payable-related party

Operating lease liability

Total liabilities

Commitments and contingencies (Note 7)

Commitments and contingencies

Shareholders’ deficit

1 unchanged sentence

$ 0.0001 par value;

150,000,000 shares authorized at November 30, 2021 and February 28, 2021;

80,539,202 and 71,107,442 issued and outstanding at November 30, 2021 and February 28, 2021, respectively.

150,000,000 shares authorized;

85,235,769 and 83,119,104 issued and outstanding at May 31, 2022 and February 28, 2022, respectively.

Additional paid-in capital

6 unchanged sentences

Total liabilities and shareholders’ deficit

See accompanying notes to these unaudited

financial statements.

The accompanying notes are an integral part of

these unaudited financial statements.

AURA SYSTEMS, INC.

1 unchanged sentence

Three Months Ended

Nine-Months Ended

(As Restated)

Cost of goods sold

1 unchanged sentence

Operating expenses:

Engineering, research & development

Selling, general & administration

Engineering, research and development (including $ 34,700 and $ 36,000 to related party, respectively)

Selling, general and administration

Total operating expenses

1 unchanged sentence

( 1,024,326 )

( 1,189,411 )

Other income (expense):

1 unchanged sentence

Gain on debt settlement

Gain on extinguishment of debt

Forgiveness of PPP loan

Gain on extinguishment of PPP loans

Gain on extinguishment of derivative warrant liability, net

Change in fair value of derivative warrant liability

$ ( 552,201 )

Gain (loss) before tax provision

$ ( 905,717 )

Basic and diluted loss per share

Basic and diluted weighted-average shares outstanding

See accompanying notes to these unaudited financial

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’

Shareholders’

Balance, February 28, 2021 (As Restated)

$ 446,249,272

Income tax provision

Net income (loss)

$ ( 467,372,506 )

$ ( 21,116,125 )

Common shares issued for cash

Share-based compensation

Balance, May 31, 2021 (unaudited) (As Restated)

$ 446,695,305

Basic income (loss) per share

Basic weighted-average shares outstanding

Diluted income (loss) per share

Diluted weighted-average shares outstanding

See accompanying notes to these

unaudited financial statements.

$ ( 468,278,223 )

$ ( 21,575,623 )

Balance, February 28, 2022

$ 450,136,522

$ ( 471,364,369 )

$ ( 21,219,535 )

Common shares issued for cash

Fair value of warrants issued for note settlement

Balance, May 31, 2022 (unaudited)

$ 451,822,543

$ ( 471,916,570 )

$ ( 20,085,503 )

See accompanying notes to these unaudited financial

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

Nine-Months Ended

Net income (loss)

Three Months Ended

(As Restated)

$ ( 552,201 )

Adjustments to reconcile net loss to cash used in operating activities

Gain on write-off of liabilities

$ ( 905,717 )

Forgiveness of PPP loan

Stock-based compensation expense

Changes in working capital assets and liabilities:

Other current assets

Adjustments to reconcile net loss to cash used in operating activities

Depreciation and amortization

Gain on extinguishment of PPP loan

Gain on extinguishment of derivative warrant liability, net

Change in fair value of derivative warrant liability

Gain on debt settlement

Share-based compensation

Changes in operating assets and liabilities:

Prepaid and other current assets

Operating lease right-of-use asset

Accounts payable and accrued expenses

2 unchanged sentences

Cash used in operating activities

( 1,966,781 )

( 1,246,498 )

Cash used in investing activities:

Purchase of property, plant and equipment

Purchase of property and equipment

Cash flows from financing activities:

Issuance of common stock

Proceeds from issuance of common stock

Principal payments of notes payable

Proceeds from Federal PPP loans

Proceeds from government assistance loans – PPP loan

Cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Beginning cash

Cash paid in the period for:

Net decrease in cash and cash equivalents

Cash and cash equivalents-beginning of period

Cash and cash equivalents-end of period

Cash paid for:

Supplemental schedule of non-cash transactions:

Accounts payable converted into shares of common stock

Accrued expenses converted into shares of common stock

Notes payable converted into shares of common stock

Acquire fixed asset with note payable

See accompanying notes to these

unaudited financial statements.

Fair value of warrants issued for note settlement

See accompanying notes to these unaudited financial

AURA SYSTEMS, INC.

CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

Shareholders’

Balance, February 29, 2020

$ 443,417,452

$ ( 466,726,027 )

$ ( 23,302,937 )

Shares issued for cash

Stock-based compensation expense

Balance, May 31, 2020

$ 443,729,916

$ ( 467,332,029 )

$ ( 23,596,339 )

Shares issued for cash

Shares issued for settlement

Stock-based compensation expense

Balance, August 31, 2020

( 464,608,637 )

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Aura Systems, Inc., (“Aura”, the “Company”)

a Delaware corporation, is engaged in the development, commercialization, and sale of products, systems, and components, using its patented

and proprietary electromagnetic technology.

Aura develops and sells AuraGen® axial flux mobile induction power systems to the industrial,

commercial, and defense mobile power generation markets.

Basis of Presentation

The accompanying unaudited condensed financial

statements as of and for the three months ended May 31, 2022 and 2021, have been prepared have been prepared in conformity with accounting

principles generally accepted in the United States of America (“U.S.

GAAP”) and the applicable rules and regulations of the

Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.

Certain information and note disclosures

normally included in the financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted pursuant to such rules

and regulations.

In the opinion of management, the unaudited condensed financial statements reflect all adjustments of a normal recurring

nature that are necessary for a fair presentation of the results for the periods presented.

The Condensed Balance Sheet information as

of February 28, 2022, was derived from the Company’s audited Financial Statements as of February 28, 2022, included in the Company’s

Annual Report on Form 10-K filed with the SEC on June 21, 2022.

These financial statements should be read in conjunction with that report.

The results of operations for the period ended May 31, 2022, may not necessarily be indicative of the results that may be expected for

the full fiscal year ending February 28, 2023.

The Company’s fiscal year ends on the last

calendar day of February.

Accordingly, the current fiscal year will end on February 28, 2023 and is referred to as “Fiscal 2023”.

Our prior fiscal years ended February 28, 2022 and 2021, and are referred to as “Fiscal 2022” or “Fiscal 2021”.

Going Concern

The accompanying financial statements have been

prepared assuming that the Company will continue as a going concern.

During the three-month period ended May 31, 2022, the Company reported

a net loss of approximately $ 552,000 and used cash in operating activities of approximately $ 722,000 , respectively.

These factors raise

substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements

In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February

28, 2022, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

The financial

statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

In the event the Company is unable to generate

profits and is unable to obtain financing for its working capital requirements, it may have to curtail its business further or cease business

Substantial additional capital resources will be required to fund continuing expenditures related to our research, development,

manufacturing and business development activities.

The Company’s continuation as a going concern is dependent upon its ability to

generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing,

and ultimately to attain profitability.

During the next twelve months the Company intends

to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen ® /VIPER products

both domestically and internationally and to add to our existing management team.

In addition, the Company plans to source new suppliers

for manufacturing operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors

to support the operation.

The Company anticipates being able to obtain new sources of funding to support these actions in the upcoming

As of the date of this filing, there continues

to be widespread concern regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which the Company

Although the impacts of the COVID-19 pandemic have not been material to date, a prolonged downturn in economic conditions could

have a material adverse effect on our customers and demand for our services.

The Company has not observed any impairments of its assets

or a significant change in the fair value of its assets due to the COVID-19 pandemic.

At this time, it is not possible for the Company

to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results

of operations, financial condition, or liquidity.

Revenue Recognition

The Company recognizes revenue in accordance with

Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue

from Contracts with Customers.

Our primary source of revenue is the manufacture

and delivery of generator sets used primarily in mobile power applications.

Our principal sales channel is sales to a domestic distributor.

In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at time of product delivery to the

domestic distributor (i.e.

point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of

our performance obligations to the customer.

Use of Estimates

The preparation of financial statements in conformity

with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date

of the financial statements, and the reported amounts of revenue and expenses during the reported periods.

Significant estimates include

assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions

used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities.

Amounts could materially change in the future.

Actual results could differ from those estimates.

Share-Based Compensation

The Company periodically

issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services

and for financing costs.

Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award,

and is recognized as expense over the requisite service period.

Recognition of compensation expense for non-employees is in the same period

and manner as if the Company had paid cash for services.

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:

1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets;

2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly

or indirectly;

3 – Unobservable inputs.

The recorded amounts of inventory, other current

assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature.

The carrying amounts of notes

payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation

to current market conditions.

The following table sets

forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of May 31, 2022 and February

Derivative warrant liability

Total liabilities

February 28, 2022

Derivative warrant liability

Total liabilities

The Company estimated the fair value of the derivative

warrant liability using the Binomial Model.

Loss per share

The Company’s loss per share amounts have

been computed based on the weighted-average number of shares of common stock outstanding for the period.

Basic earnings (loss) per share

is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock

outstanding during the period.

Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders

by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional shares of common

stock were dilutive.

Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method for convertible

debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities were exercised.

For the three-months ended May 31, 2022 and May

31, 2021, the calculations of basic and diluted loss per share are the same because potentially dilutive securities would have had an

anti-dilutive effect.

The potentially dilutive securities consisted of the following:

Convertible notes

Reclassifications

Certain prior period amounts have been reclassified

to conform to the current year presentation.

These reclassifications have no effect on the previously reported financial position, results

of operations and cash flows (see Note 2).

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards

Board (“FASB”) issued Accounting Standards Update (“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 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial

conversion models.

As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost

as long as no other features require bifurcation and recognition as derivatives.

For contracts in an entity’s own equity, the type

of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the

current guidance due to a failure to meet the settlement conditions of the derivative scope exception.

This update simplifies the related

settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider

whether collateral is required to be posted, and (iii) assess shareholder rights.

ASU 2020-06 is effective March 1, 2024, for the Company

and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method.

adoption is permitted and effective March 1, 2022, the Company early adopted ASU 2020-06 using the modified retrospective approach.

adoption of ASU 2020-06 did not have any impact on the Company’s financial statement presentation or disclosures.

In May 2021, the FASB issued ASU 2021-04, Earnings

Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic

718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):

Issuer’s Accounting for Certain

Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”).

ASU 2021-04 provides

guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified

written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument

for a new instrument.

An issuer should measure the effect of a modification or exchange as the difference between the fair value of the

modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition

model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt

origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification).

ASU 2021-04 is effective

for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

An entity should

apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date.

adopted ASU 2021-04 effective March 1, 2022.

The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement

presentation or disclosures.

Recently Issued Accounting Pronouncements Not

In June 2016, FASB issued ASU No.

2016-13, Credit

Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 requires entities to use a

forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments,

including trade receivables.

This may result in the earlier recognition of allowances for losses.

ASU 2016-13 is effective for the Company

beginning January 1, 2023, and early adoption is permitted.

The Company does not believe the potential impact of the new guidance and

related codification improvements will be material to its financial position, results

Other recent accounting pronouncements issued

by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and

Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s

present or future financial statements.

NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED

UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MAY 31, 2021

The unaudited condensed financial statements for

the three months ended May 31, 2021 and certain balances as of February 28, 2021 have been restated.

On May 31, 2022, our management determined

the following:

● that the Company erroneously

did not recognize a derivative warrant liability associated with warrants issued by prior management in prior years that included a fundamental

transaction provision that could give rise to an obligation to pay cash to the warrant holder.

As such, the Company determined that the

warrants fundamental transaction provision created a derivative liability pursuant to current accounting guidelines.

the Company had issued common stock in exchange for a settlement of debt to a former employee during fiscal 2018 and had erroneously

not accounted for it until Fiscal 2021.

the Company had granted stock options during Fiscal 2021 which were erroneously not recorded.

The effects on the previously issued financial statements are as follows:

(A) In Fiscal 2022, the Company

recognized that previously issued warrants by prior management had characteristics of derivative liabilities.

The Company determined

the fair value of the warrant derivative liability, including its initial recording and revaluation for changes in fair value and expiring

warrants, as of February 28, 2021, was $ 1,366,375 , and recorded the liability and its associated expense as a prior period adjustment

to Accumulated Deficit in the amount of $ 1,366,375 .

Additionally, the warrant derivative liability was revalued at May 31, 2021 and the

net decrease in fair value of $ 127,420 was recorded as a reduction to the liability.

The associated other income of $ 127,420 was recorded

to the statement of operations and consisted of a gain for the decrease in fair value of $ 82,800 and a gain on expiring warrants of $ 44,620 .

(B) In Fiscal 2022, the Company

recognized that during Fiscal 2021, the Company recorded the effect of issuing common stock for debt to a former employee when the issuance

had occurred in Fiscal 2018.

To correct the timing of recording the transaction, the Company calculated the gain on the extinguishment

of debt as of the February 28, 2018, issuance date in the amount of $ 256,044 and recorded the gain as a prior period adjustment to Accumulated

Additionally, the interest expense associated with the debt of $ 13,460 and gain on its extinguishment of $ 133,500 recorded in

Fiscal 2021 were reversed out of the statement of operations.

The resulting net impact of these prior period adjustments for the Fiscal

2022 beginning balance is a decrease to Additional paid-in capital of $ 136,004 and a corresponding $ 136,004 decrease in Accumulated deficit.

Fiscal 2022, the Company recognized that certain stock options granted during Fiscal 2021 should have been fully or partially vested

in the year of grant but had no share-based compensation expense recorded in Fiscal 2021.

To correct the timing of the expense recognition,

the Company computed the amount of expense associated with the vesting as of February 28, 2021 and recorded an additional $ 258,636 of

share-based compensation expense to the statement of operations.

The resulting net impact of these prior period adjustments for the Fiscal

2022 beginning balance is an increase to Additional paid-in capital of $ 258,636 and a corresponding $ 258,636 increase in Accumulated

Additionally, in order to correct the timing of the expense recognition as it continued into Fiscal 2022, the Company recorded

an additional $ 16,933 of share-based compensation expense to the statement of operations for the three-month period ended May 31, 2022.

Fiscal 2022, the Company recognized that certain stock options granted during Fiscal 2021 were being recorded as payroll compensation

expense in Fiscal 2022.

Restatement item (C) noted above properly recognizes the amount and timing of the share-based compensation expense,

which results in the need to reverse the payroll compensation recorded in Fiscal 2022.

For the three-month period ended May 31, 2021,

payroll compensation expense of $ 92,625 was reversed out of the statement of operations, and the associated liability in Accrued expenses

was reduced by the same amount.

Reclassifications

Fiscal 2021 and the three months ended May 31, 2021 (“Fiscal Q1 2022”), the Company presented interest accrued of $ 5,125

on its Economic Injury Disaster Loan as additional note payable principle.

In the accompanying condensed financial statements,

the Company has reclassified the cumulative accrued interest of $ 5,125 recorded in fiscal 2021 fiscal Q1 2022 from notes payable to accrued

The following table presents the effect of the restatements and reclassifications

on the Company’s previously issued balance sheet:

As of May 31, 2021

As Previously

Reclassifications

Accrued expenses (including accrued interest)

Derivative warrant liability

Additional paid-in capital

Accumulated deficit

$ ( 466,992,328 )

Shares issued for cash

Stock-based compensation expense

Balance, November 30, 2020

$ ( 1,238,955 )

$ ( 468,278,223 )

Balance, February 28, 2021

The following table presents the effect of the

restatements and reclassifications on the Company’s previously issued statement of operations:

As of May 31, 2021

As Previously

Reclassifications

Selling, general and administrative expense

Gain on extinguishment of derivative warrant liability

Change in fair value of derivative warrant liability

$ ( 1,108,829 )

$ ( 905,717 )

Net loss per share, basic and diluted

The following table presents the effect of the

restatements on the Company’s previously issued statement of shareholder deficit:

Shareholders’

Balance, February 28, 2021, as previously reported

$ 446,126,640

Shares issued for cash

Stock-based compensation expense

$ ( 465,883,499 )

$ ( 19,749,750 )

Balance, May 31, 2021

Prior period revisions

( 1,489,007 )

( 1,366,375 )

Corrections of errors

Balance, February 28, 2021, as restated

$ 446,249,272

Shares issued for cash

Shares issued for settlement

Stock-based compensation expense

$ ( 467,372,506 )

$ ( 21,116,125 )

Balance, August 31, 2021

Balance, May 31, 2021, as previously reported

$ 446,555,737

1 unchanged sentence

$ ( 20,429,294 )

Shares issued for cash

Shares issued for service

Stock-based compensation expense

Prior period revisions

( 1,489,007 )

( 1,366,375 )

Balance, November 30, 2021

Share-based compensation addition

Net loss reduction

Corrections of errors

Balance, May 31, 2021, as restated

$ 446,695,305

1 unchanged sentence

$ ( 21,575,623 )

See accompanying notes to these

unaudited financial statements.

AURA SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING

Nature of 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.

Basis of Presentation

In the opinion of management, the unaudited interim

condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the

results for the interim periods presented.

However, the results of operations included in such financial statements may not necessary

be indicative of annual results.

The Company uses the same accounting policies

in preparing quarterly and annual financial statements.

Certain information and footnote disclosures normally included in the annual financial

statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

have been condensed or omitted.

These unaudited condensed financial statements should be read in conjunction with the Company’s audited

financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021

(“Fiscal 2021”) filed with the Securities and Exchange Commission (“SEC”) on June 1, 2021 (“2021 Form 10-K.”).

Our fiscal year ends on the last day of February.

Accordingly, the current fiscal year is ending on February 28, 2022;

we refer to the current fiscal as Fiscal 2022.

The prior fiscal year

is Fiscal 2021.

Significant Accounting Policies

For a detailed discussion about the Company’s

significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in our financial statements

included in Company’s 2021 Form 10-K.

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.

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

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

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.

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.

Company is evaluating the impact of this guidance on its financial statements.

NOTE 2 – GOING CONCERN

The accompanying financial statements have been prepared assuming that

the Company will continue as a going concern.

During the twelve-month period ended February 28, 2021 and the nine-month period ended

November 30, 2021, the Company reported net loss of approximately $ 3.4 million and had negative cash flows from operating activities of

approximately $ 2.0 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.

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 intend to increase

the Company’s operations and focus on the sale of our AuraGen ®® /VIPER products both domestically and internationally

and to add to our existing management team.

In addition, we plan to 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.

The following table presents the effect of the

restatements and reclassifications on the Company’s previously issued statement of cash flows:

As of May 31, 2021

As Previously

Reclassifications

Cash flows from operating activities:

Gain on extinguishment of derivative warrant liability

Change in fair value of derivative warrant liability

Share-based compensation expense

Changes in working capital assets and liabilities:

Operating lease right-to-use asset

Accounts payable and accrued expenses

Accrued interest on notes payable

Operating lease liability

NOTE 3 – INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or

net realizable value, net of write downs, and consisted of the following:

Raw materials

Work-in-process

Finished goods

Total inventory

NOTE 4 – PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets consisted of

the following:

Prepaid annual software licenses

Prepaid commissions

Vendor advances

Other prepaid expenses

Total other current assets

NOTE–5 - PROPERTY AND EQUIPMENT, NET

Property and equipment

consisted of the following:

Leasehold improvements

Machinery and equipment

Computer equipment

Furniture and fixtures

Less accumulated depreciation and amortization

Depreciation expense

for the three months ended May 31, 2022 and 2021 was $ 18,222 and $ 772 , respectively:

NOTE 6 – CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following:

Convertible notes payable

In Fiscal 2013 and 2014,

the Company issued six convertible notes payable in the aggregate of $ 4,000,000 .

As of May 31, 2022 and February 28, 2022, the outstanding

balance of the convertible notes payable amounted to $ 1,402,971 .

The notes are unsecured, bear interest at 5 % per annum and are convertible

to shares of common stock at a conversion price of $ 1.40 per share, as adjusted.

The notes were originally due in 2014 to 2017, and were

all amended in 2018 and the maturity date for all the notes was changed to January 11, 2023.

At May 31, 2022 and February

28, 2022, accrued interest on convertible notes payable totaled $ 301,713 and $ 284,063 , respectively, and is included in accrued expenses

(See Note 10).

NOTE 7 – CONVERTIBLE NOTE PAYABLE-RELATED

Convertible note payable – related party consisted of the following:

Convertible note payable

On January 24, 2017,

the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company.

As part of the agreement,

the Company issued a $ 3,000,000 convertible note.

The convertible note is unsecured, bears interest at 5 % per annum, is due February 2,

2023, and is convertible into shares of common stock at a conversion price of $ 1.40 per share, as adjusted.

At May 31, 2022 and February

28, 2022, accrued interest on convertible notes payable-related party totaled $ 600,719 and $ 562,911 , respectively, and is included in

accrued expenses (See Note 10).

NOTE 8 – NOTES PAYABLE

Non-related party and related party notes payable principal and accrued

interest amounts consisted of the following:

Non-Related Party Promissory Notes (see below)

Demand promissory notes payable with Mr.

Zeitlen as of May 31, 2021 and February 22, 2021, respectively, carrying an interest rate of 10 % (see Demand Promissory Notes below)

Abdou note payable

Payroll Protection Plan loan program

CNC Associates note payable

Small Business Administration-Economic Injury Disaster Loan

Total Demand and Notes Payable

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, amended in 2017 providing for the conversion of 80 % of the principal and accrued interest into common stock at $ 1.386 , carrying interest rate of 5 %.

See Convertible Promissory Notes – Dalrymple August 2012 for further details.

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, amended in 2017 providing for the conversion of 80 % of the principal and accrued interest into common stock at $ 1.386 , carrying interest rate of 5 %.

See Convertible Promissory Notes – Dalrymple October 2012 for further details.

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, amended in 2017 providing for the conversion of 80 % of the principal and accrued interest into common stock at $ 1.386 , carrying interest rate of 5 %.

See Convertible Debt – Kenmont Capital Partners, LPD Investments and Guenther for further details.

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, amended in 2017 providing for the conversion of 80 % of the principal and accrued interest into common stock at $ 1.386 , carrying interest rate of 5 %.

See Convertible Debt – Dresner and Lempert for further details.

Total Convertible Promissory Notes

Accrued Interest - convertible, demand and notes payable

Total Non-Related Party

Notes Payable-Related Party

Convertible Note payable and accrued interest – related party, carrying an interest rate of 5 % - see Note 6, Breslow Note, for further details

Kopple Notes Payable-related party, see Kopple Notes, Note 6:

Mel Gagerman Note Payable, see Gagerman, Note 6:

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.

Total Related Party

Total notes payable and accrued interest

Current portion

$ ( 13,723,625 )

$ ( 13,015,295 )

Long-term portion

Demand Promissory Note and Notes Payable

Demand promissory

note in the amount of $ 10,000 as of November 30 and February 28, 2021 is for Mr.

Zeitlin, a former director of the Company, with an interest

rate of 10 % per annum.

Abdou and Abdou

On June 20, 2013, the Company entered into an

agreement with two individuals, Mr.

Abdou and Mr.

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

The warrants were subsequently exercised.

The Company recorded $ 24,470 as a discount, which has been fully amortized.

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

Abdou and Mr.

In September 2018, the court entered a judgment of approximately $ 235,000 plus legal fees of in favor of

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 $ 30,000 and $ 120,000 , plus accrued interest, were outstanding as of November 30 and February

28, 2021, respectively.

Paycheck Protection Plan Loans

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 were deferred for nine-months, at which time the balance was 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.

On April 1, 2021, the company received notification that the principal amount of $74,400 and accrued

interest of approximately $700 were forgiven under the terms of the loan program and were recorded as forgiveness of debt on the Condensed

Statements of Operations for the nine-months ended November 30, 2021.

3, 2021, the Company received $91,235 pursuant to Paycheck Protection Program Second Draw (“PPP2”) in accordance with

legislation approved in December 2020.

The terms and conditions of this loan is the same as PPP with the principal amount of $91,235 recognized

as part of notes payable, non-current on the balance sheet as of November 30, 2021.

Injury Disaster Loan

Notes payable consisted of the following:

Secured notes payable

(a) Note payable-EID loan

(b) Notes payable-vehicles and equipment

Unsecured notes payable

(a) Economic Injury Disaster

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.

can be used to fund payroll, healthcare benefits, rent and other qualifying expenses, and the loan is not subject to a loan forgiveness

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;

Company pledged the assets of the Company as collateral for the loan;

and there is no prepayment penalty or fees.

As of November

30 and February 28, 2021, the amounts outstanding, including accrued interest of $8,164 and $3,768, respectively, are $158,064 and $153,668,

respectively, and are classified as part of notes payable, non-current on the November 30 and February 28, 2021 balance sheets.

6, 2021, the SBA announced a one-year extension of the deferral period for loans that commenced in 2020 delaying payments of principal

and interest to July 2022.

CNC Associates Note Payable

In October 2021, the Company purchased two CNC machines for approximately

$233,000 and financed the acquisition with a vendor-sourced note payable in the initial principal amount of $209,700 with payment terms

consisting of 36 equal monthly installments of approximately $6,100, a 10% down payment of $23,300, and a 2.9% interest rate per annum.

On November 30, 2021, the outstanding loan balance was approximately $204,000 of which approximately $68,000 was classified as a current

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 $ 1,087,000 (“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 $ 1.40 per share.

There was a remaining principal balance of $ 549,954 as of November 30 and February 28, 2021, respectively.

LPD Investments

On May 7, 2013, the Company transferred 2 note

payables with a total principal value of $ 550,000 together with accrued interest to a senior secured convertible note with a principal

value of $ 558,700 (“New LPD Note”) and warrants to LPD Investments, Ltd.

The New LPD Note had a 1-year maturity date and was

convertible into shares of common stock at the conversion price of $ 0.75 per share.

The warrants were subsequently exercised.

recorded $ 175,793 as a discount, which has been fully amortized.

In 2017, this note was amended providing, among other things, for the

conversion of 80 % of the principal and accrued interest into common stock at $ 1.386 per share conditioned on the occurrence of certain

future events the last of which was completed in February 2018.

There is a remaining principal balance of $ 163,677 as of November 30 and

February 28, 2021, respectively.

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.

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.

recorded $ 235,985 as a discount, which has been fully amortized.

In 2017, this note was amended providing, among other things, for the

conversion of 80 % of the principal and accrued interest into common stock at $ 1.386 per share conditioned on the occurrence of certain

future events the last of which was completed in February 2018.

There is a remaining principal balance of $ 232,194 as of November 30 and

February 28, 2021, respectively.

Dresner and Lempert

On June 20, 2013, the Company entered into an

agreement with two individuals, Mr.

Dresner and Dr.

Lempert, for the sale of $ 200,000 of secured convertible notes payable (the “Notes”)

and warrants.

The Notes had a 1 -year maturity date and were convertible into shares of common stock at the conversion price of $ 0.50 per

The warrants were subsequently exercised.

The Company recorded $ 39,152 as a discount, which has been fully amortized.

this note was amended providing, among other things, for the conversion of 80 % of the principal and accrued interest into common stock

at $ 1.386 per share conditioned on the occurrence of certain future events the last of which was completed in February 2018.

During Fiscal

Lempert converted his share of the amount outstanding into common shares and the principal balance outstanding of $ 59,506 as

of November 30 and February 28, 2021, respectively, is for Dresner exclusively.

Dalrymple – August 2012

On August 10, 2012, the Company entered into

an agreement with an individual, Mr.

Dalrymple, for the sale of $ 1,000,000 of unsecured Convertible Promissory Note.

The Convertible

Promissory Note balance together with all accrued interest thereon was due and payable on August 10, 2017 and the annual interest rate

was 7 % per annum and was due to be repaid 5 years from the closing date.

On January 11, 2018, the note was renegotiated with a final

payment date of January 11, 2023 with an annual interest rate of 5 %.

The Company recorded $ 310,723 as a debt discount, which has

been fully amortized .

In 2017, this note was amended providing, among other things, for the conversion of 80 % of the principal

and accrued interest into common stock at $ 1.386 per share conditioned on the occurrence of certain future events the last of which was

completed in February 2018.

There is a remaining principal balance of $ 264,462 as of November 30 and February 28, 2021, respectively.

Dalrymple – October 2012

On October 2, 2012, the Company entered into

an agreement with an individual, Mr.

Dalrymple, for the sale of $ 500,000 of unsecured Convertible Promissory Note.

This Convertible

Promissory Note balance together with all accrued interest thereon was due and payable on October 2, 2017 and the annual interest rate

was 7 % per annum and was due to be repaid 5 years from the closing date.

On January 11, 2018, the note was renegotiated with a final

payment date of January 11, 2023 with an annual interest rate of 5 %.

The Company recorded $ 137,583 as a debt discount, which has

been fully amortized .

In 2017, this note was amended providing, among other things, for the conversion of 80 % of the principal

and accrued interest into common stock at $ 1.386 per share conditioned on the occurrence of certain future events the last of which was

completed in February 2018.

There is a remaining principal balance of $ 133,178 as of November 30 and February 28, 2021, respectively.

On January 30, 2017, the Company entered into

an agreement entitled First Amendment to Transaction Documents with five of seven secured creditors holding a security interest in all

of the Company’s assets except for its patents and other intellectual properties.

All of the creditors entered into the January

30, 2017 agreement with the exception of Mr.

Abdou and Mr.

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.

Cash Payment is equal to the current outstanding balance of the notes, which was approximately $1,005,000 as of November 30 and February

28, 2021, respectively, plus any outstanding accrued interest.

Loan (“EID Loan”) program.

On July 1, 2020, the Company received a $150,000 loan 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 loan is due July 1, 2050, interest accrues at 3.75% per annum, and is secured by the assets

of the Company .

(b) Notes payable-vehicle and equipment

During Fiscal 2022, the Company purchased two

pieces of equipment and a vehicle for $329,297 as a part of its efforts to expand its operations and research and development capacities.

The Company made down payments aggregating $41,300 with the balance financed by two notes payable aggregating $287,997.

The notes are

secured by the equipment and vehicle purchased.

One note is due in 36 equal monthly payments of approximately $6,100 each, including interest

at 2.9% per annum.

The second note is due in 72 equal monthly payments of approximately $1,500 each, including interest at 10.9% interest

As of May 31, 2022 and February 28, 2022, the balance of the notes was $246,534 and $265,616, respectively.

Demand promissory notes as of May 31, 2022 and

February 28, 2022 are for one individual issued in September 2015 that is payable on demand with an interest rate of 10 % per annum.

NOTE 9 – NOTES PAYABLE-RELATED PARTIES

Notes payable-related parties consisted of the following:

Unsecured notes payable

(a) Notes payable-Koppel (prior to restructuring)

Accrued interest-Koppel (prior to restructuring)

Note payable-Kopple (restructured)

Subtotal-Koppel

(b) Note payable- Gagerman

Accrued interest-Gagerman

Subtotal-Gagerman

(a) Kopple Notes

In fiscals 2013 through 2018, the Company issued

notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate of $ 6,107,323 .

Robert Kopple

is the former Vice-Chairman of the Company’s Board of Directors and is a current shareholder in the Company.

The notes were unsecured,

bear interest at rates ranging from 5 % and 15 % per annum, and were due in fiscal 2014 through fiscal 2018.

Kopple brought suit against

the Company beginning in 2017 for repayment of the notes.

At February 28, 2022, the accrued interest due

to Kopple totaled $ 6,533,318 .

Due to its significance, the balance of accrued interest is added to the note payable principal for presentation

on the accompanying balance sheet as of February 28, 2022.

As of February 28, 2022, the outstanding balance of the Kopple notes payable

and accrued interest amounted to $ 12,140,641 .

On March 14, 2022, the Company reached an agreement with Kopple to

resolve all remaining litigation between them, including all amounts owed to Kopple under the notes.

Under the terms of the settlement,

the Company agreed to issue a new note and pay Kopple an aggregate amount of $ 10,000,000 , including $ 3,000,000 to be paid in June 2022,

which was subsequently extended to July 2022 (see Note 16), and granted Koppel warrants exercisable into 3,331,664 shares of the Company’s

common stock at a price of $ 0.85 per share.

The Company used a Black-Scholes model to compute the fair value of the warrants which is

estimated to be $ 1,051,473 .

The settlement provides for certain increases in the amount payable to Kopple and the right of such parties

to enter judgment against the Company if the Company remains in uncured default in its payment obligations.

The Company assessed the settlement with Kopple

under ASC 470 and determined that the guidance under troubled debt restructuring should apply.

Per ASC 470-60, the carrying value of the

restructured note remains the same as before the restructuring, reduced only by the fair value of the warrants issued in connection with

the transaction.

The Company determined that the future undiscounted cash flows of the restructured new Kopple note exceeded the carrying

value, and accordingly, no gain was recognized, and no adjustment was made to the carrying value of the debt, other than the adjustment

for the fair value of the warrants.

Interest expense on the new Kopple note will be computed using a new effective rate that equates the

present value of the future cash payments specified by the new terms with the carrying value of the debt.

(b) Note payable-Gagerman

In April 2014, the Company

issued a note payable to Gagerman, former CEO and CFO of the Company, for $ 82,000 .

The note is an unsecured demand note and bears interest

at a rate of 10 % per annum.

At May 31, 2022 and February 28, 2022, accrued interest on notes payable-Gagerman totaled $ 75,494 and $ 73,428 ,

respectively, and is added to the note principal for presentation on the accompanying balance sheets.

As of May 31, 2022 and February

28, 2022, the outstanding balance of the Gagerman notes payable and accrued interest amounted to $ 157,494 and $ 155,428 , respectively.

On November 20, 2019, the Company reached an agreement

with its joint venture partner Jiangsu Shengfeng regarding the return of $ 700,000 that had been advanced to the Company, and the Company

issued a non-interest-bearing promissory note for $ 700,000 to be paid over a 11-month period beginning March 15, 2020, through February

As of May 31, 2022 and February 28, 2022, the principal due was $ 700,000 .

NOTE 10 – ACCRUED EXPENSES

Accrued expenses and other current liabilities consisted of the following

as of the periods referenced below:

Accrued expenses consisted of the following:

Accrued payroll and related expenses

Accrued interest

Accrued interest-related party

Accrued professional fees

Accrued interest-convertible notes payable

Accrued interest-convertible notes payable related party

Accrued interest-notes payable

Other accrued expenses

Accrued payroll and related expenses consist primarily

of salaries and vacation time accrued in prior years but not paid to employees due to our lack of financial resources (see Notes 6 and

Accrued interest consists of amounts due (see Note 3) to holders of convertible promissory notes of $ 1.4 million and for demand and

other promissory notes of approximately $ 0.5 million at November 30, 2021.

The accrued interest-related party is related to principal

amount due to Mr.

Breslow of $ 3.0 million as of November 30 and February 28, 2021 (see Note 6).

NOTE 5 – SHAREHOLDERS’ EQUITY

During the three and nine-months ended November 30, 2021, the Company

issued approximately 2,963,000 and 7,615,000 shares of common stock for approximately $ 880,000 and $ 1,868,000 in cash, respectively.

in the three-months ended November 30, 2021, were approximately 245,000 shares of common stock in exchange for services provided of $ 73,500 .

Issued in the nine-months ended November 30, 2021, were approximately 1,571,000 shares of common stock in exchange for settlement of liabilities

of $ 550,000 (See Note 6).

The 2011 Director and Executive Officers Stock

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 for up to 15 % of the number of shares of Common Stock of the Company from time to time outstanding, with

a contractual option term of five-years, and a vesting period not less than six months and one day following date of grant.

No stock options

were granted under the 2011 Plan during Fiscal 2022.

The following tables provide additional information

regarding stock options outstanding and exercisable under the 2011 Plan for the nine-months ended November 30, 2021:

Directors and Officers 2011 plan

As of May 31, 2022 and February 28, 2022, accrued expenses includes accrued

interest, accrued payroll and accrued consulting fees in the aggregate of $ 793,053 and $ 750,322 , respectively, which are due to officers

and shareholders and are considered related party transactions.

NOTE 11 – LEASES

Our administrative, and production operations

including warehousing, are housed in an approximately 18,000 square foot facility in Lake Forest, California.

The Lake Forest lease is

for 66-months effective February 2021 through August 31, 2026.

The initial monthly base rental rate was approximately $22,000 per month

and escalates 3% each year to approximately $26,000 per month in 2026.

The lease liability was determined by discounting the future lease

payments under the lease terms using a 10 % per annum discount rate to arrive at the current lease liability.

Operating lease right-of-use (“ROU”)

assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make

lease payments arising from the lease.

Generally, the implicit rate of interest in arrangements is not readily determinable and the Company

utilizes its incremental borrowing rate in determining the present value of lease payments.

The operating lease ROU asset includes any

lease payments made and excludes lease incentives.

The components of lease expense and supplemental cash flow information

related to leases for the period are as follows:

Operating lease cost (included in general and administration in the Company’s statement of operations)

Other Information

Cash paid for amounts included in the measurement of lease liabilities

Weighted average remaining lease term – operating leases (in years)

Average discount rate – operating leases

The supplemental balance sheet information related to leases for the

period is as follows:

Operating leases

Long-term right-of-use assets

Short-term operating lease liabilities

Long-term operating lease liabilities

Total operating lease liabilities

Maturities of the Company’s lease liability is as follows:

Years Ending February 28:

2023 (9 months remaining)

Total lease payments

Imputed interest/present value discount

Present value of lease liabilities

NOTE 12 – DERIVATIVE WARRANT LIABILITY

In prior years the Company issued warrants that

include a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder.

The Company determined

that the warrants do not satisfy the criteria for classification as equity instruments due to the existence of the cash settlement feature

that is not within the sole control of the Company, and the warrants are accounted for as liabilities in accordance with ASC 815.

fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying

statements of operations.

The warrant liability will ultimately be converted into the Company’s equity when the warrants are exercised,

or will be extinguished on the expiration of the outstanding warrants.

The following tables summarize the derivative

warrant liability:

Risk free interest rate

Expected volatility

Expected life in years

Expected dividend yield

Number of warrants

Fair value of derivative warrant liability

Derivative Warrants

Fair Value of Derivative Warrant Liability

February 28, 2022

Change in fair value of derivative warrant liability

Gain on extinguishment on expiration of warrants

NOTE 13 – STOCKHOLDERS’ DEFICIT

During the three-months ended May 31, 2022, the

Company issued 2,116,665 shares of common stock for approximately $ 635,000 in cash.

During the three-months ended May 31, 2021 the Company

issued 1,865,333 shares of common stock for approximately $ 283,000 .

Stock Options

A summary of the Company’s stock option activity for the three-months

ended May 31, 2022 is as follows:

Outstanding, February 28, 2022

Outstanding, November 30, 2021

Outstanding, May 31, 2022

The exercise prices and information related to options under the 2011

Plan outstanding on May 31, 2022 is as follows:

Exercise Price

Stock Options

Contractual Life

Price of Options

$ 0.25 to $ 1.40

Historically, warrants have been issued to investors and others for

services and enticements to invest funds with the Company.

Generally, these warrants fully vest immediately or within a 90-day period

from the date of grant and have an expiration date of five-years from the date of grant.

With grants dated prior to Fiscal 2021, an exercise

price of $ 1.40 has been used with all warrants.

No warrants were issued in the three and nine-months ended November 30, 2021.

Activity in issued and outstanding warrants is as follows for the nine-months

ended November 30, 2021:

Warrants outstanding

Number of Warrants

Exercise Price

Aggregate Intrinsic Value

The Company granted no stock options under its

stock option 2011 Plan for the three-month period ended May 31, 2022 and the three-month period ended May 31, 2021.

As a result of stock

options granted during the Fiscal 2021 year, the Company recognized $ 163,218 in share-based compensation expense related to the fair value

of vested stock options in the three-month period ended May 31, 2021.

A summary of the Company’s warrant activity

for the three-months ended May 31, 2022 is as follows:

Outstanding, February 28, 2022

Outstanding, November 30, 2021

Other information related to the warrants outstanding and exercisable

as of November 30, 2021 follows:

Outstanding, May 31, 2022

There was no intrinsic value as of May 31, 2022,

as the exercise prices of these warrants were greater than the market price of the Company’s stock.

The exercise prices and information

related to the warrants as of May 31, 2022 is as follows:

Exercise Price

Stock Warrants

Contractual Life

Price of Warrants

Price of Warrants Exercisable

NOTE 6 – RELATED PARTIES TRANSACTIONS

Notes payable-related

party, non-current - $ 3,000,000 on the condensed balance sheets as of November 30 and February 28, 2021 consists of the Breslow

Note as described below:

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.

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 nine-months and interest of 5 % per annum thereafter payable monthly in arrears.

The note also provides various default

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 $ 525,925 and $ 412,911 recorded as accrued interest-related

party (see Note 4) as of November 30 and February 28, 2021, respectively.

Notes payable and accrued interest-related

party, current - $ 12,791,152 on the Condensed Balance Sheet as of November 30, 2021 and $ 12,165,015 as of February 28, 2021 consists

of the Kopple Notes, the Gagerman Note and the Jiangsu Shengfeng Note as set forth below:

As of November 30, and

February 28, 2021, the principal amount owed to Robert Kopple (former Vice-Chairman of our Board) of $ 5,607,323 was unchanged.

As of November

30, 2021, accrued interest of $ 6,330,424 was owed to Mr.

Kopple for a total balance of $ 11,937,747 .

As of February 28, 2021, accrued interest

of $ 5,710,464 was owed to Mr.

Kopple for a total balance of $ 11,317,787 .

On August 19, 2013, the Company entered into an

agreement with Robert Kopple, a former member of its Board of Directors for the sale of $2,500,000 of convertible notes payable (the “Kopple

Notes”) 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

The Company recorded $667,118 as a discount, which has been fully amortized.

The Company also entered into a demand note payable

with this individual in the amount of $20,000, which bears interest at a rate of 5% per annum.

Gagerman Note

On November 30, 2021,

the Gagerman note consisted of $82,000 of unsecured note payable plus accrued interest of $71,405 for a total owed to Melvin Gagerman

of $153,405, the Company’s former CEO and CFO, pursuant to a demand note entered into on April 5, 2014.

Interest accrues at 10%

On February 28, 2021, the aggregate amount owed to Gagerman was $ 147,227 .

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 November 30, 2021 and February 28, 2021 was $ 700,000 , respectively, and is classified as part

of notes payable and accrued interest-related party, current on the balance sheets as of November 30, 2021.

Unpaid Wages to Cipora Lavut

Since Fiscal 2021, the Company has accrued unpaid

wages owed to Cipora Lavut, the Company’s current President and Board Chair.

As of November 30 and February 28, 2021, the unpaid

amounts were approximately $ 158,000 and $ 167,000 , respectively, and were included as part of accrued expenses in the Condensed Balance

In July 2021, representing a partial settlement valued at $ 100,000 , 285,714 shares of the Company’s stock were issued to

Cipora Lavut, at a share price of $ 0.35 .

NOTE 7 – COMMITMENTS &

CONTINGENCIES

Prior to Fiscal 2022,

our facilities consisted primarily of approximately 20,000 square feet in Stanton, California and a storage facility in Santa Clarita,

Effective February 28, 2021, we vacated both facilities and consolidated our administrative offices, operations including

warehousing within a 17,700 square foot facility in Lake Forest, California under a 66-month rental agreement covering March 1, 2021 through

November 30, 2026, with an initial monthly rental rate of approximately $22,000 increasing to a monthly rate of approximately $26,000

At February 28, 2021, in accordance with ASC Topic 842, we recognized a right of use (“ROU”) asset and an operating

lease liability of approximately $ 1.2 million, respectively, of which approximately $ 0.1 million was classified as a current liability

and $ 1.1 million as non-current liability at February 28, 2021.

The lease liability is determined by discounting the future lease payments

under the lease terms and applying a 10 % per annum discount rate to determine 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.

At November 30, 2021, the ROU asset

balance was approximately $ 1,044,000 and the total lease liability was approximately $ 1,087,000 , of which approximately $ 173,000 was classified

as a current liability.

Contingencies

We are subject to the legal proceedings and claims

discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary

course of business.

Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates

potential losses on such litigation if the amount of the loss is estimable and the loss is probable.

However, the outcome of legal proceedings

and claims brought against the Company is subject to significant uncertainty.

Although management considers the likelihood of such an

outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s

expectations, the Company’s financial statements for that reporting period could be materially adversely affected.

In 2017, the Company’s

former COO was awarded approximately $ 238,000 in accrued salary and related charges by the California labor board.

In September 2021,

the Company reached a settlement by which the Company agreed to pay approximately $ 330,000 , representing the principal award plus accrued

As of the time of this filing, the Company has paid approximately $ 109,000 toward the settlement amount.

The remaining balance

of approximately $ 228,000 , including accrued interest of $ 7,500 for the period September 1, 2021 to December 31, 2021, is to be paid

no later than September 1, 2022 and accrues interest of 10 % per annum until paid.

The Company is presently engaged in a dispute

with one of its former directors, Robert Kopple, relating to approximately $11.9 million (representing approximately $5.4 million loaned

to the Company over the course of 2013 to 2016;

approximately $170,000 Mr.

Kopple claims to have advanced or paid to third parties on

Aura’s behalf;

and approximately $6.3 million Mr.

Kopple claims to be owed for interest, loan fees and late payment charges) and

approximately 3.33 million warrants which Mr.

Kopple claims to be owed to him and his affiliates by the Company.

In July 2017, Mr.

filed suit against the Company as well as against current director Mr.

Diaz-Verson and former directors Mr.

Breslow and Mr.

Gagerman, our former CEO and a former director, in connection with these allegations.

In 2018, the Court dismissed Mr.

Howsmon and Mr.

Gagerman from the suit.

While the Company believes that it has certain valid defenses in these matters,

the Company is currently in settlement discussions with Mr.

However, to-date, no settlement has been reached in large part

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.

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.

$ 0.85 to $ 1.40

During March 2022, the Company reached a settlement

agreement with its former Director, Robert Kopple who had been in litigation with the Company over unpaid notes payable and accrued interest

since 2017 (See Note 9).

As a part of the settlement, the Company issued to Mr.

Kopple 3,331,664 warrants to purchase the Company’s

common stock (the “Kopple Warrants”) with a term of 7 years and at an exercise price of $ 0.85 per share.

The Company determined

the fair value of the Kopple Warrants was $ 1,051,473 using a Black-Scholes model using the assumptions as set forth in the table below:

Warrants Issued

Three-Months Ended

Exercise Price

Risk-Free Rate

Expected Term (yrs)

Dividend Rate

NOTE 14 – RELATED PARTY TRANSACTIONS

As of May 31, 2022 and February 28, 2022, Bettersea

LLC (“Bettersea”) was an 10.8 % and 11.0 %, respectively, shareholder in the Company.

For the three-months ended May 31, 2022

and May 31, 2021, the Company incurred total fees to Bettersea of $ 34,700 and $ 36,000 , respectively, for various consulting services.

As of May 31, 2022 and February 28, 2022, a total of $ 216,507 and $ 218,507 , respectively, was due to Bettersea and included in accounts

payable and accrued expenses.

NOTE 15 – CONTINGENCIES

The Company is subject to legal proceedings and

claims that have arisen in the ordinary course of business.

Our management evaluates our exposure to these claims and proceedings individually

and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable.

However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty.

Although management

considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for

amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially

adversely affected.

In 2017, the Company’s former COO was awarded

approximately $ 238,000 in accrued salary and related charges by the California labor board.

In August 2021, the Company reached a settlement

by which the Company agreed to pay approximately $ 330,000 , representing the principal award plus accrued interest.

As of the time of this

filing, the Company has paid approximately $ 134,900 toward the settlement amount.

The remaining balance of approximately $ 195,100 ,

included in accrued expenses, is to be paid no later than September 1, 2022 and accrues interest of 10 % per annum until paid.

Since July 2017 the Company has been engaged in

litigation with a former director, Robert Kopple, relating to more than $ 13 million and the current equivalent of the approximately 23

million warrants, exercisable for seven years at a price of $ 0.10 per share, which Mr.

Kopple and his affiliated entities (collectively

the “Kopple Parties”) claimed should have been originally issued to them pursuant to various agreements with the Company entered

to between 2013-2016.

In March 2022, the Company reached a settlement with the Kopple Parties that resolves all claims asserted against

the Company without any admission, concession or finding of any fault, liability or wrongdoing on the part of the Company.

Under the terms

of the settlement, the Company has agreed to pay an aggregate amount of $10 million over a period of seven years;

$3 million of which

was originally to be paid in June 2022 and subsequently extended to July 2022 (see Note 16), after which, interest will accrue on the

unpaid balance at a rate of 6%, compounded annually.

All amounts, including all accrued interest, are to be paid no later than eight years

from the date of the initial payment.

The Kopple Parties have also received seven-year warrants to purchase up to an aggregate of approximately

3.3 million shares of our common stock at a price of $0.85 per share.

The settlement also provides for standard mutual general release

provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the

Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment

obligations under the settlement.

On March 26, 2019, various stockholders of the

17 unchanged sentences

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.

opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup

their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions.

To date, no final

determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled.

NOTE 16 – SUBSEQUENT EVENTS

In March 2022, the Company reached a settlement agreement with Kopple

(see Note 9) to settle certain debt and accrued interest totaling $ 12,140,641 for $10,000,000, including $3,000,000 due on or before June

28, 2022, and the issuance of warrants exercisable into 3,331,664 shares of the Company’s common stock.

In June 2022, the Company

entered into an amendment to the settlement agreement with Kopple (the “Amendment”).

Pursuant to the Amendment, the Company

agreed to pay an extension fee and make a partial payment towards the $3,000,000 installment.

For the additional consideration and the

partial payment, Kopple agreed to extend the due date for the balance of the installment to July 2022.

In June 2022, the Company made

a partial payment of the first installment and as of the date of this report, has not yet paid the full balance of the $3,000,000 due

In July 2022, Melvin Gagerman, our former CEO and CFO, brought suit

against the Company relating to a 2014 unsecured demand note in the original amount of $ 82,000 .

With interest, Gagerman claims to now

be owed a total of approximately $ 150,000 .

The Company disputes that this note is presently enforceable against the Company and that the

demanded amount is owed to Gagerman.

Subsequent to May 31, 2022, the Company issued

1,860,001 shares of common stock in exchange for cash proceeds of approximately $ 558,000 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements