UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION 
Washington, D.C. 20549



Form
10-K



(Mark
One)

þANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the fiscal year ended February 28, 2019



OR



☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the transition period from  to



Commission
file number 0-17249

AURA SYSTEMS, INC.(Exact name of registrant as specified in its charter)



|Delaware                                                            |  | 95-4106894                               
|------------------------------------------------------------------- |  | -----------------------------------------
|(State
    or other jurisdiction of 
incorporation or organization) |  | (I.R.S.
    Employer 
Identification No.)



10541
Ashdale St.,

Stanton,
CA 90680(Address of principal executive offices, zip code)



Registrant’s
telephone number, including area code: (310) 643-5300
Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒



Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ☐  No ☒



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐



Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes ☒No ☐



Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of the “large accelerated filer,” “accelerated filer,”
“non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.



|Large accelerated filer | ☐ |                         | Accelerated filer         | ☐
|----------------------- | - | ----------------------- | ------------------------- | -
|Non-accelerated filer   | ☐ |                         | Smaller reporting company | ☒
|                        |   | Emerging growth company | ☐                        



If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒





On
August 31, 2018 the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $17,000,000.
The aggregate market value has been computed by reference to the last sale price of the stock as quoted on the Pink Sheets quotation
system on August 31, 2018. For purposes of this calculation, voting stock held by officers, directors, and affiliates has been
excluded.



On
May 30, 2019, the Registrant had 52,082,032 shares of common stock outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE: None


















TABLE
OF CONTENTS





|PART I   |                                                                                                                      |   
|-------- | -------------------------------------------------------------------------------------------------------------------- | --
|         | ITEM 1. BUSINESS                                                                                                     | 1 
|         | ITEM 1A. RISK FACTORS                                                                                                | 9 
|         | ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                   | 16
|         | ITEM 2. PROPERTIES                                                                                                   | 16
|         | ITEM 3. LEGAL PROCEEDINGS                                                                                            | 16
|         | ITEM 4. MINE SAFETY DISCLOSURES                                                                                      | 17
|         |                                                                                                                      |   
|PART II  |                                                                                                                      |   
|         | ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 18
|         | ITEM 6. SELECTED FINANCIAL DATA                                                                                      | 19
|         | ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 19
|         | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                  | 25
|         | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  | 25
|         | ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                        | 25
|         | ITEM 9A.  CONTROLS AND PROCEDURES                                                                                    | 26
|         | ITEM 9B.  OTHER INFORMATION                                                                                          | 26
|         |                                                                                                                      |   
|PART III |                                                                                                                      |   
|         | ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE                                                     | 27
|         | ITEM 11. EXECUTIVE COMPENSATION                                                                                      | 30
|         | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS              | 33
|         | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                   | 34
|         | ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                     | 35
|         |                                                                                                                      |   
|PART IV  |                                                                                                                      |   
|         | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                     | 36
|         | ITEM 16. FORM 10-K SUMMARY                                                                                           | 36
|         | SIGNATURES                                                                                                           | 38



i







SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Report contains forward-looking statements within the meaning of the federal securities laws. Statements other than statements
of historical fact included in this Report, including the statements under the headings “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Report regarding
future events or prospects are forward-looking statements. The words “approximates,” “believes,” “forecast,”
“expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,”
“could,” “should,” “seek,” “may,” or other similar expressions in this Report,
as well as other statements regarding matters that are not historical fact, constitute forward-looking statements. We caution
investors that any forward-looking statements presented in this Report are based on the beliefs of, assumptions made by, and information
currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown
risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions
are reasonable, they are not guarantees of future performance and some may inevitably prove to be incorrect. As a result, our
actual future results may differ from our expectations, and those differences may be material. Accordingly, investors should use
caution in relying on forward-looking statements to anticipate future results or trends.





Some
of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those
expressed or implied by forward-looking statements include the following:



| | ● | Our
                                         ability to generate positive cash flow from operations;
| | - | ----------------------------------------------------------------------------------------------------
| |   |                                                                                                     

| | ● | Our
                                         ability to obtain additional financing to fund our operations;
| | - | -----------------------------------------------------------------------------------------------------------
| |   |                                                                                                            

| | ● | The
                                         impact of economic, political and market conditions on us and our customers;
| | - | -------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                          

| | ● | The
                                         impact of unfavorable results of legal proceedings;
| | - | ------------------------------------------------------------------------------------------------
| |   |                                                                                                 

| | ● | Our
                                         exposure to potential liability arising from possible errors and omissions, breach of
                                         fiduciary duty, breach of duty of care, waste of corporate assets and/or similar claims
                                         that may be asserted against us;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                              

| | ● | Our
                                         ability to compete effectively against competitors offering different technologies;
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                 

| | ● | Our
                                         business development and operating development;
| | - | --------------------------------------------------------------------------------------------
| |   |                                                                                             

| | ● | Our
                                         expectations of growth in demand for our products; and
| | - | ---------------------------------------------------------------------------------------------------
| |   |                                                                                                    

| | ● | Other
                                         risks described under the heading “Risk Factors” in Part I, Item 1A of this
                                         Annual Report on Form 10-K
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We
do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise
except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable
to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you
should not place undue reliance on these forward-looking statements.



References
in this Report to “we”, “us”, “the Company,” “Aura” or “Aura Systems”
means Aura Systems, Inc. As used herein, reference to “fiscal 2020” refers to the fiscal year ended February 29, 2020,
reference to “fiscal 2019” refers to the fiscal year ended February 28, 2019, reference to “fiscal 2018”
refers to the fiscal year ended February 28, 2018, reference to “fiscal 2017” refers to the fiscal year ended February
28, 2017, reference to “fiscal 2016” refers to the fiscal year ended February 29, 2016, reference to “fiscal
2015” refers to the fiscal year ended February 28, 2015, and reference to “fiscal 2014” refers to the fiscal
year ended February 28, 2014.



ii







PART
I



ITEM
1. BUSINESS



Introduction



Aura
Systems, Inc., is a Delaware corporation that was founded in 1987. The Company designs, assembles, tests and sells our proprietary
and patented axial flux induction machine known as the AuraGen®for industrial and commercial applications and
the VIPER for military applications (collectively referred to as the “AuraGen”).



Our
patented AuraGen®system –– when applied as a generator –– uses an existing engine (of
a vehicle or any other prime mover) to create mechanical energy which is then converted into electric power by our system. Our
control system is used to deliver such power to the user. When used as an electric motor, our system delivers mechanical power
to drive mechanical devices. During the first half of fiscal 2016, the Company significantly reduced operations due to lack of
financial resources. During the second half of fiscal 2016, the Company’s operations were completely disrupted when the
Company was forced to move from its facilities in Redondo Beach, California to a smaller facility in Stanton, California. During
fiscal 2017, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous
financial obligations. During fiscal 2018, the Company successfully restructured in excess of $30 million of debt and held its
first stockholder meeting since 2011. During fiscal 2019, the Company continued to focus on seeking new sources of financing and
utilized a contract manufacturer to produce some initial products as the Company drives towards restarting its operations.



Traditional
induction machines represent a radial flux design and are the workhorse of industry due to their robustness, attractive cost,
and easy control. However, radial flux machines are also relatively heavy and bulky. Axial flux induction machines (such as the
AuraGen®), on the other hand, have all of the advantages of radial flux machines, but with the advantage of higher
energy density. This results in axial flux machines being smaller and lighter yet with equivalent performance. Unlike permanent
magnet (“PM”) machines, induction machines do not use any permanent magnets and therefore the controller can change
the magnetic (B) fields since generally the magnetic (B) field is proportionate to the voltage divided by the frequency (V/f).
It is generally accepted that for PM machines, as machine size grows, the magnetic losses increase proportionately, and partial
load efficiency drops. On the other hand, with induction machines, as the machine size grows, magnetic losses do not necessarily
grow. Induction drives could offer an advantage when high-performance is desired. The peak efficiency of an induction drive will
be somewhat lower than with PM machines, but average efficiency may actually increase.



The
history of electric motors reveals that the earliest machines were in fact axial flux machines. However, after the first radial
flux machines were demonstrated in the early 1900’s, such machines were accepted as mainstream configuration. The reason
for shelving the axial flux machines were multifold and can be summarized as follows: (i) strong axial magnetic attraction force
between the stator and the rotor, (ii) fabrication difficulties such as cutting the slots in laminated cores, (iii) high cost
involved in manufacturing the laminated stator core, (iv) difficulties in assembling the machine and maintaining a uniform air
gap and (v) providing a laminated rotor that can stand the large centrifugal forces. Technological developments by Aura show that
all of the historical objections for axial flux machines can be addressed with developments in the design of such machines, as
well as, the design of the proper manufacturing processes and tooling.



The
issue of the strong axial magnetic attraction force between the stator and the rotor was addressed by Aura’s patented approach
of using a topology of two stators and a rotor sandwiched between them. This has been disclosed in Aura’s U.S. Patent 5,734,217
(March 1998), which expired in March 2018, and U.S. Patent 6,157,175 (Dec. 2000). In addition to other benefits, the topology
is such that the axial forces on the bearings are very small and negligible.



The
Company has also developed a cast rotor for the axial flux machine as described in U.S. Patents 5,734,217 and 6,157,175. This
rotor does not require any laminates and provides the structural integrity to withstand very large centrifugal forces, while at
the same time provides the proper electric and magnetic properties.



The
AuraGen®system is composed of three primary subsystems (i) the patented axial flux alternator, (ii) the electronic
control unit (“ECU”) and (iii) mounting kit that is a mechanical interface between the alternator and the prime mover.
The architecture of our ECU is designed to separate the power generation from the power user, thus creating a flexible system
that can support multi voltages simultaneously. The system architecture is based on having a direct current (“DC”)
power bus that is used to excite the alternator and also to collect energy from the alternator. The user loads are supported from
the power bus and not directly from the alternator. This immediately leads to a load following design where the demand on the
alternator at any moment in time is equal to the demanded user load (up to the maximum alternator power capabilities). In addition,
the output power is constructed from the power bus with either a PWM based inverter for alternating current (“AC”)
output, and/or, a unique patented bi direction power supply (“BDPS”) that acts as a DC to DC converter to provide
different DC voltages as an output. The BDPS provides the capability of adding power to the bus from a DC source such as batteries
whenever sudden spikes or demands occur. The BDPS also provides the seamless transition to maintain the power bus when the prime
mover is turned off (batteries are used to support the power bus).





1







After
a lengthy development period, the Company began commercializing the AuraGen® in late 1999 and early 2000. Our first
commercial product was a 5,000-watt 120/240V AC machine, in 2001; we subsequently added an 8,000-watt configuration and also introduced
the BDPS that allowed us to provide simultaneously an AC/DC solution. In fiscal 2008, the Company introduced a system that generates
up to 16,000-watts of continuous power by combining two 8,000 watts’ systems (dual system).



Starting
in 2017, the Company began reexamining its strategic approach to the market and has identified key areas upon which to initially
focus as the Company restarts operations. The markets available for AuraGen®products are both vertical and horizontal
in nature and cover numerous industries and applications worldwide. As such, the Company has developed a strategy focused on existing
markets for the AuraGen® products as well as the formation of international joint ventures and other strategic
partnerships to address local markets and needs. The first such joint venture, Jiangsu Shengfeng Mobile Power Technology Co.,
Ltd. (“Jiangsu Shengfeng”), was entered into during 2017 to address the Chinese market. Under the Jiangsu Shengfeng
joint venture agreement, Aura owns 49% of the venture and our Chinese partner owns 51%. The Chinese partner is to contribute a
total of approximately $9.25 million to the venture –– principally in the form of facilities and equipment as wells
as approximately $500,000 in cash. The Company contributed $250,000 in cash as well as a limited license to the joint venture
to manufacture, sell and service the AuraGen® products within China. The limited license sold to the Jiangsu Shengfeng
joint venture, however, does not permit Jiangsu Shengfeng to manufacture the AuraGen®rotor; rather, the joint
venture is required to purchase all rotor subassemblies as well as certain software elements directly from the Company. Jiangsu
Shengfeng’s board of directors consists of three members appointed by the Company and three appointed by our Chinese partner;
Jiangsu Shengfeng’s CEO is appointed by our Chinese partner while its CFO and director for quality assurance and control
are appointed by Aura.



Business
Arrangements



During
the first half of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second
half of fiscal 2016, the Company’s operations were disrupted when the Company was forced to move from its facilities in
Redondo Beach, California to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were
sporadic. During fiscal 2017, fiscal 2018 and fiscal 2019, the Company suspended the majority of its engineering, manufacturing,
sales, and marketing activities to focus on renegotiating numerous financial obligations. During this time, the Company’s
agreements with numerous customers, third party vendors, and organizations and entities material to the operation of the Company
business were canceled, delayed or terminated. During fiscal 2018, the Company successfully restructured in excess of $30 million
of debt. During fiscal 2019, the Company continued to address its financial needs and utilized a contractor to begin manufacturing
of the AuraGen®product. Utilizing a contractor, the Company was able to begin manufacturing of AuraGen®products during fiscal 2019 and has shipped a small amount to customers and has a small inventory of finished products available
and believes that it will have the ability to increase production once it has confirmed orders in place during fiscal 2020.



In
March 2017, the Company signed a joint venture agreement with a Chinese company to build, service and distribute AuraGen®products in China. Under the Jiangsu Shengfeng joint venture agreement, the Chinese partner owns 51% of the joint venture
and the Company owns 49%. The Chinese partner is to contribute a total of approximately $9.75 million to the venture principally
in the form of facilities, equipment, and approximately $500,000 of working capital while the Company contributed $250,000 in
cash as well as a limited license. The limited license sold to the joint venture, however, does not permit the venture to manufacture
the AuraGen® rotor; rather, the joint venture is required to purchase all rotor subassemblies as well as certain
software elements directly from the Company.





2







In
March 2019, Harry (Zvi) Kurtzman, Elimelech Lowy, David Mann, Robert Lempert and, Harry’s sister, Cipora Lavut (the “Kurtzman
Group”), initiated an effort to replace a majority of the Board of Directors. In April 2019, the Kurtzman Group (except
for Elimelech Lowy) also filed a complaint in the Delaware Chancery Court against the Company regarding the replacement of a majority
of the Board of Directors. In June 2019, the Kurtzman Group filed with the U.S. Securities and Exchange Commission (the “SEC”)
a consent solicitation statement on Schedule 14A, purporting to ask the shareholders of Aura Systems, to elect three individuals
nominated by the Kurtzman Group to the Board effective immediately. The Kurtzman Group’s actions are aimed at taking control
of the Company. These actions have consumed the time and resources of the Company and have adversely affected its ability to operate
and its results of operations. On June 4, 2019, the Company announced that it will be holding an annual meeting of stockholders
on August 26, 2019. See Item 3, Legal Proceedings for more information.



The
AuraGen®/VIPER



The
AuraGen® is composed of three basic subsystems. The first subsystem is the axial flux induction generator that
is bolted to, and driven by, the vehicle’s engine, PTO, or any other prime mover. The second subsystem is the ECU, which filters
and conditions the electricity to provide clean, steady voltages for both AC and DC power, and provides for variable speed applications
as well as load following for increased efficiency. The third subsystem consists of mounting brackets and supporting components
for installation and integration of the generator with the vehicle engine, PTO, or the prime mover.



The
Company has power solutions for three continuous power levels: (a) 5,000 watts; (b) 8,000 watts; (c) 15,000 watts via a single
system.  All the AC power is pure sine wave with total harmonic distortion of less than 2.1% and is available in 120
VAC and/or 230/240 VAC as well as 50/60 Hz and either single or three phases. In addition, the power generated on all models can
be partitioned to provide simultaneous AC and 14 or 28 VDC.  The AuraGen® power levels can be generated as
the prime mover speed varies from idle to maximum rated speed. The VIPER (the military version of the AuraGen®system)
includes as an option a complete power management system which (i) monitors in real time the batteries’ voltage and temperature,
(ii) provides a partition of the power between AC and DC simultaneously with the ability to be programmed from all AC to all DC,
(iii) monitors the RPM of the generator, (iv) monitors the temperatures of the generator and the ECU, (v) monitors the raw power
generated, (vi) monitors both the AC and DC loads as to voltage and current, (vii) provides programming of load prioritization
and load shedding, and (viii) monitors the voltage of the internal 400-800 VDC bus.



Mobile
and Remote (not power grid connected) Power Industry



We
believe that the mobile and remote power generation market is large and growing. There are four basic market segments (i) military,
(ii) stationary but remote commercial/industrial, (iii) mobile commercial/industrial, and (iv) hybrid, electric and autonomous
vehicles. The military market place is also divided between mobile and stationary applications.



We
believe that one of the fastest growing segments in the military market place is On-Board-Exportable-Power (OBEP), which is electric
power on vehicles that can be used to support other than vehicle functions. The driver for the increased demand for on board power
are numerous advance weapon systems as well as increase in C4I functions (command, control, communication, computers
and information). Currently, most on board power is provided by Auxiliary Power Units (“APUs”) that are (i) large
fuel users, (ii) bulky, (iii) heavy and (iv) require constant maintenance. Militaries all over the world are seeking more efficient
integrated power solutions for their vehicles.



Similar
to the military demands, the commercial and industrial markets also require on board power to support modern computers, digital
sensors and instruments as well as electrical driven tools. Current automotive alternators cannot supply the existing demanded
power and thus the common solution is the use of APUs. These APUs can be environmentally unfriendly, substantial users of fuel,
heavy, bulky and require constant maintenance and scheduled service. Vehicles used in the telecommunications, utilities, public
works, construction, catering, oil and gas industries, emergency/rescue, and recreational vehicles rely heavily on mobile power
for their daily work. Hybrid and electric vehicles by their nature require significant amounts of on board power to charge batteries
as well as to operate electric motors.





3







The
traditional available solutions for mobile and remote power users are:



| | ● | Gensets
                                         (AKA APUs), Gensets are standalone power generation units that are not incorporated
                                         into a vehicle and require external fuel, either gasoline or diesel, in order to generate
                                         electricity. Gensets (i) are generally noisy and cumbersome to transport because of their
                                         weight and size, (ii) typically run at constant speed to generate 50 or 60 Hz of AC power,
                                         (iii) must be operated at a significant part of the rated power to avoid wet staking,
                                         (iv) are significantly de-rated in the presence of harmonics in the loads and (v) require
                                         significant scheduled maintenance and service. Genset technology has been utilized since
                                         the 1950s.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



| | ● | High-Output
                                         Alternators, High-output alternators are traditionally found in trucks and commercial
                                         vehicles and the vehicle’s engine is used as the prime mover. All high-output alternators
                                         provide their rated power at very high RPM and significantly less power at lower RPM.
                                         In addition, high-output alternators are generally only 30% efficient at the low RPM
                                         range and increase to 50% efficiency at the high end of the RPM range. The power generated
                                         by high-output alternators is 12 or 24 Volt DC and an inverter is required if AC power
                                         is needed. In addition, due to the low power output at low RPMs, in order to get significant
                                         power, a throttle controller is used to speed-up the engine.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | Inverters,Inverters are devices that invert DC to AC. Inverters as mobile power generators
                                         are traditionally used in low power requirements, typically less than 2,500 watts, and
                                         do not have the ability to recharge the batteries that are traditionally used as the
                                         source of power. Thus, typical inverter users require other means to recharge the used
                                         batteries such as “shore-power” or gensets. More recently dynamic inverters
                                         became available. Dynamic inverters use power from the alternator to augment power from
                                         the batteries and are able to achieve power levels in excess of 6,000 watts. Dynamic
                                         inverters introduce significant stresses on both the batteries and alternators, which
                                         causes significant life shortening for both. When the inverter is turned on, the alternator
                                         is switched off from the vehicle battery and tied into a transformer that uses electronic
                                         controls to change the DC alternator inputs to AC inverter output. A separate transformer
                                         winding provides battery charging so that fully regulated 120 Volt AC and 12 Volt DC
                                         power is available as long as the engine is running at high enough RPM to provide power
                                         for the load and the battery charging. All dynamic inverters require a high-output alternator
                                         to be able to output significant AC power. As is often the case, the limiting factor
                                         is the high-output alternator. In order to get stable output, a very accurate throttle
                                         controller is also needed to maintain steady speed on the engine.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | Permanent-Magnet
                                         Alternators. Recently, a number of companies have introduced alternators using exotic
                                         permanent magnets. These alternators tend to have higher power generation capabilities
                                         than regular alternators at lower engine RPM. In order to be practical in an under-the–hood
                                         environment (200oF) active cooling must be added, since the magnets are demagnetized
                                         at approximately 176oF. There are other issues that require an active control
                                         system that will add and subtract magnetic field strength as the engine RPM increases.
                                         Over 95% of the magnets used for electric machines comes from China and, beginning in
                                         2011, the price of these magnets has sky-rocketed. In addition, China started limiting
                                         export of the magnets in order to have sufficient supplies for local consumption.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | Fuel
                                         Cells. Fuel cells are solid-state devices that produce electricity by combining a
                                         fuel containing hydrogen with oxygen. They have a wide range of applications and can
                                         be used in place of the internal combustion engine and traditional lead-acid and lithium-ion
                                         batteries. The most widely deployed fuel cells are estimated to cost significantly
                                         more than alternative solutions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | Batteries.
                                         Batteries convert stored chemical energy to electrical.
| | - | -----------------------------------------------------------------------------------------------------------



Competition



The
Company is involved in the application of its AuraGen® technology to mobile power and, as such, faces substantial
competition from companies offering different technologies.





4







Gensets
AKA APU-Portable generators meet the large market need for auxiliary power. Millions of units per year are sold in North
America alone, and millions more across the world to meet market demands for 1 to 20 Kilowatts of portable power. The market for
these power levels addresses the commercial, leisure and residential markets, and divides essentially into: (a) higher power,
higher quality and higher price commercial level units; and (b) lower power, lower quality and lower price level units. Gensets
provide the strongest competition across the widest marketplace for auxiliary power. Onan, Honda and Kohler, among others, are
well established and respected brand names in the genset market for higher reliability auxiliary power generation. There are over
40 registered genset-manufacturing companies in the United States.



High
Output Alternators- There are many High Output Alternator manufacturers. Some of the better known are: Delco-Remy, Bosh,
Nippon Densu, Hitachi, Mitsubishi and Prestolite. All alternators provide their rated power at very high RPM and significantly
less power at lower RPM. In addition, alternators are generally only 30% efficient at the low RPM range and increase to 50% efficiency
at the high RPM range.



Inverters-There
are many inverter manufacturers; across the globe the best known one is Xentrex. The pricing of industrial grade sine wave inverters
is approximately $700-850 per kilowatt plus the cost of a high output alternator (estimated at $1,000) and a good throttle controller
(estimated in the range of $250-500).



Permanent-Magnet
(“PM”) alternators. -A number of companies have introduced alternators using exotic NdFeB magnets (UQM technologies
is one of the better known). These alternators tend to have higher power generation capabilities than regular alternators at lower
RPM. Unfortunately, PM machines with NdFeB magnets are very sensitive to temperature and, unlike the AuraGen, cannot survive the
typical under-the-hood environment (200oF+). In order to apply such devices for automotive applications one must add
expensive and cumbersome active cooling since the magnets are demagnetized at approximately (176oF). To date, such
machines have been used mostly in wind-power generation applications.



In
addition to the temperature challenges of such machines, there are other issues involving active control of the magnetic field.
The main disadvantage of PM generators is the difficulty of output voltage regulation to compensate for speed and load variation
due to the lack of a simple means of field control.



Fuel
Cells-Fuel cells are solid-state, devices that produce electricity by combining a fuel containing hydrogen with oxygen.
They have a wide range of applications and can be used in place of the internal combustion engine and traditional lead-acid and
lithium-ion batteries. These systems are, however, generally prohibitively expensive, and the most widely deployed fuel cells
are estimated to cost significantly more per kilowatt than alternative solutions.



Others-Symetron Technology by Raser Inc. is sometimes mistaken for a new form of motor or generator. The Symetron technology is a
variable frequency motor/generator controller that uses numerous control schemes to optimize performance. The Symetron technology
involves adaptive tuning to continuously optimize motor and system efficiency for the speed and torque operating point.



The
Symetron controller is a potential competitor to variable speed motor controllers provided by such companies as of ABB, or Baldor-Electric
Co.



Evans
Electric in Australia has introduced an axial flux machine with a complete conductive rotor. Such a machine was first introduced
by Brinner more than 20 years ago and was abandoned because the rotor lacked the required rigidity to withstand the magnetic and
centrifugal forces. The Brinner machine is cited in Aura’s patents.



Transport
Refrigeration (“TRU”)- The main competitors for the all-electric TRU are traditional diesel-based solutions
provided by Thermo-king and Carrier. The diesel based comparable systems provided by Thermo-king and Carrier are somewhat less
expensive than our AuraGen® all-electric solution, however the diesel solutions require frequent maintenance and
the utilization of a separate diesel engine that consumes considerable fuel every operating hour. In addition, the diesel solutions
emit harmful emissions that have been recognized by the U.S. Environmental Protection Agency, California’s Air Resource
Board and others as dangerous pollutants and are increasingly subject to federal and state regulations.





5







Most
of our competitors have far greater financial, technical, and marketing resources than we have. They have larger budgets for research,
new product development and marketing, and have long-standing customer relationships. We also compete with many larger and more
established companies in the hiring and retention of qualified personnel. Our financial condition has limited our ability to market
the AuraGen®.



The
AuraGen® uses different technology and because our product is radically different from traditionally available
mobile power solutions, users may require lengthy evaluation periods to gain confidence in the product. OEMs and large fleet users
also typically require considerable time to make changes to their planning and production.



Competitive
Advantages of the AuraGen®



We
believe the AuraGen® system to be a superior product due to its convenience, cost efficiency, fuel efficiency,
reliability, flexibility in power output, quality of the electricity generated, and its ability to provide the full power at variable
speeds as well as provide load following architecture.



| | ● | Smaller
                                         Size and Weight. The AuraGen’s® patented design is estimated
                                         to be more than 50% smaller and lighter as compared to traditional solutions of comparative
                                         output. This ultra-compact design allows the AuraGen® to reside “under-the-hood”
                                         of most vehicles and to be powered by a vehicle’s primary engine or power takeoff
                                         “PTO”. In comparison, traditional solutions are too large and bulky to be
                                         integrated directly into most vehicles and, therefore, require their own independent
                                         power source.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | Higher
                                         Efficiency. We believe that the AuraGen® power solution is also
                                         more efficient than traditional solutions, due to the increase in efficiency of the AuraGen®design over conventional designs Traditional alternators, for example, are at best
                                         50% efficient and require approximately 1 gallon of fuel per each 7.6 kW-hr. The AuraGen®system in comparison is approximately 85%5 efficient and requires approximately
                                         only 1 gallon of fuel per each 15.9 kW-hr. Thus, given a need for 10 kW of power, for
                                         example, the traditional solution will require approximately 1.3 gallons per hour of
                                         fuel while the AuraGen® solution will require only 0.63 gallons per hour
                                         for the same output.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
AuraGen® solution is also a load-following solution that further increases efficiency. A load following solution
is able to adjust the amount of power output generated at any one moment to mirror the immediate demand. This is an important
characteristic as power demands generally fluctuate (sometimes dramatically). Traditional solutions, in comparison, are not load-following
and simply provide power at their maximum output rating at all times, irrespective of demand. By producing only that amount of
power necessary to meet actual demand, however, the AuraGen® becomes especially efficient whenever less than maximum
power output is required.



| | ● | Variable
                                         Speed. The AuraGen® solution provides full power at near idol.
                                         This means that, unlike most other traditional systems, the AuraGen® system’s
                                         ability to provide users with full power is largely independent of the speed of the prime
                                         mover. The ability to operate at variable speed makes the Aura solution very attractive
                                         when the speed of the prime mover varies and is unpredictable, such as in automotive
                                         applications. The variable speed solution is a direct consequence of our system architecture
                                         where we separated the power generation from the power delivery by the power bus.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | Earth-Forward,
                                         Green Technology. The AuraGen® system is more environmentally-friendly
                                         than traditional generator and mobile power technology. Because of its greater efficiency
                                         and resulting small size, the AuraGen® system utilizes fewer resources
                                         to manufacture.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





6







In
applications, such as transport refrigeration, use of the AuraGen® system eliminates the need for a separate auxiliary
diesel engine to run the refrigeration unit; because these auxiliary diesel engines are highly pollutive as to both emissions
and noise, the AuraGen® has the potential to meaningfully impact air and noise pollution levels in areas where
it is employed.



| | ● | Durability;
                                         No Scheduled Maintenance. The AuraGen® is not sensitive to temperature
                                         or altitude variations and generates the rated power at or near idle engine RPM. The
                                         AuraGen® also does not require scheduled maintenance.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Targeted
Markets



The
Company has started to reexamine and identify key markets upon which to initially focus as the Company plans to restart operations.



(i)
One element of our business plan is focused on electric transport refrigeration. The market is well understood and both social
and economic forces are providing an unprecedented opportunity to gain significant market share. Our immediate focus is on 20-k
BTU/hr. midsize trucks and the 50-k BTU/hr. trailers.



(ii)
Another element of our business plan is focused on our mobile power solution for military applications around the globe.



(iii)
We also plan to seek joint venture opportunities similar to the agreement we entered in China to explore other international opportunities.



Facilities,
Manufacturing Process and Suppliers



During
fiscal 2019, our facilities consisted of approximately 20,000 square feet in Stanton, California and an additional storage facility
in Santa Clarita, California. The Stanton facility is used for some assembly and testing of AuraGen/VIPER systems and is rented
on a short-term basis. The rent for the Stanton facility is $10,000 per month and the storage facility is an additional $5,000
per month. Our current Stanton facility is not sufficient to support the expected operations and the Company is planning to eventually
look for a new facility to be used for limited production, testing, warehousing and engineering as well as needed office space
for support staff. The Company also rents temporary space on a month-to-month basis.



Our
Jiangsu Shengfeng joint venture, of which the Company owns 49% and as further described in “Business—Introduction”,
owns facilities of approximately 400,000 square feet, consisting of approximately 200,000 square feet of manufacturing space and
200,000 square feet of general office and engineering space. The Jiangsu Shengfeng facilities are fully paid for and there is
no monthly or annual rent associated with these facilities. The Company is currently in default on its obligations to the joint
venture.



When
the Company gears up operations again, we will need to renew relationships and contracts with our suppliers or locate suitable
new suppliers for subassemblies and other components.



Research
and Development



We
believe that ongoing research and development is important to the success of our product in order to utilize the most recent technology,
develop additional products and additional uses for existing products, stay current with changes in vehicle manufacture and design
and maintain an advantage over potential competition. Our engineering, research and development costs for fiscal 2019 were approximately
$500,000 compared to approximately $100,000 in fiscal 2018.



We
stopped practically all research and development in fiscal 2017 and fiscal 2018 due to a severe cash shortfall; however, in fiscal
2019 we started redesign work on our Electronic Control Unit (“ECU”) to include the latest state-of-the-art power
electronics and processors.





We
set an initial budget of approximately $1.0 million for research and development in fiscal 2020, dependent upon our ability to
raise additional sources of funding. We believe that ongoing research and development is important to the success of our product
in order to utilize the most recent technology, develop additional products and additional uses for existing products.





7







Patents
and Intellectual Property



Our
intellectual property portfolio consists of trademarks, proprietary know-how, trade secrets, and patents.



In
the area of electromagnetic technology, we have developed numerous magnetic systems and designs that result in a significant increase
of magnetic field density per unit volume that can be converted into useful power energy or work. This increase in field density
is a factor of three to four, which, when incorporated into mechanical devices, could result in a significant reduction in size
and cost of production for the same performance.



The
applications of these technological advances are in machines used every day by industrial, commercial, and consumers. We have
applied technology to numerous applications in industrial machines, such as generators, motors, actuators, and linear motors.



We
hold the following patents: Nos. 5,734,217; 6,157,175; 6,700,214; 6,700,802; 8,955,624; with expiration dates in 2018, 2020, 2024,2024
and 2033 respectively.



At
the end of fiscal 2013 and the first quarter of fiscal 2014, we filed five new patent applications related to the AuraGen®.
These new patent applications are specifically designed to cover the (i) integration of the AuraGen® power solution
with transport refrigeration, (ii) the interface kit of the AuraGen® with prime movers, (iii) a water cooled AuraGen®solution for situations where ventilation is not available, (iv) a unique cable system with safety protection to transfer
high power between two moving objects, and (v) a unique clamping of power electronic components to heat sink to ensure good thermal
conductivity.



Government
Regulation



We
are subject to laws and regulations that affect the Company’s activities, which include, but are not limited to, the areas
of labor, intellectual property and ownership and infringement, tax, import and export requirements, environmental, and health
and safety. As we recommence operations, our operations will again be subject to federal, state and local laws and regulations
governing the occupational health and safety of our employees and wage regulations. For example, we are subject to the requirements
of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee
health and safety. We expect to expend resources to maintain compliance with OSHA requirements and industry best practices.



Employees



As
of the date of this filing, the Company has five full-time equivalent employees. Additionally, the Company engages independent
contractors to support various areas of the business. The independent contractors are used on an as-needed basis.



Significant
Customers



We
have no significant customers at this time. However, the Company has an initial commitment of approximately $1.25 million to deliver
AuraGen® systems and components to its Chinese joint venture.



Backlog





There
are no significant customers as of the date of the filing of this Annual Report on Form 10-K. However, the Company has an initial
order of AuraGen® systems and components representing approximately $1.25 million. Management believes that once
the Company has adequate financial resources and is operating again, a significant backlog will develop. No assurances, however,
can be given as to how long it will take the Company, if at all, to develop a significant backlog.





8







Raw
Materials



The
most important raw materials we use in manufacturing our products are steel, copper, and aluminum. Raw materials are purchased
both domestically and outside the United States. We have no significant long-term supply contracts. When possible, we maintain
a number of sources for our raw materials, which we believe contribute to our ability to obtain competitive pricing. The cost
of some of our raw materials and shipping costs are dependent on petroleum cost. Higher material prices, cost of petroleum, and
costs of sourced products could have an adverse effect on margins.





We
enter into standard purchase agreements with certain foreign and domestic suppliers to source selected products. The terms of
these arrangements are customary for the industry and do not contain any long-term contractual obligations on our behalf.





Available
Information



We
file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”
or the “Commission”). These materials can be inspected and copied at the SEC’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s
Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.



On
our website, www.aurasystems.com, we provide free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after they have been electronically filed or
furnished to the SEC. Information contained on our website is not part of this Annual Report on Form 10-K or our other filings
with the SEC.



ITEM
1A. Risk Factors







We
are currently party to litigation, a consent solicitation and a potential proxy contest with the Kurtzman Group, which is costly
and time-consuming and has had a material adverse effect on our business, results of operations and financial condition. and could
adversely affect our stock price.



In
March 2019, the Company received notice that a stockholder group led by Zvi (Harry) Kurtzman, a founder of the Company, was attempting
to remove three of five members of the Company’s Board of Directors and replace them with three new members via written
consent. The Company believes that the stockholder written consents are not valid. In April 2019, Harry (Zvi) Kurtzman, David
Mann, Robert Lempert and, Harry’s sister, Cipora Lavut filed a complaint in the Delaware Chancery Court, and at the request
of plaintiffs, the Delaware court issued a Status Quo Order permitting the incumbent directors to continue serving until the court’s
decision but it prohibits the Company from taking any action outside the ordinary course of business without notice. In June 2019,
Harry (Zvi) Kurtzman, Elimelech Lowy, David Mann, Robert Lempert and Cipora Lavut filed a consent solicitation statement with
the SEC seeking stockholder consents to replace a majority of the Board of Directors. These actions have consumed the Company’s
financial resources, halted its ongoing operations, resulted in substantial costs and significantly and adversely has impacted
our reputation and diverted management’s attention and resources from our business strategies, which is having a material
adverse effect on our business, operating results and financial condition. In addition, such lawsuits and acquire control of the
Company have made it more difficult to finance our operations and obtain reasonably priced insurance for the Company. Perceived
uncertainties as to our future direction as a result of changes to composition of our Board may lead to, and we believe has caused,
the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors,
cause concern to our current or potential customers, or result in the loss of potential business opportunities and make it more
difficult to attract and retain qualified personnel and business partners.





9







We
have a history of losses, and we may not be profitable in any future period.



In
each fiscal year since our reorganization in 2006, we have reported losses.  Since the Company’s Chapter 11 Plan
reorganization in 2006, we have spent considerable amounts on, among other things, building market awareness and infrastructure
for sales and distribution, enhancing our engineering capabilities, perfecting an all-electric refrigeration transport system
for midsize trucks, developing a 16-18 kW product, and developing a nine-inch system capable of delivering approximately 4 kW
of power.  We continue to need substantial funds for the development of new products, enhancement of existing products
and in order to expand sales.  However, sales of our products have not increased as we expected them to and may never
increase to the level that we need to expand our operations, or even to sustain them.  We can provide no assurance as
to when, or if, we will recommence operations or be profitable in the future.  Even if we recommence operations and
achieve profitability, we may not be able to sustain it.



We
will need additional capital in the future to meet our obligations and financing may not be available.   During fiscal
2019, the Company attempted to resume some of its engineering and manufacturing activities, but it still struggled with meeting
its financial requirements. If we cannot obtain additional capital, we will not be able to recommence our operations.



As
a result of our operating losses, we have financed our operations through sales of our debt and equity securities.  During
the first half of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second
half of fiscal 2016, the Company’s operations were disrupted when the Company was forced to move from its facilities in
Redondo Beach, California to a smaller facility in Stanton, California. During fiscal 2017 and fiscal 2018, the Company suspended
its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. During
fiscal 2019, the Company attempted to resume some of its engineering and manufacturing activities, but it was significantly limited
in its abilities due to its inability to raise significant financing. While we plan to recommence operations, expand sales and
marketing and improve operations, we continue to operate at negative cash flow.  Our ability to continue as a going
concern is directly dependent upon our ability to obtain additional operating capital and generating sufficient operating cash
flow.   If we are unable to obtain additional funding as and when we need it, we will not be able to recommence operations
or undertake our planned expansion.



Our
independent public accounting firm has included an explanatory paragraph in its opinion to the effect that there is substantial
doubt about our ability to continue as a going concern.



Our
independent public accounting firm has included an explanatory paragraph in its opinion to the effect that there is substantial
doubt about our ability to continue as a going concern.  We do not have any sufficient committed sources of capital
and do not know whether additional financing will be available when needed on terms that are acceptable, if at all.  This
going concern statement from our independent public accounting firm may discourage some investors from purchasing our stock or
providing alternative capital financing.  The failure to satisfy our capital requirements will adversely affect our
business, financial condition, results of operations and prospects.



If
we do not receive additional financing when and as needed, we may not be able to continue the research, development and commercialization
of our technology and products.  In that case, our business and results of operations would be materially and adversely
affected.



Our
capital requirements have been and will continue to be significant.  We will require substantial additional funds in
excess of our current financial resources for research, development and commercialization of our technology and products, to obtain
and maintain patents and other intellectual property rights in these technologies and products, and for working capital and other
purposes, the timing and amount of which are difficult to ascertain.   When and as we need additional funds, such funds
may not be available on commercially reasonable terms or at all.  If we cannot obtain additional funding when and as
needed, our business and results of operation would be materially and adversely affected.





10







Market
acceptance of our AuraGen® product line is uncertain.  If a large enough market does not develop for our products,
our business and the results of our operations will be materially and adversely affected.



Our
business is dependent upon sales generated from our AuraGen®/VIPER family of products.  This product line utilizes
advanced technology and has only recently begun being used in the marketplace for selected applications.  We are dependent
on the broad acceptance by businesses and industry of our products.  Because the market for our product line is emerging,
the potential size of this market and the timing of its development cannot be predicted.  A significant market may fail
to develop, or it may develop more slowly than we anticipate, either of which will have a material adverse effect on our business
and results of operations.



Our
intellectual property rights are valuable, and any inability or failure to protect them could reduce the value of our products,
services and brand, which would have a material adverse effect on our business.



Our
patents, trademarks, and all of our other intellectual property rights are important assets for us.  There are events
that are outside of our control that pose a threat to our intellectual property rights.  For example, effective intellectual
property protection may not be available in every country in which our products and services are distributed or made available.  Also,
the efforts we have taken to protect our proprietary rights may not be sufficient or effective.  Due to our lack of
financial resources, we may not be able to adequately protect our technology portfolio or apply for new patents to extend our
intellectual property portfolio. The expiration of patents in our patent portfolio may also have an adverse effect on our business.
Any significant impairment of our intellectual property rights could harm our business and or our ability to compete.  Protecting
our intellectual property rights is costly and time consuming and we may need to resort to litigation to enforce our patent rights
or to determine the scope and validity of third-party intellectual property rights and we may not have the financial resources
to pay for such litigation.  Some of our competitors may be able to sustain the costs of complex patent litigation more
effectively than we can because they have substantially greater resources.



We
seek to obtain patent protection for our innovations.  It is possible, however, that some of these innovations may not
be protectable.  In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations
that later turn out to be important.  Furthermore, there is always the possibility, despite our efforts, that the scope
of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.  Our
inability or failure to protect our intellectual property rights could have a material adverse effect on our business by reducing
the value of our products, services and brand.



We
occasionally become subject to commercial disputes that could harm our business by distracting our management from the operation
of our business, by increasing our expenses and, if we do not prevail, by subjecting us to potential monetary damages and other
remedies.



From
time to time we are engaged in disputes regarding our commercial transactions.  These disputes could result in monetary
damages or other remedies that could adversely impact our financial position or operations. Even if we prevail in these disputes,
they may distract our management from operating our business and the cost of defending these disputes would reduce our operating
results.



We
have been named as a party in various legal proceedings, and we may be named in additional litigation, all of which will require
significant management time and attention, result in significant legal expenses and may result in an unfavorable outcome, which
could have a material adverse effect on our business, operating results and financial condition.



We
are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. Certain
current lawsuits and pending proceedings are described under Part I, Item 3. “Legal Proceedings.”



The
results of these lawsuits and future legal proceedings cannot be predicted with certainty. Also, our insurance coverage may be
insufficient or not provide any coverage at all for certain claims, our assets may be insufficient to cover any amounts that exceed
our insurance coverage, and we may have to pay damage awards or otherwise may enter into settlement arrangements in connection
with such claims. Any such payments or settlement arrangements in current or future litigation could have a material adverse effect
on our business, operating results or financial condition. Even if the plaintiffs’ claims are not successful, current future
litigation could result in substantial costs and significantly and adversely impact our reputation and divert management’s
attention and resources, which could have a material adverse effect on our business, operating results or financial condition.
In addition, such lawsuits may make it more difficult to finance our operations.





11







We
are currently party to litigation with one of our directors relating to approximately $9 million and approximately 3.15 million
warrants which the director claims are owed to him and his affiliates. An adverse ruling on these claims in this litigation would
materially and adversely affect our business results or operating and financial condition, dilute our shareholders’ equity
interests in the Company and could adversely affect our stock price.





The
Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $9 million
and approximately 3.15 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017,
Mr. Kopple filed suit against the Company as well as against the then other present and former members of the Board of Directors
in connection with these allegations. The Company believes that it has valid defenses in these matters and believes that no warrants
are due to Mr. Kopple or his affiliates. The Company intends to vigorously defend against these claims. However, if Mr. Kopple
were to prevail, an adverse ruling on these claims would materially and adversely affect our business results or operating and
financial condition, dilute our shareholders’ equity interests in the Company and could adversely affect our stock price.
See Item 3. “Legal Proceedings”, “Liquidity and Capital Resources” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form
10-K for additional information regarding the transactions under dispute.



Our
business is not diversified.  If we cannot increase market acceptance of our products, modify our products and services,
or compete with new technologies, we may never be profitable.



We
currently focus all of our resources on the successful commercialization of the AuraGen® family of products.  Because
we have elected to focus our business on a single product line rather than diversifying into other areas, our success will be
dependent upon the commercial success of these products.  If we are unable to increase market acceptance of our products,
if we are unable to modify our products and services on a timely basis so that we lose customers, or if new technologies make
our technology obsolete, we may never be profitable.



Most
of our competitors are larger and better financed than we are and have a greater presence in the marketplace.  Our business
may be adversely affected by industry competition.



Both
in the U.S. and internationally, the industries in which we operate are extremely competitive.  We face substantial
competition from companies that have a long history of offering traditional auxiliary power units (portable generators), traditional
automotive alternators, and inverters (a device that inverts battery direct current electricity to alternating current).  Most
of our competitors have substantially greater financial resources, spend considerably larger sums than we spend on research, new
product development and marketing, and have long-standing customer relationships.  Furthermore, we must compete with
many larger and better-established companies in the hiring and retention of qualified personnel.  Although we believe
we have significant technological advantages over our competitors, realizing and maintaining such advantages will require us to
develop customer relationships and will also depend on market acceptance of our products.  We may not have the financial
resources, technical expertise, or marketing and support capabilities to compete successfully, which would materially and adversely
affect our business.



We
may not be able to establish an effective distribution network or strategic OEM relationships, in which case our sales will not
increase as expected and our financial condition and results of operations would be adversely affected.



We
are in the very beginning stages of developing our distribution network and establishing strategic relationships with original
equipment manufacturer (OEM) customers.  We may not be able to identify appropriate distributors or OEM customers on
a timely basis.  The distributors with which we partner may not focus adequate resources on selling our products or
may otherwise be unsuccessful in selling them.  In addition, we cannot assure you that we will be able to establish
OEM relationships on favorable terms or at all.  The lack of success of distributors or OEM customers in marketing our
products would adversely affect our financial condition and results of operations.





12







If
we are unable to locate and lease a new facility for limited production, testing, warehousing, engineering and office space, it
would have a material adverse effect on our business and results of operations.





Our
current Stanton facility is not sufficient to support our expected operations in 2020. Accordingly, the Company is planning to
eventually look for a new facility that would be used for limited production, testing, warehousing and engineering as well as
needed office space for support staff. The inability to locate a suitable facility could adversely affect our financial performance,
business operations and growth. Appropriate locations or financing for the lease of a new facility may not be available at reasonable
costs or at all. Our failure to secure a new facility will impede our business strategy.



If
we are successful in executing our business plan to grow our business, our failure to efficiently manage our growth could have
an adverse effect on our business.



If
we are successful in executing our business plan, we may experience growth in our business that could place a significant strain
on our management and other resources.  Our ability to manage this growth will require us to successfully assimilate
new employees, improve existing management information systems and reorganize our operations.  If we fail to manage
growth efficiently, our business could be adversely affected.



We
may experience delays in product shipments and increased product costs because we depend on third party manufacturers for certain
product components.  Delays in product shipment or an inability to replace certain suppliers could have a material adverse
effect on our business and results of operations.



We
currently do not have the capability to manufacture most of the AuraGen® components on a commercial scale.  Therefore,
we rely extensively on contracts with third party manufacturers for such components.  The use of third-party manufacturers
increases the risk of delay of shipments to our customers and increases the risk of higher costs if our manufacturers are not
available when required.  Our suppliers and manufacturers may not supply us with a sufficient amount of components or
components of adequate quality, which would delay production of our product.  We do not currently have written agreements
with any suppliers.  Furthermore, those suppliers who make our more technically difficult components may not be easily
replaced. Any of these disruptions in the supply of components could have a material adverse effect on our business or results
of operations.



Although
we generally aim to use standard parts and components for our products, some of our components are currently available only from
limited sources.



We
may experience delays in production of the AuraGen® if we fail to identify alternate vendors, or if any parts supply
is interrupted or reduced or if there is a significant increase in production costs, each of which could materially adversely
and affect our business and operations.



We
will need to renew sources of component supplies to meet increases in demand for the AuraGen®.  There
is no assurance that our suppliers can or will supply the components to us on favorable terms or at all.



As
we recommence our operations and in order to meet future demand for AuraGen® systems, we will need to renew contracts
or form new contracts with our prior manufacturers and suppliers or locate other suitable manufacturers and suppliers for subassemblies
and other components.   Recently, we entered into discussions with several of our prior suppliers and we are in
the process of negotiating settlements of old payables and arranging new supply contracts. Although we believe that there are
a number of potential manufacturers and suppliers of the components, we cannot guarantee that contracts for components can be
obtained on favorable terms or at all.  Any material adverse change in terms of the purchase of these components could
increase our cost of goods.



We
need to invest in tooling to have a more extensive line of products.  If we cannot expand our tooling, it may not be
possible for us to expand our operations.



We
are currently limited in the products that we are able to manufacture because of the limitations of our tooling capabilities.  In
order to have a broader line of products that address industrial and commercial needs, we must make a significant investment in
additional tooling or pursue new alternatives such as 3D printing to replace traditional tooling.  We do not currently
have the funds required to acquire new tooling or to obtain replacements and no assurances can be given that we will have the
required funds in the future.  If we do not acquire the required funds for tooling or replacement tooling, we may not
be able to expand our product line to meet industrial and commercial needs.





13







We
are subject to government regulation that may restrict our ability to use certain suppliers outside the U.S. or to sell our products
into certain countries.  If we cannot obtain the required approval from government agencies, then our business may be
adversely affected.



We
depend on third party suppliers for our parts and components, some of which are located outside of the United States.  In
the event that some of these suppliers are barred from selling their products in the United States, or cannot meet other U.S.
government regulations, we would need to locate other suppliers, which could delay or prevent us from shipping product to our
customers.  We use copper, steel and aluminum in our product and in the event of government regulations or restrictions
of these materials we may experience a shortage of these materials to manufacture our product.  Furthermore, U.S. law
restricts us from selling products in some potential foreign markets without U.S. government approval.  If we cannot
obtain the required approvals from government agencies to obtain materials or contract with suppliers or if we are restricted
by government regulation from selling our products into certain countries, our business may be adversely affected.



We
face changes in global and local economic conditions that may adversely affect consumer demand and spending, our manufacturing
operations or sources of merchandise and international operations.



Our
industry is subject to variations in the general economy and to uncertainty regarding future economic prospects. Such uncertainty,
as well as other variations in global economic conditions such as rising fuel costs, wage and benefit inflation, currency fluctuations,
import and export tariffs and increasing interest rates, may continue to cause inconsistent and unpredictable customer spending
while increasing our own input costs. In addition, this uncertainty has had, and may continue to have, an unprecedented negative
impact on the global credit markets.  Credit has tightened significantly in the last year, resulting in financing terms
that are less attractive to borrowers, and in many cases, the unavailability of certain types of debt financing. These risks,
as well as industrial accidents or work stoppages, could also severely disrupt our manufacturing operations, which could have
a material adverse effect on our financial performance.



Our
ability to obtain adequate supplies or to control our costs may be adversely affected by events affecting international commerce
and businesses located outside the United States, including natural disasters, changes in international trade, central bank actions,
changes in the relationship of the U.S. dollar versus other currencies, labor availability and cost, and other governmental policies
of the U.S. and the countries from which we import our merchandise or in which we operate facilities. The inability to import
products from certain foreign countries or the imposition of significant tariffs could have a material adverse effect on our results
of operations.



Acquisitions,
joint ventures, and strategic alliances may have an adverse effect on our business.



We
expect to continue examining potential joint ventures and strategic alliances as part of our long-term business strategy. In March
2017, we entered into a joint venture agreement with a Chinese partner. This joint venture arrangement and other transactions
and arrangements involve significant challenges and risks, including that they do not advance our business strategy, that we get
an unsatisfactory return on our investment, that we have difficulty integrating and retaining new employees, business systems,
and technology, or that they distract management from our other businesses. If an arrangement fails to adequately anticipate changing
circumstances and interests of a party, it may result in early termination or renegotiation of the arrangement. The success of
these transactions and arrangements will depend in part on our ability to leverage them to enhance our existing products and services
or develop compelling new ones. It may take longer than expected to realize the full benefits from these transactions and arrangements,
such as increased revenue, enhanced efficiencies, or increased market share, or the benefits may ultimately be smaller than we
expected. These events could adversely affect our operating results or financial condition.





14









We
rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may
not be able to grow effectively.



Our
performance is largely dependent on the talents and efforts of highly skilled individuals.  Our future success depends
on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization.  Our
continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing
employees.  The incentives to attract, retain and motivate employees provided by our ability to pay competitive salaries
as well as offering additional incentives such as stock option grants or by future arrangements may not be as effective as in
the past.  If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we
may be unable to grow effectively.



Our
business is subject to the risks of earthquakes and other natural catastrophic events, and to interruptions by man-made problems
such as computer viruses or terrorism.



Our
corporate headquarters and our research and development operations are located in the State of California in regions known for
seismic activity. A significant natural disaster, such as an earthquake, in this region could have a material adverse effect on
our business, financial condition and results of operations. In addition, our servers are vulnerable to computer viruses, break-ins,
and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect
on our business, financial condition and results of operations.



Failure
to maintain effective internal controls over financial reporting could adversely affect our business and the market price of our
Common Stock.



Pursuant
to rules adopted by the SEC under the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal
controls over financial reporting and provide a management report on our internal controls over financial reporting in all annual
reports. This report contains, among other matters, a statement as to whether our internal controls over financial reporting are
effective and the disclosure of any material weaknesses in our internal controls over financial reporting identified by management.
Section 404 also requires our independent registered public accounting firm to audit the effectiveness of our internal control
over financial reporting.



While
we currently believe our internal controls over financial reporting are effective, we are required to comply with Section 404
on an annual basis. The Company does not have the financial resources to fully comply with all requirements of Section 404. If,
in the future, we identify one or more material weaknesses in our internal controls over financial reporting during this continuous
evaluation process, our management may not be able to assert that such internal controls are effective. Although we currently
anticipate satisfying the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of completion
for our future evaluation, testing and any required remediation. Therefore, if we are unable to assert that our internal
controls over financial reporting are effective in the future, or if our auditors are unable to attest that our internal controls
are effective or they are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence
in the accuracy and completeness of our financial reports, which would have an adverse effect on our business and the market price
of our Common Stock.



Trading
on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for
our stockholders to resell their shares.



Our
common stock is quoted on the Pink Sheets of the OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized
by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business
prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance.
Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the
trading of securities listed on a quotation system like NASDAQ or a stock exchange like the New York Stock Exchange. These factors
may result in investors having difficulty reselling any shares of our common stock.





15







ITEM
1B. UNRESOLVED STAFF COMMENTS



None



ITEM
2. PROPERTIES



Our
current facilities consist of approximately 20,000 square feet in Stanton, California and an additional storage facility in Santa
Clarita, California. The Stanton facility is currently used for some testing of AuraGen® systems. The facility
is rented on a short-term basis. The rent for the Stanton facility is $10,000 per month and the storage facility is additional
$5,000 per month. The Company also rents temporary space on a month-to-month basis. Our current Stanton facility is not sufficient
to support the expected operations in 2020. Accordingly, the Company is planning to eventually look for a new facility that would
be used for limited production, testing, warehousing and engineering as well as needed office space for support staff.



Our
Jiangsu Shengfeng joint venture, of which the Company owns 49% and as further described in “Business—Introduction”,
owns facilities of approximately 400,000 square feet, consisting of approximately 200,000 square feet of manufacturing space and
200,000 square feet of general office and engineering space. The Jiangsu Shengfeng facilities are fully paid for and there is
no monthly or annual rent associated with these facilities.



ITEM
3. LEGAL PROCEEDINGS





We
are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have
not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these
claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the
loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is
subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more
of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s
consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain
matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial
condition or operating results.





In
2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California
labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring
all its options and available remedies and is working toward an offer to settle this matter.



The
Company and the Company’s Chief Executive Officer, Melvin Gagerman, are among several defendants named in a lawsuit filed
by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January
2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. However, because secured
creditors holding in excess of 97% of the issuable stock upon conversion have executed the agreement, the agreement is binding
on all of the secured creditors, including the two plaintiffs. That agreement, among other provisions, waives all past events
of default. It is the Company’s position that the two plaintiffs are not entitled to any payment or other relief at this
time and therefore that they have no valid claim against the Company or Mr. Gagerman. In March 2017, plaintiffs moved for partial
summary adjudication against the Company and Mr. Gagerman; however, the Court denied plaintiff’s motion. Thereafter, the
Court sustained demurrers by Mr. Gagerman and the Company; as a result of these successful demurrers, in February, /2017. Mr.
Gagerman was dismissed from the suit altogether and all claims against the Company but one have been dismissed by the Court as
well. In September 2018 the court entered a judgement of approximately $235,000 in favor of the two secured creditors. The Company
has filed an appeal which is currently pending.



The
Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $9 million
and approximately 3.15 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017,
Mr. Kopple filed suit against the Company as well as against current director Mr. Diaz-Verson and former directors Mr. Breslow
and Mr. Howsmon, as well as Mr. Gagerman, the current CEO (not a director) in connection with these allegations. In 2018, the
Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers,
all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses
in these matters, the Company is currently in settlement discussions with Mr. Kopple. If the settlement negotiation is unsuccessful,
the Company intends to vigorously defend against these claims. See “Liquidity and Capital Resources” in “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this
Annual Report on Form 10-K for additional information regarding the transactions under dispute with Mr. Kopple.





16







In
April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend &Stockton LLP relating to various acts
of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018,
Kilpatrick Townsend &Stockton LLP filed a cross-complaint against the Company claiming approximately $400,000 in allegedly
unpaid legal fees. The Company has reached a settlement agreement with Kilpatrick Townsend & Stockton LLP on January 11, 2019
which released the claims of all parties and ended all litigation between the parties.



In
February 2018, the Company failed to issue approximately 2.3 million shares of stock contractually owed to BetterSea, LLC (“BetterSea”),
which is wholly owned by Mr. Zvi “Harry” Kurtzman. Mr. Kurtzman then proceeded to sue the Company for failing to issue
the required stock to BetterSea LLC. The required stock was then issued in the name of Zvi Kurtzman on August 15, 2018, along
with an additional 5,108,291 shares (approximately 12% of the then outstanding shares of the Company) for not having issued the
shares quickly enough and for the fact that the price of the stock had decreased. The Company also paid $20,000 in legal fees
on behalf of Mr. Kurtzman related to this lawsuit.



On
April 8, 2019, a complaint (the “Action”) was filed in the Court of Chancery in the State of Delaware (“Court”)
against the Company by Cipora Lavut, Robert Lempert, David Mann, Peter Dalrymple and Zvi (Harry) Kurtzman, stockholders of the
Company, alleging that stockholder consents removing Ron Buschur, Si Ryong Yu and William Anderson from the Board of Directors
and appointing Lavut, Mann and Lempert were valid and effective (the “Consents”). The Consents were executed by Cipora
Lavut, Robert Lempert, David Mann, Peter Dalrymple, Zvi (Harry) Kurtzman, Elimelech Lowy and Donald Kendall, Jr. Cipora Lavut
is the sister of Harry Kurtzman. Harry Kurtzman was CEO and Chairman of the Company until December 2001, departing prior to entering
into a Consent Decree with the SEC in June 2002 whereby Mr. Kurtzman was permanently and unconditionally barred from serving as
an officer or director of any public company, which Consent Decree followed a previous 1996 SEC enforcement action whereby Mr.
Kurtzman was found to have made materially false and misleading statements and omissions in the Company’s reports filed
with the SEC. Ms. Lavut was previously Senior Vice President, Corporation Communications of the Company and also departed in December
2001. Ms. Lavut was not named in the SEC complaint. The Consents were delivered by Mr. Kurtzman shortly after the Company advised
Mr. Kurtzman that the Company would not renew a consulting agreement with BetterSea LLC, a company controlled by Harry Kurtzman.



On
April 16, 2019, Mr. Dalrymple revoked his approval of the Consents and requested to be removed as a plaintiff in the Action, which
was granted by the Court on April 24, 2019. Subsequently, Mr. Kendall also revoked his approval of the Consents. Pursuant to its
counterclaim filed with the Court, the Company denies that the Consents are valid as they were not executed by stockholders representing
the requisite number of shares held of record to effectuate the actions in the Consents, they fail to satisfy the requirements
of the Company’s Certificate of Incorporation, Bylaws and the Delaware General Corporation Law and the plaintiff’s
claims are barred by the doctrine of unclean hands. On April 18, 2019, the Court issued a Status Quo Order providing that the
Board of Directors will consist of the current incumbent directors, Si Ryong Yu, Ronald Buschur, William Anderson, Gary Douglas
and Salvador Diaz-Version, Jr., pending further decision by the Court, that Cipora Lavut, Robert Lempert, and David Mann are not
members of the Board, pending further order of the court, and that the current Board may not take certain actions outside the
ordinary course of business without notice to the plaintiffs. On May 15, 2019, the plaintiffs filed another action in Court requesting
the Company to hold an annual stockholder meeting. On May 20, 2019, the Company filed a letter with the Court requesting the Court
to lift the Status Quo Order in light of actions taken by plaintiffs. The Company advised the Court that it was willing to hold
an annual meeting as soon as reasonably practicable, but it was prevented from doing so by the Status Quo Order issued at plaintiffs’
request. On May 24, 2019, the Court revised the Status Quo Order, deleting a provision that prevented the Company from taking
action that required a Board vote without prior notice and another provision that prevented the Board from taking action that
could result in any changes to the members or size of the Board without prior notice. The Court also reduced the time of notice
for certain actions related to the Company’s debt. The remaining provisions of the Status Quo Order remain in place. On
June 4, 2019, the Company announced that it will hold an annual stockholder meeting on August 26, 2019. A hearing on the validity
of the Consents is scheduled for June 28, 2019.





ITEM
4. MINE SAFETY DISCLOSURES



Not
applicable.





17









PART
II



ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Our
shares are quoted on the Pink Sheets operated by OTC Markets, Inc. under the symbol “AUSI”. Set forth below are high
and low bid prices for our common stock for each quarterly period in the two most recent fiscal years. Such quotations reflect
inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions in
the common stock. On February 14, 2018, we effectuated a one-for-seven reverse stock split. All stock price amounts have been
retroactively adjusted to reflect the one-for-seven reverse stock split. We had approximately 3,400 stockholders of record as
of May 22, 2019.



|Period                                 |  | High |        |  | Low |  
|-------------------------------------- |  | ---- | ------ |  | --- | -
|                                       |  |      |        |  |     |  
|Fiscal 2018                            |  |      |        |  |     |  
|First Quarter ended May 31, 2017       |  | $    | 1.26   |  |     | $
|Second Quarter ended August 31, 2017   |  | $    | 1.19   |  |     | $
|Third Quarter ended November 30, 2017  |  | $    | 0.91   |  |     | $
|Fourth Quarter ended February 28, 2018 |  | $    | 1.47   |  |     | $
|                                       |  |      |        |  |     |  
|Fiscal 2019                            |  |      |        |  |     |  
|First Quarter ended May 31, 2018       |  | $    | .74    |  |     | $
|Second Quarter ended August 31, 2018   |  | $    | .50    |  |     | $
|Third Quarter ended November 30, 2018  |  | $    | 0.35   |  |     | $
|Fourth Quarter ended February 28, 2019 |  | $    | 0.5899 |  |     | $



On
May 31, 2019, the reported closing sales price for our common stock was $0.232.



Dividend
Policy



We
have not paid any dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable
future.



Sales
of Unregistered Securities



| | ● | During
                                         the fourth quarter of fiscal 2019, we issued to eight different parties a total of 2,814,063
                                         shares of common stock for $900,500, and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | During
                                         the fourth quarter of fiscal 2019, we issued to Yakov Lowy 1,312,500 shares of common
                                         stock for debt settlement of $420,000 related to the B&H debt assumption by Yakov
                                         Lowy, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | During
                                         the fourth quarter of fiscal 2019, we issued to ECS Inc. 218,750 shares of common stock
                                         for accounts payable settlement of $108,430.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





18







As
of February 28, 2018, the Company had a subscription receivable that consisted of a $1.3 million receivable for 2,653,061 shares
of the Company’s common stock from a greater than 20% shareholder, Elimelech Lowy. Per the terms of the settlement agreement with
Mr. Lowy, as soon as the Company shareholders approved the -1-for-7 reverse stock split and elected a new Board of Directors,
Mr. Lowy was to provide the Company with the additional $1.3 million. The shareholders approved the reverse split and elected
a new Board of Directors on January 11, 2018. While the terms of the agreement called for Mr. Lowy to provide the Company with
the $1.3 million by February 28, 2018, the first payment was not received until April 27, 2018, and the balance was not paid until
December 2018. During fiscal 2019 the Company received $1,225,000 in cash from Mr. Lowy with the balance of $75,000 being applied
through the assumption of the B&H note by Yakov Lowy, a relative of Elimelech Lowy. While Mr. Lowy was in default of the agreement,
no action was taken by the Company. The Company issued to Mr. Lowy 2,653,061 shares of common stock on February 28, 2018.



In
February 2018, the Company failed to issue approximately 2.3 million shares of stock contractually owed to BetterSea, LLC (“BetterSea”),
which is wholly owned by Mr. Zvi “Harry” Kurtzman. Mr. Kurtzman then proceeded to sue the Company for failing to issue
the required stock to BetterSea LLC. The required stock was then issued in the name of Zvi Kurtzman on August 15, 2018, along
with an additional 5,108,291 shares (approximately 12% of the then outstanding shares of the Company) for not having issued the
shares quickly enough and for the fact that the price of the stock had decreased. The issuance of the shares was previously reported
by the Company. The Company also paid $20,000 in legal fees on behalf of Mr. Kurtzman related to this lawsuit.



Funds
raised were for general corporate working capital purposes. All such securities were issued and sold in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act of 1933, and the certificates representing such securities contain
a restrictive legend reflecting the limitations on future transfer of those securities. The offer and sale of these securities
was made without public solicitation or advertising. The investors represented to us that they were knowledgeable and sophisticated
and were experienced in business and financial matters so as to be capable of evaluating an investment in our securities and were
an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act of 1933. Each of
these investors was afforded full access to information regarding our business.



Repurchases
of Equity Securities



We
did not repurchase any shares of our common stock during the fourth quarter of fiscal 2019.



ITEM
6. SELECTED FINANCIAL DATA



As
a smaller reporting company, we are not required to provide disclosure under this Item 6.



ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward
Looking Statements.



This
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements.
For cautions about relying on such forward-looking statements, please refer to the section entitled “Forward Looking Statements”
at the beginning of this Report immediately prior to “Item 1”.





Overview



During
the first half of fiscal 2016, the Company significantly reduced operations due to lack of financial resources. During the second
half of fiscal 2016, the Company’s operations were disrupted when the Company was forced to move from its facilities in
Redondo Beach, California to a smaller facility in Stanton, California. Operations during the second half of fiscal 2016 were
sporadic. During fiscal 2017, fiscal 2018 and fiscal 2019, the Company suspended most of its engineering, manufacturing, sales,
and marketing activities to focus on renegotiating numerous financial obligations and minimizing expenditures while it attempted
to raise additional funding and pursue some initial engineering activities.





19







In
fiscal 2018, the Company successfully eliminated approximately 68% of its total indebtedness.



Specifically,
in fiscal 2018, our secured creditors converted approximately $5.73 million of secured debt into approximately 4.1 million shares
of the Company’s common stock. The converted debt represents approximately 80% of the total secured debt of the Company.
The balance of the secured debt (approximately $960,000) is to be paid to the secured creditors in cash if the Company raises
at least $4.0 million in proceeds through new equity offerings in one or a series of related offerings. Additionally, in fiscal
2018, approximately 12.77 million of unsecured debt was converted into approximately 9.3 million shares of the Company’s
common stock and approximately $12.3 million of unsecured debt was forgiven. In total, during fiscal 2018, the Company therefore
eliminated a total of approximately $30.23 million of debt.



As
of the date of this filing, Robert Kopple, the Company’s former Vice Chairman of the Board, is the only significant unsecured
note holder that has not agreed to restructure his debt. Mr. Kopple claims that he and his affiliates are owed approximately $9
million on terms significantly preferable to other similarly-situated unsecured creditors. The Company disputes Mr. Kopple’s
claims. See “Item 3. Legal Proceedings” included elsewhere in this Annual Report on Form 10-K for information regarding
the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted the Company’s numerous offers to restructure
this debt.



On
February 14, 2018, the Company effectuated a one-for-seven reverse stock split.



For
fiscal 2019, the Company restarted some of its engineering activities as well as completed an initial restart of the manufacturing
of the AuraGen®product. The Company utilized contractors for these services in order to minimize its expenses
while it continued to pursue new sources of financing. The Company is planning to restart operations with a new management team
once it obtains adequate financing.



Our
business is based on the exploitation of our patented mobile power solution known as the AuraGen for commercial and industrial
applications and the VIPER for military applications. Our business model consists of two major components; (i) sales and marketing,
(ii) design and engineering.



(i)
Our sales and marketing approach is composed of direct sales in North America and the use of agents, distributors and joint ventures
for sales internationally. In North America, our primary focus is in (a) transport refrigeration, and (b) U.S. Military applications.



(ii)The
second component of our business model is focused on the design of new products and engineering support for the sales activities
described above. The engineering support consists of the introduction of new features for our AuraGen®solution
such as higher power, different voltages, three phase options, shore power systems, higher current solutions as well as interface
kits for different platforms. After suspending the majority of our engineering, manufacturing, sales, and marketing activities
to focus on renegotiating numerous financial obligations in fiscal 2018 and 2019, we expect modest engineering activities budgeted
at approximately $750,000 during the fiscal 2020 year.



Critical
Accounting Policies and Estimates



Our
management’s discussion and analysis of our financial conditions and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial
statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition.
We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results
could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments
and estimates in the preparation of our consolidated financial statements.







20







Revenue
Recognition



The
Company adopted Accounting Standards Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the
entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue
to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled
to receive in exchange for those goods or services recognized as performance obligations are satisfied.



The
Company has assessed the impact of the guidance by performing the following five steps analysis:



Step
1: Identify the contract

Step
2: Identify the performance obligations

Step
3: Determine the transaction price

Step
4: Allocate the transaction price

Step
5: Recognize revenue



Inventory
Valuation and Classification



Inventories
are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory
on a regular basis for excess or obsolete inventory based on estimated future usage and sales. The Company has minimally operated
and therefore has only produced minimal product since late 2015. As a result, while the Company believes that a portion of the
inventory has value, we are unable to substantiate its demand and market value and as a result have elected to reserve it in its
entirety as of February 28, 2019 and February 28, 2018.



Stock-Based
Compensation



The
Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”,
which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair
value-based method and the recording of such expense in the consolidated statements of operations.



The
Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, “Equity
Based Payments to Non-Employees”, whereas the fair value of the equity-based compensation is based upon the measurement
date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the
date at which the necessary performance to earn the equity instruments is complete.



For
the past, several years and in accordance with established public company accounting practice, the Company has consistently utilized
the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily
to management, employees, and directors.  The Black-Scholes option-pricing model is a widely-accepted method of valuation
that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances.





21









Results
of Operations



Fiscal
2019 compared to Fiscal 2018



Revenues



The
Company had revenues of $39,274 and $0 in the years ended February 28, 2019 and February 28, 2018, respectively. The Company essentially
ceased operations in late 2015 and has only recently begun to attempt to restart operations.



Cost
of Goods



Cost
of goods sold were $170,263 and $0 in the years ended February 28, 2019 and February 28, 2018, respectively. The Company continues
to fully reserve all inventory items due to our inability to show salability on a going forward basis. Therefore, all items purchased
for the manufacture of our products that are not used in the current year are reserved for and charged to cost of goods sold.



Engineering,
Research and Development



Engineering,
research and development costs increased $391,957 to $494,636 in fiscal 2019 from $102,679 in fiscal 2018. The increase is a result
of expenses incurred in the process of designing a new electronic control unit (“ECU”) for our AuraGen products as
well as sustaining engineering expenses related to the restart of manufacturing capability.



Selling,
General and Administrative Expense



Selling,
general and administrative expenses decreased $333,109 to $5,470,228 in fiscal 2019 from $5,803,337 in fiscal 2018. The reduction
in expenses was largely due to a reduction of $288,712 in non-cash charges for shares of common stock of the Company issued to
Mr. Kurtzman. Expenses in fiscal 2019 included a non-cash charge of $1,992,252 for 5,108,335 shares of common stock of the Company
issued to Mr. Kurtzman, (approximately 12% of the then outstanding shares), as a result of the lawsuit filed by Mr. Kurtzman for
not receiving shares due him under the restructuring agreement in a timely enough manner, and for the fact that the price of the
stock had decreased. Expenses in fiscal 2018 included a non-cash charge of $2,280,964 for 2,256,400 shares of common stock of
the Company issued to Harry Kurtzman given to him under the restructuring agreement.



Additionally,
for fiscal 2019 the Company was billed a total of $378,534 for consulting services by Mr. Kurtzmans’ wholly owned entity,
BetterSea LLC, and a total of $401,631 in billings from TMK Assoc., the Company’s corporate counsel, which is owned by Mr.
Kurtzmans’ daughter. For fiscal 2018, the Company was billed $434,312 for consulting services by BetterSea LLC, and an additional
$346,089 in billings from TMK Assoc.



Of
the $5,470,228 in Selling, General and Administrative expenses incurred in fiscal 2019, a total of $2,772,417, or 51%, was incurred
by the Kurtzman family. Of the $5,803,337 in Selling, General and Administrative expenses incurred in fiscal 2018, a total of
$3,061,365, or 53%, was incurred by the Kurtzman family.





In
fiscal 2019, cash paid to BetterSea LLC totaled $388,506 and cash paid to TMK Assoc. totaled $336,977, and cash paid to Koby Lavut,
son of Cipora Lavut, totaled $18,705 for expenses, for total cash paid to the Kurtzman family of $744,188, or 31% of the total
cash used in operations by the Company. In fiscal 2018, cash paid to BetterSea LLC totaled $453,062, cash paid to TMK Assoc totaled
$569,325, cash paid to Cipora Lavut, Harry Kurtzman’s sister, for accrued and unpaid wages totaled $50,000 and cash paid
to Yaira Kurtzman, Harry Kurtzman’s daughter, for accrued and unpaid wages totaled $22,040 and cash paid to Koby Lavut for
expenses totaled $5,504. These amounts total $1,099,931 or approximately 39% of total cash used in operations for fiscal 2018.
Additionally, the Company repaid a demand loan in the amount of $197,190 to Chana Kurtzman, Harry Kurtzman’s mother, for
total cash paid to the Kurtzman family of $1,297,121 in fiscal 2018. None of the other demand notes owed by the Company were repaid
in fiscal 2018.





22







Non-Operating
Income and Expense



Net
interest expense decreased to $1,078,873 in fiscal 2019 from $5,482,393 in fiscal 2018, a decrease of $4,403,520, as a result
of the restructuring implemented in February 2018 whereby approximately $17.5 million of the Company’s debt was converted
into equity. Other income in fiscal 2019 consists of approximately $2.7 million in gain on debt settlement as the Company determined
that certain accounts payable items older than four years and for which collection efforts were abandoned did not have to be paid
and were removed from the Company’s balance sheet. In fiscal 2018, other income consisted of $13,089,048 in gain on debt
settlement as a result of the Company’s restructuring.



Net
Income/Loss



We
had a net loss of $4,456,401 in the year ended February 28, 2019 compared to income of $1,700,649 in the year ended February 28,
2018, due to the debt forgiveness as noted above.



Liquidity
and Capital Resources



In
fiscal 2019, we had a loss of approximately $4.5 million and had negative cash flows from operations of approximately $2.4 million.



Contributing
to the negative cash flows from operations were the following: cash paid to BetterSea LLC in fiscal 2019 totaled $388,506 and
cash paid to TMK Assoc. in fiscal 2019 totaled $336,977, cash paid to Koby Lavut totaled $18,705 for total cash paid to the Kurtzman
family of $744,188, or 31% of the total cash used in operations by the Company. In fiscal 2018, cash paid to BetterSea LLC totaled
$453,062, cash paid to TMK Assoc totaled $569,325, cash paid to Cipora Lavut, totaled $50,000 and cash paid to Yaira Kurtzman
totaled $22,040 and cash paid to Koby Lavut totaled $5,504. These amounts total $1,099,931 or approximately 39% of total cash
used in operations. Additionally, the company repaid a demand loan in the amount of $197,190 to Chana Kurtzman, Harry Kurtzman’s
mother, for total cash paid to the Kurtzman family of $1,297,121 in fiscal 2018. None of the other demand notes owed by the Company
were repaid in fiscal 2018.



At
February 28, 2019, we had cash of approximately $358,000, compared to cash of approximately $748,000 at February 28, 2018. Working
capital at February 28, 2019 was a negative $17.4 million as compared to a negative $20.6 million at the end of the prior fiscal
year. Accounts payable decreased $2.7 million due primarily to the elimination of certain accounts payable that were more than
four years old. At February 28, 2019 and 2018, we had no accounts receivable. In fiscal 2019 we made no acquisitions of property
and equipment.



At
February 28, 2019 and February 28, 2018, we had 150,000,000 shares of $0.0001 par value common stock authorized for issuance.
During the year ended February 28, 2019 the Company issued:





| | ● | 2,814,063
                                         shares of common stock for $900,500
| | - | --------------------------------------------------------------------------------------



| | ● | 5,108,291
                                         shares of common stock in settlement valued at $1,992,250,
| | - | -------------------------------------------------------------------------------------------------------------



| | ● | 2,256,444
                                         shares of common stock for prior year stock to be issued valued at $2,280,964,
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | ● | 218,750
                                         shares of common stock for account settlement of $108,430, and
| | - | ---------------------------------------------------------------------------------------------------------------



| | ● | 1,312,500
                                         shares of common stock for debt settlement of $420,000
| | - | ---------------------------------------------------------------------------------------------------------



During
the year ended February 28, 2018 the Company issued:



| | ● | 1,428,572
                                         shares of common stock for $2,000,000,
| | - | -----------------------------------------------------------------------------------------



| | ● | 19,963,767
                                         shares of common stock in settlement valued at $18,469,574,
| | - | ---------------------------------------------------------------------------------------------------------------



| | ● | 928,572
                                         shares of common stock for services valued at $885,000 at the market value on the issuance
                                         dates
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | 2,653,061
                                         shares of common stock for a subscription receivable of $1,300,000, and
| | - | --------------------------------------------------------------------------------------------------------------------------



| | ● | 178,571
                                         shares of common stock in settlement of $175,000 of accounts payable
| | - | ---------------------------------------------------------------------------------------------------------------------



Subscription
receivable at February 28, 2018, consisted of a $1.3 million receivable for 2,653,061 shares of the Company’s common stock from
a greater than 20% shareholder, Elimelech Lowy. Per the terms of the settlement agreement with Mr. Lowy, as soon as the Company
shareholders approved the -1-for-7 reverse stock split and elected a new Board of Directors, Mr. Lowy was to provide the Company
with the additional $1.3 million. The shareholders approved the reverse split and elected a new Board of Directors on January
11, 2018. While the terms of the agreement called for Mr, Lowy to provide the Company with the $1.3 million by February 28, 2018,
the first payment was not received until April 27, 2018, and the balance was not paid until December 2018. . During fiscal 2019
the Company received $1,225,000 in cash from Mr. Lowy with the balance of $75,000 being applied through the assumption of the
B&H note by Yakov Lowy, a relative of Elimelech Lowy. While Mr. Lowy was in default of the agreement, no action was taken
by the Company. The Company issued to Mr. Lowy 2,653,061 shares of common stock on February 28, 2019.





23







In
February 2018, the Company failed to issue approximately 2.3 million shares of stock contractually owed to BetterSea, LLC (“BetterSea”),
which is wholly owned by Mr. Harry Kurtzman. Mr. Kurtzman then proceeded to sue the Company for failing to issue the required
stock to BetterSea LLC. The required stock was then issued in the name of Zvi Kurtzman on August 15, 2018, along with an additional
5,108,291 shares (approximately 12% of the then outstanding shares of the Company) for not having issued the shares quickly enough
and for the fact that the price of the stock had decreased. The Company also paid $20,000 in legal fees on behalf of Mr. Kurtzman
related to this lawsuit.



During
the year ended February 28, 2018 we issued 135,714 shares of common stock in settlement of a note payable in the amount of $150,000
plus accrued interest of $15,288.



In
the past, in order to maintain liquidity, we have relied upon external sources of financing, principally equity financing and
private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations.
We cannot assure you that additional financing will be available at the times or in the amounts required to keep the business
operating. Based on a cash flow analysis performed by management, we estimate that the Company will need an additional $5 million
to support the Company’s operations for the fiscal year ending February 29, 2020. The issuance of additional shares of equity
in connection with such financing could dilute the interests of our existing stockholders, and such dilution could be substantial.
If we cannot raise the needed funds, we would also be forced to make further substantial reductions in our operating expenses,
which could adversely affect our ability to implement our current business plan and ultimately our viability as a Company.



Kopple
Debt -Robert Kopple, who was a director of the Company from September 2013 through January 11, 2018, claims that the
Company owes him and certain affiliated parties an aggregate of approximately $5.35 million in principal and interest, and warrants
to purchase 3,273,886 shares of our common stock at a price of $0.70 per share, as a result of various loans made by Mr. Kopple
and his affiliates (collectively, the “Kopple Parties”) to the Company between 2013 and 2016. In addition, Mr. Kopple
claims the Company owes him approximately $3.34 million in principal and interest for a $2 million convertible note.



On
or about March 23, 2013, the Kopple Parties made various cash advances to the Company in the aggregate original principal amount
of $2,500,000, evidenced by an unsecured convertible note (the “Original Kopple Note”) with the right to convert outstanding
principal and accrued and unpaid interest at $0.50 per share. On or around June 20, 2014, $500,000 of the Original Kopple Note
was reclassified as a short-term note, the principal amount of the Original Kopple Note was reduced from $2.5 million to $2.0
million and the Original Kopple Note was amended to provide that an event of default under the June 2014 Agreement (as described
and defined below) would also constitute an event of default under the Original Kopple Note.



Also
in June 2014, the Company entered into a Financing Letter of Agreement (the “June 2014 Agreement”) with two affiliate
entities of Mr. Kopple, KF Business Ventures and the Kopple Family Partnership (the “Additional Kopple Parties”),
pursuant to which the Additional Kopple Parties loaned us an additional $1,000,000 (the “June 2014 Loan”). In connection
with the June 2014 Loan, Mr. Kopple also added $202,205 in penalties and accrued interest, credited the Company with $200,000
for amounts previously repaid by the Company and consolidated several earlier advances into a single new note (the “June
2014 Kopple Note”) in the principal amount of $2,715,2067 and bearing simple interest at a rate of 10% per annum. The Company
was also required to obtain a subordination agreement from the Breslow Parties in favor of the Kopple Parties with respect to
the June 2014 Kopple Note.



Pursuant
to the June 2014 Agreement, the Kopple Parties also placed various restrictions on our ability to raise additional capital, hire
qualified personnel and pay certain expenses without his prior approval for so long as the principal amount of his note remained
outstanding. The June 2014 Kopple Note also required us to issue Mr. Kopple a stock purchase warrant (the “June 2014 Kopple
Warrant”) to purchase approximately 771,000 shares of our common stock at an exercise price of $0.70 per share, to be exercisable
for seven years. Additionally, if we borrowed funds, issued capital stock or rights to acquire or convert into capital stock,
or granted rights in respect to territories to any person for cash consideration of more than $5 million in the aggregate after
the date of the June 2014 Kopple Note, we would be required to pay the entire amount of such cash consideration in excess of $5
million as a mandatory prepayment of the June 2014 Kopple Note. Additionally, Mr. Kopple required a default provision providing
that in the event that the entire outstanding balance of the June 2014 Kopple Note was not paid in full prior to October 1, 2014,
then for each consecutive calendar month during the period beginning October 1, 2014 and ending March 31, 2015, the Company would
issue to Mr. Kopple additional stock purchase warrants, each to purchase 416,458 shares of our common stock, up to a maximum aggregate
of approximately 2.5 million shares of our common stock, at $0.70 per share (the “Kopple Penalty Warrants”), the Kopple
Penalty Warranties to be exercisable for seven years from the time of their respective issuances. In addition to the Kopple Penalty
Warrants, the default provision under the June 2014 Kopple Note provides for a 5% late charge on the total amount due plus 15%
per year interest. The Company did not repay the Kopple Parties the amounts loaned to the Company, and the Company has not yet
done so. Additionally, the Company has not issued any of the Kopple Penalty Warrants and management believes that Mr. Kopple is
not entitled to receive them. The Company has also cancelled the June 2014 Kopple Warrant.





24







We
consider the transactions described above with Mr. Kopple to be related transactions.



See
“Item 3. Legal Proceedings” included elsewhere in this Annual Report on Form 10-K for information regarding the dispute
with Mr. Kopple regarding these transactions.



Unsecured
Creditor Agreements -In fiscal 2007 and 2018, the Company entered into several debt refinancing agreements (collectively,
the “Refinancing Agreements”) with debt holders holding $2,394,520 outstanding principal, plus accrued interest in
the amount of $593,446 or a total outstanding obligation in the amount of $2,987,967 The Refinancing Agreements waive all events
of default, cancel and forgive some accrued interest and provide for new five-year 5% convertible notes (the “Refinancing
Notes”) in the aggregate principal amount of $2,394,520, with no interest for first six months and 5% per year thereafter.
When the reverse stock split became effective on February 14, 2018, the Refinancing Notes were automatically converted into 1,888,934
shares of our common stock.



Going
Concern.



Our
independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent
on our ability to implement our business plan, raise capital and generate revenues. See Report of Independent Registered Public
Accounting Firm on page F-1, together with the Company’s audited consolidated financial statements for the fiscal year ended
February 28, 2019.



Item
7A. Quantitative and Qualitative Disclosures About Market Risk



As
a smaller reporting company, we are not required to provide the information required by this Item 7A.



ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



See
Index to Consolidated Financial Statements at page F-1.



ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not
applicable.





25









ITEM
9A. CONTROLS AND PROCEDURES



Evaluation
of Disclosure Controls and Procedures



The
Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the specified time periods.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated
and communicated to its management, including its principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered
by this report, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation,
the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls
and procedures were effective as of February 28, 2019.



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
quarter ended February 28, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.



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.



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
assessed the effectiveness of the Company’s internal control over financial reporting as of February 28, 2019. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework. Based on this assessment, and on those criteria, management concluded
that the Company’s internal control over financial reporting was effective as of February 28, 2019.





ITEM
9B. OTHER INFORMATION



None







26







PART
III



ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



Directors
and Executive Officers



On
January 11, 2018, at the annual stockholder meeting, Roland Bopp, Ronald J. Buschur, Michael Paritee, Jonathan Sloane and Gary
Wells, were elected as directors. Immediately prior to the January 2018 stockholder meeting, Salvador Diaz-Verson, Jr., Melvin
Gagerman and Robert Kopple were directors. During February and March 2018, as applicable, Messrs. Sloane, Bopp and Buschur each
resigned as a director. During March 2018, the Board of Directors appointed Michael Sawruk, John M. Cochran and Jeffrey D. Cowan
as directors and Dr. Timothy B. O’Brien as interim Chief Executive Officer and Mr. Timothy O’Toole as interim Chief
Financial Officer. On March 29, 2018, certain stockholders, including Zvi (Harry) Kurtzman, Elimelech Lowy and David Mann, delivered
a written consent removing Messrs. Wells, Paritee, Sawruk, Cochran and Cowan from the Board of Directors.





The
following table sets forth the names, ages and offices of all of 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                                                                                  
|----------------------------- |  | --- |  | ---------------------------------------------------------------------------------------
|Melvin Gagerman (1)           |  | 76  |  | Chief Executive Officer, Chief Financial Officer and Secretary                         
|William Anderson (2)          |  | 72  |  | Director, Chairman of the Compensation Committee and member of the Nominating Committee
|Gary Douglas (2)              |  | 72  |  | Director, Chairman of the Nominating Committee and member of the Audit Committee       
|Salvador Diaz-Verson, Jr. (2) |  | 61  |  | Director, Chairman of the Audit Committee and Member of the Compensation Committee     
|Ronald J. Buschur             |  | 55  |  | Chairman of the Board and
    Member of the Nominating Committee                       
|Sri Ryong Yu                  |  | 71  |  | Director                                                                               





| | (1) | On
March 30, 2018, the Board re-appointed Melvin Gagerman as Chief Executive Officer, Chief Financial Officer and Secretary on an
interim basis after he had been terminated two days before by the immediate previous Board. Mr. Gagerman had been serving as an
officer and director since September 2006.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Mssrs.
Anderson, Douglas and Diaz-Verson, Jr. were appointed to the Board of Directors on March 29, 2018 by a written consent executed
by certain stockholders, including certain stockholders, including, Zvi (Harry Kurtzman), Elimelech Lowy, and David Mann.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





27







Biographical
information with respect to our directors and executive officer is provided below.



Melvin
Gagerman.Mr. Gagerman is a CPA and had been a director and our Chief Executive Officer and Chief Financial Officer since
we emerged from Chapter 11 proceedings on January 31, 2006. On March 28, 2018 he was terminated but was re-appointed on March
30, 2018 as Chief Executive Officer, Chief Financial Officer and Secretary on an interim basis. As Chief Executive Officer Mr.
Gagerman formulates policies, defines our values, directs the operations of the business and defines our corporate culture. Mr.
Gagerman has many years of experience in performing these duties and a strong background in accounting and financing. Prior to
joining Aura, Mr. Gagerman served as the Chief Executive Officer of a number of companies including Surface Protection Industries
and Applause. Mr. Gagerman has also served as Managing Partner of Good, Gagerman & Berns, an accounting firm, National Audit
Partner for Laventhol and Horwath, and Audit Supervisor at Coopers and Lybrand. Mr. Gagerman intends to retire when the Company’s
Board of Directors appoints new management.



Salvador
Diaz-Verson, Jr. Mr. Diaz-Verson, Jr. was elected as a director on March 29, 2018. Previously, he served as a director
of the Company since June 2007 until January 2018 and from 1997-2005. Mr. Diaz-Verson, 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-Verson, Jr. served as President and member of the board of directors of American Family Corporation (AFLAC,
INC.) from 1976 until 1992. Mr. Diaz-Verson, 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-Verson, 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-Verson, 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-Verson, 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.



William
Anderson. Mr. Anderson was elected as a director on March 29, 2018. Mr. Anderson holds a BS from Columbia University in
Industrial Engineering & Operations Research and an MBA from Harvard Business School. Prior to his current entrepreneurial
activities, Mr. Anderson was Chief Marketing and Chief Merchandising Officer with global responsibility for Carrefour and CEO
of @Carrefour, which was Carrefour’s initial foray into e-commerce. Mr. Anderson has held senior executive positions in
numerous companies such as Hardlines at Kmart Corporation, Federated Department Stores, Ames Department Stores and Oshman’s
Sporting Goods. He is also an experienced start-up entrepreneur, having founded Domain Home Furnishings, Leisure Concepts Management,
and Gluuteny, Inc., with private equity backing. Mr. Anderson is and has served on numerous boards of directors including: Xoran
Technologies; Wind Point Partners, OpTier; Domain (of which he is also a co-founder) a Bain Capital & Bessemer Venture Partners
retailer. In 2014, Mr. Anderson became a Vistage International Chair and formed a CEO peer-group in Philadelphia. Mr. Anderson
brings to the Board extensive experience in executive management and leadership roles, including experience as a seasoned marketer,
merchandiser, and start-up entrepreneur with global experience.



Ronald
J. Buschur. Mr. Buschur was elected as a director on July, 2018, and was then elected Chairman of the Board in September
2018. Previously, he served as a director of the Company from mid-January 2014 to late-March 2018. Mr. Buschur holds a BA from
University of Phoenix in Business Management and an AA from ITT Technical Institute. Mr. Buschur served as Chief Operating Officer
of Powerwave Technologies, Inc. from 2001 to 2005, at which time he served as Chief Executive Officer and a director until April
2013. Powerwave Technologies, Inc. filed for Chapter 11 bankruptcy protection on January 28, 2013. Subsequent to Mr. Buschur leaving
Powerwave Technologies, it filed for liquidation under chapter 7 of the United States Bankruptcy Code on June 10, 2013. Prior
to joining Powerwave, Mr. Buschur held various management positions at HMT Technology (Hitachi Metal) in Silicon Valley, an independent
supplier of thin-film disks, including President and Chief Operating Officer from 1999 to 2000, Vice President of Sales, Marketing
and Quality Assurance from 1997 to 1999 and Vice President of Quality Assurance from 1994 to 1997. Mr. Buschur has worked for
Alcoa Aluminum Corporation and Digital Equipment Corporation. In addition, he is the founder/investor/advisor to numerous software
and hardware companies. Mr. Buschur brings to the Board deep knowledge of the technology industry, previous experience as CEO,
COO and President of two publicly traded companies and he also has broad global relationships and contacts.



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.





28







Si
Ryong Yu. Mr. Si Ryong Yu has been an outside consultant to the Company since 2009 and has been instrumental in facilitating
various Company projects for the South Korean military. Prior to serving as a consultant to the Company, Mr. Yu served as CEO
of ST Microelectronics and, from 1997 to 2001, held the position of Senior Managing Director at Daewoo Electronics Company where
he had, among other roles, complete management responsibility for manufacturing of electronic systems across the globe with factories
in Eastern Europe, Latin America and Asia. Prior to holding the role of Senior Managing Director, Mr. Yu served as Director of
the Daewoo Central Research and Development Center where he managed over 3,000 engineers responsible for all research and development
activities of Daewoo Electronics. Mr. Yu holds a degree in Electrical Engineering from Seoul National University. Mr. Yu brings
to the Board his experience as an experienced senior executive with extensive global experience in managing multinational manufacturing
of advanced technology systems, as well as defining real business strategies for global manufacturing of electronic systems to
increase profitability and improve market acceptance in a very competitive global environment.



Delinquent
Section 16(a) Reports





Our
shares of common stock are registered under the Securities Exchange Act of 1934, and therefore our executive officers and directors
and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements
of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and
other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are
required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file.
Based on our review of the copies of such forms received by us, and to the best of our knowledge, no executive officers, directors
and persons holding greater than 10% of our issued and outstanding stock have filed the required reports during the year ended
February 28, 2019, except as follows:



| | ● | Ronald
                                         J. Buschur and Si Ryong Yu each filed a later Form 3 in connection with their appointment
                                         as directors in July 2018.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Zvi
                                         (Harry) Kurtzman, who the Company believes became a beneficial owner of more than 10%
                                         of the Company’s common stock in August 2018, failed to file a Form 3 and he has
                                         failed to file any Form 4 reporting 79 transactions (which is based on information in
                                         the Consent Solicitation Statement filed by the Kurtzman Group on June 7, 2019).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Elimelech
                                         Lowy has failed to file a Form 3 with respect to securities he beneficially owns and,
                                         to the extent he has conducted any transactions in the Company’s stock, he has
                                         also failed to file any Form 4.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.





29









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 Verson Jr., 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. William Anderson and Mr. Salvador Diaz Verson Jr.



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. William Anderson, Mr. Ronald J. Buschur and Mr. Gary
Douglas.



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 2019, none of the Directors received any stock
options. There are no payments due to any directors upon their resignation or retirement as members of the Board.



ITEM
11. EXECUTIVE COMPENSATION







The
following table sets forth the compensation earned by or paid to the principal executive officer and the two most highly compensated
executive officers, other than the principal executive officer, (the “named executive officers”) during the fiscal years
ended February 28, 2019 and 2018.





30











Summary
Compensation Table



|Name and Principal Position                      |  | Fiscal Year |  |  | Salary ($) |         |       | Option Awards ($) |  |   | Non-Equity Incentive Plan Compensation |  |  | All Other Compensation ($) |  |  | Total ($) |       
|------------------------------------------------ |  | ----------- |  |  | ---------- | ------- | ----- | ----------------- |  | - | -------------------------------------- |  |  | -------------------------- |  |  | --------- | ------
|                                                 |  |             |  |  |            |         |       |                   |  |   |                                        |  |  |                            |  |  |           |       
|Melvin Gagerman (1)                              |  | 2018        |  |  | $          | 32,000  | (2,4) |                   |  | - |                                        |  |  | -                          |  |  | $         | 2,000 
|Chief Executive Officer, Chief Financial Officer |  | 2019        |  |  | $          | 192,000 | (2,4) |                   |  | - |                                        |  |  | -                          |  |  | $         | 31,661





| | (1) | Mr.
                                         Gagerman was elected Chairman and Chief Financial Officer effective February 1, 2006
                                         and was elected President and Chief Executive Officer effective May 25, 2006. On March
                                         28, 2018, Mr. Gagerman was terminated, but was re-appointed on March 30, 2018.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | For
                                         additional information, see “--Employment Contracts, Termination of Employment
                                         Contracts and Change in Control Arrangements” below.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | No
                                         bonuses or stock awards were granted to the above individuals for fiscal 2018 and fiscal
                                         2019.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | During
                                         fiscal year 2018, Mr. Gagerman received a total of $32,000 in compensation; Mr. Gagerman
                                         did not receive a salary during the period from March 1, 2016 through January 11, 2018,
                                         however, on January 11, 2018 the Board of Directors authorized the Company to pay Mr.
                                         Gagerman a monthly salary of $16,000 and to provide Mr. Gagerman with health and life
                                         insurance benefits commensurate with those given to other employees. Mr. Gagerman was
                                         paid these amounts in January and February 2018. For additional information, see “--Employment
                                         Contracts, Termination of Employment Contracts and Change in Control Arrangements”
                                         below.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Represents
                                         an auto allowance.
| | --- | ----------------------------------------------------------------------



| | (6) | Consists
                                         of $12,000 in auto allowance and $19,661 in personal medical expense reimbursements.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------



Outstanding
Equity Awards at 2019 Fiscal Year-End



The
following table summarizes certain information regarding the number and value of all options to purchase our common stock held
by our named executive officer for the year ended February 28, 2019. No stock awards or equity incentive plan awards were issued
during fiscal 2019.





31









OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END







|                |  | Option Awards                                            |         |  |                                                         
|--------------- |  | -------------------------------------------------------- | ------- |  | --------------------------------------------------------
|                |  | Number of Securities Underlying Unexercised Options
 (#) |         |  | Number of Securities Underlying Unexercised Options 
(#)
|Name            |  | Exercisable                                              |         |  | Un-exercisable                                          
|                |  |                                                          |         |  |                                                         
|Melvin Gagerman |  |                                                          | 142,857 |  |                                                         
|Melvin Gagerman |  |                                                          | 200,000 |  |                                                         







Option
Exercises and Stock Vesting During 2019



No
stock options were exercised during fiscal 2019 by the individuals named in the Summary Compensation Table. No stock awards were
issued during fiscal 2019.



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. Mr. Gagerman is currently employed on
an at-will basis. On January 11, 2018, the Board of Directors authorized the Company to pay Melvin Gagerman a monthly salary of
$16,000 and to provide Mr. Gagerman with health and life insurance benefits commensurate with those given to other employees.
Mr. Gagerman received an auto allowance of $1,000 per month and reimbursement of personal medical expenses for he and his wife.
These medical reimbursements totaled $19,661 in fiscal 2019, including a payment of approximately $6,000 for the premium on a
long-term care policy.



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.







32











ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth, to the extent of our knowledge, certain information regarding our common stock owned as of May 30,
2019 (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 (1) | 
|------------------------------------------------------------------------- |  | -------------------------------- | ---------- |  | --------------------------- | 
|Melvin Gagerman (2)                                                       |  |                                  | 1,113,829  |  |                             | 
|William Anderson (3)                                                      |  |                                  | 2,857      |  |                             | 
|Salvador Diaz-Verson, Jr. (4)                                             |  |                                  | 296,664    |  |                             | 
|Gary Douglas (3)                                                          |  |                                  | 20,000     |  |                             | 
|Sri Ryong Yu                                                              |  |                                  |            |  |                             | 
|Ronald J. Buschur                                                         |  |                                  |            |  |                             | 
|All current executive officers and Directors as a group (six) (2) (3) (4) |  |                                  | 1,423,350  |  |                             | 
|                                                                          |  |                                  |            |  |                             | 
|5% Stockholders                                                           |  |                                  |            |  |                             | 
|Warren Breslow (5)                                                        |  |                                  | 8,359,195  |  |                             | 
|Robert Kopple (6)                                                         |  |                                  | 3,133,737  |  |                             | 
|Kurtzman, Lowy, Mann, Lavut, Lempert (7)                                  |  |                                  | 21,571,195 |  |                             | 
|                                                                          |  |                                  |            |  |                             | 
|Elimelech Lowy (7)                                                        |  |                                  | 11,737,363 |  |                             | 
|Zvi (Harry) Kurtzman (7)                                                  |  |                                  | 7,803,298  |  |                             | 












| | * | 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 52,082,032 shares of common stock outstanding on May 30, 2019. 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 May 30, 2019, 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., 10541 Ashdale St., Stanton, CA 90680.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Includes
810,751 warrants and options exercisable within 60 days of May 30, 2019
| | --- | --------------------------------------------------------------------------------



| | (3) | Mssrs..
Anderson, Diaz-Verson, Jr., and Douglas were appointed to the board of directors on March 29, 2019.
| | --- | -----------------------------------------------------------------------------------------------------------



| | (4) | Mr.
Diaz-Verson, Jr. previously served on the Company’s board of directors from 2006 until January 11, 2018 and reappointed
to the board of directors on March 29, 2019. Including 255,848 warrants and options exercisable within 60 days of February 28,
2019.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Includes
703,414 warrants and options exercisable within 60 days of May 30, 2019
| | --- | --------------------------------------------------------------------------------



| | (6) | The
business address of Mr. Kopple is 10866 Wilshire Blvd., Suite 1500, Los Angeles, California 90024. The Company is also presently
engaged in a dispute with Mr. Kopple that includes a claim regarding approximately 3.27 million warrants which Mr. Kopple claims
to be owed to him and his affiliates by the Company. The Company believes that it has valid defenses against Mr. Kopple’s
claims and that no warrants are issuable to Mr. Kopple. Accordingly, the amount reflected herein does not include the warrants
in dispute. See Item 3. “Legal Proceedings”, “Liquidity and Capital Resources” in “Item 7”.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | The
information is based on a Schedule 13D filed on May 21, 2019 by Zvi Kurtzman, Elimelech, Lowy, David Mann, Cirpoa Lavut and Robert
Lampert. Pursuant to the Schedule 13D, the persons reported the following beneficial ownership:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(i)
Zvi Kurtzman (419 Oakmont Place, Atlanta, GA 30327) - 7,803,298 shares. Although not reported in the Schedule 13D, based on the
Company’s records, Mr. Kurtzman also holds options to purchase 485,714 shares and warrants to purchase 111,438 shares, which
amounts are excluded from the above table;

(ii)
Elimelech Lowy (36 Beth Halevy Boisbriand Quebec J7E 4H4) - 11,737,363 shares, 4,189,670 of which he has sole dispositive power
and approximately 6,547,693 of which, to the Company’s knowledge, Mr. Lowy holds a power of attorney to vote such shares.
Although not reported in the Schedule 13D, based on the Company’s records, Mr. Lowy also holds warrants to purchase 4,092,877
shares, which amount is excluded from the above table;

(iii)
David Mann (5565 Chemin De La cote De Liesse Montreal, Quebec, Canada H40 1A1) - 1,343,115 shares, 891,204 of which he has sole
dispositive power and approximately 272,320 of which, to the Company’s knowledge, Mr. Mann holds a power of attorney to
vote such shares. Although the Schedule 13D reports that Mr. Mann holds warrants to purchase 400,000 shares, based on the Company’s
records, Mr. Mann holds warrants to purchase 393,769 shares, which amount is excluded from the above table;

(iv)
Cipora Lavut (227 Sandy Springs Place, Suite D56, Sandy Springs, GA 30328) - 495,456 shares. Although not reported in the Schedule
13D, based on the Company’s records, Ms. Lavut holds warrants to purchase 51,661 shares, which amount is excluded from the
above table; and

(v)
Robert Lempert (1209 Chapel Avenue, West Cherry Hill, NJ 08002) - 191,963 shares, excluding warrants to purchase 100,000 shares.





33









Securities
Authorized for Issuance Under Equity Compensation Plans as of February 28, 2019



Equity
Compensation Plan Information as of February 28, 2019





|                                                               |  |                                                                                                              |           |  |                                                                                         |   |      |                                                                                                                                                                                 | 
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ | --------- |  | --------------------------------------------------------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                               |  |                                                                                                              |           |  |                                                                                         |   |      |                                                                                                                                                                                 | 
|                                                               |  |                                                                                                              |           |  |                                                                                         |   |      | Number
    of Securities                                                                                                                                                        | 
|                                                               |  | Number
    of                                                                                                |           |  |                                                                                         |   |      | Remaining
    
    Available for                                                                                                                                                | 
|                                                               |  | Securities
    to 
    be Issued 
    Upon 
    Exercise
    of Outstanding Options,
    Warrants and Rights |           |  | Weighted-average
    Exercise Price of
    Outstanding
    Options, Warrants and Rights |   |      | Future
                                         Issuance Under Equity Compensation
                                         Plans (Excluding Securities Reflected in Column (a) | 
|Plan
    Category                                              |  | (a)                                                                                                          |           |  | (b)                                                                                     |   |      | (c)                                                                                                                                                                             | 
|                                                               |  |                                                                                                              |           |  |                                                                                         |   |      |                                                                                                                                                                                 | 
|Equity compensation plans
    approved by security holders (1) |  |                                                                                                              | 1,032,000 |  |                                                                                         | $ | 1.40 |                                                                                                                                                                                 | 
|Equity compensation plans not approved
    by security holders |  |                                                                                                              | 2,221,428 |  |                                                                                         | $ | 1.40 |                                                                                                                                                                                 | 





| | (1) | Reflects
options under the 2006 Stock Option Plan. 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) 3,000,000 shares of common stock, or (ii)
10% of the number of shares of common stock outstanding from time to time. The numbers in this table are as of February 28, 2019.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





For
additional information regarding options and warrants, see Note 10 to our financial statements appearing elsewhere in this report.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE



Related
Transactions



See
the related transactions disclosure under “Liquidity and Capital Resources” in “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.



Review
and Approval of Related Party Transactions



Our
Audit Committee is responsible for the review and approval of all related party transactions required to be disclosed to the public
under SEC rules. This procedure, which is contained in the written charter of our Audit Committee, has been established by our
Board of Directors in order to serve the interests of our shareholders. Related party transactions are reviewed and approved by
the Audit Committee on a case-by-case basis. Under existing, unwritten policy no related party transaction can be approved by
the Audit Committee unless it is first determined that the terms of such transaction is on terms no less favorable to us than
could be obtained from an unaffiliated third party on an arms-length basis and is otherwise in our best interest.





34









During
fiscal 2019, the Company paid the following to Kurtzman family members:





| | ● | BetterSea
                                         LLC, an entity owned by Zvi (Harry) Kurtzman, was paid cash totaling $388,506 for consulting
                                         services, which agreement was not renewed based on Mr. Kurzman’s failure to provide
                                         the deliverables as contracted.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | 5,108,335
                                         shares of common stock were issued to Mr. Kurtzman, (approximately 12% of the then outstanding
                                         shares), as a result of the lawsuit filed by Mr. Kurtzman for not receiving shares due
                                         him under the restructuring agreement in a timely enough manner, and for the fact that
                                         the price of the stock had decreased.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | 2,256,400
                                         shares of common stock were issued to Zvi (Harry) Kurtzman given to him under the restructuring
                                         agreement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | TMK
                                         Assoc., the Company’s corporate counsel, which is owned by Mr. Kurtzmans’
                                         daughter, was paid cash totaling $336,977 for legal services.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Koby
                                         Lavut, Mr. Kurtzman’s nephew, was paid cash totaling $18,705
| | - | ----------------------------------------------------------------------------------------------------------



Additionally,
for fiscal 2019 the Company was billed a total of $378,534 for consulting services by Mr. Kurtzmans’ wholly owned entity,
BetterSea LLC, and an additional $401,631 in billings from TMK Assoc., the Company’s corporate counsel, which is owned by
Mr. Kurtzmans’ daughter.



During
fiscal 2019, Si Ryong Yu, a director of the Company, was paid an aggregate of $90,000 in consulting fees.



Director
Independence



Using
the definition of “independence” included in the listing rules of The Nasdaq Stock Market, our Board has determined
that Sal Diaz-Verson, Jr., Gary Douglas, Ronald J. Buschur and William Anderson are independent directors.



ITEM
14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES



The
following table sets forth the aggregate fees billed to us by KSP Group, Inc. for the years ended February 28, 2018, and 2019:





|                   |  | Year Ended February 28, |       
|------------------ |  | ----------------------- | ------
|                   |  | 2019                    |       
|Audit Fees         |  | $                       | 55,000
|Audit-related fees |  |                         | -     
|Tax fees           |  |                         | -     
|All other fees     |  |                         | -     
|                   |  |                         |       
|Total              |  | $                       | 55,000





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.”





35









Audit
Fees



Services
provided to us by KSP Group, Inc. with respect the audit of our annual financial statements and review of our annual reports on
Form 10-K and for reviews of the financial statements are included in our quarterly reports on Form 10-Q for the first three quarters
of the years ended February 28, 2019.



Audit
Related Fees



KSP
Group, Inc. did not provide any professional services to us during fiscal 2019 or fiscal 2018 which would constitute “audit
related fees”.



Tax
Fees



KSP
Group, Inc. did not provide any professional services to us during fiscal 2019 which would constitute “tax fees”.



All
Other Fees



KSP
Group, Inc. did not provide any professional services to us during fiscal 2019 or fiscal 2018 which would constitute “other
fees”.





Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors



Under
the SEC’s rules, the Audit Committee is required to pre-approve the audit and permissible non-audit services performed by
the independent registered public accounting firm in order to ensure that they do not impair the auditors’ independence.
The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client
and establish the Audit Committee’s responsibility for administration of the engagement of the independent registered public
accounting firm.



Consistent
with the SEC’s rules, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent
auditors. These services may include audit services, audit-related services, tax and other services. Pre-approval is generally
provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee
regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the
services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. During fiscal
2018 and 2017 all services provided by KSP Group, Inc. 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.



PART
IV



ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES



Documents
filed as part of this Form 10-K:



| | 1. | Financial
Statements
| | -- | --------------------



See
Index to Consolidated Financial Statements at page F-1



| | 2. | Financial
Statement Schedules
| | -- | -----------------------------









See
Index to Consolidated Financial Statements at page F-1



| | 3. | Exhibits
| | -- | --------



See
Exhibit Index



ITEM
16. FORM 10-K SUMMARY



None.



36







INDEX
TO EXHIBITS



Description
of Documents



|3.1     | Amended and Restated Certificate
    of Incorporation of Aura Systems, Inc. (Incorporated by reference to Exhibit 3.1 to Aura Systems, Inc.’s Form 10-K filed
    on June 15, 2009)                                                                                                                                                                            
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(a)  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation, dated February 14, 2018(Incorporated by reference to Exhibit 3.1 to Aura Systems, Inc.’s
    Current Report on Form 8-K filed on February 21, 2018)                                                                                                                     
|3.2     | Amended and Restated Bylaws of Aura Systems,
    Inc. (Incorporated by reference to Exhibit 3.2 to Aura Systems, Inc.’s Report on Form 10-K filed on June 15, 2009)                                                                                                                                                                                            
|10.1*   | Aura Systems, Inc. 2006 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to Aura System, Inc.’s Form 10-K filed on March 25, 2008)                                                                                                                                                                                                                 
|10.2*   | Form of Aura Systems, Inc. Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.5 to Aura System, Inc.’s Form 10-K filed on March 25, 2008)                                                                                                                                                                                           
|10.3    | Second Amendment to Transaction Documents dated
    March 14, 2017 among Registrant and those persons who have signed the signature page thereto (Incorporated by reference to
    Exhibit 10.1 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017)                                                                               
|10.4    | Third Amendment to Transaction Documents dated
    April 8, 2017 among Registrant and those persons who have signed the signature page thereto (Incorporated by reference to
    Exhibit 10.2 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017)                                                                                 
|10.5    | Second Amendment to Debt Refinancing Agreement
    dated April 9, 2017 by and between Aura Systems, Inc., on the one hand, and Warren Breslow and the Survivor’s Trust Under
    the Warren L. Breslow Trust, on the other hand (Incorporated by reference to Exhibit 10.3 to Aura Systems, Inc.’s Quarterly
    Report on Form 10-Q filed on October 25, 2017)
|10.6    | First Amendment to Unsecured Convertible Promissory Note dated
    June 15, 2017 by and between the Survivor’s Trust Under the Warren L. Breslow Trust and the Registrant (Incorporated by reference
    to Exhibit 10.1 to Aura Systems, Inc.’s Quarterly Report on Form 10-Q filed on October 25, 2017)                                                      
|10.7    | Agreement entered into on June 19, 2017 between Aura Systems Inc. and BetterSea LLC (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Current Report on Form 8-K/A filed on May 9, 2018)                                                                                                                                                      
|10.8    | Financing Letter of Agreement dated June 20, 2014 between Aura Systems, Inc. and KF Business Ventures, LP, joined by its affiliate Kopple Family Partnership, LP (Incorporated by reference to Exhibit 10.31 to Aura Systems, Inc.’s Form 10-K for the period ended February 28, 2015)**                                                                       
|10.9    | Unsecured Promissory Note dated June 20, 2014 by Aura Systems, Inc. in favor of KF Business Ventures, LP in the original principal amount of $2,915,206.11 (Incorporated by reference to Exhibit A to Exhibit 10.31 to Aura Systems, Inc.’s Form 10-K for the period ended February 28, 2015)**                                                                
|10.10   | Form of Warrant by Aura Systems, Inc. to KF
    Business Ventures, LP (Incorporated by reference to Exhibit B to Exhibit 10.31 to Aura Systems, Inc.’s Form 10-K for
    the period ended February 28, 2015)**                                                                                                                                                 
|10.11   | Sino-Foreign Cooperative Joint Venture Contract
    dated January 27, 2017 between Aura Systems, Inc. and Jiangsu AoLunTe Electrical Machinery Industrial Col, Ltd. (Incorporated
    by reference to Exhibit 10.1 to Aura Systems, Inc.’s Form 8-K filed on February 1, 2017)                                                                                 
|10.12*  | Aura Systems, Inc. Directors and Executive Officers
    Stock Option Plan (Incorporated by reference to Exhibit 10.67 to Aura Systems, Inc.’s Form S-1 filed on November
    30, 2011)                                                                                                                                                                         
|14.1    | Code of Ethics (Incorporated by reference to
    Exhibit 14.1 to Aura Systems, Inc.’s Annual Report on Form 10-K filed on June 13, 2018)                                                                                                                                                                                                                       
|31.1    | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                    
|31.2    | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                    
|32.1    | Certification pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                                                                                               
|101.INS | XBRL Instance Document                                                                                                                                                                                                                                                                                                                                         
|101.SCH | XBRL Schema Document                                                                                                                                                                                                                                                                                                                                           
|101.CAL | XBRL Calculation Linkbase Document                                                                                                                                                                                                                                                                                                                             
|101.LAB | Label Linkbase Document                                                                                                                                                                                                                                                                                                                                        
|101.PRE | Presentation Linkbase Document                                                                                                                                                                                                                                                                                                                                 



| | * | Indicates
a management contract or compensatory plan or arrangement.
| | - | --------------------------------------------------------------------





| | ** | See Item 3. “Legal Proceedings” and Item 12.
“Security Ownership of Certain Beneficial Owners and Management” included elsewhere in this Annual Report on Form
10-K for information on the dispute with Mr. Kopple regarding these exhibits.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.                                                                                                                                                                                                                                                                                                            
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                             
| | Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

37







Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.



AURA
SYSTEMS, INC.



|Dated: | June 13, 2019           | 
|------ | ----------------------- | 
|       |                         | 
|By:    | /s/ Melvin Gagerman     | 
|       | Melvin Gagerman         | 
|       | Chief Executive Officer | 



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/ Melvin Gagerman           |  | Chief Executive Officer, Acting                  |  | June 13, 2019
|Melvin Gagerman               |  | Chief Financial Officer                          |  |              
|                              |  | (Principal Executive Officer, Principal          |  |              
|                              |  | Financial Officer, Principal Accounting Officer) |  |              
|                              |  |                                                  |  |              
|/s/ Salvador Diaz-Verson, Jr. |  | Director, Member of the Audit and                |  | June 13, 2019
|Salvador Diaz-Verson, Jr.     |  | compensation Committees                          |  |              
|                              |  |                                                  |  |              
|/s/ William Anderson          |  | Director, Member of the Compensation and         |  | June 13, 2019
|William Anderson              |  | Nomination Committees                            |  |              
|                              |  |                                                  |  |              
|/s/ Gary Douglas              |  | Director, Member of the Audit and                |  | June 13, 2019
|Gary Douglas                  |  | Nomination Committees                            |  |              
|                              |  |                                                  |  |              
|/s/ Ronald J. Buschur         |  | Chairman of the Board and Member of the          |  |              
|Ronald J. Buschur             |  | Nomination Committee                             |  | June 13, 2019









38









Index
to Financial Statements



|Report of Independent Registered
    Public Accounting Firm                               | F-2        
|----------------------------------------------------------------------------------------- | -----------
|                                                                                          |            
|Financial Statements of Aura Systems,
    Inc.:                                           |            
|                                                                                          |            
|Balance
Sheets as of February 28, 2019 and February 28, 2018                              | F-3        
|Statements of Operations - Years ended
    February 28, 2019 and February 28, 2018        | F-4        
|Statements
of Stockholders’ Deficit - Years ended February 28, 2019 and February 28, 2018 | F-5        
|Statements
of Cash Flows - Years ended February 28, 2019 and February 28, 2018            | F-6        
|Notes
to Financial Statements                                                             | F-7 to F-20





F-1







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To
the Board of Directors and Stockholders



Aura
Systems, Inc.



We
have audited the accompanying balance sheets of Aura Systems, Inc. (a Delaware corporation), (the “Company”) as of
February 28, 2019 and 2018, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each
of the years in the two years in the period then ended. The Company’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based on our audits.



We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, 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. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.



In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aura
Systems, Inc. as of February 28, 2019 and 2018, and the results of its operations and its cash flows for the two years in the
period then ended in conformity with accounting principles generally accepted in the United States of America.



The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As more
fully described in Note 10 to the financial statements, the Company has historically incurred substantial losses from operations,
and the Company may not have sufficient working capital or outside financing available to meet its planned operating activities
over the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans regarding these matters are described in Note 10. The consolidated financial statements do not
include any adjustments that might result from the outcome of these uncertainties.



/s/
KSP Group, Inc.

Certified
Public Accountants



Los
Angeles, California

June
12, 2019



F-2







AURA
SYSTEMS, INC.

BALANCE
SHEETS







|                                                                                                                                                                                                   |  | As
    of February 28, |              |   | As
    of February 28, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------------ | - | ---------------------- | -
|                                                                                                                                                                                                   |  | 2019                   |              |   | 2018                   |  
|ASSETS                                                                                                                                                                                             |  |                        |              |   |                        |  
|Current assets:                                                                                                                                                                                    |  |                        |              |   |                        |  
|Cash
    and cash equivalents                                                                                                                                                                      |  | $                      | 358,209      |   |                        | $
|                                                                                                                                                                                                   |  |                        |              |   |                        |  
|Other
    current assets                                                                                                                                                                           |  |                        | 59,849       |   |                        |  
|Total current assets                                                                                                                                                                               |  |                        | 418,058      |   |                        |  
|Investment in
    joint venture                                                                                                                                                                    |  |                        | 250,000      |   |                        |  
|                                                                                                                                                                                                   |  |                        |              |   |                        |  
|Total assets                                                                                                                                                                                       |  | $                      | 668,058      |   |                        | $
|                                                                                                                                                                                                   |  |                        |              |   |                        |  
|LIABILITIES AND STOCKHOLDERS’
    DEFICIT                                                                                                                                                          |  |                        |              |   |                        |  
|Current liabilities:                                                                                                                                                                               |  |                        |              |   |                        |  
|Accounts payable                                                                                                                                                                                   |  | $                      | 2,704,270    |   |                        | $
|Accrued expenses                                                                                                                                                                                   |  |                        | 3,383,369    |   |                        |  
|Customer advances                                                                                                                                                                                  |  |                        | 1,136,542    |   |                        |  
|Shares to be issued                                                                                                                                                                                |  |                        | -            |   |                        |  
|Notes payable                                                                                                                                                                                      |  |                        | 777,537      |   |                        |  
|Convertible note
    payable and accrued interest-related party, net of discount                                                                                                                   |  |                        | 3,644,354    |   |                        |  
|Convertible notes
    payable, net of discount                                                                                                                                                     |  |                        | 125,000      |   |                        |  
|Notes
    payable and accrued interest- related party                                                                                                                                              |  |                        | 6,156,375    |   |                        |  
|                                                                                                                                                                                                   |  |                        |              |   |                        |  
|Total current
    liabilities                                                                                                                                                                      |  |                        | 17,927,447   |   |                        |  
|Note payable-related party                                                                                                                                                                         |  |                        | 3,000,000    |   |                        |  
|Convertible notes
    payable                                                                                                                                                                      |  |                        | 1,421,647    |   |                        |  
|Total liabilities                                                                                                                                                                                  |  |                        | 22,349,094   |   |                        |  
|                                                                                                                                                                                                   |  |                        |              |   |                        |  
|Commitments and contingencies                                                                                                                                                                      |  |                        |              |   |                        |  
|                                                                                                                                                                                                   |  |                        |              |   |                        |  
|Stockholders’ deficit:                                                                                                                                                                             |  |                        |              |   |                        |  
|Common stock, $0.0001
    par value; 150,000,000 shares authorized at February 28, 2019 and 2018; 52,082,083 and 41,437,035 issued and outstanding at
    February 28, 2019 and 2018, respectively |  |                        | 5,210        |   |                        |  
|Additional paid-in
    capital                                                                                                                                                                     |  |                        | 444,386,887  |   |                        |  
|Subscription receivable                                                                                                                                                                            |  |                        | -            |   |                        |  
|Accumulated
    deficit                                                                                                                                                                            |  |                        | (466,073,131 | ) |                        |  
|Total stockholders’
    deficit                                                                                                                                                                    |  |                        | (21,681,036  | ) |                        |  
|Total liabilities
    and stockholders’ deficit                                                                                                                                                    |  | $                      | 668,058      |   |                        | $





The
accompanying notes are an integral part of these financial statements.





F-3









AURA
SYSTEMS, INC.

STATEMENTS
OF OPERATIONS



|                                             |  | For the Year ended February 28, 2019 |            |   | For the Year ended February 28, 2018 |  
|-------------------------------------------- |  | ------------------------------------ | ---------- | - | ------------------------------------ | -
|                                             |  |                                      |            |   |                                      |  
|Net Revenues                                 |  | $                                    | 39,274     |   |                                      | $
|                                             |  |                                      |            |   |                                      |  
|Cost of goods sold                           |  |                                      | 170,263    |   |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Gross profit                                 |  |                                      | (130,989   | ) |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Operating expenses:                          |  |                                      |            |   |                                      |  
|Engineering, research and development        |  |                                      | 494,636    |   |                                      |  
|Selling, general, and administrative         |  |                                      | 5,470,228  |   |                                      |  
|Total operating expenses                     |  |                                      | 5,964,864  |   |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Loss from operations                         |  |                                      | (6,095,853 | ) |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Other income (expense):                      |  |                                      |            |   |                                      |  
|Interest expense, net                        |  |                                      | (1,078,873 | ) |                                      |  
|Gain on debt settlement                      |  |                                      | 2,763,137  |   |                                      |  
|Other (expense) net                          |  |                                      | (44,813    | ) |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Total other income (expense)                 |  |                                      | 1,639,451  |   |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Net Income (Loss)                            |  | $                                    | (4,456,401 | ) |                                      | $
|                                             |  |                                      |            |   |                                      |  
|Basic Income (loss) per share                |  | $                                    | (0.10      | ) |                                      | $
|                                             |  |                                      |            |   |                                      |  
|Basic Weighted-average shares outstanding    |  |                                      | 45,648,202 |   |                                      |  
|                                             |  |                                      |            |   |                                      |  
|Diluted Income (loss) per share              |  | $                                    | (0.10      | ) |                                      | $
|                                             |  |                                      |            |   |                                      |  
|Dilutive Weighted-average shares outstanding |  |                                      | 45,648,202 |   |                                      |  





The
accompanying notes are an integral part of these financial statements





F-4









AURA
SYSTEMS, INC.

STATEMENTS
OF STOCKHOLDERS’ DEFICIT



FOR
THE YEARS ENDED FEBRUARY 28, 2019 AND 2018







|                                   |  | Common   Stock Shares |            |   | Common  Stock Amount |   |       | Additional Paid-In Capital |  |   | Subscription  Receivable |  |  | Accumulated  Deficit |            |   | Total Stockholders' Deficit |  
|---------------------------------- |  | --------------------- | ---------- | - | -------------------- | - | ----- | -------------------------- |  | - | ------------------------ |  |  | -------------------- | ---------- | - | --------------------------- | -
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Balance, February 28, 2017         |  |                       | 16,284,492 |   |                      | $ | 1,629 |                            |  | $ | 410,509,367              |  |  |                      | -          |   |                             | $
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares issued for cash             |  |                       | 4,081,633  |   |                      |   | 408   |                            |  |   | 3,299,592                |  |  |                      | (1,300,000 | ) |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares issued for debt settlement  |  |                       | 19,963,767 |   |                      |   | 1,996 |                            |  |   | 18,467,578               |  |  |                      |            |   |                             |  
|Shares issued for services         |  |                       | 928,572    |   |                      |   | 93    |                            |  |   | 884,907                  |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares issued for accounts payable |  |                       | 178,571    |   |                      |   | 18    |                            |  |   | 174,982                  |  |  |                      |            |   |                             |  
|Warrant expense                    |  |                       |            |   |                      |   |       |                            |  |   | 4,910,664                |  |  |                      |            |   |                             |  
|Net Income                         |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Balance, February 28, 2018         |  |                       | 41,437,035 |   |                      | $ | 4,144 |                            |  | $ | 438,247,091              |  |  | $                    | (1,300,000 | ) |                             | $
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares issued for cash             |  |                       | 2,814,063  |   |                      |   | 281   |                            |  |   | 900,219                  |  |  |                      | 1,300,000  |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares issued for settlement       |  |                       | 5,108,291  |   |                      |   | 511   |                            |  |   | 1,991,739                |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Prior year shares to be issued     |  |                       | 2,256,444  |   |                      |   | 226   |                            |  |   | 2,280,738                |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares issued for debt settlement  |  |                       | 1,312,500  |   |                      |   | 132   |                            |  |   | 419,868                  |  |  |                      |            |   |                             |  
|Shares issued for accounts payable |  |                       | 218,750    |   |                      |   | 23    |                            |  |   | 108,407                  |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Shares cancelled                   |  |                       | (1,065,051 | ) |                      |   | (107  | )                          |  |   |                          |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Warrant expense                    |  |                       |            |   |                      |   |       |                            |  |   | 438,826                  |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Net Loss                           |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|                                   |  |                       |            |   |                      |   |       |                            |  |   |                          |  |  |                      |            |   |                             |  
|Balance, February 28, 2019         |  |                       | 52,082,032 |   |                      | $ | 5,210 |                            |  | $ | 444,386,887              |  |  |                      | -          |   |                             | $









The
accompanying notes are an integral part of these financial statements



F-5







AURA
SYSTEMS, INC.

STATEMENTS
OF CASH FLOWS

For
the Years Ended February 28,





|                                                                            |  | 2019 |            |   | 2018 |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|                                                                            |  |      |            |   |      |  
|Cash flows from operating activities:                                       |  |      |            |   |      |  
|Net Income (loss)                                                           |  | $    | (4,456,401 | ) |      | $
|Adjustments to reconcile net loss to net cash used in operating activities: |  |      |            |   |      |  
|FMV of warrants issued for services                                         |  |      | 438,826    |   |      |  
|Amortization of debt discount                                               |  |      | -          |   |      |  
|Gain on settlement of debt                                                  |  |      | (3,270,942 | ) |      |  
|Stock issued for legal settlement                                           |  |      | 1,992,250  |   |      |  
|Stock issued for services                                                   |  |      | -          |   |      |  
|(Increase) decrease in:                                                     |  |      |            |   |      |  
|Other current assets                                                        |  |      | (17,684    | ) |      |  
|Increase (decrease) in:                                                     |  |      |            |   |      |  
|Accounts payable and accrued expenses                                       |  |      | 2,215,714  |   |      |  
|Customer advances                                                           |  |      | 632,910    |   |      |  
|                                                                            |  |      |            |   |      |  
|Net cash used in operating activities                                       |  |      | (2,465,299 | ) |      |  
|                                                                            |  |      |            |   |      |  
|Cash flows from investing activities:                                       |  |      |            |   |      |  
|Investment in joint venture                                                 |  |      | -          |   |      |  
|                                                                            |  |      |            |   |      |  
|Cash flows from financing activities:                                       |  |      |            |   |      |  
|Issuance of common stock                                                    |  |      | 900,500    |   |      |  
|Payment on note payable                                                     |  |      | 50,000     |   |      |  
|Proceeds from subscription receivable                                       |  |      | 1,225,000  |   |      |  
|Proceeds from convertible notes payable                                     |  |      | -          |   |      |  
|                                                                            |  |      |            |   |      |  
|Net cash provided by financing activities                                   |  |      | 2,075,500  |   |      |  
|                                                                            |  |      |            |   |      |  
|Net increase in cash and cash equivalents                                   |  |      | (389,779   | ) |      |  
|Cash and cash equivalents, beginning of year                                |  |      | 748,008    |   |      |  
|                                                                            |  |      |            |   |      |  
|Cash and cash equivalents, end of year                                      |  | $    | 358,209    |   |      | $
|                                                                            |  |      |            |   |      |  
|Supplemental disclosures of cash flow information:                          |  |      |            |   |      |  
|Interest paid                                                               |  | $    | 37,500     |   |      | $
|                                                                            |  |      |            |   |      |  
|Income taxes paid                                                           |  | $    | -          |   |      | $
|                                                                            |  |      |            |   |      |  
|Supplemental schedule of non-cash financing and investing activities:       |  |      |            |   |      |  
|Account payable converted into shares of common stock                       |  | $    | 108,430    |   |      | $
|Notes payable converted into shares of common stock                         |  | $    | 420,000    |   |      | $
|Conversion of convertible notes into shares of common stock                 |  | $    |            |   |      | $



The
accompanying notes are an integral part of these financial statements





F-6







AURA
SYSTEMS, INC.

NOTES
TO FINANCIAL STATEMENTS

February
28, 2019



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 sales 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. In addition, the Company has also developed and patented High Force Electromagnetic
Linear Actuators which it has sold in prior years.



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Revenue
Recognition



The
Company adopted Accounting Standards Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the
entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue
to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled
to receive in exchange for those goods or services recognized as performance obligations are satisfied.



The
Company has assessed the impact of the guidance by performing the following five steps analysis:



Step
1: Identify the contract

Step
2: Identify the performance obligations

Step
3: Determine the transaction price

Step
4: Allocate the transaction price

Step
5: Recognize revenue



Cash
and Cash Equivalents



Cash
and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less. We have not experienced any losses in such accounts and believe we are not exposed
to any significant risk on cash and cash equivalents.



Inventories



Inventories
are valued at the lower of cost (first-in, first-out) or market, on a standard cost basis. We review the components of inventory
on a regular basis for excess or obsolete inventory based on estimated future usage and sales. As further described in Note 3,
due to historical reasons, we are holding inventories in excess of what we expect to sell in the next fiscal year. The Company
has minimally operated and therefore has only produced minimal product since late 2015. As a result, while the Company believes
that a portion of the inventory has value, we are unable to substantiate its demand and market value and as a result have elected
to reserve it in its entirety as of February 28, 2019 and February 28, 2018.



Stock-Based
Compensation



The
Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation – Stock Compensation”,
which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair
value-based method and the recording of such expense in the consolidated statements of operations.





F-7









The
Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with FASB ASC 505-50, “Equity
Based Payments to Non-Employees”, whereas the fair value of the equity-based compensation is based upon the measurement
date as determined at the earlier of either (a) the date at which a performance commitment is reached or (b) at the
date at which the necessary performance to earn the equity instruments is complete.



For
the past several years and in accordance with established public company accounting practice, the Company has consistently utilized
the Black-Scholes option-pricing model to calculate the fair value of stock options and warrants issued as compensation, primarily
to management, employees, and directors.  The Black-Scholes option-pricing model is a widely-accepted method of valuation
that public companies typically utilize to calculate the fair value of options and warrants that they issue in such circumstances.



Fair
Value of Financial Instruments



We
measure our financial assets and liabilities in accordance with the requirements of FASB ASC 825 “Financial Instruments”.
The carrying values of accounts receivable, accounts payable, current notes payable, accrued expenses and other liabilities approximate
fair value due to the short-term maturities of these instruments. The carrying amounts of long-term convertible notes payable
approximate their respective fair values because of their current interest rates payable and other features of such debt in relation
to current market conditions.



Income
Taxes



We
account for income taxes in accordance with FASB ASC 740, “Income Taxes”. Under FASB ASC 740, deferred income taxes
are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their
financial statement reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax expense for the period,
if any, and the change during the period in deferred tax assets and liabilities.



We
have significant income tax net operating losses; however, due to the uncertainty of the realize-ability of the related deferred
tax asset and other deferred tax assets, a valuation allowance equal to the amount of deferred tax assets has been established
at February 28, 2019 and February 28, 2018.



FASB
ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax
benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable
based on its technical merit.



Earnings
(Loss) per Share



We
utilize FASB ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss)
available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share
is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common shares
available upon exercise of stock options and warrants using the treasury stock method, except for periods of operating loss for
which no common share equivalents are included because their effect would be anti-dilutive.



Estimates



The
preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.





F-8









Recently
Issued Accounting Pronouncements



In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes
Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments
in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. We are currently evaluating the impact of adopting ASU No. 2016-02 on our financial statements.



In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating the impact of adopting ASU No. 2016-09 on our financial statements.



In
June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Statements,” which requires companies
to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual reporting
periods, and interim periods therein, beginning after December 15, 2019 (fiscal year 2021 for the Company). The Company has not
yet determined the potential effects of the adoption of ASU 2016-13 on its Financial Statements.



In
August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which aims to
eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of
cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for annual reporting periods,
and interim periods therein, beginning after December 15, 2017 (fiscal year 2019 for the Company). The Company has determined
there is no material effect of the adoption of ASU 2016-15 on its Financial Statements.



The
Company adopted Accounting Standards Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the
entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue
to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled
to receive in exchange for those goods or services recognized as performance obligations are satisfied.



The
Company has assessed the impact of the guidance by performing the following five steps analysis:



Step
1: Identify the contract

Step
2: Identify the performance obligations

Step
3: Determine the transaction price

Step
4: Allocate the transaction price

Step
5: Recognize revenue





F-9









NOTE
3 – INVENTORIES



Inventories
at February 28, 2019 and February 28, 2018 consisted of the following:



|                  |  | 2019 |            |   | 2018 |  
|----------------- |  | ---- | ---------- | - | ---- | -
|                  |  |      |            |   |      |  
|Raw materials     |  | $    | 1,932,050  |   |      | $
|Finished goods    |  |      | 1,651,283  |   |      |  
|                  |  |      |            |   |      |  
|                  |  |      | 3,583,333  |   |      |  
|Inventory reserve |  |      | (3,583,333 | ) |      |  
|                  |  |      |            |   |      |  
|Current portion   |  | $    | -          |   |      | $



Inventories
consist primarily of components and completed units for the Company’s AuraGen® product.



Early
in our AuraGen® program, we determined it was most cost-effective to outsource production of components and subassemblies
to volume-oriented manufacturers, rather than produce these parts in-house. As a result of this decision, and based on then anticipated
sales, we purchased, prior to fiscal 2001, a substantial inventory of components at volume prices, a portion of which was then
assembled into finished AuraGen® units. Since sales did not meet expectations, we have been selling product from
this inventory for several years. Management has analyzed its inventories based on its current business plan, current potential
orders for future delivery, potential obsolescence and pending proposals with prospective customers and has determined we do not
expect to realize all of its inventories within the next year. As described in Note 2 above, while the Company believes the inventory
has some value, it has elected to fully reserve the inventory due to the inability of determining the demand and, therefore, fair
market value at February 28, 2019 and February 28, 2018 is zero.



NOTE
4 – OTHER CURRENT ASSETS



Other
current assets of $59,849 and $42,165 are comprised primarily of vendor advances of $57,777 and $42,165 as of February 28, 2019
and February 28, 2018, respectively.





F-10









NOTE
5 – NOTES PAYABLE



Notes
payable consisted of the following:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | February 28, 2019 |           |  | February 28, 2018 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- |  | ----------------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                   |           |  |                   |  
|Demand promissory notes payable with six individuals, carrying an interest rate of 10% (see Demand Promissory Notes below)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | $                 | 777,537   |  |                   | $
|Note payable – related party, carrying an interest rate of 5% - see note 6, Breslow Note, for further details                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   | 3,000,000 |  |                   |  
|Convertible Promissory Note dated August 10, 2012, due August 10, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 10th of each month with the principal payment due on the maturity date. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See 7% Convertible Promissory Notes – Dalrymple August 2012 for further details. |  |                   | 264,462   |  |                   |  
|Convertible Promissory Note dated October 2, 2012, due October 2, 2017, convertible into shares of our common stock at a price of $0.76 per share. The note carries an interest rate of 7% with interest only payments due on the 2nd of each month with the principal payment due on the maturity date. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See 7% Convertible Promissory Notes – Dalrymple October 2012 for further details. |  |                   | 133,178   |  |                   |  
|Senior secured convertible notes dated May 7, 2013, due May 7, 2014, convertible into shares of our common stock at a price of $0.75 per share. The notes carry an interest rate of 12% with interest due on the last day of the month. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Kenmont Capital Partners, LPD Investments and Guenther for further details.                                                 |  |                   | 945,825   |  |                   |  
|Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50per share. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Dresner and Lempert for further details.                                                                                                                                                                         |  |                   | 78,182    |  |                   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                   | 1,421,647 |  |                   |  
|Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50per share. On January 30, 2017, this note was amended providing, among other things, for the conversion of 80% of the principal and accrued interest into common stock at $1.386 per share conditioned on the occurrence of certain future events the last of which was completed on February 14, 2018. See Convertible Debt – Abdou and Abdou for further details.                                                                                                                                                                             |  |                   | 125,000   |  |                   |  
|Convertible notes dated April 2016 thru February 2017 with B&H TEL LLC. The notes carry an interest rate of 5% and might be converted into the company shares of common if the shareholders approve a 7:1 reverse stock split. The note holder has elected not to convert and to have the note paid over an eleven-month period. The first payment of $50,000 was paid in April 2018 with the balance of the note being assumed by a third party and converted into stock as of February 28, 2019.                                                                                                                                                                                      |  |                   | -         |  |                   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                   | 125,000   |  |                   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                   | 5,324,184 |  |                   |  
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | $                 | 902,537   |  |                   | $
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $                 | 4,421,647 |  |                   | $





F-11









DEMAND
PROMISSORY NOTES



The
Demand Promissory Notes are six individual notes issued in 2015 that are payable on demand with an interest rate of 10% per annum.
The principal amount of each note and the person/entity they are payable to are as follows: $10,000 Mr. Zeitlin, a former director
of the Company; $30,000 Mr. Sook; $461,537 Mr. Macleod, a former president of the Company; $267,000 Mr. Veen, an employee of the
Company; $4,500 Mr. Howsmon, a former director of the Company; $4,500 El Pais, an entity controlled by Salvador Diaz, a current
director of the Company.



CONVERTIBLE
DEBT



Kenmont
Capital Partners

On
May 7, 2013, the Company transferred 4 notes payable with a total principal value of $1,000,000 together with accrued interest,
and consulting fees to a senior secured convertible note with a principal value of $1,087,000 (“New Kenmont Note”)
and warrants to Kenmont Capital Partners LP. The New Kenmont Note had a 1-year maturity date and was convertible into shares of
common stock at the conversion price of $0.75 per share. The warrants were subsequently exercised. The Company recorded $342,020
as a discount, which has been fully amortized. There is a remaining balance of $549,954 as of February 28, 2019.



LPD
Investments

On
May 7, 2013, the Company transferred 2 note payables with a total principal value of $550,000 together with accrued interest to
a senior secured convertible note with a principal value of $558,700 (“New LPD Note”) and warrants to LPD Investments,
Ltd. The New LPD Note had a 1-year maturity date and was convertible into shares of common stock at the conversion price of $0.75
per share. The warrants were subsequently exercised. The Company recorded $175,793 as a discount, which has been fully amortized.
There is a remaining balance of $163,677 as of February 28, 2019.



Guenther

On
May 7, 2013, the Company entered into an agreement with an individual, Mr. Guenther, for the sale of $750,000 of secured convertible
note payable (the “Note”) and warrants. The Note had a 1-year maturity date and was convertible into shares of common
stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,000,000 shares and have an initial
exercise price of $0.75 per share and have a 7-year term. The Company recorded $235,985 as a discount, which has been fully amortized.
There is a remaining balance of $232,194 as of February 28, 2019.



Dresner
and Lempert

On
June 20, 2013, the Company entered into an agreement with two individuals, Mr. Dresner and Mr. Lempert, for the sale of $200,000
of secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible
into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company
recorded $39,152 as a discount, which has been fully amortized. There is a remaining balance of $78,182 as of February 28, 2019.



Abdou
and Abdou

On
June 20, 2013, the Company entered into an agreement with two individuals, Mr. Abdou and Mr. Abdou, for the sale of $125,000 of
secured convertible notes payable (the “Notes”) and warrants. The Notes had a 1-year maturity date and were convertible
into shares of common stock at the conversion price of $0.50 per share. The warrants were subsequently exercised. The Company
recorded $24,470 as a discount, which has been fully amortized. There is a remaining balance of $125,000 as of February 28, 2019.



F-12







Kopple
Notes



On
August 19, 2013, the Company entered into an agreement with Robert Kopple, a former member of its Board of Directors for the sale
of $2,500,000 of convertible notes payable (the “Kopple Notes”) and warrants. The Kopple Notes carry a base interest
rate of 9.5%, have a 4-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per
share. The warrants were subsequently exercised. The Company recorded $667,118 as a discount, which has been fully amortized.
The Company also entered into a demand note payable with this individual in the amount of $20,000, which bears interest at a rate
of 5%. As of February 28, 2019, the balance of the $2,000,000 note including interest is $3,621,944, and the balance of the demand
note payable including interest is $22,410. The total owed under these two notes is $3,644,354.



7%
Convertible Promissory Notes:



Dalrymple
– August 2012

On
August 10, 2012 the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $1,000,000
of unsecured Convertible Promissory Note. The Convertible Promissory Note balance together with all accrued interest thereon was
due and payable on August 10, 2017 and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing
date.   The Company recorded $310,723 as a debt discount, which will be amortized over the life of the note.There
is a remaining balance of $264,462 as of February 28, 2019.



Dalrymple
– October 2012

On
October 2, 2012 the Company entered into an agreement with an individual, Mr. Dalrymple, for the sale of $500,000 of
unsecured Convertible Promissory Note. This Convertible Promissory Note balance together with all accrued interest thereon was
due and payable on October 2, 2017and the annual interest rate was 7% per annum and was due to be repaid 5 years from the closing
date.   The Company recorded $137,583 as a debt discount, which will be amortized over the life of the note.There
is a remaining balance of $133,178 as of February 28, 2019.



On January 30, 2017 the Company entered
into an agreement entitled First Amendment to Transaction Documents with five of seven secured creditors holding a security interest
in all of the Company’s assets except for its patents and other intellectual properties. These creditors are the seven listed
above under Convertible Debt and include the following: Kenmont Capital Partners, LPD Investments, Guenther, Dresner, Lempert
and Abdou and Abdou. All of the creditors entered into the January 30, 2017 agreement with the exception of Mr. Abdou and Mr.
Abdou. The original agreement dated May 7, 2013 provided that if at least 75% of the stock issuable upon conversion of the convertible
notes votes to amend the agreement and/or waive any conditions or defaults, then any such amendments or waivers shall be binding
on all secured creditors. The five secured creditors signing the amendment total in excess of 95% of the issuable stock upon conversion
and, therefore the agreement is binding on all seven of the secured creditors. The agreement provided that all accrued and unpaid
interest will be added to the principal amount. The amended note provided for no interest from November 1, 2016 to February 14,
2018, the date at which the 1-for-7 reverse stock split became effective at which time 80% of the total debt including accrued
interest was converted into shares of common stock and a new five year 5% per annum convertible note was issued for the remainder.
The new amended and restated senior convertible notes have a maturity date of January 30, 2022. The five creditors and the Company
entered into a Second Amendment to Transaction Documents on March 14, 2017 and a Third Amendment to Transaction Documents on April
8, 2017, both of which extended the required date of the stockholder approval of the 1-for-7 reverse stock split, which was completed
on February 14, 2018. The amended and restated senior convertible notes also require the Company to make a “Required Cash
Payment” as defined in the agreement if the Company receives at least $4,000,000 in aggregate gross proceeds from the sale
of equity securities (including securities convertible into equity securities) of the Company in one or a series of related transactions.
The Required Cash Payment is equal to the current outstanding balance of the notes, which was $1,149,007 at February 28, 2019,
plus any outstanding accrued interest.





NOTE
6 – RELATED PARTIES TRANSACTIONS



Breslow
Note

On
January 24, 2017 the Company entered into a Debt Refinancing Agreement with Mr. Breslow, a former Director of the Company. Pursuant
to the agreement, both Mr. Breslow and the Company acknowledged that total debt owed to Mr. Breslow was $23,872,614 including
$8,890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest due, waive all events of default and sign
a new five-year convertible note in the amount of $14,982,041 providing for no interest for six months and interest of 5% per
annum thereafter payable monthly in arrears. The note also provides various default provisions. In accordance with the agreement,
on February 14, 2018, the effective date of the 1-for-7 reverse stock split, $11,982,041 of the note was converted into 7,403,705
shares of common stock and the then accrued interest of $9,388,338 was forgiven. A new $3,000,000 five-year note representing
the remaining balance was entered into. The note bears interest at a rate of 5% per annum payable monthly in arrears.





F-13







Kopple
Note

At
February 28, 2019, the balance in Notes Payable and accrued interest-related party, current of $6,026,087, includes $3,268,081
plus accrued interest of $2,438,765 to Mr. Kopple (a former Board member), a 10% shareholder. Related Parties Transactions also
includes $82,000 of unsecured notes payable plus accrued interest of $48,289 to Melvin Gagerman, our CEO, pursuant to a demand
note entered into on April 5, 2014. At February 28, 2019, the balance in Convertible note payable and accrued interest-related
party, includes $2,000,000 of unsecured convertible notes payable plus accrued interest of $1,621,944 and an unsecured convertible
note of $20,000 plus accrued interest of $2,410 to Mr. Kopple.



NOTE
7 – ACCRUED EXPENSES



Accrued
expenses at February 28, 2019 and February 28, 2018 consisted of the following:



|                                     |  | 2019 |           |  | 2018 |  
|------------------------------------ |  | ---- | --------- |  | ---- | -
|                                     |  |      |           |  |      |  
|Accrued payroll and related expenses |  | $    | 2,732,019 |  |      | $
|Accrued interest                     |  |      | 538,644   |  |      |  
|Other                                |  |      | 112,706   |  |      |  
|Total                                |  | $    | 3,383,369 |  |      | $



Accrued
payroll and related expenses consist of salaries and vacation time accrued but not paid to employees due to our lack of financial
resources.



NOTE
8 – COMMITMENTS & CONTINGENCIES



Leases



Our
facilities consist of approximately 20,000 rented square feet in Stanton, California and a storage facility located in Santa Clarita,
California. The Stanton facility is used for small quantity assembly and testing using components that are produced by various
suppliers as well as for general offices, engineering and warehousing. The rent for the Stanton facility is $10,000 per month
and the rent on the storage facility is $5,000 per month. The Company also rents temporary space on a month-to-month basis. The
Stanton and Santa Clarita facilities are short-term leases and are not sufficient to support the expected future operations and
the Company is planning to eventually look for a new facility to be used for limited production, testing, engineering, warehousing
as well as support staff.



Joint
Venture



In
March 2017 the Company entered into a joint venture with a Chinese partner to form Jiangsu Shengfeng Mobile Power Technology Co.,
Ltd. (“Jiangsu Shengfeng”) to address the Chinese market. Under the Jiangsu Shengfeng joint venture agreement, Aura
owns 49% of the venture and our Chinese partner owns 51%. The Chinese partner is to contribute approximately $9.25 million to
the venture –– principally in the form of facilities and equipment as wells as approximately $500,000 in cash. The
Company contributed to the venture in the form of $250,000 in cash as well as a limited license to the joint venture to manufacture,
sell and service the AuraGen® products within China. The limited license sold to the Jiangsu Shengfeng joint venture,
however, does not permit Jiangsu Shengfeng to manufacture the AuraGen®rotor; rather, the joint venture is required
to purchase all rotor subassemblies as well as certain software elements directly from the Company. Jiangsu Shengfeng’s
board of directors consists of three members appointed by the Company and three appointed by our Chinese partner; Jiangsu Shengfeng’s
CEO is appointed by our Chinese partner while its CFO and director for quality assurance and control are appointed by Aura.





F-14









In
addition, the Chinese company invested $2,000,000 in Aura at $1.40 per share for a total of 1,428,571 shares of common stock and
is required to purchase a minimum of $1,250,000 of product form the Company supported by letters of credit for distribution until
their factory is built, equipment installed, and staff hired and properly trained by Aura personnel. Aura has also committed to
supply personnel for six months at no cost other than to be reimbursed for travel, room and board. This commitment has been fulfilled
and Aura is under no further obligation to supply personnel at no cost. The agreement was subject to the approval of the Chinese
Government which was received in April 2017.



Contingencies



We
are subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have
not been fully resolved and that have arisen in the ordinary course of business. Our management evaluates our exposure to these
claims and proceedings individually and in the aggregate and evaluates potential losses on such litigation if the amount of the
loss is estimable and the loss is probable. However, the outcome of legal proceedings and claims brought against the Company is
subject to significant uncertainty. Although management considers the likelihood of such an outcome to be remote, if one or more
of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s
consolidated financial statements for that reporting period could be materially adversely affected. The Company settled certain
matters subsequent to year end that did not individually or in the aggregate have a material impact on the Company’s financial
condition or operating results.



In
2017, the Company’s former COO was awarded approximately $238,000 in accrued salary and related charges by the California
labor board. The Company believes that this award does not reflect the amount owed which is significantly lower and is exploring
all its options and available remedies and is working toward an offer to settle this matter.



The
Company and the Company’s Chief Executive Officer, Melvin Gagerman, are among several defendants named in a lawsuit filed
by two secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. In January
2017, the Company entered into an agreement with all secured creditors other than the two plaintiffs. However, because secured
creditors holding in excess of 97% of the issuable stock upon conversion have executed the agreement, the agreement is binding
on all of the secured creditors, including the two plaintiffs. That agreement, among other provisions, waives all past events
of default. It is the Company’s position that the two plaintiffs are not entitled to any payment or other relief at this
time and therefore that they have no valid claim against the Company or Mr. Gagerman. In March 2017, plaintiffs moved for partial
summary adjudication against the Company and Mr. Gagerman; however, the Court denied plaintiff’s motion. Thereafter, the
Court sustained demurrers by Mr. Gagerman and the Company; as a result of these successful demurrers, in February, /2017. Mr.
Gagerman was dismissed from the suit altogether and all claims against the Company but one have been dismissed by the Court as
well. In September 2018 the court entered a judgement of approximately $235,000 in favor of the two secured creditors. The Company
has filed an appeal which is currently pending.



The
Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $9 million
and approximately 3.15 million warrants which Mr. Kopple claims to be owed to him and his affiliates by the Company. In July 2017,
Mr. Kopple filed suit against the Company as well as against current director Mr. Diaz-Verson and former directors Mr. Breslow
and Mr. Howsmon, as well as Mr. Gagerman, the current CEO (not a director) in connection with these allegations. In 2018, the
Court sustained demurrers by Mr. Diaz-Verson, Mr. Breslow, Mr. Howsmon and Mr. Gagerman and as a result of these successful demurrers,
all four of these defendants have been dismissed from the suit. While the Company believes that it has certain valid defenses
in these matters, the Company is currently in settlement discussions with Mr. Kopple. If the settlement negotiation is unsuccessful,
the Company intends to vigorously defend against these claims. See “Liquidity and Capital Resources” in “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this
Annual Report on Form 10-K for additional information regarding the transactions under dispute with Mr. Kopple.



In
April 2018, the Company filed suit against its former counsel, Kilpatrick Townsend &Stockton LLP relating to various acts
of malpractice and breach of fiduciary duty committed by the firm in connection with its representation of Aura. In June 2018,
Kilpatrick Townsend &Stockton LLP filed a cross-complaint against the Company claiming approximately $400,000 in allegedly
unpaid legal fees. The Company has reached a settlement agreement with Kilpatrick Townsend & Stockton LLP on January 11, 2019
which released the claims of all parties and ended all litigation between the parties.





F-15









In
February 2018, the Company failed to issue approximately 2.3 million shares of stock contractually owed to BetterSea, LLC (“BetterSea”),
which is wholly owned by Mr. Zvi “Harry” Kurtzman. Mr. Kurtzman then proceeded to sue the Company for failing to issue
the required stock to BetterSea LLC. The required stock was then issued in the name of Zvi Kurtzman on August 15, 2018, along
with an additional 5,108,291 shares (approximately 12% of the then outstanding shares of the Company) for not having issued the
shares quickly enough and for the fact that the price of the stock had decreased. The Company also paid $20,000 in legal fees
on behalf of Mr. Kurtzman related to this lawsuit.



On
April 8, 2019, a complaint (the “Action”) was filed in the Court of Chancery in the State of Delaware (“Court”)
against the Company by Cipora Lavut, Robert Lempert, David Mann, Peter Dalrymple and Zvi (Harry) Kurtzman, stockholders of the
Company, alleging that stockholder consents removing Ron Buschur, Si Ryong Yu and William Anderson from the Board of Directors
and appointing Lavut, Mann and Lempert were valid and effective (the “Consents”). The Consents were delivered by Mr.
Kurtzman shortly after the Company advised Mr. Kurtzman that the Company would not renew a consulting agreement with BetterSea
LLC, a company controlled by Harry Kurtzman.



On
April 16, 2019, Mr. Dalrymple revoked his approval of the Consents and requested to be removed as a plaintiff in the Action, which
was granted by the Court on April 24, 2019. Subsequently, another stockholder also revoked his approval of the Consents. Pursuant
to its counterclaim filed with the Court, the Company denies that the Consents are valid as they were not executed by stockholders
representing the requisite number of shares held of record to effectuate the actions in the Consents, they fail to satisfy the
requirements of the Company’s Certificate of Incorporation, Bylaws and the Delaware General Corporation Law and the plaintiff’s
claims are barred by the doctrine of unclean hands. On April 18, 2019, the Court issued a Status Quo Order providing that the
Board of Directors will consist of the current incumbent directors, Si Ryong Yu, Ronald Buschur, William Anderson, Gary Douglas
and Salvador Diaz-Version, Jr., pending further decision by the Court, that Cipora Lavut, Robert Lempert, and David Mann are not
members of the Board, pending further order of the court, and that the current Board may not take certain actions outside the
ordinary course of business without notice to the plaintiffs. On May 15, 2019, the plaintiffs filed another action in Court requesting
the Company to hold an annual stockholder meeting. On May 20, 2019, the Company filed a letter with the Court requesting the Court
to lift the Status Quo Order in light of actions taken by plaintiffs. The Company advised the Court that it was willing to hold
an annual meeting as soon as reasonably practicable, but it was prevented from doing so by the Status Quo Order issued at plaintiffs’
request. On May 24, 2019, the Court revised the Status Quo Order, deleting a provision that prevented the Company from taking
action that required a Board vote without prior notice and another provision that prevented the Board from taking action that
could result in any changes to the members or size of the Board without prior notice. The Court also reduced the time of notice
for certain actions related to the Company’s debt. The remaining provisions of the Status Quo Order remain in place. On
June 4, 2019, the Company announced that it will hold an annual stockholder meeting on August 26, 2019. A hearing on the validity
of the Consents is scheduled for June 28, 2019.



NOTE
9 – STOCKHOLDERS’ DEFICIT



Common
Stock



At
February 28, 2019 and February 28, 2018, we had 150,000,000 shares of $0.0001 par value common stock authorized for issuance.
During the year ended February 28, 2019 the Company issued:



| | ● | 2,814,063
                                         shares of common stock for $900,500,
| | - | ---------------------------------------------------------------------------------------



| | ● | 5,108,291
                                         shares of common stock in settlement valued at $1,992,250,
| | - | -------------------------------------------------------------------------------------------------------------



| | ● | 2,256,444
                                         shares of common stock for prior year stock to be issued valued at $2,280,964,
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | ● | 1,312,500
                                         shares of common stock for debt settlement of $420,000, and
| | - | --------------------------------------------------------------------------------------------------------------



| | ● | 218,750
                                         shares of common stock in settlement of $108,430 of accounts payable.
| | - | ----------------------------------------------------------------------------------------------------------------------



F-16











During
the year ended February 28, 2018 the Company issued:



| | ● | 1,428,572
                                         shares of common stock for $2,000,000,
| | - | -----------------------------------------------------------------------------------------



| | ● | 19,963,767
                                         shares of common stock in settlement valued at $18,469,574,
| | - | ---------------------------------------------------------------------------------------------------------------



| | ● | 928,572
                                         shares of common stock for services valued at $885,000 at the market value on the issuance
                                         dates
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | 2,653,061
                                         shares of common stock for a subscription receivable of $1,300,000, and
| | - | --------------------------------------------------------------------------------------------------------------------------



| | ● | 178,571
                                         shares of common stock in settlement of $175,000 of accounts payable.
| | - | ----------------------------------------------------------------------------------------------------------------------



Subscription
receivable at February 28, 2018, consisted of a $1.3 million receivable for 2,653,061 shares of the Company’s common stock from
a greater than 20% shareholder, Elimelech Lowy. Per the terms of the settlement agreement with Mr. Lowy, as soon as the Company
shareholders approved the -1-for-7 reverse stock split and elected a new Board of Directors, Mr. Lowy was to provide the Company
with the additional $1.3 million. The shareholders approved the reverse split and elected a new Board of Directors on January
11, 2018. While the terms of the agreement called for Mr, Lowy to provide the Company with the $1.3 million by February 28, 2018,
the first payment was not received until April 27, 2018, and the balance was not paid until December 2018. During fiscal 2019
the company received $1,225,000 in cash from Mr. Lowy with the balance of $75,000 being applied through the assumption of the
B&H note by Yakov Lowy, a relative of Elimelech Lowy. While Mr. Lowy was in default of the agreement, no action was taken
by the Company. The Company issued to Mr. Lowy 2,653,061 shares of common stock on February 28, 2019.



In
February 2018, the Company failed to issue approximately 2.3 million shares of stock contractually owed to BetterSea, LLC (“BetterSea”),
which is wholly owned by Mr. Zvi “Harry” Kurtzman. Mr. Kurtzman then proceeded to sue the Company for failing to issue
the required stock to BetterSea LLC. The required stock was then issued in the name of Zvi Kurtzman on August 15, 2018, along
with an additional 5,108,291 shares (approximately 12% of the then outstanding shares of the Company) for not having issued the
shares quickly enough and for the fact that the price of the stock had decreased.



Employee
Stock Options



The
2006 Employee Stock Option Plan



In
September 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan, subject to shareholder approval, which was
obtained at a special shareholders meeting in 2009. Under the 2006 Plan, the Company may grant options for up to the greater of
Three Million (3,000,000) or 10% of the number of shares of the Common Stock of Aura from time to time outstanding. The shares
of Common Stock available under the 2006 Plan was increased to the greater of Ten Million shares (10,000,000) or 15% of the number
of shares of Common Stock of Aura from time to time outstanding at the October 2011 shareholders meeting. The exercise price of
each option shall be at least equal to the fair market value of such shares on the date of grant. The term of the options may
not be greater than ten years, and they typically vest over a three-year period. The plan expired in 2016 and no options have
been issued since that time.





The
2011 Director and Executive Officers Stock Option Plan



In
October 2011 shareholders approved the 2011 Director and Executive Officers Stock Option Plan at the Company’s annual meeting.
Under the 2011 Plan, the Company may grant options for up to 15% of the number of shares of Common Stock of the Company from time
to time outstanding. Pursuant to this plan, the Board or a committee of the Board may grant an option to any person who is elected
or appointed a director or executive officer of the Company. The exercise price of each option shall be at least equal to the
fair market value of such shares on the date of grant. The term of the options may not be greater than five years. The plan will
expire in 2021.





F-17









Activity
in the plans is as follows:



|                               |  | 2006 Plan                        |     
|------------------------------ |  | -------------------------------- | ----
|                               |  | Weighted- Average Exercise Price |     
|Outstanding, February 28, 2018 |  | $                                | 1.40
|Cancelled                      |  | $                                | 1.40
|Granted                        |  |                                  | -   
|Outstanding, February 28, 2019 |  | $                                | 1.40





The
exercise prices for the options outstanding at February 28, 2019, and information relating to these options is as follows:





|Options Outstanding     |  | Exercisable Options
|----------------------- |  | -------------------
|Range
of Exercise Price |  | Number             
|$1.40                   |  |                    





Warrants



Activity
in issued and outstanding warrants is as follows:



|                               |  | Number
    of Shares |           |  | Exercise
    Prices |  
|------------------------------ |  | -------------------- | --------- |  | ------------------- | -
|Outstanding, February 28, 2018 |  |                      | 8,743,505 |  |                     | $
|Granted                        |  |                      | 767,857   |  |                     | $
|Exercised                      |  |                      | -         |  |                     |  
|Cancelled                      |  |                      |           |  |                     |  
|Outstanding, February 28, 2019 |  |                      | 9,511,362 |  |                     | $



The
exercise prices for the warrants outstanding at February 28, 2019, and information relating to these warrants is as follows:



|Range
    of ExercisePrices |            | Stock
    WarrantsOutstanding |  |           | Stock
    WarrantsExercisable |  |  | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercisePrice ofWarrantsOutstanding |               |  | Weighted-AverageExercisePrice ofWarrantsExercisable |      |  | IntrinsicValue |  
|--------------------------- | ---------- | ----------------------------- |  | --------- | ----------------------------- |  |  | ---------------------------------------- |  | --------------------------------------------------- | ------------- |  | --------------------------------------------------- | ---- |  | -------------- | -
|$                           | 1.40       |                               |  | 767,857   |                               |  |  | 767,857                                  |  |                                                     | 49 months     |  | $                                                   | 1.40 |  |                | $
|$                           | 1.40       |                               |  | 5,154,646 |                               |  |  | 5,154,646                                |  |                                                     | 48 months     |  | $                                                   | 1.40 |  |                | $
|$                           | 0.70-$1.40 |                               |  | 2,783,002 |                               |  |  | 2,783,002                                |  |                                                     | 25 months     |  | $                                                   | 1.20 |  |                | $
|$                           | 1.40       |                               |  | 154,666   |                               |  |  | 154,666                                  |  |                                                     | 24 months     |  | $                                                   | 1.40 |  |                | $
|$                           | 1.40       |                               |  | 651,191   |                               |  |  | 651,191                                  |  |                                                     | 11
    months |  | $                                                   | 1.40 |  |                | $
|                            |            |                               |  |           |                               |  |  |                                          |  |                                                     |               |  |                                                     |      |  |                |  
|                            |            |                               |  | 9,511,362 |                               |  |  | 9,511,362                                |  |                                                     |               |  |                                                     |      |  |                |  





F-18











NOTE
10 – GOING CONCERN





The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
 During the years ended February 28, 2019 and February 28, 2018, the Company incurred losses of $4,456,401 and had income
of $1,700,649, respectively, and had negative cash flows from operating activities of $2,465,299 and $2,809,484, respectively.



If
the Company is unable to generate profits and is unable to continue to obtain financing for its working capital requirements,
it may have to curtail its business sharply 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 we intend to continue to attempt to restart the Company’s operations and focus on the sale of our
AuraGen® products both domestically and internationally and to hire a new management team. In addition, we plan
to locate to a new facility for operations, as well as, rebuild the engineering and sales teams as well as utilizing third party
contractors to support the operation. We anticipate being able to obtain new sources of funding to support these actions in the
upcoming fiscal year.



NOTE
11 – INCOME TAXES



The
Company did not record any income tax expense due to the net loss during the year ended February 28, 2019 and the income recorded
during the year ended February 28, 2018 that was offset by net operating loss carryforwards. The actual tax benefit differs from
the expected tax benefit computed by applying the combined United States corporate tax rate and the State of California tax rate
of 6% to loss before income taxes as follows for the years ended February 28, 2019 and February 28, 2018:





|                           |  | 2019 |     |  | 2018 |  
|-------------------------- |  | ---- | --- |  | ---- | -
|Current:                   |  | $    |     |  |      | $
|Federal                    |  |      | -   |  |      |  
|State                      |  |      | 800 |  |      |  
|                           |  |      |     |  |      |  
|Total                      |  |      | 800 |  |      |  
|                           |  |      |     |  |      |  
|Deferred                   |  |      |     |  |      |  
|Federal                    |  |      | -   |  |      |  
|State                      |  |      | -   |  |      |  
|                           |  |      |     |  |      |  
|Total                      |  |      | -   |  |      |  
|Total Income Tax Provision |  |      |     |  |      |  
|                           |  | $    | 800 |  |      | $





The
provision for income tax is included with other expense in the accompanying consolidated financial statements.



|                                           |  | 2019 |       |   | 2018 | 
|------------------------------------------ |  | ---- | ----- | - | ---- | 
|                                           |  |      |       |   |      | 
|Expected tax benefit                       |  |      | 21.0  | % |      | 
|State income taxes, net of federal benefit |  |      | 6.0   |   |      | 
|Changes in valuation allowance             |  |      | (27.0 | ) |      | 
|Total                                      |  |      | -%    |   |      | 





F-19









The
following table summarizes the significant components of our deferred tax asset at February 28, 2019 and February 28, 2018:



|                                                                                                                                                     |  | 2019 |             |   | 2018 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Deferred tax asset                                                                                                                                   |  |      |             |   |      |  
|Primarily relating to net operating loss carry-forwards, but also reserves for inventory and accounts receivable, stock-based compensation and other |  |      | 53,000,000  |   |      |  
|Valuation allowance                                                                                                                                  |  |      | (53,000,000 | ) |      |  
|Net deferred tax asset                                                                                                                               |  | $    | -           |   |      | $



We
recorded an allowance of 100% for deferred tax assets due to the uncertainty of its realization.



At
February 28, 2019, we had operating loss carry-forwards of approximately $253,000,000 for federal purposes, which expire through
2039, and $43,000,000 for state purposes, which expire through 2039.



We
follow FASB ASC 740 related to uncertain tax positions. Under FASB ASC 740, the impact of an uncertain tax position on the income
tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. At
February 28, 2019 and February 28, 2018, we have no unrecognized tax benefits.



Our
continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of February
28, 2019, and February 28, 2018, 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 2013 and forward are subject to examination by our tax authorities.
We are not currently under examination by any tax authority.



The
Company has failed to file its’ California tax returns for the years ended February 28, 2015 thru February 28, 2018 due
to its’ inability to pay the minimum franchise tax payment.



NOTE
12 – EMPLOYEE BENEFIT PLANS



The
Company has previously sponsored two employee benefit plans: The Employee Stock Ownership Plan (the “ESOP”) and a 401(k)
plan.



The
ESOP was qualified discretionary employee stock ownership plan that covers substantially all employees. We have not made any contributions
to the ESOP since fiscal year 2011 and there are no assets in the plan and the Company does not currently intent to restart the
plan.



We
sponsored a voluntary, defined contribution 401(k) plan. The plan provided for salary reduction contributions by employees and
matching contributions by us of 100% of the first 4% of the employees’ pre-tax contributions. The last matching contributions
made to the plan were $31,766 in fiscal year 2015 and no contributions have been made since. The Company does not manage or hold
any of the plan assets. The Company does not currently intend to fund this plan.



The
Company has failed to file the forms 5500 related to the 401(k) plan due to its’ inability to pay the associated fees.





F-20