AURA SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AURA SYSTEMS, INC. CONDENSED BALANCE SHEETS (Unaudited) November 30, 2022 February 28, 2022 (Unaudited) Assets Current assets Cash and cash equivalents $ 233,896 $ 150,217 Inventories 168,759 144,257 Prepaid and other current assets 182,329 255,453 Total current assets 584,984 549,927 Property and equipment, net 481,400 484,526 Operating lease right-of-use asset 864,359 1,000,467 Security deposit 159,595 159,595 Total assets $ 2,090,338 $ 2,194,515 Liabilities and Shareholders’ Deficit Current liabilities Accounts payable (including $ 222,614 and $ 208,507 due to related party, respectively) $ 2,311,081 $ 1,581,724 Accrued expenses (including $ 998,188 and $ 750,322 due to related party, respectively) 1,722,236 1,692,173 Customer advances 453,961 440,331 Notes payable, current portion 87,569 97,958 Convertible notes payable, current portion 1,402,971 1,402,971 Convertible note payable-related party 3,000,000 3,000,000 Notes payable-related parties, current portion 3,711,605 12,996,069 Operating lease liability, current portion 199,910 179,450 Derivative warrant liability 267,936 828,232 Total current liabilities 13,157,269 22,218,908 Notes payable, net of current portion 279,726 327,658 Note payable-related party, net of current portion 8,089,169 - Operating lease liability, net of current portion 714,429 867,484 Total liabilities 22,240,593 23,414,050 Commitments and contingencies - - Shareholders’ deficit Common stock: $ 0.0001 par value; 150,000,000 shares authorized; 92,616,529 and 83,119,104 issued and outstanding at November 30, 2022 and February 28, 2022, respectively. 9,262 8,312 Additional paid-in capital 453,787,210 450,136,522 Accumulated deficit ( 473,946,727 ) ( 471,364,369 ) Total shareholders’ deficit ( 20,150,255 ) ( 21,219,535 ) Total liabilities and shareholders’ deficit $ 2,090,338 $ 2,194,515 The accompanying notes are an integral part of these unaudited financial statements. 1 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three-Months Ended Nine-Months Ended November 30, November 30, 2022 2021 2022 2021 (As Restated) (As Restated) Net revenue $ 53,767 $ 58,373 $ 70,378 $ 84,531 Cost of goods sold 26,023 58,044 55,827 154,272 Gross profit (loss) 27,744 329 14,551 ( 69,741 ) Operating expenses Engineering, research and development (including $ 50,000 , $ 44,000 , $ 118,700 and $ 126,000 to related party, respectively) 228,818 207,813 639,671 370,576 Selling, general & administration 622,323 745,067 2,028,478 1,952,190 Total operating expenses 851,141 952,880 2,668,149 2,322,766 Loss from operations ( 823,397 ) ( 952,551 ) ( 2,653,598 ) ( 2,392,507 ) Other income (expense): Interest expense, net (including $ 199,441 , $ 244,593 , $ 324,189 and $ 739,151 to related parties, respectively) ( 260,309 ) ( 270,920 ) ( 489,056 ) ( 932,863 ) Change in fair value of derivative warrant liability ( 180,488 ) ( 734,106 ) 560,296 ( 594,666 ) Gain on extinguishment of derivative warrant liability - - - 44,620 Gain on debt settlement - - - 4,292 Gain on extinguishment of PPP loans - - - 75,104 Loss before tax provision ( 1,264,194 ) ( 1,957,577 ) ( 2,582,358 ) ( 3,796,020 ) Income tax provision - 129 - - Net loss $ ( 1,264,194 ) $ ( 1,957,448 ) $ ( 2,582,358 ) $ ( 3,796,020 ) Basic and diluted loss per share $ ( 0.01 ) $ ( 0.02 ) $ ( 0.03 ) $ ( 0.05 ) Basic and diluted weighted-average shares outstanding 90,759,938 79,008,726 87,433,942 75,242,317 See accompanying notes to these unaudited financial statements. 2 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT (Unaudited) Three Months and Nine Months Ended November 30, 2022 Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2022 83,119,104 $ 8,312 $ 450,136,522 $ ( 471,364,369 ) $ ( 21,219,535 ) Common shares issued for cash 2,116,665 212 634,548 - 634,760 Fair value of warrants issued for note settlement - - 1,051,473 - 1,051,473 Net loss - - - ( 552,201 ) ( 552,201 ) Balance, May 31, 2022 (unaudited) 85,235,769 8,524 451,822,543 ( 471,916,570 ) ( 20,085,503 ) Common shares issued for cash 3,943,668 394 1,033,246 - 1,033,640 Net loss - - - ( 765,963 ) ( 765,963 ) Balance, August 31, 2022 (unaudited) 89,179,437 $ 8,918 $ 452,855,789 $ ( 472,682,533 ) $ ( 19,817,826 ) Common shares issued for cash 3,437,092 344 931,421 - 931,765 Net loss - - - ( 1,264,194 ) ( 1,264,194 ) Balance, November 30, 2022 (unaudited) 92,616,529 $ 9,262 $ 453,787,210 $ ( 473,946,727 ) $ ( 20,150,255 ) Three Months and Nine Months Ended November 30, 2021 Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2021 (As Restated) 71,103,009 $ 7,109 $ 446,249,272 $ ( 467,372,506 ) $ ( 21,116,125 ) Common shares issued for cash 1,865,333 186 282,815 - 283,001 Share-based compensation - - 163,218 - 163,218 Net loss - - - ( 905,717 ) ( 905,717 ) Balance, May 31, 2021 (unaudited) (As Restated) 72,968,342 7,295 446,695,305 ( 468,278,223 ) ( 21,575,623 ) Common shares issued for cash 2,786,667 279 704,595 - 704,874 Common shares issued for settlement of debt-related parties 1,571,429 157 549,843 - 550,000 Share-based compensation 163,218 - 163,218 Net loss - - - ( 932,855 ) ( 932,855 ) Balance, August 31, 2021 (unaudited) (As Restated) 77,326,438 $ 7,731 $ 448,112,961 $ ( 469,211,078 ) $ ( 21,090,386 ) Common shares issued for cash 2, 963,330 296 879,584 - 879,880 Common shares issued for services 245,001 25 73,475 - 73,500 Share-based compensation - - 163,218 - 163,218 Net loss - - - ( 1,957,448 ) ( 1,957,448 ) Balance, November 30, 2021 (unaudited) (As Restated) 80,534,769 $ 8,052 $ 449,229,238 $ ( 471,168,526 ) $ ( 21,931,236 ) See accompanying notes to these unaudited financial statements. 3 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended November 30, 2022 November 30, 2021 (As Restated) Net loss $ ( 2,582,358 ) $ ( 3,796,020 ) Adjustments to reconcile net loss to cash used in operating activities Depreciation and amortization 57,320 6,224 Inventory write-down 4,000 - Gain on extinguishment of PPP loan - ( 75,104 ) Gain on extinguishment of derivative warrant liability, net - ( 44,620 ) Change in fair value of derivative warrant liability ( 560,296 ) 594,666 Gain on debt settlement - ( 4,292 ) Common shares issued for services - 73,500 Share-based compensation - 489,654 Changes in operating assets and liabilities: Inventory ( 28,502 ) ( 97,223 ) Prepaid and other current assets 73,124 ( 84,380 ) Operating lease right-of-use asset 136,109 123,910 Accounts payable and accrued expenses 582,547 117,113 Accrued interest on notes payable 183,052 799,836 Customer advances 13,630 - Operating lease liability ( 132,595 ) ( 70,046 ) Cash used in operating activities ( 2,253,971 ) ( 1,966,782 ) Cash used in investing activities: Purchase of property and equipment ( 54,194 ) ( 116,844 ) Cash flows from financing activities: Proceeds from issuance of common stock 2,600,165 1,867,755 Principal payments of notes payable ( 208,321 ) ( 95,572 ) Proceeds from government assistance loans – PPP loan - 91,235 Cash provided by financing activities 2,391,844 1,863,418 Net decrease in cash and cash equivalents 83,679 ( 220,208 ) Cash and cash equivalents-beginning of period 150,217 390,702 Cash and cash equivalents-end of period $ 233,896 $ 170,494 Cash paid for: Interest $ 128,178 $ - Income taxes $ - $ - Supplemental schedule of non-cash transactions: Fair value of warrants issued for note settlement $ 1,051,473 $ - Accounts payable converted into shares of common stock $ - $ 450,000 Accrued expenses converted into shares of common stock $ - $ 100,000 Acquisition of property and equipment with notes payable $ - $ 209,666 See accompanying notes to these unaudited financial statements. 4 AURA SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Three and Nine months ended November 30, 2022 and 2021 (Unaudited) 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 and nine months ended November 30, 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 three-month and nine-month periods ended November 30, 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 nine-month period ended November 30, 2022, the Company reported a net loss of approximately $ 2,582,000 , and used cash in operating activities of approximately $ 2,254,000 , and at November 30, 2022, had a stockholders’ deficit of approximately $ 20.2 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February 28, 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 altogether. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability. During the next twelve months the Company intends to continue to attempt to increase the Company’s operations and focus on 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 fourth fiscal quarter of Fiscal 2023 and in the upcoming fiscal year. 5 COVID-19 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 operates. 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 or directly to end users (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. 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: ● 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. 6 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 November 30, 2022 and February 28, 2022: November 30, 2022 Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ 267,936 $ - $ 267,936 Total liabilities $ - $ 267,936 $ - $ 267,936 February 28, 2022 Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ 828,232 $ - $ 828,232 Total liabilities $ - $ 828,232 $ - $ 828,232 The Company estimated the fair value of the derivative warrant liability using a 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 nine-months ended November 30, 2022 and November 30, 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: November 30, 2022 November 30, 2021 Warrants 8,132,498 4,900,834 Options 5,059,769 5,159,769 Convertible notes 3,868,414 3,671,336 Total 17,060,681 13,731,939 7 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. Early adoption is permitted and effective March 1, 2022, the Company early adopted ASU 2020-06 using the modified retrospective approach. The 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. The Company adopted ASU 2021-04 effective March 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures. Recently Issued Accounting Pronouncements Not Yet Adopted 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 March 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 of operations, cash flows and related disclosures. 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. 8 NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED NOVEMBER 30, 2021 The unaudited condensed financial statements for the nine months ended November 30, 2021 and certain balances as of February 28, 2021 have been restated. During the fourth quarter of Fiscal 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. ● that the Company had issued common stock in exchange for a settlement of debt to a former employee during Fiscal 2018 and had erroneously omitted accounting for it until Fiscal 2021. ● that the Company had granted stock options during Fiscal 2021 which were erroneously unrecorded. 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, August 31, 2021 and November 30, 2021 and the net decreases in fair value of $ 56,640 at May 31, 2021 and $ 127,420 at August 31, 2021 were recorded as reductions to the liability. The increase in fair value of $ 734,106 was recorded as an increase to the liability. The associated other expense of $ 734,106 for the three-month period ended November 30, 2021 was recorded to the statement of operations as a loss for the increase in the fair value of the derivative warrant liability. The associated aggregate other expense of $ 550,046 for the nine-month period ended November 30, 2021 was recorded to the statement of operations and consisted of a loss for the increase in fair value of $ 594,666 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 Deficit. 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. (C) In 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 Deficit. Additionally, in order to correct the timing of the expense recognition as it continued into Fiscal 2022, the Company recorded an additional $ 68,862 and $ 153,388 of share-based compensation expense to the statement of operations for the three-month and the nine-month periods ended November 30, 2021, respectively, as well as recording the associated increases to Additional paid-in capital in their respective periods. (D) In 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 and nine-month periods ended November 30, 2021, payroll compensation expense of $ 91,356 and $ 276,606 , respectively, was reversed out of the statement of operations, and the associated liability in Accrued expenses was reduced by the same amount. 9 Reclassifications (1) In Fiscal 2021 and the nine-months ended November 30, 2021, the Company presented interest accrued of $ 8,064 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 $ 8,064 recorded in Fiscal 2021 and the first nine months of Fiscal 2022 from notes payable to accrued interest. The following table presents the effect of the restatements and reclassifications on the Company’s previously issued balance sheet: As of November 30, 2021 As Previously Reported Adjustments Reclassifications As Restated Notes Accrued expenses (including accrued interest) $ 1,728,775 $ ( 276,606 ) $ 8,064 $ 1,460,233 [D] [1] Note payable 385,353 - ( 8,064 ) 377,289 [1] Derivative warrant liability - 1,916,420 - 1,916,420 [A] Common stock 8,054 - ( 2 ) 8,052 Additional paid-in capital 448,953,216 ( 136,004 ) 2 449,229,238 [B] 258,636 - [C] 153,388 [C] Accumulated deficit $ ( 469,252,691 ) $ ( 1,916,420 ) $ - $ ( 471,168,525 ) [A] 136,004 - [B] ( 258,636 ) - [C] ( 153,388 ) - [C] 276,606 - [D] The following table presents the effect of the restatements and reclassifications on the Company’s previously issued statements of operations: For the three months ended November 30, 2021 As Previously Reported Adjustments Reclassifications As Restated Notes Selling, general and administrative expense $ 767,561 $ 68,862 $ - $ 745,067 [C] ( 91,356 ) - [D] Gain on extinguishment of derivative warrant liability - - - - [A] Change in fair value of derivative warrant liability - 734,106 - 734,106 [A] Net loss $ ( 1,245,836 ) $ ( 711,612 ) $ - $ ( 1,957,448 ) Net loss per share, basic and diluted $ ( 0.02 ) $ ( 0.02 ) For the nine months ended November 30, 2021 As Previously Reported Adjustments Reclassifications As Restated Notes Selling, general and administrative expense $ 2,075,408 $ 153,388 $ - $ 1,952,190 [C] ( 276,606 ) - [D] Gain on extinguishment of derivative warrant liability - 44,620 - 44,620 [A] Change in fair value of derivative warrant liability - 594,666 - 594,666 [A] Net loss $ ( 3,369,192 ) $ ( 426,828 ) $ - $ ( 3,796,020 ) Net loss per share, basic and diluted $ ( 0.04 ) $ ( 0.05 ) 10 The following table presents the effect of the restatements on the Company’s previously issued statement of shareholder deficit: Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2021, as previously reported 71,107,442 $ 7,111 $ 446,126,638 $ ( 465,883,499 ) $ ( 19,749,750 ) Prior period revisions - ( 2 ) 122,634 ( 1,489,007 ) ( 1,366,375 ) Corrections of errors ( 4,433 ) - Balance, February 28, 2021, as restated 71,103,009 $ 7,109 $ 446,249,272 $ ( 467,372,506 ) $ ( 21,116,125 ) Balance, November 30, 2021, as previously reported 80,539,202 $ 8,054 $ 448,953,216 $ ( 469,252,691 ) $ ( 20,291,421 ) Prior period revisions - ( 2 ) 122,634 ( 1,489,007 ) ( 1,366,375 ) Share-based compensation addition - - 153,388 - 153,388 Net loss addition - - - ( 426,828 ) ( 426,828 ) Corrections of errors ( 4,433 ) - - - - Balance, November 30, 2021, as restated 80,534,769 $ 8,052 $ 449,229,238 $ ( 471,168,526 ) $ ( 21,931,236 ) The following table presents the effect of the restatements and reclassifications on the Company’s previously issued statement of cash flows: For the nine months ended November 30, 2021 As Previously Reported Adjustments Reclassifications As Restated Notes Cash flows from operating activities: Net loss $ ( 3,369,192 ) $ ( 426,828 ) $ - $ ( 3,796,020 ) [A] [C] [D] Gain on extinguishment of derivative warrant liability - ( 44,620 ) - ( 44,620 ) [A] Change in fair value of derivative warrant liability - ( 594,666 ) - ( 594,666 ) [A] Share-based compensation expense 336,266 153,388 - 489,654 [C] Changes in working capital assets and liabilities: Operating lease right-to-use asset - - 123,910 123,910 Accounts payable and accrued expenses 389,322 ( 276,606 ) 4,397 117,113 [D] [1] Accrued interest on notes payable 804,233 - ( 4,397 ) 799,836 [1] Operating lease liability 53,864 - ( 123,910 ) ( 70,046 ) 11 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: November 30, 2022 February 28, 2022 Raw materials $ 151,593 $ 129,836 Work-in-process 6,644 14,421 Finished goods 10,522 - Total inventory $ 168,759 $ 144,257 NOTE 4 – PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets consisted of the following: November 30, 2022 February 28, 2022 Prepaid annual software licenses $ 128,821 $ 94,907 Prepaid commissions - 73,390 Vendor advances 8,600 35,500 Prepaid insurance 13,993 - Other prepaid expenses 30,915 51,656 Total other current assets $ 182,329 $ 255,453 NOTE 5– PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: November 30, 2022 February 28, 2022 Leasehold improvements $ 56,530 $ 56,530 Machinery and equipment 301,360 276,762 Vehicle 96,334 96,334 Computer equipment 79,667 59,816 Furniture and fixtures 20,338 10,592 554,229 500,034 Less accumulated depreciation and amortization ( 72,829 ) ( 15,508 ) $ 481,400 $ 484,526 Depreciation expense for the nine months ended November 30, 2022 and 2021 was $ 57,320 and $ 6,224 , respectively. 12 NOTE 6 – CONVERTIBLE NOTES PAYABLE Convertible notes payable consisted of the following: November 30, 2022 February 28, 2022 Convertible notes payable $ 1,402,971 $ 1,402,971 Non-current - - Current $ 1,402,971 $ 1,402,971 In Fiscal 2013 and 2014, the Company issued six convertible notes payable in the aggregate of $ 4,000,000 . As of November 30, 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 November 30, 2022 and February 28, 2022, accrued interest on convertible notes payable totaled $ 336,884 and $ 284,063 , respectively, and is included in accrued expenses (See Note 10). NOTE 7 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY Convertible note payable – related party consisted of the following: November 30, 2022 February 28, 2022 Convertible note payable $ 3,000,000 $ 3,000,000 Non-current - - Current $ 3,000,000 $ 3,000,000 On January 24, 2017, the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company. As part of the agreement, the Company issued a $ 3,000,000 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 November 30, 2022 and February 28, 2022, accrued interest on convertible notes payable-related party totaled $ 675,925 and $ 562,911 , respectively, and is included in accrued expenses (See Note 10). 13 NOTE 8 – NOTES PAYABLE Notes payable consisted of the following: November 30, 2022 February 28, 2022 Secured notes payable (a) Note payable-EID loan $ 150,000 $ 150,000 (b) Notes payable-vehicle and equipment 207,295 265,616 Unsecured notes payable (c) Note payable-other 10,000 10,000 Total $ 367,295 $ 425,616 Non-current 279,726 327,658 Current 87,569 97,958 (a) Economic Injury Disaster (EID) 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 (“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 per annum. As of November 30, 2022 and February 28, 2022, the balance of the notes was $207,295 and $265,616, respectively. (c) Other notes payable Demand promissory notes as of November 30, 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. 14 NOTE 9 – NOTES PAYABLE-RELATED PARTIES Notes payable-related parties consisted of the following: November 30, 2022 February 28, 2022 Unsecured notes payable (a) Notes payable-Koppel (prior to restructuring) $ - $ 5,607,323 Accrued interest-Koppel (prior to restructuring) - 6,533,318 Note payable-Kopple (restructured) 10,939,169 - Subtotal-Koppel 10,939,169 12,140,641 (b) Note payable- Gagerman 82,000 82,000 Accrued interest-Gagerman 79,605 73,428 Subtotal-Gagerman 161,605 155,428 (c) Note payable-Jiangsu Shengfeng 700,000 700,000 Total $ 11,800,774 $ 12,996,069 Non-current 8,089,169 - Current $ 3,711,605 $ 12,996,069 (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 January 2023 (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 Black-Scholes modeling 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. Interest on the settled Note begins accruing in February 2023. Pursuant to the settlement agreement, the Company is also subject to certain affirmative and negative covenants such as periodic submission of financial statements to Koppel and restrictions on future financing and investing activities, as defined in the agreement. Management believes such covenants are normal for this type of transaction and that management believes meeting these covenants will not affect operations. 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. 15 (b) Note payable-Gagerman Melvin Gagerman, the Company’s former CEO and CFO whose employment was permanently terminated in July 2019, claims that in April 2014 the Company issued an unsecured demand promissory note to him in the amount of $ 82,000 that bears interest at a rate of 10 % per annum. Gagerman claims that this note has not been repaid to-date and is now owed. In June 2022, Gagerman brought suit against the Company for repayment of this alleged note. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when Gagerman was the Company’s CEO, CFO, Corporate Secretary and Chairman of the Company’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman. Additionally, the Company has filed a cross-complaint against Gagerman for, among things, conversion, violation of California Business & Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against the Company (see Note 15). Based on Gagerman’s claims, as of November 30, 2022 and February 28, 2022, the outstanding balance of the Gagerman notes payable and accrued interest would amount to $ 161,605 and $ 155,428 , respectively. As of November 30, 2022 and February 28, 2022, despite the fact that the Company disputes Gagerman’s claims, under ASC 450 - Contingencies , the Company has recorded the claimed notes payable and accrued interest amounts of $ 161,605 and $ 155,428 , respectively, in the accompanying balance sheets. (c) Jiangsu Shengfeng Note 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 15, 2021. As of November 30, 2022 and February 28, 2022, the principal due was $ 700,000 . NOTE 10 – ACCRUED EXPENSES Accrued expenses consisted of the following: November 30, 2022 February 28, 2022 Accrued interest-convertible notes payable $ 336,884 $ 284,063 Accrued interest-convertible notes payable related party 675,925 562,911 Accrued interest-notes payable and other 170,862 36,541 Subtotal-accrued interest 1,183,671 883,515 Accrued payroll and related expenses 392,814 431,597 Other accrued expenses 145,751 377,061 $ 1,722,236 $ 1,692,173 As of November 30, 2022 and February 28, 2022, accrued expenses includes accrued interest, accrued payroll and accrued consulting fees in the aggregate of $ 998,188 and $ 750,322 , respectively, which are due to officers and shareholders and are considered related party transactions. 16 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 November 30, 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. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives. The components of lease expense and supplemental cash flow information related to leases for the period are as follows: Nine-Months ended November 30, 2022 Nine-Months ended November 30, 2021 Lease Cost Operating lease cost (included in general and administration in the Company’s statement of operations) $ 209,145 $ 209,145 Other Information Cash paid for amounts included in the measurement of lease liabilities $ 205,632 $ 155,281 Weighted average remaining lease term – operating leases (in years) 3.75 4.75 Average discount rate – operating leases 10.0 % 10.0 % The supplemental balance sheet information related to leases for the period is as follows: At November 30, 2022 Operating leases Long-term right-of-use assets $ 864,359 Short-term operating lease liabilities $ 199,910 Long-term operating lease liabilities 714,429 Total operating lease liabilities $ 914,339 Maturities of the Company’s lease liability is as follows: Operating Lease Years Ending February 28: 2023 (3 months remaining) $ 68,544 2024 282,396 2025 290,868 2026 299,604 2027 154,296 Total lease payments 1,095,708 Less: Imputed interest/present value discount ( 181,369 ) Present value of lease liabilities $ 914,339 17 NOTE 12 – DERIVATIVE WARRANT LIABILITY In prior years under prior management, the Company issued warrants that include a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. The Company determined that the warrants do not satisfy the criteria for classification as equity instruments due to the existence of the cash settlement feature that is not within the sole control of the Company, and the warrants are accounted for as liabilities in accordance with ASC 815. The fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying statements of operations. The warrant liability will ultimately be converted into the Company’s equity when the warrants are exercised, or will be extinguished on the expiration of the outstanding warrants. The following tables summarize the derivative warrant liability: November 30, 2022 February 28, 2022 Stock price $ 0.53 $ 0.41 Risk free interest rate 4.3 % 1.0 % Expected volatility 192 % 170 % Expected life in years 0.23 0.98 Expected dividend yield 0 % 0 % Number of warrants 4,800,834 4,800,834 Fair value of derivative warrant liability $ 267,936 $ 828,232 Number of Derivative Warrants Outstanding Fair Value of Derivative Warrant Liability February 28, 2022 4,800,834 $ 828,232 Change in fair value of derivative warrant liability - ( 560,296 ) Gain on extinguishment on expiration of warrants - - November 30, 2022 4,800,834 $ 267,936 18 NOTE 13 – STOCKHOLDERS’ DEFICIT Common Stock During the nine-months ended November 30, 2022, the Company issued 9,497,425 shares of common stock for net proceeds of approximately $ 2,600,000 in cash. During the nine-months ended November 30, 2021, the Company issued 7,615,330 shares of common stock for net proceeds of approximately $ 1,868,000 . Additionally, during the nine-months ended November 30, 2021, the Company issued 1,571,429 shares of common stock in settlement of accounts payable and accrued expenses to related parties in the aggregate amount of $ 550,000 and issued 245,001 shares of common stock in exchange for services valued in the amount of $ 73,500 . Stock Options A summary of the Company’s stock option activity for the nine-months ended November 30, 2022 is as follows: Number of Options Exercise Price Weighted Average Intrinsic Value Outstanding, February 28, 2022 5,059,769 $ 0.53 $ 360,000 Granted - - - Exercised - - - Cancelled - - - Outstanding, November 30, 2022 5,059,769 $ 0.53 $ 690,000 The exercise prices and information related to options under the 2011 Plan outstanding on November 30, 2022 is as follows: Range of Exercise Price Stock Options Outstanding Stock Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Options Outstanding Weighted Average Exercise Price of Options Exercisable $ 0.25 to $ 1.40 5,059,769 5,059,769 2.49 $ 0.53 $ 0.53 The Company granted no stock options under its stock option 2011 Plan for the nine-month period ended November 30, 2022 and the nine-month period ended November 30, 2021. As a result of stock options granted during the Fiscal 2021 year, the Company recognized $ 163,218 and $ 489,654 in share-based compensation expense related to the fair value of vested stock options in the three-month and nine-month periods ended November 30, 2021. Warrants A summary of the Company’s warrant activity for the nine-months ended November 30, 2022 is as follows: Number of Warrants Exercise Price Outstanding, February 28, 2022 4,800,834 $ 1.40 Granted 3,331,664 0.85 Exercised - - Cancelled - - Outstanding, November 30, 2022 8,132,498 $ 1.17 19 There was no intrinsic value as of November 30, 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 November 30, 2022 is as follows: Range of Exercise Price Stock Warrants Outstanding Stock Warrants Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Warrants Outstanding Weighted Average Exercise Price of Warrants Exercisable $ 0.85 to $ 1.40 8,132,498 8,132,498 2.71 $ 1.17 $ 1.17 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 Black-Scholes modeling with the assumptions as set forth in the table below: Warrants Issued During the Nine-Months Ended November 30, 2022 Exercise Price $ 0.85 Share Price $ 0.317 Volatility % 225 % Risk-Free Rate 1.98 % Expected Term (yrs) 7.0 Dividend Rate 0 % NOTE 14 – RELATED PARTY TRANSACTIONS As of November 30, 2022 and February 28, 2022, Bettersea LLC (“Bettersea”) was an 9.9 % and 11.0 %, respectively, shareholder in the Company. For the three-months and nine-months ended November 30, 2022 and November 30, 2021, the Company incurred total fees to Bettersea of $ 50,000 , $ 44,000 , $ 118,700 and $ 126,000 , respectively, for various consulting services. As of November 30, 2022 and February 28, 2022, a total of $ 222,614 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 $ 254,000 toward the settlement amount, including accrued interest. The remaining balance of approximately $ 101,000 , included in accrued expenses, is to be paid no later than March 1, 2023 and accrues interest of 10 % per annum until paid. 20 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 January 2023, 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. In March 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered signed written consents to the Company removing Ronald Buschur, William Anderson, and Si Ryong Yu as directors of the Company’s Board and electing Cipora Lavut, David Mann and Dr. Robert Lempert as directors in their stead. These written consents represented a majority of the then-outstanding shares of the Company’s common stock. Because of the refusal by not only the removed directors but also the Company’s prior management 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 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 stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled. In June 2022, Melvin Gagerman, the Company’s former CEO and CFO whose employment with Aura was permanently terminated in July 2019, brought suit against the Company for repayment of an allegedly unsecured demand promissory note in the principal amount of $ 82,000 which he claims was entered into in April 2014 and bears interest at a rate of 10 % per annum. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when he was the Company’s CEO, CFO, Corporate Secretary and Chairman of Aura’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman and has filed a cross-complaint against him for, among things, conversion, violation of California Business& Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against Aura, including without limitation, Gagerman’s actions in opposing the valid 2019 stockholder consent action. NOTE 16 – SUBSEQUENT EVENTS In December 2022, the Company executed a fourth amendment to the March 2022 settlement to extend the balance due on the initial $3,000,000 payment to January 2023 (see Note 9). The Company paid an additional $30,000 to the Kopple Parties for the extension, bringing the aggregate total to $105,000 for cash payments related to the extensions. Additionally, the Company agreed to pay an additional $ 100,000 forbearance fee to be paid with the final interest payment under the settlement, bringing the aggregate total to $ 230,000 in these deferred forbearance fees. Subsequent to November 30, 2022, the Company issued 442,424 shares of common stock in exchange for cash proceeds of approximately $ 146,000 . 21