AURA SYSTEMS INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15I and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our President and Chief Financial Officer concluded as of February 28, 2023, that our disclosure controls and procedures were effective.. Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of February 28, 2023. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on these assessments, and on those criteria, the Company’s management concluded that as of February 28, 2023, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles . Remediation of Prior Material Weaknesses We previously identified and disclosed in our Form 10-K filed for the year ended February 28, 2022, as well as, in our subsequent quarterly reports, a deficiency in internal control over financial reporting that existed relating to (1) ineffective controls over transactions for debt issuances to provide for review of all terms in a timely and accurate manner, to ensure reporting is in conformity with generally accepted accounting principles and properly reflected in the financial results; and (2) ineffective controls over transactions for issuances of common stock, options, and warrants to provide for review of all terms in a timely and accurate manner, to ensure reporting is in conformity with generally accepted accounting principles and properly reflected in the financial results. We increased our personnel resources and technical accounting expertise within the accounting function with the hiring of a new Chief Financial Officer in 2022. We intend to hire one or more additional personnel for the finance and accounting function which will provide additional manpower to perform timely and complete reviews of debt and equity transactions consistent with control objectives to further improve our personnel resources and technical accounting expertise. We have prepared written policies and procedures for accounting and financial reporting, establishing a formal process to account for all transactions, including equity and debt transactions. We plan to continue adding additional policies to further enhance reporting controls and procedures. We have upgraded our existing financial system to a more robust enterprise resource planning and financial reporting system. We plan to incorporate the processes specific to the new system into the aforementioned written procedures during the coming fiscal year. As a result of these actions, as described below, the management team has concluded that the material weaknesses identified for the year ended February 28, 2022, have been remediated as of February 28, 2023. 33 Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal year ended February 28, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, other than the improvements noted above. Inherent Limitations on Effectiveness of Controls The Company does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION None Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. None 34 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive Officers In March 2019, stockholders of the Company controlling a majority of the outstanding shares of the Company’s common stock delivered signed written consents to the Company removing Ronald Buschur, William Anderson, and Si Ryong Yu as members of the Company’s Board and electing Ms. Cipora Lavut, Mr. David Mann, and Dr. Robert Lempert as directors of the Company in their stead. As a result of Aura’s refused to recognize the legal effectiveness of the consents, in April 2019, stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholder action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled. In July 2019 the employment of Melvin Gagerman was terminated. (See Item 3, Legal Proceedings for more information.) Also in July 2019, the Board of Directors appointed Ms. Lavut to succeed Mr. Gagerman as President of Aura, appointed Mr. Mann to succeed Mr. Gagerman as Chief Financial Officer of the Company, and appointed Dr. Lempert Secretary of Aura. In February 2022, the Board of Directors appointed Mr. Steven Willett to succeed Mr. Mann as the Company’s Chief Financial Officer. Mr. Mann remains on the Board of Directors. The following table sets forth the names, ages, and offices of all our current directors and executive officers. Our officers are appointed by, and serve at the pleasure of, the Board of Directors. The stockholders at the annual meeting elect our directors to serve until the next meeting. Name Age Title Gary Douglas (1) 75 Director, Member of the Audit Committee Salvador Diaz-Verson, Jr. (1) 64 Director, Chairman of the Audit Committee David Mann (2), (3) 51 Director, Chairman of the Compensation Committee, Member of the Nominating Committee and Member of the Audit Committee, former Chief Financial Officer Cipora Lavut (2) 67 President, Chairman of the Board, Member of Nominating Committee and Member of the Compensation Committee Robert Lempert (2) 79 Secretary, Director, Chairman of the Nominating Committee and Member of the Compensation Committee Steven Willett (4) 65 Chief Financial Officer (1) Mr. Douglas and Mr. Diaz-Verson, Jr. were appointed to the Board of Directors on March 29, 2018 by the written consent of stockholders holding a majority of the Company’s shares. (2) In March 2019, stockholders of the Company controlling a combined total of more than 27.5 million shares delivered signed written consents to the Company electing Ms. Lavut, Mr. Mann and Dr. Lempert to the Company’s Board of Directors. Because of Aura’s refusal to recognize the legal effectiveness of the consents, in April 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware seeking an order confirming the validity of the elections. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent. In July 2019, the Board of Directors appointed Ms. Lavut President and Chairman of the Board, appointed Mr. Mann as Chief Financial Officer and appointed Dr. Lempert as Secretary. (3) On February 14, 2022, Mr. Mann resigned as Chief Financial Officer. (4) On February 14, 2022, Mr. Willett was appointed as Chief Financial Officer. 35 Biographical information with respect to our current directors and executive officer is provided below. Salvador Diaz-Versón, Jr . Mr. Diaz-Versón, Jr. was elected as a director on March 29, 2018. Previously, he served as a director of the Company from 1997-2005 and again from June 2007 until January 2018. Mr. Diaz-Versón, Jr. is the founder, Chairman and President of Diaz-Verson Capital Investments, Inc., and was a registered investment advisor with the Securities and Exchange Commission until 2009. Mr. Diaz-Versón, Jr. served as President and member of the board of directors of American Family Corporation (AFLAC, INC.) from 1976 until 1992. Mr. Diaz-Versón, Jr. served as President and Chief Investment Officer of American Family Life Assurance Company, a subsidiary of AFLAC, Inc. He is currently Chairman of Miramar Securities. Mr. Diaz-Versón, Jr. has received two presidential appointments to the Christopher Columbus Fellowship Foundation; first by President George H.W. Bush in 1992 and subsequently by President Clinton in 2000. Mr. Diaz-Versón, Jr. is a trustee of the Florida State University Foundation and is a national trustee of the Boys and Girls Club of America. He also serves as a trustee of Clark Atlanta University. Mr. Diaz-Versón, Jr. is a graduate of Florida State University and was selected as a director in view of his lengthy experience in managing companies and his knowledge of capital investments. Gary Douglas . Mr. Douglas was elected as a director on March 29, 2018. Mr. Gary Douglas has a BBA in Management degree, with extensive experience in cooperate communication and investment banking. He is a principal in Douglas Strategic Communications LLC, a marketing strategy and communications consultancy, and Ex officio Chairman of Picture Marketing, Inc., a digital marketing company. Mr. Douglas also formally served as Chief Marketing Officer of O’Melveny Consulting LLP, a unit of a global law firm. He also served as President of SP/Hambros America and Division President of Geneva Learning Systems and Group Vice President of Business Development for the five Geneva Companies, both SP/Hambros and The Geneva companies were middle market investment bankers. Mr. Douglas brings to the Board extensive experience in cooperate communication and investment banking. Cipora Lavut . Ms. Lavut was one of Aura’s original founding members. From 1987 to 2002 Ms. Lavut served on Aura’s Board and as a Senior Vice President. During this period, Ms. Lavut was instrumental to Aura receiving large contracts from The Boeing Company, Litton Industries and the United States Air Force. Ms. Lavut also provided critical investor relations and marketing support during this time. Ms. Lavut left Aura in 2002. Ms. Lavut presently provides marketing and business consulting to a variety of retail and service-oriented businesses. She holds a B.A. Business degree from California State University, Northridge. Robert Lempert . Dr. Lempert graduated from the University of Pennsylvania and conducted his residency at the Albert Einstein Medical Center in Philadelphia. Dr. Lempert also served as a Captain in the U.S. Army and previously served on the Company’s Board from November 28, 2017 (when he was appointed by the then-Board to fill one of the two existing vacancies) until January 11, 2018. Dr. Lempert has been a significant investor, shareholder and an active advocate of Aura’s technology for more than 20 years. David Mann . Mr. Mann has been Vice President of Marketing for Mann Marketing, a manufacturing and import company, since 1990 and the Vice President of Sales of that company since 2007. From 2000 until 2007, Mr. Mann also served as Vice President of Operations. Mr. Mann has extensive experience dealing with all aspects of marketing and sales, as well as suppliers in both North America and China. Mr. Mann has been an investor in the Aura since 2007 and previously served as a director of the Company from November 28, 2017 (when he was appointed by the then-Board to fill one of the two existing vacancies) until January 11, 2018. Mr. Mann holds a degree in Business Administration from College St. Laurent, Montreal, Canada. Steven Willett . Mr. Willett was previously employed by Govino, LLC, where he has served as CFO and Vice President of Finance since 2017. From 2014 to 2017, Mr. Willett served as Director of Finance for the Americas of Identiv, Inc., and prior to that, as Director of Finance of aerospace & defense contractor Trex Enterprises Corporation. Mr. Willett holds a Bachelor of Science degree in accounting from the University of Massachusetts and an M.B.A. with a concentration in finance from Bentley University McCallum Graduate School of Business. 36 Delinquent Section 16(a) Reports Our shares of common stock are registered under the Securities Exchange Act of 1934, and therefore our executive officers and directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, no executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports during the years ended February 28, 2023 and February 28, 2022. Code of Ethics We have adopted a Code of Ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other members of the Company’s Finance Department. This Code of Ethics is posted on the Company’s website within a broader Code of Business Conduct and Ethics at www.aurasystems.com in the Investor Relations section. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a waiver from, the provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of such provision of our Code of Ethics by posting such information on our website within four business days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed. Family Relationships None of our directors or executive officers is related to one another. Committees of the Board of Directors The Board maintains the following committees to assist it in discharging its oversight responsibilities. Audit Committee . The Audit Committee does not have a formal charter but is responsible primarily for overseeing the services performed by our independent registered public accounting firm, evaluating our accounting policies and system of internal controls, and reviewing our annual and quarterly reports before filing with the Securities and Exchange Commission. The current members of the Audit Committee are Mr. Salvador Diaz Versón Jr., Mr. David Mann and Mr. Gary Douglas. The Board of Directors has determined that the Audit Committee does not have a member who is an “audit committee financial expert” as such term is defined by the rules and regulations of the Securities and Exchange Commission. While the Board recognizes that the Board members serving on the Audit Committee do not meet the qualifications required of an “audit committee financial expert,” the Board believes that the appointment of a new director to the Board of Directors and to the Audit Committee at this time is not necessary as the level of financial knowledge and experience of the current member of the Audit Committee, including such member’s ability to read and understand fundamental financial statements, is sufficient to adequately discharge the Audit Committee’s responsibilities Compensation Committee . The Compensation Committee does not have a formal charter but reviews and recommends to the full Board the amounts and types of compensation to be paid to the Chairman and Chief Executive Officer; reviews and approves the amounts and types of compensation to be paid to our other executive officers and the non-employee directors; reviews and approves, on behalf of the Board, salary, bonus and equity guidelines for our other employees; and administers our equity plans. The Compensation Committee is currently comprised of Mr. David Mann, Ms. Cipora Lavut and Dr. Robert Lempert. Nominating Committee . The Nominating Committee does not have a formal charter but assists the Board in identifying qualified individuals to become directors, determines the composition of the Board and its committees, monitors the process to assess the Board’s effectiveness and helps develop and implement our corporate governance guidelines. The Nominating Committee also considers nominees proposed by stockholders. The Nominating Committee currently consists of Mr. David Mann, Ms. Cipora Lavut and Dr. Robert Lempert. Director Compensation Although we do not currently compensate our directors in cash for their service as members of our Board of Directors, the Board may, in its discretion, elect to compensate directors for attending Board and Committee meetings and to reimburse directors for out-of-pocket expenses incurred in connection with attending such meetings. Additionally, our directors are eligible to receive stock options under the 2011 Directors and Executive Officer Stock Option Plan. During Fiscal 2023, no stock compensation was awarded to any of the Company’s directors. During Fiscal 2022, no stock compensation was awarded to any of the Company’s directors. 37 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation earned by or paid to the principal executive officer and the named executive officers during the Fiscal years ended February 28, 2023 and February 28, 2022. 2022 Summary Compensation Table Fiscal Salary Option Awards Non-Equity Incentive Compensation All Other Compensation Total Name and Principal Position Year ($) ($) ($) ($) ($) Cipora Lavut 2023 269,315 (2) - - - 269,315 President 2022 144,750 (1) - - 100,000 (3) 244,750 Steven Willett 2023 160,000 - - - 160,000 Chief Financial Officer 2022 6,154 (3) - - - 6,154 (1) For Fiscal 2022, Ms. Lavut has been accruing an annual salary of $250,000 and has been paid $144,750 in cash over the same period, deferring the balance. (2) For Fiscal 2023, Ms. Lavut has been accruing an annual salary of $250,000 and has been paid $269,315 in cash over the same period, as she was paid out a portion of her previously deferred wages balance. (3) Mr. Willett began serving as Chief Financial Officer in February 2022. The amount in the table for Fiscal 2022 represents the pro rata compensation received for the two-week period since his appointment. Outstanding Equity Awards at 2023 Fiscal Year-End The Board of Directors and Executive Officers have been granted various options to acquire the Company’s common stock under the Company’s 2011 Directors and Executive Officers Stock Option Plan (the “2011 Plan”) as detailed in the table below. All of these options were outstanding as of February 28, 2023. Stock Options & Warrants Outstanding Weighted Average Remaining Contractual Life in Years Weighted Average Exercise Price of Options & Warrants Outstanding Cipora Lavut, President and Board Chair 750,000 2.67 $ 0.42 Salvador Diaz-Verson, Jr., Director 1,092,857 1.77 $ 0.61 Gary Douglas, Director 700,000 1.82 $ 0.58 David Mann, Director 400,000 2.32 $ 0.25 Robert Lempert, Director 350,000 2.26 $ 0.25 Option Exercises and Stock Vesting During Fiscal 2023 No stock options were exercised during Fiscal 2023 by the individuals named in the Summary Compensation Table. No stock options were granted nor was there any vesting of previously granted stock options during Fiscal 2023 related to the individuals named in the Summary Compensation Table. Option Exercises and Stock Vesting During Fiscal 2022 No stock options were exercised during Fiscal 2022 by the individuals named in the Summary Compensation Table. Also, during Fiscal 2022, stock options granted in Fiscal 2021 became fully vested. On December 10, 2020, the Board of Directors approved the grant of an aggregate total of 1,000,000 options to acquire the Company’s common stock to four of the five current Board members in varying amounts for services provided outside of standard Board responsibilities under the Company’s 2011 Plan. The options were granted with pro rata monthly vesting over a one-year vesting period, with a five-year expiration term, and with an exercise price of $0.25 per option share. The Company recognized approximately $128,000 of share-based compensation expense for the vesting of the Directors’ common stock options in Fiscal 2022. 38 Employment Contracts, Termination of Employment Contracts and Change in Control Arrangements We do not currently have any employment agreements with any of our Named Executive Officers. Potential Payments to the Named Executive Officers Upon Termination or Change in Control None of the named executive officers is entitled to any payments or benefits upon termination, whether by change in control or otherwise, other than benefits available generally to all employees. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, to the extent of our knowledge, certain information regarding our common stock owned as of June 30, 2020 (i) by each person who is known to be the beneficial owner of more than 5% of our outstanding common stock, (ii) by each of our Directors and the named executive officers in the Summary Compensation Table, and (iii) by all Directors and current executive officers as a group: Beneficial Ownership Table Beneficial Owner (1) Number of Shares of Common Stock Percent of Common Stock Salvador Diaz-Verson, Jr. (2) 1,162,607 1.2 % Gary Douglas (3) 700,000 * % Cipora Lavut (4) 2,639,660 2.8 % Robert Lempert (5) 497,343 * % David Mann (6) 1,811,931 1.9 % Steven Willett (7) 150 * % All current executive officers and Directors as a group (six) (2) (3) (4) (5) (6) (7) 6,811,691 7.0 % 5% Stockholders Warren Breslow (8) 9,655,759 9.9 % Elimelech Lowy (9) 5,018,252 5.3 % BetterSea LLC (10) 9,179,912 9.7 % Robert Kopple (11) 6,005,469 6.1 % * Less than 1% of outstanding shares (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission. The calculation of the percentage of beneficial ownership is based upon 94,648,346 shares of common stock outstanding on February 28, 2023. In computing the number of shares beneficially owned by any stockholder and the percentage ownership of such stockholder, shares of common stock which may be acquired by a such stockholder upon exercise or conversion of warrants or options which are currently exercisable or exercisable within 60 days of February 28, 2023, are deemed to be exercised and outstanding. Such shares, however, are not deemed outstanding for purposes of computing the beneficial ownership percentage of any other person. Shares issuable upon exercise of warrants and options which are subject to stockholder approval are not deemed outstanding for purposes of determining beneficial ownership. Except as indicated by footnote, to our knowledge, the persons named in the table above have the sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The mailing address for each of the officers and directors is c/o Aura Systems, Inc., 20431 North Sea, Lake Forest, CA 92630. (2) Includes 1,092,857 warrants exercisable within 60 days of February 28, 2023. (3) Includes 700,000 warrants exercisable within 60 days of February 28, 2023 (4) Includes 750,000 warrants exercisable within 60 days of February 28, 2023. (5) Includes warrants to purchase 350,000 shares exercisable within 60 days of February 28, 2023. (6) Includes warrants to purchase 400,000 shares exercisable within 60 days of February 28, 2023, as well as 1,411,931 shares, 979,204 of which Mr. Mann has sole dispositive power and approximately 432,727 of which, Mr. Mann holds a power of attorney to vote such shares. (7) Includes common shares only as of February 28, 2022. (8) Includes the right to convert $3,000,000 and accrued interest of $712,911 convertible note payable to 2,652,079 common shares at a conversion price of $1.40. (9) Includes 5,018,252 common shares, which Mr. Lowy has sole dispositive power. (10) Includes common shares only as of February 28, 2022. (11) Includes warrants to purchase 3,331,664 shares exercisable within 60 days of February 28, 2023. 39 Securities Authorized for Issuance Under Equity Compensation Plans as of February 28, 2023 Equity Compensation Plan Information as of February 28, 2023 a. b. c. Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price for Options, Warrants and Rights Number of Securities For Future Issuances Under Equity Compensation Plans (Excluding Securities Reflected in Column (a.) Equity compensation plans approved by equity holders 3,292,857 $ 0.48 10,904,394 Equity compensation plans not approved by equity holders 1,500,000 $ 0.50 - (1) Reflects options under the 2006 Stock Option Plan and the 2011 Stock Option Plan, of which both were approved by Company shareholders. Additionally, it includes options which were authorized by the Board but cannot be issued until the proposal for renewal of the employee stock option plan is approved by the shareholders. The 2006 Stock Option Plan authorizes the Company to grant stock options exercisable for up to an aggregate number of shares of common stock equal to the greater of (i) 10,000,000 shares of common stock, or (ii) 10% of the number of shares of common stock outstanding from time to time. The 2011 Stock Option Plan authorizes the Company to grant stock options or warrants to executive officers and directors exercisable for up to an aggregate number of shares equivalent to 15% of the number of shares of common stock outstanding from time to time. The numbers in this table are as of February 28, 2023 (See Note 13 to the Financial Statements). For additional information regarding options and warrants, see Note 13 to our financial statements appearing elsewhere in this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Review and Approval of Related Party Transactions Our Audit Committee is responsible for the review and approval of all related party transactions required to be disclosed to the public under SEC rules. This procedure has been established by our Board of Directors in order to serve the interests of our shareholders. Related party transactions are reviewed and approved by the Audit Committee on a case-by-case basis. Under existing, unwritten policy no related party transaction can be approved by the Audit Committee unless it is first determined that the terms of such transaction is on terms no less favorable to us than could be obtained from an unaffiliated third party on an arms-length basis and is otherwise in our best interest. Director Independence Using the definition of “independence” included in the listing rules of The Nasdaq Stock Market, our Board has determined that Salvador Diaz-Versón, Jr. and Gary Douglas are both independent directors. 40 ITEM 14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES Weinberg & Company, P.A. (“Weinberg”) was engaged to be the Company’s principal accountant and auditor in April 2022. Prior to the engagement of Weinberg, BF Borgers, CPA, PC (“BFB CPA”) served as the Company’s principal accountant and auditor. The following table sets forth the aggregate fees billed to us by Weinberg for the year ended February 28, 2023, and by BFB CPA for the year ended February 28, 2022: Year Ended (amounts in thousands) February 28, 2023 February 28, 2022 Audit Fees $ 134 $ 55 Audit-related fees - - Tax fees - - All other fees - - Total $ 134 $ 55 As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-K, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those Fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.” Audit Fees Services provided to us by Weinberg with respect the audit of our annual financial statements and review of our annual report on Form 10-K for the year ended February 28, 2022, and for reviews of the financial statements which are included in our quarterly reports on Form 10-Q for the first three quarters of the year ended February 28, 2023. Services provided to us by BFB CPA with respect the audit of our annual financial statements and review of our annual reports on Form 10-K for February 28, 2021, and for reviews of the financial statements which are included in our quarterly reports on Form 10-Q for the first three quarters of the years ended February 28, 2022. Audit Related Fees Weinberg did not provide any professional services to us during Fiscal 2023 which would constitute “audit related fees”. BFB CPA did not provide any professional services to us during Fiscal 2022 which would constitute “audit related fees”. Tax Fees Weinberg did not provide any professional services to us during Fiscal 2023 which would constitute “tax fees”. BFB CPA did not provide any professional services to us during Fiscal 2022 which would constitute “tax fees”. All Other Fees Weinberg did not provide any professional services to us during Fiscal 2023 which would constitute “other fees”. BFB CPA did not provide any professional services to us during Fiscal 2022 which would constitute “other fees”. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors Under the SEC’s rules, the Audit Committee is required to pre-approve the audit and permissible non-audit services performed by the independent registered public accounting firm in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent registered public accounting firm. Consistent with the SEC’s rules, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. During Fiscal 2023 all services provided by Weinberg were pre-approved by the Audit Committee in accordance with this policy. During Fiscal 2022 all services provided by BFB CPA were pre-approved by the Audit Committee in accordance with this policy. There were no hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent Fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees. 41 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Documents filed as part of this Form 10-K: 1. Financial Statements See Index to Financial Statements at page F-1 2. Financial Statement Schedules See Index to Financial Statements at page F-1 3. Exhibits See Exhibit Index ITEM 16. FORM 10-K SUMMARY None. 42 INDEX TO EXHIBITS Description of Documents 3.1 Amended and Restated Certificate of Incorporation of Aura Systems, Inc. (Incorporated by reference to Exhibit 3.1 to Aura Systems, Inc.’s Form 10-K filed on June 15, 2009) 3.1(a) Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated February 14, 2018 (Incorporated by reference to Exhibit 3.1 to Aura Systems, Inc.’s Current Report on Form 8-K filed on February 21, 2018) 3.2 Amended and Restated Bylaws of Aura Systems, Inc. (Incorporated by reference to Exhibit 3.2 to Aura Systems, Inc.’s Report on Form 10-K filed on June 15, 2009) 10.1* Aura Systems, Inc. 2006 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to Aura System, Inc.’s Form 10-K filed on March 25, 2008) 10.2* Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.5 to Aura System, Inc.’s Form 10-K filed on March 25, 2008) 10.3 Second Amendment to Transaction Documents dated March 14, 2017 among Registrant and those persons who have signed the signature page thereto (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.4 Third Amendment to Transaction Documents dated April 8, 2017 among Registrant and those persons who have signed the signature page thereto (Incorporated by reference to Exhibit 10.2 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.5 Second Amendment to Debt Refinancing Agreement dated April 9, 2017 by and between Aura Systems, Inc., on the one hand, and Warren Breslow and the Survivor’s Trust Under the Warren L. Breslow Trust, on the other hand (Incorporated by reference to Exhibit 10.3 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.6 First Amendment to Unsecured Convertible Promissory Note dated June 15, 2017 by and between the Survivor’s Trust Under the Warren L. Breslow Trust and the Registrant (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017) 10.7 Agreement entered into on June 19, 2017 between Aura Systems Inc. and BetterSea LLC (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Current Report on Form 8-K/A filed on May 9, 2018) 10.11 Sino-Foreign Cooperative Joint Venture Contract dated January 27, 2017 between Aura Systems, Inc. and Jiangsu AoLunTe Electrical Machinery Industrial Col, Ltd. (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Form 8-K filed on February 1, 2017) 10.12* Aura Systems, Inc. Directors and Executive Officers Stock Option Plan (Incorporated by reference to Exhibit 10.67 to Aura Systems, Inc.’s Form S-1 filed on November 30, 2011) 14.1 Code of Ethics (Incorporated by reference to Exhibit 14.1 to Aura Systems, Inc.’s Annual Report on Form 10-K filed on June 13, 2018) 31.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Indicates a management contract or compensatory plan or arrangement. In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed. Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 43 Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AURA SYSTEMS, INC. Dated: May 26, 2023 By: /s/ Cipora Lavut Cipora Lavut President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signatures Title Date /s/ Cipora Lavut President (Principal Executive Officer), Board Chair May 26, 2023 Cipora Lavut /s/ Steven Willett Chief Financial Officer (Principal Financial Officer) May 26, 2023 Steven Willett /s/ David Mann Director May 26, 2023 David Mann /s/ Robert Lempert Director May 26, 2023 Robert Lempert /s/ Gary Douglas Director May 26, 2023 Gary Douglas /s/ Salvador Diaz-Verson, Jr. Director May 26, 2023 Salvador Diaz-Verson, Jr. 44 Index to Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 572 ) F-2 Financial Statements of Aura Systems, Inc.: Balance Sheets as of February 28, 2023 and February 28, 2022 F-4 Statements of Operations - Years ended February 28, 2023 and February 28, 2022 F-5 Statements of Stockholders’ Deficit - Years ended February 28, 2023 and February 28, 2022 F-6 Statements of Cash Flows - Years ended February 28, 2023 and February 28, 2022 F-7 Notes to Financial Statements F-8 to F-24 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Aura Systems, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Aura Systems, Inc. (the “Company”) as of February 28, 2023 and 2022, the related statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended February 28, 2023, the Company incurred a net loss and used cash in operations, and at February 28, 2023, had a stockholders’ deficit. In addition, at February 28, 2023, notes payable and related accrued interest with an aggregate balance of $6.2 million have reached maturity and are past due. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates. F- 2 Troubled debt restructuring As described in Note 9 to the financial statements, in March 2022, the Company signed an agreement with a noteholder to settle past due notes payable and accrued interest aggregating $12.1 million by the issuance of a new restructured note payable for $10 million. As part of the agreement, the Company also issued warrants with a fair value of $1.1 million to the noteholder. Management assessed the settlement agreement and determined that the accounting guidance under troubled debt restructuring should apply as the Company was experiencing financial difficulties and the noteholder granted a concession. We identified the accounting for the troubled debt restructuring as a critical audit matter because of the significant judgements made by management in the application of troubled debt restructuring accounting and the valuation of the notes payable, accrued interest, and warrants. This required a high degree of auditor judgement to assess the reasonableness of management’s c onclusions. The primary procedures we performed related to the troubled debt restructuring included: ● We obtained supporting agreements, and inquired of management to gain an understanding of the relevant facts and circumstances related to the troubled debt restructuring. ● We agreed amounts of the past due notes and accrued interest to supporting schedules. ● We recalculated the fair value of the warrants issued. ● We evaluated management’s accounting conclusions regarding the troubled debt restructuring. ● We assessed the sufficiency of management’s disclosures related to the troubled debt restructuring. We have served as th e Company’s auditor since 2022. /s/ Weinberg & Company, P.A. Los Angeles, California May 26, 2023 F- 3 AURA SYSTEMS, INC. BALANCE SHEETS February 28, 2023 February 28, 2022 (amounts in thousands, except share data) Assets Current assets Cash and cash equivalents $ 15 $ 150 Inventories 155 144 Prepaid and other current assets 142 256 Total current assets 312 550 Property and equipment, net 461 485 Operating lease right-of-use asset 816 1,000 Security deposit 160 160 Total assets $ 1,749 $ 2,195 Liabilities and Shareholders’ Deficit Current liabilities Accounts payable (including $ 226 and $ 209 due to related party, respectively) $ 2,317 $ 1,582 Accrued expenses (including $ 1,145 and $ 750 due to related party, respectively) 1,830 1,692 Customer advances 454 440 Notes payable, current portion 92 98 Convertible notes payable, current portion-past due 1,403 1,403 Convertible note payable-related party-past due 3,000 3,000 Notes payable-related parties, current portion (includes $ 700 past due) 4,714 12,996 Operating lease liability, current portion 207 180 Derivative warrant liability 9 828 Total current liabilities 14,026 22,219 Notes payable, net of current portion 256 328 Note payable-related party, net of current portion 7,065 - Operating lease liability, net of current portion 660 867 Total liabilities 22,007 23,414 Commitments and contingencies - - Shareholders’ deficit Common stock: $ 0.0001 par value; 150,000,000 shares authorized; 94,648,346 and 83,119,104 issued and outstanding at February 28, 2023 and February 28, 2022, respectively. 9 8 Additional paid-in capital 454,507 450,137 Accumulated deficit ( 474,774 ) ( 471,364 ) Total shareholders’ deficit ( 20,258 ) ( 21,219 ) Total liabilities and shareholders’ deficit $ 1,749 $ 2,195 See accompanying notes to these financial statements. F- 4 AURA SYSTEMS, INC. STATEMENTS OF OPERATIONS Fiscal Years Ended February 28, 2023 February 28, 2022 (amounts in thousands, except share and per share data) Net revenue $ 71 $ 100 Cost of goods sold 88 124 Gross loss ( 17 ) ( 24 ) Operating expenses: Engineering, research and development (including $ 150 and $ 138 to related party, respectively) 850 611 Selling, general and administration 2,636 2,795 Total operating expenses 3,486 3,406 Loss from operations ( 3,503 ) ( 3,430 ) Other income (expense): Interest expense, net (including $ 545 and $ 981 to related parties, respectively) ( 727 ) ( 1,271 ) Gain on extinguishment of derivative warrant liability 237 61 Change in fair value of derivative warrant liability 582 477 Gain on extinguishment of PPP loans - 167 Gain on debt settlement - 4 Other income 1 - Net loss $ ( 3,410 ) $ ( 3,992 ) Basic and diluted loss per share $ ( 0.04 ) $ ( 0.05 ) Basic and diluted weighted-average shares outstanding 88,947,803 76,805,616 See accompanying notes to these financial statements. F- 5 AURA SYSTEMS INC. STATEMENTS OF SHAREHOLDERS’ DEFICIT (in thousands, except share data) 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 $ 446,249 $ ( 467,372 ) $ ( 21,116 ) Common shares issued for cash 10,199,665 1 2,652 - 2,653 Common shares issued for settlement of debt-related parties 1,571,429 - 550 - 550 Common shares issued for services 245,001 - 74 - 74 Share-based compensation - - 612 - 612 Net loss - - - ( 3,992 ) ( 3,992 ) Balance, February 28, 2022 83,119,104 8 450,137 ( 471,364 ) ( 21,219 ) Common shares issued for cash 11,529,242 1 3,269 - 3,270 Fair value of warrants issued for note settlement - - 1,051 - 1,051 Fair value of warrants issued for services - - 50 - 50 Net loss ( 3,410 ) ( 3,410 ) Balance, February 28, 2023 94,648,346 $ 9 $ 454,507 $ ( 474,774 ) $ ( 20,258 ) See accompanying notes to these financial statements. F- 6 AURA SYSTEMS, INC. STATEMENTS OF CASH FLOWS Fiscal Years Ended February 28, 2023 February 28, 2022 (amounts in thousands) Net loss $ ( 3,410 ) $ ( 3,992 ) Adjustments to reconcile net loss to cash used in operating activities Depreciation 78 15 Inventory write-down 4 36 Gain on extinguishment of PPP loans - ( 167 ) Gain on extinguishment of derivative warrant liability, net ( 237 ) ( 61 ) Change in fair value of derivative warrant liability ( 582 ) ( 477 ) Gain on debt settlement - ( 4 ) Common stock issued for services - 74 Common stock warrants issued for services 50 - Share-based compensation - 612 Changes in operating assets and liabilities: Inventory ( 15 ) ( 86 ) Prepaid and other current assets 114 ( 90 ) Operating lease right-of-use asset 184 167 Accounts payable and accrued expenses 364 387 Accrued interest on notes payable 492 1,056 Customer advances 14 - Operating lease liability ( 179 ) ( 111 ) Cash used in operating activities ( 3,123 ) ( 2,641 ) Cash used in investing activities: Purchase of property and equipment ( 54 ) ( 196 ) Cash flows from financing activities: Proceeds from issuance of common stock 3,270 2,653 Principal payments of notes payable ( 228 ) ( 147 ) Proceeds from government assistance loans – PPP loan - 91 Cash provided by financing activities 3,042 2,597 Net decrease in cash and cash equivalents ( 135 ) ( 240 ) Cash and cash equivalents-beginning of year 150 390 Cash and cash equivalents-end of year $ 15 $ 150 Cash paid for: Interest $ 166 $ 85 Income taxes $ - $ - Supplemental schedule of non-cash transactions: Fair value of warrants issued for note settlement $ 1,051 $ - Accounts payable converted into shares of common stock $ - $ 450 Accrued expenses converted into shares of common stock $ - $ 100 Acquisition of property and equipment with notes payable $ - $ 288 See accompanying notes to these financial statements. F- 7 AURA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS Years ended February 28, 2023 and 2022 (In thousands, except share and per share amounts) NOTE 1 – ORGANIZATION AND OPERATIONS Aura Systems, Inc., (“Aura”, “We” or the “Company”) a Delaware corporation, was founded to engage in the development, commercialization, and sale of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen ® axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the fiscal year ended February 28, 2023, the Company incurred a net loss of approximately $ 3.4 million and had negative cash flows from operating activities of approximately $ 3.1 million and at February 28, 2023, had a stockholders deficit of approximately $ 20.3 million and a working capital deficit of approximately $ 13.7 million. In addition, as of February 28, 2023, notes payable with an aggregate balance of $ 5.1 million and accrued interest of $ 1.1 million are past due. These factors raise substantial doubts about the Company’s ability to continue as a going concern within one year of the date that these financial statements are issued. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Subsequent to February 28, 2023, the Company issued 2,334,847 shares of common stock in exchange for cash proceeds of $ 770 . The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. During the next twelve months we intend to continue to attempt to increase the Company’s sale of our AuraGen ® /VIPER products both domestically and internationally and to add to our existing management team. In addition, we plan to continue 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. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing. 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. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, notes payable, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. F- 8 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. To determine revenue recognition under ASC 606, an entity performs the following five-steps (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-steps to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Our primary source of revenue is the manufacture and delivery of generator sets used primarily in mobile power applications, which represented nearly 100 % of our revenues of approximately $ 71 and $ 100 for the fiscal years ended February 28, 2023 and 2022, respectively. Our principal sales channel is sales to a domestic distributor. In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer. Our payment terms are cash payment due upon delivery and typically includes a 2 % price discount off the selling price in accordance with this policy. Our commercial terms and conditions do not include a right of return for reasons other than a defect in performance or quality. We offer a 24-month assurance-type warranty covering material and manufacturing defects, which we account for under the guidance of ASC 460, Guarantees. We have a limited history of shipments, and, as such, we have not recorded a warranty liability on our balance sheets at February 28, 2023 and 2022, respectively; however, we expect warranty claims to be immaterial. Cost of Goods Sold Cost of goods sold primarily consists of the salaries of certain employees and contractors, purchase price of consumer products, packaging supplies, inventory reserve and customer shipping and handling expenses. Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of revenue upon sale of products to our customers. Cash and Cash Equivalents Cash and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Inventories Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, on an average cost basis. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not be subsequently written up. During the years ended February 28, 2023 and 2022, the Company wrote-down inventories of $ 4 and $ 36 , respectively. F- 9 Property and Equipment Property and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of approximately three years up to ten years once the individual assets are placed in service. Leasehold improvements are amortized over the shorter of the useful life or the remaining period of the applicable lease term. Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value at that time. At February 28, 2023 and 2022, management determined there were no impairments of the Company’s property and equipment. Impairment of Long-lived Assets The Company reviews its property and equipment, right-of-use asset, and other long-lived assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. For the years ended February 28, 2023 and 2022, the Company had no impairment of long-lived assets. Leases The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. Customer Advances Customer advances represent consideration received from customers under revenue contracts for which the Company has not yet delivered to the customer the ordered goods or services. Concentration of Credit and Other Risks Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. Cash is deposited with a limited number of financial institutions. The balances held at any one financial institution at times may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits of up to $ 250 . We have not experienced any losses in such accounts and believe we are not exposed to any significant risk on cash and cash equivalents. During the year ended February 28, 2023, one customer accounted for 55 % and one customer accounted for 10 % of revenues. During the year ended February 28, 2022, one customer accounted for 18 %, two customers each accounted for 16 % and one customer accounted for 15 % of revenues. As of February 28, 2023, four vendors accounted for 38 %, 10 %, 10 % and 13 % of accounts payable. As of February 28, 2022, three vendors accounted for 44 %, 13 % and 15 % of accounts payable. Research and Development The Company engages in research and development to stay current with changes in vehicle manufacture and design and to maintain an advantage over potential competition. Research and development expenses relate primarily to the development, design, and testing of preproduction prototypes and models and are expensed as incurred. Research and development costs for Fiscal 2023 and 2022 were approximately $ 850 and $ 611 , respectively. 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. F- 10 Income Taxes The Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Derivative Warrant Liability The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. The Company uses Level 3 inputs for its valuation methodology for the derivative liabilities as their fair values were determined by using a Binomial pricing model. The Company’s derivative liabilities are adjusted to reflect fair value at each reporting date, with any increase or decrease in the fair value being recorded in the statement of operations. Fair Value of Financial Instruments The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: ● Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets; ● Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and ● Level 3 – Unobservable inputs. The recorded amounts of inventory, other current assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature. The carrying amounts of notes payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation to current market conditions. The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of February 28, 2023 and 2022: February 28, 2023 Level 1 Level 2 Level 3 Total (amounts in thousands) Liabilities Derivative warrant liability $ - $ - $ 9 $ 9 Total $ - $ - $ 9 $ 9 February 28, 2022 Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ - $ 828 $ 828 Total $ - $ - $ 828 $ 828 The Company estimated the fair value of the derivative warrant liability using the Binomial Model (see Note 12). F- 11 Earnings (loss) per share The Company’s earnings (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. The following information sets forth the computation of basic and diluted net increase in the Company’s net assets per share resulting from operations for the years ended February 28, 2023 and 2022: Year Ended February 28, 2023 2022 (amounts in thousands, except share and per share data) Numerator Net loss ( 3,410 ) ( 3,992 ) Denominator Denominator for basic weighted average share 88,947,803 76,805,616 Earnings (loss) per share Basic loss per share: ( 0.04 ) ( 0.05 ) Diluted loss per share ( 0.04 ) ( 0.05 ) For the years ended February 28, 2023 and 2022, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following: February 28, 2023 February 28, 2022 Warrants 3,564,764 4,800,834 Options 4,792,857 5,059,769 Convertible notes 3,907,187 3,749,961 Total 12,264,808 13,610,564 Segments The Company operates in one segment for the manufacture and delivery of generator sets. In accordance with the “ Segment Reporting ” Topic of the ASC, the Company’s chief operating decision maker has been identified as the President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements. F- 12 Recently Issued Accounting Pronouncements In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 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. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. 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, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and related 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. In September 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning March 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows. Other recent accounting pronouncements and guidance issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements. NOTE 3 – INVENTORIES Inventories consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Raw materials $ 114 $ 130 Work-in-process 22 14 Finished goods 19 - Total inventory $ 155 $ 144 F- 13 NOTE 4 – PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Prepaid annual software licenses $ 92 $ 95 Prepaid commissions - 73 Vendor advances 8 35 Prepaid insurance 11 - Other prepaid expenses 31 53 Total prepaid and other current assets $ 142 $ 256 NOTE–5 - PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: February 28, 2023 2022 (amounts in thousands) Leasehold improvements $ 57 $ 57 Machinery and equipment 301 277 Vehicle 96 96 Computer equipment 80 60 Furniture and fixtures 20 10 554 500 Less accumulated depreciation and amortization ( 93 ) ( 15 ) $ 461 $ 485 Depreciation expense for the years ended February 28, 2023 and 2022 was $ 78 and $ 15 , respectively: NOTE 6 – CONVERTIBLE NOTES PAYABLE Convertible notes payable consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Convertible notes payable -past due $ 1,403 $ 1,403 Non-current - - Current $ 1,403 $ 1,403 In Fiscal 2013 and 2014, the Company issued six convertible notes payable in the aggregate of $ 4,000 . As of February 28, 2022 and 2021, the outstanding balance of the convertible notes payable amounted to $ 1,403 . The notes are unsecured, bear interest at 5 % per annum and are convertible to shares of common stock at a conversion price of $ 1.40 per share, as adjusted. The notes were originally due in 2014 to 2017, and were all amended in 2018 and the maturity date for all the notes was changed to January 11, 2023. As of February 28, 2023, the convertible notes of $ 1,403 and accrued interest of $ 354 have reached maturity and are past due. At February 28, 2023 and 2022, accrued interest on convertible notes payable totaled approximately $ 354 and $ 284 , respectively, and is included in accrued expenses (See Note 10). F- 14 NOTE 7 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY Convertible note payable – related party consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Convertible note payable -past due $ 3,000 $ 3,000 Non-current - - Current $ 3,000 $ 3,000 On January 24, 2017, the Company entered into a debt refinancing agreement with a former director and current shareholder of the Company. As part of the agreement, the Company issued a $ 3,000 convertible note. The convertible note is unsecured, bears interest at 5 % per annum, is due February 2, 2023, and is convertible into shares of common stock at a conversion price of $ 1.40 per share, as adjusted. As of February 28, 2023, the convertible note of $ 3,000 and related accrued interest of $ 713 has reached maturity and is past due. At February 28, 2023 and 2022, accrued interest on convertible notes payable-related party totaled approximately $ 713 and $ 563 , respectively, and is included in accrued expenses (See Note 10). NOTE 8 – NOTES PAYABLE Notes payable consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Secured notes payable (a) Note payable-EID loan $ 150 $ 150 (b) Notes payable-vehicles and equipment 188 266 Unsecured notes payable (c) Note payable-other 10 10 Total $ 348 $ 426 Non-current 256 328 (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 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 approximately $329 as a part of its efforts to expand its operations and research and development capacities. The Company made down payments aggregating to approximately $41 with the balance financed by two notes payable aggregating to approximately $288. The notes are secured by the equipment and vehicle purchased. One note is due in 36 equal monthly payments of approximately $6 each, including interest at 2.9% per annum. The second note is due in 72 equal monthly payments of approximately $1.5 each, including interest at 10.9% interest per annum. As of February 28, 2023, the balance of the notes was approximately $188. (c) Other notes payable Demand promissory notes as of February 28, 2023 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. At February 28, 2023 and 2022, accrued interest on notes payable totaled approximately $ 23 and $ 36 , respectively, and is included in accrued expenses (See Note 10). F- 15 NOTE 9 – NOTES PAYABLE-RELATED PARTIES Notes payable-related parties consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Unsecured notes payable (a) Notes payable-Koppel (prior to restructuring) $ - $ 5,607 Accrued interest-Koppel (prior to restructuring) - 6,534 Notes payable -Koppel (restructured) 10,915 - Subtotal-Koppel 10,915 12,141 (b) Note payable- Gagerman 82 82 Accrued interest-Gagerman 82 73 Subtotal-Gagerman 164 155 (c) Note payable-Jiangsu Shengfeng-past due 700 700 Total $ 11,779 $ 12,996 Non-current 7,065 - Current $ 4,714 $ 12,996 (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 . 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 approximately $ 6,534 . 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 approximately $ 12,141 . 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 , including $ 3,000 initially due in June 2022, and $ 1,000 to be paid annually for seven years after the initial $ 3,000 is paid. In June 2022, $ 150 of the new note was paid, and the balance of $ 2,850 has been extended to May 29, 2023 (see Note 17). As of February 28, 2023, in exchange for the extended payment date, the Company has paid $ 105 in extension fees in cash, and recorded an additional $ 230 in deferred forbearance fees all of which are included in interest expense. The deferred forbearance fees are due with the final payment under the settlement agreement. All amounts, including all accrued interest and accrued forbearance fees, are to be paid no later than eight years from the date of the initial payment. Additionally, the settlement agreement 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 approximately $ 1,051 . The settlement provides for certain increases in the amounts payable to Kopple and the right of such parties to enter judgement against the Company if the Company remains in uncured default in its payment obligations. Interest on the new note began accruing in January 2023 at 6 % per annum, and as a result the Company recorded approximately $ 52 of interest in Fiscal 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, including the covenant to not create any indebtedness that is senior in right of payment to the Kopple debt. Management believes such covenants are normal for this type of transaction and that management believes meeting these covenants will not affect operations and the Company was in compliance with all covenants as of February 28, 2023. The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply as the Company was experiencing financial difficulties and Kopple granted a concession. Per ASC 470-60, the carrying value of the restructured note remains the same as before the restructuring, reduced only by the fair value of the warrants issued in connection with the transaction. The Company determined that the future undiscounted cash flows of the restructured new Kopple note exceeded the carrying value, and accordingly, no gain was recognized, and no adjustment was made to the carrying value of the debt, other than the adjustment for the fair value of the warrants. 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. F- 16 (b) Note payable-Gagerman Melvin Gagerman, the Company’s former CEO and CFO whose employment was permanently terminated in July 2019, claims that in April 2014 the Company issued an unsecured demand promissory note to him in the amount of $ 82 that bears interest at a rate of 10 % per annum. Gagerman claims that this note has not been repaid to date and is now owed. In June 2022, Gagerman brought suit against the Company for repayment of this alleged note. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when Gagerman was the Company’s CEO, CFO, Corporate Secretary and Chairman of the Company’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman. Additionally, the Company has filed a cross-complaint against Gagerman for, among things, conversion, violation of California Business & Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against the Company. Based on Gagerman’s claims, as of February 28, 2023 and February 28, 2022, the outstanding balance of the Gagerman notes payable and accrued interest would amount to approximately $ 164 and $ 155 , respectively. As of February 28, 2022 and February 28, 2022, despite the fact that the Company disputes Gagerman’s claims, under the guidance of ASC 450 - Contingencies , the Company has recorded the claimed notes payable and accrued interest amounts of approximately $ 164 and $ 155 , respectively, in the accompanying balance sheets. (c) Jiangsu Shengfeng Note On November 20, 2019, the Company reached an agreement with a former joint venture partner Jiangsu Shengfeng regarding the return of $ 700 that had been advanced to the Company in prior years. As a result, in November 2019, and the Company issued a non-interest-bearing promissory note for $ 700 to be paid over an 11-month period beginning March 15, 2020, through February 15, 2021. As of February 28, 2023 and 2022, the principal due was $ 700 , respectively, and was past due. NOTE 10 – ACCRUED EXPENSES Accrued expenses consisted of the following: February 28, 2023 February 28, 2022 (amounts in thousands) Accrued interest-convertible notes payable (past due) $ 354 $ 284 Accrued interest-convertible notes payable related party (past due) 713 563 Accrued interest-notes payable and other 322 36 Subtotal-accrued interest 1,389 883 Accrued payroll and related expenses 315 432 Other accrued expenses 126 377 $ 1,830 $ 1,692 As of February 28, 2023 and February 28, 2022, accrued expenses includes accrued interest, accrued payroll and accrued consulting fees in the aggregate of $ 1,145 and $ 750 , respectively, which are due to officers and shareholders and are considered related party transactions. NOTE 11 – LEASES During Fiscal 2021, our facilities consisted primarily of an approximate 20 square feet facility in Stanton, California and an additional storage facility in Santa Clarita, California. Effective February 28, 2021, the Company vacated these facilities and terminated the corresponding leases and consolidated our administrative and production operations, including warehousing, are housed within an approximately 18 square foot facility in Lake Forest, California. The Lake Forest facility lease is for 66-months effective February 2021 through August 31, 2026. The initial monthly base rental rate was approximately $22 per month and escalates 3% each year to approximately $26 per month in 2026. The lease liability was determined by discounting the future lease payments under the lease terms using a 10 % per annum discount rate to arrive at the current lease liability. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives. F- 17 The components of lease expense and supplemental cash flow information related to leases for the period are as follows: Year ended February 28, 2023 Year ended February 28, 2022 (amounts in thousands) Lease Cost Operating lease cost (included in general and administration in the Company’s statement of operations) $ 279 $ 279 Other Information Cash paid for amounts included in the measurement of lease liabilities for the years ended February 28, 2023 and 2022, respectively $ 274 $ 222 Weighted average remaining lease term – operating leases (in years) 3.5 4.5 Average discount rate – operating leases 10.0 % 10.0 % The supplemental balance sheet information related to leases for the period is as follows: At February 28, 2023 Operating leases Long-term right-of-use assets $ 816 Short-term operating lease liabilities $ 207 Long-term operating lease liabilities 660 Total operating lease liabilities $ 867 Maturities of the Company’s lease liability is as follows: Year Ending February 28: Operating Lease 2024 $ 282 2025 291 2026 300 2027 154 Total lease payments 1,027 Less: Imputed interest/present value discount ( 160 ) Present value of lease liabilities $ 867 F- 18 NOTE 12 – DERIVATIVE WARRANT LIABILITY In prior years under prior management, the Company issued warrants in prior years 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: February 28, 2023 February 28, 2022 (amounts in thousands, except share and per share data) Stock price $ 0.25 $ 0.41 Risk free interest rate 4.7 % 1.0 % Expected volatility 190 % 170 % Expected life in years 0.97 0.98 Expected dividend yield 0 % 0 % Number of warrants 113,100 4,800,834 Fair value of derivative warrant liability $ 9 $ 828 Number of Warrants Outstanding Fair Value of Derivative Warrant Liability (amounts in thousands, except share data) February 29, 2021 5,622,272 $ 1,366 Change in fair value of derivative warrant liability - ( 477 ) Gain on extinguishment on expiration of warrants ( 861,438 ) ( 61 ) February 28, 2022 4,800,834 $ 828 Change in fair value of derivative warrant liability - ( 582 ) Gain on extinguishment on expiration of warrants ( 4,687,734 ) ( 237 ) February 28, 2023 113,100 $ 9 NOTE 13 – STOCKHOLDERS’ DEFICIT Common Stock On February 28, 2023 and February 28, 2022, the Company had 150,000,000 shares of $ 0.0001 par value common stock authorized for issuance. During the year ended February 28, 2023, the Company issued 11,529,242 shares of common stock for net proceeds of approximately $ 3,270 in cash. During the year ended February 28, 2022, the Company issued 10,199,665 shares of common stock for net proceeds of approximately$ 2,653 in cash. Additionally, during the year ended February 28, 2022, 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 and issued 245,001 shares of common stock in exchange for services valued in the amount of approximately $ 74 . F- 19 Stock Options A summary of the Company’s stock option activity is as follows: Number of Shares Exercise Price Weighted Average Intrinsic Value (amounts in thousands, except share and per share data) Total options, February 28, 2021 (As Restated) 5,290,001 $ 0.77 $ 225 Granted - - - Exercised - - - Cancelled ( 230,232 ) 1.40 - Total options, February 28, 2022 5,059,769 $ 0.55 $ 360 Granted - - - Exercised - - - Cancelled ( 266,912 ) 1.40 - Total options, February 28, 2023 4,792,857 $ 0.48 $ 394 Exercisable, February 28, 2023 4,792,857 $ 0.48 $ 394 The exercise prices and information related to options under the 2011 Plan outstanding on February 28, 2023 are as follows: Range of Exercise Price Stock Options Outstanding Stock Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Options Outstanding Weighted Average Exercise Price of Options Exercisable $ 0.25 to $ 1.40 4,792,857 4,792,857 2.38 $ 0.48 $ 0.48 The Company granted no stock options under its stock option 2011 plan during Fiscal 2023 and 2022. During the year ended February 28, 2022, the Company recognized approximately $ 612 in share-based compensation expense related to the fair value of vested stock options. The aggregate fair value of the options was determined at the time of grant using a Black-Scholes option pricing model. F- 20 Employee Stock Option Plans In October 2011, the Company’s shareholders approved the 2011 Director and Executive Officers Stock Option Plan (the “2011 Plan”). Under the 2011 Plan, the Company may grant options, or warrants, for up to 15 % of the number of shares of Common Stock of the Company outstanding from time to time. Pursuant to this plan, the Board or a committee of the Board may grant an option to any person who is elected or appointed a director or executive officer of the Company. The exercise price of each option shall be at least equal to the fair market value of such shares on the date of grant, and the term of the options may not be greater than five years. Warrants Number of Warrants Exercise Price Outstanding, February 29, 2021 5,662,272 $ 1.40 Granted - - Exercised - - Expired ( 861,438 ) 1.40 Outstanding, February 28, 2022 4,800,834 $ 1.40 Granted 3,451,664 0.82 Exercised - - Expired ( 4,687,734 ) 1.40 Outstanding, February 28, 2023 3,564,764 $ 0.86 There was no intrinsic value as of February 28, 2023, as the exercise prices of these warrants were greater than the market price of the Company’s stock. The exercise prices and information related to the warrants under the 2011 Plan outstanding on February 28, 2023 are 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 3,564,764 3,564,764 5.83 $ 0.86 $ 0.86 During March 2022, the Company reached a settlement agreement with its former Director, Robert Kopple, (see Note 9). As a part of the settlement, the Company issued to Mr. Kopple warrants to purchase 3,331,664 shares of the Company’s common stock (the “Kopple Warrants”) with a term of 7 years at an exercise price of $ 0.85 per share. The closing price of the Company’s common stock on the date of issuance was $ 0.317 per share. The fair value of the Kopple Warrants was approximately $ 1,051 and was recorded as a reduction to the outstanding balance of notes payable due Kopple and an increase in the additional paid-in capital of the Company. During December 2022, the Company issued warrants to purchase 120,000 of the Company’s common stock with a term of 5 years at an exercise price of $ 0.50 per share in exchange for consulting services. The closing price of the Company’s common stock on the date of issuance was $ 0.425 per share. The fair value of the warrants issued for services was approximately $ 50,000 and was recorded as a general and administrative expense in the statement of operations and an increase in the additional paid-in capital of the Company. The fair values of warrants issued during Fiscal 2023 were computed using various option pricing models including Black-Scholes model (Kopple warrants) and binomial model (services warrants) using the weighted average assumptions as set forth in the table below: Weighted Average Assumptions for Warrants Issued During the Fiscal 2023 Exercise Price $ 0.84 Share Price $ 0.341 Volatility % 224.6 % Risk-Free Rate 2.04 % Expected Term (yrs) 6.9 Dividend Rate 0 % F- 21 NOTE 14 – INCOME TAXES For the years ended February 28, 2023 and 2022, the Company had no income tax expense. FY2023 FY2022 Current: Federal $ - $ - State - - Total current $ - $ - Deferred: Federal $ - $ - State - - Total deferred $ - $ - Total Provision $ - $ - For the years ended February 28, 2023 and 2022, a reconciliation of the effective income tax rate to the U.S. statutory rate is as follows: FY2023 FY2022 Federal tax benefit at statutory rate 21 % 21 % State tax benefit, net of federal benefit 7 % 7 % Change in valuation allowance ( 28 )% ( 28 )% Total 0 % 0 % As of February 28, 2023, and February 28, 2022, the following table summarizes our deferred tax asset: FY2023 FY2022 (amounts in thousands) Deferred tax asset Net operating loss carryforwards $ 39,374 $ 42,141 Gross deferred tax assets 39,374 42,141 Valuation allowance ( 39,374 ) ( 42,141 ) Net deferred tax asset (liability) $ - $ - The provisions of ASC Topic 740, Accounting for Income Taxes, require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. For the years ended February 28, 2023 and 2022, based on all available objective evidence, including the existence of cumulative losses, the Company determined that it was more likely than not that the net deferred tax assets were not fully realizable. Accordingly, the Company established a full valuation allowance against its net deferred tax assets. The Company intends to maintain a full valuation allowance on net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance. During the years ended February 28, 2023 and 2022, the valuation allowance decreased by $ 2.7 million and $ 4.8 million, respectively. At February 28, 2023, the Company had available Federal and state net operating loss carryforwards (“NOL”s) to reduce future taxable income. For Federal purposes the amounts available were approximately $ 154.4 million and for state purposes the amounts available were approximately $ 99.4 million. The Federal carryforwards expire on various dates through 2043 and the state carryforwards expire on various dates through 2043. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL may be limited as a result of changes in stock ownership. The Company’s operations are based in California and it is subject to Federal and California state income tax. Tax years after 2017 are open to examination by United States and state tax authorities. The Company adopted the provisions of ASC 740, which requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any tax benefit can be recorded in the financial statements. ASC 740 also provides guidance on the recognition, measurement, classification and interest and penalties related to uncertain tax positions. As of February 28, 2023 and 2022, no liability for unrecognized tax benefits was required to be recorded or disclosed. F- 22 Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of February 28, 2023, and February 28, 2022, we have no accrued interest and penalties related to uncertain tax positions. We are subject to taxation in the U.S. and California. Our tax years for 2014 and forward are subject to examination by our tax authorities. We are not currently under examination by any tax authority. The Company has failed to file its California tax returns for the years ended February 28, 2015 through February 28, 2023 due to its inability to pay the minimum annual franchise tax payment of eight hundred dollars. The balance of accrued income taxes related to unpaid California franchise tax of $4.8 represents six years of minimum taxes due. NOTE 15 – RELATED PARTY TRANSACTIONS As of February 28, 2023 and 2022, Bettersea LLC (“Bettersea”) was a 9.7 % and 11.0 %, respectively, shareholder in the Company. For the years ended February 28, 2023 and 2022, the Company incurred total fees to Bettersea of $ 150 and $ 138 , respectively, for consulting services. As of February 28, 2023 and 2022, a total of approximately $ 226 and $ 219 , respectively, was due to Bettersea and included in accounts payable and accrued expenses. During Fiscal 2022, the Company issued 1,285,714 shares of common stock with a fair value of Four hundred fifty thousand dollars for the settlement of accounts payable of Four hundred fifty thousand dollars due to Bettersea. Also, during fiscal 2022, the Company issued 285,715 shares of common stock with a fair value of One hundred thousand dollars for the settlement of accounts payable of One hundred thousand dollars due to the Company’s President. There were no gains or losses recognized on these transactions. NOTE 16 – CONTINGENCIES The Company is subject to legal proceedings and claims that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially adversely affected. In 2017, the Company’s former COO was awarded approximately $ 238 in accrued salary and related charges by the California labor board. In August 2021, the Company reached a settlement by which the Company agreed to pay approximately $ 330 , representing the principal award plus accrued interest. As of the time of this filing, the Company has paid approximately $ 272 toward the settlement amount. The remaining balance of approximately $ 58 is to be paid no later than September 1, 2023 , and accrues interest of 10 % per annum until paid. Between July 2017 and March 2022, the Company had 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 agreed to pay an aggregate amount of $10,000 (see Note 9), including an initial amount of $3,000 due in June 2022. In June, 2022, the Company paid $150 of the initial amount. All amounts, including all accrued interest and accrued forbearance fees, are to be paid no later than eight years from the date of the initial payment. The settlement also provides for standard mutual general release provisions and includes customary representations, warranties, and covenants, including certain increases in the amount payable to the Kopple Parties and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations under the settlement. As of the date of this report, the Company has not yet paid the $2,850 balance of the initial installment (see Note 17). F- 23 On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company. On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled. NOTE 17 – SUBSEQUENT EVENTS Subsequent to February 28, 2023, additional amendments to the settlement agreement with Kopple (see Note 9) were entered into extending the due date for the $ 2,850 balance due on the initial payment to May 29, 2023. In exchange for the additional amendments, the Company agreed to pay additional extension fees of $ 60 in cash and an additional $ 200 in deferred forbearance fees to be paid with the final payment under the settlement agreement. Subsequent to February 28, 2023, the Company issued 2,334,847 shares of common stock in exchange for cash proceeds of $ 770 . F-24