AURA SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS AURA SYSTEMS, INC. CONDENSED BALANCE SHEETS (Unaudited) (amounts in thousands, except share data) May 31, 2023 February 28, 2023 (Unaudited) Assets Current assets Cash and cash equivalents $ 50 $ 15 Inventories 162 155 Prepaid and other current assets 129 142 Total current assets 341 312 Property and equipment, net 458 461 Operating lease right-of-use asset 767 816 Security deposit 160 160 Total assets $ 1,726 $ 1,749 Liabilities and Shareholders’ Deficit Current liabilities Accounts payable and accrued expenses (including $ 370 and $ 376 due to related party, respectively) $ 2,762 $ 2,758 Accrued interest (including $ 1,382 and $ 995 due to related party, respectively) 1,794 1,389 Customer advances 447 454 Convertible notes payable, past due 1,403 1,403 Convertible note payable-related party, past due 3,000 3,000 Notes payable, current portion 92 92 Notes payable-related parties, current portion 4,716 4,714 Operating lease liability, current portion 214 207 Warrant derivative liability 3 9 Total current liabilities 14,431 14,026 Notes payable, non-current portion 235 256 Note payable-related party, non-current portion 7,003 7,065 Operating lease liability, non-current portion 603 660 Total liabilities 22,272 22,007 Commitments and contingencies - - Shareholders’ deficit Common stock: $ 0.0001 par value; 150,000,000 shares authorized; 97,234,708 and 94,648,346 issued and outstanding at May 31, 2023 and February 28, 2023, respectively. 9 9 Additional paid-in capital 455,360 454,507 Accumulated deficit ( 475,915 ) ( 474,774 ) Total shareholders’ deficit ( 20,546 ) ( 20,258 ) Total liabilities and shareholders’ deficit $ 1,726 $ 1,749 The accompanying notes are an integral part of these unaudited financial statements. 1 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended (amounts in thousands, except share and per share data) May 31, 2023 May 31, 2022 Net revenue $ 10 $ 6 Cost of goods sold 15 13 Gross loss ( 5 ) ( 7 ) Operating expenses: Engineering, research and development (including $ 36 and $ 35 to related party, respectively) 207 167 Selling, general and administration 508 850 Total operating expenses 715 1,017 Loss from operations ( 720 ) ( 1,024 ) Other income (expense): Interest expense, net ( 428 ) ( 81 ) Change in fair value of derivative warrant liability 7 553 Net loss $ ( 1,141 ) $ ( 552 ) Basic and diluted loss per share $ ( 0.01 ) $ ( 0.01 ) Basic and diluted weighted-average shares outstanding 96,036,536 84,273,089 See accompanying notes to these unaudited financial statements. 2 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT (Unaudited) (in thousands, except share data) Common Stock Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Shareholders’ Deficit Balance, February 28, 2022 83,119,104 $ 8 $ 450,137 $ ( 471,364 ) $ ( 21,219 ) Common shares issued for cash 2,116,665 - 635 - 635 Fair value of warrants issued for note settlement - - 1,051 - 1,051 Net loss - - - ( 552 ) ( 552 ) Balance, May 31, 2022 (unaudited) 85,235,769 $ 8 $ 451,823 $ ( 471,916 ) $ ( 20,085 ) Balance, February 28, 2023 94,648,346 $ 9 $ 454,507 $ ( 474,774 ) $ ( 20,258 ) Common shares issued for cash 2,586,362 - 853 - 853 Net loss - - - ( 1,141 ) ( 1,141 ) Balance, May 31, 2023 (unaudited) 97,234,708 $ 9 $ 455,360 $ ( 475,915 ) $ ( 20,546 ) See accompanying notes to these unaudited financial statements. 3 AURA SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended (amounts in thousands) May 31, 2023 May 31, 2022 Net loss $ ( 1,141 ) $ ( 552 ) Adjustments to reconcile net loss to cash used in operating activities Depreciation and amortization 26 18 Change in fair value of derivative warrant liability ( 7 ) ( 553 ) Changes in operating assets and liabilities: Inventory ( 7 ) ( 19 ) Prepaid and other current assets ( 9 ) 53 Deposit - 27 Operating lease right-of-use asset 49 44 Accounts payable, accrued expenses and customer advances ( 3 ) 244 Accrued interest on notes payable 345 59 Operating lease liability ( 50 ) ( 43 ) Cash used in operating activities ( 797 ) ( 722 ) Cash used in investing activities: Purchase of property and equipment ( 1 ) ( 23 ) Cash flows from financing activities: Proceeds from issuance of common stock 853 635 Principal payments of notes payable ( 20 ) ( 19 ) Cash provided by financing activities 833 616 Net increase (decrease) in cash and cash equivalents 35 ( 129 ) Cash and cash equivalents-beginning of period 15 150 Cash and cash equivalents-end of period $ 50 $ 21 Cash paid for: Interest $ 67 $ 39 Income taxes $ - $ - Supplemental schedule of non-cash transactions: Reclassification of prepaid expense to property and equipment $ 22 $ - Adjustment to interest expense to account for the effective interest rate of note payable $ 62 $ - Fair value of warrants issued for note settlement $ - $ 1,051 See accompanying notes to these unaudited financial statements. 4 AURA SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share amounts) NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Aura Systems, Inc., (“Aura”, the “Company”) a Delaware corporation, is engaged in the development, commercialization, and sale of products, systems, and components, using its patented and proprietary electromagnetic technology. Aura develops and sells AuraGen® axial flux mobile induction power systems to the industrial, commercial, and defense mobile power generation markets. Basis of Presentation The accompanying unaudited condensed financial statements as of and for the three months ended May 31, 2023 and 2022, have been prepared have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented. The Condensed Balance Sheet information as of February 28, 2023, was derived from the Company’s audited Financial Statements as of February 28, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on May 26, 2023. These financial statements should be read in conjunction with that report. The results of operations for the period ended May 31, 2023, may not necessarily be indicative of the results that may be expected for the full fiscal year ending February 28, 2024. The Company’s fiscal year ends on the last calendar day of February. Accordingly, the current fiscal year will end on February 28, 2024 and is referred to as “Fiscal 2024”. Our prior fiscal years ended February 28, 2023, February 28, 2022 and 2021, and are referred to as “Fiscal 2023”, “Fiscal 2022” and “Fiscal 2021”, respectively. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the three-month period ended May 31, 2023, the Company reported a net loss of approximately $ 1,141 and used cash in operating activities of approximately $ 797 , respectively, and at May 31, 2023 the Company had a stockholders’ deficit of $ 20,546 . In addition, at May 31,2023, convertible notes payable in the aggregate amount of $ 4,403 are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s February 28, 2023, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In the event the Company is unable to generate profits and is unable to obtain financing for its working capital requirements, it may have to curtail its business further or cease business altogether. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability. During the next twelve months the Company intends to continue to attempt to increase the Company’s operations and focus on the sale of our AuraGen ® /VIPER products both domestically and internationally and to add to our existing management team. In addition, the Company plans to source new suppliers for manufacturing operations, rebuild the engineering and sales teams, and to the extent appropriate, utilize third party contractors to support the operation. The Company anticipates being able to obtain new sources of funding to support these actions in the upcoming fiscal year. 5 COVID-19 As of the date of this filing, the COVID-19 pandemic has been declared to be officially over. Despite this fact, there continues to be lingering impacts of the COVID-19 pandemic in the regions in which the Company operates. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results stemming from the outbreak and its lingering effects on the Company’s business or results of operations, financial condition, or liquidity. Revenue Recognition The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Our primary source of revenue is the manufacture and delivery of generator sets used primarily in mobile power applications. Our principal sales channel is sales to a domestic distributor. In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates. Share-Based Compensation The Company periodically issues stock options and warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for services. Fair Value of Financial Instruments The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: ● Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets; ● Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and ● Level 3 – Unobservable inputs. 6 The recorded amounts of inventory, other current assets, accounts payable, and accrued expenses approximate their fair value due to their short-term nature. The carrying amounts of notes payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation to current market conditions. The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of May 31, 2023 and February 28, 2023: May 31, 2023 (amounts in thousands) Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ - $ 3 $ 3 Total $ - $ - $ 3 $ 3 February 28, 2023 Level 1 Level 2 Level 3 Total Liabilities Derivative warrant liability $ - $ - $ 9 $ 9 Total $ - $ - $ 9 $ 9 The Company estimated the fair value of the derivative warrant liability using the Binomial Model. The following table provides a roll-forward of the warrant derivative liability measured at fair value on a recurring basis using unobservable level 3 inputs for the period ended May 31, 2023 as follows: (amounts in thousands, except share data) Number of Derivative Warrants Outstanding Fair Value of Warrant Derivative Liability February 28, 2023 113,100 $ 9 Change in fair value of derivative warrant liability - ( 7 ) May 31, 2023 113,100 $ 3 7 Reclassifications Certain February 28, 2023 balances have been reclassified to conform with the May 31, 2023 presentation. In presenting the Company’s consolidated balance sheet at February 28, 2023, the Company originally presented accrued interest of $ 1,389 and accrued payroll and expenses of $ 441 , totaling $ 1,830 as a separate line item called Accrued Expenses. In presenting the Company’s consolidated balance sheet at May 31, 2023, the Company has reclassified the balance of accrued interest of $ 1,389 as a separate line item, and the balance of accrued payroll and expenses of $ 441 as part of accounts payable and accrued expense in the accompanying February 28, 2023 financial statements. Loss per share The Company’s loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional shares of common stock were dilutive. Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method for convertible debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities were exercised. For the three-months ended May 31, 2023 and May 31, 2022, the calculations of basic and diluted loss per share are the same because potentially dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following: May 31, 2023 May 31, 2022 Warrants 3,564,764 8,132,498 Options 4,250,000 5,059,769 Convertible notes 3,946,823 3,749,961 Total 11,761,578 16,942,228 8 Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements 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 adopted ASU 2021-04 effective March 1, 2023. The adoption of ASU 2016-13 did not have any impact on the Company’s financial statement presentation or disclosures. 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. 9 NOTE 2 – CONVERTIBLE NOTES PAYABLE, PAST DUE Convertible notes payable consisted of the following: (amounts in thousands) May 31, 2023 February 28, 2023 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 . 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 May 31, 2023 and February 28, 2023, the outstanding balance of the convertible notes payable amounted to $ 1,403 and are past due. At May 31, 2023 and February 28, 2023, accrued interest on convertible notes payable totaled approximately $ 372 and $ 354 , respectively. NOTE 3 – CONVERTIBLE NOTE PAYABLE-RELATED PARTY, PAST DUE Convertible note payable – related party consisted of the following: (amounts in thousands) May 31, 2023 February 28, 2023 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, was 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 May 31, 2023, the convertible note of $ 3,000 and related accrued interest of $ 751 has reached maturity and is past due. At May 31, 2023 and February 28, 2023, accrued interest on convertible notes payable-related party totaled $ 751 and $ 713 , respectively. 10 NOTE 4 – NOTES PAYABLE Notes payable consisted of the following: (amounts in thousands) May 31, 2023 February 28, 2023 Secured notes payable (a) Note payable-EID loan $ 150 $ 150 (b) Notes payable-vehicles and equipment 167 188 Unsecured notes payable (c) Note payable-other 10 10 Total 327 348 Non-current 235 256 Current $ 92 $ 92 (a) Economic Injury Disaster (EID) Loan On July 1, 2020, the Company received a $150 loan under the United States Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EID Loan”) program. The loan is due July 1, 2050, interest accrues at 3.75% per annum, and is secured by the assets of the Company . Accrued interest at May 31, 2023 and February 28, 2023 was $ 12 and $ 13 , respectively. (b) Notes payable-vehicle and equipment During Fiscal 2022, the Company issued notes payable to purchase two pieces of equipment and a vehicle for $329. The notes are secured by the equipment and vehicle purchased. One note for $210 is due October 31, 2024, and requires 36 equal monthly payments of approximately $6 each, including interest at 2.9% per annum. The second note for $78 is due January 20, 2027, and requires 72 equal monthly payments of approximately $1.5 each, including interest at 10.9% interest per annum. As of May 31, 2023 and February 28, 2023, the balance of the two notes was approximately $167 and $188, respectively. (c) Note payable-other As of May 31, 2023 and February 28, 2023, the Company has one note payable due to an individual issued in September 2015 that is payable on demand with an interest rate of 10 % per annum. Accrued interest at May 31, 2023 and February 28, 2023 was $ 10 and $ 10 , respectively. 11 NOTE 5 – NOTES PAYABLE-RELATED PARTIES Notes payable-related parties consisted of the following: (amounts in thousands) May 31, 2023 February 28, 2023 Unsecured notes payable (a) Notes payable-Kopple (as restructured) $ 10,853 $ 10,915 (b) Note payable- Gagerman 82 82 Accrued interest-Gagerman 84 82 Subtotal-Gagerman 166 164 (c) Note payable-Jiangsu Shengfeng – past due 700 700 Total $ 11,719 $ 11,779 Non-current 7,003 7,065 Current $ 4,716 $ 4,714 (a) Kopple Note 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. 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. Additionally, the settlement agreement granted Koppel a five year, fully vested warrant exercisable into 3,331,664 shares of the Company’s common stock at a price of $ 0.85 per share with a fair value of $ 1.1 million. The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply. 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. 12 In June 2022, the first installment of $ 3 million became due, of which $ 150 was paid. Through February 28, 2023, the note was amended several times to extend the payment date of the remaining balance of $ 2,850 of the initial payment through January 2023, and the Company incurred extension and forbearance fees totaling $ 335 , of which, $ 105 was paid and $ 230 was accrued. As of February 28, 2023, outstanding principal balance amounted to $ 10.9 million and accrued interest and fees of $ 282 , for a total of $ 11.2 million. In January 2023, pursuant to the terms of the amended note payable, the Company started accruing interest on the outstanding note balance at a rate of 6 % per annum, compounded annually. During the three months ended March 31, 2023, the Company recorded extension and forbearance fees totaling $ 260 , of which $ 60 was paid, to further extend the payment date of the $ 2,850 to May 2023, and accrued interest at 6 % of $ 149 . In addition, the Company recorded a reduction of $ 62 to the note liability to adjust stated interest of 6 % to an effective interest rate of 3.5 %. As of May 31, 2023, outstanding balance of the note payable amounted to $ 10.8 million and accrued interest and fees of $ 631 for a total of $ 11.5 million. In July 2023, the note was again amended to extend the payment date of the $ 2,850 to August 1, 2023 (See Note 12). 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. 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 May 31, 2023. (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 May 31, 2023 and February 28, 2023, the outstanding balance of the Gagerman notes payable and accrued interest would amount to approximately $ 166 and $ 16 , respectively. As of May 31, 2023 and February 28, 2023, 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 $ 166 and $ 164 , 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 May 31, 2023 and February 28, 2023, the principal due was $ 700 , respectively, and was past due. 13 NOTE 6 – ACCRUED INTEREST Accrued expenses consisted of the following: (amounts in thousands) May 31, 2023 February 28, 2023 Accrued interest-convertible notes payable (past due) $ 372 $ 354 Accrued interest-convertible notes payable related party (past due) 751 713 Accrued interest and fees- Kopple note payable 631 282 Accrued interest-notes payable 22 23 Accrued interest- other 18 17 $ 1,794 $ 1,389 NOTE 7 – LEASES Our administrative, and production operations including warehousing, are housed in an approximately 18,000 square foot facility in Lake Forest, California. The Lake Forest lease is for 66-months effective February 2021 through August 31, 2026. The initial monthly base rental rate was approximately $22 per month and escalates 3% each year to approximately $26 per month in 2026. The lease liability was determined by discounting the future lease payments under the lease terms using a 10 % per annum discount rate to arrive at the current lease liability. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives. The components of lease expense and supplemental cash flow information related to leases for the period are as follows: (amounts in thousands) Three-Months ended May 31, 2023 Three-Months ended May 31, 2022 Lease Cost Operating lease cost (included in general and administration in the Company’s statement of operations) $ 70 $ 70 Other Information Cash paid for amounts included in the measurement of lease liabilities $ 71 $ 69 Weighted average remaining lease term – operating leases (in years) 3.25 4.25 Average discount rate – operating leases 10.0 % 10.0 % 14 The supplemental balance sheet information related to leases for the period is as follows: At May 31, 2023 Operating leases Long-term right-of-use assets $ 767 Short-term operating lease liabilities $ 214 Long-term operating lease liabilities 603 Total operating lease liabilities $ 817 Maturities of the Company’s lease liability is as follows: Operating Lease Years Ending February 28: 2024 (9 months remaining) $ 212 2025 291 2026 300 2027 154 Total lease payments 957 Less: Imputed interest/present value discount ( 140 ) Present value of lease liabilities $ 817 NOTE 8 – WARRANT DERIVATIVE LIABILITY In prior years the Company issued warrants that include a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. The Company determined that the warrants do not satisfy the criteria for classification as equity instruments due to the existence of the cash settlement feature that is not within the sole control of the Company, and the warrants are accounted for as liabilities in accordance with ASC 815. 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: (amounts in thousands, except share and per share data) May 31, 2023 February 28, 2023 Stock price $ 0.18 $ 0.25 Risk free interest rate 5.2 % 4.7 % Expected volatility 171 % 190 % Expected life in years 0.71 0.97 Expected dividend yield 0 % 0 % Number of warrant shares 113,100 113,100 Fair value of derivative warrant liability $ 3 $ 9 15 NOTE 9 – STOCKHOLDERS’ DEFICIT Common Stock During the three-months ended May 31, 2023, the Company issued 2,586,362 shares of common stock for approximately $ 853 in cash. During the three-months ended May 31, 2022 the Company issued 2,116,665 shares of common stock for approximately $ 635 . Stock Options A summary of the Company’s stock option activity for the three-months ended May 31, 2023 is as follows: (amounts in thousands, except share and per share data) Number of Options Exercise Price Weighted Average Intrinsic Value Outstanding, February 28, 2023 4,792,857 $ 0.48 $ - Granted - - - Exercised - - - Cancelled ( 542,857 ) 1.40 - Outstanding, May 31, 2023 4,250,000 $ 0.37 $ - There was no intrinsic value as of May 28, 2023, as the exercise prices of these options were greater than the market price of the Company’s stock. The exercise prices and information related to options under the 2011 Plan outstanding on May 31, 2023 is as follows: Range of Exercise Price Stock Options Outstanding Stock Options Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Options Outstanding Weighted Average Exercise Price of Options Exercisable $ 0.25 to $ 0.50 4,250,000 4,250,000 2.42 $ 0.37 $ 0.37 The Company granted no stock options under its stock option 2011 Plan for the three-month period ended May 31, 2023 and the three-month period ended May 31, 2022. Warrants A summary of the Company’s warrant activity for the three-months ended May 31, 2023 is as follows: Number of Warrants Exercise Price Outstanding, February 28, 2023 3,564,764 $ 0.86 Granted - - Exercised - - Cancelled - - Outstanding, May 31, 2023 3,564,764 $ 0.86 16 There was no intrinsic value as of May 31, 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 as of May 31, 2023 is as follows: Range of Exercise Price Stock Warrants Outstanding Stock Warrants Exercisable Weighted Average Remaining Contractual Life Weighted Average Exercise Price of Warrants Outstanding Weighted Average Exercise Price of Warrants Exercisable $ 0.50 to $ 1.40 3,564,764 3,564,764 5.58 $ 0.86 $ 0.86 During March 2022, the Company reached a settlement agreement with its former Director, Robert Kopple who had been in litigation with the Company over unpaid notes payable and accrued interest since 2017 (See Note 6). As a part of the settlement, the Company issued to Mr. Kopple 3,331,664 warrants to purchase the Company’s common stock (the “Kopple Warrants”) with a term of 7 years and at an exercise price of $ 0.85 per share. The Company determined the fair value of the Kopple Warrants was $ 1,051 using a Black-Scholes model using the assumptions as set forth in the table below: Warrants Issued During the Three-Months Ended May 31, 2022 Exercise Price $ 0.85 Share Price $ 0.317 Volatility % 225 % Risk-Free Rate 1.98 % Expected Term (yrs) 7.0 Dividend Rate 0 % NOTE 10 – RELATED PARTY TRANSACTIONS As of May 31, 2023 and February 28, 2023, Bettersea LLC (“Bettersea”) was an 9.4 % and 9.7 %, respectively, shareholder in the Company. For the three-months ended May 31, 2023 and May 31, 2022, the Company incurred total fees to Bettersea of $ 36 and $ 35 , respectively, for various consulting services. As of May 31, 2023 and February 28, 2023, a total of $ 231 and $ 216 , respectively, was due to Bettersea and included in accounts payable and accrued expenses. NOTE 11 – CONTINGENCIES The Company is subject to legal proceedings and claims that have arisen in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s financial statements for that reporting period could be materially adversely affected. 17 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 $ 277 toward the settlement amount. The remaining balance of approximately $ 53 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, including an initial amount of $3,000 due in June 2022, which was subsequently extended to August 1, 2023. 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 6). On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company. On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Dr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Dr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr. As a result of prior management’s unsuccessful opposition to this stockholders’ action filed in the Court of Chancery, such stockholders may be potentially entitled to recoup their litigation costs from the Company under Delaware’s corporate benefit doctrine and/or other legal provisions. To date, no final determination has been made as to the amount of recoupment, if any, to which such stockholders may be entitled. NOTE 12 – SUBSEQUENT EVENTS Subsequent to May 31, 2023, an additional amendment to the settlement agreement with Kopple (see Note 6) was entered into extending the due date for the $ 2,850 balance due on the initial payment to August 1, 2023. In exchange for the additional amendments, the Company agreed to pay additional extension fees of $ 30 in cash and an additional $ 100 in deferred forbearance fees to be paid with the final payment under the settlement agreement. Subsequent to May 31, 2023, the Company issued 969,698 shares of common stock in exchange for cash proceeds of approximately $ 320 . 18