On January 30, 2017 the Company entered into several Refinancing Agreementsan agreement entitled First Amendment to Transaction Documents with five of seven secured creditors holding a debt holder totaling $2,237,456 includingsecurity interest in all of $489,466.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 Mr. M. Abdou and Mr. W. Abdou. All of the creditors entered into the January 30, 2017 agreement with the exception of the Messrs. Abdou. The agreements waivedoriginal 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 eventssecured creditors. The five secured creditors signing the amendment total in excess of default95% 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 new five-year 5% convertible notes with no interest for the first six months. Upon the effective date offrom November 1, 2016 to February 14, 2018, of the 1 for 7date at which the 1-for-7 reverse stock split became effective at which time 80% of the notes weretotal debt including accrued interest was converted into 1,164,555 shares of common stock.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 May 31, 2019, plus any outstanding accrued interest. 

NOTE 45 – ACCRUED EXPENSES

Accrued expenses consisted of the following:

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

NOTE 56 – SHAREHOLDERS’ EQUITY

Common Stock

During the ninethree months ended November 30, 2018,May 31, 2019, we issued 2,256,444 shares of common stock, valued at $2,280,964 to Harry Kurtzman on behalf of BetterSea LLC, a greater than 15% shareholder as part of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued at $1,992,251 to Harry Kurtzman on behalf of BetterSea LLC as a settlement for disputes.

During the nine months ended November 30, 2018, we issued 742,857 warrants to members of our board of directors. The warrants have a term of five years and an exercise price of $1.40. The company recorded an expense of $312,072 for the issuance of these warrants. During the nine months ended November 30, 2018, we re-priced to $1.40 all outstanding employee options and warrants that had a previous exercise price greater than $1.40. The company recorded an expense of $105,352 as a result of the re-pricing.

During the nine months ended November 30, 2017, we issued 5,000,000 (714,268 shares post reverse split)156,250 shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture,$50,000.

During the three months ended May 31, 2018, we issued 5,116,959 (730,995 shares post reverse split)did not issue any shares of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 (357,142 shares post reverse split) shares of common stock valued at $325,000 in connection with a consulting agreement.stock.

Employee Stock Options

During the nine months ended November 30, 2018, there were no stock options granted to employees and 742,857 stock options with an exercise price of $1.40 per share granted to directors, which are set forth below under “Warrants.” The 2006 Employee Stock Option Plan

In September 2006, our Board of Directors adopted the 2006 Employee Stock Option Plan.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. No options were issued during the three-month period ended May 31, 2019. Activity in thisthe plan for the three-month period ended May 31, 2019 is as follows:

The exercise prices forInformation regarding the options outstanding and exercisable as of May 31, 2019 follows:

The 2011 Director and Executive Officers Stock Option Plan

In October 2011 shareholders approved the 2011 Director and Executive Officers Stock Option Plan at November 30, 2018, and information relatingthe Company’s annual meeting. Under the 2011 Plan, the Company may grant options for up to these15% 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. Activity in the plan for the three-month period ended May 31, 2019 is as follows:

Warrants

Activity in issued and outstanding warrants is as follows:

The exercise prices forInformation regarding the warrants outstanding at November 30, 2018, and information relating to these warrants isexercisable as follows:of May 31, 2019 follows 

NOTE 67 – 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 71-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 due and payable in five years bearinginto. The note bears interest at a rate of 5% per annum payable monthly in arrears.

Kopple Note

At November 30, 2018,May 31, 2019, the balance in Notes Payable and accrued interest-related party, current of $6,289,907, includes $3,268,081$3,424,882 plus accrued interest of $2,319,357$2,526,564 to Mr. Kopple (a former Board member), a 10% shareholder. At May 31, 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 $1,697,534 and an unsecured convertible note of $20,000 plus accrued interest of $2,659 to Mr. Kopple.

Gagerman Note

Related Parties Transactionsparties transactions also includes $82,000 of unsecured notes payable plus accrued interest of $46,231$50,346 owed to ourMelvin Gagerman, the Company’s former CEO, pursuant to a demand note entered into on April 5, 2014. At November 30, 2018, the balance in Convertible note payable and accrued interest-related party, long term, includes $2,000,000 of unsecured convertible notes payable plus accrued interest of $1,546,354 and an unsecured convertible note of $20,000 plus accrued interest of $2,160 to Mr. Kopple. Subscriptions receivable at November 30, 2018 includes $175,000 for the issuance of 357,143 shares which were previously issued. The balance in notes payable - long term, includes $3,000,000 to Mr. Breslow, a 20% shareholder.

During the nine months ended November 30, 2018, we issued 2,256,444 shares of common stock, valued at $2,280,964 to Harry Kurtzman on behalf of BetterSea LLC, a greater than 15% shareholder as part of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued at $1,992,251 to Harry Kurtzman on behalf of BetterSea LLC as a settlement for disputes. During the nine months ended November 30, 2018, BetterSea LLC billed the company $314,645 for services rendered and was paid $316,963. The company also employs the law firm of TMK Assoc., owned by the daughter of Harry Kurtzman, as its corporate attorney. In the nine months ended November 30, 2018, TMK Assoc. has billed the company $324,581 for services rendered and has been paid $279,351. During the nine months ended November 30, 2018, the company paid Mr. Si Ryong Yu $80,000 for consulting services. During the nine months ended November 30, 2018, the company received $1,225,000 from Elimelech Lowy, a greater than 40% shareholder as partial payment on a subscription receivable of $1,300,000 for stock issued in February 2018. The agreement had called for the stock to be paid for at the time of issuance.

NOTE 78 – COMMITMENTS & CONTINGENCIES

Leases

Our facilities consist of approximately 20,000 rented square feet in Stanton, California and an additional storage facility in Santa Clarita, California. The Stanton facility is currently being used for small quantitysome assembly and testing using components that are produced by various suppliers as well as for general offices, engineeringof AuraGen^®/VIPER systems and warehousing.is rented on a month-to-month basis. The rent for the Stanton facility is $10,000 per month. Themonth and the storage facility is an additional $5,000 per month, both on a month-to-month basis. Our current Stanton facility is not sufficient for our near term anticipated needsto support the expected operations and the Company is actively lookingevaluating new facility options to be used for a new facility.limited production, testing, warehousing and engineering, as well as needed office space for support staff. The Company arrangements for the Stanton facility arealso rents temporary storage space on a month-per-month rent.month-to-month basis. Commencing in February 2019, the Company began renting approximately 300 square feet of office space in Irvine, California at a cost of $ 2,350 per month on a month-to-month basis. In July 2019, the Company ceased renting this office space.

Following the adoption of Topic 842, Leases, as of the start of fiscal year 2020, the Company determined that there was no impact on its Condensed Financial Statements during the three month period ended May 31, 2019. The standard requires entities to evaluate all lease transactions including leases previously classified as operating leases, and, if required under Topic 842, a right-to-use asset and a corresponding lease liability may be recorded on the balance sheet in the period in which the lease commences.

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 contributedis 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 contributedsold 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.

In addition, our Chinese partner invested $2,000,000 in Aura common stock at $1.40 per share for a total of 1,428,571 shares of common stock andJiangsu Shengfeng is required to purchase a minimum of $1,250,000 of product from 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 reimbursebe 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. Mr. Song, the majority shareholder of the Chinese partner of the joint venture, invested $2,000,000 in Aura’s common shares at a price of $1.40 per share.

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 June2017, 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.

In 2016, the Company became one ofand the Company’s former Chief Executive Officer, Melvin Gagerman, were named among several other defendants named in a lawsuit filed by two of seven secured creditors demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. TheIn January 2017, the Company entered into an amended agreement with the five otherall secured creditors representingother than the two plaintiffs. In September 2018 the court entered a judgment of approximately $235,000 in excessfavor of 95% of the total secured debt. In August 2018 the two secured creditors who brought suit against the Company were awarded approximately $240,000 at trial.creditors. The Company intends to appealsubsequently appealed this award.judgment and, in September 2019, reached a settlement agreement with these creditors.

The Company is presently engaged in a dispute with one of its former directors, Robert Kopple, relating to approximately $5.4$9 million and approximately 3.143.15 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 Mr. Gagerman (currently not a director) andcurrent director Mr. Diaz-Verson Jr. together withand former directors Mr. Breslow and Mr. Howsmon, as well as Mr. Gagerman, the former CEO (not a director) in connection with these allegations. Mssrs.In 2018, the Court sustained demurrers by Mr. Diaz-Verson, Jr.,Mr. Breslow, Mr. Howsmon and HowsmonMr. Gagerman and as a result of these successful demurrers, all four of these defendants have each been dismissed from thisthe suit. TheWhile the Company believes that it has certain valid defenses in these matters, andthe 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& Stockton LLP relating toalleging 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& Stockton LLP filed a cross-complaint against the Company claiming approximatelyin excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached a settlement with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The Company believes that it has valid defenses to these claimsaction and intends to vigorously defend against these claims.the cross-complaint were both subsequently dismissed.

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC (“BetterSea”), one of the Company’s long-standing technical consultants. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillment of this contractual obligation based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company has a disputealso paid $20,000 in legal fees on behalf of BetterSea related to legal expense associated with its former landlord and vacated its former premises prior to the endCompany’s delays in the issuance of its lease. The premises have been released to a third party and no action has been filedthe stock.

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company nor doesclaiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company believe it has any liability. Further whilehad brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’s father, Jacob Binstok, for damages suffered by the Company believes it has claims againstas a result of the landlord based on their actions,defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company has nonetheless elected to accruesuccessfully received a judgment against J.B. Moving & Delivery in the amount due for unpaid rent.of approximately $114,000. The Company disputes that any amount is now owed to Scholnick.

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and electing Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Mr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding future events or prospects are forward-looking statements. The words “approximates,” “believes,” “forecasts,” “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 will 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:

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.

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. DuringBeginning with fiscal 2017 and fiscalthrough 2018, the Company suspended itswe reduced our engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations.obligations and minimizing expenditures while we attempted to raise additional funding and pursue some initial engineering activities 

In fiscal 2018, the Companywe successfully eliminated approximately 68% of itsour 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’sour common stock. The converted debt representsrepresented approximately 80% of the total secured debt of the Company. The balance of the secured debt (the remaining approximate 20%),(approximately $960,000) is to be paid to the secured creditors in cash if the Company raiseswe raise 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$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 thereforewe eliminated a total of approximately $30.23 million of debt.

As of the date of this Report,filing, Robert Kopple, the Company’sour 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 $5.35$9.5 million on terms significantly preferable to other similarly-situatedsimilarly situated unsecured creditors. The Company disputesWe dispute Mr. Kopple’s claims. See “Item 3. Legal Proceedings” included elsewhere in the Company’sthis Annual Report on Form 10-K for the year ended February 28, 201810-K/A for information regarding the dispute with Mr. Kopple regarding these transactions. Mr. Kopple has not accepted the Company’sour numerous offers to restructure this debt.

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

The Company is planningIn fiscal 2019, we began increasing our engineering and manufacturing activities. We utilized contractors for these services in order to restart operations with aminimize our expense while we continued to pursue new sources of financing. In July 2019, we began significantly increasing our sales, engineering, manufacturing and marketing activities under our new management team and is presently in the process of identifying candidates for Chief Financial Officer and Chief Executive Officer. Currently, the Company has a contractual agreement for $1.25 million of orders for the AuraGen^® product to fill during the next eight months and anticipates that it may receive significant additional orders once the Company is back in operation.team.

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 threetwo major components; (i) sales and marketing, (ii) engineering,design and (iii) customer service and support.engineering. 

(i) Our sales and marketing approach isapproaches are 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) mobile exportable power applications, (b) transport refrigeration, and (b)(c) 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 20172018 and 2018,2019, we expect modest engineering activities budgeted at approximately $750,000 during the fiscal 20192020 year.

(iii)Operations.

During the first half of fiscal 2016, we significantly reduced operations due to lack of financial resources. During the second half of fiscal 2016, our operations were further disrupted when the we were 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 reduced its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. During this time, our 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, we successfully restructured in excess of $30 million of debt. During fiscal 2019, we continued to address our financial needs, was able to ship a small quantity of product during fiscal 2019 and shipped a small amount to customers, and maintained a small inventory of finished product. The third componentCompany believes that it will have the ability to increase production during fiscal 2020 once it has secured additional sources of capital and confirmed orders are in-place. Our marketing strategy during fiscal 2020 includes the following key activities:

(i) One element of our business modelplan is customer service. In fiscal 2019, we expectfocused on electric transport refrigeration. The market is well understood and both social and economic forces are providing an unprecedented opportunity to rehire several previously trained field engineers to support our product in North America. In addition, we are working closely with our Chinese Joint Venture partner to train their staff to support our products overseas.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.

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 on Form 10-K/A issued on October 23, 2019.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial conditionconditions 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.

Revenue Recognition

We 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 required to make judgments based on historical experience and future expectations, as tosatisfied.

We have assessed the reliability of shipments made to our customers. These judgments are required to assess the proprietyimpact of the recognition of revenue based on Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” and related guidance. Because sales are currently in limited volume and many sales are for evaluative purposes, we have not booked a general reserve for returns. We will consider an appropriate level of reserve for product returns when our sales increase to commercial levels.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 consist primarily of components and completed units for our AuraGen^® product. Inventories are valued at the lower of cost (first-in, first-out) or market. Provision is mademarket, on a standard cost basis. We review the components of inventory on a regular basis for estimated amounts of current inventories that will ultimately becomeexcess or obsolete due to changes in the product itself or vehicle engine types that go out of production. Management believes that existing inventories can, and will, be sold in the future without significant costs to upgrade it to current models and that the valuation of the inventories accurately reflects the realizable values of these assets. The AuraGen^® product being sold currently is not technologically different from those in current use. Existing finished goods inventories can be upgraded to the current model with only a small amount of materials and manpower. We make these assessmentsinventory based on the following factors: i) existing orders, ii) ageestimated future usage and sales. We have minimally operated and therefore have only produced minimal product since late 2015. As a result, while we believe that a portion of the inventory iii) historical experiencehas value, we are unable to substantiate its demand and iv) our expectationsmarket value and as a result we have elected to future sales. If expected sales volumes do not materialize, there would be a material impact on our financial statements.reserve it in its entirety as of May 31 and February 28, 2019.

Stock-Based Compensation

ValuationWe account for stock-based compensation under the provisions of Long-Lived AssetsFASB 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.

Long-lived assets, consisting primarily of propertyWe account for stock option and equipment,warrant grants issued and patents and trademarks, comprise a portion of our total assets.  Long-lived assets are reviewed for impairment whenever events or changesvesting to non-employees in circumstances indicate that their carrying values August not be recoverable. Recoverability of assets is measured by a comparisonaccordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”, whereas the fair value of the carryingequity-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, we have consistently utilized the Black-Scholes option-pricing model to calculate the fair value of an assetstock 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 future net cash flows expected to be generated by those assets. Net cash flows are estimated based on expectations as to the realize-abilityfair value of the asset. Factorsoptions and warrants that could trigger a review include significant changesthey issue in the manner of an asset’s use or our overall strategy.such circumstances.

Specific asset categories are treated as follows:

Accounts Receivable: We record an allowance for doubtful accounts based on our expectation of collect-ability of current and past due accounts receivable.

Property, Plant and Equipment: We depreciate our property and equipment over various useful lives ranging from five to ten years. Adjustments are made as warranted when market conditions and values indicate that the current value of an asset is less than its net book value.

When we determine that an asset is impaired, we measure any such impairment by discounting an asset’s realizable value to the present using a discount rate appropriate to the perceived risk in realizing such value. When we determine that an impaired asset has no foreseeable realizable value, we write such asset down to zero.

Results of Operations

Nine months ended November 30, 2018 compared to nine months ended November 30, 2017

Net revenues were $39,274 for the nine months ended November 30, 2018 (the “Nine Months FY2019”) compared to $0 for the nine months ended November 30, 2017 (the “Nine Months FY2018”).

Cost of goods were $110,026 in the Nine Months FY2019 compared to $0 for the Nine Months FY2018.

Engineering, research and development expenses increased $277,043 (1,097%) to $302,293 in the Nine Months FY2019 from $25,250 in the Nine Months FY 2018. All the expense in the current year period is due to the Company redesigning the ECU for the Auragen system.

Selling, general and administrative expense increased $3,036,032 (173%) to $4,789,451 in the Nine Months FY2019 from $1,753,419 in the Nine Months FY2018. The increase is primarily attributable to the value of the stock and warrants issued in the amount of $2,431,077 and an increase in legal expenses of approximately $260,000.

Net interest expense in the Nine Months FY2019 decreased $1,779,730 (68%) to $848,593 from $2,628,323 in the Nine Months FY2018 as a result of the restructuring in the fourth quarter of the prior year that eliminated a substantial amount of debt.

Our net loss for the Nine Months FY2019 increased $491,423 to $5,706,947 from $5,215,524 in the Nine Months FY2018.

Three months ended November 30, 2018May 31, 2019 compared to three months ended November 30, 2017May 31, 2018

Net revenues were $0 for the three months ended November 30, 2018May 31, 2019 (the “Third“First Quarter FY2019”FY2020”) compared to $0$37,400 for the three months ended November 30, 2017May 31, 2018 (the “Third“First Quarter FY2018”FY2019”).

Cost of goods sold were $37,032$0 in the ThirdFirst Quarter FY2019FY2020 compared to $0 for$14,677 in the ThirdFirst Quarter FY2018.FY2019.

Engineering, research and development expenses increased $113,167 to $138,417were $44,082 in the ThirdFirst Quarter FY2019 from $25,250FY2020, compared to $132,853 in the ThirdFirst Quarter FY 2018. All the expense in the current year period is due to the Company redesigning the ECU for the Auragen system.2019.

Selling, general and administrative expense decreased $121,287 (11%$687,743,850 (69%) to $790,985$314,223,116 in the ThirdFirst Quarter FY2019FY2020 from $822,616$1,001,966 in the ThirdFirst Quarter FY2018.FY2019. The decrease is primarily due to a non-cash charge of $312,000 for warrants issued to the Board of Directors in the prior year, a decrease of approximately $73,000 in consulting fees, and a reduction in other legal expense of approximately $240,000.

Net interest expense in the ThirdFirst Quarter FY2019 decreased $507,051 (63%)FY2020 increased $39,798, or14%, to $295,221$317,015 from $802,272$277,217 in the ThirdFirst Quarter FY2018 as a result of the restructuring in the fourth quarter of the prior year that eliminated a substantial amount of debt.FY2019.

Our net loss for the ThirdFirst Quarter FY2019FY2020 decreased $530,343$358306, or 35%, to $1,310,445$675,321 from $1,661,534$1,036,382 in the ThirdFirst Quarter FY2018.FY2019.

Liquidity and Capital Resources

We had cash of approximately $21,000 and $748,000 as of November 30, 2018, and February 28, 2018, respectively.  We had a working capital deficit at November 30, 2018, and February 28, 2018 of $20,452,425 and $20,682,519, respectively. The working capital deficit includes notes payable and accrued interest to related parties of $9,284,183 and $8,696,665 as of November 30 and February 28, 2018, respectively.

Net cash used in operations for the ninethree months ended November 30, 2018,May 31, 2019, was $1,902,151,$397,436, a decrease of $162,189$603,147 from the comparable period in the prior fiscal year. Net cash provided by financing activities during the ninethree months ended November 30, 2018,May 31, 2019, was $1,175,000, resulting$50,000 from net proceeds from subscriptions receivablethe issuance of $1,225,000 partially offset by a payment of $50,000 on a note payable.

There were no acquisitions of property and equipment during the Nine months FY2019 or the Nine months FY2018.

Accrued expensescommon stock as of November 30, 2018 increased $111,863 to $3,323,498 from $3,211,635 as of February 28, 2018. Approximately $2,225,000 of accrued expenses is salaries accrued but unpaid to certain current and former employees duecompared to a lacktotal of resources, and approximately $500,000 is accrued but unused vacation earned$450,000 provided by employees.

The Company had a deficitfinancing activities in the first quarter of $24,435,402 in shareholders’ equity as of November 30, 2018, compared to $24,665,496 as of February 28, 2018.

Since 2002 substantially all of our revenues from operations have been derived from sales of the AuraGen^®.fiscal 2019. The cash flow generated from our operations to date has not been sufficient to fund our working capital needs, and we cannot predict when operating cash flow will be sufficient to fund working capital needs.

There were no acquisitions of property and equipment during the First Quarter FY2020 or the First Quarter FY2019.

Accrued expenses as of May 31, 2019 increased $146,564 to $3,352,020 from $3,205,456 as of February 28, 2019. At May 31, 2019, approximately $2.3 million of accrued expenses is salaries accrued but unpaid to certain current and former employees due to a lack of resources, and approximately $0.5 million is accrued but unused vacation earned by employees.

The Company had a deficit of $22.2 million in shareholders’ equity as of May 31, 2019, compared to $21.6 million as of February 28, 2019 with the net change attributed to net loss of approximately $675,000 offset by issuance of shares of $50,000.

In the past, in order to maintaingenerate liquidity we have relied upon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and require additional debt or equity financing to fund ongoing operations. The issuance of additional shares of equity in connection with any such financing could dilute the interests of our existing stockholders, and such dilution could be substantial. If we cannot raise 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.

Capital Transactions

During the nine months ended November 30, 2018, we issued 2,256,444 shares of common stock, valued at $2,280,964 to Harry Kurtzman on behalf of BetterSea LLC, a greater than 15% shareholder as part of the restructuring agreement. We issued an additional 5,108,291 shares of common stock valued at $1,992,251 to Harry Kurtzman on behalf of BetterSea LLC as a settlement for disputes. During the nine months ended November 30, 2018, we issued 742,857 warrants to members of our board of directors. The warrants have a term of five years and an exercise price of $1.40. The company recorded an expense of $312,072 for the issuance of these warrants.

During the nine months ended November 30, 2017, we issued 5,000,000 (714,286 post split) shares of common stock for $1,000,000 in conjunction with our Chinese Joint Venture, we issued 5,116,959(730,994 post split) shares of common stock valued at $665,204 as part of a settlement agreement, and we issued 2,500,000 (357,143 post split) shares of common stock valued at $325,000 in connection with a consulting agreement.

Inventories

Inventories consist primarily of components and completed units of 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. Since sales did not meet such expectations, we have been selling product from this inventory for several years.

Most of our inventory consists of a variety of (i) metallic, mechanical components, and (ii) electrical components including metallic chassis to hold the assembled electrical systems. The vast majority of mechanical components are not aged and most of the electrical components are also not aged. The components that are aged are related to the prime mover/Generator interface that may not be in demand any longer.

In the past we have offered and ship three different basic models of systems; (i) a 5 kW based system, (ii) an 8.5 kW based system and (iii) a 16 kW based systems (two 8.5 kW systems configured in tandem back-to-back). Each of these systems can be configured with different options such as 110 VAC only, 220 VAC only, 24 VDC only, 12 VDC only and AC/DC combinations of the same or different voltages. In addition, the system can be configured with single phase, split phase or three-phase output.

A number of the mechanical components are common to all three of the above configurations, while others are very specific. For example, the stators and rotors for the 5 kW systems are different from the 8.5 kW systems, but the housings are the same. Similarly, the electrical components consist of some parts that are geared for a specific configuration while others are generic and can be used for all of the configurations. The electrical chassis are also interchangeable between the 5 kW and 8.5 kW configurations. Due to the nature and mix of the product being sold, frequently, the 5 kW electrical systems are upgraded to 8.5 kW systems by replacing some components.

From the above description one can understand that the inventory consists of numerous components and subassemblies but not finished systems; therefore, each system that is sold and shipped to a customer is built from some components that are in inventory and others that need to be purchased to be able to configure the required system.

8.5 kW systems represent the majority of product previously shipped. These systems are built by using existing inventory subassemblies and parts, including some that can be used for both 5 kW and 8.5 kW systems, and additional parts that are purchased to provide the required configuration. Typically, such systems are built using approximately 20 to 25 percent of existing inventory and approximately 75% of additional parts that are purchased.

However, most of the systems sold to the Korean military consist of 5 kW systems. They have been purchasing approximately 100 systems per year and have indicated to us that they will continue to do so for the next five years. To date we have shipped over 500 such systems (in this case 100% of the rotors and stators are used from existing inventory and over 50% of the electrical parts are also from inventory).

In addition to the above, we have encountered demand for different and unique configurations that require the purchase of additional parts.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide disclosure under this Item 3.

ITEM 4. 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. For the last 3 fiscal years, these control and procedures broke down due to insufficient capital to maintain such controls and procedures. 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 acting Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Chief Executive Officer and acting Chief Financial Officer concluded that these controls and procedures were effectiveineffective as of the end of the period covered by this report in ensuring that information requiring disclosure is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended November 30, 2018,May 31, 2019, which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. 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. Please refer to Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the year ended February 28, 2018 for a description. 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. 

In 2016, the Company and the Company’s former Chief Executive Officer, Melvin Gagerman, became two ofwere named among several other 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. That agreement, among other provisions, waived all past events of default. In October 2017September 2018 the court dismissedentered a judgment of approximately $235,000 in favor of the plaintiffs’two secured creditors. The Company subsequently appealed this judgment and, in September 2019, reached a settlement agreement with these creditors (see note 14)

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 for exemplary damages, leaving only contract claims.to be owed to him and his affiliates by the Company. In AugustJuly 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 former CEO (not a director) in connection with these allegations. In 2018, the plaintiffs were awarded approximately$240,000 at trial. TheCourt 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 appealvigorously 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 award.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& Stockton LLP relating toalleging 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& Stockton LLP filed a cross-complaint against the Company claiming approximatelyin excess of $400,000 in allegedly unpaid legal fees. In January 2019, the Company reached a settlement with Kilpatrick Townsend & Stockton LLP, pursuant to which, among other things, Kilpatrick Townsend & Stockton LLP agreed to dismiss its cross-complaint and waive all unpaid legal fees. The action and the cross-complaint were both subsequently dismissed.

In February 2018, the Company failed to issue shares of stock contractually owed to BetterSea, LLC (“BetterSea”), one of the Company’s long-standing technical consultants. On August 15, 2018, 7,364,735 restricted shares were issued in fulfillment of this contractual obligation based on the then-outstanding closing quote of the stock. The issuance of the shares was previously reported by the Company. The Company believesalso paid $20,000 in legal fees on behalf of BetterSea related to legal expense associated with the Company’s delays in the issuance of the stock.

In May 2018, Shelley Scholnick dba JB Transporters brought suit against the Company claiming ongoing fees in excess of $52,000 owed for the storage of the Company’s property. Notably, in June 2017, the Company had brought suit against J.B. Moving & Delivery, a business operated and controlled by Scholnick’s father, Jacob Binstok, for damages suffered by the Company as a result of the defendant’s improper storage of the Company’s property and improper refusal to return such property. In 2018, the Company successfully received a judgment against J.B. Moving & Delivery in the amount of approximately $114,000. The Company disputes that it has valid defensesany amount is now owed to these claimsScholnick.

On March 26, 2019, various stockholders of the Company controlling a combined total of more than 27.5 million shares delivered a signed written consent to the Company removing Ronald Buschur as a member of the Company’s Board and intendselecting Cipora Lavut as a director of the Company.  On March 27, 2019, those same stockholders delivered a further signed written consent to vigorously defend against these claims.the Company removing William Anderson and Si Ryong Yu as members of the Company’s Board and electing Robert Lempert and David Mann as directors of the Company. These written consents represented a majority of the outstanding shares of the Company’s common stock as of March 26, 2019 and March 27, 2019, respectively. Because of Aura’s refusal to recognize the legal effectiveness of the consents, on April 8, 2019 the stockholders filed suit in the Court of Chancery of the State of Delaware pursuant to Section 225 of the Delaware General Corporations Law, seeking an order confirming the validity of the consents and declaring that Aura’s Board consists of Ms. Lavut, Mr. Mann, Mr. Lempert, Mr. Douglas and Mr. Diaz-Versón, Jr. On July 8, 2019 the Court of Chancery entered final judgment in favor of the stockholder plaintiffs, confirming that (a) Ronald Buschur, Si Ryong Yu and William Anderson had been validly removed by the holders of a majority of the Company’s outstanding stock acting by written consent (b) Ms. Lavut, Mr. Mann and Mr. Lempert had been validly elected by the holders of a majority of the Company’s outstanding stock acting by written consent, and (c) the Company’s Board of Directors validly consists of Cipora Lavut, David Mann, Robert Lempert, Gary Douglas and Salvador Diaz-Versón, Jr.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K issued on June 13, 2019 and the Amended Annual Report on Form 10-K/A for the year ended February 28, 2018.2019, issued on October 24, 2019.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.During the quarter ended May 31, 2019, we issued 156,250 shares of common stock for $50,000.

ITEM 3. Defaults Upon Senior Securities.

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 to be owed approximately $5.4$5.3 million plus interest and approximately 22 million warrants on terms significantly preferable to other similarly-situated unsecured creditors. To-date, Mr. Kopple has not accepted the Company’s multiple offers to restructure his debt. The Company is presently engaged in a dispute with Mr. Kopple relating to the debt and securities which Mr. Kopple claims to be owed to him and his affiliates by the Company. See, “Note 3 – Notes Payable” and “Note 5 – Related Parties Transactions” to the Company’s condensed financial statements and “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this quarterly report on Form 10-Q for additional information regarding amounts that may be owed under the Company’s notes payable and the recent restructuring of certain Company debt.

In June 2014, we 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 us with $200,000 for amounts previously repaid by us 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. We were 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, we 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. We have not repaid the Kopple Parties for the amounts loaned to us. Additionally, we have not issued any of the Kopple Penalty Warrants and management believes that Mr. Kopple is not entitled to receive them. We have also cancelled the June 2014 Kopple Warrant.

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

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information.

None.

ITEM 6.  Exhibits

SIGNATURES

Pursuant to the requirements 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.

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